CONTRACT-II

SYLLABUS:

UNIT-I:

Contract of Indemnity- Definition, Nature and Scope- Rights of Indemnity holder-

commencement of the indemnifier’s liability.

Contract of Guarantee- Definition, Nature and Scope- Differences between Contract of

indemnity and guarantee- Rights of surety- Discharge of surety- extent of surety’s liability-
Co- Surety.

UNIT-II

Contract of Bailment- Definition- kinds- Duties of Bailer and Bailee- Rights of Finder of
Goods as Bailee- Liability towards true owner- Rights to dispose of the goods.

Contract of Pledge- Definition- Comparison with Bailment- Rights and Duties of Pawnor
and Pawnee.

UNIT – III

Agency- Definition- Creation of Agency- Kinds of Agents- Distinction between Agent and
Servant- Rights and Duties of Agent- Relation of Principal with third parties- Delegation-
Duties and Rights of Agent- Extent of Agents authority- Personal liability of Agent-
Termination of Agency.

UNIT- IV

Indian Partnership Act- Definition- Nature, Mode of Determining the existence of

Partnership- Relation of Partner to one another- Rights and duties of partners- Retirements-
Expulsion- Dissolution of Firm- Registration of Firms.

UNIT- V

Sale of Goods Act- The contract of sale- Conditions and Warranties- Passing of Property-
Transfer of title- Performance of the Contract- Rights of Unpaid Seller against goods-
Remedies for Breach of Contract.

UNIT-I
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Introduction:

Contracts of indemnity and guarantee are a species of the general contract. As such
the principles of the general law of contract are applicable to them. The special principles
relating to them are contained in Chapter VIII (sections 124 to 147) of the Indian Contract
Act 1872, and are discussed below.

CONTRACT OF INDEMNITY:

Generally, the term indemnity means ‘promise to make good the loss. Indemnity is
protection against loss, especially in the form of a promise to pay, or payment for loss of
money, goods, etc. it is a security against, or compensation for loss. For example, ‘A’
contracts to indemnify ‘B’ against the consequences of any proceedings which ‘C’ may take
against ‘B’ in respect of a certain sum of 500 rupees. This is a contract of indemnity.

Definitions of Indemnity:

According to Chitti:

“The term ‘indemnity’ in its widest sense means recompense for any loss or liability
which one person has incurred, whether the duty to indemnify comes from an agreement or
not”.

According to Section 124 of Indian Contract Act 1872:

“A contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person, is called a
‘contract of Indemnity’.

This provision incorporates a contract where one party promises to save the other
from loss which may be caused, either

(i) By the conduct of the promisor himself, or,

(ii) By the conduct of any other person.

This definition covers indemnity for loss caused by human agency only. It does not
deal with those classes of cases where the indemnity arises from loss caused by events or
accidents which do not or may not depend upon the conduct of the indemnifier or any other
person. In a contract of indemnity, the person in who promises to indemnify is known as
“indemnifier”, and the person in whose favour such a promise is made is known as
“indemnified” or “indemnity holder”. A contract of indemnity is really a class of contingent
contracts.

Essentials for Contract of Indemnity

1. The contract of indemnity must have all the essentials of the valid contract like free
consent, consideration, and object should be lawful etc. etc.
2. The second essential is that the contract of indemnity can be expressed or implied.
3. Another essential of contract of indemnity is the loss should be caused to the
indemnity holder because of the behaviour of the promisor or the third party.

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 4. The last but not the least is that promisor is promising with the promisee who is
Indemnity holder in this contract to save him from the loss. The indemnifier is
entering into the contract with the indemnity holder to save him from the loss.

Nature and Scope of Contract of Indemnity:

English Law:

Under English law, the word indemnity carries a much wider meaning than given to it
under the Indian Contract Act. According to English Law “an indemnity is a contract, express
or implied to keep a person, who has entered into or who is about to enter into, a contract or
incur any other liability, indemnified against loss. Thus under English law the term
“indemnity” “includes promises to save the promisee harmless from loss caused by events or
accidents which do not or may not depend on the conduct of any person or by liability arising
from something done by the promise at the request of the promisor. Under English law
promise to indemnity may be express or implied.

A leading case on the point is Dugdale v/s Lovering in this case; certain trucks were
in possession of the plaintiff. The defendant as well as a company (K.P.Company) claimed
them .on the demand of delivery of trucks by the defendants, the plaintiff demanded an
indemnity bond, but no reply was received, yet they delivered the trucks to the defendants.
Subsequently, the said company sued the plaintiff for conversion of property and succeeded
in the suit. It was held that the defendants were liable to indemnify bond led to the creation of
an implied promise.

Indian Law:

The definition of contract of indemnity as given in the Indian Contract Act is not
exhaustive. It includes: (a) express promise to indemnity, and (b) cases were the loss is
caused by the conduct of the promisor himself or by the conduct of any other person. But it
does not include: (a) implied promises to indemnify, and (b) cases where loss arises from
accidents and events not depending on the conduct of the promisor or any other person.

