Under section 128 of ICA, the liability of surety is co-extensive that of the principal debtor that means the surety is liable to the same extent as the principal debtor. For example if the principal debtor is not liable for debt for some reason, then surety is also not liable for the same. Also, the principal debtor is discharged from his debt by the creditor for some reason then surety will be discharged too. This section depends on the contract as well. Therefore, the suretyÕs liability depends on the terms of the contract and is not liable to pay more than the principal debtor has taken.The liability of the surety is joint and connected with the principal debtor. It is the choice of the creditor to recover the amount either from the principal debtor after his default or from surety. He may file a suit against both the principal debtor and the surety or may file a suit against the surety only or the principal debtor only.
A contract of guarantee may be for an existing liability or for future liability. A contract of guarantee can be a specific guarantee (for any specific transaction only) or continuing guarantee.
Specific Guarantee: A specific guarantee is for a single debt or any specified transaction. It comes to an end when such debt has been paid.
Continuing Guarantee: A continuing guarantee is a type of guarantee which applies to a series of transactions.
A continuing guarantee applies to all the transactions entered into by the principal debtor until it is revoked by the surety. A continuing guarantee can be revoked anytime by surety for future transactions by giving notice to the creditors. However, the liability of a surety is not reduced for transactions entered into before such revocation of guarantee.
Reference: Section 126 of Indian Contract Act defines Contract of guarantee. It defines a contract of guarantees a contract to perform the promise or discharge the liability of a third person in case of his default.