GITAM UNIVERSITY

GITAM SCHOOL OF LAW

Gandhi Nagar, Beach Road, Rushikonda.Visakhapatanam. Andhra Pradesh. 530045

Contracts – I
Project on
"Is the liability of surety
is co-extensive with that of the debtor?"

Submitted by
PERLA SAI GANESH
122033201003
BBA LLB
Semester - 3

Under The Guidance of

Dr. Ritu Gupta
Assistant Professor
GITAM School of Law
 CONTENTS
S.no Contents Pg.no
1. Acknowledgement i
2. Declaration ii
3. Introduction 1
4. Main features of contract of guarantee 1
5. Liability and surety: Its nature and extent 3
6. Suing either of the parties in case of default 4
7. Conclusion 5
8. Bibliography 6

i
 ACKNOWLEDGEMENT

The accomplishment of this project is only possible by the kind support and guidance
of many individuals. I wish like to express my heart-felt thanks to all of them.

Firstly, I would express my respect and thanks to my professor Dr. Ritu Gupta ma'am
for her guidance and persistent supervision as well as for providing proper data
regarding the project and also for her support in carrying out this project.

Secondly, I would also thank my classmates who helped me in developing and

finalizing this project with their abilities and also helped me in completing the project
within the limited time frame.

ii
 DECLARATION
I Sai Ganesh Perla hereby declare that the project on the case law is being submitted by
me in the partial fulfilment of the requirement for my academic study of B.B.A.L.L.B
(HONS) 2nd semester.

The matter embodied in this project report has not been submitted to any other
University or Institution for the award of degree. This project is my original work and
it has not been presented earlier in any manner. This information is purely academic
interest.

Date

Signature
Sai Ganesh Perla
122033201003
BBA-LLB
Gitam School of Law.

iii
Introduction
Contract of guarantee is a specific performance contract. It is called specific performance
because it is an equitable relief. This is not the usual legal remedy where compensation for
damages is adequate. Damage and specific performance are both remedies available upon
breach of obligations by a party to the contract; the former is a substitutional remedy; and the
latter a specific remedy.

The law prescribes that in an event where the actual damage for not performing the contract
cannot be measured or monetary compensation is not adequate, one party can ask the court to
direct the other party to fulfil the requirements of the contract.

It is also a discretionary relief, that is, it is left to the court to decide whether specific
performance should be given to a party asking for it.

Main features of contract of guarantee

1. The contract may be either oral or in writing1:
A guarantee may be either oral or written. On this point, the position in India is different
from that in England. According to English law, for a valid contract of guarantee, it is
necessary that it should be in writing and signed by the party to be charged therewith.

2. There should be a principal debt:

A contract of guarantee presupposes a principal debt or an obligation to be discharged
by the principal debtor. The surety undertakes to be liable only if the principal debtor
fails to discharge his obligation. If there is no such principal debt, but there is a promise
by one party in favour of another for compensating in a certain situation, and the
performance of this promise is not dependent upon the default of somebody else, it is a
contract of indemnity.
Thus, when A and B go to a shop, A purchases goods and B tells the seller - “If A does
not pay you, I will", it is a contract of guarantee. On the other hand, if A is not the

1
S. 124, the Indian Contract Act, 1872.

1
 principal debtor, but only B makes a promise to the shopkeeper to pay, for instance, B
tells the shopkeeper Let him (A) have the goods, I will be your paymaster', it is a
contract of indemnity.

3. Benefit to the principal debtor is sufficient consideration

As in any other contract, the consideration is also needed for a contract of guarantee.
For the surety's promise, it is not necessary that there should be direct consideration
between the creditor and the surety, it is enough that the creditor had done something
for the benefit of the principal debtor. Benefit to the principal debtor constitutes a
sufficient consideration to the surety for giving the guarantee.

“Anything done, or any promise made for the benefit of the principal debtor, may be a

sufficient consideration to the surety for giving the guarantee 2.”

4. Consent of the surety

The consent of the surety should not have been obtained by misrepresentation or
concealment. The creditor should not obtain guarantee either by any misrepresentation
or concealment of any material facts concerning the transaction. If the guarantee has
been obtained that way, the guarantee is invalid.

The Indian Contract Act states that –

Guarantee obtained by misrepresentation invalid -

“Any guarantee which has been obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the
transaction, is invalid3.”

Guarantee obtained by concealment invalid -

“Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstance is invalid4.”