The scope of section 124 is narrower than the concept of “indemnity” under English
Law. In Gajanan Moreshwar v/s Moreshwar Madan, (AIR 1942 Bombay 302), the
Bombay High Court observed that section 124 deals with one particular kind of indemnity
which arises from a promise made by the indemnifier to save the indemnified from the loss
caused to him by the conduct of indemnifier himself, or by the conduct of any other person or
from loss caused by events or accidents which do not or may not depend upon the conduct of
the indemnifier or any other person, or by reason of liability incurred by something done by
the indemnified at the request of the indemnifier”.

Thus we see that while in England, nature of loss is not restricted to the some person
but also include events and accident not connected with the conduct of any party; in India it is
restricted to the conduct of some person. It may however noted that section 124 is not

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exhaustive and it has been held that the “courts would apply the same principles that the
courts in England do”.

A contract of Indemnity is a contract which one party promises to save the other from
loss caused to him by the conduct of the promisor or by the conduct of any other person, as
contemplated by section 124 of the Indian Contract Act. It does not cover a promise to
compensate for loss not arising due to human agency. Therefore, a contract of insurance is
not covered by the definition of section 124. But indemnity as applicable to marine insurance
must not be an indemnity, as contemplated by the Indian Contract Act, as the loss in such
contract is covered by the contract itself and such loss it not caused to the assured by the
conduct of the insurer nor by the conduct of any other person. The contract of indemnity is a
species of the general contract. As such it must have all the essential elements of a valid
contract.

Rights of Indemnity Holder {Section-125}:

In a suit against the indemnifier, he may have been compelled to pay damages, and
incurred costs, etc. in his own turn, he can bring an action against the promisor (indemnifier)
to recover damages and costs, etc. Section 125 deals with rights of indemnity-holder (i.e.,
indemnified) when sued. According to it, an indemnity-holder is entitled to recover from the
promisor-

1. He can recover all damages, which he may be compelled to pay in any suit in respect
of any matter to which the promise to indemnify has been given.
2. He is entitled to all costs, which he may be compelled to pay, in bringing or defending
it,
a) He acted under the authority of the indemnifier
b) If he did not act in contravention of the orders of the indemnifier
c) Acted in such a way as a prudent man would act.
3. To recover all sums, which he may have paid under the terms of any compromise of
any such suit, the compromise should not be contrary to the orders of the indemnifier
and should prudent or authorised by the indemnifier.

According to section 125 an indemnity holder is entitled to recover the following

amount from the indemnifier, provided the indemnity holder must have acted within
the scope of his authority. From the above it is clear that the indemnity holder has the
following rights

a. He can recover all damages which he may be compelled to pay in any suit in
respect of any matter to which indemnity has been given.
b. He is entitled to all costs which he is compelled to pay in bringing or defending
any suit, provided (i) he acted under the authority of the indemnifier, (ii) did not
act in contravention of the orders of the indemnifier and (iii) acted in such a way
as a prudent man would act in a similar circumstance.
c. He can recover all sums which have been paid by him for a compromise of any
such suit, if the compromise was within the purview of the contract of indemnity.

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 The above mentioned are the rights of an indemnity holder when sued.

Commencement of the Indemnifier’s Liability:

The extent of Indemnity- Holder rights will be treated as the extent of Indemnifier’s
liability under the contract of Indemnity.

There has been a controversy regarding the point, as to whether the indemnifier can
be asked to indemnify before the indemnity- holder has actually suffered the loss, or his
liability arises only after the loss has been suffered by the indemnity-holder.

According to English Common Law, no action could be brought against the

indemnifier until the indemnity-holder had suffered actual loss. This situation created a great
hardship in those cases where the indemnity- holder was not in a position to meet the claim
out of his pocket. Relief was provided to the indemnity-holder in such cases by the Court of
Equity. According to the rules evolved by the Courts of Equity it was no more necessary for
the indemnity-holder to be demnified before he could be indemnified. In other words, the
indemnity-holder can now compel the indemnifier to save him from the loss in respect of
liability against which indemnity has been promised.

The Indian Contract Act (section 125) does not state the time of the commencement
of the indemnifier’s liability under the contract of indemnity. Different High Courts have
been observing different rules in this connection. Some High Courts have held that the
indemnifier is not liable until the indemnified has incurred an actual loss. Others have held
that the indemnified can compel the indemnifier to make good his loss even before he
actually discharges his liability. In this regard, it has been observed by Buckley L.J.
“Indemnity is not given by repayment after payment. Indemnity requires that the party to be
indemnified shall never be called upon to pay”.

The later view, which is based on equitable principles, has now almost come to stay.
It has been rightly observed in an English case, Liverpool Insurance Co’s Case (1914) “To
indemnify does not merely mean to reimburse in respect of moneys paid, but to save from
loss in respect of liability against which the indemnify has been given. If it be held that
payment is a condition precedent to recovery, the contract may be of little value to the person
to be indemnified, who may be unable to meet the claim in the first instance.”

