The scheme of Indian Contract Act, 1872 on the subject of a Contract of Guarantee may be summarized as follows:
(a) A contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditor and the surety {Punjab National Bank v. Sri Vikram Cotton Mills, (1970) 1 SCC 60; AIR 1970 SC 1973; (1970) 2 SCR 462; 40 Comp Cas 927}. The purpose of a guarantee being to secure the repayment of a debt, the existence of a recoverable debt is necessary. It is of the essence of a guarantee that there should be someone liable as a principal debtor and the surety undertakes to be liable on his default. If there is no principal debt, there can be no valid guarantee. This was so held by the House of Lords in the Scottish case of Swan v. Bank of Scotland {(1836) 10 Bligh NS 627} decided as early as 1836.
(b) 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 (section 145).
(c) 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 (section 140). 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 (section 141).
(d) In essence, ultimately the debt is to be recovered from the principal debtor, either primarily by the creditor or finally by the surety. Certainly, there is no mandate of Contract Act that finally the principal debt is to be recovered from the surety.
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