When the liability of surety, which he had undertaken under a contract of guarantee, is extinguished or comes to an end, he is said to be discharged from liability.
The modes of discharge of a surety, as recognized by the Indian Contract Act, are as under:. When the surety has undertaken liability on certain terms, it is expected that they will remain unchanged during the while period of guarantee. If there is any variance in the terms of the contract between the principal debtor and the creditor, without the consent of the surety, the surety gets discharged as regards transactions subsequent to such a change.
The provision concerning the discharge of the surety on the release or discharge of the principal debtor as contained in Section and its illustrations, is as under:. Discharges 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.
Section mentions further circumstances when a contract between the creditor and the principal debtor can result in the discharge of the surety. The Section is as under:. According to this section, a contract between the creditor and the principal debtor discharges the surety in the following three circumstances :.
By the conduct of the creditor 1. By variance in terms of contract sec A surety is liable for what he has undertaken in the contract. When the terms of the contract between the principal debtor and the creditor are varied without the surety s consent , the surety is discharged as to the transactions subsequent to the variance. S guarantees repayment.
C pays the amount to p on1st January. S is discharged from his liability, as the terms of the contract have been varied. But the surety is not discharged by operation of law. A contract 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 suretyship. C for the valuable consideration gives p further time for payment of one of the instalments.
Held the giving of time to p discharged s from any further liability under the guarantee. 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.
C cancels the mortgage. B becomes insolvent and c sues a on his guarantee. A is discharged to the extent of the value of the security. By invalidation of contract 1. By concealment sec. C engage p as a clerk to collect money for him.
P fails to account for some of his receipts and c, in consequences, calls upon him to furnish security for his duly accounting.
S gives his guarantee for p s duly accounting. It is, however, significant to note that a principal debtor will not be held liable where there is a defect in documents and the same applies to the surety. Sections of ICA provide certain circumstances under which the liability of the surety is discharged which include revocation by the death of the surety, revocation by giving notice, etc. A surety is a person or an organization that guarantees to pay the sum of money to the creditor in an instance where the principal debtor makes a default or is not able to pay.
When the principal debtor fails to pay his debts, a surety assumes upon himself, the responsibility to pay the debts of the principal debtor. In a contract between two parties, where one party questions the ability of the other party to satisfy the requirements of the contract, a presence of surety is very common. A lender, in order to reduce risk, may require the debtor with a surety while entering into a contract.
Therefore, a surety takes all the responsibility to pay the debts of the principal debtor if he is unable to pay them. Section of ICA talks about the liability of the surety. A surety immediately becomes liable for the payment if the principal debtor makes a default.
It was also held in Central Bank of India v. Also, Section [5] of ICA provides that if there is more than one surety for the same debt, then they are required to repay the debt in equal amounts. A surety and the principal debtor have the same liabilities and therefore a surety will not be held liable for something for which the principal debtor himself is not liable, however, the primary liability stays with the principal debtor only.
The surety has only secondary liability. A creditor can also directly sue the surety. In Maharaja of Benaras v. Har Narain Singh [6] , the principal was laid out that the surety is not liable for the interest on the principal amount as the principal debtor, himself, was not liable for it. The surety will be liable for the principal amount only unless otherwise mentioned in the contract. An amount to which the principal debtor is liable, a surety would also be liable, no more or less.
However, the liability of a surety is only co-extensive with the principal debtor when there is no limit on the extent of the liability. Also, the liability of a surety cannot go past the terms of the contract of guarantee or more than what he has undertaken. Therefore a guarantor cannot be made liable beyond the terms that are agreed upon.
In the case of Zakir Hussain v. Deputy Commissioner of Gonda [7] , it was laid down that a surety will not be liable to the interest of the principal amount under the contract of guarantee, he would only be liable for the principal amount. The liability of a surety is secondary and it is also immediate in a case where the principal debtor makes a default. A notice of default is not required to be provided by the creditor to the surety unless otherwise agreed in the contract of guarantee.
This provides an opportunity to limit the liability of the surety. A surety can limit his liability to a certain amount or fixed amount but it is vital to note that the liability of a surety cannot be greater than the liability of the principal debtor himself.
This principle was also laid down in the case of Aditya Narayan Chouresia v. Bank of India [8] where it was said that guarantors or the sureties are only bound to the amount which they decided and not beyond that. A surety can avail of certain rights against the principal debtor, creditor, and co-sureties. These rights are as follows A surety can avail two rights against the principal debtor that are right of subrogation, and the right of indemnity. This is called the right of subrogation against the principal debtor.
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