Discharge of Surety from Liability

A surety is said to be discharged from his liability
when his liability under the contract comes to an end. The following are the modes or circumstances under which a surety is discharged from his liability:

(i) by revocation

(ii) by the conduct of the creditor, and

(iii) by invalidation of contract ofnguarantee.

1. By Revocation of the Contract or
GuaranteenRevocation means cancellation. The surety is discharged from liability when the contract of guarantee is revoked in anyone of the following modes:

1. Notice by surety- A contract of guarantee may be specific or continuing. A specific guarantee cannot be revoked by the surety if the liability has already accured.

2. Death of surety- The death of the surety operates as a revocation of continuing guarantee for future transactions. The estate of the deceased surety will not be liable for any transactions entered between the creditor and the principal debtor even if the creditor has no notice of death. In case the parties have agreed to a notice of surety’s death, the notice of death will be necessary. Under English Law also notice to surety’s death is necessary.

3. Novation- The contract of guarantee may be discharged by novation. Novation means that a new contractnis made in place of the old one, either between the same parties or between different (i.e., some other) parties. Thus, the original contract comes to an end, and therefore the surety stands discharged in relation to the old contracts. In such cases, the discharge of old contract forms consideration for the new contract (Section 62 of the Contract Act.)

II. By Conduct of the Creditor

The surety may be discharged from his liability because of some specific conduct of the creditor in relation to the contract of guarantee in any of the following circumstances:

1. Variance i.e., change in terms of the contract- According to Section 133 of the Contract Act, “Any variance, made without the surety’s consent in the terms of the contract between the principal debtor and the creditor, discharges the surety in relation to the transactions subsequent to the variance.” The basic principle is that the surety cannot be held responsible for something for which he has not contracted. It is for the surety to judge whether he will continue to remain liable on the changed contract or not. However, it may be noted that an attempted’ variance which remains in operative will not discharge the surety. Similarly, where the guarantee is for the performance of several distinct debts or obligations, a change in the nature of one of them will discharge the surety only in relation to the changed debt or obligation, and not in relation to the other debts or obligations.

2. Release or discharge of the principal debtor- Section 134 lays down two circumstances when the surety is discharged: (i) if the creditor makes a fresh contract with the principal debtor by which the latter (i.e., principal debtor) is released from his liability, (ii) if the creditor does any act or omission which has the legal effect of discharging the principal debtor from his liability.

Certain points are to be noted in this regard. Where the principal debtor is discharged by operation of law, the surety is not discharged from his liability, for example, the discharge of principal debtor in case of insolvency, or by the expiry of limitation period, or in liquidation proceedings in the case of a company, does not discharge the surety from his liability. But where by operation of law the liability of the principal debtor is reduced, the surety’s liability is also reduced proportionately.

3. Certain arrangements made by the creditor with the principal debtor without the consent of surety- According to Section 135 of the Contract Act, where the creditor enters into a contract with the principal debtor without the consent of the surety, by which the creditor

(i) makes a composition (settlement of debt by mutual concession) with, or

(ii) promises to give time to, or

(iii) promises not to sue, the principal debtor, then the surety is discharged from his liability due to such arrangements.

4. Creditor’s act or omission impairing surety’s eventual (ultimate) remedy-Section 139 of the Contract Act lays down that if the creditor does any such act which is inconsistent with the rights of the surety, or omits to do any act which is required of him as him duty towards the surety, and due to such act or omission the eventual remedy available to the surety against the principal debtor is impaired (weakened or damaged), then the surety is discharged. It may be noted that Section 139 applies only where the eventual remedy of surety against the principal debtor is weakened or damaged, and if such remedy is not impaired, the surety is not discharged.

5. Loss of security- Section 141 of the Contract Act provides that if the creditor loses, or without the consent of the surety parts with the security given to him by the principal debtor at the time of making the contract, the surety is discharged to the extent of the value of the security. Here, security includes all rights which the creditor has against the property at the date of the contract.

III. By Invalidation of Contract of Guarantee

A contract of guarantee may be avoided if it becomes void, or voidable at the option of the surety. A surety may be discharged from his liability in the following cases:

1. Guarantee obtained by misrepresentation- Sec-
tion 142 of the Contract Act provides that when a misrepresentation is made by the creditor relating to a material fact in the contract of guarantee, the contract is invalid.

2. Guarantee obtained by concealment- Section 143 of the Act lays down that when a guarantee is obtained by the creditor by means of keeping silence.