contracts ii.pdf

8/9/2019 contracts II.pdf

1/15

1 | P a g e

RIGHTS OF SURETY

CONTRACTS- II

Submitted By:

ADITI INDRANI

2013004

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

Vishakhapatnam


2/15

2 | P a g e

TABLE OF CONTENTS

Acknowledgement 3

Introduction 4

Right against principal debtor 5

Right against Subrogation 6

Right to Indemnify 9

Illustrations 10

Rights against co-sureties 10

Illustrations 11

Cases 12-14

Conclusion 15

Bibliography 15


3/15

3 | P a g e

ACKNOWLEDGMENT

I am highly elated to work on the topic Rights of surety. I take this opportunity to express my

gratitude to the people who have been instrumental in successful completion of the project.

I am thankful to my teacher Miss Parvathy S.S, who guided me in every step. I would like to

enlighten my readers with my efforts. I have tried my best to bring luminosity to this project.

I am thankful to my friends, colleagues and seniors for providing me continuous guidance. I am

thankful to librarian who provided me required books and necessary materials. I could not

complete the project without their assistance.

ADITI INDRANI


4/15

4 | P a g e

INTRODUCTION

There are three parties in a contract of guarantee and there are three contracts. So the parties are

the debtor, creditor and the surety. Surety has got rights against debtor. But sometime in a

contract of guarantee, the surety is not all alone. There is more than one surety or there are more

than two sureties. Then sometime one surety can exercise his rights against the other co sureties.

So the point of the co sureties will also be touched. So the suretys rights against the creditor,

rights against debtor and rights against co sureties will be discussed now in very brief.

Rights against Principal Debtor

Rights of Sub-rogation:Sub rogation is a process where rights will get shifted from one

person to the other. If surety makes payment to creditor, surety gets all rights of creditor

by sub-rogation and from then onwards surety can behave like a creditor.

Right of Indemnity:Principal of indemnity operates between principal debtor and suretywhere principal debtor becomes implied indemnifier and surety becomes implied

indemnity holder. Therefore, surety can make principal debtor answerable for all

sufferings.

Rights against Creditor

Right to get Securities:If Surety makes payment to creditor, surety can get all securities

into his possession from creditor.

Right to ask for Set-off: Surety can give advice to creditor to sell away the security and

to utilize the amount thus realized for set off.

Rights of Sub-rogation:When ever surety makes payment to creditor, creditor foregoes

or looses all of his rights in his capacity as creditor and those rights will be attained by

surety.

Rights against Co-Sureties

Right to ask for Contribution:Surety can ask his co-sureties to contribute the amount

when principal debtor comes across default. If they have given guarantee for equal

amounts, they have to contribute equally. In case where guarantee is given for in equal

amounts, the mode of contribution differs from England law to Indian law. As per

England law contribution is to be made in the ratio of guarantee amounts.


5/15

5 | P a g e

RIGHTS AGAINST PRINCIPAL DEBTOR

The rights of the surety against debtor are and that first right is the rightof subrogation. Now

what is the meaning of the right of subrogation? Right of subrogation says that when a surety

makes the payment to the creditor and creditor is out of the scene now, therefore now surety will

deal with the debtor in a manner as if he is a creditor. The surety after making the payment to the

creditor will step into the shoes of the creditor. Because after making the payment to the creditor,

the creditor is out of the scene now. Surety have given the guarantee to the creditor and creditor

after getting the payment is out of scene and now the surety will step into the shoes. He will

occupy the same position which was available with the creditor. He will step into the shoes of the

creditor and will deal with the debtor as if he is a creditor. So his role will change he will not

remain simply as a surety. He will become now creditor for the debtor. So stepping into the

shoes of somebody is a right of the subrogation. So now surety has got a right to recover the

amount which he has paid to the creditor. It may include the principal amount, it may include the

interest and it may include the cost also.

In the contract of indemnity we have studied that indemnifier will compensate the indemnity

holder in case the indemnity holder suffers from some loss. So, indemnity stands for

compensating the loss, making good to the loss. If we apply the same concept which we have

studied in the contract of indemnity, in the contract of guarantee then we find that the surety has

got a right to indemnify himself if, because of the fault of the debtor, if the surety has suffered

from some loss or if he has been damaged because of the non fulfillment of the words or non

fulfillment of his promise and the surety has received some dent or he has suffered from some

loss so making good to the loss, the contract of indemnity will be applying here will apply here

and surety has got a right to get indemnity against the debtor. He will be compensated by the

debtor. Right to be relief from the liability, is another right available to the surety. Surety can go

to the debtor and can say to him that he should fulfill or he should perform the contract and thatis on the due date he should make the payment to the creditor. These are the rights of surety

against debtor.

