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Surety/Guarantor: Rights and Liability

Hello friends today we will discuss the basic attributes of the relationship between principal and the surety. The liability of the guarantee is co-extensive with the principal debtor. It is the duty of the guarantor to pay the debt to the creditor. To a certain extent liability of the surety can be discharged.  Guarantee means assurance or promise.  A contract of guarantee is the tri party agreement between the creditor, debtor and the surety. The essential ingredients of guarantee agreement are :-

  1. Existing recoverable debt which must be specific;
  2. Duty to perform the obligation;
  3. There must be concurrence of Principal, Debtor and Guarantor. In other words, there must be a tri party agreement in existence.
  4.  There must be a valid consideration which is same as the amount of loan itself in such type agreement and same is covered under Sec 127 of the Contract Act

Rights and Liabilities

Sec 140--once a guaranteed debt is satisfied paid by the guarantor, then all the securities held by the creditor shall stand transferred to the guarantor.

Sec 141—on account of negligent act of the creditor in protecting the security if it is lost then to the value of the security to that extent the liability of the guarantor is absolved, whether it was in knowledge  to the guarantor or not.

Eg suppose C advances loan to B on guarantee of A. Also B mortgage some assets with C. Now if C cancels the mortgage and B fails to repay, then C sues A, then A is absolve from the liability of the amount of mortgaged assets.

Sec 142—Guarantee obtained by misrepresentation is invalid.

Eg Suppose A employs B as a clerk for accounting for money, B makes some default. Now C gives guarantee to A for B’s conduct, however A do not tell C about B’s past conduct. In such an event, guarantee given by C is invalid.

Sec 143—Guarantee obtained by fraud is also invalid.

Eg Suppose A guarantee B for money to the goods supplied to C. However without A’s  knowledge, B & C secretly agreed to utilize the proceeds for some earlier debt. Then A’s guarantee is invalid.

Sec 145—it talks about the implied promise to indemnify the surety for the amount he has paid on behalf of the principal debtor by the debtor if the same is not paid wrongfully.

Sec 146—stipulates that in case of co-sureties, both of them in absence of any contract to the contrary are liable to pay the unpaid debt in equal proportions if not paid by the principal borrower.  

 

I you have understood the relationship between the borrower and the surety. For any query please feel free to write in the comment section.

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