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RESEARCH PROJECT

NATURE AND EXTENT OF SURETIES


LIABILITY

Submitted To Dr. Vijay Kumar Vimal, Lecturer of Law


Submitted By Ms. Aditi Soni
Roll no. - 1607

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TABLE OF CONTENT

TABLE OF CONTENT ................................................................................................................................ 2


INTRODUCTION ....................................................................................................................................... 3
CO EXTENSIVE LIABILITY ....................................................................................................................... 5
SURETYS LIABILITY WHEN PRINCIPAL IS INSOLVENT ........................................................................... 14
BANKERS NEGLIGENCE AND SURETYS LIABILITY ................................................................................. 15
SURETY FOR MINORS CONTRACT ........................................................................................................ 18
CONCLUSION......................................................................................................................................... 20
BIBLIOGRAPHY ...................................................................................................................................... 21

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INTRODUCTION

Where the parties do not specifically agree as to the extent of the liability or the surety does
not put up any limit on his ability at the time of entering into the contract, the liability of the
surety will be co-extensive with that of the principal debtor. In other words, whatever amount
of money a creditor can legally realise from the principal debtor including interest, cost of
litigation, damages etc., the same amount he can recover from the surety.

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

The liability of the surety arises immediately on the default of the principal debtor but the
creditor is not bound to give any notice of the default of the principal debtor to the surety or it
exhaust all the remedies open to him as against the debtor before proceeding against the
surety. Besides that, creditor is free to release the debt when it becomes due to either from the
debtor or the surety. It is not necessary for him to proceed against the debtor first. He may sue
the surety without suing the principal debtor. It is suretys duty to see that the principal debtor
pays or performs his obligation.

The liability of the surety is co-extensive with that of the principal debtor unless the contract
otherwise provides (Section 128). A creditor is not found to proceed against the principal
debtor. He can sue the surety without sueing the principal debtor. As soon as the debtor has
made default in payment of the debt, the surety is immediately liable. But until default the
creditor cannot call upon the surety to pay. In this sense, the nature of the suretys liability is
secondary.

For example: A guarantees to B the payment of a bill 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.

Section 128 only explains the quantum of a suretys obligation when terms of the contract do
not limit it. Conversely it doesnt follow that the surety can never be liable when the principal
debtor cannot be held liable. Thus, a surety is not discharged from liability by the mere fact
that the contract between the principal debtor and creditor was voidable at the option of the
former, and was avoided by the former. Where the agreement between the principal debtor

3
and creditor is void as for example in the case of minority of principal debtor, the surety is
liable as a principal debtor; for in such cases the contract of the so-called surety is not
collateral, but a principal contract1.

Nature and Extent of Suretys Liability

1. Co-extensive: Section 128 of Indian Contract Act deals with the nature of the liability of
the surety. According to this section, the liability of surety is coextensive with that of
the principal debtor, unless it is otherwise provided by the contract. The expression co-
extensive shows the maximum extent of suretys liability. Surety is liable for the whole
of the amount for which the principal debtor is liable. So, in extent, suretys liability is at
par with principal debtors liability. It is neither more nor less.

2. Suretys right to limit his liability: Although the liability of the surety is co-extensive
with that of the principal debtor, he may limit his liability.
He may expressly declare his guarantee to be limited to a fixed amount. In other words,
the liability of a surety can be made less by a special contract but his liability cannot be
made greater than that of the principal debtor.

3. Suretys liability arises immediately on default of the principal debtor: Suretys


liability is secondary and not primary. The suretys liability
arises immediately on default by the principal debtor. He cannot be called upon to pay
unless the principal debtor has committed the default.
But in case of default by the principal debtor the creditor is not required to give a notice
of default to the surety. Creditor is not bound to proceed first against the principal debtor
before suing the surety unless the contract so provides.

4. Suretys liability where the original contract between creditor and principal debtor
is void or voidable: The contract between the surety
and the creditor is an independent contract. Thus, where the original contract between
the creditor and the principal debtor is void the surety will be liable as if he is the
principal debtor. Similarly, where the contract between the creditor and the principal
debtor is voidable, the surety may not be discharged from liability.

