Discharge of surety from his liability PDF

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DISCHARGE OF SURETY According to Section 126 of the Indian Contract Act, 1872 A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A contract of guarantee refers to a contract to perform the promise or discharge the liability of a third person in case of any default by him. Surety is the person giving the guarantee. The person for whom the guarantee is given is the Principle Debtor. The person to whom the surety gives the guarantee is the Creditor. A guarantee may be oral or in writing. A contract of guarantee shall also satisfy all the necessary conditions or elements of a valid contract. As per section 127, anything is done or any promise made for the benefit of the principal debtor provides sufficient consideration to the surety for giving the guarantee to the creditor.

For example, A asks B to sell goods to him on credit and deliver them. B agrees to it on a condition that C will guarantee the payment of the price of the goods. C guarantees the payment in consideration of B’s promise to deliver the goods. This is sufficient consideration for C’s or Surety’s promise.

Discharge of a Surety (Sec.130 – 141) Surety is said to be discharged when his liability comes to send. Section 130 to Section 142 of the Indian Contract Act, 1872 deals with the Provision of "Discharge of Surety".Following are the modes of Discharge of Surety's Liability1. By Revocation: According to Section 130 of the Indian Contract Act, a continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. Ordinarily a guarantee cannot be revoked if the liability has already been accrued. But Section 130 provides for revocation of continuing guarantee. However, the surety shall remain liable for the acts already acted upon, i.e., prior to the notice of revocation.

2. By Death: According to Section 131 of the Indian Contract Act, 1872 the death of the surety operatesas a revocation of a continuing guarantee, so far as regards future transactions. In case of a continuing guarantee, the death of the surety, in the absence of any contract to the contrary, discharges him from liability as regards future transactions (i.e., transactions after his death). In other words, the surety’s survivors or legal representatives would not be liable unless expressly mentioned in the contract.

3. By Variance in the terms of the contract: Section 133 of the Indian Contract Act says that "any variance made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. It means Surety is not liable for any variation in the terms of the contract between the principal debtor and the creditor without surety’s consent.

Illustrations (a) A becomes surety to C for B’s conduct as manager in C’s bank. Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to over-draw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent and is not liable to make good this loss. (b) A becomes surety to C for payment of rent by B under a lease. Afterwards B and C contract to hike the rent, without informing A. A would hence, be discharged from his liability as a surety for accruing subsequent to the variance in terms of the contract without his consent. (c) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st January, A is discharged from his liability, as the contract has been varied, inasmuch as C might sue B for the money before the first of March.

4. Discharge of surety by release or discharge of principal debtor (Section 134 of I.C.A): 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. Illustrations (a) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation of A’s land, and thereby prevents him from raising the indigo. C is no longer liable on his guarantee. (b) A contracts with B for a fixed price to build a house for B within a stipulated time. B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his suretyship.

5. When Creditor Compounds with, gives time to, or agrees not to sue the principal debtor (Section 135) : Where the creditor, without the consent of the surety arrives at a settlement with the principal debtor, or promises to give him more time, or promises not to sue him by a contract between the creditor and the principal debtor, the surety is absolved from the liability, unless the surety assents to such contract. Therefore a contract between the creditor and the principal debtor, by which the creditor make a composition with, or promises to give time, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.

6. Discharge of surety by creditor's act or omission impairing surety's eventual remedy: According to Section 139 of the Indian Contract Act, if the creditor does any act which is inconsistent with the right of the surety, or omits to do any 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. Illustrations (a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this prepayment.

7. By loss of Security by the Creditor (Section 141): A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety, the surety is discharged to the extent of the value of the security. Illustrations

(a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C, cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.

8. By Invalidation of Contract: According to Section 142 of The Indian Contract Act, any Guarantee obtained by misrepresentation is invalid. Section 142 runs as follows:Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.

9. By Novation: Novation, i.e., entering into a fresh contract, either between the same parties or between other parties, constitutes another mode of discharging a surety from the liability. If the parties to a contract (of guarantee) agree to substitute it with a new contract, the original contract need not be performed and so the surety stands discharged with regard to the old contract. For the surety, too, a fresh contract would have to be drafted. Illustrations (a) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted. (b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A’s), estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old....