The Liability of the Surety in Banking Contracts of Guarantee

In a banking contract of guarantee, the surety is liable to the creditor (the bank) for the debts or obligations of the principal debtor (the customer). The surety’s liability is secondary, which means that the creditor cannot sue the surety until the principal debtor has defaulted on their obligations.

The liability of the surety in a banking contract of guarantee is based on the terms of the guarantee agreement. The guarantee agreement will typically specify the amount of the surety’s liability, the debts or obligations that the surety is liable for, and the conditions under which the surety’s liability will arise.

Types of Suretyship

There are two main types of suretyship:

  • Simple suretyship: In simple suretyship, the surety is liable for the full amount of the principal debtor’s debt.
  • Limited suretyship: In limited suretyship, the surety is only liable for a certain amount of the principal debtor’s debt.

The Surety’s Defenses

The surety may have a number of defenses against the creditor’s claim. These defenses include:

  • The principal debtor’s default: The surety is not liable if the principal debtor does not default on their obligations.
  • The creditor’s negligence: The surety may not be liable if the creditor was negligent in lending money to the principal debtor.
  • The surety’s lack of knowledge: The surety may not be liable if they did not know about the principal debtor’s debts when they entered into the guarantee agreement.
  • The surety’s release: The surety may be released from their liability if the creditor releases them from the guarantee agreement.

MCQs on the Liability of the Surety in Banking Contracts of Guarantee

  1. Which of the following is not a type of suretyship?
    • Simple suretyship
    • Limited suretyship
    • Guaranty
    • Indemnity
    • Answer: Guaranty. A guarantee is not a type of suretyship. It is a contract in which one party (the guarantor) promises to be liable for the debts or obligations of another party (the principal debtor) if the principal debtor defaults on their obligations.
  2. A surety is liable to the creditor for the full amount of the principal debtor’s debt. Is this always true?
    • No, this is not always true. The surety’s liability may be limited to a certain amount, depending on the terms of the guarantee agreement.
  3. A surety may be released from their liability if the creditor releases them from the guarantee agreement. Is this always true?
    • No, this is not always true. The surety may only be released from their liability if the release is in writing and signed by the surety.
  4. A surety may have a defense against the creditor’s claim if the creditor was negligent in lending money to the principal debtor. Is this always true?
    • No, this is not always true. The surety’s negligence may also be a defense against the creditor’s claim.
  5. A surety may have a defense against the creditor’s claim if they did not know about the principal debtor’s debts when they entered into the guarantee agreement. Is this always true?
    • No, this is not always true. The surety may only have this defense if they did not have any reason to know about the principal debtor’s debts.