1
Kashiba v. Shripat (1894) 19 Born. 697

4
CO EXTENSIVE LIABILITY

Section 128 of the Contract Act provides that the liability of the surety is co - extensive with
that of the principal debtor, unless it is otherwise provided by the contract. A suretys liability
to pay the debt is not removed by reason of creditors omission to sue the principal debtor.
The creditor is not bound to exhaust his remedy against the principal debtor before suing the
surety, and a suit may be maintained against the surety though the principal debtor has not
been sued. But where the liability arises only upon the happening of a contingency, the surety
is not liable until that contingency has taken place.2 The liability of the guarantor to pay the
amount under the guarantee is not automatically suspended when the liability of the principal
debtor is suspended under some statutory provision. Thus a contract of guarantee being an
independent contract is not affected by liquidation proceedings against the principal debtor3.

If on account of a contract of partnership being illegal, the principals liability is


unenforceable, the surety will also not be liable.4 In Gerrad v James,5 the English Court held
that a Company Director who guaranteed a contract by the company which is ultra vires that
company, remained liable to the creditor. The Bombay High Court held in E G. Bankruptcy,
Jagannath v Shivnarayan6 that a discharge of the principal debtor by operation of law does
not discharge the surety. If a contract of surety ship is a guarantee in the true sense, namely
which contains a promise to answer for the debt, default or miscarriage of another, then
there is a strong prima facie rule of construction that the suretys obligations are to be
interpreted as co - extensive with those of the principal debtor.

Accordingly, it has been held that the obligations of a guarantor of "the due fulfilment of any
obligation" of a party to a charter party which contained an arbitration clause, covered the
debtors liability to pay interest and costs as well as the principal sum awarded by the
arbitrators.7

When a surety guarantees the performance of a contractual liability on the part of the
principal to make certain payments to the creditor by instalments, there may now be

2
Subankhan v Lalkhan AIR 1947 Nag. 643
3
M.S.E.B, Bombay v Official Liquidator H.C. Ernakulam AIR 1982 SC 1497
4
Varadarajulu v Thavasi Nadar AIR 1963 Madras 942
5
(1925) Ch 616
6
AIR 1940 Bombay 387
7
Compania Sudamericana de Fletes SA v African Continental Bank Ltd (1973) 1 Lloyds Rep 21

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difficulties in construing the contract of guarantee in accordance with the principle of co -
extensiveness. The starting point of those difficulties is well explained in Lep Air v Moschi8.
In that case, the debtor defaulted under a contract for payment in instalments for services
already provided by the creditor. The creditor treated the contract as repudiated. The question
which arose was whether the creditor could sue the surety for the balance monies due under
contract at the time of the repudiation, notwithstanding that when he accepted the repudiation
the debtors primary obligation to pay specific instalments of money became translated into
secondary obligations to pay damages. The suretys obligation was to see to it that the debtor
performed his contractual obligations, so that when the debtor defaulted, the surety became
liable to pay the creditor a sum of money for the loss he thereby sustained. However, it was
quite clearly envisaged in that case that the liability of the debtor and guarantor would remain
co - extensive and that no rule of construction would be used to breach this fundamental
principle. Thus Lord Diplock said in that case as under :

"Whenever the debtor has failed voluntarily to perform an obligation which is the subject of
the guarantee the creditor can recover from the guarantor as breach of his contract of
guarantee whatever sum the creditor could have recovered from the debtor himself as a
consequence of that failure. The debtors liability is also the measure of the guarantors
liability.

Despite this clear affirmation of the principle of co - extensiveness, the Court of Appeal and
the House of Lords subsequently construed two similar guarantees in a way which, at least
prima facie, appears to derogate from the principle of co - extensiveness.

Co - extensiveness of liability is one of the essential characteristics of a guarantee that


distinguishes it from contract of indemnity. Where, therefore, the liability of a promisor under
an agreement exceeds that of the primary debtor, in that, for example, he may be liable, when
the primary debtor is not, or for an amount for which he is not, then the agreement is not a
guarantee, and the promisor undertakes primary liability himself. In such circumstances, the
contract in question can be viewed as an indemnity.

