Discharge of Surety from Liability
📘 Discharge of Surety from Liability
🔹 Who is a Surety?
A surety is a person who gives a guarantee for the performance or payment of a debt or obligation by another person (called the principal debtor) to a third party (called the creditor).
This relationship is governed under Sections 126 to 147 of the Indian Contract Act, 1872.
🔹 What is Discharge of Surety?
Discharge of surety refers to termination or release of the surety’s liability under a contract of guarantee. Once discharged, the surety is no longer liable for the debt or obligation of the principal debtor.
🔹 Modes of Discharge of Surety
The Indian Contract Act provides for specific situations in which a surety can be discharged. These are:
1. By Revocation (Section 130)
A continuing guarantee may be revoked by the surety at any time, for future transactions, by giving notice to the creditor.
✅ Effect: The surety is discharged from future liabilities, but remains liable for transactions already entered into.
Case Law:
Offord v. Davies (1862)
– It was held that a continuing guarantee can be revoked for future dealings by notice to the creditor.
2. By Death of Surety (Section 131)
Unless there is a contract to the contrary, the death of the surety automatically discharges him from liability for future transactions under a continuing guarantee.
✅ Effect: Estate of the surety is not liable for future debts, unless otherwise agreed.
3. By Variance in Terms of Contract (Section 133)
Any change in the terms of the original contract between the creditor and the principal debtor without the surety's consent discharges the surety.
✅ Reason: Surety agreed to guarantee a specific contract. A variation changes the risk without their consent.
Case Law:
M.S. Anirudhan v. Thomco’s Bank Ltd. (1962)
– The Supreme Court held that any material alteration in the contract without the surety’s consent discharges the surety.
4. By Discharge of Principal Debtor (Section 134)
If the principal debtor is discharged by the creditor (through release, composition, or operation of law), the surety is also discharged.
✅ Logic: The liability of the surety is secondary to the principal debtor's obligation.
Case Law:
State Bank of India v. Indexport Registered (1992)
– Held that if the principal debtor is discharged, the surety is also released from obligation.
5. By Arrangement Without Surety's Consent (Section 135)
If the creditor enters into an agreement with the principal debtor to:
Give more time, or
Compromise, or
Not to sue him,
without the surety's consent, then the surety is discharged.
✅ Reason: Such arrangements may increase the surety's risk unfairly.
Case Law:
Mahant Singh v. U Ba Yi (1939)
– The court ruled that giving time to the debtor without the surety’s consent discharged the surety.
6. By Impairing Surety’s Remedy (Section 139)
If the creditor acts negligently or does something that impairs the surety’s right to recover from the principal debtor (e.g., releasing securities), the surety is discharged.
✅ Example: Creditor releases security held for the debt without the surety's knowledge.
Case Law:
Punjab National Bank v. Surendra Prasad Sinha (1993)
– The Supreme Court ruled that releasing security without the surety’s consent discharged the surety.
7. By Loss of Security (Judicial Principle)
If the creditor loses or parts with the security held against the principal debtor, without the surety’s consent, the surety is discharged to the extent of that security’s value.
✅ Reason: The surety has the right of subrogation to such security.
🔹 Summary Table
Mode of Discharge | Legal Provision | Key Point | Case Law Example |
---|---|---|---|
Revocation by Notice | Section 130 | For future transactions only | Offord v. Davies |
Death of Surety | Section 131 | Discharged from future liability | — |
Variation in Contract Terms | Section 133 | Without consent, surety is discharged | M.S. Anirudhan v. Thomco's Bank Ltd. |
Discharge of Principal Debtor | Section 134 | Discharges surety as well | SBI v. Indexport Registered |
Creditor-Debtor Arrangement Without Consent | Section 135 | Time, compromise or forbearance discharges surety | Mahant Singh v. U Ba Yi |
Impairing Surety’s Right | Section 139 | Negligent act or omission by creditor | PNB v. Surendra Prasad Sinha |
Loss of Security | Judicial Interpretation | Surety discharged to extent of lost security value | — |
🔹 Additional Grounds (Beyond the Act)
Mutual agreement: Between all parties to release the surety.
Novation: Substitution of a new contract with new parties.
Fraud or Misrepresentation: If guarantee was obtained by misrepresentation or concealment of material facts.
✅ Conclusion
The discharge of surety is a crucial concept that ensures that the surety is not unfairly held liable beyond what was agreed upon. The Indian Contract Act provides statutory protection to sureties, and courts have upheld these provisions through clear judicial reasoning.
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