Project Report

“Discharge Of Surety”

[A PROJECT OF LAW OF CONTRACT-II]

Supervised by- Dr. Rohit Sharma.

Assistant Professor of Law,

Himachal Pradesh National Law University, Shimla (HPNLU).

Submitted by- Aman Singh Sengar.

Enrollment no. 1020220164.

Semester- 3rd.

Session-2022-2027.
 BONAFIDE CERTIFICATE.

This certificate is to declare that this project based upon ‘Discharge of Surety’ is an original
work of Aman Singh Sengar, a bona fide student of Himachal Pradesh National Law University,
Shimla.

Signature:

Aman Singh Sengar.

 ACKNOWLEDGEMENT

The accomplishment of this project is owed to the constant support and guidance of people to
whom I’d like to convey my sincerest gratitude.

Dr. Rohit Sharma, our Law of Contracts Professor, enabled me to complete this project, with his
constant encouragement. His valuable help and guidance were instrumental in this project and in
resolving all the doubts encountered during the making of this project.

Library staff aided me in my research for the project through the usage of the online databases
and journal collection available in the library.

Lastly, I would like to sincerely appreciate my parents and friends for their constant
encouragement and moral support to enable me to complete this project.
Table of Contents:
 Introduction.
 Surety.
 Surety’s Liability.
 Discharge of Surety’s Liability.
 Conclusion.
 Bibliography.
Introduction:

The Indian Contract Act, 1872 enumerates a ‘contract of guarantee’ which is considered as the
most important aspect of the said act. A contract of guarantee involves three parties that are
principal debtor, creditor, and a surety. A surety is a person who gives a guarantee to the creditor
that he would make the debt payment if the principal debtor makes a default. A surety is thereby
liable to the creditor for the debt repayment. This liability of the surety can be discharged or
released in certain circumstances that are expressly provided under the said act. Also, certain
rights against the creditor, principal debtor, or co-sureties are available to a surety. Hence, a
contract of guarantee is incomplete without a surety.

Section 126 of the Indian Contract Act, 1872 (ICA) provides that ‘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 section also defines the term ‘surety’. The person who gives a guarantee to pay the
amount advanced or perform any duty is called a surety while the person to whom the guarantee
is given is called a creditor. The person on behalf of whom the guarantee is given is called a
principal debtor. Also, a guarantee can either be oral or written. Hence, we can say that in a
contract of guarantee, a surety is responsible to pay the creditor, an amount that the principal
debtor is unable to pay.

A contract of guarantee acts as a second resource if the first resource i.e., the person to whom the
money is advanced, fails to pay. According to Section 127 of ICA, there is enough consideration
for a surety to give a guarantee to the creditor when the principal debtor does or promises
something to the creditor. Surety plays a very vital role in a contract of guarantee as he is the
ultimate person who will be liable to pay the sum of money to the creditor in case the principal
debtor makes a default.

Section 128 of ICA provides for surety’s liability which is co-extensive with the principal
debtor’s liability. It means that the surety has the same liabilities as the principal debtor. Hence, a
surety is liable to pay the amount owed to the principal debtor, if he makes a default in payment
to the creditor. Also, a creditor can directly sue the surety without suing the principal debtor. It
is, however, significant to note that a principal debtor will not be held liable where there is a
defect in documents and the same applies to the surety. The discharge of surety’s liability means
when his liabilities under the contract of guarantee comes to an end. Sections 130-144 of ICA
provide certain circumstances under which the liability of the surety is discharged which include
revocation by the death of the surety, revocation by giving notice, etc.

Who is a Surety?

A surety is a person or an organization that guarantees to pay the sum of money to the creditor in
an instance where the principal debtor makes a default or is not able to pay. A surety is also
called the ‘guarantor’. When the principal debtor fails to pay his debts, a surety assumes upon
himself, the responsibility to pay the debts of the principal debtor. Section 126 of ICA, also
defines the term ‘surety’ while defining the contract of guarantee. In a contract between two
parties, where one party questions the ability of the other party to satisfy the requirements of the
contract, a presence of surety is very common. A lender, in order to reduce risk, may require the
debtor with a surety while entering into a contract. Therefore, a surety takes all the responsibility
to pay the debts of the principal debtor if he is unable to pay them.

Surety’s Liability:

Section 128 of ICA talks about the liability of the surety. Under the contract of guarantee, the
surety’s liability is co-extensive with the principal debtor unless otherwise provided. A surety
immediately becomes liable for the payment if the principal debtor makes a default. It was also
held in Central Bank of India v. C.L. Vimla that, “the liability of the guarantor is co-extensive
with that of the debtor. The only exception to the nature of the liability of the guarantor is
provided in the section itself, which is only if it is stated explicitly to be otherwise in the
contract. Also, Section 146 of ICA provides that if there is more than one surety for the same
debt, then they are required to repay the debt in equal amounts.