However, the principle of co - extensiveness is not an immutable rule. The precise extent of
the liability of the surety will always be governed by the provisions of guarantee on their true
construction of the document, and the parties remain free to provide for limitations of the

8
(1973) AC 331

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liabilities of the surety without detracting from the nature of the contract as guarantee. For
example, the surety guarantees only the future transactions, and not the past indebtedness.
Furthermore, the court has not always regarded itself as bound to treat the surety as co -
extensively liable with the principal, and there are circumstances where the surety will remain
liable notwithstanding the fact that the principal is not, or is no longer, liable for the principal
obligations9.

An interesting case entitled Radha Thiagarajan v South Indian Bank Ltd10 was decided by the
Kerala High Court. In that case, the appellant and her husband executed a continuing
guarantee in favour of the respondent bank for grant of an over draft account to a textile
company, the terms of which provided that the liabilities of the sureties would remain
unaffected, notwithstanding any indulgence or release granted to the company. The bank
instituted a suit against the company and the sureties for recovery of money under the
overdraft account. The company was, meanwhile, taken over under section 18A of the
Industries (Development and Regulation) Act, 1951 and subsequently nationalised under the
Sick Textile Undertakings (Nationalisation) Act, 1974. The suit was dismissed as against the
company on the ground of availability of alternative remedy under the Nationalisation Act,
but decreed as against the appellant. The appellant contended that since the liability of the
principal debtor was extinguished under the Nationalisation Act, the liability of the sureties
was also extinguished. It was held that under Section 5 of the Nationalisation Act, every
liability of the textile undertaking, other than a liability arising from loans advanced by
Government after it had been taken over under the Industries (Development and
Regulation)Act, 1951 was the exclusive liability of the owner and enforceable against him
only. Under Section 24 of the Nationalisation Act, the liability of the owner stood discharged
in respect of a claim only to the extent the claim was admitted in terms of Section 23(4) of
the Act. The discharge under the section had, therefore, no effect upon any claim which had
been rejected in part or whole, and in regard to any such claim, the remedy against the owner
had to be pursued outside the statute. The liability of the surety remained unimpaired in
respect of the undischarged debt. This case clearly points out that the discharge of the
principal debtor is not discharge of the surety where it is not brought about by the voluntary
act of the creditor, but by operation of law.

9
Moschi v Lep Air Services Ltd (1973) AC 331
10
(1988) 63 Comp. Cas. 61

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The principle of co - extensiveness is farther reinforced by the decision of the Supreme Court
in the following two leading cases;

Bank of Bihar Ltd v Damodar Prasad and Another11

The plaintiff- bank had lent moneys to Demodar Prasad (Defendant No.l) on the guarantee of
P.N. Sinha (Defendant No. 2). In terms of his guarantee bond, Sinha had agreed to pay and
satisfy the liability of the principal debtor upto Rs.12,000/- and interest thereon two days after
demand by the bank. The bond also provided that the bank would be at liberty to enforce and
recover upon the guarantee, notwithstanding any other guarantee, security or remedy which
the bank might hold or be entitled to in respect of the amount secured. As, despite its
demands, the bank could not recover the dues from either the borrower or the surety it filed a
suit against both of them. The trial court decreed against them, but ordered that the hank
could enforce its dues in question against the surety, only after having exhausted its remedies
against the borrower. The banks appeal to the Patna High Court against this order was
dismissed. The bank successfully appealed to the Supreme Court. The Supreme Court held
that the demand for payment of the liability of the principal debtor was the only condition for
the enforcement of the bond. The condition was fulfilled. Neither the principal debtor nor the
surety discharged the admitted liability of the principal debtor in spite of demands. Under
Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the
surety is co - extensive with that of the principal debtor. The surety became thus liable to pay
the entire amount. His liability was immediate. It was not deferred until the creditor
exhausted his remedies against the principal debtor Before payment the surety has no right to
dictate terms to the creditor and ask him to pursue his remedies against the principal debtor in
the first instance.

