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Right To Subrogation: Contract Law

Right of Subrogation[1] is a legal doctrine, that empowers a party, which has settled a debt or claim on behalf of another party, to step into the shoes of the party which originally owed the claim or debt. In Indian Contract Act, 1872 this principle is laid down in Section 140 for Contract of Guarantee. Section 140 states the right of surety on payment or performance.

Section 140
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 To elaborate briefly,[2]

A contract of guarantee is a tripartite agreement among three parties.
  1. A person who agrees to be responsible for the debt or obligation of another person Guarantor or Surety
  2. The person who has taken the services or amount of someone else:
    Principal Debtor
  3. The person or entity to whom the principal debtor owes money or obligation
Thus, according to this provision of S 140, in case of default of payment by the principal debtor, the surety ensures to pay the outstanding due. The reason is that the surety's right is co-extensive with the principal debtor. Upon making this payment, the surety gains the legal authority to wield all the rights and remedies that the creditor, earlier possessed with the principal debtor, even though the surety does not hold the status of the creditor.

The word subrogate is derived from two Latin terms,
  1. Sub-under
  2. Rogare-to ask
Thus, collectively, it transmutes to substitution or succession concerning payment.

This doctrine was first laid down in Morgan v Seymore, and gave an equitable principle, whereby upon fulfilling the responsibilities of the principal, the surety is granted to assume the status of the creditor and benefit from all the rights that the creditor possessed against the principal.

There are various types of subrogation[3], used across various law and procedural codes.

Briefly, they are of three types.
  1. Legal Subrogation:In the legal subrogation, subrogation arises independently, without any contractual agreements under the operation of law. This type of subrogation operates equitably and without any specific contract in place. At the same time, it is crucial to note that subrogation cannot override a contract mutually agreed upon by the parties. Instead, it can be altered or terminated through contractual agreements.
  2. Conventional Subrogation:In conventional subrogation, subrogation arises from a contractual agreement. It typically occurs when one party fulfills the debt of another under the contract. This comes under certain benefits. For instance:
    • (a) They can either be written or unwritten
    • (b) They can be expressed or implied.
  3. Statutory Subrogation:In statutory subrogation, subrogation arises via a legislative enactment. This type of subrogation typically involves the allocation of subrogation rights to a specific party or group of parties as outlined in the legislation. The terms and conditions of the statutory subrogation are determined by the language and provision of the relevant statute, thus making it subject to statutory interpretation.

Limitations on the Right of Subrogation[4]
  • Pre-existing debt: The right of subrogation does not extend to situations where individuals settle a debt that they are already responsible for based on pre-existing obligation. In simpler terms, subrogation rights are not granted to individuals who are merely discharging their debts. Additionally, if a person comes forth voluntarily to choose to pay off the debt, subrogation will not apply. Subrogation will not apply to cases where the acts are done without moral or legal obligation.
  • Guarantee and Insurance: In contracts of guarantee and insurance, the right of subrogation does not come forth unless the surety has duly performed his obligations. It is important to note that contracts of insurance, personal accidents, and life insurance are not included. The right of subrogation under contract of guarantee has been explained here further in detail in this thesis.
  • Real Estate Payments: In real estate properties, an individual with interest in a property can cover taxes and assessments owned by another party on the same property. By doing so, the individual becomes subrogated to the state or public taxing bodies' lien on the property. Typically such subrogation is guaranteed by statute. However, it's important to note that to avoid being considered a volunteer, a person cannot pay taxes or assessments on a property in which there are no vested interests unless there is a written agreement for subrogation.

The Right Of Subrogation: A Contractual Detailed Study

Rights of surety after payment
The rights of surety as a creditor come forth, only when surety has fulfilled his obligations or duties. Furthermore, the surety obligations stand out when the principal debtor is in arrears.

As discussed above, the surety right is co-extensive with that of the principal debtor. The same principle remains in existence, even when the debt is resolved. Therefore, the surety is empowered to sue the creditor.

For instance, in

Lamplugh Iron Ore Co, a director who paid the overdue rents was allowed to represent the creditor during liquidation. This includes legal measures, like filing legal action in the creditor's name and obtaining compensation from the principal debtor from the resulting debt.

