Nature of liability of surety

As laid down in Section 128 of the Indian Contract Act, 1872, the liability of the surety is
coextensive with that of the principal debtor, unless it is otherwise provided by the contract.
(SBI v V.N. Anantha Krishnam 2005). It emphasizes the maximum degree as well as the scope
of the surety’s liability. The surety may, however, by an agreement place a limit upon his
liability.

Illustration- A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and
charges which may have become due on it.

If the PD’s liability is affected by illegality, so is also that of the surety. Therefore, where the
liability of the PD is held to be not enforceable on the ground of the contract being illegal,
there is no question of surety being made liable.
If the principal debtor happens to be a minor and the agreement made by him is void, the
surety cannot be made liable in respect of the same because the liability of the surety is
coextensive with that of the principal debtor. It has been held in an English case, that the
guarantee of the loan to an infant is void, because the loan to the infant itself is void.

 Coextensive
The first principle governing surety's liability is that it is co-extensive with that of the
principal debtor. The expression "co-extensive with that of the principal debtor" shows the
maximum extent of the surety's liability. He is liable for the whole of the amount for which
the principal debtor is liable and he is liable for no more- Maharaja of Benares v Har
Narain Singh, 1906-07. ‘Coextensive’ is an attribute to the word extent and refers to the
amount or the quantum of the principal debt.
In case of Hargopal Agarwal v SBI 1956, it was held that the PD’s liability is reduced, the
liability of the surety is also reduced accordingly.
The Section further explains how the surety may, however, in the agreement impose
certain limits to the extent of his liability entering into a special contract. He can make a
declaration and impose a certain limit or restriction to his liability.
Unless it is expressly mentioned in the terms of the contract, neither can the surety be
held liable by the creditor nor can he sue him, till the principal debtor makes a default.
Therefore, the surety’s liability is secondary or peripheral in nature.
It is encouraging to take note of the fact that even before the Indian Contract Act, 1872
was enacted the Indian courts perceived the principle of co-extensiveness. In the case of
Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji (1869), the Bombay High
Court explained how it is not binding on the creditor to extinguish his remedies before
suing the principal debtor. On obtaining a decree against the surety, it may be enforced in
the same manner as a decree for any other debt.
 Condition precedent
Where there is a condition precedent to the surety’s liability, he will not be liable unless
that condition is first fulfilled. Section 144 is based on this principle to an extent. It says-
 Where a person gives a guarantee upon a contract that creditor shall not act upon it until
another person has joined in it as co-surety, the guarantee is not valid if that other person
does not join. When an individual gives a guarantee to undertake a task unless another
individual joins as a co-surety, the guarantee will be invalid if another co-surety does not
join the contract.
In National Provincial Bank of England v. Brackenbury (1906), a guarantee was signed by
the defendant. The defendant signed the contract on the condition that three more
individuals would also sign the contract, as part of a joint and several guarantee. However,
one of the three individuals did not sign the contract of guarantee. The Court held that no
agreement took place since there was a condition to the contract that was not fulfilled.
Hence, the defendant was held not liable.
 The extent of liability of surety
It is still a critical issue to measure the maximum extent of surety’s liability and to what
extent it is being invoked presently. Herein the question is at what time the surety’s liability
comes under scrutiny- when the debtor has not fulfilled their part of the promise.
 Proceeding against surety without exhausting remedies against debtor
Where the liability is otherwise unconditional, the court cannot of its own introduce a
condition into it. This was pointed out by the Supreme Court in Bank of Bihar Ltd v
Damodar Prasad 1969. The court said: "The very object of the guarantee is defeated if the
creditor is asked to postpone his remedies against the surety. It is the duty of the surety
to pay the decretal amount. On such payment he will be subrogated to the rights of the
creditors. Before payment the surety has no right to dictate terms to the creditor and ask
him to pursue his remedies against the principal in the first instance. The surety is a
guarantor; and it is his business to see that the principal pays, and not that of the creditor."
The surety’s liability is not removed in case of the omission of the creditor in suing the
borrower. The creditor does have to necessarily exhaust his remedies against the principal
debtor before they sue the surety. They can still maintain a suit if no proceedings have
