Discharge by Surety from Liability – Contract of Guarantee

Discharge Of Surety From Liability

When the liability of surety, which he had undertaken under a contract of guarantee, is extinguished or comes to an end, he is said to be discharged from liability. The modes of discharge of a surety, as recognized by the Indian Contract Act, are as under:

  • Revocation by the surety (Section 130)
  • By surety’s death (Section 131)
  • By variance in the terms of the contract (Section 133)
  • By release or discharge of principal debtor (Section 134)
  • When creditor compounds with, give time to, or agrees not to sue, the principal debtor (Section 135)
  • By creditor’s act or omission impairing surety’s eventual remedy (Section 139)
  • By loss of the security by the creditor (Section 141)

1) By Revocation By The Surety (Section 130)

According to Section 130:

“A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor”

This Section permits revocation of guarantee by the surety:

When it is a continuing guarantee;

As regards future transactions only.

2) By Surety’s Death (Section 131)

According to Section 131

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“The death of a surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

3) By Variance In The Terms Of Contract (Section 133)

When the surety has undertaken liability on certain terms, it is expected that they will remain unchanged during the while period of guarantee.

If there is any variance in the terms of the contract between the principal debtor and the creditor, without the consent of the surety, the surety gets discharged as regards transactions subsequent to such a change.

“Any variance, made without the surety’s consent, in the terms the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

4) By Release Or Discharge Of The Principal Debtor (Section 134)

The provision concerning the discharge of the surety on the release or discharge of the principal debtor as contained in Section 134 and its illustrations, is as under:

134. Discharges of surety by release or discharge of principal debtor – The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

5) When Creditor Compounds With, Gives Time to, or Agrees Not To Sue The Principal Debtor (Section 135)

Section 135 mentions further circumstances when a contract between the creditor and the principal debtor can result in the discharge of the surety. The Section is as under:

“135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor – A contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract”

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According to this section, a contract between the creditor and the principal debtor discharges the surety in the following three circumstances :

When the creditor makes composition with the principal debtor;

When the creditor promises to give time to the principal debtor; and

When the creditor promises not to sue the principal debtor.

  • I) Creditor Compounding With The Principal Debtor

When the creditor makes compositions with the principal debtor without the consent of the surety, this means variation in the original contract.

Its obvious consequence, therefore, is the discharge of the surety form the liability.

  • II) Creditor Promising To Give Time to The Principal Debtor:

Promise to give time to the principal debtor means extending the period of payment which was not contemplated in the contract of guarantee.

  • III) Creditor Promising Not to Sue The Principal Debtor

A contract between the creditor and the principal debtor whereby the creditor promises not to sue the principal debtor, also results in the discharge of the surety.

Mere Forbearance To Sue Not Enough

“137. Creditor’s forbearance to sue does not discharge surety – Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.

6) By Creditor’s Act or Omission Impairing Surety’s Eventual Remedy (Section 139)

Section 139 incorporates the rule that when the act or omission on the part of the creditor is inconsistent with the interest of the surety, and the same results in impairing surety’s eventual remedy against the principal debtor, the surety is discharged thereby. Section 139 is as follows:

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“139. Discharges of surety by creditor’s act or omission impairing surety’s eventual remedy. If the creditor does any act which is inconsistent with the right of the surety, or omits to do an act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.”

According to Section 140, the surety after making the payment which may have become due on performing the duty, on the default of the principal debtor, is invested with all the rights which the creditor had against the principal debtor.

7) By Loss Of The Security By The Creditor (Section 141)

According to Section 141, the surety is entitled to all the securities which the creditor has against the principal debtor at the time when the contract of surety ship is entered into.

If the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

For instance, the seller of the goods allows the buyer to take away the goods without insisting for the payment of the price for the same, the surety who guarantees the payment of the price by the buyer, is discharged from his liability.

Discharge Of Principal Debtor Without Creditor’s Fault Does Not Discharge The Surety

According to Section 141, the surety is discharged if the principal debtor gets discharged due to the fault of the creditor. If there is no voluntary act of the creditor in the discharge of the principal debtor, the surety continues to be liable in spite of discharge of the principal debtor.

 

Author: R. Shanmuga Sundaram,
Student - Chettinad School of Law

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