NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

SECOND SEMESTER
B.A. LL.B. (Hons.)

LAW OF CONTRACTS - II

PROJECT-TOPIC

Submitted by: Submitted to:

Ronit Rampuriya Asst. Professor
2021BALLB126 Neha Sharma
ACKNOWLEDGEMENT
I extend my sincere gratitude to Asst. Prof. Neha Sharma for providing me an opportunity to
work on this project titled “Passing of Property in Goods: an analysis”. I express my
thankfulness to her for taking a keen interest in the project and providing constant
encouragement along with constructive criticism at every stage of the project. I am also thankful
to my family for providing relentless support in every way possible.
DECLARATION
I, Pushpendra Dixit, S/O Late Vinod Dixit, Roll Number 2021BALLB100 Enrolment Number
A-2397 do hereby declare that the Project titled “Passing of Property in Goods: an analysis” is an
outcome of my independent research endeavor and has been carried out under the guidance of
Asst. Prof. Neha Sharma. Literature relied on by me for this project has been fully and
completely acknowledged in the footnotes and bibliography. The Project is not plagiarized and
all reasonable steps have been taken to avoid plagiarism. Similarity Index as per the Turnitin
Report is %. In case, my project is found to be plagiarized, the course teacher shall have the full
liberty to ask me to revise the Project. If I fail to comply with the instructions of the teacher, my
project may be referred to the Committee.
Table of Contents
RESEARCH METHODOLOGY 4
INTRODUCTION 5
EXTENT OF SURETY’S LIABILITY 6
NATURE: COEXTENSIVE 6
EXHAUSTING REMEDIES BEFORE SUING THE SURETY 8
A LAWSUIT JUST AGAINST THE MAJOR DEBTOR 8
A CLAIM ONLY AGAINST THE SURETY 8
ACTION TAKEN AGAINST THE SURETY'S MORTGAGED PROPERTY 9
PRINCIPAL DEBTOR PASSES AWAY 9
RIGHT OF THE SURETY TO RESTRICT HIS DUTY OR MAKE IT CONDITIONAL 9
TERMINATION OF SURETY’S LIABILITY 11
By Revocation 11
By Death of Surety 11
By Variance 11
By Release or Discharge of Principal Debtor 11
When Surety’s Remedy is impaired 12
CONCLUSION 13
RESEARCH METHODOLOGY
STATEMENT OF PROBLEM
It is a well-known fact that surety is liable for principal debtor’s default, but the extent of
surety’s liability is not known and needs to be analyzed to establish it.
HYPOTHESIS
A surety has co-extensive liability with the principal debtor and the surety cannot be held for
more liability than what is extenuated on the principal debtor. The liability of the surety is not
absolute and can be terminated in many cases.
RESEARCH QUESTIONS
 Whether surety can be more liable than principal debtor?
 Whether surety can be absolved as surety if the terms of contract are changed?
 Whether surety alone can be sued to pay for damages?
 Whether principal debtor or surety can be sued in case of the death of one of them?
OBJECTIVES OF THE STUDY
To understand the meaning of the surety and principal debtor.
To understand the cases in which the surety can be absolved of his liability.
To understand the cases in which the surety is minor or not in capacity to take his
decisions.
METHOD OF STUDY
This project is based on a doctrinal mode of research. It is a knowledge-based, descriptive study,
normative. Existing theories and analyses on the topic have been examined and consulted in
various online and offline articles, books, and papers.
REVIEW OF LITERATURE
For this research paper, a variety of literary materials including books, journals, and academic
articles were taken into account. Aside from that, many blogs and websites were referred to for a
basic understanding.
Pollock and Mulla, The Sale of Goods Act and Indian Partnership Act, (Eleventh Edition,
LexisNexis)
Chapter 3 of this book gives a thorough understanding of the concepts related to the Transfer of
Property in Goods
INTRODUCTION
A surety is undoubtedly and not unjustly, an object of some favor both at law and at equity”
~ Lord Selborne
The precise performance contract of Guarantee is outlined in the Indian Contract Act of 1872.
One of the earliest types of contractual duties has always been a guarantee. A guarantee is
created when a party, known as the surety, promises to fulfil the obligations or liabilities of a
third party in the event of that party's failure to do so. The guarantee contracts lack the customary
legal remedy of damages compensation and instead provide for a specified remedy or a
substitutional remedy. Section 126 of the Indian Contract Act of 1872 defines the Contract of
Guarantee. When a loan is requested or items are purchased on credit, the contract of guarantee
is significant. A third party guarantees to the loan provider or product supplier that the borrower
is trustworthy and deserving of the loan. The debtor may be held liable for upholding the
