The Author, Pragyanshu Gautam is a first-year BA.LLB student at Hidayatullah National Law University, Raipur.
Introductory Remarks
Can the suit against surety (guarantor) be taken before taking action against the principal debtor?:
Yes, it is held maintainable without even taking proceedings against the principal debtor. As in the case of N. Narasimhaiah v. Karnataka State Financial, “the creditor, in his affidavit had proclaimed sufficient reasoning for not proceeding against the principal debtor.” Similarly, in the case of Vijay Singh Padode v. Sicom Ltd “a contract of guarantee was made enforceable by its terms against the guarantor severally and jointly with that of the principal debtor company.” The court held that the creditor has the option to sue the company along with the guarantor or sue surety alone.
In the leading case of Bank of Bihar v. Damodar Prasad it was held that “the proceeding against surety can be done without exhausting remedies against the principal debtor.” This case decision was first given by Patna High Court and then overruled by Supreme Court which is the final judgment. The facts were the defendant guaranteed a loan but default took place so the defendant was sued. The ‘trial court’ gave official order that the “bank shall enforce the guarantee in question after the remedies had been exhausted against the principal debtor.” A similar view was given by the Allahabad High Court without reference to the Supreme Court ruling. As S.C in the case said that by following the condition of this kind would defeat the parties intention as “the very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. The trial court gave no reason for the extraordinary direction. Also, the solvency of a principal is not a sufficient reason for restraining the execution of the decree against the surety. It is the duty of the surety to pay the decretal amount and with such payment, he will be subrogated to the rights of the creditors.” After subrogation may exhaust the remedies against the creditor. The surety also called the guarantor, “it is his obligation and business to see that the principal debtor pays, and not that of the creditor.”
Thus, from this case can well interpret the meaning of coextensive: coextensive means equal in amount and time - when the liability of the principal debtor arises, the liability of surety arises. It shows “the maximum extent of the surety’s liability that he is liable for the whole of the amount for which the debtor is liable and not able to pay.” In addition to this, the “surety is not only liable for the whole amount but also for interest and charges which may become due on it.”
Therefore, we conclude from the above case and illustrations that the proceeding against surety can be taken “without exhausting the remedies against the principal debtor.”
As the judgment given by the Supreme Court in the above leading case, we analyze the law relating to guarantee and surety’s liability (S.128 of the Indian Contract Act)
In the law, Surety is the promisor and Creditor is the promisee, and debt (loan) is given because of surety. The fundamental principle about the surety’s liability is laid down in S.128 of the Act. The last few words of the S.128 of the surety’s liability says that it is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.”
Illustration: A, the guarantor gives surety for C that payment of the bill of exchange would be done by C (acceptor) to B (the creditor). The bill is dishonored by C. Currently, A, a surety is not only liable for the whole amount of the bill but also for any interest and charges which may have become payable.
Guarantee (meaning “third-person liability” in case of any default in performance, S.126 of the Contract Act), nowadays “guarantor is surety” and past guarantee cannot be considered for guarantee (S.127).
The basic function of a guarantee is to help a person economically by enabling them to get a loan, or goods on credit, or employment. As in the “old case of Birkmyr v Darnell”, “If two come to a shop and one buys, and the other gives him credit, promises the seller, ‘if he does not pay you, I will.” This “type of collateral undertaking to be liable for the default of another” is called a “contract of guarantee.” In English law it is defined as “a promise to answer for the debt, default or miscarriage of another.”
S.127 (consideration for guarantee) is an exception of 2(d) (consideration of the promise). But past consideration (one of the essentials of guarantee) given is not an exception to S.2(b) (promise) of the ICA as discussed in the case of SBI v Premco Saw Mills.
Surety (each and every reimburse + promise both) rights in S. 141: It says that “surety is entitled to the benefit of the security which the creditor has given against the principal debtor and the time when the contract of guarantee was entered into whether the surety knows it or not.”
Surety and Guarantee difference
The primary difference between them is “the time at which a creditor can collect from each.” With the concern of “suretyship, the creditor can look to the surety for an immediate payment upon the occurrence of a default payment by a debtor.” However, whereas a guarantor is an individual, “the creditor first asks to collect the debt from the principal debtor before demanding the performance from the guarantor.” Guarantor stands alone or independent for any underlying obligation “by the principal debtor to a creditor (does not have in writing) whereas surety can exist only for a valid agreement between the principal debtor, creditor, and surety, a person binding himself on behalf of the debtor.” There is a greater risk for the guarantor than a surety (credit risk on the principle of exercising his right recourse) whereas the guarantor of a surety is not subrogated on the creditor’s right upon payment, which increases the risk for him.
Is Surety an unprotected debtor?
A surety is favored by law as such surety liability is a “favored debtor” as “the liability of the surety is contingent and secondary.” The surety would be asked for paying debt only after the action on the principal debtor has been taken by the creditor. In the case of Davies v London Provincial, Marine Insurance said that “a contract of guarantee is not a contract uberrimae fides or one of absolute good faith.” It is the “duty of an acceptor taking guarantee to put surety in the possession of all the facts which is likely to affect the degree of his responsibility, and if he rejects it then it is at his immediate danger.” Additionally, a surety is required to know the whole contract entered into with his principal.
Conclusion: Surety is favored by the law and has various rights (subrogation, rights before payment, right to indemnity, rights against the creditor and so on) and is explained from S. 133-S.141 In ICA. It is the duty of the creditor to put the surety in possession of all the facts likely to affect the degree of responsiveness in case the material is not disclosed to the surety to the surety will “not be liable under guarantee.” There are various rights of the surety which ensures the balance of the liability on the principal debtor (S.128) and surety.
Notes and References:
1. As given in S.126 “In the Indian Contract Act, 1872”, 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.’
2. 2003 (5) KraLJ 164.
3. It is a writing statement of oath voluntarily made by the person who is authorized by law to do so and serves as evidence for its “commitment to facts” as required in the court proceedings.
4. (2000) 2 Bom CR 263.
5. When two or more persons are “liable in respect of the same liability in most common law legal systems they either may be: jointly liable or severally liable or jointly and severally liable.”
6. AIR 1969 SC 297: (1969) 1 SCR 620.
7. Avatar Singh, in CONTRACT AND SPECIFIC RELIEF (2020).
8. It is the amount calculated on combining principle, interest, and stamp duty.
9. Maharaja of Benares v Har Narain Singh, ILR (1906-07) 28 All 25.
10. Nandlal Chogalal v Surajmal Gangaram, AIR 1932 Nag 62.
11. Bob Bernstein, Guaranty or Surety?Bernstein(2016), https://bernsteinlaw.com/guaranty-or-surety/ (last visited June 10, 2021).
12. 91 ER 27: 1 Salked, 27.
13. It is an undertaking or promise (either in the form of fixed deposits or assets) committed as security for repayment of a loan that binds the guarantor to perform in the event of default.
14. S.4, Statute of Frauds 1677, 29 Car, II, C 3.
15. AIR 1984 Guj 92.
16. What is the difference between a guaranty and a surety?, Euler Hermes, https://www.eulerhermes.com/en_BE/news/latest-news/bndg-what-is-the-difference-between-a-guaranty-and-a-surety.html (last visited June 10, 2021).
17. Why surety is a Favoured debtor?, https://askinglot.com/why-surety-is-a-favoured-debtor (last visited June 11, 2021).
18. Co (1878) LR 8 Ch D 469.
