Page 95 - DMGT102_MERCANTILE_LAWS_I

Unit 7: Contracts of Guarantee and Indemnity

Notes
Example: C the holder of an overdue bill of exchange, drawn by A as surety for B and
accepted by B, contracts with M to give time to B. A is not discharged.
(b) Mere forbearance on the part of creditor to sue the principal debtor, or to enforce any
other remedy against him, does not, in the absence of a provision to the contrary,
discharge the surety (s.137).

Example: B owes C (a banker) a debt guaranteed by A and the debt becomes payable,
but C does not sue B for a year after debt becomes payable. A is not discharged from his surety
ship.
(c) If the creditor releases one of the co-sureties, the other co-surety (or co-sureties)
thereby is not discharged. The co-surety released by the creditor is also not released
from his liability to the other sureties (s.138).
4. Not to do any act inconsistent with the rights of the surety. (s.139): Where C lends money
to B on the security of a joint and several promissory note made in C’s favour by B and by
A as surety for B, together with a bill of sale of B’s furniture, which give power to C to sell
the furniture and apply the proceeds in discharge of the note. Subsequently, C sells the
furniture, but owing to his misconduct and wilful negligence, only a small price is realized,
then A is discharged from liability on the note.

7.4 Rights, Liability and Discharge of Surety

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.

7.4.1 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.

7.4.2 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, Rs 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.]

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