The Supreme Court took a similar stance Amrit Lal Goverdhan Lalan v State Bank of Travancore[5]e, which said that the surety possesses the right to all remedies the creditor had against the principal debtor, including the enforcement of securities and payment methods. The surety can step into the creditor's position, have securities transferred, even without a specific agreement, and utilize all available securities against the debtor. This entitlement of the surety is not solely based on contract but is rooted in natural justice. The law grants the surety certain rights, which are emphasized in Section 140, so the surety possesses the same rights as the creditor immediately and doesn't need a written transfer.

Although this right often adds to the advantage of the surety.

This might not be true at times.

The Bank of Bihar v Damodar Das [6]The case demonstrated the same. The bank loan was guaranteed by the defendant. Following a default, the defendant was sued. Here is the case in detail,

The trial court ordered that the bank enforce the guarantee in question only after exhausting all remedies against the principal debtor. The order was upheld by the Patna High Court. The Supreme Court, however, overturned it.

Important Observation
This means that when principal debtors become insolvent, the surety cannot require that the principal debtor seek remedies from the creditor first. The Supreme Court has clarified that in such situations, the surety is still obligated to pay. The surety, in turn, will be subrogated to the creditor's rights against the principal debtor, even though the rights may not be beneficial when the debtor is insolvent. The court says, The very object of guarantee is defeated if the creditor is asked to postpone his remedies against the surety."

Right Of Surety Before Payment:
  1. Temporary Injunction
    Under the Right of Subrogation, Even before payment, the surety has certain rights. In a legal matter before the Calcutta High Court, the surety discovered that the principal debtor was selling out personal assets to evade potential seizure by the surety after payment. To stop the principal debtor from taking such action, the surety requested and the court issued a temporary injunction.

    Concerning an authoritative source, Justice Sukumar Chakravarthy said that if, in any legal proceeding, it can be established through an affidavit or any other means that the defendant is either threatening or on the verge of disposing of assets, intending to defraud the creditors, the court has the authority to issue a temporary injunction preventing such actions or provide alternative orders to halt or hinder the removal or disposal of the property.

    In State Bank of India v Fravina Dyes Intermediate [11], the Bombay High Court ruled that a guarantor, utilizing the subrogation doctrine, can seek a temporary injunction against the debtor before paying the creditor if there's a threat of the debtor disposing of assets to defraud the creditor. This means the guarantor can obtain an injunction against the principal debtor under specific circumstances.
  2. Right to approach a Court of Equity
    Sureties have a right to approach the court of equity after the debt has matured, seeking to enforce the debtor's obligation to release them from liability by settling the debt. Alternatively, they can initiate legal action in the creditor's name and recover the debt from the principal, provided that the principal agrees to indemnify the creditor against the potential risks, delays, and expenses associated with the lawsuit.

In Snell Principles Of Equity, a passage discusses the remedies of the surety under two sub-parts, Before Payment and After Payment.

A surety who guarantees payment of a debt on behalf of a principal debtor has the right to legally compel the principal debtor to fulfill their obligation. The right is considered equitable and resembles the legal concept of quia timet, i.e., it is unfair for any person to constantly live under the fear of potential financial responsibility.

The surety can exercise this right even if the creditor has not demanded payment or refused to take legal action. The surety can take legal action pre-emptively, especially when the signs are visible that the principal debtor might breach the obligations.

However, there are limitations to this right. This right is not applicable, and is not yet due, defined, or accrued. Additionally, suppose the terms of the guarantee explicitly state that legal action can only be taken after a formal demand for payment by the creditor. In that case, the surety cannot initiate proceedings before such a demand.

In a lawsuit, aimed to recover mortgage funds from both principal debtor and surety, the sureties made the payment upon the issuance of preliminary decree. The court ruled that this action constituted payments while the lawsuit was ongoing. Moreover, the court determined that, by legal principle, the lawsuit effectively transferred to the sureties' ownership, allowing them to pursue the case against the principal debtor through subrogation.

Important Conditions for Right of Subrogation
In a contract of guarantee, for a right of subrogation to be fulfilled, six conditions need to be fulfilled.

Lawful Object:

Subrogation in a contract must perform a lawful purpose. Section 23 of ICA, 1872 already gives the provision for lawful object. It becomes unlawful if it violates any legal prohibitions, as enumerated in Section 23. They are:
  • forbidden by law
  • is of such nature that, if permitted, it would defeat the provisions of law.
  • is fraudulent.
  • involves or implies, injury to the person or property of another.
  • The court regards it immoral, or opposed to public policy
Thus if subrogation comes under any of these provisions, it will be held invalid and void.


