Rights and Discharge of Surety

Edited By Ritika Jonwal | Updated on Jul 02, 2025 06:33 PM IST

The surety is essential in a guaranteed contract because the whole arrangement hinges on the surety he offers. The creditor has double safety in this scenario, as opposed to being entitled to payment of his debts first by the principal debtor and then losing the surety's assurance upon its expiration.

This Story also Contains

Meaning of Contract of Guarantee
Essentials of Contract of Guarantee
Who is Surety?
Rights of Surety
Discharge of Surety
Conditions for Discharge of Surety
Case Laws on Rights and Discharge of Surety
Conclusion

Rights and Discharge of Surety

This places the creditor in a more secure and solid position in terms of getting paid. The surety bears a widespread obligation to settle the major debtor's outstanding amounts, regardless of whether they benefited directly from the initial agreement between the principle debtor and the creditor. Because of the nature of the agreement, the guarantor is entitled to certain legal rights while under a contract of surety. These rights also apply to the creditor and main debtor, as well as additional co-sureties. The project discusses the surety's several rights.

Meaning of Contract of Guarantee

The Indian Contract Act of 1872, Section 126, defines what a contract of guarantee is. The simplest definition of a "contract of guarantee" is an assurance and a legally enforceable agreement.

Three parties to a contract are involved in the Contract of Guarantee. In a sense, a person who is referred to as a creditor lends money to another person who needs money, referred to as the principal debtor, along with someone who assures that the money will be returned to the creditor either by the principal debtor or if he defaults by the guarantor or surety.

Essentials of Contract of Guarantee

Parties associated with the Contract

A contract of guarantee can only be given by a three-party contract. There are three parties involved: the creditor, the surety, and the primary debtor. About a loan taken out by the principal debtor from a creditor secured by a surety.

Surety’s Role

The surety is purchased in the contract in the same capacity as a person who guarantees the principal debtor will pay the amount; however, if the principal debtor defaults, the creditor may request payment of the debt amount from the surety. The crucial thing to remember in this situation is that the creditor can only request that the surety pay off his debt if the principal debtor fails to do so.

Involvement of Consideration

Contract law has long recognized the rule that a deal may only be considered legally binding if there is consideration involved. Regarding the consideration as part of surety, Section 127 of the Indian Contract Act, of 1872 made it clear that any benefit received by the principal debtor may be deemed to be for the surety to provide the guarantee.

The Contract Should be Valid

When determining whether a contract is legitimate, there are a few things to consider. To engage in a contract, there needs to be an offer made with legal consideration by both parties, and the parties must be at least eighteen years old and provide their free agreement.

All Facts must be Communicated

It is necessary to provide the surety with complete information regarding the terms of the contract being executed. The creditor or principal debtor may not withhold any information about the guarantee contract.

Existence of Debt

Any debt of any type must be included in the contract. If there is no debt, there can be no guaranteed contract. The promise to repay the unpaid money must have come from the surety or the principal debtor.

Who is Surety?

A surety is a person who takes on the guarantee that the principal debtor will pay back the money. A guarantor is another term for a surety. The creditor may request repayment from the surety if the principal debtor defaults on the loan.

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Rights of Surety

Rights Against Creditor

Right to Securities with the Creditor

The right of the surety to receive a portion of the security held throughout the execution of the contract of guarantee is stated in Section 141 of the Indian Contract Act, of 1872. In terms of security, the surety's position is identical to the creditor's. A creditor is required to disclose the security to the surety; it makes no difference if the surety knows about the security or not. The surety is entitled to a share if the principal debtor defaults on the payment and the surety has satisfied all outstanding debts.

Loss of Securities without the negligence of the Creditor

In this scenario, in the event of a payment default, the creditor seizes the principal debtor's security. The right of set-off concerning the security value from the principal debtor's obligation belongs to the surety.

Rights Against the Principal Debtor

Subrogation Rights

Section 140 of the Indian Contract Act of 1872 delineates the subrogation privilege. The subrogation right is the creation of a new contract to collect the debt from the parties. The surety has settled the amount due since the principal debtor went into default. The major debtor now has the right to repay the surety, who was the creditor in the first guarantee contract, for the sum repaid. The surety now acts as the creditor.