RIGHT OF SUBROGATION

Section 140 provides for the right of subrogation.


6/15

6 | P a g e

Right of a surety against principal debtor: Where a guaranteed debt has become due, or default of

the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or

performance of all he is liable for, is invested with all the rights which the creditor had against

the principal debtor. A surety is thus, upon the payment of the guaranteed sum or on performance

of a guaranteed duty, subrogated or invested with all the rights which the creditor had against the

principal debtor. This arises on payment of the whole sum due or performance of the entire duty.

Surety steps into the shoes of the creditor. Surety may now sue the principal debtor in as much as

the creditor had the right to sue the principal debtor.

Section 140 embodies the general rule of equity expounded by Sir Samuel Romilly as counsel

and accepted by the Court of Chancery. The surety will be entitled to every remedy which the

creditor has against the principal debtor, to enforce every security and all means of payment, tostand in the place of the creditor; not only through the medium of contract, but even by means of

securities entered into without the knowledge of the surety having a right to have those securities

transferred to him, though there was no stipulation for that; and to avail himself of all those

securities against the debtor. This right of a surety also stands, not upon a principle of natural

justice.

Right 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

payment or performance of all that he is liable for, is invested with all the rights which the

creditor had against the principal debtor.

When the surety has paid all that he is liable for he is invested with all the rights which the

creditor had against the principal debtor. The surety steps into the shoes of the creditor. The

creditor had the right to sue the principal debtor. "If the liability of the surety is coextensive with

that of the principal debtor, his right is not less coextensive with that of the creditor after he

satisfies the creditors debts1. The surety may, therefore, sue the principal debtor in the rights of

the creditor.

1Babu Rao Ram Chandra Rao v Babu Manaklal Nehmal, AIR 1938 Nag 413.


7/15

7 | P a g e

For example in lampleigh I ron Ore Co Ltd Re:2

A director of a company in liquidation guaranteed and paid the rents due from the company

before the date of the liquidation. It was held that he was entitled to stand in the place of the

creditor, and to use all remedies, if need be, in the name of the creditor in any action to obtain

indemnification from the principal debtor for the lass sustained

The Supreme Court has laid down that the surety will be entitled to every remedy which the

creditor had against the principal debtor; to enforce every securityand all means of payment; to

stand in the place of the creditor; to have the securities transferred to him, though there was no

stipulation for that; and to avail himself of all those securities against the debtor. This right of a

surety stands not merely upon contract, but also natural justice. The language of the section 140

which employs the words is invested with all the rights which the creditor had against the

principal debtor makes it plain that even without the necessity of a transfer, the law vests those

rights in the surety.3

This may not always be to the advantage of the surety. Where the principal debtor becomes

insolvent, the surety cannot ask the creditor first to pursue his remedy against the principal

debtor. The Supreme Court has pointed that even then the surety should pay. He will be

subrogated to the rights of the creditor against the principal debtor, though such rights against an

insolvent debtor may not be of much use. The very object of guarantee is defeated if the creditor

is asked to postpone his remedies against the surety.4

Rights of surety before payment

Under the right of subrogation the surety may get certain rights even before payment. The

Calcutta High Court examined this possibility in a case where the surety found, that the amount

having become due, the principle debtor was disposing of his personal properties one after the

other lest the surety, after paying, may seize them and sought a temporary injunction to preventthe principal debtor from doing so. The Court granted the injunction. Relying upon an

2(1927) 1 Ch 3082Amritlal Goverdhan lallan v State Bank of Travencore, AIR 1968 SC 1432: (1968) 3 SCR2Bank of Bihar Ltd v Damodar Prasad, AIR 1969 SC 297: (1969) 1 SCR 620, 623.


8/15

8 | P a g e

authoritative work, SUKUMAR CHAKRAVARTY J said5 that if in any suit it is proved by

affidavit or otherwise that the defendant threatens, or is about to remove or dispose of his

property with intent to defraud his creditors, the court may grant a temporary injunction to

restrain such act or to such other order for the purpose of staying or preventing the removal or

disposition of the property.

