CONTRACT OF GUARANTEE AND IT’S PRECARIOUS

POSITION IN CONTRACT LAWS: AN INSIGHT INTO THE

INDIAN CONUNDRUM.

4.5 Law of Contracts II

Project Topic
Submitted by
Pranoy Goswami.
Unique ID
SM0117037.
Re-Submission (Semester 4 Project)
Submitted to
Dr. Daisy Changmai;
Guest Faculty of Law.
Faculty-in-Charge, Law of Contracts.

National Law University and Judicial Academy, Assam.

December, 2020.
 ACKNOWLEDGEMENT

It is imperative to the people who contributed in the completion of it, without whose
aid this project wouldn’t have seen practicability.
The primary extension of gratitude goes out to Dr. Daisy Changmai, Guest Faculty of
Law, whose continuous guidance provided the requisite impetus and gave tremendous
insight into the topic undertaken during the course of this project. I am grateful to the
IT Staff and the Library Staff for provision of the Digital Library access and other
corollaries to help in the smooth completion of the project.

1
 RESEARCH METHODOLOGY

Subject: Law of Contracts II

TOPIC: CONTRACT OF GUARANTEE AND ITS PRECARIOUS POSITION

IN CONTRACT LAWS: AN INSIGHT INTO THE INDIAN CONUNDRUM

The present study is essentially doctrinal study; research undertaken is descriptive in

nature with an analytical approach to the percolate guidelines laid in given case. Both
primary and secondary data has been used and examine in the holistic manner for the
purpose of the dissertation

The data collected by the researcher in this project is of secondary nature. The data
has been collected through books, journals, legal databases and websites.

2
 CONTENTS

 Table of Cases.

 Introduction.

 Chapter 1-Liability of the Surety.

 Chapter 2-“The liability of the surety is co-extensive with that of the principle
debtor, unless it is otherwise provided by the contract.”- Analysis of
Precedents under Contract Law.

 Chapter 3- Surety’s Rights against the Principal Debtor.

 Conclusion.

 Bibliography.

3
TABLE OF CASES

1. Anand Singh v. Collector of Bijnor AIR 1932 All 610

2. Associated Japanese Bank (Intl) Ltd. V Credit Du Nord SA [1988] 3 All ER
902
3. Bank of Bihar, Ltd v. Damodar Prasad AIR 1969 SC 297
4. Badeley v. Consolidated Bank (1886) 34 Ch D 536
5. Board v. Official Liquidator AIR 1982 SC 1497
6. Brojondra v. Hindustan Co-operative Society ILR 44 Cal 978
7. Bur Singh v. Labhu Ram 1930 Lah 399
8. Carr Lazarus Phillips v. Alfred Ernst Mitchell AIR 1930 Cal 17
9. Chhaju Singh v. Emperor AIR 1921 Lah 79
10. Craythorne v. Swinburne 1803-13 All ER Rep 181
11. Holl v. Hadley (1835) 2 A&E 758
12. Industrial Finance Corporation of India Ltd. V. Cannore Spinning & Weaving
Mills (2001) 5 S.C.C. 54
13. Jaggannath Baksh Singh v. Chandra Bhukan Singh and another AIR 1937
Oudh 19
14. Kahn Chand Singh v. Tek AIR 1968 J&K 93
15. Maroti v. Hussain Miya AIR 1925 Nag 392
16. M S E B, Bombay v. Official Liquidator, AIR 1982 SC 1497
17. Narayan Singh v. Chattarsingh AIR 1973 Raj. 347
18. Pawan Kumar Jain v. Pradeshiya Industrial and Investment Corpn. Of Uttar
Pradesh
19. AIR 1998 All 57
20. Punjab National Bank Limited v. Sri Bikram Cotton Mills Ltd AIR 1970 SC
1973
21. Re Fox, Walker & Co ex p Bishop (1880) 15 Ch D 400 (CA)
22. SBI v. M. P. Iron and Steel Works Pvt. Ltd., Raipur AIR 1998 M.P. 93

4
23. State Bank of India v. Krishnan, IN THE DEBT RECOVERY APPELLATE
TRIBUNAL AT CHENNAI, RA-43/2004 (OA-866/1999-DRT, Bangalore)

5
Introduction

Section 128 of the Indian Contract Act, 1872, states that the liability of the surety is
co-extensive with that of the principal debtor, unless it is otherwise provided by the
contract. Section 126 defines ‘surety’ as the person who gives the guarantee and
‘principle debtor’ as the person in respect of whose default the guarantee is given.

