A guarantee contract refers to a contract for the fulfilment of a promise or discharge of a third person’s liability in the event of any default on his part. The person giving the guarantee is Surety. The Principle Debtor is the individual for whom the guarantee is provided. The creditor is the person to whom the collateral provides the guarantee. A warranty may be either oral or in writing. We will address the Discharge and Rights of Surety here.
A guarantee contract is considered to be of enormous commercial viability and has been used extensively in the event of any commercial transactions. This is because a guarantee contract acts as a second pocket to repay the amount if it fails to pay the first pocket or the person to whom the loan is advanced.
In the guarantee contract, the security obliges the creditor to pay the amount if the principal debtor is unable to pay the amount. Through its various provisions, the Indian Contract Act, 1872 ensures that it protects the interest of all parties in a guarantee contract, in particular the interests of the guarantee. It may happen that when the guarantee contract was initially concluded, the contract was not entirely based on good faith. However, our legal system makes it a point, after entering into such a contract, that good faith is imposed on the creditor. It also ensures that there is no confusion relating to the rights and obligations of the guarantee.
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 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.
Rights of The Surety
A surety has the following rights:
a) AGAINST THE PRINCIPAL DEBTOR:
Right of subrogation: Rights of surety on payment or performance- The surety after paying the creditor or fulfilling his obligation under the contract takes the place of the creditor. He has all rights vested in him which the creditor had against the principal debtor.
When the surety has carried out all his obligations under the contract, he is conferred with all the rights which the creditor had against the principal debtor. The surety steps into the shoes of the creditor.
In Babu Rao Ramchandra Rao v Babu Manaklal Nehmal: “If the liability of the surety is coextensive with that of the principal debtor, his right is not less coextensive with that of the creditor after he satisfies the creditor’s debt’’.
Right to Indemnity: In Section (145) every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The right enables the surety to recover from the principal debtor whatever sum he has rightfully paid under the guarantee.
Illustration: A guarantees to C, to the extent of 2000 rupees, payment for the rice to be supplied by C to B. C supplies to B rice to a less amount than 2000 rupees, but obtains from A payment of the sum of 2000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.
b) AGAINST THE CREDITOR:
Right to securities: The surety steps into the shoes of the creditor and gets the right to have the securities, if any, which the creditor has against the principal debtor, irrespective of the fact whether the surety knows of the existence of such security or not.
If the creditor loses or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
State of M P V Kaluram (1967)6 State sold lot of felled timber to a person-price payable in 4 instalments-payment guaranteed by defendant-if there was default in payment of an instalment,
State would prevent further removal of timber & sell remaining timber for realisation of price- buyer defaulted but even so State allowed him to remove the timber-Surety was then sued for the price-held not liable-by allowing goods to be removed by the buyer the security was lost. If the securities are burdened with further advances it will not affect the rights of the surety
Right of set off: If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the principal debtor had against the creditor. He is entitled to use the defences of the debtor against the creditor.
c) AGAINST CO SURETIES:
Release by the creditor of one of the co sureties does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties.
The co sureties, in the absence of a contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or that part of it which remains unpaid by the principal debtor.
Guarantee is one of the specific contracts. They are the guarantor and the creditor who carry out this legal act and the debtor does not play a role in the realization of contact. As soon as the guarantee and its effect that is the transferring of obligation to obligation are carried out, the debt will be transferred from the obligation of the debtor to the obligation of the guarantor. It is necessary to note, as a concluding point, that this decision laid down the law for the interpretation of the principle of discharge of surety by variance in the terms of the contract of guarantee. In spite of the criticism above, the interpretation of the rule of discharge of surety, as laid down in this judgment is still a good law. This in the humble opinion of the researcher, this decision is a precedent and thus unimpeachable. In fact, as mentioned before, this judgment laid down an Indian authority on the fact that any alterations in the terms of guarantee which is not material or is beneficial for the surety shall not be considered to discharge the surety from his obligations under the contract.