You are on page 1of 17

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

CONTRACT-2
1

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

ROLE OF CO-SURETY IN CONTRACT OF GURANTEE
Submitted byRAJ LAKSHMI

Acknowledgement

This is to state that I, (RAJ LAKSHMI) completed my third semester project
work of LAW OF CONTRACTS on the topic “ROLE OF CO-SURETY IN
CONTACT OF GUARANTEE”. This project would have not come to an end
successfully without the help of many distinguished and undistinguished
personalities. I sincerely acknowledge the help rendered to me by my Faculty
for the Law of Contracts, He has helped us a lot whenever I needed any sort of
assistance and guidance related to the topic. I acknowledge the sincere help of
our library staffs and our net centre-in-charge, who by rendering us help in
locating appropriate resources to collect materials. It is a good platform to
recognize the help and guidance furnished to us by many persons in this regard;
I heartily acknowledge their help and support rendered to me.

2

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

Contents
1. RESEARCH METHODOLOGY
2. INTRODUCTION
3. CONTRACT OF GUARANTEE
4. INGREDIENTS OF CONTRACT OF GUARANTEE
5. LIABILITY OF SURETY
6. NATURE AND EXTENT
7. LIABILITY OF CO-SURETY
8. RIGHTS AGAINST CO-SURETIES
9. EFFECT OF RELEASING A CO-SURETY
10.RIGHT TO CONTRIBUTION
11.BIBLIOGRAPHY

3

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

Research Methodology
The topic “Role of Co-Surety in Contract of Guarantee” is not a very vast
topic but is a type of liability commonly found in the LAW OF CONTRACTS.
It can be studied along with liability or role of surety. My observations and
conclusions are based upon the secondary materials. The methodology adopted
by me to draw conclusion about the topic is basically depended upon nondoctrinal research. I took the help of various research papers having focus upon
the study of Contract, Contract of Guarantee, Role of Surety along with Role of
Co- Surety. I also took the help of text books, magazines, public opinion but to a
very limited scope which was basically a feedback from my friends and the
most non exhaustive resource that is the internet.

4

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

Introduction
Contract of Guarantee
Section 126 defines a Contract of Guarantee as under:
“A "contract of guarantee” is a contract to perform the promise, or discharge the
liability, of a third person in case of his default.”

The section further provides that:
“The person who gives the guarantee is called the “surety”, the person in respect
of whose default the guarantee is given is called “principal debtor” and the
person to whom the guarantee is given is called the “creditor”.”
A guarantee may be wither oral or written.

Liability of Surety
Where the appellant stood as guarantor to funding done to his son’s property
business venture. Later on the son converted his proprietary business into
private limited company. The respondent –creditor gave his consent to such
change and fresh agreement was entered into under which the company became
hirer and appellant’s son with one another became guarantors. On default by
company, suit for recovery was filed against it and the two guarantors under the
subsequent agreement but appellant was not made a party to that suit. Plaint
neither referred to the first agreement of guarantee nor asked any relief against
the appellant. Held, that inclusion of property of appellant recovery. Certificate

5

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

issued was not proper because subsequent agreement amounted to novation of
contract by which the guarantee of appellants stood discharged. 1

Liability of Co- Surety
It has been already noted that the liability of sureties is co-extensive with that
against that of principal debtor. It implies that the creditor can proceed against
the principal debtor or the surety, at his discretion, unless it is otherwise
provided in the contract. The same principle is applicable with regard to the
rights and liabilities of the co-sureties. Since the liability of the co-sureties is
joint and several, a co-surety cannot insist that the creditor should proceed
either against the principal debtor or against any other surety before proceeding
against him.

For example, A takes a loan from a bank. A promises to the bank to repay the
loan. B also makes a promise to the bank saying that if A does not repay the
loan “then I will pay.” In this case, A is the principal debtor, who undertakes to
repay the loan; B is the surety, whose liability is secondary because he promises
to perform the same duty in case there is default on the part of A. The bank in
whose favour the promise has been made is the creditor.
The object of a contract of guarantee is to provide additional security to the
creditor in the form of a promise by the surety to fulfil a certain obligation, in
case the principal debtor fails to do that.2

1 Satish Chandra Jain v. National small Industries Corp. Ltd. AIR 2003 SC 623.
2 13th Report 1958, on Indian Contract Act, 1872, at 51.
6

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

In every contract of guarantee, there are three parties, the creditor, the principal
debtor and the surety. There are three contracts in a contract of guarantee.
Firstly, the principal debtor himself makes a promise in favour of the creditor to
perform the promise etc.3
Secondly, the surety undertakes to be liable towards the creditor if the principal
debtor makes a default.4
Thirdly, an implied promise by the principal debtor in favour of the surety that
in case the surety has to discharge the liability of the default of the principal
debtor, the principal debtor shall indemnify the surety for the same.5
When a borrower and a guarantor both sign an agreement in favour of a bank,
they are jointly and severally liable under that contract. 6 The contract of
guarantee is no doubt tripartite in nature but it is not necessary or essential that
the principal debtor must expressly be a party to that document. In a contract of
guarantee, the principal debtor may be a party to the contract by implication.
Thus, there is possibility that a person may become a surety without the
knowledge and consent of the principal debtor.

