Discharge of Surety’s Liability

In a Contract of Guarantee, a Surety is a person who promises to fulfill the debtor’s obligation if the debtor defaults. Indian Contract Act, 1872 (Sections 130-144) governs the discharge (termination) of a surety’s liability.

A surety’s liability can be discharged in multiple ways, including by the conduct of the creditor, by operation of law, or by mutual agreement.

Modes of Discharge of Surety’s Liability:

A. Discharge by Revocation (Section 130)

• A surety can revoke liability for future transactions if:

  • The guarantee is a continuing guarantee.

  • The surety gives notice of revocation to the creditor.

• Example: If ‘A’ guarantees ‘B’s credit purchases from ‘C’ up to ₹1 lakh, ‘A’ can revoke liability for future transactions after notice.

B. Discharge by Death of Surety (Section 131)

• A surety’s death terminates liability for future transactions, unless there is an express contract stating otherwise.

• Exception: If the creditor is unaware of the death, liability continues for prior agreements.

C. Discharge by Variance in Contract Terms (Section 133)

• Any material alteration in the contract terms without the surety’s consent discharges the surety.

• Example: If the creditor extends the repayment period without informing the surety, the surety is released.

D. Discharge by Release or Discharge of Principal Debtor (Section 134)

• If the creditor releases the principal debtor, the surety is automatically discharged.

• Exception: If the surety consents to such release, liability continues.

E. Discharge by Creditor’s Act Impairing Surety’s Rights (Section 139)

• If the creditor does any act that reduces the surety’s security or increases the risk, the surety is discharged.

• Example: If the creditor fails to register a mortgage (security), the surety is released.

F. Discharge by Inconsistent Acts (Section 137)

• The creditor’s negligence in enforcing the debt does not discharge the surety.

• However, if the creditor actively prevents repayment, the surety may be discharged.

G. Discharge by Novation (Section 62 of ICA)

If a new contract replaces the old one, the surety is discharged unless they agree to the new terms.

H. Discharge by Creditor’s Delay in Suing (Section 140)

If the creditor unreasonably delays legal action against the debtor, the surety may be discharged.

I. Discharge by Loss of Security (Section 141)

• The surety is entitled to the benefit of the creditor’s securities.

• If the creditor loses or parts with the security, the surety is discharged to the extent of the lost security.

Case Laws on Discharge of Surety:

• State Bank of Saurashtra vs. Chitranjan Rangnath Raja (1980)

The court held that any unauthorized alteration in contract terms discharges the surety.

• M.S. Anirudhan vs. Thomco’s Bank Ltd. (1963)

The Supreme Court ruled that if the creditor fails to enforce a security, the surety is discharged proportionately.

• Punjab National Bank vs. Sri Vikram Cotton Mills (1970)

The surety was discharged because the creditor extended the repayment period without consent.

Practical Implications:

• Bank Guarantees: A surety must ensure that the creditor does not modify loan terms without consent.

• Loan Agreements: Creditors must protect securities to avoid discharging the surety.

• Business Contracts: Any change in contract conditions should be communicated to the surety.