Indemnity Rights

The Indian Contract Act of 1872 mentions a contract of indemnity by indemnifying the surety under Section 145. "To indemnify" refers to a party's obligation to reimburse another party for losses incurred as a result of the promisor's performance. Under the terms of the Contract of Guarantee, the principal debtor is required to compensate the surety for any payment defaults at the time the loan balance is discharged. The indemnity provisions are an implied obligation of the major debtor in the event of payment default; they do not need to be stated in the contract.

Securities Received by the Creditor after Contract of Guarantee

The right of surety in the security specified in the contract of guarantee is referenced in Section 141 of the Indian Contract Act, of 1872. If the principle debtor defaults on the loan and the surety makes the payment, the surety is entitled to security benefits. In this scenario, the surety may be released if the money is being taken out of security.

Rights of Surety against Co-Sureties

Co-Surety’s Right to Get Release from the Contract

According to Section 138 of the Indian Contract Act of 1872, a surety's release from liability does not release the other sureties from their obligations. Here, "co-sureties" refers to a situation in which multiple sureties provide a guarantee or assume responsibility for the principal debtor's payment. According to Section 138, if the creditor requests only one surety to fulfil his obligation and the principal debtor defaults on the loan. In this situation, the surety may request that the other sureties fulfil their obligations.

Co-Sureties are entitled to Contribute Equally

The Indian Contract Act of 1872 states in Section 146 that co-securities have joint liabilities. It must be assumed that all co-securities will equally share any debt not paid by the principal debtor if the contract does not specifically state that co-securities are liable jointly.

Co-Surities Entitled to pay the amount as promised

According to Section 147, if the primary debtor defaults on the loan, the co-securities are required to reimburse the major debtor if they have pledged to pay a specific amount toward the total debt.

Discharge of Surety

The Indian Contract Act of 1872 specifies that a guarantor may be relieved from liability under certain circumstances. A surety is released from liability when they are no longer required to honour their commitment if the principal debtor defaults.

Conditions for Discharge of Surety

A surety may be released from his obligation under three main conditions. The situation is as follows:

Discharge of Surety by Revocation

By way of Notice

Revocation of a continuing guarantee, or a guarantee for a sequence of transactions, is permitted by Section 130 of the Indian Contract Act, 1872, upon notification to the creditor. A specific assurance, however, cannot be withdrawn if the contract has already been executed.

A continuous assurance can only be withdrawn for future transactions by filing a notice, according to an analysis of Section 130. As for already completed transactions, the surety is still accountable. Since there are no pending future transactions, this explains why the section does not include the revocation of a specific guarantee. If there is no contract to the contrary, the notification to the creditor should be delivered at any time and should be explicit and obvious in that it states the purpose of terminating liability for future transactions.

By Death

According to Section 131 of the Indian Contract Act of 1872, the surety's liability is released in the event of the surety's demise. According to the interpretation of Section 131, the surety is discharged upon the surety's death. The surety is released from any further agreements.

If the transactions for which the surety made the guarantee have already taken place, then the surety's legal heirs are required to complete them. The legal heirs cannot be held personally accountable for the surety's debts; rather, their liability is limited to the amount of property they inherit. In addition, no clause that conflicts with this section may be included in the contract.

Discharge of Surety by Conduct of Party

Terms of Contract Changed

In the case that the terms of the contract are materially altered or varied, a surety's liability may be released under Section 133 of the Indian Contract Act, 1872.

The clause implies that a surety may be released from liability if a contract is altered without the surety's approval, particularly when the contract is a continuous contract of assurance. The materiality of the deviation is the primary criterion that determines when the surety will be released. Whether the variance is important will depend on the court's consideration of all the facts. The court may use its discretion to decide whether the variance is important if it helps the surety.

Performance of Contract of Guarantee

Section 134 of the Indian Contract Act, of 1872 states that if the principal debtor pays the loan and fulfils his promise, the surety will be released from his obligation and the guarantee contract will be signed.