Ingredients of the Contract of Guarantee:
1. The Contract maybe either oral or in writing.

3 Section 126 of Indian Contract Act, 1872
4 Ibid
5 Section 145, Also see Nagpur N.S. Bank v Union of India, AIR 1981 A.P. 153, at
158.
6 State Bank of India v Prem Dass, AIR 1998 Delhi 49.
7

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

According to section 126, a guarantee may be either oral or written. On
this point, the position in India is different from that in England.
According to English law, for a valid contract of guarantee, it is necessary
that it should be in writing and signed by the party to be charged
therewith.
2. There should be a principal debt.
Contracts of guarantee pre-suppose a principal debt or on an obligation to
be discharge his obligation to be discharged by the principal debtor. The
surety undertakes to be liable only if the principal debtor fails to
discharge his obligation. If there is no such principal debt, but there is a
promise by one party in favour of another for compensating in a certain
situation, and the performance of this promise is not dependent upon the
default of somebody else, it is a contract of indemnity.
3. Benefit to the principal debtor is sufficient consideration.
As in any other contract, the consideration is also needed for a contract of
guarantee. For the surety’s promise, it is not necessary that there should
be direct consideration between the creditor’s and the surety; it is enough
that the creditor had done something for the benefit of the principal
debtor. Benefit to the principal debtor constitutes a sufficient
consideration to the surety for giving the guarantee. This is clear from
section 127, which reads as under:
“Anything done, or any promise made for the benefit of the principal
debtor may be sufficient consideration to the surety for giving the
guarantee.”
4. Consent of the surety should not have been obtained by
misrepresentation or concealment.
The creditor should obtain guarantee either by any misrepresentation or
concealment of any material facts concerning the transaction. If the
guarantee has been obtained that way the guarantee is invalid. The
position is explained by sections 142 and 143, which are as under:

8

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

“Section 142 Guarantee obtained by misrepresentation invalid – Any
guarantee which has been obtained by means of misrepresentation made
by the creditor, or with his knowledge and assent, concerning a material
part of the transaction is invalid.”
“Section 143 Guarantee obtained by concealment invalid – Any
guarantee which the creditor has obtained by means of keeping silence as
to material circumstance invalid.”
Nature and Extent:
According to section 128, “The liability of the surety is co-extensive with that
of the principal debtor, unless it is otherwise provided by the contract.”
The provision that the surety’s liability is co-extensive with that of the
principal debtor means that his liability is exactly the same as that of the
principal debtor. It means that on a default having been made by the principal
debtor, the creditor can recovered from the principal debtor. For instance, the
principal debtor makes a default in the payment of a debt of Rs. 10,000/-. The
creditor may recover from the surety the sum of Rs. 10,000/- plus interest
becoming due thereon as well as the amount spent by him in recovering that
amount. This may be further explained by the following example. A
guaranteed to B the payment of a bill of exchange by C, the acceptor The bill
is dishonoured by C, the acceptor A is liable not only for the amount of the
bill but also for any interest and charges which may have become due on it.7
If the principal debtor’s liability is reduced, e.g., after the creditor has
recovered a p[art of the sum due from him out of his property, the liability of
the surety is also reduced accordingly.8
If the principal debtor’s liability is affected by illegality, so is also that of the
surety.

7 Illustration to section 128 of Indian Contract Act, 1872.
8 Harigopal Agarwal v. State Bank of India. AIR Mad. 211.
9

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

Therefore, where the liability of the principal is held to be not enforceable on
the ground of the contract being illegal, there is no question of surety being
made liable.
If the principal debtor happens to be a minor and the agreement made by him
is void, the surety too cannot be made liable in respect of the same because
the liability of the surety is co-extensive with that of the principal debtor.9 It
has been held in an English case 10, that the guarantee of the loan or an
overdraft to an infant is void, because the loan to the infant itself is void.
Condition that there shall be a co-surety.
Sometimes, there may be a condition in a contract of guarantee that there
shall be a co-surety also. Where a person gives a guarantee upon a contract
that the creditor shall not act upon it until another person has joined in it as
co-surety, the guarantee is not valid if that other person does not join11. It
means that in such a contract, liability of the surety is dependent on the
condition precedent that a co-surety will join. The surety can be made liable
under such a contract only if the co-surety joins, otherwise not.
Liability of Co-Surety
It has been already noted that the liability of sureties is co-extensive with that
against that of principal debtor. It implies that the creditor can proceed against
the principal debtor or the surety, at his discretion, unless it is otherwise
provided in the contract. The same principle is applicable with regard to the
rights and liabilities of the co-sureties. Since the liability of the co-sureties is
joint and several, a co-surety cannot insist that the creditor should proceed

