Discharge of Surety
Follow Us
Subscribe
Home
Law of Contracts

Discharge of Surety

discharge of surety, discharge of surety meaning, surety dishcarged,
Discharge of Surety

Discharge of surety has been provided under the Indian Contract Act, 1872. In certain circumstances, a discharge of surety from his liability towards the principal debtor if his liability to perform the promise comes to an end.

discharge of surety, surety discharged, discharge of surety meaning,
Discharge of Surety

There are numerous situations under which the discharge of surety from his liability is given below chart;

Discharge by Revocation

Revocation of Guarantee by Giving Notice (Sec. 130)

As per section 130 of the Indian Contract Act, 1872, it is provided that a continuing guarantee is a guarantee for a series of transactions that can be revoked if a notice is served to the creditor. However, the revocation in the case of the specific guarantee is not possible if the contract entered into has already been acted upon.

Further, continuing guarantee can be revoked by serving a notice only for any future transactions. Whereas, the surety is liable for the transactions which are already entered into. Therefore, the section does not include the revocation of a specific guarantee because there are no future transactions which are not entered into a specific guarantee.

The notice given by the surety is intending to terminate the surety’s liability as to any future transactions. Also, there should not be any existence of the contract stating the contrary to such notice for revocation of a contract of guarantee.

In the case of Sita Ram Gupta v/s Punjab National Bank, 2008, the facts of the case, appellant revoked the guarantee given by him before the amount was advanced to Principal Debtor. However, there is a clause in a contract of guarantee, which provides that the guarantee is of continuing guarantee and will not be cancelled or revoked. The court held that the appellant was himself responsible for waiving off his rights and therefore, the contract of guarantee cannot be revoked.

Revocation by Death (Sec. 131)

According to section 131 of the Indian Contract Act, 1872, it is provided that in the case of death of the surety, the liability of the surety comes to an end i.e. discharged from his liability towards the Principal Debtor.

Further, it provides that the death of the surety will discharge the surety from all the liability and future transactions towards the principal debtor which formed while entering into a contract of guarantee.

However, the surety is discharged from his liability by the death of the surety the legal heirs of the deceased surety have the obligation towards the transactions for which the deceased surety was given the guarantee. The legal heirs of the deceased surety are made liable only to the extent of the property that they have inherited after the death of the surety and they cannot be made personally liable for the obligations of the deceased surety.

Discharge by Variance in Terms of Contract (Sec. 133)

Section 133 of the Indian Contract Act, 1872, it is stated the discharge of the surety from the liability towards the principal debtor in case of material alteration or variance or change in the terms and conditions of the contract of guarantee.

In the other words, the surety will not be made liable in case of any default by the principal debtor when there is a change or variance in the terms and conditions of the contract of guarantee without the prior consent or knowledge of the surety.

For such change or variance in the terms and conditions of the contract of guarantee, the court has to decide by keeping all the material facts into consideration, whether a given change or variance in the terms of the contract leads to benefit of the surety then the surety may not be discharged from his liability as it is within the discretion of the court with regards to the material facts in the contract of guarantee.

In Bonar v/s Macdonald, 1850, the facts of the case, the defendant entered into a contract of guarantee for the conduct of the Branch Manager of the particular Bank. The bank raised the salary of the Branch Manager and he was made liable for one-fourth of the loss of the Bank without the consent of surety. The manager allowed the customer to overdraw his amount and this leads to a loss to Bank.

It was held by the Hon'ble Court that the variation made in the terms and conditions of the contract of guarantee was made without the consent and knowledge of the surety into consideration and the variation made in the contract is material. Hence, the court held that the surety is discharged from his liability.

Release or Discharge of the Principal Debtor (Sec. 134)

As per sec. 134 of the Indian Contract Act, 1872, provides for the discharge of the liability of the surety in the case of the principal debtor being released from his liability to repay the debt amount.