Listing the other rights of the surety which arise in his favor before payment, the court cited the

following passage from STORY ON EQUITY:6

Sureties, also, are entitled to come into a court of equity, after a debt has become due, to

compel the debtor to exonerate them from their liability by paying the debt; or sue in the

creditors name, and collect debt from the principal, if he will indemnify the creditor against the

risk, delay and expense of the suit.

The Court brought out from SNELLS PRINCIPLES OF EQUITY7a passage which discusses

the remedies of the surety under two heads, viz., before payment and after payment:

It has been stated there that the surety has an equitable right to compel the principal debtor to

pay the debt so relieve the surety from the necessity of paying it out of his pocket. It is in the

nature of quia timet, and is based on the principle that it is unreasonable that a man should

always have a cloud hang over him, so that he ought to be entitled to remove it. It is, therefore,

immaterial that the creditor has refused to sue or that he has made no demand. A fortiori, the

action lies where the principal debtor threatens to commit a breach of the obligations which the

surety has guaranteed and an order may be made even though the principal debtor is without

funds. But an action will not lie where the debt is not an actual, accrued or definite debt or, if on

its true construction, the guarantee precludes action before the creditor demands payment.

In a suit against the principal debtor and sureties for recovery of the mortgage money the

sureties paid the amount on passing of preliminary decree. The Court said that this amounted to

5138 (para 327, 3rdedn) at p. 283, AIR 1987 Cal.5467 (28thEdn by) P.V. Baker and P. St. J. Langan.


9/15

9 | P a g e

payment during the pendency of the suit. The court further said that, by operation of law, the suit

became assigned in their favor and they could continue it against the principle debtor by virtue of

the subrogation.8

RIGHT TO INDEMNIFY

In every contract of guarantee there is an implied promise by the principle debtor to indemnify

the surety. Hence, the surety is entitled to recover, all those sums which he has rightfully paid

under the guarantee, from the principle debtor. But no sums can be recovered from the principle

debtor that surety has paid wrongfully. In a contract of guarantee, when the principal debtor

makes a default, the surety has to make the payment to the creditor. This payment is made by

him on behalf of the debtor. After making such payment, he can recover the same from the

principal debtor. Such a claim can be made by the surety only in respect of the sums he has paid

wrongfully.

Section 145 deals with 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 sum which he has paid wrongfully.

Thus in every contract of guarantee there is an implied promise by the principal debtor to

indemnify the surety. The right enables the surety to recover from the principal debtor whatever

sum he has rightfully paid under the guarantee,9but not sums which he paid wrongfully.

An example of wrongful payment is a case where a surety had guaranteed the payment of four

motor vehicles delivered oh hire-purchase. The surety contented that he had paid Rs 4000 in

discharge of his liability, but he failed to give an account of the price which the motor vehicles

might have realized on resale. He was not allowed to recover his indemnify.10

In c.k. aboobacker v. k.p. ayishu, it has been held by the Kerala High Court that a guarantor is

liable for any payment or performance or any obligation only to the extent the principal debtor

8Kadamba Sugar Industries (P) Ltd v Devru Ganapati hedge bhairi, AIR 1993 Kant 288.9Supreme leasing v Low chuan heny, 1989 Current LJ 809 HC Kuala lumpur.10Chekkeva ponnamma v A.S Thammayya, AIR 1983 Kant 124.


10/15

10 | P a g e

has defaulted. If a substantial portion of the loan has been paid by the principal debtor, the

guarantor is to pay only the balance due. According to section 145, after the surety has paid the

amount, the principal debtor should indemnify the surety for everything the surety has rightfully

paid under the contract of guarantee.

ILLUSTRAIONS

B indebted to C, and A is the surety for the debt. C demands payment from A, and on his refusal

sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is

compelled to pay the amount of the debts with costs. He can recover from B the amount paid by

him for costs, as well as the principal debt.

2) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B

upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and, on

As refusal to pay, sues him upon the bill. A, not having reasonable grounds for doing so,

defends the suit, and has to pay the amount of the bill and costs. He can recover from B the

amount of the bill, but not the sum paid for costs, as there was no real ground for defending the

action.

3) A guarantees to C, to the extent of 2000 rupees, payment for rice to be supplied by C to B. C

supplies to B rice to a less amount than 2000 rupees, but obtains from A payment of the sum of2000 rupees in respect of the rice supplied. A cannot recover from B more that the price of the

rice actually supplied.

