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Case Analysis: Craythorne v/s Swineburne

Contract of guarantee is defined in Section 126 of the Indian Contract Act. It explains a guarantee contract as a contract to execute a promise or relieve the responsibility of a third party in the event of his default. The individual who provides the guarantee is referred to as "surety." The individual to whom the guarantee is issued is referred to as the "Principal debtor." The creditor is the individual whose guarantee is provided.

There are 2 sorts of guarantee contracts. It might be either oral or written. But, for an agreement to develop among the parties, there must be agreement, which implies that all 3 parties must be aware of the deal. A guarantee contract is a pledge to account for the payments of the primary debtor's obligation to the creditors or the fulfilment of some duty. In the event that the major debtor defaults, who is initially obligated to pay or conduct?

As a result, the major debtor bears the main obligation to pay. The Surety, on the other hand, has secondary obligation, which means that if the primary debtor defaults, the surety must step in. As a result, the purpose of the guarantee contract is to indemnify if the primary debtor failed to uphold his pledge. This indemnity is not the same as the indemnify contract under Section 124 of the ICA.

Surety promises the creditor that if the primary debtor defaults, they would perform the 3rd party's responsibility or perform the principal debtor's pledge. As a result, the surety assures the creditor of the primary debtor's action. It is possible to construe the surety's responsibility as collateral to the major debtor's liabilities. If the primary debtor fails to pay, the surety is obligated to be made accountable under a conditioned pledge. The Act strives to safeguard the benefits of all 3 parties engaged in a guarantee contract, having a focus on the surety's interests.

A Guarantee Contract Must Have Three Fundamental Elements:

  • Consideration:
    It is a necessary component of a guarantee contract. The consideration might be financial, a future deed, private possessions, or anything else that helps the major debtor significantly.
     
  • Not made in good faith:
    A guarantee contract is never an uberrimae fides agreement, which is a contract formed in good faith. However, there is a need to reveal all pertinent information to the surety in order for him to make an educated decision. As a result, a promise acquired by concealing or deception is void.
     
  • Either oral or written:
    As per Section 126 of the Indian Contract Act of 1872, the contract might be both oral or written.


Role of Surety

Surety is defined as the giving of trust on the premise where an individual serves as a guarantee while making a commitment. It is well within the guarantor's understanding that the cash has been given on the grounds of the guarantor's faith, and in certain instances, the guarantor's role is very close with that of a trustees.

Whatever performed or any assistance offered by the creditor for the advantage of the primary debtor could be adequate recompense to the surety for granting the creditor the guarantee. A guarantor is indeed a debtor in a guarantee contract. A guarantor's responsibility to the creditors cannot surpass the conditions stipulated in the guarantee agreement.

Nature of Liability of Surety

As per Section 128 of the Indian Contract Act of 1872, the surety's responsibility is coextensive. It is of the equal proportion as the major debtor. It stresses the surety's greatest degree of culpability and also the breadth of the surety's liability.

Coextensive

The term 'coextensive' relates to the quantity or degree of the primary obligation and is a property of the term extend. This section solely covers the scope of the surety's commitment where no restriction has been imposed on the legality of the primary debtor's responsibility. The Section goes on to clarify how well the surety can, under the agreement, restrict the amount of his obligation when signing into a particular contract. They could make a statement and minimize or constrain their obligation in some way.

Until clearly stated in the provisions of the agreement, the surety cannot be made responsible by the creditor, and neither can he sue him, until the primary debtor defaults. As a result, the surety's obligation is secondary or peripheral. It is reassuring to observe that Indian courts recognised the notion of co-extensiveness long earlier to the Indian Contract Act of 1872 was adopted.

The Bombay High Court clarified in the matter of Lachman Joharimal v. Bapu Khandu and Others (1869) that it is not compulsory on the creditor to exhaust his rights before prosecuting the major debtor. When a decision is obtained against the surety, it could be enforced in the same manner as a declaration or judgment for any responsibility of the parties or any debt that has not been fulfilled.

Condition Precedent to the Surety's Liability

In which a condition previous to the surety's obligation exists, he would not be responsible until that requirement is met firstly. To some degree, Section 144 is predicated on this premise. For instance, if a person guarantees to do a work until other person enters as a co-surety, the guarantee is null and void if some other co-surety doesn't really enter the agreement.

