Nature and scope of a surety's liability

Nature of the liability.

1. Co-extensive. Under section 128 of the Indian Contract Act, 1872, the surety's liability runs as far as the principal debtor's, unless the contract of guarantee provides otherwise.
2. Secondary. The surety is liable only when the principal debtor defaults.
3. Enforceable directly. Once the default occurs, the creditor may proceed against the surety first, without first suing the principal debtor, unless the parties have agreed otherwise.
4. Dependent on the principal debtor's liability. Where the principal debtor cannot be held liable because of a defect in the document, the surety's liability also comes to an end.

Scope of the liability.

1. The whole debt with its incidents. The surety answers for the principal sum and also for the interest and charges for which the principal debtor is liable. The illustration to section 128 makes a surety for the payment of a dishonoured bill liable for its amount and for the interest and charges due on it. Example: Meera guarantees her brother's ₹5,00,000 car loan from a bank; if he defaults, the bank may recover from her the unpaid instalments together with the interest and charges he owes on them.
2. Limits set by the contract. Because section 128 yields to the contract, the guarantee may cap the surety's liability at a stated amount, and he is then liable only up to that cap.
3. Continuing guarantee. A guarantee may extend to a series of transactions (s. 129). The surety is then liable for the transactions within its limit; in the Act's tea-dealer illustration, a surety who guaranteed £100 is liable for £100 although £200 of later supplies are unpaid. He may revoke such a guarantee at any time, as to future transactions, by notice to the creditor (s. 130).

Where the liability ends. Because his liability depends on the contract he guaranteed, the surety is discharged by the creditor's dealings that change his position:

• variance in the terms of the contract between the creditor and the principal debtor without the surety's consent, which discharges him as to transactions after the variance (s. 133);
• release of the principal debtor, either by a contract between the creditor and the principal debtor that releases the debtor, or by any act or omission of the creditor whose legal consequence is the debtor's discharge (s. 134);
• an agreement made by the creditor with the principal debtor to compound with him, to give him time, or not to sue him, unless the surety assents to it (s. 135). A contract to give time made with a third person, not with the principal debtor, does not discharge the surety (s. 136).