Lord Eldon observed in Wright v Simpson (1802) 6 Ves. Jr. 714, 734,

"But the surety is a guarantor, and it is his business to see whether the principal pays, and not
that of the creditor". In the absence of some special equity the surety has no right to restrain
an action against him by the creditor on the ground that the principal is solvent or that the
creditor may have relief against the principal debtor in some other proceedings. Likewise,
where the creditor obtained a decree against the surety and the principal, the surety has no
right to restrain execution against him until the creditor has exhausted his remedies against

11
AIR 1969 SC 297

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the principal debtor. The solvency of the principal is not a sufficient ground to restrain
execution of the decree 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 creditor under section
140 of the Indian Contract Act, and he may then recover the amount from the principal. The
very object of the guarantee will be defeated if the creditor is asked to postpone his remedies
against the surety. In the present case, the creditor is a banking company. A guarantee is a
collateral security usually taken by the banker. The security will become useless if his rights
against the surety can be so easily cut down.

State Bank of India v Indexport Registered12

The Supreme held in this case that a suretys liability to pay the debt is not removed by the
reason of the creditors omission to sue the principal debtor. The creditor is not bound to
exhaust his remedies against the principal before suing the surety, and a suit is maintainable
against the surety though the principle has not been sued.

The Supreme Court cited the following passage from Chitty on Contracts:13

"Prima facie the surety may be proceeded against without demand against him and without
first proceeding against the principal debtor".

The court also cited the following passage from Halsburys Laws of England:14

"It is not necessary for the creditor, before proceeding against the surety, to request the
principal debtor to pay, or to sue him, although solvent, unless this is expressly stipulated
for".

The Supreme Court emphasized the principle of Section 128 of the Contract Act and referred
to Bank of Bihar Ltd v Damodar Prasad and Another (AIR 1969 SC 297) quoted supra. The
Supreme Court also approved the Karnataka High Court decision in the case of Hukumchand
Insurance Co Ltd v Bank of Baroda15.

The question as to the liability of the surety, its extent and the manner of its enforcement have
to be decided on first principles as to the nature and incidents of suretyship. The liability of a
principal debtor and the liability of a surety which is co - extensive with that of the former are

12
AIR 1992 SC 1740
13
24th Edn. Vol, 2, para 4831
14
4th Ed, Vol 20 para 159
15
AIR 1977 Kant 204

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really separate liabilities, although arising out of the same transaction. Notwithstanding the
fact that they may stem from the same transaction, the two liabilities are distinct".

The aforesaid principles laid down by the Supreme Court were later followed by Madhya
Pradesh High Court in State Bank of India v M.P. Iron and Steel (P) Ltd16 and Madras High
Court in Balakrishnan v Chunnilal Bagmar.17

The Kerala High Court in State Bank of India v G.J.Herman and others18 following the
Supreme Court decision made the following observations while dwelling on the liabilities of
the co - surety :

"The Principle laid down by the Supreme Court is that the liability of the sureties is co -
extensive with that of the principle debtor. Consequently creditor can proceed against the
principal debtor or against the sureties, unless it is otherwise provided in the contract. The
same should be principle with regard to the rights and liabilities between the co - sureties as
well. A co - surety cannot insist that the creditor should proceed either against principal
debtor or against other sureties before proceeding against him, since the liability of a surety is
joint and several. To the extent to which they stood guarantee, they are liable to be proceeded
against by the creditor. The option is entirely that of the creditor to decide against whom he
could proceed either against principal debtor or against any of the sureties. Court for that
matter, or a co - surety cannot insist that creditor should proceed against other sureties before
proceeding against him. Such a direction is directly against the principle of co -
extensiveness.

Section 126 of the Act defining a contract of guarantee states that it is a contract to perform
the promise or discharge the liability of a third person in case of default.
From this definition it is evident that the surety is to perform the promise or discharge the
liability of the Principal debtor in case of the Principal debtors default. In other words, the
surety undertakes to be liable only if the Principal debtor fails to discharge his obligation.

