Discharge of Surety | Circumstances when Liability of Surety comes to end

Discharge of Surety – Situations when liability of surety comes to an end

A surety’s liability comes to an end under any of the following circumstances.

• By notice of revocation
• By death of surety
• By novation
• By variance in terms of contract
• By release or discharge of principal debtor
• By arrangement between principal debtor and creditor
• By impairing surety’s remedy
• By loss of security, and
• By invalidation of the contract

1. Notice of revocation

Ordinarily a guarantee cannot be revoked if the liability has already been accrued. But Section 130 provides for revocation of continuing guarantee. For example, if A has stood surety for a Rs 5,00,000 home loan of B from a bank, and the money has been disbursed, A cannot revoke the guarantee, as the liability has accrued. Accordingly, where a guarantee is a continuing one and extends to a series of transactions, the surety as to future transactions may revoke it, by giving notice to the creditor. However, the surety shall remain liable for the acts already acted upon, i.e., prior to the notice of revocation.

2. Death of Surety

In case of a continuing guarantee, the death of the surety, in the absence of any contract to the contrary, discharges him from liability as regards future transactions (i.e., transactions after his death). In other words, the surety’s survivors or legal representatives would not be liable unless expressly mentioned in the contract.

3. Novation

Novation, i.e., entering into a fresh contract, either between the same parties or between other parties, constitutes another mode of discharging a surety from the liability. If the parties to a contract (of guarantee) agree to substitute it with a new contract, the original contract need not be performed and so the surety stands discharged with regard to the old contract. For the surety, too, a fresh contract would have to be drafted.

4. Variance in terms of contract

Any variance or alteration in the terms of the contract made between the principal debtor and the creditor, without the surety’s consent, discharges the surety as to the transactions taking place subsequent to the variance.

The following are some of the examples in this regard.

Example 1

A becomes surety to C for payment of rent by B under a lease. Afterwards B and C contract to hike the rent, without informing A. A would hence, be discharged from his liability as a surety for accruing subsequent to the variance in terms of the contract without his consent.

Example 2

C contracts to lend B Rs 5,000 on March 1. A guarantees repayment. C pays Rs 5,000 to B on January 1, A is discharged from his liability, as the contract has been varied for early release of loan by the creditor.

5. 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. The following example explains the point.

Example: A contracts with B to build a house for B for a fixed price within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B fails to supply the timber. C is thus discharged from his surety.

6. Arrangement between principal debtor and creditor

Where the creditor, without the consent of the surety arrives at a settlement with the principal debtor, or promises to give him more time, or promises not to sue him by a contract between the creditor and the principal debtor, the surety is absolved from the liability, unless the surety assents to such contract.

Where, however, a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged. For instance, 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.

7. Impairing surety’s remedy

If the creditor commits any act, which is inconsistent with the rights of the surety, or fails to perform any act that his duty to the surety requires him to do, such that the eventual remedy of the surety himself against the principal debtor is impaired; the surety is discharged.

The following are some of the illustrations in this regard.

Example 1

B contracts to build a ship for C for a given sum, to be paid in installments as the work reaches certain stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A, prepays the last two installments to B. A is discharged by the prepayment.

Example 2

C lends money to B on the security of a joint and several promissory note made in C’s favour by B, and by A as surety for B, together with a bill of sale of B’s furniture, which gives power to C to sell the furniture. Owing to his (C’s) misconduct and wilful negligence, only a small price is realized. A is discharged from liability on the note.

Example 3

A puts N as an apprentice to B, and gives a guarantee to B for N’s fidelity. B, on his part, promises that he will, at least once a month, see N deposit the cash collected by him on B’s behalf. B, however, fails to check up the books as promised, and M embezzles. A is not liable to B on his guarantee.

8. Loss of security

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 security. It is immaterial whether the surety was or is aware of such security or not. For instance, C advances to B, his tenant, Rs 2,000 on the guarantee of A. C has also a further security for Rs 2,000 by a mortgage of B’s furniture. C, however cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.

9. Invalidation of the contract

A surety is also discharged upon invalidation of the contract (i.e., between the creditor and the surety). A contract of guarantee is invalid in the following circumstances.

Guarantee obtained by misrepresentation: Any guarantee, which has been obtained by means of misrepresentation made by the creditor, or with his knowledge or assent, concerning a material part of the transaction is invalid.

Guarantee obtained by concealment: Any guarantee, which the creditor has obtained by means of keeping silence as to the material circumstances, is invalid.

Default on Part of co-surety: 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.