A surety and the principal debtor have the same liabilities and therefore a surety will not be held
liable for something for which the principal debtor himself is not liable, however, the primary
liability stays with the principal debtor only. The surety has only secondary liability. A creditor
can also directly sue the surety. In Maharaja of Banaras v. Har Narain Singh, the principal
was laid out that the surety is not liable for the interest on the principal amount as the principal
debtor, himself, was not liable for it. The surety will be liable for the principal amount only
unless otherwise mentioned in the contract.
Discharge of Surety’s Liability:

Section 126 of ICA defines a contract of guarantee which also includes that a surety is someone
who provides a guarantee of the debt payment in a case where the principal debtor makes a
default. A surety, therefore, has a liability to pay the debts of the principal debtor if he fails to
make a payment. A surety acts as an assurance for the creditor in case the principal debtor fails
to perform his act.

A surety is considered as a ‘favoured debtor’ and the liability of a surety can be discharged or
released. Discharge of surety’s liability means that the liabilities of the surety have come to an
end and he is no longer under any obligation. A surety may be discharged or released from his
liabilities by any agreement, operation of law, the performance of the principal debtor’s act,
payment of principal debtor’s debt, or by any breach on the part of the creditor in the contract of
guarantee. The ICA incorporates certain circumstances under which the surety is discharged
from its liabilities. These circumstances are provided under Sections 130-144. They can be
enclosed under the following heads up:

1) Discharge by Revocation:

Revocation by Notice: Section 130 of ICA provides for the revocation of a continuing guarantee
for future transactions by the surety. It says that the surety, by giving notice to the creditor, can
revoke a continuing guarantee for future transactions. The notice should clearly state that the
surety is discontinuing his liability for future transactions. However, a specific guarantee for the
liability that has already been arisen cannot be revoked by the surety. A surety is still liable for
the transactions already entered into.

Illustration:

X guarantees payment to Y for selling apples for Rs 100 to Z. Y supplied the apples of Rs 500 to
Z. Thus, X gave a notice to Y not to supply the apples any further. Here, X would be liable for
the payment of Rs 500 apples but not for the ones which would be supplied after the notice of
revocation.
Case Law:

In Offord v Davies, the surety ensured the debtor's repayment of bills discounted by the
borrower up to $600 for 1 year. Before any bills were discounted, the surety cancelled the
guarantee. However, the creditor continued to discount bills, and the debtor continued to default
on payments. The surety was found not to be responsible for the bills discounted after his
revocation.

Revocation by Death: Section 131 of ICA provides for the revocation of continuing guarantee
for the continuing transactions. In case of the surety’s death, he is released from his liability and
his legal heirs will not be liable for the transactions, either continuing or in future. However, they
will be liable if so is provided in the contract of guarantee.

Case Law:

In, Durga Priya Chowdhury v Durga Pada Roy, the terms of the assurance were to be binding
on the surety's heirs and members in the same way as they were on the surety. In light of this
clause, the learned judges held that the surety's guarantee was not revoked even after his death,
and that his heirs were responsible for any act committed by the debtor during his tenure.

2) Discharge by Conduct:

Variation in terms of the Contract: Section 133 of ICA provides for the discharge of surety’s
liability by any variation in the terms of the contract of guarantee entered upon by the creditor
and principal debtor. A surety is only liable for the terms agreed upon by him thus if the creditor
and the principal debtor make any changes in the terms of the contract without informing or
consulting the surety, he will be immediately released from his liability. This principle was also
laid down in the case of Bonar v. McDonald where the court held that the surety will be
discharged from his liabilities because the variance in terms of the contract was material.

Illustration:

X guarantees Z against the misconduct of Y in an office to which Y is appointed by Z, and of

which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the
office is materially altered. Afterwards, Y misconducts himself. X is discharged by the change
from future liability under his guarantee, though the misconduct of Y is in respect of a duty not
affected by the later Act

X becomes surety to Z for Y’s conduct as a manager in Z’s bank. Afterwards Y and Z contract
without surety’s consent, that Y’s salary sell be raised. In this Surety that is X is discharged as X
did not know about the contract between Y and Z.

Case Laws:

1. The judgement of Bonar v Macdonald [9], cleared that in cases where the fresh
agreement was a substitution of the new agreement, the surety is not liable to make good
the loss. In cases like where a person guaranteed the payment of rent but it was increased
without surety’s consent, the liability of surety was said to be discharged.

