Right of Subrogation: (Sec 140) – Right of a surety against principal debtor: 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 he is liable for, is invested with all the rights which the creditor had against the principal debtor. A surety is thus, upon the payment of the guaranteed sum or on performance of a guaranteed duty, subrogated or invested with all the rights which the creditor had against the principal debtor.
This arises on payment of the whole sum due or performance of the entire duty. Surety steps into the shoes of the creditor. Surety may now sue the principal debtor in as much as the creditor had the right to sue the principal debtor.
Section 140 embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court of Chancery. The surety will be entitled to every remedy which the creditor has against the principal debtor, to enforce every security and all means of payment, to stand in the place of the creditor; not only through the medium of contract, but even by means of securities entered into without the knowledge of the surety having a right to have those securities transferred to him, though there was no stipulation for that; and to avail himself of all those securities against the debtor. This right of a surety also stands, not upon a principle of natural justice.
Right to benefit of creditor’s securities (Sec 141) – Right of surety against the creditor: 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 surety ship is entered into, whether the surety knows of the existence of such security or not. We have seen above while discussing discharge of surety that 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.
This right of surety arises on payment by him of the whole of the debt due to the creditor. Surety is entitled to be subrogated to all the rights and benefits of securities with the creditor which he has against the principal debtor. His right extends to securities of which he is not aware. He is also entitled to securities received by the creditor before or after the contract of surety ship. 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. If the securities are burdened with further advances, if will not affect the rights of the surety.
Rights to indemnity (Sec 145) – Right of surety against the principal debtor: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. 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.
1. 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.
2. C lends B a sum of money, and A at the request of B accepts a bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and on A’s refusal to pay, sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action.
3. A guarantees to C to the extent of Rs 2,000 payment for rice to be supplied to B rice of a less amount that Rs 2,000 but obtains from A payment of the sum of Rs 2,000 in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.
Surety has a right to be exonerated by the principal debtor where his liability has become absolute. Surety is entitled to recover from the principal debtor actual sum rightfully due from him. For this, in every contract of guarantee, there is an implied promise by the principal debtor to indemnity the surety. In case surety pays less than what is due from the principal debtor, he is entitled to receive the sum actually paid by him.