CONTRACTS

SEMESTER 3

ROLL.NO: 18LLB023 C.H RAHUL

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 TABLE OF CONTENTS

1. Acknowledgement……………………………………………………………………….3

2. Abstract…………………………………………………………………………………..4

3. Introduction………………………………………………………………………………5

4. Essential features of contract of guarantee………………………………………………5

5. Surety’s liability………………………………………………………………………….6

6. CENTRAL BANK OF INDIA VS. C.L VIMLA DEVI………………………………..7

7. M. S. Anirudhan Vs. The Thomco's Bank Ltd…………………………………………..11

8. Bank Of Bihar Ltd vs Damodar Prasad & Anr……………………………………….....13

9. Modes of Discharge of surety's Liability………………………………………………16

10. Babu Rao Ramchandra Rao and others vs. Babu Manaklal Nehrmal…………………22

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ACKNOWLEDGEMENT

I would sincerely like to put forward my heartfelt appreciation to our respected Contract
professor Jogi naidu garu for giving me a golden opportunity to take up this project regarding
Rights and liabilities of surety in contract of guarantee. I have tried my best to collect
information about the project in various possible ways to depict a clear picture of the given
project topic.

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RIGHTS AND LIABITIES OF SURETY UNDER CONTRACT OF GUARANTEE

S.126 of Indian contract act defines the terms contract of guarantee, surety, principal debtor and
debtor. According to the S.126 a contract of guarantee is a contract to perform the promise or
discharge the liability, of a third perform in case of his default.1The person who gives the
guarantee is called the surety; the person in respect of whose default the guarantee is given is
called principal debtor.

In this project iam going to extent of surety’s liability and discharge of surety from liability and
deal with five case laws with respect to the topic.

The fundamental principle about the surety’s liability, as laid down in S.128, is the liability of
the surety is co-extensive with that of the principal debtor. For this issue iam going to discuss the
case Central bank of India v C.L Vimla2.

S.144 describes that where there is a condition precedent of the surety’s liability he will not be
liable unless the condition is first fulfilled. For this iam going to explain the case Bank of Bihar
Ltd V Damodar Prasad3.

S.133 describes 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 and creditor, discharges
the surety as to transactions subsequent to the variance. For this Anirudhan v thomco’s bank ltd.

S.141 Surety’s right to benefit of creditor’s securities ….

1
Contract and specific relief act by Avatar singh, 12 th edition p 599
2
2015 7 SCC 337
3
AIR 1969 SC 297

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 Introduction
According to Section 126 a ‘contract of guarantee’ is a contract to perform the promise, or
discharge the liability, of a third person in case of his default. The person who gives the
guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is
called the ‘principal debtor’, and the person to whom the guarantee is given is called the
‘creditor’. A guarantee may be either oral or written. —A ‘contract of guarantee’ is a contract to
perform the promise, or discharge the liability, of a third person in case of his default. The person
who gives the guarantee is called the ‘surety’; the person in respect of whose default the
guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given
is called the ‘creditor’. A guarantee may be either oral or written.4

ESSENTIAL FEATURES OF CONTRACT OF GUARANTEE

1. TRIPARTITE CONTRACT:

It is an agreement between the principal debtor, creator and surety. The tree separates contracts
exist between them. If the promise principal debtor is not fulfilled, the liability for the surety
arises.

In a contract of guarantee the principal debtor is liable and the surety will be liable on principal
debtor’s default. The principal contract exists between the principal debtor and the creditor and
the contract between the sureties is a secondary contract.

2. CONSIDERATION:

A contract guarantee like other contracts must fulfill essentials of a valid contract. It must be
supported by some consideration. It is not necessary that there must be direct consideration
between the surely and the creditor. The consideration by the principal debtor is sufficient for the
surety. (Section 127)

3. MISREPRESENTATION:
4
Indian contract act 1872.

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A guarantee obtained by means of misrepresentation made by the creator or with his
knowledge ad assent, concerning a material part of the transaction is in valid. If the consent of
surety will be obtained by misrepresentation, the surety is discharged from his liability (section
142).

4. CONCEALMENT:

A guarantee which the creditor obtains by means of keeping silence to material circumstances is
invalid. The expression keeping silence means intentional concealment of the facts. The creditor
should disclose to surety the facts which are likely to affect the surety’s liability (Section 143)

5. WRITING NOT NECESSARY:

It is not necessary that the contract of guarantee must be in writing. It may be either oral or
written. It may be express of implied from the conduct of parties.