2. In Anirudhan v Thomco’s Bank Ltd., for the purpose of securing the loan amount and
interest payable by the principal debtor to the borrower from time to time, a surety
executed a continuing guarantee in the amount of Rs 2,50,000. The debtor defaulted on
the loan, and the principal debtor made subsequent overdraws in the same loan account in
excess of the limit without the permission of the surety. The surety was only liable up to
Rs 2,50,000, and he was not responsible for any overdraws made by the bank without the
surety's permission.
3. In P.S. Chakrapani vs Indian Bank, it was established that there was continuing
guarantee and surety has rights of revocation, however inspite of issuing a notice,
revocation was not allowed as the suit was barred by time i.e., not filed within the period
of limitation that is 3 months.

Discharge or Release of Principal debtor: Section 134 of ICA incorporates a discharge of

surety’s secondary liability in a case where the primary liability of the principal debtor is
released or discharged. The liability of the principal debtor can be discharged either by entering
into a contract with the creditor or by any act or omission on the part of the creditor. Thus, in
these cases, where the principal debtor itself is released from his liabilities, the surety’s liability
is also discharged.

Illustrations:
 a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and
afterwards B becomes embarrassed and contracts with his creditors (including C) to
assign to them his property in consideration of their releasing him from their demands.
Here B is released from his debt by the contract with C, and A is discharged from his
suretyship. (a) A gives a guarantee to C for goods to be supplied by C to B. C supplies
goods to B, and afterwards B becomes embarrassed and contracts with his creditors
(including C) to assign to them his property in consideration of their releasing him from
their demands. Here B is released from his debt by the contract with C, and A is
discharged from his suretyship."
b) 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 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."
c) 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.

Case Law:
In Sankana Kalana v. Virupakshapa Ganeshapa section 134 of the Contract Act states that the
sankana’s omission to sue principal Mohidin gets discharged that boar his own costs
throughout. Pinhey, J. 3. Reading Section 134 of Act IX of 1872 with Section 137 of …, as held
in Hajarimal v. Krishnaram I.L.R. 5 Bom. 647 by Section 137, which obviously governs the
present case. 2. It is contended, however, on behalf of the respondent Virupakshapa

Compounding by Creditor with Principal Debtor: Section 135 of ICA provides for the
discharge of surety’s liability when the creditor compounds with or promises the principal debtor
that he will not sue the principal debtor on the occurrence of default in performance. In such a
scenario, the liability of the surety is released unless he consents to such a contract.
Case Law:

In Chakkunny v. Viswanatha Iyer it was stated that section 135 of the Indian Contract Act is an
effective answer to the discharge of the surety,single Judge of the Allahabad High Court held in
Kunj Lal v. Batuk Prasad (120 I.C 552) that the surety gets discharged from his liability under
section 135 of the Indian Contract Act ,1872 in the judgment there is no discussion of the
principle.

Impairing surety’s remedies: Section 139 of ICA discharges the surety from its liabilities if the
creditor has done any act or omission which is inconsistent with the rights of the surety. Also, if
the said act or omission impairs the eventual remedies of the surety against the principal debtor,
the surety’s liabilities are said to be 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.
b) C lends money to B on the security of a joint and several promissory note made in C’s
favour by B, and by A as surety for B, together with a bill of sale of B’s furniture, which
gives power to C to sell the furniture, and apply the proceeds in discharge of the note.
Subsequently, C sells the furniture, but owing to his misconduct and wilful negligence,
only a small price is realized. A is discharged from liability on the note.
c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on
his part that he will at least once a month, see M makeup the cash. B omits to see this
done as promised, and M embezzles. A is not liable to B on his guarantee.

Case Law:

Sitaramaswamy v. Basavayya AIR 1920 Mad 311

It was stated that a person became surety for four defendants and have agreed to be liable for any
decree which may be passed against them. The plaintiff obtained a decree against the 1st
defendant alone and exonerated the other three defendants. At that time it became surety there
were four persons (equally coparceners in a family property as we were told) against all of them
he had his own remedy if he had to pay anything under the decree.

They held that a surety should be held to be discharged on the principle of Section 139 of the
Indian Contract Act. It may be observed that there was a variance in the terms of the contract
between the principal debtors and the creditor which brings the case within Sections 133 or 135
of the Indian Contracts Act 1872.

Loss of Security: Section 141 of ICA provides that if the creditor losses or parts with any
security without the consent of the surety, then the surety will be discharged from his liability for
the value of the security so parted with or lost. It is immaterial that surety knew of the securities
or not.

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.
b) C, a creditor whose advance to B is secured by a decree, receives also a guarantee for the
advance from A. C afterwards takes B’s goods in execution under the decree, and then,
without the knowledge of A, withdraws the execution. A is discharged.
c) A, as security for B, makes a bond jointly with B to C, to secure a loan from C to B.
Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives
up the further security. A is not discharged.

3) Discharge by Invalidation of a Contract

Guarantee obtained by Misrepresentation: As per Section 142 of ICA, a guarantee obtained by

the means of misrepresentation on the part of the creditor that concerns a material fact is invalid.
Hence, the surety’s liability will be discharged.

