Liability of surety

Introduction:
A surety is a person who comes forward to pay the amount in the event of the
borrower failing to pay the amount. Nature, extent and limit of the liability of
surety are discussed below.
Contract of guarantee: A contract of guarantee is precisely stated
under Section 126 of the Indian contract Act 1872. According to this section, a
contract of guarantee can be understood as a contract that requires an
individual or a group of individuals to perform a promise made or to discharge
their liability under the contract when the third party to the contract failed to
fulfill their part of the promise.
Nature and extent of surety’s liability:
According to section 128, “the liability of the surety is coextensive 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 principle
debtor. It means that on a default having been made by the principal debtor,
the creditor can recover from the surety all what he could have recovered
from the principal debtor. For example, the principal debtor makes a default in
the payment of a debt of Rs. 10,000/-. The creditor may recover from the
surety the sum of Rs. 10,000/- plus interest becoming due thereon as well as
the amount spent by him in recovering that amount.
 If the principal debtor’s liability is reduced, e.g., after the creditor has
recovered a part of the sum due from him out of his property, the liability
of the surety is also reduced accordingly.
C Narayan singh v. chattarsingh
In this case it has been held that if the principal debtor’s liability is scaled
down in an amended decree or otherwise extinguished in whole also pro
tanto be reduced or extinguished.
 If the principle debtor happens to be a minor and the agreement made by
him is void, the surety to can’t be made liable in respect of the same
because the liability of the surety is coextensive with that of the principal
debtor.
 Creditor can sue the surety without exhausting remedies against the
principal debtor: The liability of the surety is joint and several with the
principal debtor. Principal debtor fails to perform his obligation, the
creditor can sue either the principal debtor, or the surety or both of them.
C Bank of Bihar v. Damodar Prasad
The plaintiff bank lent money to Damodar Prasad, on the guarantee of Paras
Nath sinha. In spite of demands by the bank, the loan was neither repaid by
Damodar Prasad (principal debtor), nor by Paras Nath Sinha (the surety). The
bank then filed a suit against both the principal debtor and the surety. In its
appeal before the Supreme Court, The plaintiff bank challenged the validity of
the condition in the decree that the bank should enforce the decree against
the surety only after having exhausted the remedies against the principal
debtor.
 Prior action against principal debtor not necessary
C Ram Bahadur Singh v. Tehsildar Bisli
In this case it was held that the guarantors cannot insist that creditor must
first proceed against the principal borrower and not the guarantor.
C Mukesh Gupta v. SICOM Ltd., Mumbai
In this case, the Bombay high court held that guarantor could not contend
that surety stood discharged because of alleged failure of creditor to take
timely steps to preserve security to call for additional security.
 Prior action against pledged goods not necessary
C State Bank of India v. Gautmi Devi Gupta
In this case it has been held that if there is a decree in favour of the creditor
bank in his favour, certain goods have been hypothecated, it is not necessary
that the decree holder bank should proceed to recover the decretal amount
first from the hypothecated goods and then proceed against the surety. Even
without proceeding against the hypothecated property, the bank can proceed
against the surety.
Limit on surety’s liability by contract: As already mentioned in section 128, it
means if the contract between the parties so provides, surety’s liability may
not be there to the full extent as that of the principal debtor but smaller than
that. Thus, if the surety undertakes to be liable to the extent of Rs. 250/- his
liability is limited to that extent.
C Yarlagadda Bapanna v. Devata China Yerakayya
The bond executed by the surety limited his liability to the tome of Rs. 15,000
with a stipulation that he might be liable to any amount that might be finally
decreed. It was held that the respondent (surety) had undertaken the liability
only to the tune of Rs. 15,000 and the clause rendering himself liable to any
amount that might be finally decreed should be constructed as meaning not
exceeding Rs. 15,000.
C Aditya Narayan Chauresia v. Bank of India
In this case it has been held by the Patna High Court that if the guarantors
bind themselves up to a certain maximum limit, their liability cannot go
beyond that.
Conclusion: We can conclude from the above discussion that the co-
extensiveness concept cannot be categorized as a rigorous principle. The
surety might specify the conditions under which his liability under the
contract terms arises. The provisions cited above make it very clear that
sureties' interests must be protected.