A

Project topic on

Rights of Surety against Principal Debtor

School of Law,
JECRC University

Submitted to: Submitted by:

Dr. Namita Jain Tanuj Sharma

Assistant professor, 17BALN027

School of Law, B.A. L.L.B. (H)

JECRC University Department of Law

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 CERTIFICATE

This is to certify that Tanuj Sharma of BA. L.L.B. (hons.) has successfully completed this
research project on the topic " Rights of Surety against Principal Debtor " prescribed by
Dr.Namita Jain, during academic session 2018-2019 as per the guidelines issues by the School of
Law, JECRC University.

Student’s signature Teacher’s signature

Tanuj Sharma Dr.Namita Jain

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 ACKNOWLEDGEMENT

I am very thankful to Mr. Mahesh Koolwal, Dean Sir for their valuable guidance, keen interest
and encouragement at various stages of my training period. His suggestions were of immense
help throughout the duration of the project. His perceptive criticism kept me working to make
this project in a much better way. Working under his was an extremely knowledgeable
experience for me. I would also like to give my sincere gratitude to all the friends and colleagues
who filled in the survey.

I would like to take this opportunity to express my profound gratitude and deep regard to my
teacher Dr. Namita Jain, for her exemplary guidance, valuable feedback and constant
encouragement throughout the duration of the project. Her valuable suggestions were of
immense help throughout my project work. Her perceptive criticism kept me working to make
this project in a much better way. Working under her was an extremely knowledgeable
experience for me.

I would like to take this opportunity to express my profound gratitude and deep regard to my
teachers of library staff for their exemplary guidance, valuable feedback and constant
encouragement throughout the duration of the project. Their perceptive criticism kept me
working to make this project in a much better way.

I would also like to give my sincere gratitude to all the friends and colleagues who filled in the
survey.

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 Contents

I. Project brief

II. Certificate

III. Acknowledgement

IV. Contents

1. Introduction

2. Surety and Surety's liability:

3. Rights against the principal debtor

4. Rights of subrogation

5. Right to demand for relief

6. Right to claim indemnity

7. Right to issue notice to the debtor

8. Conclusion

9. Bibliography & Webliography

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 Introduction

The contract of guarantee is also known as the Contract of Suretyship. Section 126 of the Indian
Contract Act, 1872 defines the Contract of guarantee - a "contract of guarantee” is a contract to
perform the promise, or discharge the liability, of a third person in case of his default. The person
who gives the guarantee is called the “surety”. Surety is also known as Guarantor. In the event of
a decree in favor of the creditor against the principal debtor the wings of the decree can also be
extended against the sureties as their liability in coextensive with the principal debtor. A surety is
a person who comes forward to pay the amount in the event of the borrower failing to pay the
amount .It means that on a default having been made by the principal debtor the creditors can
recover from the surety all what he could have recovered from the principal debtor. For instance,
the principal debtor makes a default in the payment of a debt of Rs. 10000/-.

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 Surety:

A surety is a person who comes forward to pay the amount in the event of the borrower failing to
pay the amount. In the event of a decree in favour of the creditor against the principal debtor the
wings of the decree can also be extended against the sureties as their liability in coextensive with
the principal debtor. But when a suit against the principal debtor was dismissed for default and
the decision became final there being no liability surviving against the debtor the surety’s
liability gets automatically terminated.

Surety's liability:

The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
provided by the contract. The provision that the surety’s liability is coextensive with that of the
principal debtor means that his liability is exactly the same as that of the principal debtor. It
means that on a default having been made by the principal debtor the creditors can recover from
the surety all what he could have recovered from the principal debtor.

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 Rights against the principal debtor

1.Rights of subrogation

Regarding rights of surety on payment or performance, Section 140 of the Contract Act, 1872
provides, “where a guaranteed debt has become due, or default of the principal debtor to perform
to perform a guaranteed duty has taken place, the surety upon payment or performance of all
that he is liable for is invested with all the rights which the creditor had against the principal
debtor.” This right of surety is called ‘the right of subrogation’. The surety steps into the shoes of
the creditor. The creditor has the right to sue the principal debtor. By the same right, the surety
may sue the principal debtor. Similarly, if the creditor has the right to stop goods in transit, or
has a seller’s lien, the surety on payment of all that he is liable for would be entitled to exercise
these rights. This right of subrogation stands not merely upon contract but also upon natural
justice. Thus as soon as the guarantor has paid off the creditor against the principal debtor unless
he has already waived the right.

2. Right to demand for relief

Before making the payment, the surety can compel the debtor to relieve him from liability by
paying off the debt.

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3. Right to claim indemnity

Regarding to implied promise to indemnify surety, Section 145 of the Contract Act provides “in
every contract of guarantee there is an implied promise by the principal debtor to indemnify the
surety and the surety is entitled to recover from the principal debtor whatever sum he had
rightfully paid under the guarantee, but no sums which he has pad wrongfully.

Example: ‘B’ is indebted to ‘C’ and ‘A’ is surety for the debt. ‘C’ demands payment from ‘A’
and on his refusal sues for the amount. ‘A’ defends the suit, having reasonable grounds for doing
so, but he is compelled to pay the amount of debt with costs. He can recover from ‘B’ the
amount paid by him for costs, as well as the principal debt. The guarantor’s right of indemnity
entitled him to recover from the principal debtor the full amount he has paid together with
interest. The reason is the surety is entitled to full indemnification. Until the guarantor has paid
the creditor, the guarantor’s right of indemnity against the principal debtor does not constitute a
debt owed by the principal debtor to guarantor. The right of indemnity exists only as to claims
that the guarantor must pay because of his position as guarantor. If he pays a claim for which the
principal debtor is not liable, he will have no right to be indemnified for such amount form the
principal debtor. In C.K. Aboobacker v. K.P. Ayishu, principal debtor paid a substantial portion
of the loan and the guarantor has paid the balance due. It was held that the principal debtor
should indemnify the surety for everything the surety has rightfully paid under the contract of
guarantee as per Section 145 of the Contract Act.

4. Right to issue notice to the debtor

The surety is entitled to issue a third party notice to the principal debtor when, he issued by the
creditor.

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 CONCLUSION

After studying the whole topic I would like to conclude that a surety is a person who comes
forward to pay the amount in the event of the borrower failing to pay the amount. In the event of
a decree in favor of the creditor against the principal debtor the wings of the decree can also be
extended against the sureties as their liability in coextensive with the principal debtor. The
liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
provided by the contract. A surety has certain rights against the principal debtor, the creditor and
co-sureties.

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 BIBLIOGRAPHY

• Indian Contract Act, 1872

• Indian Contract by R.K Bangia

WEBLIOGRAPHY

• www.indiankanoon.com
• www.lawoctopus.com
• www.legalindia.com

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