DISCHARGE OF SURETY: RECENT TRENDS AND CASES

Submitted in partial fulfilment for Internal Component for the award of the Degree B.Com.,
LL.B.(Hons)

Submitted by

Prakhar Bhatt

Reg. No. BA0150030

Under the Supervision & Guidance of

Mr. Shriram

Assistant Professor

TAMIL NADU NATIONAL LAW SCHOOL

Tiruchirappalli – 620 009

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 1

Mr. SHRIRAM
Assistant Professor in Law of Contracts
Tamil Nadu National Law School
Tiruchirappalli
Tamil Nadu – 620 009

CERTIFICATE

This is to certify that the project work entitled “Discharge of surety: recent trend
and cases” is a bonafide record of the research work done by Prakhar Bhatt, under my
supervision and guidance. It has not been submitted by any other University for the
award of any degree, diploma, associateship, fellowship or for any other similar
recognition.

Place: Tiruchirappalli

Date:

Signature of the Guide

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 2

PRAKHAR BHATT
Tamil Nadu National Law School
Tiruchirappalli
Tamil Nadu – 620 009

DECLARATION

I, Prakhar Bhatt, do hereby declare that the project entitled “Discharge of

surety: recent trend and cases” submitted to Tamil Nadu National Law School in
partial fulfillment of requirement for award of degree in Under Graduate in Law to
Tamil Nadu National Law School, Tiruchirappalli, is my original research work. It
and has not been formed basis for award of any degree or diploma or fellowship or
any other title to any other candidate of any university.

Counter Signed Signature of the Candidate

Project Guide

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 3

 ACKNOWLEDGEMENT

At the outset, I take this opportunity to thank my Professor Mr. Shriram from the
bottom of my heart who have been of immense help during moments of anxiety and torpidity
while the project was taking its crucial shape.

Secondly, I convey my deepest regards to the Vice Chancellor Mrs. Kamala

Shankaran and the administrative staff of TNNLS who held the project in high esteem by
providing reliable information in the form of library infrastructure and database connections in
times of need.

Thirdly, the contribution made by my parents and friends by foregoing their precious
time is unforgettable and highly solicited. Their valuable advice and timely supervision paved
the way for the successful completion of this project.

Finally, I thank the Almighty who gave me the courage and stamina to confront all
hurdles during the making of this project. Words aren’t sufficient to acknowledge the
tremendous contributions of various people involved in this project, as I know ‘Words are Poor
Comforters’. I once again wholeheartedly and earnestly thank all the people who were
involved directly or indirectly during this project making which helped me to come out with
flying colours.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 4

 TABLE OF CONTENTS

Discharge of surety .................................................................................................................. 6

By revocation ............................................................................................................................ 6

1. Section 130...................................................................................................................................... 6
2. Section 131...................................................................................................................................... 7
3. Section 62........................................................................................................................................ 7

By the conduct of the creditors ............................................................................................... 8

4. Section 133...................................................................................................................................... 8
7. Section 139.................................................................................................................................... 11
8 – section 141 .................................................................................................................................. 13

By invalidation of contract .................................................................................................... 13

9 – section 142 .................................................................................................................................. 13

10 – section 143 ................................................................................................................................ 14
11 – section 144 ................................................................................................................................ 14

Conclusion .............................................................................................................................. 14

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 5

 DISCHARGE OF SURETY: RECENT TRENDS AND CASES

DISCHARGE OF SURETY
A surety is said to be discharged from liability when his liability comes to an end. Indian
Contract Act 1872 specifies the following conditions in which a surety is discharged of his
liability –

1. By Revocation {section 130, 131, and 62}.

2. By The Conduct of the Creditors {section 133, 134, 135, 139, and 141}.
3. By Invalidation of a Contract {section 142, 143, and 144}1.

BY REVOCATION

1. SECTION 130 – Revocation of continuing guarantee — A continuing guarantee may at any

time be revoked by the surety, as to future transactions, by notice to the creditor. A
continuing guarantee may at any time be revoked by the surety, as to future transactions, by
notice to the creditor2.

By A Notice of Revocation -

Revocation by surety by giving a notice: A continuing guarantee may at any time be revoked
by the surety, as to future transaction, by notice to the creditor.

A specific guarantee cannot be revoked by the surety if the liability has already accrued. A
continuing guarantee may at any time be revoked by the surety as to future transaction by the
notice to the creditor. But the surety remains liable for transaction already entered into 3.