A similar observation was made in the case of Gajanan Moreshwar v/s Moreshwar
Madan, (AIR 1942 Bombay 302) that if the indemnified had incurred a liability and that
liability is absolute, he is entitled to call upon the indemnifier to save him from that liability
and pay it off.”

Brief facts of the Case:

Gajanan was a lease holder of a land under Bombay Municipality for long period. He
transferred the lease to defendant and the same was approved by Bombay Municipality. But
no execution to that effect was made in favour of defendant so the lease was continued to
remain in the name of plaintiff. The defendant borrowed Rs.5000 from ‘A’. The lease-hold

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interest was given as security to ‘A’. The plaintiff at the defendant request executed the
mortgage. The defendant agreed to pay the principal amount and interest and release the
mortgage. As the defendant did not pay and release the mortgage the plaintiff sued the
defendant for indemnity. The defendant contended that the suit was premature as the plaintiff
had not yet suffered any loss. But the Court did not consider and allow the plaintiff
contention and held defendant liable. Further the Court said that Section 124 and 125 are not
exhaustive of the law of indemnity and the Courts of India would apply the same equitable
principle that the Courts in England do.

The Law Commission of India has expressed the opinion that the view expressed in
the Gajanan Moreshwar v/s Moreshwar Madan, (AIR 1942 Bombay 302) is correct and
should be adopted by the legislature. The Law Commission recommended that as in English
Law, “that right of the indemnity-holder should be more fully defined and the remedies of an
indemnity-holder be indicated even in cases where he has not been sued.”

CONTRACT OF GUARANTEE

The expression ‘Guarantee’ literally means “assurance given by one person to another
at the default of some other”. It is also known as the Contract of Suretyship.

Definition of Contract of Guarantee (Section-126):

According to section 126 of the Indian Contract Act 1872, “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 section further provides that, the person who gives the guarantee is called the
“Surety”, the person in respect of whose default the guarantee is given is called the
“Principal debtor” and the person to whom the guarantee is given is called the
“Creditor”.”.

Examples:

(a) ‘A’ takes a loan from a bank. ‘A’ promises to the bank to repay the loan. ‘B’ also makes a
promise to the bank saying that if ‘A’ does not repay the loan “then I will pay.” In this case,

‘A’ is the Principal Debtor, who undertakes to repay the loan.

‘B’ is the Surety, whose liability is secondary because he promises to perform the
same duty in case there is default on the part of ‘A’.

The Bank is the Creditor in whose favour the promise has been made.

(b) S and P go into a shop. S says to the shopkeeper, C, “Let P have the goods, and if he does
not pay, I will pay.” This is a contract of guarantee.

Nature and Scope of Contract of Guarantee:

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 The object of a contract of guarantee is to provide additional security to the creditor in the
form of a promise by the surety to fulfil a certain obligation, in case the principal debtor
fails to do that.

Section-126 further provides that, the person who gives the guarantee is called the
“Surety”, the person in respect of whose default the guarantee is given is called the
“Principal debtor” and the person to whom the guarantee is given is called the “Creditor”.
A guarantee may be either oral or written. It may be express or implied and may even be
inferred from the course of conduct of the parties concerned.

A contract of guarantee is a tripartite agreement which contemplates the principal

debtor called “P”, the creditor “C” and the surety “S” in it. There is a triangular relationship
in which the following there collateral contracts may be distinguished:

1. As between C and P, there is a contract out of which the guaranteed debt arises.
2. As between S and C, there is a contract by which S guarantees to pay to C, P’s debt in
case of his (P’s) default.
3. As between S and P, there is a contract that P shall indemnify S in case S pays in the
event of a default by P. this contract, if it is not expressed between the parties, is
always implied.
S

Contract- 2 Contract- 3

C P.D

Contract-1

Main Features of Contract of Guarantee:

A contract of guarantee must fulfil all the essential elements given under section 10 of
the Indian Contract Act 1872.

1. The contract may be either oral or in writing:

According to section 126, a guarantee may be either oral or written. On this
point, the position in India is different from that in England. According to English
law, for a valid contract of guarantee, it is necessary that it should be in writing and
signed by the party to be charged therewith.
2. There should be a Principal debt:
A contract of guarantee is an essence of a contract by which one person agrees
to answer for some liability of another. The surety undertakes to be liable only if the
principal debtor fails to discharge his obligation. If there is no such principal debt, but
there is a promise by one party in favour of another then it is considered as indemnity.
There can be no contract of guarantee unless and until there is a principal debt.

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 3. Consideration :
A contract of guarantee is like any other contract, must be supported by
consideration. Where the surety guarantees some future debt or transaction, the
consideration, may be a promise on the part of the creditor to grant the credit or enter
into the transaction or the actual act of doing so. For a surety’s promise, it is necessary
that there should be direct consideration between the creditor and the surety; it is
enough that the creditor had done something for the benefit of the principal debtor.
4. Concurrence :
A contract of guarantee requires the concurrence of all the three parties to it,
viz, the principal debtor, the creditor and the surety.