The origin of the contract of surety lies in the Roman law. A surety is “one who takes
upon himself the obligation of another, that other still being liable”.  Firstly, the
surety undertakes to the creditor that the principal debtor, who remains bound, will
perform his commitment, and secondly that if the principal debtor fails to do so, the
surety will execute it or failing that indemnify the creditor.  This indemnity generally
takes place in the form of the payment of money to the creditor. 1

The phrase ‘co-extensive with that of the principal debtor’ 2 in section 128 of the
Indian Contract Act, 1872, primarily shows the maximum extent of the surety’s
liability. A surety however, may restrict his liability by contract. A surety is as much
liable to the creditor as the principal debtor, unless he has specified the extent of his
liabilities in a contract of guarantee.3

The surety’s liability arises when the principal debtor has made a default. On the
commission of the default by the principal debtor, causing loss or damage to the
creditor, the surety is, unless the terms of the contract of guarantee specify otherwise,
at once liable to the degree of his commitment. A notice of default is not required,
unless it is specified in the contract. It is the desire of the creditor to recover the
damages either from the principal debtor or from the surety. The creditor can employ

1
Popatlal, Sanguita, ‘The Contract of “ Guarantee” in South African Law’, as cited in
www.bowman.co.za/LawArticles/Law-Article.asp, last visited on 20th December, 2020.
2
Narayan Singh v. Chattarsingh, AIR 1973 Raj. 347, Maharashtra State Electricity Board v. Official
Liquidator ,AIR 1982 SC 1497.
3
Singh, Avtar, 1989, “Extent of Sureties’ Liability”, Law Of Contract, 5th edition, Eastern Book
Company, pp. 384-385.

6
the same mode of recovery against the surety as against the principal debtor. 4But if
the contract of guarantee provides for certain conditions precedent to the surety’s
liability, for instance, that the creditor will first initiate proceedings against the
principal debtor etc, the surety will be made liable only after those conditions have
been satisfied. 5

Where a contract provides that the surety would be held liable for what may finally be
found due from the principal debtor, the surety is not liable until the deficiency or
contingency is found by the creditor by taking steps against the principal debtor. In
Punjab National Bank Limited v. Sri Bikram Cotton Mills Ltd 6, Here, the guarantee
bond secured the ‘ultimate balance’ remaining due to the creditor. In this case the
liability of the surety did not arise until the ultimate balance was determined.7

In the case of liability for past transactions, a surety is not liable for any of the
liabilities incurred by the principal debtor prior to the signing of the contract of
suretyship, unless something of that kind is specified in the contract. 8 The liability of
the surety is joint and several with the principal debtor. 9 It is the responsibility of the
surety to pay for the losses to the creditor, after which he would be subrogated to the
rights of the creditor as per s. 142 of the Indian Contract Act, 1872.10

The creditor cannot be restrained from executing his decree on the pre text of the
solvency of the principal debtor.11 A surety is discharged from liability by the release
or discharge of the principle debtor, as laid down in s. 134 of the Indian Contract Act,

4
Pawan Kumar Jain v. Pradeshiya Industrial and Investment Corpn. Of Uttar Pradesh,
AIR 1998 All 57.
5
Bhadbhade, Nilima, 2001, Pollock and Mulla- Indian Contract and Specific Relief Acts, Vol 2,
Butterworths, New Delhi. pp-1779-1781.
6
AIR 1970 SC 1973.
7
Supra note 6.
8
Ibid.
9
State Bank of India v. Krishnan, IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT
CHENNAI, RA-43/2004 (OA-866/1999-DRT, Bangalore) as cited in
www.drat.tn.nic.in/Judgements/J-028.htm last visited on 28th December, 2020.
10
Bank of Bihar, Ltd v. Damodar Prasad, AIR 1969 SC 297.
11
Ibid.

7
1872. There are various pre texts for this discharge such as death of the surety,
variance in the terms of the contract, act of omission of the creditor etc.12

12
Mallick, M.R. ,J, 2000,“Surety’s Liability”, Commentaries on Indian Contract Act,1 st edition, Kamal
Law House, Calcutta, p-860-861

8
 Liability of the Surety

(1) The Concept of ‘Surety’.