For e.g. A guarantee to B, to the extent of Rs.10, 000 that C shall pay all the bills that B shall
draw upon him. B draws upon C. C accepts the bills. A gives notice of revocation. C dishonors
the bills at maturity. A is liable upon his guarantee4.

1
Avtar Singh, “CONTRACT AND SPECIFIC RELIEF”, Pg. No. 578, 11 th Edition, 2013.
2
See Section 130, Indian Contract Act 1872.
3
Supra 1.
4
Supra 2.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 6

2. SECTION 131 – Revocation of continuing guarantee by surety’s death.—The death of the
surety operates, in the absence of any contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions5.

By death of surety

• The death of the surety operates in the absence of any contract to the contrary as a
revocation of a continuing guarantee so far as future transactions. The deceased
surety’s estate will not be liable for any transaction entered into between the creditor
and the principal debtor after the death of surety, even if the creditor has no notice of
death, or in simple words, The deceased surety’s estate will not be liable for any
transaction entered into between the creditor and the principal debtor after the death
of the surety, even if the creditor has no notice of the death6.

CASES ON SECTION 130 & 131

 Hargopal Aggarwal v. SBI7: The overdraft of the company were guaranteed by

the company’s directors and the banker recovered a part of the loan by disposing
of certain goods belonging to the company, The Madras high court held that the
liability of the surety had gone down accordingly.

 Windfield v. De St Croin8: when a person guaranteed the payment of the rent by

his servant and revoke the guarantee as soon as the servant left his employment,
he was not held liable for rents which became due after the revocation.

3. SECTION 62 - If the parties to a contract agree to substitute a new contract for it, or to
rescind or alter it, the original contract need not be performed. —If the parties to a contract
agree to substitute a new contract for it, or to rescind or alter it, the original contract need not
be performed9.

5
See section 131, Indian Contract Act 1872.
6
Ibid.
7
(1976) 1 MLJ 250.
8
Windfield v. De St Croin 1919.
9
See section 62, Indian Contract Act 1872.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 7

BY NOVATION

Novation means substitution of a new contract of guarantee for an old one either between the
same parties or between one of the old parties and a new party, the consideration for the new
contract being the mutual discharge of the old contract. The original contract of guarantee in
such a case comes to an end

Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C, that B shall
thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a
new debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of
his (A’s), estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract
and extinguishes the old.

(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees, B orders A to credit C
with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1,000
rupees, and no new contract has been entered into10.

BY THE CONDUCT OF THE CREDITORS

4. SECTION 133 – Any variance, made without the surety’s consent, in the terms of the
contract between the principal 1[debtor] and the creditor, discharges the surety as to
transactions subsequent to the variance11.

Illustrations -
1 - A becomes a surety to C for B's conduct as manager in C's bank. Afterwards, B and C
contract without A's consent that B's salary shall be raised and that B shall be liable for 1/4th
of the losses on overdrafts. B allows a customer to overdraft and the bank loses money. A is
not liable for the loss.

2 - A guarantees C against the misconduct of B in an office to which B is appointed by C.

10
Ibid.
11
See section 133, Indian Contract Act 1872.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 8

The conditions of employment are defined in an act of legislature. In a subsequent act, the
nature of the office is materially altered. B misconducts. A discharged by the change from the
future liablity of his guarantee even though B's misconduct is on duty that is not affected by
the act.

3 - B appoints C as a salesperson on a fixed yearly salary upon A's guarantee on due account
of sales by C. Later on, without A's consent, B and C contract that C will be paid on
commission basis. A is not liable for C's misconduct after the change.

 4 - C promises to lend 5000Rs to B on 1st March. A guarantee the repayment. C

gives the money to B on 1st January. A is discharged of his liability because of the
variance in as much as C may decide to sue B before 1st march12.

5. SECTION 134 - By discharge of principal debtor - The surety is discharged by

any contract between the creditor and the principal debtor by which the principal
debtor is discharged; or by any action of the creditor the legal consequence of
which is the discharge of the principal debtor But the surety is not discharged by
operation of law13.

Illustrations
1 - A gives a guarantee to C for goods to be delivered to B. Later on, B
contracts with C to assign his property to C in lieu of the debt. B is discharged of
his liability and A is discharged of his liability.

2 - A contracts with B to grow indigo on A's land and deliver it to B at a

fixed price. C guarantees A's performance. B diverts a stream of water that is
necessary for A to grow indigo. This action of B causes A to be discharged of the
liability. Consequently C is discharged of his surety ship as well.

