Meaning of Contract of Suretyship
A Contract of Suretyship is defined under Section 126 of the Indian Contract Act, 1872. It is a contract in which a person (called the surety) promises to discharge the liability of a third person (the principal debtor) in case the latter fails to do so. The party in whose favor this promise is made is called the creditor. Thus, three parties are involved: the creditor, the principal debtor, and the surety. The essence of this contract is to provide security to the creditor against default by the debtor.
Nature and Essentials of Suretyship
The contract of suretyship can be either oral or written and must satisfy all general conditions of a valid contract. Consideration is essential, but under Section 127, anything done or any promise made for the benefit of the principal debtor is sufficient consideration for the surety’s promise. The surety’s liability is generally co-extensive with that of the principal debtor unless otherwise agreed upon (Section 128). This means the creditor can directly proceed against the surety without exhausting remedies against the debtor first.
Rights and Liabilities of the Surety
The surety enjoys certain rights, such as the right to be indemnified by the principal debtor, the right of subrogation after paying the debt, and the right to benefit from any securities held by the creditor. At the same time, the surety is liable for the entire debt if the debtor defaults, unless there is a contract limiting his liability. The suretyship thus balances creditor’s protection with safeguards for the surety.
Real-Life Example
Suppose Ravi borrows ₹1 lakh from a bank, and Arun acts as a surety. If Ravi fails to repay the loan, the bank can demand full payment directly from Arun under Section 128. After paying the bank, Arun can recover the money from Ravi. This example highlights both the liability of the surety towards the creditor and his right to recover from the debtor.
Mnemonic to Remember – “3 C’s”
To recall the essentials of a Contract of Suretyship, remember 3 C’s:
- C = Creditor (to whom the promise is made)
- C = Contract (agreement under Section 126)
- C = Co-extensive liability (Section 128)
Think: “Suretyship stands on 3 C’s – Creditor, Contract, and Co-extensive liability.”
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