RIGHTS AGAINST CO-SURETIES

When we say co sureties it means in a contract of guarantee there are more than one surety.

Sometime in the contract, it happens that one person does not want to take the complete liability

in terms of the surety in a contract. There has to be a more than or sometime there are more than

one surety in that case what are rights available with the surety. Right of the surety in this case

will be that he has got a right to contribute. Rights of contribution stands for that suppose on the

due date or in a contract of guarantee one surety is making the complete payment on behalf of

the other co sureties. Then, he has got a right to claim the contribution from the other co sureties.


11/15

11 | P a g e

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, 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:

1. A, B and C are sureties to D for the sum of Rs 3,000 lent to E. E makes default in payment. A,

B and C are liable between themselves to pay Rs 1,000 each.

2. A, B, and C are sureties to D for the sum of Rs 1,000 lent to E, and there is a contract between

A, B, and C that A is to be responsible to the extent of one quarter, 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 Rs 250, B Rs 250, and C Rs 500.

The co-sureties are entitled to share in the rights which any one of them has obtained from the

principal, for example, share in the right tobenefit of creditors securities or indemnity. Claim of

one co-surety against other co-sureties arises only when

i) He has paid more than his share of the debt to the principal debtor; or

ii) suit is decreed for full amount against one of co-sureties, and any payment by him will entitle

him to contribution from other co-sureties.

Co-sureties bound in different sums: Co-sureties who are bound in different sums are liable to

pay equally as far as the limits of their respective obligations permit (Sec 147)

ILLUSTRATIONS:

1. A, B, and C as sureties for D, enter into three several bonds, each in a different penalty,

namely A in the penalty of Rs 10,000, B in that of 20,000, C in that of Rs 40,000, conditioned for

Ds duly accounting to E. D makes default to the extent of Rs 40,000. A is liable to pay Rs

10,000.

2. A, B, and C as sureties for D, enter into three several bonds, each in a different penalty,

namely, A in the penalty of Rs 10,000, B in that of 20,000 rupees, C in that of Rs 40,000


12/15

12 | P a g e

conditioned for Ds duly accounting to E. D makes default to the extent of Rs 40,000 A is liable

to pay Rs 10,000 and B and C Rs 15,000 each.

3. A, B, and C as sureties for D, enter into there several bonds, each in a different penalty,

namely, A in a penalty of Rs 10,000, B, in that of Rs 20,000, C in that of Rs 40,000 conditioned

for Ds duly accounting to E. D makes default to the extent of Rs 70,000. A, B, and C have to

pay each the penalty of his bond.

As discussed above, release by the creditor of one co-surety does not discharge the other co-

sureties. It does not either free the surely so released from his responsibility to the other sureties

(Sec 138). Released co-surety will remain liable to others for contribution in the event of default.

Where a person gives a guarantee upon a contract that a 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 join (Sec 144).

It should be further noted that any undertaking between debtors at the time when debt was

contracted or subsequently that one of them shall only be liable as a surety, will not affect the

rights of the creditor in any way even if the creditor knew of the agreement between the debtors.

CASES

(1)Amritlal Goverdhan Lallon v. State of Travancore, AIR 1968 SC 1432.

FACTS:

Respondents 3 to 6, as partner of respondent 2 firm (R2), entered into an agreement with a bank

(R1) to open a cash credit account to the extent of Rs. 100,000 to be secured by goods to be

pledged with the bank. The agreement provided that the borrowers shall be responsible for the

quantity and quality of the goods pledged. The appellant (A) became surety for the borrowers

w.r.t the account upto Rs.100,000 and allowed the bank to recover, notwithstanding to any other

security the bank may hold. The stock pledged with the initial valued about Rs. 99,991 but after

verification shortage of goods to the value of Rs. 35,690 was found. It was alleged that R2-R-6

must have taken the goods. They were granted time to make up the deficit but they failed to do


13/15

13 | P a g e

so. After adjusting the money realized on the sale of the goods pledged and other adjustments, a

sum of Rs. 40,933.58 was found due to the bank of R2-R6. The bank filed a suit against them

and A.

HELD:

Trial Court: suit decreed.

High Court:decree confirmed

SUPREME COURT:

Contentions(Appellant, A)

1. Certain entries in the account books of the bank showed that the maximum limit of credit

was reduced to Rs. 50,000 and again raised to Rs. 100,000 without consulting the

appellant, therefore there was variations in the terms of the contract without the suretys

(appellants) consent and, under s. 133 of the Indian Contract Act the liability of the

appellant was discharged.