SURETY’S LIABILITY

The first and the foremost point in the surety’s liability is that it is coextensive of the debtor’s
liability. When we say the coextensive of debtor’s liability it means surety liability is as much as
the debtor’s liability. Meaning thereby, in case the debtor makes a default in the making the
payment to the creditor, then whatever the creditor can recover from the debtor, the same amount
of the liability will fall on the shoulders of the surety. Surety will also be responsible to same
amount of the liability, because he has given the surety and his liability is extensive to an extent
of the debtor’s liability. For example, if a debtor is making a default in making the payment to
the surety and later on the surety has to make the payment of the amount along with the some
cost and the interest also, then surety can recover that principal amount along with the cost or
interest from the debtor. So his liability will be the coextensive of the debtor’s liability. The
second point is surety’s liability may be limited. A surety at the time of giving the surety can
limits his liability in whole of the debt. For example, if A is granted a loan by the B, of rupees
10,000/- but C who is a surety can limit his liability by saying that he will be responsible only for
7,000/- rupees. So in the loan of 10,000/-, the surety has limited his liability by giving the
guarantee of rupees 7,000/- only, this is another nature and extent of surety’s liability. The third

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point is the surety’s liability will arise on the default of the principal debtor. We know that
whenever a default is made by the principal debtor in the contract of guarantee then surety comes
into the picture. If on the due date when a debt is to be return by the debtor to the creditor, if the
debtor returns the money to the creditor, surety does not come in the picture, he comes in picture
only when debtor has made a default. So his liability arises on making a default by the debtor.
On a due date the creditor cannot directly come to the surety for the repayment of the loan. He
has to go to the debtor and in case he makes a default, then surety will come into the picture. And
the last point in the extent into the surety’s liability is; the surety will be liable if there is a
contract between principal debtor and that contract is void. So in case the main contract between
the principal debtor and the creditor is void, the surety’s liability will be the primary liability. For
example, A who is a minor has taken the loan from the B and B has given the loan to the A of
rupees 10,000/- but the contract between both of them is void. In this case the primary liability
will be the liability of the fee who has given the guarantee in the contract. So if there is a void
contract between the debtor and the creditor the liability of the surety will be the prime liability.
These are the points which are included in the nature and extent of surety’s liability.

CENTRAL BANK OF INDIA VS. C.L VIMLA DEVI5

Central Bank of India … Appellant

:Versus:

C.L. Vimla & Ors. … Respondents

Procedural history: First the case was filed by the appellants in the debt recovery tribunal for
the settlement of the Debt. DRT referred it to Lok adalat for awarding the settlement. Then
respondents appealed to High court of Karnataka. Then appellants through special leave petition
approached supreme court of India.

5
2015 7 SCC 337

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FACTS: C.l Vimla (Respondent no.1) is the gurantor . The appellant Central Bank of India is the
Bank to whom the property involved in the present case, was mortgaged. The property which
was mortagaged was the property of the C.L Narsimhaiah Shetty, Husband of C.L vimla Devi.
Her husband, during his life time, executed a Will dated 31.05.1995 bequeathing his undivided
share in favor of his sons equally and while settling the property he granted life interest in favour
of the guarantor. After the death of her husband she is in the possession of the house along with
other family members. He has not approved her to sell or home loan the property. The property
was mortgaged in favour of Central Bank of India for raising a loan of Rs.17, 50,000/- for family
business. The business suffered loss. Consequently, as the respondents were unable to repay the
mortgage amount, the Bank filed O.A. No.309/2002 before the Debt Recovery Tribunal,
Bangalore. The Debt Recovery Tribunal referred the case for settlement before Lok Adalat. The
High Court Legal Services Committee considered the reference and passed an award where
under the borrower have agreed to pay Rs.33, 50,000/- as final settlement of the claim of the
Bank. This settlement was not within the knowledge of the guarantor C.L. Vimla as she had not
signed the joint memo. One of her sons N. Surya Bhagavan has signed it. Her advocate has also
signed the joint memo. She discovered that the property has been requested to be sold by sale.
She additionally found out about the marking of Joint Memo by N.Surya Bhagavan and the
Bank. So she filed Writ Petition before the High Court of Karnataka for setting aside the award
issued by the Lok Adalat, as far as she was concerned.

During pendency of the writ petition, the Recovery Officer conducted auction. The auction
purchaser has purchased the property for Rs.3.27 crores

DECISION OF HIGH COURT: H.C held that as the guarantor was not a party to the Joint
Memo, the decree would not be binding on her. Thus, the High Court held that the auction was
violative of Order 21 Rule 64. It also rejected the plea for solatium of 20% of the Central Bank
of India.

