Rights of the Surety under Sections 140 to 147 of the Indian Contract Act, 1872: Subrogation, the Benefit of the Creditor's Securities, the Implied Indemnity, and Contribution Between Co-Sureties

The surety pays a debt that is not his own and receives nothing for doing so. The Act balances that by giving him an unusually strong set of rights, exercisable in three directions: against the principal debtor, who must indemnify him; against the creditor, whose securities he takes over; and against his co-sureties, who must share the burden. This topic sets out those rights, and closes with a map of Chapter VIII showing where each of the other questions on guarantee is answered.

1. Rights Against the Principal Debtor

Sections 140 and 145, Indian Contract Act, 1872

140. Rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

145. Implied promise to indemnify surety. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.

Illustrations. (b) B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt. (c) A guarantees to C, to the extent of two thousand rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than two thousand rupees, but obtains from A payment of the sum of two thousand rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.

1.1 Subrogation under Section 140

The right arises on payment or performance of all that the surety is liable for. Partial payment does not subrogate him, though the contract may provide otherwise.
He is invested with all the rights the creditor had. He may sue the principal debtor in the creditor's place and may enforce every remedy the creditor had, including securities and priorities.
Subrogation is a transfer of the creditor's position, not a new right, so the surety takes it subject to whatever limitations affected the creditor.
It applies in insolvency. A surety who pays may prove in the principal debtor's insolvency in place of the creditor, and the Supreme Court has confirmed the operation of Section 140 in the corporate insolvency context.

1.2 Indemnity under Section 145

Section 145 implies a promise by the principal debtor to indemnify the surety, and it exists in every contract of guarantee whether or not the parties addressed it. Two limits are built into the section. The surety recovers what he rightfully paid, which includes costs reasonably incurred in defending a suit, as Illustration (b) shows. He recovers nothing for sums paid wrongfully, so a surety who pays more than the guarantee required, or who pays without any liability, bears the excess himself, which is the point of Illustration (c).

What the surety may claim against each of the other parties

2. Rights Against the Creditor

Sections 141 and 139, Indian Contract Act, 1872

141. Surety's right to benefit of creditor's securities. A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety parts with, such security, the surety is discharged to the extent of the value of the security.

139. Discharge of surety by creditor's act or omission impairing surety's eventual remedy. If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.

📖 State Bank of Saurashtra v. Chitranjan Rangnath Raja, (1980) 4 SCC 516

Facts: A bank advanced money to a principal debtor against the pledge of goods, namely tins of oil stored in a godown, and also took a personal guarantee from a surety. The pledged goods were lost through the bank's own negligence in failing to keep them in safe custody. The bank sued the surety for the whole amount, contending that the contract of guarantee was independent of the pledge.

Held: The surety was discharged. The pledge and the guarantee formed one composite transaction, the principal debtor having offered two securities, the goods and the personal guarantee. The bank having been negligent and having lost the security, the combined operation of Sections 139 and 141 discharged the surety. The creditor's duty to preserve securities held at the time the guarantee was given runs in favour of the surety, whose eventual remedy against the principal debtor was impaired by their loss.

Ratio: A creditor who loses a security through his own negligence discharges the surety to the extent of its value under Section 141, and where the loss impairs the surety's eventual remedy, Section 139 operates as well.

⚠ Section 141 protects securities held at the date of the guarantee

The words are precise and are frequently misread. The surety is entitled to the benefit of every security the creditor had against the principal debtor at the time the contract of suretyship was entered into, and his knowledge is irrelevant. Securities obtained by the creditor afterwards are not within the section, though in practice they usually enure for the surety's benefit on subrogation under Section 140 once he has paid in full. The discharge is pro tanto: the surety is released to the extent of the value of the security lost or parted with, not necessarily in full, which distinguishes Section 141 from the complete discharge worked by Sections 133 to 135.

2.1 Other rights against the creditor

Before payment, the surety may require the creditor to sue the principal debtor, though the creditor is under no obligation to do so and the surety must indemnify him against the costs and risk.
On being sued, the surety may set up every defence available to the principal debtor arising out of the contract, his liability being co-extensive under Section 128.
He may insist on disclosure, since Sections 142 and 143 invalidate a guarantee obtained by misrepresentation or by concealment of a material circumstance.
He is discharged by the creditor's conduct falling within Sections 133 to 139, which is dealt with in the topic on discharge of the surety.

3. Rights Against Co-Sureties

Sections 146 and 147, Indian Contract Act, 1872

146. Co-sureties liable to contribute equally. Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.

147. Liability of co-sureties bound in different sums. Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.

📖 Craythorne v. Swinburne, (1807) 14 Ves 160

Facts: Two persons had become liable for the same debt of the same principal debtor, one under a bond and the other under a subsequent undertaking. One of them paid and sought contribution from the other, who contended that he stood in a different position and was not a co-surety at all.