S. 126 of the Indian Contract Act, 1872 provides that,

“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
person who gives the guarantee is called the “surety”, the person in
respect of whose default the guarantee is given is called the “principal
debtor”, and the person to whom the guarantee is given is called the
“creditor”.”

For instance, X, a business man takes a loan from bank Y and promises the bank that
he would repay the loan. Z, who is the uncle of X also makes a promise to the bank
saying that if X is not able to repay the loan, then he (Z) will. Here, X is the principal
debtor, who undertakes the task of repaying the loan, Y is the surety, who promises to
perform the same duty in case there is default on part of X. The bank in whose favour
the promise has been made is the creditor.13

The ‘surety’ provides the supplementary security to the creditor in the form of a
promise to fulfill certain responsibilities, in case the principle debtor fails to do that,
the consequences can be stark and different to the one presumed.

(2) Extent of the surety’s liability under different circumstances under the
Indian and the English Law.

According to Section 128 of the Indian Contract Act, 1872,

13
Bangia, R.K., 2000,“Contracts of Indemnity and Guarantee”, Indian Contract Act, 9th
Edition,Allahabad Law Agency, Faridabad,p-341.

9
 “The liability of the surety is co-extensive with that of the principle
debtor, unless it is otherwise provided by the contract.”

Section 128 codifies the English common law rule that the liability of the surety is
co-extensive with that of the principal debtor,14 i.e the surety’s liability is exactly the
same as the principal debtor and in case of a default by the principal debtor, the
creditor can recover from the surety everything he could have recovered from the
debtor. But this depends on the terms and conditions of the contract.

This section, however, lays down only the measure of the obligation of a surety when
the terms of the contract do not specify it. It has got no reference to the nature of the
obligation of the principal.15 The extent thus mentioned in this section must be
restricted to the liability of the principal debtor and not to the method of discharge of
debt of the principal debtor.16 Hence it was rightly held in SBI v. M. P. Iron and
Steel Works Pvt. Ltd., Raipur17that the right to recover a debt partially or completely
lies in a creditor till such time the debt of the principal debtor is discharged and only
then will the liability of the surety come to an end.

When there is a condition precedent to the surety’s liability, he will not be liable
unless that condition is fulfilled first.18 For instance, in a contract of guarantee, there
is a condition, that in case of default by the principal debtor, the creditor will first take
proceedings against the principal debtor. In such a case, in case of a default the surety
could be made liable only after the creditor has initiated proceedings against the
debtor. 19

Any express or implied condition which is precedent to the surety’s liability has to be
fulfilled before any remedy can be had to him. 20 In cases where a guarantee provides

14
M S E B, Bombay v. Official Liquidator, AIR 1982 SC 1497.
15
Brojondra v. Hindustan Co-operative Society, ILR 44 Cal 978.
16
Mallick, M.R. ,J, 2000,“Surety’s Liability”, Commentaries on Indian Contract Act,1 st edition, Kamal
Law House, Calcutta, p-838.
17
AIR 1998 M.P. 93, p-98.
18
Bhadbhade, Nilima, 2001, Pollock and Mulla- Indian Contract and Specific Relief Acts, Vol 2,
Butterworths, New Delhi, pp-1779-1781.
19
Holl v. Hadley (1835) 2 A&E 758.
20
Associated Japanese Bank (Intl) Ltd. V Credit Du Nord SA [1988] 3 All ER 902

10
that the surety will be liable for what may ultimately be due from the principal debtor,
the surety is not liable until the deficiency is found after taking measures against the
debtor.21 . In Punjab National Bank Limited v. Sri Bikram Cotton Mills Ltd 22, the
guarantee bond secured the ‘ultimate balance’ remaining due to the creditor. In this
case the liability of the surety did not arise until the ultimate balance was
determined.23

The liability of the principal debtor and the surety is joint and several and the creditor
can either proceed against the principal debtor or the surety or the both of them
simultaneously.24 The law on this point has been well settled by the Supreme Court in
Industrial Finance Corporation of India Ltd. V. Cannore Spinning & Weaving
Mills25, where it was held that the rights of the creditor to recover money from the
guarantors arises out of the terms of the deed of guarantee which are not in any way
superseded or brought to naught only because the creditor may not be able to recover
money from the principal debtor.