Mere Compromise

The surety is released from the contract in this scenario because, per Section 135 of the Indian Contract Act of 1872, the creditor grants the principal debtor an extension of time to pay the loan amount and guarantees that he won't sue the debtor for it.

Discharge of Surety by Invalidation of Contract of Guarantee

Contracts Executed Through Misrepresentation

Section 142 of the Indian Contract Act, 1872 states that a contract is void if the creditor made it by withholding important information from the parties or by misrepresenting its terms. It won't be subject to legal enforcement. The contract is deemed void if the surety is provided with misleading information or misrepresented facts, and the surety bases its guarantee on these misrepresentations. Consequently, the surety is released from any obligation under the guarantee.

Contracts Entered Through Concealing Facts

Concealing information is the act of one party not disclosing facts that would have affected the other party's decision to sign a contract. Section 143 of the Indian Contract Act deals with situations where a guarantee is obtained via deceit.

If the creditor conceals material facts from the surety that would have persuaded the guarantor to provide the guarantee, the contract is considered null and unenforceable. The assurance absolves the surety of any responsibility.

Unless Co-Sureties Consent to a Contract.

According to Section 144 of the Indian Contract Act of 1872, a contract cannot be enforced unless a contract of guarantee is signed by the other co-sureties.

Case Laws on Rights and Discharge of Surety

In the case of, Sita Ram Gupta v. Punjab National Bank

In this instance, the appellant attempted to revoke the guarantee before the funds were released to the principal debtor. However, a clause in the guarantee agreement specified that the guarantee is indefinite and non-terminable. The appellant had given up his right to withdraw the contract, according to the court, hence he was unable to do so.

In the case of Kahiba Bin Narsapa Nikade v. Narshiv Sheipat

In this case, According to the High Court of Bombay, a guarantor to a bond issued by a minor for funds borrowed for legal proceedings but deemed not essential may be sued depending on whether the kid's contract is deemed void or voidable. The court found no justification for a person to enter into a contract that would require a third party to undertake an imperfectly obligated duty. The surety's contract is a main contract rather than collateral if the obligation is void.

Conclusion

The release of a surety from obligation under a guarantee is one of the most crucial components of contract law that upholds equality and fairness in business agreements. Certain provisions in the Indian Contract Act of 1872 allow a guarantor to be relieved from liability under many circumstances, such as the release of the principal debtor, the renunciation of the guarantee, and contract changes. The aforementioned clauses protect the surety's rights from foreseeable obligations.

Frequently Asked Questions (FAQs)

1. What are the Rights of a Surety?

Whether or not the surety is aware of the existence of a security, at the time the contract of suretyship is entered into, the surety is entitled to the benefit of all security that the creditor has against the principal debtor. If the creditor loses or parts with such security without the surety's consent, the surety is released to the extent of the security's value.

2. What are the Rights of a Surety?

A surety has several important rights, including:

3. What is the discharge of the Surety bond?

A bonding firm (also known as a surety company) may be discharged once the principal on the bond, who is often the general contractor, has completed his duties.

4. What is the nature of the rights and liabilities of a surety?

The surety bears the same liability as the major debtor. The surety may be immediately sued by a creditor.

5. What is the discharge of surety?

The surety is released from liability if the creditor violates the surety's rights in any way or neglects to fulfil any obligation owed to the surety, impairing the surety's ultimate recourse against the principal debtor.

6. Who is eligible for surety?

In general, the following people may be qualified to guarantee bail: Family Members: Close relatives of the accused, such as parents, spouses, siblings, or adult children, are frequently seen as qualified to offer surety.

7. How does the statute of limitations affect a surety's liability?

If the statute of limitations expires on the creditor's claim against the principal debtor, it typically also expires on the claim against the surety. This is because the surety's obligation is generally considered accessory to the principal debt. However, some jurisdictions may have specific rules or exceptions regarding limitation periods for sureties.

