Law on the Liability of Guarantor in Contracts

Law on the Liability of Guarantor in Contracts

In case of Canara Bank v. Archean Industries Pvt Ltd [2026] GCtR 226 (SC), it was noted that Chapter VIII of the Indian Contract Act, 1872 deals with the law regarding “Indemnity and Guarantee”. 

Contract of Guarantee

A reading of the provisions of ICA indicates that a contract of guarantee is an undertaking to perform the promise or discharge the liability of a third person, in case of his default. It is essentially a voluntary act of taking up the burden of a third party, who has received or is about to receive some benefit and has failed to make the payment. The guarantor is called the “surety” and person in default is called the “Principal Debtor”.

"Direct Benefit" Not Necessary

It is well settled that it is not necessary for the guarantor to derive any direct benefit from the transaction. It is sufficient if the principal debtor derives the benefit. The consideration for a contract of guarantee may be past, present or future. The guarantee is, in itself, a separate contract and enforceable independently, and the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by the contract. Consequently, both are jointly and severally liable. The creditor, to whom both the principal debtor and surety are liable, can sue either or both of them. In case, the creditor proceeds to recover only from the surety, the surety is at liberty to recover the same from the principal debtor as he would have stepped into the shoes of the original creditor by virtue of the doctrine of subrogation, and all the attendant remedies available to the creditor are available to him. 

Role of Pleadings

It was also held that it is a settled principle that no amount of evidence can be looked into in the absence of proper pleadings.  Plaintiff is the dominus litis and it is for the plaintiff to determine the cause of action and the parties against whom the suit is to be instituted.