Held: Lord Eldon LC stated the foundation of the right of contribution. It does not rest on contract, since co-sureties may be bound under different instruments, at different times, and without knowledge of one another. It rests on a principle of equity: persons who stand in the same situation with respect to a common burden must bear it equally, and one who has discharged more than his share may call on the others to make it up. Whether the parties were co-sureties was a question of the substance of their positions and not of the form of their instruments.

Ratio: Contribution between co-sureties is founded on equity and not on contract. It applies whether the sureties are bound under the same or different instruments and whether or not they knew of each other, which is exactly what Section 146 enacts.

3.1 How contribution works

Situation	Result under Sections 146 and 147
Three co-sureties, each bound for the whole of a debt of ninety thousand, debtor pays nothing	Each bears thirty thousand; a surety who pays the whole recovers sixty thousand by contribution
Co-sureties bound under different instruments, unaware of each other	Section 146 applies all the same; the right is not founded on any agreement between them
Co-sureties bound in different sums, the unpaid debt being less than the smallest limit	They pay equally, since the equal shares fall within every limit
Co-sureties bound in different sums, the unpaid debt exceeding the smallest limit	Section 147: they contribute equally so far as their respective limits permit, the surety with the smaller limit paying up to it and the balance being shared by the rest
One co-surety is insolvent	The solvent co-sureties bear the deficiency between them, on the same principle as Section 43 for joint promisors
The creditor releases one co-surety	Section 138: the others are not discharged, and the released surety remains answerable to them for contribution

4. A Map of Chapter VIII

Question	Provision	Where it is developed
What is a guarantee, and who are the parties?	Section 126	Contract of Guarantee
What is the consideration for the surety's promise?	Section 127	Contract of Guarantee
How far is the surety liable?	Section 128	Contract of Guarantee
What is a continuing guarantee, and how is it revoked?	Sections 129 to 131	Continuing Guarantee
When is the surety discharged by the creditor's conduct?	Sections 133 to 139	Discharge of the Surety
What rights does the surety have on paying?	Sections 140, 141 and 145	This topic
When is a guarantee invalid from the outset?	Sections 142 to 144	Discharge of the Surety
How do co-sureties share the burden?	Sections 146 and 147	This topic

5. The Surety's Rights Summarised

Against whom	Right	Provision
The principal debtor	Subrogation to all the creditor's rights on payment in full	Section 140
The principal debtor	Indemnity for sums rightfully paid, including reasonable costs	Section 145
The creditor	The benefit of every security held at the date of the guarantee, and discharge pro tanto if it is lost or parted with	Section 141
The creditor	Discharge where the creditor's act or omission impairs his eventual remedy	Section 139
The creditor	Invalidity where the guarantee was obtained by misrepresentation or concealment	Sections 142 and 143
Co-sureties	Equal contribution, and equal contribution within respective limits	Sections 146 and 147
Co-sureties	No discharge by the release of one, and the released surety still contributes	Section 138

6. The Position Stated Shortly

Section 140 subrogates the surety to all the creditor's rights against the principal debtor on payment or performance of all he is liable for.
Section 145 implies a promise by the principal debtor to indemnify the surety for sums rightfully paid, including reasonable costs, but not for sums paid wrongfully.
Section 141 entitles the surety to the benefit of every security the creditor held at the date of the guarantee, whether or not the surety knew of it.
Loss of or parting with such a security discharges the surety to the extent of its value.
State Bank of Saurashtra v. Chitranjan Rangnath Raja: a bank negligent in preserving pledged goods discharged the surety under the combined operation of Sections 139 and 141.
Section 139 discharges the surety where the creditor's act or omission impairs his eventual remedy against the principal debtor.
Sections 146 and 147 require co-sureties to contribute equally, and equally within their respective limits where they are bound in different sums.
Craythorne v. Swinburne: contribution rests on equity, not contract, and applies though the sureties were bound separately and did not know of each other.
Section 138 preserves the liability of the other co-sureties and the released surety's duty to contribute where the creditor releases one.

7. Related Topics and Provisions

Topic or provision	Connection
Contract of Guarantee under Section 126	Definition, consideration and co-extensive liability
Continuing Guarantee under Sections 129 to 131	Revocation and the surety's death
Discharge of the Surety	Sections 133 to 139 and 142 to 144
Contract of Indemnity under Sections 124 and 125	Why the Act gives a surety rights it does not give an indemnifier
Sections 140 and 145, Indian Contract Act	Subrogation and implied indemnity
Sections 139 and 141, Indian Contract Act	Impairment of remedy and loss of security
Sections 146 and 147, Indian Contract Act	Contribution between co-sureties
Section 43, Indian Contract Act	Contribution between joint promisors, on the same principle
Appropriation of Payments under Sections 59 to 61	Clayton's Case and the reduction of a guaranteed balance