Co-Suretyship under the Indian Contract Law: A Glance at the Rights and Liabilities

The Indian Contracts Act, 1872 has detailed provisions related to surety rights and the contract of guarantee. In this article, the author seeks to analyse the rights and liabilities of the co-sureties and understand their nature. The article provides a detailed analysis of the effect of discharging a surety and the right to contribution.

I. Introduction

A Contract of Guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.[1] The person who gives the guarantee is called a surety as defined under Section 126 of the Indian Contracts Act, 1872. It is possible that a single debt may be guaranteed by more than one person. In such instances, where the debt has been guaranteed by more than one person, they are called co-sureties. Thus, in relation to a guarantor, co-surety means any other person named as ‘guarantor’ or who otherwise guarantees payment of the money.

II. Legal Provisions in the Act

The Act contains provisions which lay down the rights and liabilities of the co-sureties. The co-sureties are jointly and severally liable under the Indian Contracts Act, 1872. While looking at the provisions regarding co-sureties, it is apparent that the rights of one co-surety will amount to the liability of the other sureties present in the contract of guarantee and vice-versa. The various provisions relating to co-surety rights and liabilities include Sections 138, 146 and 147 of the Act.

III. Effect of Discharging a Surety

Section 138 of the Act deals with the effect of releasing a surety from his guarantee and its impact on the remaining co-sureties. It provides that in instances where there are co-sureties, a release by the creditor of one of them does not discharge the others.

For instance, if there are three co-sureties A, B and C for a debt and the creditor releases A from his debt, it will not have the effect of releasing B and C from fulfilling their liability to the creditor. They will be liable for the whole debt. Moreover, the section provides that the release of a co-surety by the creditor will not absolve him from his responsibility to the other sureties.

Thus, in the above-mentioned instance, even if A is discharged by the creditor, he is still liable for his part to the debt and is obligated to fulfil his responsibility to the other sureties. This provision has an identical effect to Section 44 of the Act which deals with the release of a joint promisor.

Section 138 of the Act is significant in that this provision is divergent from the English law in this regard. In contrast to the Indian position, the English law provides that when the creditor releases one of the co-sureties who have contracted jointly and severally, the others are also discharged, the joint suretyship of the others being part of the consideration of each as held by the King’s Bench in the case of Jenkins v. Jenkins[2]. The same position was expounded in other landmark judgements of the English Courts in cases such as North v. Wakefield[3] and Wilkinson v. Lindo[4].

The Indian Contracts Act, 1872 was drafted with the intention to modify this position in England. From a bare reading of the provision, it is clear that the liability of co-surety in India is joint and several. It is to be noted that the fact that the surety bond is enforceable against each surety, severally, and that it is open to the creditor to release one or more of the joint sureties does not alter the true character of an adjudication of the court when the proceedings are commenced to enforce the covenants of the bond against all the sureties. This point clearly enunciated in the case of Sri Chand v. Jagdish Pershad Kishan Chand[5] by the SC.

The court held that the released co-surety will remain liable to the others for contribution in the event of default. The Supreme Court held that the mere fact that the obligation arising under the covenant may be enforced severally against all the covenantors, does not make the liability of each covenantor distinct. It is true, the court pointed out, that in the enforcement of the claim of the decree-holder the properties, belonging to the sureties individually, may be sold separately; but that is because the properties are separately owned and not because the liability arises under distinct transactions.[6]

III. Right to Contribution

Sections 146 and 147 of the Act recognize the principle of the right to the contribution of co-sureties. Section 146 provides that where two or more persons are co-sureties for the same debt or duty, either jointly or severally and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.[7]

From the provision, it is very clear that if there exists no contract between the sureties laying down the extent of each of their liabilities, then all of them will be liable to pay an equal share of the whole debt. The principle of equal contribution is subject of the maximum limit, if any, fixed by a surety to his liability.

However, if a contract exists which clearly specifies the limit of each surety’s liability, then each shall only be liable to the quantum specified in the contract. For instance, if X, Y and Z are sureties of A for an amount of Rs 1000 lent to him by B and there exists a contract between the sureties specifying that X shall be liable for 1/4^th of the debt, Y for 1/4^th and Z for the rest of the debt, then upon default by A, X & Y together shall be liable for Rs 500 and Z for the remaining 500 rupees.

Whereas Section 146 of the Act deals with the scenario when co-sureties are liable to contribute equally, Section 147 of the Act describes the liability of the situations wherein the sureties are bound in different terms. The sections say that:

“Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.”

It is very clear that the co-surety’s right to contribution has long been recognized on the basis of the principles of equity. This was enunciated by the court in decisions as early as Ibn Hasan and another v. Brijbhukan Saran, I.L.R.[8]

With regards to co-surety rights, one question which repeatedly came up before the Indian courts in the early years was whether the surety could be allowed to work out his rights against his co-sureties and the principal debtor and release the security in the same suit. In the case of Kamal Chander v. Sushila Bala Dassee[9], the court answered this question in affirmative.

IV. Conclusion

From an analysis of the above provisions, it is clear that the co-sureties are jointly and severally liable in India. As discussed above, the discharge of one co-surety from his liability does not release the other co-sureties from their liability. They are liable to bear the loss equally, subject to the limit of the debt guaranteed by him. As mentioned earlier, if one of them has paid more than his share, he can claim contribution from others. Where the co-sureties have limited their liabilities to different sums, they should contribute equally and not exceeding their respective limits.

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References

[1] Section 126 of the Indian Contracts Act, 1872

[2] (1928) 2 K.B. 501

[3] 18 L.J. Q.B. 214

[4] 10 L.J. Ex. 94

[5] AIR 1966 SC 1427

[6] Ibid, Available Here

[7] Avatar Singh, Business Law (10^th ed., 2014)

[8] (1904) 26 All. 40

[9] 1801.C. 572

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