In case of a contract between the principal debtor and the creditor, where the contract
is voidable at the option of the principal debtor and is avoided by him, or where the
contract is void ab-initio, the surety is not necessarily discharged of his obligations. In
Chhaju Singh v. Emperor26, a minor had entered into a contract (the contract being
void ab-initio as the minor does not have the capacity to enter into legally enforceable
contract). Here, even though the contract was void, the surety was liable as a principal
debtor.

Section 134 of the Indian Contract Act discusses the discharge of surety by release or
discharge of the principal debtor. It states,

21
Carr Lazarus Phillips v. Alfred Ernst Mitchell AIR 1930 Cal 17.
22
AIR 1970 SC 1973.
23
Ed.Bhadbhade, Nilima, 2001, Pollock and Mulla- Indian Contract and Specific Relief Acts, Vol 2,
Butterworths, New Delhi. pp-1779-1781.
24
ibid, p-1791.
25
(2001) 5 S.C.C. 54.
26
AIR 1921 Lah 79.

11
 “The surety is discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released, or by any act
or omission of the creditor, the legal consequence of which is the
discharge of the principal debtor.”

In Kahn Chand Singh v. Tek 27, the creditor accepted a compromise and released the
principal debtor. Here, the surety was also likewise released. It was held that any
release of the principal debtor is a release of the surety also. In cases of Debt Relief
Acts, where the liability of the principal debtor is reduced under the provisions of a
statute, the liability of the surety is also thereby diminished. 28 In cases of Insolvency
Acts, the Hon’ble Supreme Court has laid down that a discharge which the principal
debtor may secure by reason of winding up or insolvency does not absolve the surety
of his liability.29

Chapter 2

27
AIR 1968 J&K 93.
28
Narayan Singh v. Chattarsingh, AIR 1973 Raj. 347.
29
M S E B, Bombay v. Official Liquidator, AIR 1982 SC 1497.

12
 “The liability of the surety is co-extensive with that of the principle
debtor, unless it is otherwise provided by the contract.”

CASE ANALYSIS

(1) Narayan Singh v. Chattarsingh 30

Facts: A decree from the Civil Court was obtained by the decree-holder against
Jeetmal.pd respondent and appellant Narayan Singh who stood surety for the debt
advanced by the decree-holder to the principal debtor, i.e. Jeetmal. After the
decree was put in execution, principal debtor made an application under Section 6
of the Rajasthan Relief of Agricultural Indebtedness Act. 1957, before the Debt
Relief Court for the re-determination of his decretal amount as he was an
agriculturist. The executing Court abated the execution proceedings against both
the judgment-debtors. On appeal, the learned Judge, relying on an authority of
this Court in Brij Gopal v. Bhanwarlal, 1965 Raj LW 19631, upheld the order of
abatement against the principal debtor only and directed that execution
proceedings may continue against the appellant judgment-debtor (surety) as he
was not an agriculturist. Narayan Singh appealed against this judgement on the
ground that the liability of a surety-judgement-debtor is co-extensive with
that of the principal debtor and, therefore, unless the debt is re-determined

by the Debt Relief Court, the amount of the decree cannot be executed
against that judgment-debtor who stood surety for the principal debtor to
pay off the debt if the principal debtor failed to discharge his liability.
30
AIR 1973 Raj. 347.
31
The HC later denied the relevance of considering this judgement in the current case. It held that
judgment is clearly distinguishable as in Brij Gopal case all the judgment-debtors against whom the
decree was passed were mortgagors and out of those only one of the mortgagors was an agriculturist
who made an application under Section 6 of the Act for determination of the debt. Under mortgage
debt the liability of the mortgagors is not co-extensive with each other and so those mortgagors who
were not agriculturists could not claim any benefit of the provisions of the Act because if the debt is
scaled down in the case of agriculturist mortgagor, that scaling down would apply only to the benefit
of the agriculturist and not for non-agriculturists who could not take recourse under the provisions of
the Act.

