The concept surety is given in Chapter VIII (Sections 124–147) of Indian Contract Act. A surety is an individual who undertakes to fulfill the obligations of a principal debtor, either by performing a promise or discharging a liability, in the event of the debtor’s default. This tripartite relationship of the surety, the principal debtor and the creditor, is formalized by a contract of guarantee. The role of surety is to provide assurance to the creditor, making sure that the debtor’s obligations are met. In return, the Indian Contract Act grants the surety specific rights against the creditor to prevent unfair treatment and protect their interests. These rights are critical to maintaining a balance in contractual relationships, ensuring that the surety is not unduly burdened by the creditor’s actions or omissions. This article explores the right of surety against creditor along with the illustrative examples.
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What is Surety?
Under the Indian Contract Act, 1872, a surety is someone who promises to pay a debt or fulfill an obligation if the borrower (principal debtor) fails to do so. For example, if you borrow money from a bank and your friend agrees to pay if you can’t, your friend is the surety. The Act gives the surety some protections, like:
Access to any security (like property) the bank holds from the borrower.
The right to step into the bank’s shoes and recover money from the borrower after paying the debt.
Being freed from responsibility if the bank changes the loan terms or lets the borrower off without the surety’s permission.
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Right of Surety Against Creditor
The Indian Contract Act, 1872 provides several rights of surety against creditor in order to safeguard their interests. These rights are primarily provided in Sections 140 and 141 with additional protections implied through provisions governing the discharge of a surety which is given under Sections 133–139. Let's look into the detailed examination of these rights:
1. Right to Benefit of Creditor’s Securities (Section 141)
Under Section 141, the surety is entitled to the benefit of every security that the creditor holds against the principal debtor at the time the contract of guarantee is entered into, regardless of whether the surety is aware of such securities and if the creditor loses or parts with these securities without the surety’s consent, the surety is discharged to the extent of the value of the lost security. This right of surety against creditor ensures that the surety can rely on the same protections available to the creditor.
Example: If a creditor holds a mortgage on the principal debtor’s property as security for a loan and cancels this mortgage without the surety’s consent, the surety is discharged from liability to the extent of the value of that property.
Implication: This provision protects the surety from being prejudiced by the creditor’s unilateral actions that diminish the available recourse against the principal debtor.
2. Right of Subrogation (Section 140)
Section 140 grants the surety the right of subrogation, meaning that upon paying or performing the guaranteed debt or duty, the surety is invested with all the rights that the creditor had against the principal debtor. This allows the surety to “step into the shoes” of the creditor and pursue any remedies or securities that the creditor could have enforced.
Example: If a surety pays off a ₹10,000 debt owed by the principal debtor to the creditor, the surety can claim any securities (e.g., collateral) or rights (e.g., to sue the debtor) that the creditor held.
Implication: This right ensures that the surety is not left without recourse after fulfilling their obligation to the creditor.
3. Rights Implied from Discharge Provisions (Sections 133–139)
Several provisions of the Act provide for the discharge of a surety based on the actions of the creditor, implicitly granting the surety rights to be protected from such actions. These include:
Section 133 (Discharge by Variance in Terms of Contract): If the creditor makes any change or alterations to the terms of the contract with the principal debtor without the surety’s consent, the surety is discharged. This protects the surety from being bound by altered obligations they did not agree to.
Section 134 (Discharge by Release or Discharge of Principal Debtor): If the creditor releases or discharges the principal debtor, the surety is also discharged, as their liability is coextensive with that of the debtor.
Section 135 (Discharge When Creditor Compounds with, Gives Time to, or Agrees Not to Sue Principal Debtor): If the creditor makes a composition with, grants additional time to, or agrees not to sue the principal debtor without the surety’s consent, the surety is discharged unless they assent to such an arrangement.
Section 139 (Discharge by Creditor’s Act or Omission Impairing Surety’s Remedy): If the creditor does any act inconsistent with the surety’s rights or fails to perform a duty owed to the surety, and this impairs the surety’s eventual remedy against the principal debtor, the surety is discharged.
