Nature and Extent of Surety’s Liability

The nature and extent of surety’s liability may be understood from the following points:

1. The liability of surety is co-extensive- Section of the Contract Act lays down that unless there is a contract to the contrary, the liability of the surety is co-extensive with that of the principal debtor. It means that the surety will be liable to the same extent as the principal debtor is towards the creditor. Whatever amount the creditor can legally realise from the principal debtor, including interest, damages, cost of litigation etc., the same amount he (the creditor) can recover from the surety. Thus, the liability of surety can neither be more nor less than the principal debtor’s liability.

2. The liability of surety arises the same moment
when default is made by the principal debtor- The liability of surety arises immediately when the principal debtor defaults in making the payment. It is not necessary that notice of default should be given to the surety. Moreover, surety has no right to ask the creditor first to exhaust all the remedies open to him against the principal debtor, before taking action against him (surety). It means that the creditor is not bound to proceed first against the principal debtor before suing the surety.

3. The surety is free to restrict or limit his liability-
At the time of giving guarantee it is open to the surety that he may restrict or limit his liability to a fixed amount which is expressly declared by him. Moreover, his liability may also depend upon other terms in this regard in the contract.

4. Sometimes the surety is liable, though the principal debtor is not liable-The liability of surety is co-extensive with that of the principal debtor. However, there may be certain circumstances in which due to some legal provisions the principal debtor cannot be held liable, even then the surety will be liable. This is so because the contract between the surety and the creditor is an independent contract and not a collateral one. For examples:

(a) When the principal debtor is a minor, the surety is liable.

(b) If by any act the liability of the principal debtor is reduced or terminated, the surety continues to be liable-if the creditor fails to sue the principal debtor and the debt becomes time-barred, the surety continues to be liable.

5. If there is a condition precedent for the surety’s
liability, the surety will be liable only when that condition is fulfilled first-Section 144 of the Contract Act lays down for such Situations that where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that person does not join.

6. In a continuing guarantee- In a continuing guar-
antee, the liability of surety extends to a series of transactions over a period of time.

7. The surety will not be liable- The surety will not be liable if the creditor has obtained guarantee either by misrepresenting a material fact regarding the transaction or by keeping silence to material circumstances.

8. A discharge of principal debtor by operation of law does not discharge the surety from liability- If the principal debtor is discharged by Operation of law, for example, insolvency, it does not discharge the surety, and he remains liable for the whole amount of debt.

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