Example: C enters into a contract with P. S, without any communication with P,

undertakes for a consideration moving from C to indemnify C against any damage that may
arise from a breach of P’s obligation. This does not make S a surety for P, a person cannot
become a surety without the consent of the principal debtor.

5. Consent of the surety should not be obtained by Misrepresentation or

Concealment:
The creditor should not obtain guarantee either by any misrepresentation or
concealment of any material facts concerning the transaction. If the guarantee has
been obtained that way, the guarantee is invalid.

Kinds of Guarantee:
The function of a contract of guarantee is to enable a person to get a loan, or goods
on credit, or an employment. A guarantee may therefore be given for (1) the repayment of a
debt, or (2) the payment of the price of the goods sold on credit, or (3) the good conduct or
honesty of a person employed in a particular office. The guarantee may be given for an
existing or a future, debt or obligation. a guarantee may be in single transaction or in respect
of a number of transaction.
The guarantee can be explained in two ways. One is known as the simple guarantee
another is known as the continuous guarantee.

1. Simple Guarantee/ Specific Guarantee/Ordinary Guarantee:

Simple guarantee is a guarantee which is given for a single transaction or debt. In
other words it is a guarantee applies to a single or particular transaction or debt is called as
simple or specific or ordinary guarantee. It comes to an end when the guaranteed debt is duly
discharged or the promise is duly performed. The guarantor will not be liable for any fresh
transaction that has taken place between the principal debtor and the creditor after the
performance or discharge of the first transaction or debt.
For Example: 1. A suppose goes to the B to get loan and A says to the B that he
wants 10,000/- rupees as a sum. In this case C gives the guarantee to the B that he should
give the 10,000/- rupees to the A in a single transaction, and in one single transaction B gives
the 10,000/- rupees to the A, this is known as the simple guarantee.
2. A borrows a sum of Rs. 10.000 from B, and C gives specific guarantee. In this case, C
will not be liable for the fresh loan if A pays off the original loan and takes a fresh
loan from B.
It may be noted that specific guarantee cannot be revoked by the guarantor
until the specific transaction is performed.

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2. Continuous Guarantee:
According to section 129 of the Contract Act “A guarantee which extends to a
series of transaction is called as continues guarantee. In other words, Continuous
guarantee is a guarantee given for series of transaction. It is not limited to a single
transaction but it is generally for an indefinite time or until revoked. The liability of a
surety in the case of a continuing guarantee extends to all the transactions
contemplated until the revocation of the guarantee.

Suppose in the above mentioned same example A goes to the B to get the
loan of 1, 00,000/- rupees and if we take up the same example C gives the guarantee
to the B that in case A does not make the payment, he will make the payment. But he
puts a condition that B should give the 1 Lakh rupees to the A in not single one
transaction but in the 10 transaction of 10 thousand rupees each, now B is giving 10
thousand rupees in 10 transactions this is known as the continuous guarantee.

For example: a) A guarantees B for C’s purchases from B on credit upto Rs.
10,000 for a period of one year. It is an example of continuing guarantee.
b) “I agree to be answerable to K for the amount of five sacks of flour, to be
delivered to T, payable in one month.” It was held that a guarantee for five sacks
delivered at one time, but not a continuing guarantee to cover subsequent deliveries
though not exceeding in the whole five sacks [Kay v/s Groves, (1829)]
c) S guarantees payment to C, a tea dealer, to the amount of Rs. 10,000 for any
tea he may from time to time supply to P. C supplies P with tea to the value of Rs.
20,000. P fails to pay. The guarantee given by S is a continuing guarantee, and he is
accordingly liable to C to the extent of Rs.10, 000.

Now advantage of the continuous guarantee is the surety can revocate his
guarantee at anytime. If surety comes to know that principal debtor is not utilising
money in a proper manner and if he or for some other reason if he feels that he should
withdraw his guarantee then in continuous guarantee. The surety is in advantageous
position as he can withdraw the guarantee after some transaction, say for example, A
was given the loan by the B of 1, 00,000/- rupees and C promised that he gives the
guarantee of 1, 00,000/- rupees but the loan should be given to him in the 10
transaction or after every end of the month he should be given the 10,000/- rupees.
Suppose the B has the given the loan of 40,000/- rupees in 4 transaction. After 4
transactions the C who is a surety comes to know that A is not utilising the money in
productive purpose. Then C can withdraw the guarantee after the 4th transaction. He
can say to the B that now I would like to revocate my guarantee because now I will
not be responsible. But C will be responsible to the B for the 4 transaction which have
already taken place.
 Revocation of Continuing Guarantee:
A continuing guarantee may be revoked asto future transactions in the
following ways:
1. By Notice: a continuing guarantee can be revoked by the surety as to the
future transactions, by notice to the creditor.