contract's requirements in the event that they fail to return the loan or pay the price of the
products. The contract between the creditor, the principal debtor, and the guarantor or surety is
therefore a tripartite one.
The nature and extent of a surety's responsibility under guarantee contracts are the topics of this
research. It tries to give a general overview of when a surety may be freed from its duties under a
guarantee after a significant change to the primary loan arrangement.
EXTENT OF SURETY’S LIABILITY
NATURE: COEXTENSIVE
Under the Principle of Co-Extensiveness, unless the contract expressly states otherwise, the
surety's obligation is co-extensive with that of the principal debtor. The sole exception to the
terms of the guarantor's obligation are those that are specifically specified to be different in the
contract, as mentioned in the provision itself. The surety will be held accountable to the same
degree as the principal-debtor in this situation, which is referred to as being co-extensive. The
decision in E. G. Bankruptcy: Jagannath vs. Shivnarayan established that the surety is not
released under the law when the principal debtor is released.
Although a surety's obligation is co-extensive with the principal debtor's, the surety may restrict
its liability through a unique arrangement. He may specifically state that his culpability is set at a
specified amount level. Additionally, unless the contract specifically states otherwise, the surety
cannot be sued by the creditor to enforce his responsibility before the principal debtor has
defaulted. As a result, the surety's responsibility is secondary in nature rather than primary, and it
becomes due right away when the principal debtor defaults. However, unless specifically stated
in the contract, the creditor is not required to take action against the principal debtor before
taking legal action against the surety.
The conditions of the guarantee contract must be followed when determining the surety's level of
culpability. The guarantee's terms are the limit of the guarantor's responsibility. The
responsibility of the surety may not be co-extensive with that of the principal debtor, which
otherwise shall be co-extensive if the limit of liability has been expressly stated in the terms of
the contract.
The guarantor cannot be held liable for more than he has agreed to in the case of State of
Maharashtra v. MN Kaul. When all other rules of construction fail to resolve uncertainty, the
Courts interpret the guarantee contra preferentem, that is, against the guarantor. However,
regardless of the method used, it is essential that the guarantor's liability is limited to what was
agreed upon. Additionally, the surety may be held accountable for both the principal sum and
any interest owed under the contract.
The coextensiveness principle is not an immutable concept. The parties are permitted to stipulate
limitations on the surety's liabilities without impairing the character of the contract as a
guarantee. However, the precise extent of the surety's liability will always be limited by the
provisions of guarantee on their genuine construction of the contract. There are instances where
the guarantor will remain liable notwithstanding the fact that the principle is not, or is no longer,
accountable for the principal obligations, and the court has not always viewed itself as bound to
recognise the surety as co-extensively liable with the principal.
EXHAUSTING REMEDIES BEFORE SUING THE SURETY
In the event that the creditor chooses not to sue the borrower, the surety's responsibility is not
abated. Before suing the surety, the creditor does not necessarily have to exhaust all of its
available legal options against the primary debtor. Even if there haven't been any prior legal
actions taken against the borrower, they are still able to pursue a lawsuit. The surety, however, is
not responsible until the contingency occurs.
When the surety has guaranteed completing a contractual obligation to pay the creditor in
instalments, it is difficult to understand the concept of coextensiveness.
According to the Supreme Court in Bank of Bihar Ltd v. Damodar Prasad and Another (1968),
the only need was to seek payment for the primary debtor's obligation to carry out the bond. Both
the major debtor and the surety failed to uphold their half of the bargain upon the completion of
the condition and in spite of repeated requests. The surety was responsible for paying the entire
amount due since the responsibility was both vast and urgent in nature. There was no waiting
period or expectation for the creditor's remedies against the major debtor to be exhausted.