In National Provincial Bank of England v. Brackenbury (1906), the defendant entered into a contract of guarantee. The defendant agreed to enter into the agreement on the conditions that 3 other people sign it as part of a common as well as multiple guarantee. Nevertheless, one of 3 persons didn't even entered into the guarantee contract. The Court determined that no contract occurred because a contract criterion was not met. As a result, the defendant was found not guilty.

The Extent of Liability of Surety

This is always a significant question to determine the greatest extent of a surety's obligation and the amount to which it is now enforced. The concern being that when the surety's obligation comes into play-when the debtor has still not completed their half of the pledge of all the remedies available to the creditor towards the debtor.

In the case of Bank of Bihar Ltd v. Damodar Prasad and Others (1968), in which the Supreme Court described how well the the only situation necessary for successful execution of the bond was to claim payment relating to the principal debtor's liability. Notwithstanding continuous requests, both the major surety and the debtor was unable to perform their half of the deal on the completion of the conditions.

A Suit Against Surety Alone

A litigation against the surety that does not include the principal debtor has indeed been found to be maintainable. In N.Narasimhaiah v. Karnataka State Financial Corporation (2004), the creditor provided adequate grounds in his affidavit for not pursuing against the principle debt.

The conditions established towards the guarantors individually and collectively with that of the major debtor's firm rendered a guarantee contract enforceable. The Court ruled that the creditor might sue both the corporation and the guarantor as co-defendants or only the surety. The position of the surety is vulnerable.

Death of Principal Debtor

In the event of the major debtor's death, any claim brought on him would be null and void from the start. Nevertheless, the surety will not be released from his obligation to repay the money.

Surety's Right to Limit his Liability or Make it Conditional
In the contract, the surety may limit the scope of his obligation. He can specifically limit his guarantee to a certain sum, in which situation the surety could not be held accountable for any sum in excess of the stated amount. The major debtor owed extra, but this is not the surety's obligation to be accountable for even just an one penny beyond what is mentioned in the contract.

Surety's Liability

Section 128 of the ICA states that the obligation of the guarantor is co-extensive with that of the major debtor, which indicates that the surety is responsible to the same degree as the principal debtor. For instance, if the primary debtor is not accountable for the obligation for any cause, the surety is indeed not responsible either. Furthermore, if the creditor discharges the primary debtor for whatever cause, the surety would be released as well.

This part is also dependent on the agreement. As a result, the surety's responsibility is determined by the provisions of the agreement, and he or she is not obligated to repay extra than what the primary debtor has accepted.

Discharge of Surety

Sections 133-139 clarify all of the conditions under which surety is released. Every one of these sections can be referred to as the surety's rights because the surety is no longer accountable under the guarantee. A guarantee contract is a contract that can be discharged like any other agreement.

The discharging of surety by deviation is explained in Section 133 of the ICA. Exceptions to this Section: If a change in the contract is implemented even without surety's approval that is favourable towards the surety, the surety also isn't released. If the change is insignificant or insignificant, the certainty is not released.

Co-Sureties

Section 138:
Whenever one co-surety is freed, another co-surety is not discharged. A discharge by a creditor from one of them doesn't really relieve another sureties of their obligations to other sureties, nor does it discharge the surety who has been discharged from his obligations to other sureties.

Section 146:
Co-sureties are defined in this section. When two or more people are co-sureties for same debt or obligation, they are obligated to pay each other an equal amount of the total debt or that portion of it that stays due by the principal debtor. If not specified in the contract, the contributions of all co-sureties shall be equivalent. If the percentage is specified in the contract, it shall be followed.

Section 147:
Co-sureties are bonds of various amounts that are obligated to pay equally as far as their separate responsibilities allow. For example, suppose A, B, and C are sureties for D in three separate bonds. A received a Rs.10,000 fine, B received a Rs.20,000 sanction, and C received a Rs.40,000 sanction. D defaults to the tune of Rs. 40,000. As a result, A's responsibility is 10,000, B's liability is 15,000, and C's liability is also 15,000.

