Contract Act, Section 132

Contract Act, Section 132: Liability of Two Persons Primarily Liable Not Affected by an Arrangement Between Them That One Shall Be Surety on the Other’s Default

Section 132 of the Indian Contract Act, 1872 governs situations where persons jointly undertake an obligation towards a third person but privately agree that one will act only as a surety for the other.

The section provides that such private arrangements do not affect the liability towards the third person unless he is a party to the agreement, even if he has knowledge of it.

1. Purpose of Section 132

The primary objective of Section 132 is to protect the rights of a third party against any private arrangement made between persons jointly liable under a contract.

The provision ensures that parties cannot unilaterally alter or diminish their obligations towards a creditor or promisee by entering into separate agreements among themselves without the consent of the third party.

2. Applicability of Section 132

Section 132 applies where two persons jointly undertake a liability towards a third person and subsequently enter into a separate agreement regulating their respective liabilities inter se.

The provision becomes relevant only when the third person is not a party to the internal arrangement between the two contracting persons.

3. Primary Contract with the Third Person

The first contract referred to in Section 132 is the agreement entered into jointly by the two persons with the third party.

Under this contract, both persons assume legal responsibility towards the third party and become liable according to the terms of that agreement.

4. Separate Agreement Between the Two Persons

Apart from the principal contract, the parties may enter into a separate agreement where one acts as a surety, and such arrangement governs only their mutual rights and liabilities without affecting the original obligation. 

5. Third Person Not a Party to the Internal Agreement

A crucial requirement of Section 132 is that the third person must not be a party to the internal arrangement.

Since the third person has neither agreed to nor accepted the modified allocation of liability, his legal rights continue to be governed solely by the original contract.

6. Liability Towards the Third Person Remains Unchanged

Section 132 expressly provides that the liability of each of the two contracting persons towards the third person remains unaffected by their private agreement.

Accordingly, the third person may continue to enforce the original contractual obligations against either or both of them in accordance with the first contract.

7. Knowledge of the Third Person Is Immaterial

An important feature of Section 132 is that a third person's knowledge of a private arrangement does not affect his legal rights unless he has become a party to that agreement. 

8. Principle of Privity of Contract

Section 132 reflects the doctrine of privity of contract by providing that an agreement between two parties creates rights and obligations only between them and cannot limit the rights of a third person who is not a party to it. 

9. Internal Rights Between the Two Parties

Although a private arrangement does not affect the rights of a third person, it remains legally effective between the parties, allowing one person to enforce their rights against the other according to the agreement. 

10. Protection of Commercial Certainty

Section 132 promotes commercial certainty by ensuring that creditors can rely on contractual obligations undertaken by the parties and that private agreements cannot alter their rights without consent.