Protecting the Surety’s Interests
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The contract of guarantee is entered into with surety provided that there is an existing contract between Creditor and Principal debtor. It is provided that surety’s liability is co- extensive with that of principal-debtor. Ques: Individually, how can the Surety protect his own interest while protecting the interest of Creditor?
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The contract of guarantee is entered into with surety provided that there is an existing contract between Creditor and Principal debtor. It is provided that surety’s liability is co-extensive with that of principal-debtor. Keeping in view the extensive amount of risks that surety undertakes, Chapter VIII of the Indian Contract Act,1872 provides a comprehensive set of rights to protect the interest of surety.
1)Right to Consideration- When the creditor enters into a contract with the surety there must be a substantive consideration that benefits the principal debtor. Otherwise, the surety can refuse to perform the liabilities since the contract is void.
2)Revocation of continuing guarantee- The surety has the right to revoke the contract under circumstances such as the surety sends notice to the creditor implying his consent to revoke the contract for the future transaction or the obvious circumstance such as upon his death.
3)Variation in the contract- The liabilities of the surety depends upon the agreement between the creditor and principal debtor. If the terms of the agreement are changed completely which alters the considerations of parties without obtaining the consent of surety, then surety would not be bound to indemnify the creditor.
4)Discharge of surety’s liabilities- As the contract between surety and creditor is derived from the contract between the creditor and principal debtor, the closure of the later contract automatically provides the closure former contract and subsequently the liabilities of surety. Also, if the creditor promises for extension of time to the principal debtor or not to sue the principal debtor; enables the surety right to end the contract provided that he has not assented to such agreement.
5)Upon the imparity of surety’s rights- The surety has the right to end the contract if the creditor does anything inconsistent with the rights of surety or it deviates from the duties towards the surety which potentially causes the imparity of remedies available to the surety against the principal debtor.
6)Surety on the payment- The rights of the creditor will be automatically transferred to the surety when the principal debtor makes the default payment provided that the creditor is already indemnified.
7)Misrepresentation and Concealment – The surety has the right to be compensated if any guarantee obtained by misrepresentation or concealment of facts.
8)An implied promise- The surety has the right to be indemnified by the principal debtor in every contract of guarantee.
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