Thus, the contract of guarantee pre-supposes that a Principal debt or an obligation on part of
the Principal debtor must be discharged by him only. The liability of the surety arises only
when the Principal debtor fails to discharge his obligations. Thus, it may be said that the

16
AIR 1998 MP 93
17
AIR 1998 Madras 175
18
AIR 1998 Kerala 161

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liability of the surety is secondary and collateral. His liability springs in to existence only
on the default of the Principal debtor. The moment the default is made the surety is saddled
with the liability for the whole amount as if he were himself the person originally liable.
Although the suretys liability is secondary and collateral yet Section 128 of ICA provides
that the same should be co-extensive with that of the Principal debtor, unless otherwise
provided by the contract.
The term co-extensive refers to the fact that the surety is liable to the same extent as the
Principal debtor. The liability of the surety is no less and no more than that of the Principal
debtor.

Thus, the surety is liable for what the Principal debtor is liable. On a default having been
made by the Principal debtor, the creditor can recover from the surety all that he could have
recovered from the Principal debtor. The surety , for instance, cannot be made to pay interest
if the contract does not contain such terms. Moreover, the liability of the surety is said to
be vicarious with that of the Principal debtor. Vicarious liability means that the liability
between the two parties is joined and several. The principle of vicarious
liability involved in the contract of guarantee was first recognized in the case of Madho
Shah vs. Sita Ram.

From the above discussion, the following legal consequences arise

If the Principal debtor is not liable on the Principal debt, the surety is also not liable.
If the Principal debt is illegal then the Principal debtor and the surety are not liable.
If the Principal debtors liability is reduced, the liability of the surety is also reduced to
that extent.
If the Principal debtor is discharged by the creditors breach of contract, the surety too, is
discharged from such obligation.
From the above proposition of law and judging by the legal position of the surety it may be
concluded that the surety is a favored debtor.

As per section 128, the liability of a surety is co-extensive with that of the principal debtor,
unless it is otherwise provided in the contract.
Illustration - A guaratees the payment of a bill by B to C. The bill becomes due and B fails to

11
pay. A is liable to C not only for the amount of the bill but also for the interest.

This basically means that although the liability of the surety is co-extensive with that of the
principal debtor, he may place a limit on it in the contract. Co-extensive implies the
maximum extent possible. He is liable for the whole of the amount of the debt or the
promises. However, when part of a debt was recovered by disposing off certain goods, the
liability of the surety is also reduced by the same amount. This was held in the case
of Harigopal Agarwal vs State Bank of India AIR 1956.

The surety can also place conditions on his guarantee. Section 144 says that where a person
gives guarantee upon a contract that the creditor shall not act upon it untill another person has
joined it as co-surety, the guarantee is not valid if the co-surety does not join. In the case
of National Provincial Bank of England vs Brakenbury 1906, the defendant signed a
guarantee which was supposed to be signed by three other co-surities. One of them did not
sign and so the defendant was not held liable.

Similarly, a surety may specify in the contract that his liability cannot exceed a certain
amount.

However, where the liability is unconditional, the court cannot introduce any conditions.
Thus, in the case of Bank of Bihar Ltd. vs Damodar Prasad AIR 1969, SC overruled trial
court's and high court's order that the creditor must first exhaust all remedies against the
principal debtor before suing the surety.

Under section 128 of ICA, the liability of surety is co-extensive that of the principal debtor
that means the surety is liable to the same extent as the principal debtor. For example if the
principal debtor is not liable for debt for some reason, then surety is also not liable for the
same. Also, the principal debtor is discharged from his debt by the creditor for some reason
then surety will be discharged too. This section depends on the contract as well. Therefore,
the suretys liability depends on the terms of the contract and is not liable to pay more than
the principal debtor has taken.19

19
Section 128, The Indian Contract Act

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Example- 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. 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.

The liability of the surety is joint and connected with the principal debtor. It is the choice of
the creditor to recover the amount either from the principal debtor after his default or from
surety. He may file a suit against both the principal debtor and the surety or may file a suit
against the surety only or the principal debtor only.

In Bank of Bihar v Damodar Prasad20 it was held that the creditor do not have exhaust all the
remedies against principal debtor before suing the surety. It is the duty of the surety to pay
the debt if principal debtor does not pay. The purpose of contract of guarantee is defeated if
the creditor is asked to postpone his remedies against the surety. The liability of surety is
immediate.

The legal position as crystallized by a series of cases of this court is clear that the liability of
the guarantor and principle debtors are co-extensive and not in alternative.