been initiated beforehand against the borrower. However, the surety cannot be held liable
until the contingency takes place.
In case of SBI v. Indexport Registered (1992), the Supreme Court explained how the surety
does not become free from their liability to pay the debt solely because of the creditor’s
omission in initiating proceedings against the surety. It was reinstated that the creditor is
not confined to having his remedies and a suit is still maintainable before suing the
principal debtor.
The Supreme Court explained how prima facie there can be proceedings against the surety
despite the absence of demand and without proceeding against the principal debtor first.
They explained the lack of any such prerequisite for the creditor to request payment from
the principal debtor or sue him for not fulfilling his part of the promise and they can
directly initiate proceedings against the surety unless it has been expressly stipulated in
the contract.
In the case of Hukumchand Insurance Co Ltd v. Bank of Baroda (1977), the Karnataka High
Court observed- the two main factors which decide the liability, extent, and manner of
enforcement are- the nature and the incidents that occurred. Although the principal
 debtor and the surety’s liability arise from the same bargain, the two liabilities are not
alike.
It is the choice of the creditor which remedy they find fit to pursue and neither the
defaulter nor the surety can compel the creditor in any manner and advise them to take
recourse to a particular remedy. It falls in the exclusive domain of the creditor.
In the case of State Bank of India v. G.J. Herman and others (1998), the Kerala High Court
held that in the case of a composite decree, the court or the co-surety cannot insist that
the creditor should proceed against other sureties before proceeding against him. It is the
creditor's option to decide for himself against whom he should proceed first. The surety
so selected for recovery would have the right to recover contribution from the co-sureties
and indemnity from the principal debtor.
 Action against principal debtor alone
The creditor can proceed against the principal debtor alone without initiating any
proceedings against the surety. His suit cannot be rejected on the ground that he has not
joined the guarantor as a defendant to the suit- Union Bank of India v. Noor Dairy Farms
(1997). Dismissal of the suit against the principal debtor does not absolve the liability of
the surety under the contract of Guarantee.
 Suit against surety alone
A suit against the surety without initiating proceedings against the principal debtor has
been held to be maintainable. In N.Narasimhaiah v. Karnataka State Financial
Corporation (2004), the creditor, in his affidavit, showed sufficient reasons for not
proceeding against the principal debtor. A contract of guarantee was made enforceable by
its terms against the guarantors severally and jointly with that of the principal debtor’s
company. The Court held that the creditor has the option to sue the company and the
surety as co-defendants or the surety alone- Vijay Singh Padode v Sicom Ltd, (2000). This
makes the position of sureties specially vulnerable.
 Proceedings against surety’s mortgaged property
A financial corporation cannot take possession of the surety’s mortgaged property without
prior notice. The corporation also cannot issue any public notice to sell the property
without notice to the surety. The reason is that the liability of the guarantor is secondary
and arises only when the borrower fails in repayment.
The property of the surety which has been offered as a security can be proceeded against
without exhausting remedies against the principal debtor- A. Mohamed Ali v T.N.
Industrial Investment Corpn Ltd, 2009.
 Prosecution of surety for bouncing of his cheque
Where the surety had issued a cheque as a security for repayment of loan, but the cheque
bounced, the court said that he was liable to be prosecuted under S. 138 of the Negotiable
Instruments Act.
 Death of principal debtor
In case of the death of the principal debtor, any suit against him would be void ab initio.
However, the surety would not be discharged of his liability to pay the amount- Syndicate
Bank v A.P. Manjunath, (1999).
 In Orissa Agro Industries Corpn Ltd v. Sarbeswar Guru, (1985), it was held that the
dismissal of the suit against the principal debtor, under Order 1 of CPC would not
automatically absolve the surety of its liability.
 Surety’s right to limit his liability or make it conditional
It is open to the surety to place a limit upon his liability. He may expressly declare his
guarantee to be limited to a fixed amount, for example, that "my liability under this
guarantee shall not at any time exceed the sum of £250". In such a case, whatever may be
owing from the principal debtor, the liability of the surety cannot go beyond the sum so
specified- Hobson v Bass (1871).

Conclusion
The principle of co-extensiveness cannot be classified as a rigid principle. The exact degree
and extent of the surety’s liability would be governed by the provisions mentioned in the
contract of guarantee on the actual constructed document and the parties have the freedom
to impose certain restrictions towards the surety’s liability.