Important circumstances under which a surety is discharged from his liability are given below:
1. Notice of revocation:
An ‘ordinary guarantee’ for a single specific debt or transaction cannot be revoked once it is acted upon. But a ‘continuing guarantee’ may at any time, be revoked by the surety as to future transactions, by giving notice to the creditor (Sec. 130).
ADVERTISEMENTS:
Thus, in such a case, the liability of the surety comes to an end in respect of future transaction which may be entered into by the principal debtor after the surety has served the notice of revocation. The surety shall, however, continue to remain liable for transactions entered into prior to the notice.
2. Death of surety (Sec. 131):
In case of a ‘continuing guarantee’ the death of a surety also discharges him from liability as regards transactions after his death, unless there is a contract to the contrary. The deceased surety’s estate will not be liable for any transaction entered into after the death, even if the creditor has no notice of the death.
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ADVERTISEMENTS:
3. Variance 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.”
Although the words “as to transactions subsequent to the variance” are more pertinent in the case of ‘continuing guarantee’, but the principle as laid down in the Section is equally applicable in ‘specific guarantee’ as well.
Thus a surety is discharged from liability when, without his consent, the creditor makes any change in the terms of his contract with the principal debtor (no matter whether the variation is beneficial to the surety or is made innocently or does not materially affect the position of the surety) because a surety is liable only for what he has undertaken in the contract. “Surety has a right to say:
ADVERTISEMENTS:
The contract is no longer that for which I engaged to be surety; you have put an end to the contract that I guaranteed, and my obligation, therefore, is at an end”. It is important to note that mere knowledge and silence of the surety does not amount to an implied consent (Polak vs Everett). Again, accepting further security for the same debt is not treated as variance in terms of contract.
Illustrations:
(Appended to Sec. 133). (a) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for B’s duly accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B.
(b) C contracts to lend B Rs 5,000 on the first March. A guarantees, repayment. C pays the 5,000 rupees to B on the first January. A is discharged from his liability, as the contract has been varied in as much as C might sue B for the money before the first of March.
4. Release or discharge of principal debtor (Sec. 134):
This Section provides for the following two ways of discharge of surety from liability:
(a) The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released. Any release of the principal debtor is a release of the surety also.
(b) The surety is also discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
Illustrations:
(Appended to Sec. 134). (a) A gives a guarantee to C for goods to be supplied by C to B. C supplies good to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his surety ship.
(b) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his surety ship (because the contract stands discharged against A, the contractor).
5. Arrangement by creditor with principal debtor without surety’s consent (Sec. 135):
Where the creditor, without the consent of the surety, makes an arrangement with the principal debtor for composition, or promises to give him time or not to sue him, the surety will be discharged.
But in the following cases, a surety is not discharged:
(a) Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with principal debtor, the surety is not discharged (Sec. 136).
Illustration (To Sec. 136):
C, the holder of an overdue bill of exchange drawn by A as surety for B and accepted by B, contracts with M to give time to B. A is not discharged.
(b) Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him, does not discharge the surety, unless otherwise agreed (Sec. 137).
Illustration (To Sec. 137):
B owes to C a debt guaranteed by A. The debt becomes payable, C does not sue B for a year after the debt has become payable. A is not discharged from the surety ship.
(c) Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties (Sec. 138).
6. Creditor’s act or omission impairing sureties eventual remedy (Sec. 139):
“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 himself against the principal debtor is thereby impaired, the surety is discharged.”
In short, it is the duty of the creditor to do every act necessary for the protection of the rights of the surety and if he fails in this duty, the surety is discharged.
Thus, where the integrity of a cashier is guaranteed, it is the duty of the employer to give information to the surety if any dishonest act is done by the employee.
If the employer continues to employ him after an act of dishonesty (which is proved), the surety is discharged, if he is not informed within a reasonable time, because then the surety’s right (eventual remedy) to inform police for necessary recovery action is lost or damaged, i.e., may not be so fruitful as it would have been, had a report been lodged earlier.
Illustrations:
(Appended to Sec. 139). (a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages, (the last instalment not to be paid before the completion of the ship).
A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this prepayment.
(b) A puts A/as an apprentice to B and gives a guarantee to B for A is fidelity. B promises on his part that he will, at least once a month, see M make up the cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee.
7. Loss of security (Sec. 141):
If the creditor loses or, without the consent of the surety, parts with any security given to him, at the time of the contract of guarantee, the surety is discharged from liability to the extent of the value of security. The word ‘loss’ here means loss because of carelessness or negligence.
Thus if the security is lost due to an act of God or enemies of the state or unavoidable accident, the surety would not be discharged. Again, if the securities lost or parted with, were obtained afterwards as a further security, the surety would not be discharged (Bhushayya vs Suryanarayan).
8. Invalidation of the contract of guarantee (in between the creditor and the surety):
A surety is also discharged from liability when the contract of guarantee (in between the creditor and the surety) is invalid. A contract of guarantee is invalid in the following cases:
(i) Where the guarantee has been obtained by means of misrepresentation or fraud or keeping silence as to material part of the transaction, by the creditor or with creditor’s knowledge and assent (Sees. 142 and 143). Notice that under these Sections the guarantee remains valid if the misrepresentation or concealment is done by the debtor without the concurrence of the creditor.
Illustrations:
(Appended to Sec. 143). (a) A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A, in consequence, calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt.
This agreement is concealed from A. A is not liable as a surety.
(ii) Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join (Sec. 144).
(iii) Where it lacks one or more essential elements of a valid contract, e.g., surety is incompetent to contract or the object is illegal.