Short essay on 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.