The important provision of providing the liability of surety in a contract of guarantee Section 128 of the Indian Contract Act, 1872. A guarantee is when someone (the surety) promises to answer for another person’s (the principal debtor’s) debt or obligation, if that person has failed to do so. In this section, the liability of the surety is said to be coextensive with the liability of the principal debtor, except in cases of otherwise agreement.

The importance of Section 128 of Indian Contract Act, 1872 comes in that it establishes the limits to whose responsibility it is to be and protects the surety interests by making sure that changes in the terms of the principal contract or the occurrence of the creditor does not cause an unfair exposure to the surety. In this article, the interpretation of Section 128, and how the judicial approach matches with the interpretation of the Section 128 will be explored and the implication of the Section 128 of Indian Contract Act, 1872 will be analysed.

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Surety’s Liability: Section 128 of Indian Contract Act, 1872

Before diving into the specifics of Section 128 of Indian Contract Act, 1872, understanding the meaning of surety is important. The principal debtor is a person who obligates himself by a surety, a person is bound absolutely and individually for the performance of all the obligations of the principal debtor. In this case,  it is called the surety, to assure that if the principal debtor fails, the surety shall answer it. In such contracts, the surety’s liability is secondary, that is, it only applies if the principal debtor fails to discharge its obligations.

The liability of the surety in a contract of guarantee that has been specifically covered under Section 128 of Indian Contract Act, 1872. It states:

"The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract."

The world of contracts has a lot riding on this one simple yet establishing section. It says that the surety is responsible for the debt just as much as the main borrower, unless the contract says otherwise.

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Key Elements of Section 128 of Indian Contract Act, 1872

Below are the key elements of surety’s liability under Section 128 of Indian Contract Act, 1872:

• Co-extensive Liability: The most important subsection of section 128 is the fact that liability of the surety is coextensive with that of the principal debtor. Therefore, in this case the surety is liable to such an extent as the principal debtor. According to the contract, the surety’s liability will be ₹ 1,00,000 if the principal debtor is bound to pay a debt of ₹1,00,000, otherwise the liability of the principal debtor.

• Exceptions to Co-extensive Liability: Section 128 provides that the liability of the surety shall extend to the entire amount due by the principal debtor but otherwise provides for exceptions. If, however, the surety’s liability is limited or in some way different from the principal debtor’s liability under a contract, then such terms will prevail in how much the surety is responsible. As an example, a contract may set a limitation of the surety’s obligation to a certain sum or amount of the debt.

• Secondary Liability: Liability of the surety is secondary, why the surety's liability will only arise when the principal debtor defaults on his obligation. The surety is an alternate channel of payment or fulfilment, but not the main one. In other words, the surety has first to attempt to recover the debt from the principal debtor, before the creditor can sue the surety.

• Duration of Liability: The liability attached to surety generally continues as long as the principal debtor’s obligations continue. The responsibility of surety ends when the principal debtor repays the debt or fulfils their obligations. The surety however remains liable on the debt until the debt is paid, unless the debtor defaults.

• Liability in Different Types of Contracts: Section 128 applies not only to commercial and personal guarantee contracts but also to various other types of contracts. The surety’s liability is co-extensive with the principal debtor’s liability from the date of principal debtor’s liability or the beginning of the performance of the contract, agreements or contracts governed by the State, as the case may be, except as otherwise agreed in the agreement.

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Illustrative examples of Section 128

To illustrate better how Section 128 of Contract Act, 1872 should be applied, we may consider a few example situations.

• Loan Guarantee: A person, Mr. A, borrows five lakhs from a bank, and Mr B agrees to act as a surety of Mr. A’s loan. According to section 128 of Indian contract act, 1872, if Mr. A defaults in repaying the loan, Mr. B, as the surety, is equally liable for the five lakhs debt, unless the contract specifies otherwise.

• Performance guarantee: company ABC enters into a contract with company XYZ to complete a construction project worth five lakhs. Company PQR provides a performance guarantee as a surety for company ABC. If company ABC fails to complete the project as per the contract, company PQR’s liability to complete the project or compensate company XYZ is co-extensive with company ABCs obligations

• Limited liability in a contract: Suppose Mr. A borrows ₹1,00,000 from a bank and Mr B acts as a surety. However, the contract states that Mr B’s liability is limited to ₹50,000. In this case, although Mr A’s liability is ₹1,00,000, Mr. Bean liabilities are restricted to ₹50,000, and this is an exception to the rule of co-extensive liability in section 128 of Indian contract act, 1872.

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Relevant Case Laws

Section 128 of the Indian Contract Act, 1872 makes it clear that a surety is only as bound as the principal debtor unless and until the contract dictates otherwise. Interactions between the Indian courts and this provision have over the years been occasioned by different judicial precedents.

• One such case that throws light on how a section is judicially interpreted is Union of India v. V. Natarajan. Here the Supreme Court reaffirmed that the liability of the surety is coextensive with that of the principal debtor, and except where the agreement is otherwise. According to the Court, if surety is bound by the contents of the contract in its entirety, no matter how the principal debtor defaults, the surety has no option but to comply. Finally, the Court pointed out that the surety’s liability is founded on the fact that the principal debtor fails, and terminates once the debtor fulfilled his obligation.

• The second important case in this regard, is that of K. S. Venkataraman & Co. v. The State of Madras in which the Supreme Court reiterated the principle of co-extension of liability. The Court held that if the contract does not clearly provide that a guarantee’s surety’s liability is limited to the amount therein specified, then a surety is not limited in his liability. The drafting of guarantees containing precise terms to avoid ambiguity as to the extent of liability was particularly important to come to light in this case.

Summary

Section 128 of Indian Contract, Act 1872 is one of the most important provisions amongst which a co-extensive liability is made of the surety along with the principal debtor, except where the contract otherwise provides. This principle has been consistently upheld in the judicial interpretation of this sentence, notwithstanding sureties being liable to the same extent as the principal debtor, save in so far as the contract so provides. This interpretation has been solidified by landmark cases, which affirm that the liability of the surety is identical to that of the debtor, unless explicitly specified otherwise. However, courts have also stressed the importance of contract terms in the delineation of the scope of a surety's liability, providing exceptions for contract terms. This procedure of careful judicial interpretation promotes the interests of creditors and sureties and facilitates the achievement of fairness and clarity in the terms of guarantee contracts.

Section 128 of Indian Contract Act, 1872: FAQs

Q1. What does Section 128 state?

It states that a surety’s liability is coextensive with that of the principal debtor, unless the contract says otherwise.

Q2. Is the surety liable greater than that agreed upon?

Indeed, unless the contract limits the surety’s liability.

Q3. What happens with the surety’s liability if the Principal debtor fulfils their obligation?

The surety's liability is at an end when the debtor performs his duty.

Q4. Is a surety able to avoid liability if the debtor goes into default?

A surety is responsible if the debtor defaults, unless the contract clearly says that they are not.

Q5. Is the surety’s liability a time bound liability?

The capacity of the surety lasts as long as the liability of the principal debtor does exist.