Section 564: Surety’s obligation

1) Except as otherwise provided for in the contract, the surety’s obligation shall be as follows:

(a) Obligation of the surety shall arise at the time when the debtor fails to discharge the obligation to be discharged by him or her.

(b) Obligation of the surety shall be the same as the obligation of the debtor who has to repay the loan or discharge the obligation, and the surety shall remain liable until the debtor becomes free from the obligation to repay or discharge.

(c) Obligation of the surety shall not be discharged merely because the principal debtor becomes free from the obligation by operation of law.

2) Notwithstanding anything contained in sub-section (1), if both security and guarantee have been given for any loan or obligation, the surety shall not be liable to the extent covered by the security so provided.

3) A contract of guarantee shall be effective immediately when the principal debtor breaches the obligation of repayment or discharging liability to the creditor, and the creditor may cause the surety to discharge such liability.

Explanation: For the purposes of this Part, the term “creditor” means a person who has lent a loan and also includes a person who is entitled to obtain any benefit from, or have any act done, by the person who is bound to repay the loan or discharge the liability.

4) Notwithstanding anything contained in sub-section (3), the creditor shall give a notice to the principal debtor to perform the contract according to its terms and conditions before claiming the surety under the contract of guarantee for the repayment of the amount not paid or discharge of the liability not discharged according to the contract.