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 2. By death of the Surety: the death of the surety operates, in the absence of
any contract to the contrary, as a revocation of a continuing guarantee, so
far as regards future transactions.
3. By any other Mode: a continuing guarantee may also be revoked under
all those circumstances under which a surety is discharged from his
liability. i.e., a) by variance in the terms of the contract
b) by release or discharge of principal debtor
c) by creditors losing the securities belonging to principal debtor.

Distinction between Contract of Indemnity and Contract of Guarantee:

SL.NO CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

1. Section 124 of the Indian Contract Act Section 126 of the Indian Contract Act
defines Contact of Indemnity. defines Contact of Guarantee.

2. The Contact of Indemnity means make Whereas the Contact of Guarantee

good the loss. means assurance given by one person to
another at the default of some other.
3. There are two parties to the contract of There are three parties to the contract of
indemnity namely: guarantee namely:
1. Indemnifier, and 1. Surety;
2. Indemnity Holder 2. Creditor; and
3. Principal Debtor.
4. In a contract of indemnity there is only There are three contracts in a contract of
one contract i.e., between Indemnifier guarantee i.e., between
and the Indemnity Holder. i. Surety and Creditor;
ii. Principal Debtor and Surety,
and
iii. Creditor and Principal Debtor
5. In this the liability of the indemnifier The liability of the surety arises, if there
arises on the happening of a is a default by principal debtor.
contingency.
6. The object of this is made to protect the The object of the contract of guarantee is
promisee against some likely loss. the security of the creditor.
7. In this the liability of the indemnifier is In this the liability of the surety is
primary. secondary.
8.  Contract of indemnity depends upon  In case of guarantee there is an existing
the possibility of risk or loss. debt or duty performance about which
guarantee is given.

9. In case of indemnity contract the But in contract of guarantee, if surety

indemnifier, after compensating makes payment to creditor, he (surety)
indemnity holder`s loss, cannot recover can recover that amount from principal
that amount from any person. debtor.
10. In a contract of indemnity, the loss falls In a contract of guarantee, after the
on the indemnifier and therefore, after surety had discharged his liability and
the indemnifier had indemnified the paid to the creditor, he steps into the

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 indemnity holder, he cannot recover the shoes of the creditor and he can realise
amount from anybody. the payments made by him, from the
principal debtor.

SURETY/ GUARANTOR

A surety is a person who comes forward to pay the amount in the event of the
borrower failing to pay the amount.

Rights of Surety:

The Surety has rights against-

(1) The Principal Debtor,

(2) The Creditor, and
(3) The Co-Sureties.
Surety’s rights against each one of them are being discussed here under
1. Rights Against Principal Debtor:
The surety has following two rights against the principal debtor
(1) Right of Subrogation (Section-140):
The term Subrogation means Substitution of one person or group of another in
respect of debt. When the Principal Debtor makes default in the performance of his
duty, and on such a default, the surety makes the necessary payment or makes
performance of all what he is liable for, he becomes invested with all the rights which
the creditor had against the principal debtor. In other words, the surety steps into the
shoes of the creditor. This is known as surety’s right of subrogation. According to
section 140 the surety can claim a legal right for payment. The surety gets into the
shoes of creditor as regards all securities existed at the time when the surety executed
the guarantee or if they were required subsequently.
In Kadamba Sugar Industries Pvt. Ltd. and others v/s Devru Ganapathi
Hegde and others, (AIR 1993), the Karnataka High Court held that the surety stands
in a unique position. He is such a great favourite in law that he is entitled to the
benefits of the securities although he is not aware of their existence. Under section-
140, when a guaranteed debt has become due of default of the principal debtor to
perform a guaranteed duty has taken place, the surety upon the payment or
performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.
(2) Right of Indemnity against the Principal Debtor(Section-145):
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 all payments properly made. After the surety makes the payment under the
guarantee, he becomes a creditor of the principal debtor and can recover from him the
amount he has paid with interest. If he sustains damage beyond the amount paid, he
can recover that damage also.

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 For example: P is indebted to C, and S is surety for the debt. C demands
payment from S and, on his refusal, sues him for the amount. S defends the suit,
having reasonable grounds for doing so, but is compelled to pay the amount of the
debt with costs. He can recover from P the amount paid by him for costs, as well as
the principal debt.