Further, it is contended that when the creditor releases or discharges the principal debtor from the debt payment, the surety is automatically discharged from his liability towards the principal debtor.

Herein, the principal debtor is discharged from his liability, it is a primary liability which is discharged and automatically the surety is also discharged from his liability, it is a secondary liability which is discharged. This means when the surety is discharged from his liability it will not automatically discharge the liability of the principal debtor.

There are two situations in which the liability of the principal debtor can be discharged. These are as follows;

Existence of a Contract or Laws

Where there is an existence of a contract or law which reduced the debt of the principal debtor the liability of the surety is also limited to the reduced debt.

For instance, in the case where the amount of the principal debtor gets reduced to the application of the debt relief act, the surety will be liable only for the reduced amount. However, in case the principal debtor is discharged from the liability in case of insolvency, the surety is not discharged.

Act or Omission

Another situation in which the liability of the principal debtor is discharged. When there is an act or omission on the part of the creditor and because of this discharged the liability of the principal debtor is, similarly the liability of the surety is also discharged.

Compounding by Creditor and Principal Debtor (Sec. 135)

Section 135 of the Contract Act, it is provided that the liability of the surety may be discharged if there is a composition or formation of a new agreement between the creditor and principal debtor.

There are three circumstances in which the liability of the surety may be discharged when there is compounding by the creditor and principal debtor. These are;

Composition

Composition refers to variation or change in the original contract and adding something new which was not present in the original contract. In case there is a composition in the contract between the principal debtor and the creditor without the surety’s consent, it would discharge the liability of the surety.

Promise to give time

As per section 136 of the Contract Act, if there is a contract between the creditor and principal debtor whereby the creditor has agreed to give some time for the repayment of debt to the principal debtor, therefore, the liability of the surety is discharged for that period.

Promise not to sue

As per section 137 of the Contract Act, it is provided that if there is an explicit contract which provides that the creditor will not sue in the event of default then it will result in the discharge of surety from his liability.

Discharge by Invalidation (Sec. 142 - 144)

A surety can be discharged from his liability when the contract of guarantee is invalidated. There are three circumstances in which the liability of the surety may be discharged when the contract of guarantee is become invalidated.

Guarantee by Misrepresentation (Sec. 142)

Section 142 of the Contract Act, provides that if a contract of guarantee has been entered into owing to the misrepresentation of a material fact which was known to the creditor, then the contract of guarantee is invalidated.

Guarantee by Concealment (Sec. 143)

Section 143 of the Contract Act, if a contract of guarantee is obtained due to concealment of a material fact by the creditor then the contract of guarantee would be invalid.

Failure of Co-Surety to Join a Surety (Sec. 144)

As per section 144 of the Contract Act, If the surety has put forth a condition that the creditor shall not act upon the contract in the absence of another co-surety and this condition is not fulfilled, it would lead to invalidation of the contract of guarantee.

Frequently Asked Questions

What are the modes of discharge of surety?

The various modes of discharge of surety are as follows: 1. Discharge by Revocation, 2. Discharge by Variance in Terms of Contract, 3. Release or Discharge of the Principal Debtor, 4. Compounding by Creditor and Principal Debtor, 5. Discharge by Invalidation.

What are the rights of a surety how the surety is discharged?

As per Section 134 of the Contract Act, the surety will be discharged from his promise if the principal debtor fulfils his promise or pays the loan and the contract of guarantee is executed.

Which will not discharge the surety?

As per section 136 of the Contract Act, the surety is not discharged when an agreement is made with a third person to give time to the principal debtor.

Conclusion

Discharge of surety from the liability towards the principal debtor has been provided under the Indian Contract Act, 1872. A surety must be protected from any change in the terms of a contract for which he didn’t give his assent. A surety’s liability is co-extensive with the principal debtor and hence, he is not liable for anything which is not agreed upon.

Referred Books:

Post a Comment

Post a Comment