A LAWSUIT JUST AGAINST THE MAJOR DEBTOR

The surety need not be involved in any legal actions the creditor brings against the lead debtor.
According to the ruling in Union Bank of India v. Noor Dairy Farms (1996), such a lawsuit
would be maintainable. The dismissal of a lawsuit against the primary debtor does not release the
surety from their obligation under a contract of guarantee.
A CLAIM ONLY AGAINST THE SURETY
It has been determined that a lawsuit against the surety may be filed without first bringing legal
action against the principal debtor.
In N. Narasimhaiah v. Karnataka State Financial Corporation (2004), the creditor provided
enough justifications in his affidavit for choosing not to pursue collection of the principal
amount. The provisions set out against the guarantors individually and together with that of the
major debtor's firm created an agreement of guarantee that was enforceable. The Court ruled that
the creditor has the choice to file a lawsuit against the corporation and the guarantor jointly or
only the surety.
ACTION TAKEN AGAINST THE SURETY'S MORTGAGED PROPERTY
The surety's mortgaged property of the guarantor cannot be taken by a financial company
without prior notification. A public notice of the corporation's intent to sell the property cannot
be made without the surety's consent. This is so because the surety's duty is secondarily liable
and would only become a problem if the primary debtor didn't pay the loan. Without exhausted
the legal remedies against the primary debtor, action may be taken against the surety's property
that has been pledged as security.
PRINCIPAL DEBTOR PASSES AWAY
Any lawsuit brought against the principal debtor would be invalid from the beginning if he
passed away. The surety would not be released from his obligation to pay the sum, though.
According to Order 1 of the Code of Civil Procedure, 1908, the claim against the principal debtor
was dismissed in Orissa Agro Industries Corpn Ltd v. Sarbeswar Guru (1985), but this did not
automatically relieve the surety of its obligation.
RIGHT OF THE SURETY TO RESTRICT HIS DUTY OR MAKE IT CONDITIONAL
The agreement might contain restrictions on the surety's responsibility. He can specifically
declare his guarantee to be for a specific amount, and in such case, the surety cannot be held
responsible for any sum beyond that fixed amount.
Although the principal debtor owes a larger sum, the surety is not liable for more than what was
specified in the agreement. For instance, the surety explicitly stated in Hobson v. Bass (1871)
that "my obligation under this guarantee must not at any time exceed the sum of £250."
WHEN PRINCIPAL DEBTOR IS A MINOR
According to the Indian Contract Act, the parties' competence is a prerequisite for a contract's
legality. Any agreement with a minor is thus null and invalid from the start. 4 In light of this, the
creditor's agreement with a small principle debtor is null and void. Because the law does not
force the minor to keep the pledge, the debt is null and worthless. There can be no culpability as
a result. An newborn received a loan in the English case of Swan v. Bank of Scotland, (1836) 10
Bli (N.S.) 627. According to the House of Lords, the sureties cannot be held accountable because
the newborn is not required to pay back.
However, Kashiba v. Sripat Narshiv (1894) I.L.R. 19 Bom 697 was the first case in the Indian
setting to address the issue of the surety's obligation in situations when the major debtor is a
minor. The Bombay High Court ruled that the sureties are responsible whether or not the
obligation is invalid or voidable. In contrast, it was determined that a guarantee given for an
unenforceable duty is invalid, absolving the surety of any liability in the case of Manju Mahadev
v. Shivappa Manju (1918) I.L.R 42 Bom.
Additionally, in accordance with Section 128, the surety's obligation is joint and several with that
of the primary debtor. According to this interpretation, the surety will not always be held
responsible when the primary debtor is a minor. The Madras High Court cited section 128 of the
Indian Contract Act, which calls for "coextensive responsibility of the guarantor and primary
debtor," in E.K. Kelappan Nambiar vs. Moolakal Kunhi Raman and Anr (1956). According to
the ruling, section 128 prohibits holding a surety accountable to a creditor for a debt for which
the primary debtor was not personally responsible.
The judges have nonetheless found the surety liable in a number of cases, despite the fact that
section 128 was applicable. This was either because the surety hid the minor's status from the
creditor, which is obviously a case of misrepresentation, or because the minor received certain
necessities of life that the creditor is required to pay back.
TERMINATION OF SURETY’S LIABILITY

When a debtor fails to comply, the Surety's obligation to keep his or her commitment is
discharged.
The following clauses outline the circumstances in which the Surety's liability is discharged:

By Revocation
Section 130 allows for the cancellation of the guarantee agreement with notice to the creditor.
This revocation only applies to future transactions; it does not apply to transactions that have
already been made. Therefore, where there are no pending transactions in the future.

By Death of Surety
The circumstance where the Surety dies is discussed in Section 131 of the Act. Only future
transactions are eligible for this discharge of responsibility; prior transactions are not.
The liability can be pursued against the Surety's legal heirs in the R.K. Diwan v. State of UP case
to the extent of the property inherited, but not in a personal capacity.

By Variance
According to the ruling in Pratap Singh v. Keshavlal, section 133 of the Act has a clause that
releases the surety from obligation if the creditor changes any terms or circumstances of the
contract with the principal debtor without the surety's approval.
It is understood that the Surety will be released from its obligation as a result of the creditor's
changes to the contract's provisions. The circumstance in this instance, nevertheless, has to be
accurately examined.

By Release or Discharge of Principal Debtor

According to Section 134 of the Act, the Surety is released from all obligations and rights
included in any agreement between the creditor and the primary debtor.
The Privy Council ruled in an ancient case that the surety is no longer liable for the debt and is
no longer permitted to sue the principal on the creditor's behalf after the obligation has been paid
in full.
In Maharashtra SEB v. Official Liquidator, the Supreme Court ruled that if a contract is made
between the creditor and the primary debtor by which the debtor is freed from the obligations,
the Surety would likewise be relieved. In this situation, the Surety's liability will not be released
even if the primary debtor is declared insolvent or liquidated.

When Surety’s Remedy is impaired

Section 139 states the circumstances in which the surety's responsibility and rights may be
released. The surety's remedy will be compromised if the creditor takes any action that is
inconsistent with the surety's rights and obligations.
CONCLUSION
Under Section 128 of the Contract Act of 1872, the Surety's responsibility is equal to that of the
primary debtor. This has often been subjected to court interpretation, which has established
crucial guidelines for the surety's obligation. The status of Section 128's surety responsibility has
been changed to not being a rigid rule. The conditions of the guarantee contract itself bring the
extraordinary circumstance to the liabilities. The conditions of the guarantee itself have the
power to restrict the scope of obligation. The parties are free to put restrictions, if any, to the
surety's obligation, and the surety's exact and precise extent will always be governed by the
requirements of the guarantee on how the contract has been formed. Each instance has made the
principle's application clearer, but there is still much room for improvement. The courts will
keep debating and elaborating on the legitimacy of the concept in light of the specifics of the
time.