The prerequisites for contractual capacity when obtaining a contract of guarantee must adhere to Section 11 of ICA, 1872. The Section 11 of ICA states:
Every person is competent to contract who is of the age of majority according to the law he is subject to, and who is of sound mind and is not disqualified by any law which he is subject to."

Intention to create a legal relationship:

Just like any other contract under ICA, under Section 10 of ICA, 1872. There should be an Intention to create a legal relationship.

Set-off or counterclaim:

If the principal debtor defaults and the surety is required to fulfill the payment to the creditor, the surety has the entitlement to utilize any set-off or counterclaim that the principal debtor possessed against the creditor.

Representation and Warranties:

The surety, principal debtor, and creditor provide specific representations and warranties, which must not be inaccurate or erroneous. It has been stated that a contract of guarantee is not uberrimae fides or of absolute good faith. Section 142 (Guarantee obtained by misrepresentation) and Section 143 (Guarantee obtained by concealment) exist to ensure no such act. If Misrepresentation or Concealment is found in any contract of guarantee the guarantee will not come into force. As a result, Subrogation of surety will too cease to exist.


The Indian Contract Act, 1872 includes an indemnity clause within the guarantee contract to establish an implicit commitment from the principal debtor to indemnify the surety. As per this provision, the surety is entitled to seek reimbursement from the principal debtor for any payments made on their behalf. This is enumerated in Section 145 of the Indian Contract Act, 1872, i.e., (Implied Promise to Indemnify Surety). Section 145:
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 not sums which he has paid wrongfully.

An instance of this could be found in:
Chekkera Ponnamma v A.S. Thammaya
The surety herein had guaranteed the payment of four motor vehicles on the hire and Purchase agreement. The surety argued that he had fulfilled his obligation by paying Rs4000, yet he neglected to provide details regarding the potential resale value of the motor vehicles. Consequently, his claim for indemnification was denied.

Principles Of Subrogation
Understanding the doctrine requires grasping its essentials and underlying principles. In the seminal case of Economic Transport Organisation v. Charan Spinning Milla (P) Ltd and Ors [(2010) 4 SCC 114], the Supreme Court delineated the principles of subrogation as follows:
  • The doctrine empowers the insurer to pursue legal recourse against a third party under
  • When a subrogation letter delineates terms between the insurer and the insured, it governs their rights.
  • Upon settlement of a claim by an insurer, an equitable subrogation right arises, enabling the insurer to seek redress from the third party. However, this doctrine leaves the insured's right to pursue legal action unaffected.


  • Potential inefficiency and expense when the third party or wrongdoer is also insured
  • Unfairly burdens the third party while providing a confident escape for corporate insurers, who can simply pay the costs to their premium-paying clientele.

In the end, the legal principle of subrogation, ingrafted into normative frameworks, like the Indian Contract Act, of 1872, is perceived as the cornerstone, allowing justice to be done. They are in a position to act as interested parties in settling the debt for others of such a nature that they are given the same powers as the creditor. Though legally allowed, conventional and statutory subrogation offer unique routes, but the biggest concerns are related to the pre-existing debts and the contractual issues.

Subrogation right of suretyship has significant legal implications, allowing sureties to go through complex trading conditions and claim damages more promptly. Besides, the emerging concerns regarding possible incompetences and distortions are evident in the discussions on the subject. The last part is understanding subrogation's principles and limits because it will help to create and maintain fairness and effectiveness in contractual relations.

  1. Das R (, 3 March 2020) accessed 11 March 2024
  2. Bhandari N, 'Doctrine of Subrogation and Its Uses in Contract of Guarantee' (2019) 3 International Journal of Advance Research and Development 1
  3. 'Subrogation - the Basics' (Subrogation - The Basics | Stimmel Law, 7 April 2016) accessed 11 March 2024
  4. Mahawar S, 'Surety's Right of Subrogation under Section 140 and 141 of the Ica' (iPleaders, 3 November 2023) accessed 11 March 2024
  5. 1968 AIR 1432
  6. 1969 AIR 297

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