2. Right Against Creditor :

(1) Right To Securities with the Creditor(Section141):
After the surety has been performed his duty under the contract of guarantee,
he is subrogated to all the rights which are available to the creditors against the
principal debtor. Section 141 further makes the provision that a surety is entitled
to the benefit of every security which the creditor has against the principal debtor
at the time when the contract of Suretyship is entered into. It is, however, not
necessary that at the time of making the contract, the surety should be aware of the
securities which the creditor had. It becomes the duty of the creditor not to lose or
part with such securities belonging to the principal debtor which he possesses at
the time of making of the contract of guarantee. If the creditor, without the
consent of the surety, loses or parts with such securities, this is an act prejudicial
to the interest of the surety and he is discharged thereby.
3. Right Against the Co- Sureties(Section- 146 & 147):
(1) Right of Contribution against Co-Sureties (Sec-146):
As against co-sureties every surety has a right to ask the other sureties to pay
off the principal debt. When a debt is guaranteed by two or more sureties, they
are called as co-sureties. The co-sureties are liable to contribute, as agreed towards
the payment of the guaranteed debt. When one of the co-sureties makes the
payment to the creditor, he has a right to claim contribution from the other co-
sureties. This principle will apply whether their liability is joint or several, and
whether their liability arises under the same or different contracts, and whether
with or without the knowledge of each other.
For Example: S1, S2, & S3 are sureties to C for the sum of Rs. 3000 lent to
P. P makes default in payment. S1, S2 & S3 are liable as between themselves to
pay Rs.1000 each.
(2) Liability of Co- Sureties Bound in Different Sums(Section 147):
Where the co-sureties have agreed to guarantee different sums, they have to
contribute equally subject to the maximum amount guaranteed by each one. The
fact that the sureties are liable jointly or severally under one contract or several
contracts or without the knowledge of each other is immaterial. It may be said
that, between co-sureties, there is equality of burden and benefit.

DISCHARGE OF SURETY

A surety is said to be discharged when his liability comes to an end. In other words, when the
liability of surety, which he had undertaken under a contract of guarantee, is extinguished or
comes to an end, he is said to be discharged from liability. The various modes of his
discharge are shown in the chart given below:

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 Discharge of Surety

1. By Revocation 2.By the Conduct of the Creditor 3.By Invalidation of Contract

1. Revocation By Surety(sec-130)
2. Death of Surety(sec-131)
3. Novation(sec-62)
1. Variance in terms of Contract(sec-133)
2. Release or discharge of Principal Debtor(sec-134)
3. Compounding by Creditor with Principal
Debtor(sec-135)
4. Creditors act or omission impairing surety’s
eventual remedy(sec-139)
5. Loss of Security(sec-141)

1. Guarantee obtained by
misrepresentation(sec-142)
2. Guarantee obtained by concealment(sec-143)
3. Failure of a co-surety to join a surety(sec-
144)
4. Failure of consideration.

DISCHARGE OF SURETY

1. DISCHARGE OF SURETY BY REVOCATION:

(1) Revocation of surety by giving a notice (sec-130): A specific guarantee cannot be

revoked by the surety if the liability has already accrued. A continuing guarantee may at any
time, be revoked by the surety, as to future transactions, by giving notice to the creditor. But
the surety remains liable for transactions already entered into.

(2) Revocation by Death (sec-131): The death of the surety operates, in the absence of any
contract to the contrary, as a revocation of a continuing guarantee, so far as regards future
transactions.. The effect of the death of the surety is that it results in automatic revocation of
the guarantee as to future transactions. But such revocation does not affect the transactions
which were executed prior to the death of the surety.

For example: in a contract of guarantee, it is mentioned that on the death of the surety, his
property or his legal representatives will be responsible for such liability, in such a case, the
guarantee is not revoked even if the surety dies.

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(3) Revocation by Novation (sec-62):

Novation means substitution of a new contract of guarantee for an old one/ existing
contract of guarantee. The novation may be either between the same parties or between one
of the old parties and a new party. The surety is liable for old contract. According to
section62 if the parties to a contract agree to substitute a new contract for it, or rescind/ alter
it the old contract is need to be performed. The consideration for the new contract being the
mutual discharge of the old contract. The original contract of guarantee in such a case comes
to an end.

2. DISCHARGE OF SURETY BY THE CONDUCT OF THE CREDITOR.

(1) Variance in terms of Contract (sec-133):

If a variation is made in the terms of the contract between the principal debtor and the
creditor, without the surety’s consent, the surety is discharged from liability as to transactions
made after the variance. But the variance must be such as materially affects the position of
surety. Similarly, a surety will not be discharged by a variation if he has consented to the
same. Surety is discharged from the contract even if the alteration is innocently made for his
benefit. If there is a written contract of guarantee and there is no variance of the same in
writing, the validity of the contract is not affected.

For example: (a) C agrees to appoint P as a salesman to sell goods at a yearly salary,
upon S being a surety to C for P’s duly accounting for money received by him as a salesman.
Afterwards without S’s knowledge or consent, C and P agree that P should be paid by a
commission on the goods sold by him and not by a fixed salary. S is not liable for subsequent
misconduct of C.

(b) C contracts to lend P Rs. 5000 on 1 st March. S guarantees repayment. C pays the
amount to P on 1st January. Sis discharged from his liability, as the terms of the contract have
been varied.

(c) S guaranteed payment for goods supplied by C to P, upon condition that 18 months
credit was given. C gives only 12 months credit. In this case surety was discharged due to the
variance in terms of contract.