3 - A contracts with B to build a house for him. B is to supply timber. C

guarantees A's performance. B fails to supply timber. C is discharged of his

12
Ibid.
13
See section 134, Indian Contract Act 1872.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 9

 liability14.

If the principal debtor is released by a compromise with the creditor, the surety is
discharged but if the principal debtor is discharged by the operation of insolvency
laws, the surety is not discharged. This was held in the case of Maharashtra SEB
vs Official Liquidator 198215. The facts are A bank under took to pay to the SEB
a sum not exceeding Rs. 50,000 within 48 hours of demand. The guarantee was
submitted on behalf of the supplier who had deposited with the bank sufficient
securities. There was no condition to the bank’s liabilities except the demand by
the board. The board demanded the payment. The supplier was the company
which went into liquidation. The liquidator sought to prevent the board from
realising the guarantee and the bank from paying it. No such relief was allowed.
The board has the right to enforce the payments of the guarantee and the bank
had the right to reimburse itself out of the securities.

6. SECTION 135 - By composition, extension of time, or promise not to sue - A contract

between the principal debtor and the creditor by which the creditor makes a composition
with, or promises to give time to, or promises to not sue the principal debtor, discharges the
surety unless the surety assents to such a contract16.

For e.g. P purchased a motor car from C under hire-purchase agreement on guarantee of S for
the due performance of the agreement. C for the valuable consideration gives P further time
for payment of one of the instalments. Held the giving of time to P discharged S from any
further liability under the guarantee17.

It should be noted that as per section 136, if a contract is made by the creditor with a third
person to give more time to the principal debtor, the surety is not discharged. However, in
the case of Wandoor Jupitor Chits vs K P Mathew AIR 198018, it was held that the surety
was not discharged when the period of limitation got extended due to acknowledgement of

14
Ibid.
15
Maharashtra SEB V. Official Liquidator, 1982 AIR 1497.
16
See section 135, Indian Contract Act 1872.
17
Ibid.
18
Wandoor Jupitor Chits vs K P Mathew AIR 1980 Ker 190.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 10

debt by the principal debtor.

Further, as per section 137, mere forbearance to sue or to not make use of any remedy that is
available to the creditor against the principal debtor, does not automatically discharge the
surety.
Illustration -
B owes C a debt guaranteed by A. The debt becomes payable. However, C does not sue B
for a year. This does not discharge A from his suretyship19.

It must be noted that forbearing to sue until the expiry of the period of limitation has the legal
consequence of discharge of the principal debtor and thus as per section 134, will cause the
surety to be discharged as well. If section 134 stood alone, this inference was correct.
However, section 137 explicitly says that mere forbearance to sue does not discharge the
surety. This contradiction was removed in the case of Mahanth Singh vs U B Yi20 by Privy
Council. It held that failure to sue the principal debtor until recovery is banned by period of
limitation does not discharge the surety.

7. SECTION 139 - By impairing surety's remedy - If the creditor does any act that is
inconsistent with the rights of the surety or omits to do an act which his duty to surety
requires him to do, and the eventual remedy of the surety himself against the principal debtor
is thereby impaired, the surety is discharged21.

Illustrations -
C contracts with B to build a ship the payment of which is to be made in installments at
various stages of completion. A guarantee's C's performance. B prepays last two installments.
A is discharged of his liability.

A appoints M as an apprentice upon getting a guarantee of M's fidelity by B. A also

promises that he will at least once a month see M make up the cash. A fails to do this. M
embezzles. B is discharged of his suretyship.

19
Avtar Singh, “CONTRACT AND SPECIFIC RELIEF” , Pg. No. 592, 11 th Edition, 2013
20
(1939) 41 BOMLR 742
21
See section 139, Indian Contract Act 1872.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 11

 A lends money to B with C as surety. A also gets as a security the mortgate to B's
furniture. B defaults and A sells his furniture. However, due to A's carelessness very small
amount is received by sale of the furniture. C is discharged of the liability22.

State of MP vs Kaluram23 - HELD:

Trial Court: Accepted K’s contentions and decreed in his favour.

High Court (MP): Confirmed the decree of the Trial Court

SUPREME COURT (SHAH J.)