20
Bank of Bihar v. Damodar Prasad AIR 1969 SC 297

13
SURETYS LIABILITY WHEN PRINCIPAL IS
INSOLVENT

Usually if the principal is known to be insolvent, the creditor will bring his action against the
surety instead. He may prove in the bankruptcy or liquidation of the principal. However the
question may arise as to the creditors right to claim against the surety if a payment made by
the principal to the creditor is set aside as wrongful preference, and he has to repay the money
to the liquidator or trustee in bankruptcy.

The position appears to be that if the creditor was not a party to the preference, he probably
can recover the money from the surety, on the grounds that there was no valid payment to
him and he has not done anything to discharge the surety on equitable grounds.21

Claims Against The Estate of the Surety

If the liability of the surety has not accrued by the time he dies, the general rule is that his
personal representatives cannot be forced to set aside a sum out of his estate to meet the
potential future liability on the guarantee.

In Antrobus v Davidson,22 an application made by the executor of the deceased creditor


against the representatives of the deceased surety for an order that the latter should set aside a
sufficient sum of the estate to answer future contingent demands, was dismissed. However, if
the liability of the surety has already accrued, or if the terms of the guarantee are worded in
such a way that he appears to be a principal debtor with a liability to make payment on a
fixed future date, albeit he is really a surety, a sufficient sum must be set aside out of his
estate to meet that liability, even if there is a prospect that the principal debtor might pay the
debt instead.23

21
Petty v Cooke (1871) LR 6 QB 790
22
(1817) 3 Mer 569
23
Atkinson v Grey (1853) 1 Sm & G 577

14
BANKERS NEGLIGENCE AND SURETYS
LIABILITY

Bankers Negligence and Suretys Liability Section 139 of the Indian Contract Act, 1872
provides that 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, the surety is discharged.
Under this section, the negligence of the banker in handling the security will discharge the
suretys liability to the extent of the impairment of such security.

Any negligent or improper handling by banker of the securities belonging to the debtor which
reduces their value will diminish the liability of the guarantor to the extent to which the
securities depreciate, unless there is a clause in the contract of guarantee allowing the banker
to deal with the securities as he may think fit. Similarly, if the banker holds some securities
belonging to the principal debtor, he should not return them wholly or partially to the
principal debtor, as thereby he will prejudice the interests of the surety.

In State Bank of Saurashtra v Chitranjan Rangnath Raja and another,24 the bank granted a
cash credit facility to the customer against pledge of goods by the principal debtor and the
personal guarantee of the surety. Goods pledged under the custody of the bank were lost by
the negligence of the bank. The Supreme Court held that the surety is discharged to the extent
of the security of the goods lost. The Court observed that even if the surety of the personal
guarantee is not aware of the security offered by the principal debtor, yet once the right of the
surety against the principal debtor is impaired by any action or inaction, which implies
negligence appearing from lack of supervision undertaken in the contract, the surety would be
discharged to the extent of the value of the securities so impaired.

In State Bank of India v Quality Bread Factory,25 cash credit was given by the bank on open
cash credit system. Hypothecated goods were lost by the negligence of the bank. Based on
the aforesaid decision of the Supreme Court, Punjab and Haryana High Court held that it has
not been laid down in the Contract Act that this principle applies only to pledges and not the
hypothecation. Therefore the law applies equally to open credit system. The bank should, as a

24
AIR 1980 SC 1528
25
AIR 1983 Punjab & Haryana 244

15
pledgee, keep requisite vigilance on the debtor both in the "lock and key" system and "Open
Credit System" in order to protect himself and the security against the illegal actions ofthe
debtor. Any negligence or inaction on the part of the bank by which he loses the security
absolves the surety from his liability.

In Jose Inacio Lourence v Syndicate Bank,26 the bank had given a loan for purchase of a
vehicle and since the loan was not paid by the principal debtor the bank filed a suit both
against the principal debtor and surety which was decreed. The case of the surety in appeal
was that the principal debtor had transferred the vehicle which was now registered in another
State and the Bank had failed to register the charge (Hire Purchase or H.P. Clause) with the
Regional Transport Authority and it was unable to produce the vehicle for the benefit of the
surety. In such circumstances, the Bombay High Court held that this amounted to parting
with security and the surety stood discharged to the extent of the value of the security. The
failure to register the charge was an act which was inconsistent with the rights of the surety
within the meaning of Section 139 of the Indian Contract Act, 1872, as the eventual remedy
of the surety had been impaired.

