Discharge of Surety – Contract of Guarantee

Introduction

In a contract of guarantee ,the surety undertakes to pay an amount to the creditor in case the principal debtor is not able to pay the amount .The Indian contract act,1872 through its provisions ensures that it protects the interest of all the parties in the contract of guarantee ,especially the interest of the surety

Discharge of surety

The Indian contract 1872 , provides for the discharge of the liability in case of certain given circumstances.

The situations under which the surety is discharged from his liability is :

  • Discharge by revocation
  • Revocation of guarantee by giving notice ( Section 130)

Section 130 of the Indian Contract Act,1872 states that the continuing guarantee can be revoked by issuing a notice as to future transactions ,however the surety will be liable for all the previous transactions .The notice should be given to the creditor at any time ,the notice should be clear and specific and it should indicate that the surety is intending to terminate his liability as to future transactions ,their should be not any existence of the contract stating the contrary .

  • Revocation by Death (Section 131)

Section 131 of the Indian Contract Act,1872 states that the death of the surety discharges the surety from liability as to future transactions which are entered into ,however the legal heirs of the surety shall be liable to all the previous  transactions for which the surety has given the guarantee ,in case of the transactions have already been entered into. They are only liable to the extent of the property they have inherited, they cannot be made personally  liable for the obligations of the surety.

  • Discharge by the conduct of the parties
  • Variance in the terms of the contract (Section 133)
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Section 133 of  the Indian contract act ,1872 states that the surety is discharged from the liability in case of changes made in the terms of the contract without the consent of the surety in case of a continuing contract of  guarantee .

  • Release or discharge of principal debtor (Section 134)

Section 134 of the Indian contract act,1872 states that the surety is discharged from the liability in case the principal debtor is released from the liability to pay back the amount .

  • Compounding by creditor with principal debtor (Section 135)

Section 135 of the Indian contract act 1872 states that a surety can be discharged from his liability if there is any composition or any new arrangement between the creditor and the principal debtor ,the surety can be discharged from his liability in case of three circumstances:

  1. Composition

It refers to the variation in the original contract and adding something which was not present in the original contract ,if there is a composition in the contract between the principal debtor and the creditor without the surety’s consent ,it would discharge his liability .

  • Promise to give time

The surety is entitled to ask the principal debtor to pay off the debt when it is time for repayment ,however if there is a contract between the principal debtor and the creditor whereby the creditor has agreed to give some more time to repay the amount without the consent of the surety into consideration ,the surety will be discharged.

  1. Promise not to sue

If there is an contract that the creditor would not sue the principal debtor in case of a default ,then this would result in the discharge of the surety.

  • Creditor’s act impairing surety’s eventual remedy
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It is the duty of  the creditor not to do any act which is inconsistent with the contract it would result in the impairment of  the remedy of the surety to get the amount recovered from the principal debtor after repayment, the surety takes the place of the creditor and exercise all the rights of the creditor and if any rights are impaired against the principal debtor is impaired due to any act or omission by the creditor it would discharge the act of the surety.

  • Loss of security

Section 141 of the Indian contract act,1872 gives the surety the right to claim all the security which had been kept with the creditor after paying the amount to the creditor ,if the security gets lost and the surety does not get the security for any reason ,the surety gets discharged from his liability.

  • Discharge by invalidation

A surety can be discharged from the liability if the contract of guarantee is invalidated ,circumstances under which contract of guarantee is invalidated .

  • Guarantee by misrepresentation

Section 142 of the Indian contract act,1872 states that if the contract of guarantee has been entered into owing to misrepresentation of the material fact which was known to the creditor ,it would invalidate the contract.

  • Guarantee by concealment

Section 143 of the Indian contract act 1872 states that if the contract of guarantee has been obtained by concealment of the material facts by the creditor ,the contract would be invalid.

  • Section 144 states that the if the surety puts forward a condition that the creditor shall not act upon the contract on the presence of the another co-surety and if this condition is not fulfilled ,the contract of guarantee would be invalid.

Author: Mauli Dogra,
Student ,MIT WPU

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