Q1: A acts as a surety for a contract between B and C, on behalf of B. When there was a breach of contract by B, C instead of proceeding against B files a case against A. Discuss
 

Facts of the case:

• B and C enter into a contract
• A acts as a Surety for the above contract
• B breached the contract
• C initiated court proceedings against A, instead of B

Issues/Questions Involved in the case:

• Can C sue A, a Surety, instead of B, a party to the contract, who has actually breached the contract with C?

Decision/Judgement arrived at in the case:

• Yes, C can sue A, a Surety, instead of B, a party to the contract, who has actually breached the contract with C.

Reasons/Principles Applied to arrive at the Decision:

Definitions:

According to Section 126 of Indian Contract Act, “Contract of guarantee”, “surety”, “principal debtor” and “creditor”. — 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”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

According to Section 128 of Indian Contract Act, “Surety’s liability”. — The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.

According to Section 142 of Indian Contract Act, “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 invalid.

According to Section 143 of Indian Contract Act, “Guarantee obtained by concealment invalid.”—Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances, is invalid.

 

Meaning:

There are 3 parties to a contract of guarantee.

1. Principle Debtor
2. Creditor
3. Guarantor or Surety

And between these parties, there exists 3 contracts

1. Between Principle debtor and Creditor
2. Between Principle debtor and Surety
3. Between Surety and Creditor

Essential features of a Contract of Guarantee or Surety:

• Tripartite Agreement
• Existence of Principle Debtor
• Consent of three parties
• Applicability of essentials of a valid contract
• Past consideration is not consideration for guarantee
• Guarantee not to be obtained by misrepresentation (Complete disclosure of facts to all parties)

Explanation:

From the above points, it is vividly understood that the quantum of obligation of a Surety is the same as that of a Principle Debtor, unless there is a contract on the contrary. The liability of the Surety cannot be more than that of the Principle Debtor. Surety’s liability also depends upon the construction of the Contract of Guarantee. A Creditor is not bound to proceed first against the Principle Debtor before suing the Surety, unless otherwise agreed beforehand in the contract. Therefore, it is amply evident that the Creditor can sue the Surety without suing the Principle Debtor.

Liability of Guarantor or Surety:

1. Liability of Surety is secondary or contingent to that of the Principle Debtor and arises immediately upon the default of the Principle Debtor. Hence if Surety becomes insolvent, before any default by the Principle Debtor, the Creditor is left with no remedy.
2. Liability of Surety is immediately available for Creditor to claim, unless there is an express provision in the contract that the creditor must in the first instance, proceed against the Principle Debtor.
3. The Creditor can sue the Surety, even though he is holding securities from the Principle Debtor for his debt.
4. Liability of Surety is void, if the complete disclosure of all material facts is not done by the Principle Debtor or the Creditor or are altered on a later date without the knowledge of Surety, after initial concurrence.

Supporting Case laws/precedents/references:

1. Bank of Bihar v. Damodar Prasad [AIR 1969 SC 297]

In this case, the Court held that it is the duty of the Surety to see that the Principle Debtor fulfils his obligation. As soon as the time for payment is due, the Surety becomes liable directly, if the Principle Debtor does not or is unable to pay or perform his obligation.

1. Bank of India Limited v. R.S. Cowasjee [AIR 1955 Bom 419]

In this case, it was held that the Principle Debtor has got discharged of the obligation by operation of law.

1. Narayan Singh v. Chhattar Singh [AIR 1973 Raj 347]

In this case, it was held that if the liability of the Principle Debtor is scaled down under Debt Relief Act, the Surety’s liability also gets reduced. Hence it is to be noted that the Surety will be held liable to the extent of the Principle Debtor’s liability only.

Conclusion to the Problem:

In view of the above discussion, the liability of C towards A, arises immediately after the breach of contract by B. A can very well sue C, without proceeding against B.

 

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