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Liability of Surety

A surety is a person who guarantees the performance of a contract or the repayment of a debt by the principal debtor. Under the Indian Contract Act, 1872, the liability of a surety is defined and governed by Sections 126 to 147. The liability of a surety depends on the nature of the guarantee and the circumstances surrounding the contract.

1. Nature of Surety’s Liability

(a) Co-Extensive Liability (Section 128)

  • The liability of the surety is co-extensive with that of the principal debtor unless specified otherwise in the contract.
  • This means that the surety is liable for the same amount or obligation as the principal debtor.
  • Example: If the principal debtor owes ₹1 lakh, the surety’s liability is also ₹1 lakh.

(b) Secondary Liability

  • The surety’s liability arises only when the principal debtor defaults. It is secondary, meaning the creditor must first demand payment from the debtor before proceeding against the surety.
  • However, the creditor can choose to sue the surety directly without exhausting remedies against the debtor.

(c) Conditional or Absolute Liability

  • The liability of the surety may be conditional (e.g., triggered upon a specific event) or absolute (immediate upon default), depending on the terms of the guarantee.

2. Circumstances That Affect Surety’s Liability

(a) Default by the Principal Debtor

  • The surety becomes liable only when the principal debtor fails to perform their obligations as per the contract.

(b) Multiple Sureties

  • If there are multiple sureties, each surety’s liability depends on the agreement:
    • Joint Liability: All sureties are equally liable.
    • Several Liability: Each surety is liable only for their specific share.

(c) Limited or Unlimited Liability

  • A surety’s liability can be:
    • Limited: The surety’s liability is capped at a specific amount or duration.
    • Unlimited: The surety assumes complete liability for all obligations of the principal debtor.

3. Discharge of Surety’s Liability

The surety’s liability can be discharged under the following conditions:

(a) By Performance of the Principal Debtor

  • If the debtor fulfills their obligations, the surety is automatically discharged.

(b) By Revocation of the Guarantee (Section 130)

  • A surety can revoke a continuing guarantee for future transactions by giving notice to the creditor.

(c) By Release of Principal Debtor (Section 134)

  • If the creditor releases the principal debtor from liability, the surety is also discharged.

(d) By Alteration of Contract (Section 133)

  • Any material change in the terms of the contract without the surety’s consent discharges their liability.

(e) By Creditor’s Acts or Omissions (Section 139)

  • If the creditor acts in a way that impairs the surety’s rights or remedies (e.g., failing to enforce a security), the surety’s liability is discharged.

4. Extent of Surety’s Liability

(a) Defined by the Contract

  • The liability of the surety is determined by the terms of the contract of guarantee. Any ambiguity is interpreted against the surety.

(b) Liability for Default in Specific Transactions

  • In a specific guarantee, the surety is liable only for the specific obligation guaranteed.
  • In a continuing guarantee, the surety is liable for all transactions covered by the guarantee until it is revoked.

(c) No Liability for Unauthorized Acts

  • The surety is not liable for any obligations arising from unauthorized acts of the principal debtor.

5. Liability in Case of Death of Surety

  • If a surety dies, their liability for future transactions under a continuing guarantee ceases unless the agreement states otherwise. However, their estate remains liable for transactions completed before their death.

6. Examples of Surety’s Liability

  1. Loan Guarantee:
    A guarantees repayment of a ₹10 lakh loan taken by B. If B defaults, A is liable to repay the loan amount.

  2. Performance Guarantee:
    A guarantees that B will complete a construction project. If B fails to do so, A must compensate the project owner.

  3. Limited Guarantee:
    A guarantees B’s debt up to ₹5 lakhs. If B defaults on a ₹10 lakh debt, A is liable only for ₹5 lakhs.

Summary of Surety’s Liability

Aspect Details
Nature of Liability Co-extensive with the debtor; secondary liability triggered by default.
Defined by Contract Liability depends on the terms of the guarantee (limited or unlimited, specific or continuing).
Discharge of Liability By performance, revocation, release of debtor, or alteration of terms.
Death of Surety Liability ceases for future transactions under a continuing guarantee unless specified.

The liability of a surety plays a critical role in ensuring the performance of contracts and repayment of debts. However, legal safeguards such as the right to subrogation, indemnity, and discharge protect the surety from undue burden.

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