Bank Loans for Property and Law on the Liability of Guarantor
S.128 of Indian Contract Act, 1872 is about liability of Surety and the section says that "the liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract." To understand what is contract we can see S.2(h) of ICA, 1872 which says : "An agreement enforceable by law is a contract". S.2(h) requires enforceability by law. We can see S.126 of ICA which says that the person who gives the guarantee is is called the surety. S.126 makes it clear that guarantee can be oral or written ; so it is not essential that a surety should give guarantee through signature or in any written form.
In the case of Central Bank of India v. C.L. Vimla [2015] GCtR 2509 (SC) the law on liability of guarantors in respect of loans was explained.
After referring S.128 of Indian Contract Act, 1872 it was held that the legislature has succinctly stated that the liability of the guarantor is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.
In view of the provisions of Section 128 of the Contract Act, the liability of the guarantor/surety is co-extensive with that of the debtor.” The only exception to the nature of the liability of the guarantor is provided in the Section itself, which is only if it stated explicitly to be otherwise in the Contract.
It is the prerogative of the Creditor alone whether he would move against the principal debtor first or the surety, to realize the loan amount. Clauses in the letter of guarantee are binding on the guarantors. The mere fact of ignorance cannot be a valid ground.