FACTS OF THE CASE
1. Plaintiff bank lent money to Defendant 1 with Defendant 2 as surety, through a guarantee bond. When the loan became due, neither debtor not surety repaid the dues after demand.
2. Trial court decreed against both, but added a condition: the Bank must first exhaust remedies against the principal debtor before proceeding against the surety. High Court upheld this condition. The bank appealed to the Supreme Court.
ISSUES RAISED
1. Whether the creditor (Bank) must exhaust remedies against the principal debtor before proceeding against the surety under a contract of guarantee.
2. Is the condition imposed by the Trial Court valid?
DECISION AND REASONING
The guarantee bond had no clause postponing surety liability until after action against the principal. The condition imposed by the lower court was not supported by any legal provision and went against commercial practice. The surety cannot insist that the creditor first proceed against the principal. Imposing such a condition defeats the purpose of taking a guarantee, especially in banking where guarantees are a form of collateral. The solvency of the principal does not relieve the surety from liability or delay enforcement.
Court observed that neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. Hence the surety became liable to pay the entire amount.
LEGAL PRINCIPLES/DOCTRINAL SIGNIFICANCE
The court interpreted section 128, to mean that co extensive liability also implies that both the principal debtor and the surety become liable at the same time. There is no question of primacy or priority that needs to be given to either of them by the creditor when it comes to demanding performance of the said guarantee. Therefore, the legal principle that evolves out of this case is that even though a guarantor’s liability may sometimes be called secondary, under Section 128 of the Indian Contract Act, the liability of the surety is coextensive with that of the principal debtor—meaning the surety can be sued immediately, unless the contract specifies otherwise.
The decision is consistent with earlier precedents. The Court in this case cited common law (e.g., Wright v. Simpson) and Indian precedent (Lachhman Joharimal) to affirm that the creditor can directly enforce liability against the surety. It clarifies the law on liability of surety by asserting that before payment, the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. The surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor. Where upon the terms of the surety bond it was incumbent upon the decree-holder to proceed against the judgment debtor and it was only where the decretal amount could not be realised from him that the decree-holder could proceed against the surety, then the judgment debtor ought to be first proceeded against.1 But in the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. Where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal.
CRITICAL ANALYSIS AND REFLECTION
Supreme court critiqued Trial court’s rationale, by observing that “it is not stated how and when the creditor would exhaust his remedies against the principal. Is the creditor to ask for imprisonment of the principal? Is he bound to discover at his peril all the properties of the principal and sell them; and if he cannot, does he lose his remedy against the surety? Has he to file an insolvency petition against the principal? The trial court gave no reasons for this extraordinary direction.”2 SC rightly reasoned that the demand for payment of the liability of the principal debtor was the only condition for the enforcement of the bond. That condition was fulfilled. The surety’s liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
I think it often happens, as is the case with Mulla when it differentiates between indemnity and guarantee, that surety’s liability is sometimes considered or called a secondary liability3. Or there are descriptions even in scholarly/academic work that sometimes define a contract of guarantee as providing a second pocket to the creditor to recover his debt or to have an assurance to get a return for his services or goods given on credit. It provides a second pocket if the first is unable to pay back to the creditor.4 It may be, that a categorization of this kind leads to the impressing that the surety is only to be approached once all other remedies are exhausted. However, this case clarifies this possible dilemma by correctly interpreting the meaning and implication of the principle of “co extensive liability” under section 128 of ICA.
Even the judgement in the recent case of Lalit Kumar Jain v Union of India, identifies the concept of the principle of double dip. It says: “When a primary obligator and a guarantor are liable on account of a single claim, the creditor can assert claim for the full amount owed against each debtor until the creditor can assert a claim for the full amount owed against each debtor until the creditor is paid in full (that is it can double dip). This means that in case a portion of debt is recovered from one of the entities, either principal borrower or guarantor, the other would be liable for the unsatisfied amount of the claim, the principal borrower being joint and several with the surety. This principle is opposed to the principle prohibiting “double proof” in which the same debt is pursued against the same estate twice, leading to double payment”.5 In my opinion, this corroborates the decision in Bank of Bihar v Damodar Prasad, that creditor is at liberty to proceed against either of the two parties, whether individually or cumulatively, and in no compulsory hierarchical order.
In my opinion, the Supreme Court correctly held that a surety cannot dictate the terms of the guarantee, as the primary objective of such a contract is to provide the creditor with security against any default by the principal debtor. If, at the time of default, the surety avoids responsibility by claiming that their liability is secondary, and insisting that the creditor must first recover from the debtor’s assets—especially when the debtor is solvent—it undermines the very purpose of the guarantee. Such a stance by the surety defeats the intent behind entering into the contract of guarantee.6
CONCLUSION
This judgment reinforces the principle that the liability of the surety is equal and immediate, not secondary or conditional upon creditor’s actions against the debtor. Readers should take away that a surety cannot escape liability by insisting that the creditor must first proceed against the principal debtor, as such a view would defeat the very purpose of the contract of guarantee, which is to protect the creditor against loss from default. This case also affirms the surety’s right of subrogation, ensuring that their interests are not left unprotected once they fulfil their obligation.
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Footnotes
1. Shubham Kumar, ‘Co-Extensive Liability of Surety’ (SSRN, 2024) https://ssrn.com/abstract=4689087 accessed 12 July 2025.
2. Bank of Bihar Ltd. v. Dr. Damodar Prasad [1969] 1 SCR 620
3. Pollock and Mulla, The Indian Contract and Specific Relief Acts (15th edn, LexisNexis 2021) 314.
4. AICLR Editorial Board, ‘Critical Appraisal of the Role of Surety in Contract of Guarantee’ (AICLR, 17 February 2023) https://www.aiclr.in/post/critical-appraisal-of-the-role-of-surety-in-contract-of-guarantee accessed 11 July 2025.
5. Shubham Kumar, ‘Co-Extensive Liability of Surety’ (SSRN, 2024) https://ssrn.com/abstract=4689087 accessed 12 July 2025.
6. Shriyansh Sameer Mishra, ‘Case Comment: Bank of Bihar v Damodar Prasad & Anr – Surety Moving Along with the Principal Debtor to Step into the Creditor’s Shoes’ (2023) 3(3) Jus Corpus Law Journal 158.