Discharge Of Surety

When the liability of the surety is
extinguished, he is said to be
discharged; A surety may be
discharged:
(i) By revocation.
(ii) By the act or conduct of the
creditor.
(iii) By invalidation of the contract
of guarantee.
I. Discharge of surety by
revocation:
(a) Revocation by notice (Sec.
130):
A continuing guarantee may, at
any time, be revoked by the
surety, as to future transactions,
by notice to the creditor. But a
specific guarantee cannot be
revoked if the creditor has given
the loan.
(b) Revocation by death (Sec.
131):
The death of the surety operates,
in the absence of any contract to
contrary, as a revocation of
continuing guarantee for future
transactions. The estate of the
deceased surety will not be liable
for any transactions entered
between the creditor and the
principal-debtor even if the
creditor has no notice of death. In
case the parties have agreed to a
notice of surety's death, then
notice of death will be necessary.
Under English Law also, notice of
surety's death is necessary.
(c) Discharge of surety by
novation (Sec. 62):
A contract of guarantee is a
species of the general contract. As
such, a contract of guarantee is
discharged by novation, i.e., by
substituting a new contract in
place of the old one. The original
contract is discharged.
II. Discharge of surety by the
act or conduct of the creditor:
1. By variation in terms of
contract (Sec. 133):
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.
Example:
A becomes surety to C for B's
conduct as a 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 over-drafts. B
allows a customer to overdraw,
and the bank loses a sum of
money. A is discharged from his
surety-ship by the variation made
without his consent and is not
liable to make good the loss.
It should be noted that variation
discharges the surety in respect of
transactions which take place
after the variation. Therefore, he
continues to be liable for the
transactions which were entered
before the variation took place.
2. By release or discharge of
principal-debtor (Sec. 134):
A surety is discharged by any
contract between the creditor and
the principal-debtor by which the
principal debtor is released or by
an act or omission of the creditor,
the legal consequence of which is
the discharge of the principal-
debtor.
Example:
A contracts with B for a fixed price
to build a house for B within a
month, B supplying the necessary
timber. C guarantees A's
performance of the contract. B
fails to supply the timber. C is
discharged from his surety-ship.
Exceptions:
In the following cases, the surety
is not discharged:
(i) Death: Death of the principal-
debtor does not discharge the
surety from his liability.
(ii) Insolvency: Similarly,
insolvency of the principal debtor
does not discharge the surety.
(iii) Omission to sue within the
period of limitation:
The omission of the creditor to
sue within the period of limitation
does not discharge the surety.
Example:
B owes to C a debt guaranteed by
A. The debt becomes payable. C
does not sue B for more than 3
years after the debt has become
payable. Although the debt has
become time-barred, yet the
surety is not discharged from his
liability as surety.
(iv) Release of one of the co-
sureties (Sec. 138):
In case there are co-sureties, a
release of one of them by the
creditor does not discharge the
other; neither does it free a
surety so released from his
responsibility to other co-sureties.
3. By compounding by the
creditor with the principal
debtor (Sec. 138):
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 such contract is made with
the consent of the surety.
It should be noted that the surety
is discharged only if the contract
to give time to principal- debtor is
made by the creditor with the
principal-debtor. Therefore, if a
contract is made with a third
party, the surety is not discharged
(Sec. 136).
Example:
C, the holder of an overdue bill of
exchange drawn by A as surety for
B, and accepted by B, contracts
with C to give time to B. A is not
discharged.
4. By creditor's act or omission
impairing surety's eventual
remedy (Sec. 139):
In case the creditor does any act
which is inconsistent with the
rights 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.
Examples:
(1) B contracts to build a ship for
C for a sum of 2 lakh rupees, to
be paid by installment as the work
reaches certain stages. A
guarantees B's performance to C.
C without the knowledge of A, pre-
pays the last two installments
without the work being completed.
A is discharged by the pre-
payment.
(2) A employs B as a cashier on
the guarantee of C. A promises to
check up the cash of the cashier
at least once a month. He does
not check the cash for 2 months.
The cashier misappropriates the
funds, C is not liable to A on his
guarantee.
It should be noted that the failure
of the creditor to sue the
principal-debtor within the period
of limitation does not discharge
the surety.
5. By loss of surety (Sec. 141):
If the creditor loses, or without
the consent of the surety, parts
with any security given at the time
of contract, the surety is
discharged to the extent of the
value of the security.
It should be noted that the surety
will be discharged only when he
parts with any security given at
the time of contract. He is not
discharged when he parts with
any security given after the
contract of guarantee is made.
Examples:
(1) A advances to B Rs. 2,000 on
the guarantee of C. A also has an
additional security for the Rs.
2,000 by a mortgage of B's
furniture. A cancels the mortgage,
thereby returns the furniture to B.
B becomes insolvent and is unable
to pay anything. C is discharged
from his liability to the extent of
the value of the security
(furniture).
(2) A gives a loan to B on the
security of C. Afterwards, A
obtains B's scooter as a further
security. Subsequently, A gives up
the further security, i.e., returns
the scooter to B. In this case, C is
not discharged to the extent of
the value of the security as the
further security was given after
the loan had already been given.
III. Discharge of Surety by
Invalidation of the Contract :
(i) By obtaining guarantee by
misrepresentation (Sec. 142):
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.
(ii) By obtaining guarantee by
concealment (Sec. 143):
Any guarantee which the creditor
has obtained by means of keeping
silence as to the material facts of
circumstances is invalid.
Example:
A engaged B as a cashier. B
misappropriates some cash.
Thereupon, A asks B to bring
some surety who can guarantee
his good conduct. C give his
guarantee for B's good conduct. A
does not inform C about B's
previous misconduct. B again
misappropriates cash. C is not
liable as a surety.
(iii) By the failure of the co-
surety to join (Sec. 144):
Where a person gives guarantee
upon a contract that the creditor
shall not act upon it until the
other co-surety has joined, the
guarantee is not valid if the other
person does not join.
Whether Failure of
Consideration between the
Creditor and Principal debtor
discharged the Surety :
It has already been discussed that
there is, no need of separate
consideration for a contract of
guarantee between the creditor
and surety. But there must be
consideration between the
creditor and the principal debtor.
Therefore, on the failure of such
consideration, surety will be
discharged from his liability.