1. (w.r.t K’s 2nd contention) S had a charge over the goods sold as well as the right to
remain in possession till full payment of the installments. When the goods were
completely removed by J that security was lost and to the extent of the value of the
security lost the surety stood discharged. Since S parted with the goods before
receiving due payments s.83(2) can’t be enforced.

2. (w.r.t 1st contention of K & S) As soon as the contract was entered into and the
coupe boundary certificate was produced, the property in the goods passed to J and
s.83 was attracted. The Divisional Forest Officer had authority to stop removal of
those goods until the amount was paid. They however allowed J to remove the goods
sold and thereafter were paid.

3. (w.r.t 2nd contention of S) The terms of the statute do not apply only to cases in
which by positive action on the part of the creditor the security is parted with. Even if
the security is lost by the creditor, the surety is discharged.

4. Kaluram stood discharged from all liability to pay.

In the case of State Bank of Saurashtra vs Chitranjan Ranganath Raja 198024, the bank
failed to properly take care of the contents of a go down pledged to it against a loan and the

22
Ibid.
23
State of M.P. V. Kaluram 1967 AIR 1105, 1967 SCR (1) 266.
24
State Bank of Saurashtra vs Chitranjan Ranganath Raja and ANR AIR 1528, 1980 SCR (3) 915.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 12

contents were lost. The court held that the surety was not liable for the amount of the goods
lost.

Creditor's duty is not only to take care of the security well but also to realize it proper
value. Also, before disposing of the security, the surety must be informed on the account of
natural justice so that he can have the option to take over the security by paying off the debt.
In the case of Hiranyaprava vs Orissa State Financial Corp AIR 199525, it was held that if
such a notice of disposing off of the security is not given, the surety cannot be held liable for
the shortfall.

However, when the goods are merely hypothecated and are in the custody of the debtor, and
if their loss is not because of the creditor, the surety is not discharged of his liability.

8 – SECTION 141 - A surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is entered into, whether
the surety knows of the existence of such security or not; and if the creditor loses, or without
the consent of the surety, parts with such security, the surety is discharged to the extent of the
value of the security26.

Surety’s right to benefit of creditor’s securities - if the creditor loses or, without the consent
of the surety, parts with the security he has against the principal debtor at the time when the
contract of suretyship is entered into, the surety is discharged to the extent of the value of the
security.

For e.g. C advances to B, his tenant Rs.2, 000 on the guarantee of A. C has also further security
for Rs.2, 000 by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent and
c sues a on his guarantee. A is discharged to the extent of the value of the security27.

BY INVALIDATION OF CONTRACT
9 – SECTION 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 invalid28.

25
Hiranyaprava vs Orissa State Financial Corp AIR 1995 AIR 1995 Ori 1.
26
See section 141, Indian Contract Act 1872.
27
Ibid.
28
See section 142, Indian Contract Act 1872.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 13

10 – SECTION 143 - Any guarantee which the creditor has obtained by means of keeping silence
as to a material circumstance, is invalid29.

When a creditor obtains guarantee by concealing or keeping silent over the materials facts, the
surety is discharged as the guarantee is invalid.

For e.g. C engage p as a clerk to collect money for him. P fails to account for some of his
receipts and c, in consequences, calls upon him to furnish security for his duly accounting. S
gives his guarantee for p’s duly accounting. C does not acquaint s with p’s previous contract.
P afterwards makes default. The guarantee is invalid30.

11 – SECTION 144 - Where a person gives a guarantee upon a contract that a creditor shall not
act upon it until another person has joined in it as co-surety the guarantee is not valid if that
person does not join31.

For e.g. S2 signed a guarantee given to a bank which on the face of it was intended to be joint
and several guarantee of S1, S2, S3 and S4. S4 did not sign and afterwards died. The bank did
not agree with s1, s2 and s3 to dispense with s4’s signatures. Held s2 was not liable32.

CONCLUSION
According to the Indian Contract Act 1872, discharge of surety can be done in three methods:
1. By Revocation {section 130, 131, and 62}.
2. By the Conduct of the Creditors {section 133, 134, 135, 139, and 141}.
3. By Invalidation of a Contract {section 142, 143, and 144}.
A surety’s liability comes to an end under the mentioned points. There are cases analyzed
above in the paper which are held appropriate under this topic.

29
See section 143, Indian Contract Act 1872.
30
Ibid.
31
See section 144, Indian Contract Act 1872.
32
Ibid.

DISCHARGE OF SURETY: RECENT TRENDS AND CASES| 14