Background
The case involves two parties namely Craythorne, who is the plaintiff in this case and Sir John Swineborne, the defendant in this case. As per the request put in front by Sir John's Swineborne, Henry Swineborne was given a certain amount of money as loan by the New Castle Bank. the purpose of giving this amount of money was to make transfer of money from one bank to another.

The concerned amount of money was given to Henry Swineborne against the Collateral security of two Bonds. The bonds were off to the bonds were of two kinds, when was a joint bond of relationship between Henry Swineborne, as the principal in the agreement, and Craythorne, as the security of the principal. the Other Bond was required to be formed by John Swineborne.

The Other Bond was required to be formed by John Swineborne, giving is a statement that this bond would automatically come to an end, as soon as the amount of money granted as loan to Henry Swineborne would be paid either by Henry Swinborne himself or by his agent Craythorne.

However, unfortunately Henry Swineborne passed away, which ended in making Craythorne liable for payment of the whole some by himself. he paid the whole amount of money from his own savings. now since he wanted compensation, he filed a bill for making John Swineborne liable to pay the amount of his part.

Contentions foot in front by the parties involved in the case

Plaintiff:
Mr Craythorne, who was the plaintiff in this case foot falling contentions from his side:

It is totally irrelevant and unreasonable whether the surety is involved are responsible for only one instrument, or several more. this was held in the case of Deering v Earl (cite) of Winchalesea. it was already known by Johnson born that he was already involved as co-surity with others as well.

Defendant:
Mr. John Swineborne, who was the defendant in the case has pleaded that he never shared any obligation of a course surety along with Craythorne, and his Bond was Limited only to ensure little security in case any kind of default in payment at the end of the principal Henry Swineborne,or his surity Craythorne.

Issue:
  • Whether JS' engagement was to be co-surety for C or surety for both (HS & C) i.e. to pay only, if both should make default?
Judgement
The judgement in this case has been delivered in favour of the plaintiff. "Lord Eldon accepted the principle mentioned in second contention of the plaintiff" (cite).

John Swineborne himself deliberately proposed to become a co surety of Henry Swineborne to the bank, even though he never communicated it either with Henry Swineborne or Craythorne. the original agreement required Henry sign born and create form to bear the liability by themselves, but by intentionally and voluntary adding his name, Johnson Bourne bind himself to some extent of liability but he cannot be bound to the liability for which he has not contented himself for.

It was nothing but a advance between John Swineborne and the concerned Bank. While on the other hand, since neither Craythorne nor Henry Swineborne, had any kind of direct contact with him, they had no right to complain about it. Therefore, John Swineborne cannot be held as a course surety between both of them. He is as good as a principal and is only liable to pay when both of the parties fail to pay the amount.

Analysis:
When there are more than one person who become surety for the same debt or part of the debt they are known as co-surities. They are liable to pay equally for the amount to be paid unless there is a contract to the contrary. In the present case, John Swineborne (JS) had voluntarily offered to become a security for Henry Swineburne (HS). Therefore, he was a co-surety to JS and hence equally liable to pay as there was no contract to the contrary. Further, he never bothered to release himself from the liability until Craythorne filed a suit against him.

However, the court said that the contract was only between bank and JS and therefore Craythorne could not sue JS. It is to be noted that the contract of gurantee is an tripartite agreement and therefore, JS could not be released from the liability just because he did not directly entered into a contract with either with HS or Craythorne. Hence, the ruling of court cannot be justified. It is submitted here that the JS had become a co-surety and entered into a tripartite agreement the moment he entered into contract with the bank.

Conclusion
The co-extensiveness concept cannot be regarded as a rigorous principle. The precise degree and magnitude of the surety's liability would've been ruled by the regulations stated in the guarantee on the real crafted document, and the parties would be independent to enforce specific constraints on the surety's liability without straying from the real nature of the guarantee contract. The specific and exact degree are always governed by the conditions of guarantee on how the agreement has been worded, and the parties have the discretion to add limits to the surety's obligation if any.

References:
  • Avatar Singh, Contract And Specific Relief (12th ed. 2020).
  • The Indian Contract Act, 1872, (Universal 2021)
  • Indian Case Law, https://indiancaselaw.in/craythorne-v-swineburne/ (last visited Mar.25, 2022, 9:49 PM).

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