In Amrit Lai Goverdhan Lalan v State Bank of Travancore,27 the bank lost goods of
Rs.35,690/- with it due to its negligence. The Supreme Court held that the surety was
discharged of the liability to the bank to the extent of Rs.35,690/-.

In M.R. Chakrapani Iyengar v Canara Bank,28 the surety informed the bank that an electric
oven hypothecated by the principal debtor to the bank was sold to a particular party and gave
details. The bank did not take steps to seize the property to sell it and recover its dues which
could easily have been done. The surety prayed for discharge since the bank was negligent in
realising the security.

The trial court negatived his contention and passed a decree against the principal debtor and
the surety. The surety filed a Civil Revision Petition before the Karnataka High Court. The
amount due was Rs.4000/- to be paid to the bank to liquidate the debt. The court held that the
bank was grossly negligent in not seizing and selling the hypothecated goods though the
surety had intimated the factual position to the bank. The bank could have filed even a police
complaint for tracing of the asset, which was not done. The court heavily came down on the

26
(1989) 65 Comp. Cas. 698
27
AIR 1968 SC 1432
28
(1999) 95 Comp. Cas. 862

16
bank stating the bank had been guilty of negligence or gross inaction and the surety had been
wrongly foisted with the liability which would have otherwise been discharged through the
seizure and sale of the property. The court allowed the appeal of the surety and set aside the
trial courts order as far as the surety was concerned. In Chistovan Vaz and another v Indian
Overseas Bank and others48, the first respondent bank advanced a loan of Rs.96,000/- for
purchase of a mini - bus against hypothecation of the mini bus. The appellants stood
guarantee. The principal borrower defaulted in repayment. The bank attached the vehicle and
with the help of the police the said vehicle was detained for five months. Thereafter the
branch manager took possession of the said vehicle which was auctioned fetching a value of
Rs. 10000/- only.

The trial court decreed the suit against the principal debtor and sureties who filed an appeal
before the Bombay High Court Panaji Bench. The High Court held that the bank took
possession of the hypothecated vehicle without informing the surety and allowed the vehicle
to deteriorate due to exposure to rain and sun and it had to be sold as scrap.

The court further held following the Supreme Courts decision in State Bank of Saurashtra v
Chitranjan Rangnath Raja29 that in maintaining the mini bus, the bank was absolutely
negligent and their negligence contributed to the deterioration of the mini bus. Therefore, any
reduction in the value of the security is to be accounted for by the bank and the sureties stand
discharged to that extent under the combined operations of Sections 139 and 141 of the
Indian Contract Act, 1872.

29
AIR 1980 SC 1528

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SURETY FOR MINORS CONTRACT

The obligation of sureties is an obligation accessory to that of a principal debtor. If the


principal debtor is not obliged, neither is the surety, as there can be no accessory without a
principal obligation according to the rule of law. The guiding principle applicable to contracts
of guarantee is that the liability of the surety is co - extensive with that of the principal
debtor. However the fact that the principal obligation is void or unenforceable will not
necessarily release the surety from his liability under the guarantee. The surety may find
himself liable to the creditor where the principal debtor is not, or under a liability to the
creditor different from that of the principal debtor. In accordance with the principle of co -
extensiveness, the fact that the principal obligation is void will mean that as a general rule the
surety will not be liable under his guarantee of the principals obligations there under, for
example where the principal obligation is void for minority of the debtor. However, there are
a number of different situations in which the general rule does not apply, and the surety will
be liable notwithstanding the voidness of the principal obligation.

Section 11 of the Indian Contract Act, 1872 provides that a minor is not competent to
contract. In Mohiribibi v Dharmodas,30 the Privy Council held in respect of section 11 of the
Contract Act as under :

"Looking at Section 11 their Lordships are satisfied that the Act makes it essential that all
contracting parties should be competent to contract and especially provides that a person who
by reason of infancy is incompetent to contract cannot make a contract within the meaning of
the Act. The question whether a contract is void or voidable presupposes the existence of a
contract within the meaning of the Act, and cannot arise in the case of an infant".

