State grounds on which a surety is discharged from his liability under a contract of guarantee.

Question: State grounds on which a surety is discharged from his liability under a contract of guarantee. [JJS 2018]

Find the answer to the mains question of the Law of Contract only on Legal Bites. [State grounds on which a surety is discharged from his liability under a contract of guarantee.]

Answer

Under the Indian Contract Act, 1872, a surety can be discharged from his liability under a contract of guarantee on several grounds. Let us have a look at the grounds for discharge of surety under the ICA:

1. Discharge by Revocation

a. Revocation by Notice (Section 130): A continuing guarantee may be revoked by the surety as to future transactions, by notice to the creditor.

b. Revocation by Death (Section 131): The death of the surety operates as a revocation of a continuing guarantee about future transactions unless there is a contract to the contrary.

2. Discharge by Conduct of the Parties

a. Variance in Terms of the Contract (Section 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 after the variance.

b. Release or Discharge of the Principal Debtor (Section 134): The surety is discharged if the principal debtor is released by the creditor or if the debtor is discharged under any agreement made between the creditor and the debtor without the surety's consent.

c. Compounding by Creditor with the Principal Debtor (Section 135): If the creditor, without the surety’s consent, makes a composition with, or promises to give time to, or not to sue the principal debtor, the surety is discharged.

d. Creditor’s Act or Omission Impairing Surety’s Eventual Remedy (Section 139): The surety is discharged if 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 against the principal debtor is thereby impaired.

3. Discharge by Invalidation of the Contract

a. Guarantee Obtained by Misrepresentation (Section 142): Any guarantee which has been obtained using misrepresentation made by the creditor or with his knowledge and assent concerning a material part of the transaction is invalid.

b. Guarantee Obtained by Concealment (Section 143): Any guarantee that the creditor has obtained using keeping silence as to material circumstances is invalid.

c. Failure of a Co-Surety to Join a Surety (Section 144): Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined as co-surety, the guarantee is not valid if that other person does not join.

In the case of Amrit Lal Goverdhan Lalan v. State Bank of Travancore, 1968 AIR 1432, it was held that if the terms of the original contract are varied without the surety’s consent, the surety is discharged from liability.

The Hon’ble Supreme Court in the case of Bank of Bihar Ltd. v. Damodar Prasad & Anr, 1969 AIR 297, held that a surety’s liability is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.