8. How does the principle of "strictissimi juris" apply to suretyship?

The principle of "strictissimi juris" (of the strictest right) traditionally applied to suretyship, meaning that any material change to the underlying obligation would discharge the surety. Modern law has relaxed this principle, especially for compensated sureties, requiring that changes actually prejudice the surety's interests before discharge is granted.

9. What is the concept of "reservation of rights" in suretyship?

"Reservation of rights" refers to a creditor's ability to preserve their rights against a surety while granting concessions to the principal debtor. By explicitly reserving their rights, the creditor can, for example, extend the time for payment to the principal debtor without discharging the surety. This concept helps balance the interests of all parties involved.

10. How does fraud or misrepresentation affect a surety's obligations?

Fraud or material misrepresentation can void a suretyship agreement and discharge the surety from their obligations. If the surety was induced to enter the agreement based on false information provided by either the creditor or the principal debtor, they may have grounds to be released from their commitment.

11. What is a co-surety arrangement, and how does it work?

In a co-surety arrangement, multiple sureties agree to guarantee the same obligation. If one surety pays more than their fair share, they have the right to seek contribution from the others. Co-sureties are typically jointly and severally liable, meaning the creditor can pursue any or all of them for the full amount of the debt.

12. What is meant by the discharge of a surety?

The discharge of a surety refers to the release of the surety from their obligations under the suretyship agreement. This can occur through various means, such as payment of the debt, alteration of the principal contract, release of the principal debtor, or certain actions by the creditor that prejudice the surety's rights.

13. How can a material alteration of the principal contract affect a surety?

A material alteration of the principal contract without the surety's consent can discharge the surety from their obligations. This is because such changes may increase the surety's risk or alter the nature of the obligation they originally agreed to guarantee. However, minor or immaterial changes typically do not result in discharge.

14. What is the impact of releasing the principal debtor on the surety's obligations?

Generally, if the creditor releases the principal debtor from their obligations, this also discharges the surety. The rationale is that the surety's obligation is accessory to that of the principal debtor, so if the primary obligation ceases to exist, so does the secondary one. However, there may be exceptions if the surety explicitly agrees to remain liable.

15. What is a continuing guarantee, and how does it differ from a specific guarantee?

A continuing guarantee is an agreement to be surety for a series of transactions or obligations over time, rather than for a single, specific debt. Unlike a specific guarantee, which ends when the particular debt is paid, a continuing guarantee remains in force until revoked or terminated according to its terms. This type of guarantee is common in ongoing business relationships.

16. Can a surety revoke their obligation, and if so, how?

In most cases, a surety can revoke their obligation for future transactions in a continuing guarantee by giving notice to the creditor. However, this revocation typically doesn't affect liability for transactions that have already occurred. For a specific guarantee, revocation is generally not possible once the creditor has acted on the guarantee, unless the contract provides for it.

17. What is the role of notice in suretyship?

Notice plays a crucial role in suretyship. Depending on the agreement and applicable law, a surety may be entitled to notice of the principal debtor's default, changes to the underlying obligation, or other significant events. Failure to provide required notice may, in some cases, discharge the surety or limit their liability.

18. How does the death of a surety impact the suretyship agreement?

The death of a surety doesn't automatically terminate the suretyship agreement. Generally, the surety's estate remains liable for obligations incurred before death. However, for continuing guarantees, the death of the surety (or notice of death to the creditor) typically terminates the agreement for future transactions.

19. What is a "suretyship defense," and can you provide an example?

A suretyship defense is a legal argument a surety can use to avoid or limit their liability. Examples include:

20. How does bankruptcy of the principal debtor affect the surety's obligations?

The bankruptcy of the principal debtor doesn't automatically discharge the surety. In fact, it often triggers the surety's obligation to pay. However, the surety may file a claim in the bankruptcy proceedings to recover any payments made. The specific effects can vary based on bankruptcy laws and the terms of the suretyship agreement.