13
Judgement- The High Court quoted the decision in A. L. S. PL. Subramania Chettiar
(deed.), v. Moniam P. Narayanaswami Gounder32, where the learned Judges after an
extensive scrutiny of the liabilities of a surety as well as of the principal debtor, who
was an agriculturist held that a non-agriculturist surety will not be liable for the whole
debt when the principal debt has been scaled down under the provisions of the Debt
Relief Act but will be liable only to the extent to which the debt is scaled down and is
due from the principal debtor. The court further cited the judgement of Spencer. J.in
Sami Iyer v. Ramaswami Chettiar33, where it was said ;

"Ordinarily the liability of a surety is co-extensive with that of the

principal debtor unless it is otherwise provided for ..... An illustration of
the effect of Section 128, Contract Act occurs in Sheikh Suleman v.
Shivram Bhikaji. (1888) ILR 12 Bom 71 where it was observed that if an
amount recoverable by a plaintiff, from a defendant debtor is
diminished in appeal, the surety's engagement, being one of indemnity,
would diminish in like proportion. So, if the sum recoverable became
zero, owing to the decree being reversed, the surety's liability would also
be reduced to nothing."

Hence, it was held that the effect of scaling down the principal debtor’s liability was
that the surety’s liability had also accordingly been reduced. The decree-holder was
entitled to recover the amount of the decree as modified by the Debt Relief Court
from the surety.

(2) Bank of Bihar v. Damodar Prasad34

32
AIR 1951 Mad 48 (FB).
33
AIR 1923 Mad 340.
34
AIR 1969 SC 297.

14
Facts- The plaintiff bank, lent money to Damodar Prasad (principal-debtor) on the
guarantee of Paras Nath Sharma (surety). The loan was neither repaid by Damodar
Prasad nor by Paras Nath Sharma despite repetitive demands by the bank. The
plaintiff bank then filed a suit against them in the Court of the subordinate judge,
Patna, claiming a decree for the amount due. The Trial Court passed a decree in
favour of the bank both on the condition that the bank shall be able to enforce its dues
against the surety only after having exhausted all its remedies against Damodar
Prasad (debtor). The plaintiff appealed to the High Court, which dismissed the appeal.
The plaintiff appealed to the SC challenging the legality of the direction given by the
HC.

Judgement-- Justice R. S. Bachawat opined that the creditor can sue the surety even
though he has not exhausted his remedies against the principal. He further expressed
his view on this point by stating that,

“Before payment, the surety has no right to dictate terms to the creditor
and ask him to pursue his remedies against the principal in the first
instance. In the absence of some special equity, the surety has no right
to restrain an action against him by the creditor on the ground that the
principal is solvent or that the creditor may have relief against the
principal in some other proceedings.

Where the creditor has obtained a decree against the surety and the
principal, the surety has no right to restrain execution against him until
the creditor has exhausted his remedies against the principal.”

If the creditor is asked to postpone his remedies against the surety, then the whole
purpose of the Guarantee is defeated. The court further said that the guarantee is a
collateral security taken by the banker and will become useless if his rights against
the surety can be so easily cut down.

15
The court finally allowed the appeal and directed the plaintiffs to recover the dues
from Dr. Paras Nath Sinha i.e the plaintiffs could recover the dues from the surety
without exhausting their remedies against the principal debtor, Damodar Prasad.

(3) Maharashtra State Electricity Board v. Official Liquidator, H.C. Ernakulam35

Facts-The appellant Maharashtra State Electricity Board (MSEB) (creditor) entered

into a contract with a company, Cochin Malleables Pvt. Ltd to supply goods to the
board according to tenders issued .The company had made a security deposit of Rs.
50,000 with the MSEB in the form of a bank guarantee given by the Canara Bank,
which stated,

“THE CANARA BANK LTD. hereby agrees unequivocally and

unconditionally to pay, within 48 (Forty eight) hours, on demand in
writing from the Maharashtra State Electricity Board or any officer
authorised by it in this behalf, of any amount up to and not exceeding
Rs. 50,000/- (Rupees Fifty thousand only) to the said Maharashtra State
Electricity Board, Bombay on behalf of M/s. Cochin Malleables
(Private) Ltd., Trichur, who have tendered and/or contracted or may
tender or contract hereafter for supply of materials equipment or service
to the Maharashtra State Electricity Board and have been exempted
from payment of earnest money and/or security deposit against such
tenders or contracts.”
The MSEB on August 27, 1973, called upon the Bank to pay the guarantee amount of
Rs. 50,000. Thereafter reminders were sent and a final demand was made on May 23,
1974. In the meanwhile Company filed a petition on July 30, 1973 on the file of the
High Court of Kerala for the winding up of the Company in liquidation. By an order

35
AIR 1982 SC 1497.

16
dated September 16, 1974 the High Court ordered the winding up of the Company in
liquidation and directed the Official Liquidator to take charge of its affairs.

