Who is a Surety in a Contract?

In the world of contracts, a surety is an important figure who guarantees the performance of obligations by another party. The term “surety” is commonly seen in contracts of guarantee, a legal framework under Indian law that provides an assurance to a creditor that a debt will be paid or a duty will be fulfilled, even if the principal party defaults. This article delves into the role, rights, and liabilities of a surety in a contract, with specific reference to the Indian Contract Act, 1872.

What is a Contract of Guarantee?

A contract of guarantee is defined under Section 126 of the Indian Contract Act, 1872. It involves three parties:

1. Creditor – The party lending money or providing a service.
2. Principal Debtor – The party who is directly responsible for the debt or performance.
3. Surety – The person who provides a guarantee, promising to perform the debtor’s obligation if the debtor fails to do so.

The surety’s promise is secondary, meaning their liability only arises when the principal debtor defaults. The contract of guarantee serves as a safeguard for creditors, ensuring that if the principal debtor is unable to meet their obligations, the surety will fulfill them. The surety’s liability is governed by the terms of the contract and is generally co-extensive with that of the principal debtor, unless specified otherwise.

Role of a Surety in a Contract

The role of a surety in a contract is pivotal, as they act as a secondary source of liability. To better understand this role, let us break it down into key responsibilities and implications:

• Backup to the Creditor: The primary purpose of the surety is to assure the creditor that the debt or obligation will be met, even if the principal debtor fails to fulfill their responsibilities. The creditor can approach the surety only if the principal debtor defaults.
• Conditional Promise: The surety’s promise is conditional. They are obligated to make the payment or perform the duty only if the principal debtor defaults. Until then, the surety has no immediate responsibility.
• Secondary Liability: A key feature of the surety’s role is that their liability is secondary. This means that the creditor must first attempt to recover the debt from the principal debtor before approaching the surety.

The legal framework surrounding the surety’s role ensures that they are not unfairly burdened and that their obligation is conditional on the failure of the principal debtor to fulfil their commitments.

Rights of a Surety in a Contract

Under Indian Contract Law, a surety has several rights that protect their interests and provide recourse in case of default. These rights are categorised into three main groups: rights against the creditor, rights against the principal debtor, and rights against co-sureties.

Rights Against the Creditor

The surety has certain rights to ensure that their interests are protected in case of default by the principal debtor.

• Right to Securities with the Creditor: Under Section 141 of the Indian Contract Act, the surety is entitled to a share of the security held by the creditor, in proportion to their obligation. This is true even if the surety was unaware of the security held. If the creditor has received securities from the principal debtor, the surety is entitled to a proportionate share of those securities in case they have to pay the debt.
• Right to Set Off Loss of Securities: If the creditor loses the security through negligence or misconduct, the surety has the right to set off their claim for the loss of security against the debt owed by the principal debtor. This means that the surety can use the loss of security as a basis for reducing their liability.

Rights Against the Principal Debtor

When a surety pays the debt on behalf of the principal debtor, they step into the shoes of the creditor and can claim their rights against the debtor.

• Right of Subrogation: Section 140 of the Indian Contract Act grants the surety the right of subrogation. This means that once the surety pays the debt, they acquire the creditor’s rights and can pursue the principal debtor to recover the amount. Essentially, the surety can act on behalf of the creditor to recover the debt.
  
• Right of Indemnity: Under Section 145, the principal debtor is required to indemnify the surety. Indemnification means that the debtor must compensate the surety for any loss they incur due to having to settle the debt. This right is implied by law, even if the contract does not specifically mention it.
• Rights Over Securities: Section 141 of the Indian Contract Act also mentions that the surety has rights over any securities the creditor has received from the principal debtor after the contract of guarantee has been signed. If the creditor claims the security, the surety is entitled to the benefit.

Rights Against Co-Sureties

When there are multiple sureties in a contract, they may have certain rights against each other. These rights ensure that no single surety is unfairly burdened.

• Right to Contribution: Section 146 of the Indian Contract Act mandates that co-sureties share the debt equally, unless the contract specifies otherwise. If one surety pays more than their fair share, they are entitled to claim contribution from the other sureties.
• Co-Surety’s Right to Release: Under Section 138, a co-surety who has been discharged from liability may seek a release from the other co-sureties. However, this does not automatically discharge the other co-sureties.
• Co-Sureties’ Liability: Section 147 requires that if the co-sureties have agreed to pay specific amounts in the event of a default, they must fulfil those promises in the agreed amounts. For instance, if three co-sureties agree to pay Rs 10,000 each for a total debt of Rs 30,000, each surety is bound to pay their share.

Surety’s Liability

One of the most important aspects of a surety’s role in a contract is the extent of their liability. The Indian Contract Act provides that the liability of a surety is co-extensive with that of the principal debtor, unless the contract provides otherwise. This means that the surety’s liability is the same as the principal debtor’s, in terms of the amount and scope of the debt.

For example, if the principal debtor owes Rs 100,000 to the creditor, the surety is liable for the same amount. However, if the contract specifies a different amount for the surety’s liability, the terms of the contract will prevail.

Conditions Under Which a Surety Can Be Discharged

There are several conditions under which a surety can be discharged from their liability. These include:

• Revocation of the Guarantee: Under Section 130, the surety can revoke the guarantee by giving notice to the creditor. However, this revocation only applies to future obligations and does not affect past obligations.
• Death of the Surety: As per Section 131, the death of the surety discharges their liability. However, the legal heirs may still be liable under certain circumstances.
• Changes in Terms by the Creditor: Section 133 states that if the creditor alters the terms of the contract without the surety’s knowledge or consent, the surety will be discharged from liability.
• Performance of the Contract: If the principal debtor fulfils the contract or repays the debt, the surety’s liability comes to an end, as per Section 134.
• Compromise with the Principal Debtor: If the creditor gives more time to the debtor or makes a compromise, the surety is discharged from their obligation under Section 135.
• Invalid Contracts: A surety may be discharged if the contract was entered into through misrepresentation, concealment of facts, or without the consent of co-sureties, as per Sections 142 to 144.

Conclusion

In the context of Indian Contract Law, the surety plays a crucial role in ensuring that debts are paid and obligations are fulfilled. The surety’s liability is secondary and co-extensive with that of the principal debtor, and they have specific rights against the creditor, principal debtor, and co-sureties. Understanding the rights and liabilities of a surety is vital for anyone entering into a contract of guarantee, whether as a surety or a creditor.