9 Kelappan Nambiar v. Kunhi Raman AIR 1957 Mad. 164.
10 Coutts & Co. v. Browne Lecky 1947 K.B. 104.
11 Section 144 Indian Contracts Act, 1872.
10

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

either against the principal debtor or against any other surety before proceeding
against him.
In State Bank of India v. G.J. Herman 12, it has been held that when there is a
composite decree against the principal debtor and the sureties, the creditor has
the discretion to decide against whom he wants to proceed. Neither the court nor
a co-surety can insist that the creditor should first proceed against another surety
before proceeding against him. Such a direction would go against the coextensiveness of the liability of the sureties with that of the principal debtor.
RIGHTS AGAINST CO-SURETIES
Where a debt has been guaranteed by more than one person, they are called cosureties. Some of their rights against each other are:
1. Effect of releasing a surety;
2. Right to contribution.
1. Effect of Releasing a Surety(Section 138)
Section 138 of Indian Contract Act, 1872 -Release of one co-surety does
not discharge others – Where there are co-sureties, a release by the
creditor of one of them does not discharge the others; neither does it free
the surety so released from his responsibility to the other sureties.
If the creditor releases one of many co-sureties, it does not discharge the other
co-sureties. Such a released co-surety continues to be liable to the other cosureties.
Release of one of several sureties
This section is a necessary consequence of the principal laid down in s 44, and
must be taken as a deliberate extension of a rule which in the common law is
limited to the case of co-sureties contracting severally and not jointly:

12 AIR 1998 Ker. 1
11

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

‘The release of a surety discharges a joint co-surety, but not a co-surety
severally bound.13’
Only where co-sureties have contracted jointly, i.e. where the joint surety ship
of the others was part of the consideration for the contract of each, whether a
release of one of them by the creditor discharge the others. 14 The present
section appears to abolish this distinction.
The liability of surety is joint and several, and is a guarantor seeks to ensure the
surety bond against some of the joint sureties only, the other sureties will not, on
that account, be discharged, nor will release by the creditor of one of them
discharge the other. The principle of this section has also been applied to
security bonds executed in favour of the Court. Thus, enforcement of surety
bond given by sureties for satisfaction of decree – against one or release of one
– does not operate as discharge of others. Their liability is joint and several, and
not distinct.15
When one of the sureties dies pending suit, remaining sureties are not
discharged by reason of the plaintiff not proceeding against principal – debtor,
or allowing the suit to be dismissed against it. Nor is any suit against these
sureties affected by the principles of res judicata 16.

13 Leake, eighth edn., p. 716; Re Armitage, ex p Good (1877) 5 Ch D 46.
14 Charles Dudley Robert Ward v. National Bank of New Zealand 1883 8 App Cas
755, pp. 764, 765.
15 Sri Chand v Jagdish Pershad Kishan Chand AIR 1966 SC 1427
16 United Bank of India v. Modern Stores(India) Ltd. AIR 1988 Cal 18 (appeal of
co sureties from decree passed against them abated after death of one cosurety, and failure to bring his legal representatives on record in time)
12

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

The creditor may at his will release any of the co-sureties from his liability. But
that will not operate as a discharge of his co-sureties. However, the released cosurety will remain liable to the others for contribution in the event of default.17
2. Right to Contribution (Section 146-47)
Section 146 - Co-sureties liable to contribute equally. Where two or
more persons are CO-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contracts, and whether
with or without the knowledge of each other, the co-sureties, in the
absence of any contract to the contrary, are liable, as between themselves,
to pay each an equal share of the whole debt, or of that
part of it which remains unpaid by the principal debtor.
Illustrations
(a)A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes
default in payment. A, la and C are liable, as between themselves, to pay 1,000
rupees each.
(b)A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there
is a contract between A, B and C that A is to be responsible to the extent of onequarter, B to the extent of one quarter, and C to the extent of one-half. E makes
default in payment. As between the sureties, A is liable to pay 250 rupees, B 250
rupees, and C 500 rupees.
Where a debt or duty is guaranteed by two or more persons, and one of them
pays more than his share of that debt, or performs the duty, he is entitled to
compel contribution from the other or others, whether they are bound jointly or
severally, or under the same contract or different contracts, and whether he

17 Sri Chand v. Jagdish Prashad Kishan Chand, (1966) 3 SCR 451, 456-57: AIR
1966 SC 1427.
13

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

knew or did not know at the time of making the guarantee that he is a co-surety
with others.
The Principle
Co-sureties need not be bound under the same contract, the right to contribution
being independent of any agreement for that purpose.18 Under English law, the
right to contribution is not founded on contract, but is the result of a general
equity arising at the inception of the contract of guarantee on the ground of
equality of burden and benefit.

