Indemnity and Guarantee Part 2

Section 140. Rights of surety on payment or performance.

• When a guaranteed debt becomes due or the principal debtor defaults, the surety pays or performs the obligation.

• After doing so, the surety acquires all the rights of the creditor against the principal debtor.

• The surety can recover the amount from the principal debtor just as the creditor could.

• So , essentially , the surety becomes the debtor.

Section 141. Surety’s right to benefit of creditor’s securities.

• A surety is entitled to the benefit of all securities the creditor holds against the principal debtor.

• This applies to all securities existing at the time the suretyship is created.

• The surety’s right exists even if they are unaware of these securities.

• If the creditor loses or parts with such security without the surety’s consent, the surety is discharged to the extent of the value of that security.

Illustrations:

(a).

• C advances ₹2,000 to B, guaranteed by A, and also holds a mortgage on B’s furniture as security.

• C cancels the mortgage. B becomes insolvent, and C sues A.

• A is discharged to the extent of the furniture’s value.

(b).

• C, whose advance to B is secured by a decree, also obtains a guarantee from A.

• C executes the decree to seize B’s goods, then withdraws the execution without A’s knowledge.

• A is discharged.

(c).

• A, as surety for B, gives a bond jointly with B to C.

• Later, C obtains additional security from B for the same debt, then gives it up.

• A is not discharged, because this further security was obtained after the original suretyship.

Section 142. Guarantee obtained by misrepresentation invalid.

• A guarantee is invalid if it is obtained through misrepresentation by the creditor.

• This includes situations where the creditor knows and allows false information about an important aspect of the transaction.

• If the surety was induced to give the guarantee based on false information or concealment of important facts, the guarantee cannot be enforced.

Section 143. Guarantee obtained by concealment invalid.

• A guarantee is invalid if the creditor has obtained it by concealing material facts or keeping silent about circumstances that are important to the surety.

Illustrations:

(a).

• A employs B as a clerk to collect money.

• B fails to account for some receipts.

• A asks C to guarantee B’s proper accounting but does not disclose B’s past misconduct.

• Later, B defaults. The guarantee is invalid.

(b).

• A guarantees to C payment for 2,000 tons of iron supplied to B.

• B and C secretly agree that B will pay extra beyond the market price to settle an old debt, which is not disclosed to A.

• A is not liable as a surety.

Section 144. Guarantee on contract that creditor shall not act on it until co-surety joins.

• If a person gives a guarantee conditioned on another co-surety joining, the guarantee depends on that condition.

• If the other co-surety does not join, the condition is not fulfilled.

• In such a case, the guarantee is invalid.

Section 145. Implied promise to indemnify surety.

• In every guarantee, the principal debtor must repay the surety.

• The surety can get back any money they paid correctly under the guarantee.

• The surety cannot get back money that was paid by mistake or wrongly.

Illustrations:

(a).

• B owes C a debt, and A is the surety.

• C sues A, who defends with reasonable grounds but is compelled to pay the debt and costs.

• A can recover both the principal debt and costs from B.

(b).

• C lends money to B, and A accepts a bill of exchange as surety.

• A refuses to pay and defends without reasonable grounds, ultimately paying the bill and costs.

• A can recover the bill amount only, not the costs, from B.

(c).

• A guarantees payment of 2,000 rupees to C for rice supplied to B.

• C supplies less than 2,000 rupees but claims full 2,000 from A.

• A can recover from B only the price of rice actually supplied.

Section 146. Co-sureties liable to contribute equally.

• When two or more persons are co-sureties for the same debt, whether jointly or separately, they share responsibility.

• This applies even if they do not know each other.

• Unless there is a different agreement, they must contribute equally toward the debt or any part not paid by the principal debtor.

Illustrations:

(a).

• A, B, and C are sureties for 3,000 rupees lent to E. E defaults.

• Each co-surety (A, B, C) must pay 1,000 rupees.

(b).

• A, B, and C are sureties for 1,000 rupees lent to E, but by contract, A and B are responsible for one-quarter each, and C for one-half.

• E defaults.

• As per agreement: A pays 250 rupees, B pays 250 rupees, and C pays 500 rupees.

Section 147. Liability of co-sureties bound in different sums.

• When co-sureties are bound in different sums, they must contribute equally, but only up to the limit of their respective obligations.

Illustrations:

(a).

• A, B, and C are sureties for D with bonds of 10,000, 20,000, and 40,000 rupees respectively.

• D defaults by 30,000 rupees.

• Each pays 10,000 rupees.

(b).

• A, B, and C have bonds of 10,000, 20,000, and 40,000 rupees.

• D defaults by 40,000 rupees.

• A pays 10,000, B pays 15,000, C pays 15,000.

(c).

• A, B, and C have bonds of 10,000, 20,000, and 40,000 rupees.

• D defaults by 70,000 rupees.

• Each pays the full amount of their bond: A-10,000, B-20,000, C-40,000.