 Leading Cases:
1. Bonar V/S Macdonald: The defendant was a surety for the conduct of a bank
manager. Subsequent to this agreement, the bank enhanced manager’s salary and
the manager agreed to be liable for ¼ of the losses on discounts allowed to him.
This arrangement between bank and its manager had been made without the
knowledge of the surety. It was held that this arrangement had resulted in the
discharge of surety.
2. Amrit Lal v/s State Bank of Travancore: The credit limit of the debtor, which
had been fixed at Rs. 1, 00,000 was first reduced to Rs. 50,000 and then again
raised to 1, 00,000 without consulting the surety. This was done by oral
instructions to the cashier only (not altering any document). It was held that in this

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 case there was no variation in the terms of the contract within the meaning of
section 133, and therefore, the surety had not been discharged thereby.

(2). Release or Discharge of Principal Debtor (sec-134):

The surety is discharged by any contract between the creditor and the principal
debtor, by which the principal debtor is released. The surety is also discharged by any act or
omission of the creditor, the legal consequence of which is discharge of the principal debtor.

For Example: A contracts to build a house for B and C stands guarantee to B for the due
performance of the contract by A. therefore if B releases A from the performance of the
contract, the liability of C as a surety shall come to an end.

A contract to build a house for B, on the condition that B will supply the
necessary timber. C guarantees A’s performance of the contract. B fails to supply the timber.
It would discharge of the principal debtor.

(3). Compounding by Creditor with Principal Debtor (sec-135):

According to section 135 “A contract between the creditor and the principal debtor
by which the creditor makes a composition or promise to give time or not to sue the Principal
debtor which discharge the surety unless the surety assent to the contract. This section
provides three modes of discharge from liability:

1. When the creditor makes composition with the principal debtor

2. When the creditor promises to give time to the principal debtor, and
3. When the creditor promises not to sue the principal debtor.
It may be noted that in the above stated circumstances, the surety is discharged
if the creditor and the principal debtor make such contract without the consent
of the surety. If such a contract is made with the consent of the surety, he would
not be discharged.

For Example: A borrows Rs. 10,000 from B. C stands as a surety as regards the repayment
of loan by A to B. thereafter, A and B agree that A may repay Rs. 5,000 instead of Rs.
10,000. C is thereby discharged from liability as a surety.

(4). Creditors act or Omission impairing surety’s eventual remedy (sec-139):

A surety is discharged if the creditor does any act which is inconsistent with the
rights of the surety or omits to do any act which his duty to the surety requires him to do, and
the eventual remedy of the surety himself against the principal debtor is thereby impaired. It
is the duty of the creditor not to do anything which is inconsistent with the rights of the
surety.

For Example: P contracts to build a ship for C for a given sum to be paid by instalments as
the work reaches certain stages. S becomes surety to C for P’s due performance of the
contract C, without the knowledge of S, prepays to C the last two instalments. S is discharged
by this prepayment.

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(5). Loss of Security (sec-141):

If the creditor loses or, without the consent of the surety, parts with any security
given to him at the time of the contract of guarantee, the surety is discharged from liability to
the extent of the value of security. If there are two or more debts each secured by separate
security, the surety for one of the debts is not discharged if the creditor loses or parts with the
security or securities relating to other debts.

For Example: C advances to B his tenant Rs.2000 on the guarantee of A. C has also a further
security for a sum of Rs. 2000 by a mortgage of B’s furniture. C cancels the mortgage. B
becomes insolvent and C sues A on his guarantee. A is discharged from liability to the
amount of the value of furniture.

3. DISCHARGE OF SURETY BY INVALIDATION OF CONTRACT:

(1). Guarantee obtained by Misrepresentation (sec-142):Any guarantee which has been

obtained by means of misrepresentation made by the creditor, or with his knowledge and
assent, concerning a material part of the transaction, is invalid.

(2). Guarantee obtained by Concealment (sec-143): Any guarantee which the creditor has
obtained by means of keeping silence as to material circumstances is invalid.

(3). Failure of a co-surety to join a Surety (sec- 144): Where a person gives a guarantee
upon a contract that the 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. A surety, who has
agreed to become so on the basis that he will be a co- surety with another, is wholly released,
if the intended co-surety does not join.

(4). Failure of consideration: Where in a contract of guarantee there is a failure of

consideration as between the creditor and the principal debtor, the surety is discharged.