2. Under s. 135 of the Act, the conduct of the bank in giving time to R2-R6 to make up

thedeficit in the quantity of goods absolved A of all liability.3. Under s. 141 of the Act, since a portion of security was parted with or lost by the creditor

without suretys consent, the liability of A was discharged to the extent of the value of

the security so lost.

RAMASWAMI, J.

1. (w.r.t 1stcontention of A) The entries in the books of account were mere internal

instructionsnot legally bindingon the respondents, and in view of the formal record inthe original agreement and letter of guarantee, there could not have been a variation in the

terms without a proper written agreement. Therefore, there was no variance in the terms

of the contract and the provisions of s. 133 of the Act were not attracted.

2. (w.r.t 2ndcontention of A) The act of the Bank in giving time to the principal debtor to

make up the quantity of goods pledged is not tantamount to giving of time to the principal


14/15

14 | P a g e

debtor for making payment of the money, within the meaning of the section 135 and

hence it is not attracted. What really constitutes a promise to give time within the

meaning of s. 135 of the Act is the extension of the period at which, the principal debtor

was by the original contract obliged to pay the creditor, by substituting a new and valid

contract between them, or, whenever the taking of a new security from the principal

debtor operates as giving time.

3. (w.r.t 3rdcontention of A)Under s. 140 of the Contract Act the surety is, on payment of

the amount due by the principal debtor, entitled to be put in the same position in which

the creditor stood in relation to the principal debtor. Under s. 141 of the Act the surety

has a right to the securities held by the creditor at the date when he became surety. The

shortage was brought about by the negligence of the Bank and to that extent it must be

deemedto be a loss by the Bank of the security. Contention accepted.11

4. (2) In the case of Lampleigh Iron Ore Co Ltd, Re 1927, the court has laid down that

the surety will be entitled, to every remedy which the creditor has against the principal

debtor; to enforce every security and all means of payment; to stand in place of the

creditor to have the securities transferred in his name, though there was no stipulation for

that; and to avail himself of all those securities against the debtor.

(3) In the case of Kadamba Sugar Industries Pvt Ltd vs Devru Ganapathi AIR 1993,

Kar HC held that surety is entitled to the benefits of the securities even if he is not aware

of their existence

5. (4) In the case of Mamata Ghose vs United Industrial Bank AIR 1987, Cal HC held

that under the right of subrogation, the surety may get certain rights even before payment.

In this case, the principal debtor was disposing off his personal properties one after

another lest the surety, after paying the debt, seize them. The surety sought for temporary

injunction, which was granted.12

11 http://indiancaselaws.wordpress.com/(visited on April 24, 2014)12http://hanumant.com/(visited on April 24, 2014)
http://indiancaselaws.wordpress.com/http://indiancaselaws.wordpress.com/http://hanumant.com/http://hanumant.com/http://hanumant.com/http://hanumant.com/http://indiancaselaws.wordpress.com/


15/15

15 | P a g e

CONCLUSION

This project deals about the rights of the surety against principal debtor. From above it can be

concluded that surety has right of subrogation and right to indemnity against the principal debtor

mentioned in section 140 and section 145 of Indian Contract Act respectively about which it is

mentioned in the introductory part of the project. Further these rights are mentioned in detail

followed with important case laws and illustrations related to it in the main body of the project.

Hence it can concluded that when the surety has paid all that he is liable for he is invested with

all the rights which the creditor had against the principal debtor basically the surety steps into the

shoes of the creditor. The creditor had the right to sue the principal debtor so the surety may,

therefore, sue the principal debtor in the rights of the creditor. Along with this there is an implied

promise by the principal debtor to indemnify the surety. The right enables the surety to recover

from the principal debtor whatever sum he has rightfully paid under the guarantee.

BIBLIOGRAPHY

Bangia, R.K., Contracts- II, Allahabad law agency: Allahabad; 2009, Reprint 2013.

Singh Avtar, Contracts and specific relief act textbook, Universal law publishing co. New

Delhi; 2005.

http://indiancaselaws.wordpress.com/(visited on April 24, 2014). http://hanumant.com/(visited on April 24, 2014).
http://indiancaselaws.wordpress.com/http://indiancaselaws.wordpress.com/http://hanumant.com/http://hanumant.com/http://hanumant.com/http://indiancaselaws.wordpress.com/

contracts ii.pdf

Documents