Example (Section 135): If a creditor agrees to give the principal debtor an additional six months to repay a loan without the surety’s consent, the surety is discharged from their obligation unless they agree to the extension.
Implication: These provisions ensure that the creditor’s actions do not unfairly increase the surety’s liability or hinder their ability to recover from the principal debtor.
Right of Surety Against Creditor
The following table summarises the right of surety against creditor along with its respective provision, explanation and examples:
Section | Right | Description | Example |
141 | Right to Benefit of Creditor’s Securities | Surety is entitled to any security held by the creditor; discharge occurs if creditor loses/part with security without consent. | Creditor cancels a mortgage on debtor’s property; surety discharged to the value of the property. |
140 | Right of Subrogation | Surety inherits creditor’s rights against the debtor upon payment/performance. | Surety pays ₹10,000 debt and can claim creditor’s securities or sue the debtor. |
133 | Right to Discharge by Variance | Surety discharged if creditor alters contract terms without consent. | Creditor changes loan interest rate; surety discharged. |
134 | Right to Discharge by Release | Surety discharged if creditor releases principal debtor. | Creditor forgives debtor’s debt; surety discharged. |
135 | Right to Discharge by Composition | Surety discharged if creditor gives time or compounds with debtor without consent. | Creditor extends repayment period; surety discharged unless they consent. |
139 | Right to Discharge by Impairment | Surety discharged if creditor’s act/omission impairs surety’s remedy. | Creditor fails to pursue debtor, harming surety’s recovery; surety discharged. |
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Illustrations of the Right of Surety against Creditor
The Indian Contract Act, 1872 includes illustrations under various sections in order to clarify the application of the right of surety against creditor. These examples provide ways into how the law operates:
Section 141 (Right to Benefit of Creditor’s Securities): C advances ₹2,000 to B, with A as the surety. C holds a mortgage on B’s furniture as security. If C cancels the mortgage without A’s consent, A is discharged to the extent of the furniture’s value.
Section 139 (Discharge by Creditor’s Act or Omission): C lends ₹2,000 to B, with A as surety. C agrees not to sue B for one year, impairing A’s ability to recover from B. A is discharged due to the creditor’s action.
Section 135 (Discharge When Creditor Compounds with Principal Debtor): C, the creditor, agrees with B, the principal debtor, to extend the repayment period by six months. A, the surety, did not consent to this extension. A is discharged unless they assent to the agreement.
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Summary
The right of surety against creditor under the Indian Contract Act, 1872 are designed to balance the risks assumed by the surety in guaranteeing the principal debtor’s obligations. Key rights include the right to benefit from the creditor’s securities (Section 141), the right of subrogation (Section 140) and protections against the actions of the creditor that prejudice the position of a surety (Sections 133–139). The illustrations provide a clear way to understand how these rights operate in practice, ensuring that sureties are not unfairly burdened. These provisions and judicial interpretations collectively uphold the principles of fairness and equity in contracts of guarantee.
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Right of Surety against Creditor: FAQs
Q1. What is the right of surety against the creditor?
The surety can claim the creditor’s securities (Section 141), gain subrogation rights after payment (Section 140), and be discharged if the creditor alters the contract or impairs the surety’s remedies without consent (Sections 133–139).
Q2. What is Section 146 of the Contract Act?
Section 146 allows a co-surety who pays the debt to seek proportional contribution from other co-sureties, based on their agreement or equally if unspecified.
Q3. What are the rights of surety in Section 140?
Under Section 140, a surety who pays the debt gains subrogation, inheriting the creditor’s rights against the debtor, including securities and legal remedies.
Q4. What are the rights of a guarantor against a creditor?
A guarantor (surety) can access the creditor’s securities (Section 141), claim subrogation after payment (Section 140), and be discharged if the creditor changes terms or releases the debtor without consent (Sections 133–139).
Q5. What is the principle of surety?
A surety guarantees the debtor’s obligation, with secondary liability, and is protected by rights to securities, subrogation, and discharge if the creditor’s actions harm their position.
