Contract of guarantee and rights of the surety

1. Definition and essentials: section 126

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 the surety, the person in respect of whose default it is given is the principal debtor, and the person to whom it is given is the creditor. A guarantee may be oral or written.

• A principal debt. The surety's liability is secondary: he answers for another's default. If there is no liability in the principal debtor, there is ordinarily nothing to guarantee. This is the root of the minor's problem below.
• Consent of all three. The debtor must request the surety, expressly or impliedly, and the creditor must accept him.
• Consideration. Section 127: anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration to the surety for giving the guarantee. The surety need not receive anything himself. Past consideration will not do: in illustration (c), A sells and delivers goods to B, and C afterwards, without consideration, agrees to pay for them if B defaults; the agreement is void.
• No misrepresentation or concealment. A guarantee obtained by misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid (section 142); so is one obtained by the creditor keeping silence as to a material circumstance (section 143). Section 144: if the guarantee is given on the condition that the creditor will not act on it until another person joins as co-surety, it is invalid if that person does not join.

2. Continuing guarantee: section 129

A guarantee which extends to a series of transactions is a continuing guarantee. Illustration (a): A, in consideration that B will employ C to collect rents, promises to be responsible up to Rs 5,000 for due collection and payment by C. This is continuing. Illustration (b): A guarantees payment to B, a tea-dealer, up to a fixed amount for any tea he may from time to time supply to C; this too is continuing. Illustration (c): A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and paid for in a month; this is a single transaction and the guarantee is not continuing. A bank guarantee for an overdraft account is the modern example. Revocation of a continuing guarantee is in the next note (sections 130–131).

3. Indemnity and guarantee distinguished

• Parties. Indemnity (s.124): Two. Guarantee (s.126): Three.
• Number of contracts. Indemnity (s.124): One. Guarantee (s.126): Three.
• Liability. Indemnity (s.124): Primary and independent. Guarantee (s.126): Secondary; arises on the debtor's default.
• Object. Indemnity (s.124): Save the promisee from loss. Guarantee (s.126): Assure the creditor of performance by the debtor.
• Existing debt. Indemnity (s.124): Not needed. Guarantee (s.126): Presupposes a debt or duty of a third person.
• Request. Indemnity (s.124): None from a third party needed. Guarantee (s.126): Surety acts at the request of the debtor.
• Right after payment. Indemnity (s.124): No statutory right; indemnifier claims against the wrongdoer by subrogation in equity. Guarantee (s.126): Surety steps into creditor's shoes (s.140) and is indemnified by debtor (s.145).

4. Extent of the surety's liability: section 128

The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. He is liable for the whole debt and its interest and charges, and no more; the parties may limit his liability to a fixed sum. Illustration: A guarantees to B payment of a bill of exchange by C, the acceptor; the bill is dishonoured; A is liable for the amount of the bill and for interest and charges.

Co-extensive means equal in extent, not deferred in time. In Bank of Bihar Ltd. v. Damodar Prasad, 1968 INSC 184, AIR 1969 SC 297, the trial court had directed the bank to first exhaust its remedies against the principal debtor. The Supreme Court set this aside: the very object of a guarantee is defeated if the creditor is asked to postpone his remedy against the surety. The surety's liability is immediate on default, and the creditor may proceed against him first. The same principle was applied to execution of a decree in State Bank of India v. Indexport Registered, 1992 INSC 146, (1992) 3 SCC 159: the decree-holder may execute against the guarantor without first proceeding against the principal debtor.

5. Rights of the surety

Against the principal debtor.

• Subrogation, section 140. Where a guaranteed debt has become due, or the principal debtor has defaulted, the surety, on payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
• Implied indemnity, section 145. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The surety may recover whatever sum he has rightfully paid under the guarantee, but not sums paid wrongfully. Illustration (b): if the surety defends a suit by the creditor without any reasonable ground, he cannot recover the costs of that defence.
• Before payment, once the debt is due, he may in equity call upon the debtor to pay the creditor and so relieve him.

Against the creditor.

• Benefit of securities, section 141. The surety is entitled to the benefit of every security the creditor has against the principal debtor at the time the guarantee is entered into, whether or not the surety knows of it. If the creditor loses or parts with any such security without the surety's consent, the surety is discharged to the extent of its value. See State Bank of Saurashtra in the next note.
• The right of set-off: if the creditor sues the surety, the surety may use any set-off the principal debtor had against the creditor.

Against co-sureties. Co-sureties liable for the same debt contribute equally, unless otherwise agreed (section 146); where they are bound in different sums, equally up to the limits of their respective obligations (section 147). A surety who pays more than his share may recover the excess from the others, and is entitled to share in any security a co-surety has received.

6. Problem: guarantee of a minor's debt

A lends money to B, a minor, on C's guarantee. B fails to pay and, when sued, pleads minority. Can A recover from C?

Issue. Whether a surety is liable where the principal debtor's contract is void because of minority.

Law. A minor's agreement is void ab initio: Mohori Bibee v. Dharmodas Ghose (Privy Council, 1903). A guarantee under section 126 presupposes a liability of the principal debtor, and section 128 makes the surety's liability co-extensive with his. Against that, section 128 begins “unless otherwise provided by the contract”, and the creditor may have relied on the surety precisely because the borrower was a minor.

Application. There are two views, and the answer should state both.

• The surety is liable. In Kashiba v. Shripat (Bombay High Court, 1894), the Court held the surety liable though the principal debtor, being under disability, was not. On this view, where the creditor and surety both know of the disability, the surety's undertaking is in substance an independent, original promise to pay, a contract of indemnity, rather than a guarantee of someone else's liability. The surety becomes in effect the principal debtor. Indian textbooks generally state this as the Indian position.
• The surety is not liable. On a strict reading of sections 126 and 128 there is no debt to guarantee, and a surety cannot be liable for more than the principal. In England, Coutts & Co. v. Browne-Lecky (1947) held a guarantor of a minor's overdraft not liable, since the minor's debt was void under the Infants Relief Act, 1874. That result was reversed by statute: section 2 of the Minors' Contracts Act, 1987 provides that a guarantee is not unenforceable merely because the principal obligation is unenforceable on the ground of minority.

The way to reconcile them is to read the contract. If C knew that B was a minor and promised A that the money would be repaid in any event, the promise is an independent undertaking and C is liable on it, as in Kashiba. If C merely promised to pay if B, being liable, failed to pay, and neither party knew of the minority, the strict view has more force.

Conclusion. On the Bombay view, which is the one usually followed in India, A can recover from C, treating C's undertaking as an original liability. The answer should add that this rests on construing C's promise as one of indemnity, since a guarantee in the strict sense of section 126 needs an enforceable principal debt, and that English law reaches the same result today only by statute.

How this is examined

“Distinguish between a contract of indemnity and a contract of guarantee” is set almost every year and was in the January 2026 paper; the comparison list plus a paragraph on each is enough for 10 marks. “Explain the rights of a surety” is the other essay; use the debtor / creditor / co-surety arrangement. The minor's guarantee problem was set in January 2026: state both views, cite Kashiba and Mohori Bibee, and reach a conclusion. Bank of Bihar is the case to cite on section 128.