Section 128 of the Indian Contract Act, 1872 - Surety's Liability

Section 128 of the Indian Contract Act, 1872 states the general rule governing the extent of a surety's liability under a contract of guarantee. Unless the contract of guarantee provides otherwise, the surety's liability is co-extensive with that of the principal debtor.

Text of Section 128 - Surety's liability

What does Section 128 mean?

A surety is the person who gives the guarantee. The principal debtor is the person whose default is guaranteed, and the creditor is the person to whom the guarantee is given. These expressions are defined in Section 126 of the Indian Contract Act, 1872.

The expression co-extensive liability means that, as a general rule, the surety's liability extends to the same debt or obligation for which the principal debtor is liable. The extent of that liability may, however, be restricted by the terms of the guarantee itself because Section 128 expressly permits a contract to provide otherwise.

Illustration under Section 128

The statutory illustration explains that where A guarantees to B payment of a bill of exchange accepted by C, and C dishonours the bill, A is liable not merely for the amount of the bill but also for the interest and charges that have become due on it.

Important legal principles

• Liability generally arises on default: The guarantee becomes enforceable in accordance with its terms when the guaranteed obligation is not performed.
• Creditor need not ordinarily proceed against the borrower first: The Supreme Court has recognised that a surety cannot insist that the creditor first exhaust remedies against the principal debtor before enforcing an otherwise enforceable guarantee.
• The guarantee contract remains important: Section 128 itself says "unless it is otherwise provided by the contract." A guarantee may therefore limit the amount, duration, conditions or circumstances of the surety's liability.
• Other statutory protections continue to matter: Sections 133 to 141 contain provisions concerning circumstances in which a surety may be discharged or may obtain rights against the principal debtor or securities held by the creditor.

Supreme Court position on a creditor proceeding against the surety

In Bank of Bihar Ltd. v. Damodar Prasad, AIR 1969 SC 297, the Supreme Court explained that the surety's liability was immediate under the guarantee before it and was not postponed until the creditor had exhausted remedies against the principal debtor. The principle has continued to be cited in later cases concerning guarantees.

In Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, the Supreme Court discussed the co-extensive character of guarantor liability in the context of insolvency law and the effect of proceedings concerning the principal borrower. The precise result in any guarantee dispute nevertheless depends on the guarantee terms, the governing statute and the facts of the case.

Can a surety's liability be limited?

Yes. Section 128 expressly makes the general rule subject to the contract. A guarantee may be drafted for a fixed amount, a particular transaction, a defined period or subject to specified conditions. The actual guarantee document should therefore be read before deciding the extent and enforceability of the surety's obligation.

Related provisions of the Indian Contract Act

Section 128 should be read with the surrounding provisions on guarantees, including Section 126 on the meaning of a contract of guarantee, Section 127 on consideration for guarantee, Section 129 on continuing guarantees, and Sections 133 to 145 dealing with discharge, rights and obligations connected with suretyship.