Ever since this decision it has not been doubted that a minors agreement is absolutely void.
The ruling of the Privy Council in the Mohiribibi Case has been generally followed by courts
in India and applied both to the advantage and disadvantage of minors.

Section 128 of the Indian Contract Act, 1872 provides that the liability of the surety is co -
extensive with that of the principal debtor. When Section 128 is read with section 11, the
minors obligation under the contract is void and hence the surety for the minors obligation
is not liable. The principle of co - extensiveness does not make the surety for a minor liable

30
(1903) 30 IA 114

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due to the principal obligation of the minor being void. The dictum is that guarantee being a
collateral or secondary obligation cannot be enforced when the principal obligation is void.

Bombay High Court in Kashiba v Shripat31 held that the surety to a bond passed (executed)
by a minor was liable. When the original agreement is void e.g. a contract by minor, the
surety is liable as a principal debtor. This case laid down the principle that the surety for a
minors contract is liable while the minor being principal debtor is not liable. Kashibas case
was considered by a Bench of the Madras High Court in Kelappan Nambiar v Kunhiraman.32

The Bench held that in the absence of special circumstances like fraudulent representation,
or in the absence of other features from which a court can infer a contract to be one of
indemnity the liability of the surety is only ancillary and rests only on a valid obligation on
the part of the party whose debt or obligation is guaranteed. Where the liability of the
principal is held unenforceable, there is no question of the surety being made liable. This case
establishes that a surety for a minors contract is not liable since the principal obligation of
the minor is void. Minors contract is the foundation for the surety to guarantee the
obligation. When the foundation is itself a nullity the suretys ancillary contract of guarantee
is also a nullity. The case also laid down that the contract of guarantee is collateral to the
main contract of the principal debtor with the creditor. When the main contract is void the
collateral contract is also void. Since the liability of the surety is secondary, not primary, it
does not arise at all when no liability can ever be fastened on the principal debtor because of
his minority at the time of entering into the contract. It is apparent that the decisions of
Bombay High Court and Madras High Court are in conflict with each other. Bombay High
Court decision is more relevant to Indian commercial law. The legal provisions relating to
personal disabilities are intended for the protection of the person affected by that disability. It
follows that others cannot share in this protection. To this extent the rule that the contract of
guarantee is accessory to the main contract is inoperative. The guarantee is given for the
purpose of protecting the creditor just against the possibility of the debtor pleading his
incapacity, like minority.

31
(1903) 30 IA 114
32
(1956) 2 MU 544; AIR 1957 Madras 164

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CONCLUSION

Under section 128 of ICA, the liability of surety is co-extensive that of the principal debtor
that means the surety is liable to the same extent as the principal debtor. For example if the
principal debtor is not liable for debt for some reason, then surety is also not liable for the
same. Also, the principal debtor is discharged from his debt by the creditor for some reason
then surety will be discharged too. This section depends on the contract as well. Therefore,
the suretys liability depends on the terms of the contract and is not liable to pay more than
the principal debtor has taken.

The liability of the surety is joint and connected with the principal debtor. It is the choice of
the creditor to recover the amount either from the principal debtor after his default or from
surety. He may file a suit against both the principal debtor and the surety or may file a suit
against the surety only or the principal debtor only.

In Bank of Bihar v Damodar Prasad, it was held that the creditor do not have to exhaust all the
remedies against principal debtor before suing the surety. It is the duty of the surety to pay
the debt if principal debtor does not pay. The purpose of contract of guarantee is defeated if
the creditor is asked to postpone his remedies against the surety. The liability of surety is
immediate.

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BIBLIOGRAPHY
ACTS

Indian Partnership Act, 1932

BOOKS

Sir Dinshaw Fardunji Mulla, The Indian Contract Act, Anirudh Wadhwa, Lexis Nexis, 15 th

edn., 2015

Avtar Singh, Law of Contracts and Specific Relief, Eastern Book Co, 11 th edn, 2009

WEBSITES

www.jstor.com

www.oup.co.in

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