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Unit 8: Contract of Guarantee

8.4 Rights, Liabilities and Discharge of Surety Notes

Rights of a surety may be classified under three heads: (i) rights against the creditor, (ii) rights
against the principal debtor and (iii) Rights against co-sureties.

8.4.1 Rights against the Creditor

In case of fidelity guarantee, the surety can direct creditor to dismiss the employee whose honesty
he has guaranteed, in the event of proved dishonesty of the employee. The creditor’s failure to do
so will exonerate the surety from his liability.

8.4.2 Rights against the Principal Debtor

1. Right of subrogation: Section 140 lays down that where a surety has paid the guaranteed
debt on its becoming due or has performed the guaranteed duty on the default of the
principal debtor, he is invested with all the rights which the creditor has against the debtor.
In other words, the surety is subrogated to all the rights which the creditor had against the
principal debtor. So, if the creditor loses, or without the consent of the surety parts with
any securities (whether known to the surety or not) the surety is discharged to the extent of
the value of such securities (s.141). Further, the creditor must hand over to the surety, the
securities in the same condition as they formerly stood in his hands.

2. Right to be indemnifi ed: The surety has a right to recover from the principal debtor the
amounts which he has rightfully paid under the contract of guarantee.

Task “A” advances to “B”, a minor, ` 500 on the guarantee of C. On demand for
repayment B pleads minority. Can A recover that amount from C?
[Hint: No. The liability of surety is extensive with that of the principal debtor.]

8.4.3 Rights against Co-sureties

Where a debt has been guaranteed by more than one person, they are called co-sureties. S.146
provides for a right of contribution between them. When a surety has paid more than his share or
a decree has been passed against him for more than his share, he has a right of contribution from
the other sureties who are equally bound to pay with him.

Example: A, B and C are sureties to D for the sum of ` 3,000 lent to E. E defaults in making
payment. A, B and C are liable, as between themselves to pay ` 1,000 each and if any one of them
has to pay more than his share, i.e., ` 1,000 he can claim contribution from the others, for the
amount paid in excess of ` 1,000.

If one of the sureties becomes insolvent, the solvent co-sureties shall have to contribute the whole
amount equally.
Where, the co-sureties have guaranteed different sums, they are bound under S. 147 to contribute

equally, subject to the limit fixed by their guarantee and not proportionately to the liability
undertaken.

Examples: (i) A, B and C as sureties for D, enter into three several bonds, each in a
different penalty, namely, A in the penalty of ` 10,000, B in that of ` 20,000, C in that of ` 40,000,

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