2
S. 127, the Indian Contract Act, 1872.
3
S. 142, the Indian Contract Act, 1872.
4
S. 143, the Indian Contract Act, 1872.

2
Liability of Surety : Its Nature and Extent
"The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise
provided by the contracts5."

The provision that the surety's liability is coextensive with that of the principal debtor means
that his liability is exactly the same as that of the principal debtor. It means that on a default
having been made by the principal debtor, the creditor can recover from the surety, all that
what he could have recovered from the principal debtor.

For instance, the principal debtor makes a default in the payment of a debt of Rs. 10,000/-. The
creditor may recover from the surety the sum of Rs. 10,000/- plus interest becoming due
thereon as well as the amount spent by him in recovering that amount.

This may be further explained by the following example.

A guaranteed to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured
by C, the acceptor. 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.1 If the principal debtor's liability is reduced, e.g.,
after the creditor has recovered a part of the sum due from him out of his property, the liability
of the surety is also reduced accordingly.

In Narayan Singh v. Chattarsingh6,' it has been held that if the principal debtor's liability is
scaled down in an amended decree or otherwise extinguished in whole or in part by a statute,
the liability of the surety would also pro tanto be reduced or extinguished. In this case, the
liability of an agriculturist, who was the principal debtor, was scaled down under the Rajasthan
Relief of Agricultural Indebtedness Act, 1957. It was held that the effect of scaling down the
principal debtor's liability was that the surety's liability had also been reduced accordingly.

The surety's liability was considered to be reduced for another reason also, and that was that if
the surety is made liable for the full amount, he in his turn will become entitled to recover the
same from the principal debtor, and this will eventually negative the benefit conferred upon
the agriculturist principal debtor under the statute. If the principal debtor's liability is affected
by illegality, so is also that of the surety.

5
S. 128, the Indian Contract Act, 1872.
6
AIR 1973 Raj 347.

3
Therefore, where the liability of the principal is held to be not enforceable on the ground of the
contract being illegal, there is no question of surety being made liable.' If the principal debtor
happens to be a minor and the agreement made by him is void, the surety too cannot be made
liable in respect of the same because the liability of the surety is coextensive with that of the
principal debtor. It has been held in an English case, that the guarantee of the loan or an
overdraft to an infant is void, because the loan to the infant itself is void7.

Suing either of the parties in case of default

When the liability of a surety is co-extensive as per the section 128 of the Indian Contract Act,
1872, the creditor has the right to sue either of the parties in case of the default by the principal
debtor. If the principal debtor fails to repay the debt, the liability of the surety arises. In this
context, the creditor can sue either the principal debtor or the surety. This means, the older
principal that states that the surety can only be sues after being exhausted of all the remedies
against the principal debtor is no longer applicable.

In the case of Bank of Bihar v. Damodar Prasad8, the plaintiff bank lent money to Damodar
Prasad, on the guarantee of Paras Nath Sinha. In spite of demands by the bank, the loan was
neither repaid by Damodar Prasad (principal debtor), nor by Paras Nath Sinha (the surety). The
bank then filed a suit against both the principal debtor and the surety. A decree was passed in
favour of the bank but with the condition that the plaintiff bank shall be at liberty to enforce its
dues against the surety only after having exhausted its remedies against the principal debtor. In
its appeal before the Supreme Court, the plaintiff bank challenged the validity of the condition
in the decree that the bank should enforce the decree against the surety only after having
exhausted the remedies against the principal debtor. The honourable Supreme court in this case
held that 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. Except to have mentioned in the
contract, the surety has no right to restrain the creditor from pursuing any action against him.

7
Coutts and Co. v. Browne-Lecky and Others (1946), 62 T.L.R. 421.
8
A.I.R 1969 SC 297.

4
Conclusion
Therefore, as the law established clearly states, in case of the default that is being made by the
principal debtor, the creditor has every right to sue any of the both parties for recovery of the
loan. The earlier principal that says that the creditor must sue the surety only after exhaustion
if all the remedies available to him against the principal debtor is obsolete. The principal so
established by various courts in different cases have truly widened the scope of the concept of
rights of the creditor.

5
Bibliography
1. The Indian Contract Act, 1872.
2. Contract – II, Dr. R.K. Bangia.
3. Contracts & Specific relief act, Avtar Singh.
4. https://www.legalbites.in/co-extensive-liability-of-surety/