The bank wrote a letter to the official liquidator stating that the company was liable to
the Bank for Rs. 50,000 demanded by the MSEB as per the terms of the bank
guarantee. The liquidator sought an order from the company judge restraining the
MSEB from recovering the amount covered by the guarantee on the basis that since
the company had been ordered to be wound up the MSEB could not claim the amount
of guarantee from the bank, as such a claim would affect the assets of the company in
liquidation. The MSEB appealed.

Judgement- Justice Venkataramiah opined that there was no dispute regarding the terms
of the document on the basis of which the Electricity Board had claimed the amount from
the Bank as the contract was one of guarantee and not of indemnity. The payment of the
amount guaranteed by the Bank to the tune of Rs 50,000 was not made dependent upon
the proof of any default on the part of the Company in liquidation. The Bank could not
plead that it is liable only to the extent of loss that might have been suffered by the
MSEB owing to any default on the part of the company in liquidation. The liability was
absolute and unconditional. The fact that the principal debtor had gone into liquidation
also would not have any effect on the liability of the Bank i.e. the guarantor.

He cited Jaggannath Ganeshram Aggarwala v. Shivnarayan Bhagirath,36 wherein it was

established that,

“A surety is no doubt discharged under Section 134 of the Indian Contract

Act37 …..But a discharge which the principal debtor may secure by
operation of law in bankruptcy (or in liquidation proceedings in the case of
a company) does not absolve the surety of his liability,”

36
AIR 1940 Bom 247.
37
Refer to p-9 of the written submissions.

17
The court said that the Company Judge could not make any order under the Companies
Act, barring the Electricity Board from recovering the amount guaranteed by the Bank as
this had nothing to do with the assets of the Company in liquidation. Hence, no relief as
granted to the company and it was held that the board had the right to and was entitled to
enforce payment of guarantee and the bank had the right to reimburse itself out of the
securities.

18
Chapter 3

SURETY’S RIGHTS AGAINST THE PRINCIPAL DEBTOR

As stated in s. 128 of the ICA, 1872, the liability of the surety is co-extensive with that of
the principal debtor. A surety is required to make good the losses suffered by the creditor
emerging out of the contract of guarantee. A creditor has full right to seek damages from
either the principal debtor or the surety or the both of them. In cases when the creditor
seeks the compensation of losses from the surety, the surety after completing its
obligation (i.e. the obligation of compensating the creditor) steps into the shoes of
the creditor (subrogation) and has full right to seek indemnification or
reimbursement from the principal debtor both under the law and under equity.

Section 140 of the ICA, 1872 states,

Rights of surety on payment or performance.— Where a guaranteed

debt has become due, or default of the principal debtor to perform a
guaranteed duty has taken place, the surety, upon the payment or
performance of all that he is liable for, is invested with all rights which
the creditor had against the principal debtor.”

This must be taken to mean that the surety steps into the shoes of the creditor and has
the same rights conferred upon it which the creditor had against the principal debtor.
Hence, the surety can ask for indemnity from the principal debtor for the amount he
has fairly paid under the guarantee as per s. 145 of the ICA, 1872 and is also allowed
to the gains of every security which the creditor had against the principal debtor when
the contract was entered into, as per s. 141 of the ICA.38

38
Bangia, R.K., 2000, “Contracts of Indemnity and Guarantee”, Indian Contract Act, 9th
edition,Allahabad Law Agency, Faridabad,pp-364-365.

19
Suppose A gets hurt in a car accident and it is clearly not his fault. His car is wrecked
and he has been badly injured. He is covered for both the damage to his car and his
personal injuries, and so he calls his insurance company and the company pays all of
his expenses relating to the accident. Later, the insurance company, realizing that the
other party at fault also has insurance that will cover the damages, seeks out
reimbursement from that insurance company since its insured was actually at fault for
the accident, by the principal of subrogation.