NATURE AND EXTENT OF SURETY’S LIABILITY:

1. Section128 of the Contract Act defines the nature and extent of surety’s liability. It
provides that liability of the surety is co-extensive with that of the principal debtor.
The term co-extensive with that of the principal debtor shows the quantum of the
surety’s liability. The surety is liable for what the principal debtor is liable. In case the
debtor makes a default in the making the payment to the creditor, then whatever the
creditor can recover from the debtor, the same amount of the liability will fall on the
shoulders of the surety.
2. Surety will also be responsible to same amount of the liability, because he has given
the surety and his liability is extensive to an extent of the debtor’s liability. For
example, if a debtor is making a default in making the payment to the surety and later
on the surety has to make the payment of the amount along with the some cost and the
interest also, then surety can recover that principal amount along with the cost or
interest from the debtor. So his liability will be the coextensive of the debtor’s
liability.
3. The surety’s liability may be limited. A surety at the time of giving the surety can
limits his liability in whole of the debt. For example, if A is granted a loan by the B,

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 of rupees 10,000/- but C who is a surety can limit his liability by saying that he will
be responsible only for 7,000/- rupees. So in the loan of 10,000/-, the surety has
limited his liability by giving the guarantee of rupees 7,000/- only, this is another
nature and extent of surety’s liability.
4. The surety’s liability will arise on the default of the principal debtor. We know that
whenever a default is made by the principal debtor in the contract of guarantee then
surety comes into the picture. If on the due date when a debt is to be return by the
debtor to the creditor, if the debtor returns the money to the creditor, surety does not
come in the picture, he comes in picture only when debtor has made a default. So his
liability arises on making a default by the debtor. On a due date the creditor cannot
directly come to the surety for the repayment of the loan. He has to go to the debtor
and in case he makes a default, then surety will come into the picture.
 Aditya Narayan v/s Bank of India (AIR. 2000 Pat.222) :
In this case, it has been held by the Patna High Court that if the guarantors
bind themselves upto a certain maximum limit their liability cannot go beyond
that. The liability of the surety arises when there is a default on the part of the
principal debtor. The liability of the surety is secondary. However a creditor
can sue the surety first.
5. The liability of the surety arises immediately on the default of the debtor, notice of the
default is not necessary to bring an action against the surety. Where the liability is to
arise only on the happening of a contingent event, the surety is not liable until that
contingency actually happened. The surety cannot be called upon to pay unless the
principal debtor has made a default.
6. In the extent into the surety’s liability is; the surety will be liable if there is a contract
between principal debtor and the creditor is void. So in case the main contract
between the principal debtor and the creditor is void, the surety’s liability will be the
primary liability. For example, A who is a minor has taken the loan from the B and B
has given the loan to the A of rupees 10,000/- but the contract between both of them is
void. In this case the primary liability will be the liability of the fee who has given the
guarantee in the contract. So if there is a void contract between the debtor and the
creditor the liability of the surety will be the prime liability.
7. The liability of surety is joint and several. The liability is joint in the sense, the
creditor can sue both the Principal Debtor and the Surety.
 In Ram Bahadur Singh v/s Tehsildar Bisli (AIR. 2002):
In this the Supreme Court held that the guarantor cannot insist that creditor
must first proceed against the principal debtor and not the guarantor. In other
words it is open to the creditor to proceed for making recovery against the
guarantors without first proceeding against the principal debtor.

Conclusion: The surety is sometimes called a ‘favoured debtor’. This is because; it is not
open to the creditor to call upon the surety to pay under the contract of guarantee unless the
creditor has performed his part of the contract. A surety is an object of some favour both at
law and at equity. A contract of guarantee must thus be strictly construed in favour of the
surety.

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 CO-SURETY:

When a debt is guaranteed by two or more sureties, either under the same
contract or under different contracts, they are called co-sureties. The co- sureties are liable to
contribute, as agreed, towards the payment of the guaranteed debt. When one of the co-
sureties makes payment to the creditor, he has a right to claim contribution from the other co-
surety or co-sureties. When two or more persons stand as sureties for a single or same debt,
either jointly or severally, in the absence of an agreement to the contrary, the co-sureties are
liable to contribute equally towards the guaranteed debt. In case one of the co-surety is
compelled to pay the whole debt, he can claim equal contributions from the other co-sureties.

As against co-sureties every surety has a right to ask the other sureties to pay off the
principal debt. When a debt is guaranteed by two or more sureties, they are called as co-
sureties. The co-sureties are liable to contribute, as agreed towards the payment of the
guaranteed debt. When one of the co-sureties makes the payment to the creditor, he has a
right to claim contribution from the other co-sureties. This principle will apply whether their
liability is joint or several, and whether their liability arises under the same or different
contracts, and whether with or without the knowledge of each other. For Example: S1, S2, &
S3 are sureties to C for the sum of Rs. 3000 lent to P. P makes default in payment. S1, S2 &
S3 are liable as between themselves to pay Rs.1000 each.

Where the co-sureties have agreed to guarantee different sums, they have to
contribute equally subject to the maximum amount guaranteed by each one. The fact that the
sureties are liable jointly or severally under one contract or several contracts or without the
knowledge of each other is immaterial. It may be said that, between co-sureties, there is
equality of burden and benefit.

Where a person gives a guarantee upon a contract that the 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. A surety, who has agreed to become so on the basis that he will be a co- surety
with another, is wholly released, if the intended co-surety does not join.

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