CONTRACTS ASSIGNMENT – 1

QUESTION ATTEMPTED: 3RD

SUBITTED TO: Professor Bhavya Tandon

SUBMITTED BY: Shivangi Mayaramka

BATCH & ID: LLB’21 (21010517)

TOTAL WORD COUNT: 1070 words

The contract of guarantee is covered in the Indian contracts act from section 126 to 144, it
elucidates the essentials that help formulate an agreement that comprises of 3 parties and
subsequently has 3 contracts (first between the principal debtor and the creditor, second
between the creditor and the surety and lastly between the surety and the principal debtor)
while one can study indemnity and guarantee in consonance with each other one of the stark
differences between the two in terms of the liability marked by law. Contract of indemnity
prescribes the indemnifier as the primary liable party whereas under guarantee the the
principal debtor holds the primary liability and surety the secondary. But how does one
define the exact extent of a surety’s liability and exactly how to invoke it? S. 128 talks about
the co-extensiveness of the surety’s liability unless provided otherwise in the contract drafted.
In my humble analysis of the said statutes mentioned in the question I would like to argue
against the fact that one could exclude the stamping of section 128 and coequally reprimand
Section (s) 133, 134, 135, 139 which speak of modes of discharge of a surety’s liability by
conduct of the creditor.

My foremost argument would be how the language of section 128 forms the basis for the
subsequent sections that deal with variance in terms of contract, release or discharge of
principal debtor or the creditor compounding and suing the principal debtor respectively. I
would connote them as exceptions to the secondary liability of a surety like seen in the
landmark precedents Lep Air vs Moschi (1973)

“The obligation of a guarantor under a contract ‘is not an

obligation himself to pay a sum of money to the creditor, but an
obligation to see to it that another person, the debtor, does
 something.’ When a repudiatory breach is accepted by the
injured party to discharge the contract, all primary obligations
remaining for performance in the future are discharged and
replaced in the case of the party in default by a secondary
obligation to pay the damages imposed by law.”1

A contract cannot be complied without due consideration and hence without a derivative
liability being imposed on part of the surety be it specific or continuing, there is no basis to a
contract of guarantee, to substantiate my argument even further I would like to cite the case
of Bank Of Bihar Ltd vs Damodar Prasad & Anr where the doctrine of co extensiveness of
guarantee has been further pursued and exemplified it was held : “It is the duty of the surety
to pay the decretal amount. On such payment he will be subrogated to the rights of the
creditor under s. 140 of the Indian Contract Act.” 2 this case was decided keeping in my
mind the Lachman Joharimal v. Bapu Khandu and Another (1869) where the high court of
Bombay enunciated that a creditor is not expected to exhaust all his remedies prior to filing a
charge against the principal debtor, and the decree that is passed against the principal debtor
will be upheld also in the case of the surety keeping in mind the tangent of the contract. the
principal of co-extensiveness is for the protection of the creditor in a contract of guarantee
and in my opinion a creditor in such contract Is the most vulnerable party, needless to say as
the section confers the surety has to pay the due amount subject to any additional expenses
(damages or interest as prescribed in the terms of the contract).

But the above mentioned precedents and notations do not conclude that a creditor cannot sue
the surety solely without bringing the principal debtor into picture as was held in the case of
N.Narasimhaiah v. Karnataka State Financial Corporation (2004) 3 where the honourable
bench decided that the creditor could sue both the principal debtor and the surety as co-
defendants or surety alone, this goes on to prove how even post being the secondary to the
principal debtor in terms of liability, a surety’s responsibility cannot be discharged unless
there are very specific grounds to reprimand like stated in the sections that deal with the same
in exclusive capacity.
nonetheless in addition to the discharge to the surety’s liability the law grants considerable
protection by impugning how a surety can demand a cap on the liability in terms of the
contract, they can mark a restriction and this right to limit the liability is seen in the case of
Hobson vs Bass (1871) 4

Sections 133-139 explicitly deal with surety’s rights and fluctuation or variance in terms
leading to the discharge of it’s liabilities. these sections are into play to make sure that the 3
parties entering into the contract and privy to all the terms it states and no one is bound to do
something which the said party hasn’t contracted for. The said sections are not absolute in

1
Lep Air Services v Rolloswin Investments Ltd; Moschi v LEP Air Services: HL 1973
2
1969 AIR 297, 1969 SCR (1) 620
3
2003 (5) KarLJ 164
4
Hobson v. Bass, 1871, 6 Ch. App. 792
their capacity and come with the exception that if the amendment made is for the benefit or
made in good faith of the surety, then they cannot be discharged of their liability, this was
held in Anirudhan v The Thomco’s Bank Ltd 5

To conclude S. 133 only discharges the surety’s liability on account of unsubstantial variance
in a contract and hence is open to exception of amendments made in good faith, section 134
deals with release of principal debtor which is also subject to express or implied release,
Section 135 has three grounds (1. creditor makes compromise with the principal debtor, 2.
creditor increases the duration of payment without the consent of surety, 3. if creditor
promises to never sue the principal debtor) and S. 139 can be seen as an eventual remedy
which sprouts on two essentials, first being inconsistency towards the contract on part of the
creditor and secondly the first issue will lead to weakening of the principal debtors position.
Therefore, through my research into said case laws and statutes I have derived that the
pursuance of section 128 is extremely necessary to formulate the contract of guarantee due to
its building block nature and without it there can be no structure or availability of recourse to
any party.

Fin.

5
1963 AIR 746, 1963 SCR Supl. (1) 63