Guarantee, discharge of surety from his liability

1. CONTRACTS - 2
DISCHARGE OF SURETY FROM
LIABILITY

2. MEANING AND ESSENTIALS
According to section 126.-
It is a contract to perform the promise or to
discharge the liability of a third person in
case of his default.
 Parties- Surety, Principal debtor, creditor.

3. TYPES OF GUARANTEE
(Sec 129)
•Specific, Simple or Limited Guarantee: It
extends to a single transaction.
 Continuing Guarantee (Sec 129): It extends
to a series of transactions.
Eg,. A guarantees B for all the payments
that C would make to B for the delivery of
goods ordered.

4. DISCHARGE OF SURETY
1. By Revocation (Sec130)
2. By Death of Surety (Sec131)
3.By Variance (Sec133)
4. By Release or Discharge of
Principal Debtor (Sec134)
5. Composition, Extension of Time
and Promise not to Sue (Sec135)
6. By Imparing Surety’s Remedy
(Sec139)

5. By Revocation [s.130]
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.
Illustration:
A guarantees to B, to the extent of 10,000
rupees, that C shall pay all the bills that B
shall draw upon him. B draws upon C. C
accepts the bill. A gives notice of
revocation. C dishonours the bill at
maturity. A is liable upon his guarantee.

6. Cont…
Guarantee given for an existing debt cannot
be revoked.
Revocation becomes effective for future
transactions only.
The surety shall be liable for transactions
which have already taken place.
A continuing guarantee may at any time be
revoked by giving notice to the creditor.

7. CASE LAWS:
Sita Ram Gupta vs Punjab National Bank
on 10 March, 2008
Anil Kumar vs Central Bank of India, AIR
1997 HP 5

8. BY DEATH OF SURETY[S.131]
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 transactions.

9. Cont…
 In absence of any contract to the contrary.
For eg., the surety should include a clause
stating that after his lifetime the surety ends.
Liability of Legal Heirs:
The liability of the deceased surety can be
imposed against his legal heirs but only to
the extent of the property inherited by them.

10. CASE LAWS:
 Mohammad Ubed Ullah And Ors. vs
Mohammad Insha Allah Khan on 30
July, 1920
 SBI vs Jayanthi, AIR 2011 Mad 179

11. BY VARIANCE [S.133]
133. Discharge of surety by variance in
terms of contract.— 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 variance.

12. Cont…
 Variance should be substantial.
 Cases of ambiguity- application of rule of
contra preferentem.
.

13. CASE LAW:
 Keshavlal Harilal Setalvad vs Pratapsing
Moholalbhai Sheth on 17, 1931.
 Bonar vs Macdonald

14. Release or Discharge of Principal
Debtor [S.134]
 134. Discharge of surety by release or
discharge of principal debtor.—The surety
is discharged by any contract between the
creditor and the principal debtor, by which
the principal debtor is released, or by any
act or omission of the creditor, the legal
consequence of which is the discharge of
the principal debtor.

15. Cont…
i. Discharge of Principal Debtor
A surety is discharged if :
 The creditor without his consent,
unconditionally releases the debtor.
.

16. CASE LAW:
 State Bank Of Patiala vs S.K. Mathur on 9
February, 2011
ii. Act or Omission:
 Release of debtor by complete novation.
 Compromise

17. Composition, Extension of Time
and Promise not to Sue [S.135]
135. Discharge of surety when creditor
compounds with, gives time to, or agrees
not to sue, principal debtor.-
The section provides for 3 modes of
discharge from liability:
1)Composition, 2)Promise to give time,
3)Promise not to sue the debtor.

18. Exemptions..
136. Surety not discharged when agreement
made with third person to give time to
principal debtor.-
137. Creditor’s forbearance to sue does not
discharge surety.-
138. Release of one co-surety does not
discharge others.-
Eg., Anil Kumar vs Central Bank of
India, AIR 1997 HP 5.

19. 6. By Imparing Surety’s Remedy
[S.139]
139. Discharge of surety by creditor’s act or
omission impairing surety’s eventual
remedy.-
 Does an act which is inconsistent with the rights of the
surety.
 Omits to do any act which is his duty to the surety and the
eventual remedy of the surety himself against the debtor is
thereby impaired.
 Residuary in nature, which ensures no contract can be
made to the contrary.

20. CASE LAW:
 United Finance Ltd vs Woodcock, 1963 1
WLR 455
 SBI vs Praveen Tanneries, (1992) An
LT5
 State of Madhya Pradesh vs Kaluram, AIR
1967 SC 1105.

21. Thank You …