The insurance company after paying for A’s claim, is “subrogated” to the rights of the
insured’s policy and can “step into the shoes of the insured” to go after or sue the
negligent party on the insured’s behalf.

Section 145 of the ICA propounds that,

“Implied Promise to indemnify surety- - In every contract of guarantee,

there is an implied promise by the principal debtor to indemnify the
surety, and the surety is entitled to recover from the principal debtor,
whatever sum he has rightfully paid under the guarantee, but no sums
which he has paid wrongfully.”

A surety who pays off the debts of another party is subrogated to the creditor's former
claims and remedies against the debtor to recover the sum paid.39

READ THE JUJMENT----In Craythorne v. Swinburne40, Sir Samuel Romilly said

that the entire doctrine of principal and surety, with all its consequences etc, lies upon
the principles of equity and not that of contract. He further opined that a surety is
entitled to each and every remedy that the creditor has against the principal debtor
and is allowed to enforce every security and all means of payment to stand in the
shoes of the creditor, not only through the medium of an expressed contract but also
by means of security entered into without the surety’s knowledge and he has a right to
have those securities transferred to him and to benefit himself of all those securities

39
Forbes v Jackson (1882) 19 Ch D 615.
40
1803-13 All ER Rep 181.

20
against the principal debtor. “This right of a surety also stands, not upon contract,
but upon a principle of natural justice.”

In Bur Singh v. Labhu Ram41, Labhu Ram (Creditor) obtained a money decree against
Bela Singh (debtor). During the execution of the decree, Bur Singh (surety) gave
security that if the judgement debtor fails to appear before the court, he, Bur Singh,
would be liable for the decretal amount due. Bela Singh defaulted and as a result Bur
Singh was arrested. He paid the decretal amount in the court. Bur Singh filed a suit
against the both Bela Ram and Labhu Singh42, contending that the decretal amount
had been illegally obtained from him by the two and that Bela Singh was liable to pay
him for the same under the implied contract of indemnity.

The Court held that since, Bur Singh was made to pay the decretal amount on the
ground of the default of the performance of the conditions of the security bond by
Bela Singh, He is entitled to claim for the same from him (Bela Singh), because when
a person acts as a surety for another, there is an implied warranty by the latter that he
would indemnify the former in case he is indemnified due to a default by him in the
performance of the conditions of the security bond.

It was also held in Maroti v. Hussain Miya43 that a surety is entitled to indemnity,
where the mortgage suit was dismissed against the principal debtor, but money decree
was passed against the surety.44

In Anand Singh v. Collector of Bijnor45, it was held that where after the decree
against the principal debtor and the surety, the principal debtor, applied to a Debt
Conciliation Board, which on the failure of the decree holder to prove his debt,
discharged him from the debt, but not the surety, The surety after the payment under

41
1930 Lah 399.
42
His claim against Labhu Singh was dismissed as the court held that it was not open to him to contest
his liability under the security bond as between him and the decree holder, by means of a separate suit.
43
AIR 1925 Nag 392.
44
Pollock & Mulla, 2006, “MULLA- Indian Contracts and Specific Relief Acts”,ed. Padia, R.G., Vol 2
13th edition, Lexis Nexis Butterworths, New Delhi.p-1918.
45
AIR 1932 All 610.

21
the decree was entitled to be reimbursed by the principal debtor, under the provisions
of s. 145 of the ICA.46

In another case, Jaggannath Baksh Singh v. Chandra Bhukan Singh and another,47 the
appellant, J B Singh, wrote a letter to the deceased father, S B Singh, of the
respondents, requesting him o advance a loan of Rs. 1200 to D H Singh. With regard
to the recommendation, S B Singh advanced the loan and obtained a pro-note the
same day. The plaintiffs sued on the basis of this pro-note, impleading J B Singh as
a surety. J B Singh contended that he was not liable as a surety and also questioned
his liability for interest.

The court held that for a contract of suretyship, there should be concurrence of the
principal debtor, the creditor and the surety, but this does not mean that there must be
an evidence ascertaining that the surety undertook his obligation at the express
request of the principal debtor. Besides, there was ample of circumstances to show
that the letter was written at the request of D H Singh and since the appellant had
made himself liable in case there was any problem in the “payment” of the money i.e.
payment by the principal debtor, all the necessary requirements of a contract of
guarantee are satisfied and the appellant was held liable as a surety.

