A guarantee contract is a contract that discharges another person’s liability (third party) in a matter of default by that third party. A surety means the party of the contract that gives the guarantee who has to pay the amount when the borrower fails to pay the amount. It means that on default of the primary debtor, the Creditor recovers from the surety. The person who gives the amount to the debtor is known as the Creditor. Also, the party for whom the guarantee is given is called Principal Debtor. This gave birth to rights of surety.
For instance, if the principal debtor defaults on a debt amount of Rs. 20,000/-, the Creditor can ask the surety for the payment.
Who is Surety?
In a guaranteed contract, a person who comes as a guarantee to the payment of amount borrowed by the primary debtor to Creditor is known as Surety. This means if the debtor fails to pay, the surety has to pay. Therefore, they are coextensively liable to the Creditor and the primary debtor.
Also, when there is a suit against the primary debtor by the Creditor and if the debtor is dismissed for their defaults. Then there is no liability of the primary debtor, and the surety’s liability also gets terminated automatically.
What are the liabilities of Surety?
The liabilities of surety in a guaranteed contract are co-extensive to that of the debtor unless any other clause has been mentioned in the contract. Here it means that if there is a default of the debtor, the Creditor can recover the amount from the surety that initially was to be discovered from the primary debtor. And also, in case the primary debtor is dismissed from their defaults. Then, the liability of surety also gets automatically terminated. This to and fro between surety and liability gave birth to rights and liabilities of surety.
What are the Rights of Surety against the Principal debtor?
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Section 140 of The Contract Act, 1872
Right of Surety on Payment or performance, i.e., Right to Subrogation
This section states that in the case where the primary debtor is at fault and cannot perform their duty, the surety carries all the liability of the primary debtor to the Creditor. But with this, they get a right to step into the shoes of the Creditor and, by any legal action, recover all the liabilities paid from the primary debtor. This right of Surety after the performance or payment of liability is known as the Right to Subrogation.
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Section 145 of The Contract Act, 1872
For indemnifying Surety, the promise should be implied.
Here as per the section in the contract of guarantees on the default of the primary debtor. The surety has to pay all the liabilities to the Creditor. After making this payment, the Creditor can recover this amount from the primary debtor. And this claim by the surety is only on rightful payments under guarantee and not for the one paid wrongfully. The Right and duties of Surety are known as the Right of indemnity against the primary debtor in the guarantee contract.
What are the rights of the surety against the Creditor?
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Section 141 of The Contract Act, 1872
Here in this section, it is noted that when surety performs all their liability against the Creditor as per the contract. They are subrogated to the rights available to the primary debtor by the Creditor. Further, this section also says that surety is entitled to security benefits the Creditor had against the debtor when the contract was entered into. Also, it is not necessary that while entering into the contract of guarantee, the surety must know about the securities creditor had. This right of surety against creditors is known as the Right to Securities. Check out the Rights of Surety pdf to learn more.
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Loss of Securities of contract by Creditor’s negligence
If the securities of the contract of the guarantee are lost by the negligence of the Creditor, the surety is discharged of its liability co-extensive to the principal debtor. Also, if the contract securities are lost without the Creditor’s fault, the surety is not released of their liability, co-extensive to the primary debtor.
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Securities received after the contract of guarantee
As we have seen above, section 141 of The Contracts Act, 1872, mentions that the surety has the Right to securities that the Creditor has against the primary debtor at the time of contract.
But with this also comes that the surety has no right to securities which the Creditor made against the debtor after the contract of guarantee. So, the surety does not have to perform the liability in the loss of securities due to the contract.
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No Right to goods in hypothecation
Here we know that the surety is entitled to all the securities and goods with the Creditor after performing the liability. This covers the situation where the pledged goods own the Creditor. But if they lose the goods, the surety does not have to perform the liability. So, if the goods are hypothecated, the Creditor doesn’t possess goods, so the surety cannot invoke section 141 of The Contact Act, 1872.
Conclusion
After studying all the details about the rights of Surety and liabilities above, we can conclude that surety is that person who becomes the part of the contract to pay the liabilities on default of the primary debtor. Any decree between the Creditor and the primary debtor can also be extended to the surety as Right and duties of Surety. Therefore, the rights and liabilities of Surety are co-extensive to the debtor otherwise mentioned in the contract of guarantee.