by Surety is a legal term that refers to a person who agrees to be responsible for the debt or obligation of another person, known as the principal debtor, in the event that the debtor fails to fulfill their obligation to a third party, known as the creditor. A surety is essentially a guarantor who provides a guarantee or assurance of payment or performance on behalf of the principal debtor.
Under Indian contract law, a surety is bound by the terms of the contract of guarantee that they have entered into with the creditor. The surety’s liability is generally co-extensive with that of the principal debtor, meaning that the surety can be held responsible for the full amount of the debt or obligation if the debtor fails to fulfill their obligation. However, if the contract of guarantee contains a limitation on the surety’s liability, such as a cap on the amount for which the surety is liable, then the surety’s liability is limited to that amount.
A surety may be required in various situations, such as in connection with a loan, a lease, or a construction contract. In such cases, the creditor may require a surety to provide a guarantee of payment or performance on behalf of the principal debtor to ensure that the creditor’s interests are protected.
It is important for a surety to fully understand the terms and conditions of the contract of guarantee before entering into it, as the surety’s liability can be significant. It is recommended to seek the advice of a qualified attorney who is familiar with the laws of India before entering into any contract of guarantee as a surety.
Rights of Surety
Under Indian contract law, a surety has certain rights that are aimed at protecting their interests in the contract of guarantee. Some of the rights of a surety are:
- Right of Subrogation: The right of subrogation allows the surety to step into the shoes of the creditor and recover the amount paid to the creditor from the principal debtor. This means that if the surety pays the debt owed by the principal debtor to the creditor, the surety is entitled to recover that amount from the principal debtor.
- Right to be Discharged: A surety has the right to be discharged from their obligations under the contract of guarantee in certain circumstances. For example, if the creditor alters the terms of the agreement without the consent of the surety, the surety is discharged from their obligations under the contract of guarantee.
- Right of Contribution: If there are multiple sureties for the same debt or obligation, each surety has the right to claim contribution from the other sureties in proportion to their liability. This means that if one surety pays more than their share of the debt or obligation, they can seek reimbursement from the other sureties.
- Right to Notice: The creditor is required to give notice to the surety in case of default by the principal debtor. This allows the surety to take appropriate steps to mitigate their loss, such as paying the debt owed by the principal debtor to avoid further damages.
- Right of Set-Off: If the principal debtor owes money to the surety, the surety has the right to set off that amount against the debt owed by the principal debtor to the creditor.
Liabilities of Surety
Under Indian contract law, a surety has certain liabilities under the contract of guarantee that they enter into with the creditor. The liabilities of a surety are:
- Primary Liability: A surety has primary liability for the debt or obligation of the principal debtor. This means that if the principal debtor fails to fulfill their obligation, the surety is liable to the creditor for the entire amount of the debt or obligation.
- Co-Extensive Liability: The liability of the surety is co-extensive with that of the principal debtor. This means that the surety is liable for the full amount of the debt or obligation, and not just a portion of it. However, if the contract of guarantee contains a limitation on the surety’s liability, such as a cap on the amount for which the surety is liable, then the surety’s liability is limited to that amount.
- Liability to Pay on Demand: The creditor can demand payment from the surety as soon as the principal debtor defaults on their obligation. The creditor does not need to wait until the debt becomes due before making a demand on the surety.
- Liability for Interest and Costs: The surety is also liable for any interest that accrues on the debt or obligation, as well as any costs associated with the collection of the debt or obligation.
- Liability even in case of Invalidity of Principal Contract: The liability of the surety is not affected by the invalidity of the principal contract. This means that even if the principal contract is declared invalid, the surety is still liable for the debt or obligation of the principal debtor.
Discharge of Surety
Under Indian contract law, a surety can be discharged from their obligations under a contract of guarantee in certain circumstances. Some of the ways in which a surety can be discharged from their obligations are:
- Discharge by Performance: If the principal debtor fulfills their obligations under the contract, the surety is discharged from their obligations as well.
- Discharge by Agreement: The creditor can agree to release the surety from their obligations under the contract of guarantee. This can be done by way of a written agreement between the creditor, the principal debtor, and the surety.
- Discharge by Variation of Terms: If the creditor alters the terms of the contract of guarantee without the consent of the surety, the surety is discharged from their obligations under the contract of guarantee.
- Discharge by Novation: If the creditor and the principal debtor enter into a new contract that replaces the original contract of guarantee, the surety is discharged from their obligations under the original contract.
- Discharge by Time: If the contract of guarantee has a specific time period, the surety is discharged from their obligations once that time period has expired.
- Discharge by Loss of Security: If the creditor loses the security provided by the principal debtor, the surety is discharged from their obligations under the contract of guarantee.