Hence, the guarantor’s right to indemnification is his right to be reimbursed with the
amount which he has paid for the principal debtor (this amount includes the interest
as well).48And in cases where the surety has sustained damages beyond the principal
and interest which he has been made to pay under his guarantee, he is allowed to
recover that damage as well.49

46
Pollock & Mulla, 2006, “MULLA- Indian Contracts and Specific Relief Acts”,ed. Padia, R.G., Vol 2
13th edition, Lexis Nexis Butterworths, New Delhi.p-1916.
47
AIR 1937 Oudh 19.
48
Re Fox, Walker & Co ex p Bishop (1880) 15 Ch D 400 (CA) as cited in Pollock & Mulla, 2006,
“MULLA- Indian Contracts and Specific Relief Acts”,ed. Padia, R.G., Vol 2 13th edition, Lexis Nexis
Butterworths, New Delhi.p-1919.
49
Badeley v. Consolidated Bank (1886) 34 Ch D 536 , supra note 46.

22
Conclusion

The researcher has, through this project, tried to establish the relationship between the
Surety and the Principal Debtor. The surety acts as an assurance to the creditor that
the principal debtor, who is bound by the contract, will perform his commitment, and
also that if the principal debtor fails to do so, the surety will execute it or failing that
indemnify the creditor.

As per Section 128 of the Indian Contract Act, the liability of the surety is co-
extensive with the liability of the principal debtor. However, the extent of the liability
is subjected to the contract to the contrary. The liability of the surety is joint and
several with the principal debtor. It is the choice of the creditor to recuperate the
amount either from the principal debtor or the surety after the default of the debtor.

The liability of the surety is immediate and the surety can in no way ask the creditor
to proceed against the debtor first, unless and until it is expressly laid down in the
contract. A surety is discharged of his liability depending on various incidents, for eg,
variance in the terms of the contract, act of omission of the creditor etc. Besides, the
surety is also discharged by a contract between the creditor and the debtor, by which,
the debtor is released, as per s. 134 of the Indian Contract Act.

However, the surety also has a right to get indemnified in cases where the creditor
seeks the compensation of losses from the surety. The surety, in such cases, after
completing his obligation, steps into the shoes of the creditor (subrogation) and has
full right to seek indemnification or reimbursement from the principal debtor both
under the law and under equity. And also where the surety has sustained damages
beyond the principal and interest, which he has been compelled to pay under the
contract of guarantee, in such cases, the surety, is allowed to recover that extra
damage as well.

Bibliography

23
Statutes
Indian Contract Act, 1872.

Books
 Singh, Avtar, 1989, “Extent Of Sureties’ liability”, Law Of Contract,5 th
edition, Eastern book Company, Lucknow.

 Bangia, R.K., 2000, “Contracts of Indemnity and Guarantee”, Indian Contract

Act, 9th edition, Allahabad Law Agency, Faridabad.

 Beale, H.G, 2004, “Suretyship”, Chitti on Contracts, Vol 2, Sweet and

Maxwell, London.

 Lord Haitshan of St. Maryleborne, 1978, “Guarantee and Indemnity”,

Halsbury’s Law of England, Vol 20, 4th edition, Butterworths, London.

 Bhadbhade, Nilima, 2001, Pollock and Mulla- Indian Contract and Specific
Relief Acts, Vol 2, Butterworths, New Delhi.

 Moitra, A.C., 2005, Law of Contracts and Specific Relief, 5th edition,
Universal Law Publishing Co. Pvt. Ltd., Delhi.

 Mallick, M.R. ,J, 2000,“Surety’s Liability”, Commentaries on Indian Contract

Act,1st edition, Kamal Law House, Calcutta.

 Mukherjee, T.K.,2003, Law of Contracts, Vol 2, 1 st edition, Rep 2003,

Premier Publishing Company, Allahabad.

24
  Pollock & Mulla, 2006, “MULLA- Indian Contracts and Specific Relief
Acts”,ed. Padia, R.G., Vol 2, 13 th edition, Lexis Nexis Butterworths, New
Delhi.

Articles
 THE CONTRACT OF “GUARANTEE” IN SOUTH AFRICAN LAW, By
Sanguita Popatlal, as cited in www.bowman.co.za/LawArticles/Law-
Article.asp.

25