Guarantee obtained by Concealment: As per Section 143 of ICA, a guarantee obtained by

concealing a material fact of a contract on the part of the creditor is constituted as invalid and as
a result, the liability of the surety will be discharged.
Illustrations:

a) A engages B as clerk to collect money for him. B fails to account for some of his
receipts, and A in consequence calls upon him to furnish security for his duly accounting.
C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous
conduct. B afterwards makes default. The guarantee is invalid.
b) A guarantee to C payment for iron to be supplied by him to B to the amount of 2,000
tons. B and C have privately agreed that B should five rupees per ton beyond the market
price, such excess to be applied in liquidation of an old debt. This agreement is concealed
from A. A is not liable as a surety.

Default on the part of Co-Sureties: As per Section 144 of ICA, when a condition is proposed by
a surety that the creditor will not act upon the contract unless another co-surety has joined. The
non-fulfilment of this condition will result in the invalidation of the contract and thus the surety
will be discharged from his liability.

Conclusion:

Several provisions of the Indian Contract Act specify a number of circumstances in which the
surety's liability to the creditor may be discharged. These diverse scenarios are described under
sections 130–139 of the Act. The Indian Contract Act, 1872 provides for the discharge of the
liability of surety in case of certain given circumstances with the objective of securing the
interests of the surety, who guarantees payment of the debt in case of a default.

The situation under which the surety can be discharged from his liability can be categorised into
three different heads i.e., by revocation, the conduct of the parties and invalidation of the
contract.

A surety plays a very vital role in a contract of guarantee as the guarantee under this contract is
provided only by the surety to pay the debts of a principal debtor, in case he makes a default in
payment. The Indian Contract Act, in order to protect the interests of a surety under a contract of
guarantee, provides for the discharge of the surety’s liability under various circumstances. 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. One of the interesting features of the surety's liability is that
it co-occurs with the debtor's liability. The surety might specify the conditions under which his
liability under the contract terms arises. The provisions cited above make it very clear that
sureties' interests must be protected. In the context of the Indian Contract Act of 1872, the
discharge of a surety is a significant legal concept that pertains to the release of a person who has
guaranteed the performance of another's obligation. Section 133 to Section 139 of the Indian
Contract Act specifically deal with the discharge of a surety, outlining the various scenarios and
conditions under which a surety can be relieved from their obligation.

One of the primary ways a surety can be discharged is through the act of variance in the terms of
the contract between the principal debtor and the creditor. If there are any material changes made
to the original contract without the consent of the surety, it can discharge the surety from their
liability. This is because the surety has only guaranteed the terms of the original contract and any
alteration without their consent fundamentally changes the nature of their obligation.

Another crucial aspect leading to the discharge of a surety is when the creditor does not exercise
reasonable diligence in enforcing their rights against the principal debtor. According to Section
141 of the Indian Contract Act, if the creditor acts negligently or fails to take necessary legal
actions against the principal debtor, thereby causing a loss to the surety, the surety will be
discharged to the extent of the loss caused by the creditor's inaction.

Moreover, if the creditor enters into a compromise or arrangement with the principal debtor that
affects the rights of the surety without their consent, the surety is discharged from their
obligations to the extent that they are prejudiced by such an arrangement. This is stipulated under
Section 134 of the Act and emphasizes the importance of the surety's consent in any
modifications to the contractual terms.

Furthermore, the death or insolvency of the surety, as well as the release or discharge of the
principal debtor by the creditor, leads to the discharge of the surety's obligation. Additionally, if
the contract between the principal debtor and the creditor becomes void or illegal due to
subsequent legislation, the surety is discharged from their liability.
It's important to note that while these circumstances lead to the discharge of a surety, there are
certain scenarios where the surety's liability may not be entirely discharged. For instance, if the
surety has provided a separate contract guaranteeing the repayment, independent of the principal
debtor's obligation, the discharge of the principal debtor might not affect the surety's liability.

In conclusion, the discharge of a surety under the Indian Contract Act of 1872 encompasses
various situations where the surety is released from their obligation to guarantee the performance
of the principal debtor. These provisions aim to ensure fairness and protect the surety from
undue prejudice arising from changes or actions taken without their consent, emphasizing the
importance of mutual agreement and diligent enforcement of rights in contracts involving surety.

Bibliography:

 ICA, 1874.
 Literature Referred: Singh Avtar (2017)., Pollock and Sir Dinshaw Fardunji Mulla
(2017).
 Indian Kanoon.
 Legal Service India.
 SCC Online.
 The Legal Lock.
 English Contract Laws News.
 www.google.com/amp/s/blog.ipleaders.in/discharge-suretys-liability/amp/
 www.investopedia.com/terms/s/surety.asp

Thank You