21. How does the concept of "impairment of collateral" affect a surety's liability?

Impairment of collateral occurs when the creditor loses, releases, or damages collateral securing the principal debt. If this happens without the surety's consent, it may discharge the surety to the extent of the impairment. The rationale is that the surety's risk has increased, as they can no longer rely on that collateral to offset their potential liability.

22. How does the concept of "consideration" apply in suretyship agreements?

Consideration, a fundamental element of contract law, also applies to suretyship agreements. For a suretyship to be legally binding, there must be consideration flowing to the surety. This can be direct (like a fee for a compensated surety) or indirect (such as the benefit of a loan being extended to a family member for an uncompensated surety). Importantly, the consideration supporting the main contract can often serve as consideration for the suretyship as well.

23. How does the concept of "indemnity" differ from "suretyship"?

While both indemnity and suretyship involve one party assuming responsibility for another's obligations, they differ in key ways:

24. What is the "rule of explicitness" in suretyship law, and why is it important?

The rule of explicitness requires that certain terms in a suretyship agreement, particularly those that waive important surety rights or defenses, must be clearly and unambiguously state

25. How does the concept of "suretyship by operation of law" work?

Suretyship by operation of law occurs when the law imposes surety-like obligations on a party, even without an explicit agreement. For example, in some jurisdictions, a person who assumes a mortgage when buying property might become a surety for the original borrower by operation of law. This concept recognizes that certain transactions inherently create surety-like responsibilities.

26. What is a "fidelity bond," and how does it function as a form of suretyship?

A fidelity bond is a type of surety bond that protects an employer against losses caused by dishonest acts of employees. It functions as a form of suretyship where the surety (usually an insurance company) agrees to compensate the employer (the obligee) for losses due to employee theft, fraud, or other specified dishonest acts. This type of bond is common in industries handling money or valuable assets and provides a layer of financial protection for businesses.

27. What is a "performance bond," and how does it function in suretyship?

A performance bond is a type of surety bond that guarantees the completion of a contract according to its terms. Common in construction and service industries, it protects the party hiring the contractor (the obligee) by ensuring that if the contractor fails to complete the work as agreed, the surety will either complete the contract or compensate the obligee for losses.

28. What is a "letter of credit," and how does it relate to suretyship?

A letter of credit is a document issued by a bank guaranteeing payment to a beneficiary under specified conditions. While not technically a suretyship, it serves a similar function by providing assurance of payment. Unlike traditional suretyship, letters of credit create an independent obligation for the issuing bank, separate from the underlying transaction.

29. What is the right of subrogation?

The right of subrogation allows a surety who has paid the creditor to "step into the shoes" of the creditor and pursue the principal debtor for repayment. This right enables the surety to use any legal remedies the creditor had against the principal debtor, helping the surety recover the amount paid on the principal debtor's behalf.

30. What is the right of indemnity in suretyship?

The right of indemnity allows a surety to seek reimbursement from the principal debtor for any amount the surety has paid to the creditor. This right is based on the principle that the ultimate responsibility for the debt lies with the principal debtor, not the surety who merely guaranteed it.

31. How does the surety's right to securities work?

The right to securities entitles a surety to access any collateral or other securities the creditor holds against the principal debtor. If the surety pays the debt, they can use these securities to recover their payment from the principal debtor, putting them in the same position as the original creditor.

32. How does the right of contribution work in suretyship?

The right of contribution allows a surety who has paid more than their fair share of the debt to seek reimbursement from co-sureties. If multiple sureties exist for the same debt, and one surety pays the entire amount, that surety can demand that the others contribute their proportionate shares.

33. What is a surety in contract law?

A surety is a person or entity that agrees to be legally responsible for another party's debt or obligation if that party fails to fulfill it. This creates a three-party relationship: the creditor, the principal debtor, and the surety. The surety essentially provides a guarantee or assurance to the creditor that the debt will be paid or the obligation met.

34. How does a suretyship differ from a guarantee?

While often used interchangeably, suretyship and guarantee have subtle differences. A surety is jointly and severally liable with the principal debtor from the outset, meaning the creditor can pursue either party immediately upon default. A guarantor, however, typically has secondary liability, meaning the creditor must first exhaust remedies against the principal debtor before pursuing the guarantor.