Right of Contribution
If the creditor calls upon one of the co-sureties to pay the principal debt or any
part of it, that surety has a right, on principles of equity, to call upon his cosureties.19
However, ‘surety has no claim against his co-sureties until he has paid more
than his share of the debt to the principal-creditor,’ 20 for only then does it
become certain that there is ultimately any case for contribution at all. However,
a judgement against the surety at the suit
of the creditor for the full amount of the guarantee (or an equivalent process,
such as the allowance of a claim for the sum in the administration of the surety’s
estate) will have some effect as payment for this purpose, and entitle the surety
or his representatives to a declaration of the right to contribution; it seems that
this is a matter of purely equitable jurisdiction.21
When does the Right Arise
18 Wolmershausen v. Gullick (1891-94) All ER Rep 740.
19 Ibn Hasan v. Brijbhukan Saran (1904) ILR 26 All 407, p. 418
20 Re Snowdon, ex p Snowdon (1881) 17 Ch D 44, p 48 per Brett J.
14

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

A surety’s right to contribution from his co-sureties may arise before he has
made payment under his guarantee. His right to contribution from the cosureties, after payment, does not arise until he has paid more than his total
proportion or share of the common liability. A payment made by a surety even
before he is called upon by the creditor to pay, is not treated as a voluntary
payment, and entitles him to claim contribution from the other co-sureties. 22In
order to recover contribution, he need not show that he abstained from paying
the creditor compelled him to pay.
Where a co-surety, not acting officiously or voluntarily, paid an ascertained and
guaranteed liability of the debtor, he was entitled to a contribution from his cosurety., even though the creditor had not made a formal written demand as
required by the guarantee. Such requirement of demand was not a pre-condition
for liability under the guarantee, but a procedural or evidentiary requirement
included for the benefit of the surety alone, and could, therefore, be waived by
him.23
Mode of Contribution
If the co-sureties run accounts together, a surety may, as a general rule, setoff
any moneys owing against a claim for contribution by his co-surety. 24 However,
if the creditor’s claim against the sureties is secured by a charge, then the
sureties’ subrogated claim to contribution is also secured, and not subjected to
set-off.25
21 Wolmerhausen v. Gullick (1891-94) All ER Rep 740.
22 Pitt v. Pursord (1841) 8 M&W 538; Davies v. Humphreys (1835-42) All ER Rep.
101; Leigh v. Dickeson(1881-85) All ER Rep. 1099 (CA)
23 Stimson v. Smith (1999) 2 All ER 833
24 Halsbury’s Law of England, ‘Guarantee and Indemnity’, fourth edn., reissue,
vol. 20, para 265
25 Chitty on Contracts, 28th edn. P. 1354, paras 44-111
15

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

Where claiming contribution, the guarantor must give credit for all that he has
received from the principal-debtor, or by means of a counter security given by
way of indemnity.26
A guarantor, who has made payment of more than his due proportion of the
common liability, is entitled to have assigned to him all the creditor’s rights and
securities, irrespective of whether satisfied, for the purpose of obtaining
contribution, including securities received by the creditor from co-guarantors.
He may recover contribution from those securities. Thus all the co-sureties are
entitled to share in the benefit of any security or indemnity which any one of
them has obtained from the principal-debtors and this, whether they knew of it.
The surety bringing in, under this rule, what he receives from his security, may
resort again to that security for the liability to which he remains subject, and the
co-sureties may again claim the benefit of participation and so on until the cosureties have been fully reimbursed or the counter security exhausted.27

BIBLIOGRAPHY
BOOKS:
1. Beatson J, Anson’s Law of Contract, Oxford University Press, 28th edition.
2. Singh Avtar, Law of Contract and Specific Relief, Eastern Book Company,
Lucknow, 9th edition, 2002.
3. Bhadbadhe Nilima, Pollock and Mulla Indian Contract and Specific Relief
Acts, Lexis Nexis Butterworths, 12th edition.
4. Moitra, Law Of Contract and Specific Relief Acts, Universal Law Publishing
House, Delhi, 5th edition.
26 Ellesmere Brewery Co. v. Cooper (1895-99) All ER Rep. 1121
27 Berridge v. Berridge (1890) 44 Ch D 168
16

ROLE OF CO-SURETY IN CONTRACT OF GUARANTEE

5. Saharay H.K, Dutt on Contract, Eastern Law House, 10th edition.

17