02/04/2019 Discharge of Surety | Circumstances when Liability of Surety comes to end

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

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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 QR CODE

By invalidation of the contract

1. Notice of revocation
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Ordinarily a guarantee cannot be revoked if the liability has already been accrued. Product Planning – Meaning,
Elements and Importance
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
Transfer of Ownership – Sale of
been disbursed, A cannot revoke the guarantee, as the liability has accrued. Specific Goods, Unascertained
Goods, on Approval
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 Advantages and Disadvantages of
the creditor. However, the surety shall remain liable for the acts already acted Corporate Enterprises

upon, i.e., prior to the notice of revocation.

Production Control | Meaning,
2. Death of Surety Objectives, Functions,
Advantages, Requirements
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 Notes on Scrutiny of Expenses in
Auditing – Role of Auditor
transactions (i.e., transactions after his death). In other words, the surety’s
survivors or legal representatives would not be liable unless expressly mentioned
Materiality in Auditing |
in the contract. Instances of Materiality | Duty of
Auditor
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.
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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
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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. This site uses cookies to give you the best possible experience.

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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
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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.

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