35. What is the difference between a general and a special surety?

A general surety agrees to be responsible for all of a principal debtor's obligations to a creditor, often up to a specified limit. A special surety, on the other hand, guarantees a specific transaction or obligation. General sureties are more common in ongoing business relationships, while special sureties are typically used for one-time transactions.

36. What is the difference between a compensated and an uncompensated surety?

A compensated surety receives payment or other consideration for assuming the role of surety, often in a professional capacity (like a bonding company). An uncompensated surety, also known as a gratuitous surety, receives no direct benefit for their promise and often acts out of personal relationship or goodwill. Courts may interpret the obligations of compensated sureties more strictly.

37. What is the "pain point" rule in suretyship, and how does it work?

The "pain point" rule, also known as the rule of "first dollar liability," states that a surety becomes liable as soon as the principal debtor defaults, even if the amount in default is small. This means the creditor can immediately pursue the surety for payment without having to exhaust all remedies against the principal debtor first.

38. How does the principle of "quia timet" apply in suretyship law?

The principle of "quia timet" (because he fears) allows a surety to seek relief before actually incurring a loss. For example, if a surety believes the principal debtor is likely to default, they may be able to seek a court order requiring the principal debtor to perform their obligation or provide security. This principle helps protect sureties from potential future losses.

39. How does the concept of "marshaling of assets" apply to suretyship?

Marshaling of assets is a principle that requires a creditor with claims against multiple sources of payment to exhaust certain sources before turning to others. In suretyship, this might require a creditor to first pursue the principal debtor's assets before seeking payment from the surety, especially if the surety has fewer resources. This principle aims to protect the surety's interests.

40. What is the significance of the "surety's right to complete" in construction contracts?

The surety's right to complete is particularly relevant in construction bonds. If a contractor defaults, the surety may have the right to step in and complete the project rather than simply paying damages. This right allows the surety to potentially minimize losses and fulfill the original contract, benefiting both the surety and the project owner.

41. How does the principle of "exoneration" apply in suretyship law?

Exoneration refers to the surety's right to compel the principal debtor to pay the debt or perform the obligation, thereby relieving the surety of potential liability. This right can be exercised even before the surety has made any payment, allowing the surety to proactively protect their interests if they believe the principal debtor may default.

42. What is the "doctrine of strictissimi juris," and how has its application evolved in modern suretyship law?

The doctrine of strictissimi juris (of the strictest right) traditionally held that any material change to the underlying obligation would discharge the surety. This strict interpretation was based on the idea that suretyship agreements should be construed in favor of the surety. However, modern law has relaxed this doctrine, especially for compensated sureties. Courts now often require that changes actually prejudice the surety's interests before granting discharge, reflecting a more balanced approach to suretyship obligations.

43. How does the principle of "equitable subrogation" apply in suretyship law?

Equitable subrogation is a legal doctrine that allows a surety who has paid the creditor to "step into the shoes" of the creditor and pursue the principal debtor for reimbursement. This principle goes beyond mere contractual rights and is based on equity and fairness. It allows the surety to access all the rights and remedies the creditor had against the principal debtor, including any liens or security interests, helping ensure the surety can recover their losses.

44. What is the significance of "waiver" in suretyship agreements?

Waiver in suretyship refers to the voluntary relinquishment of a right by the surety. This can include waiving certain defenses or protections that would otherwise be available. For example, a surety might waive the right to notice of the principal debtor's default. Waivers can significantly impact the surety's position and are often scrutinized by courts, especially in cases involving uncompensated sureties or consumers, to ensure they were made knowingly and voluntarily.

45. How does the concept of "novation" affect suretyship obligations?

Novation is the substitution of a new contract for an existing one, with the consent of all parties involved. In suretyship, a novation of the principal contract typically discharges the surety unless they consent to remain bound under the new agreement. This is because novation fundamentally alters the obligation the surety originally guaranteed. Understanding novation is crucial for sureties to avoid unintended continued liability when underlying contracts change significantly.