Rights of surety in contract of guarantee have been seen under sections 140 to 146 of the Indian Contract Act, 1872. The contract of guarantee is also known as a “Contract of Suretyship”.
As per section 126 of the Contract Act, the Contract of Guarantee is defined as “a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default.” The person who gives the guarantee is called the “Surety”. A surety is also known as Guarantor.
What are the rights of surety? When the surety makes a payment of debt taken by the principal debtor and discharges the liability of the principal debtor then the surety gets various rights, these rights of a surety are;
Right of Surety against Principal Debtor,
Rights of Surety against Creditor, and
Rights against the co-sureties.Rights against the Principal Debtor
Right of Surety against Principal Debtor
1) Right of subrogation (Section 140)
As per section 140 of the Contract Act, the right of subrogation means that since the surety had given a guarantee to the creditor and the creditor after getting the payment is out of the scene, the surety will now deal with the debtor as if he is a creditor. Hence the surety has the right to recover the amount which he has paid to the creditor which may include the principal amount, costs and interest.
2) Right of Indemnity (Section 145)
As per section 145 of the Contract Act, in every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. This is because the surety has suffered a loss due to the non-fulfilment of the promise by the principal debtor and therefore the surety has a right to be compensated by the debtor
Rights of Surety against Creditor
1) Right to securities given by the principal debtor (section 141)
As per section 141 of the Contract Act, on the default of payment by the principal debtor, when the surety pays off the debt of the principal debtor he becomes entitled to claim all the securities which were given by the principal debtor to the creditor. The Surety has the right to all securities whether received before or after the creation of the guarantee and it is also immaterial whether the surety has knowledge of those securities or not.
Illustration: A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up further security. A is not discharged.
2) Right to set off
When the creditor sues the surety for the payment of the principal debtor’s liabilities, the surety can claim set off, or counterclaim if any, which the principal debtor had against the creditor.
Rights against the Co-sureties
1) Release of one co-surety does not discharge others (Section 138)
As per section 138 of the Indian Contract Act, 1872, when the repayment of debt of the principal debtor is guaranteed by more than one person they are called Co-sureties and they are liable to contribute as agreed towards the payment of guaranteed debt. The release by the creditor of one of the co-sureties does not discharge the others, nor does it free the released surety from his responsibility to the other sureties.
Thus when the payment of a debt or performance of duty is guaranteed by co-sureties and the principal debtor has defaulted in fulfilling his obligation and thus the creditor compels only one or more of the co-sureties to perform the whole contract, the co-surety sureties performing the contract are entitled to claim contribution from the remaining co-sureties.
2) Co-sureties to contribute equally (Section 146)
As per section 146 of the Act, in the absence of any contract to the contrary, the co-sureties are liable to contribute equally. This principle will apply even when the liability of co-sureties is joint or several, whether under the same or different contracts, and whether with or without the knowledge of each other.
Illustration: – A, B, C, and D are co-sureties for a debt of Rs. 2,0000 lent by Z to R. R defaults in repaying the loan. A, B, C, and D are liable to contribute Rs. 5000 each.
3) Liability of co-sureties bound in different sums (Section 147)
As per section 147 of the Contract Act, when the co-sureties have agreed to guarantee different sums, they have to contribute equally subject to the maximum of the amount guaranteed by each one.
Rights of Surety have been provided under the Indian Contract Act, 1872. The surety is the person who comes forward to pay the amount in the event of the borrower failing to pay the amount.