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ISSUES RAISED:

1. Is the liability of the guarantor is co-extensive with that of the principal debtor under Section
128 of Indian contract act in case of C.L Vimla devi as a guarantor.

2. Can the guarantor not being a party to the joint memo discharge the guarantor from liability?

Contentions of the appellants:

1. The respondent cannot seek recalling of the settlement which was entered into between the
Lender and the Borrower.

2. The High Court has not recognized Clause 2 of the Form of Guarantee that was executed by
Respondent No.1 in favour of the Bank

3. The respondents cannot escape the liability after 3 years making an offer for the settlement
of matter.

4. The High Court has failed to appreciate that Respondent No.1 and her family members had
availed loan for business purposes. They were unable to repay the loan amount. Thus, it is
apparent that various proceedings were initiated by Respondent No.1 with a mala fide and
fraudulent intent to stall the recovery proceedings

5. High court was not justified for rejecting the request made by appellants for 20% of solatium

Contentions of the respondents

1. Their contention is that the loan raised by the partnership firm called Satyashree Silks. She
has got nothing to do with the firm.

2. The counsel for the Respondents stated that Joint Memo was not signed by the Respondents.
No notice was issued on the Joint Memo to the Respondents.

3.  Respondents alleges that the Joint Memo was filed whereunder the partners of Satyashree
Silks would repay the sum of Rs.33, 50,000/-. The learned counsel contends that N. Surya
Bhagavan had no authority to enter into a contract on behalf of the Respondents. 

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DECISION: C.L Vimla is liable as a gurantor even though she is not in the patt of joint memo.

REASONING:

Under Section 128 of the Indian Contract Act, 1872 states that the liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise provided by the contract."
Intention of the legislature must be taken while deciding these cases. Court took the case of Ram
Kishun & Others vs State Of U.P. & Others6. It was held in this case that t is the prerogative
of the Creditor alone whether he would move against the principal debtor first or the surety, to
realize the loan amount7

The S.C observed that e creditor has a right to obtain a decree against the surety and the principal
debtor. The surety has no right to restrain execution of the decree against him until the creditor
has exhausted his remedy against the principal debtor for the reason that it is the business of the
surety/guarantor to see whether the principal debtor has paid or not. The surety does not have a
right to dictate terms to the creditor as to how he should make the recovery and pursue his
remedies against the principal debtor at his instance”.

The mere fact of ignorance cannot be a valid ground. The respondent, C.L. Vimala and her son,
N.Surya Bhagavan who signed the joint memo, were residing in the same house. We see no
reason why the Respondent would not know of the joint memo, when she could have by
reasonable means made herself aware of the proceedings.

As the sale is completed the auction purchaser purchased it for Rs.3.27 crores by availing private
borrowing for the said property and he is paying nearly Rs.5 lakhs per month as interest.
Therefore, in our opinion, the equity and good conscience also has to play a role in the matter in
question on the given facts and after considering the conduct of the respondents (C.L. Vimla and
others) in the matter.

S.C set aside the order passed by the High Court, and allow these appeals case will be discussed.

6
(2012) 11 SCC 511
7
Ram Kishun & Others vs State Of U.P. & Others on 2 February, 2010

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 According to Section 133 in Indian contract act 1872

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. —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.

M. S. Anirudhan Vs. The Thomco's Bank Ltd.8

Procedural history: Trial court –High court of Kerala – Supreme court of India.

The appellant agreed to stand surety for an overdraft allowed by the respondent Bank to S. A
blank form of guarantee was given by the Bank to S, who then had it filled up by the appellant
stating the maximum amount which he guaranteed as Rs. 25000/-. When S brought the letter of
guarantee duly signed by the appellant and himself to the Bank the latter refused to accept the
guarantee up to that limit as it was not prepared to give S accommodation for a larger sum than
Rs. 20000/and wanted it to be limited to Rs. 20000/-. S then made alterations in the letter with
the amount of the maximum limit corrected to Rs. 20000/and gave it to the Bank. In a suit
instituted by the Bank against the principal debtor, S, and the appellant on the basis of the
contract of guarantee for Rs. 20000/-, the appellant pleaded that as the document was altered
without his knowledge or consent, he was discharged from his liability.

ISSUES RAISED:

1. Whether variance made without the surety’s consent, in the terms of the contract between
the principal and creditor, discharges the surety from liability or not?

Appellant’s contention:

The case of the appellant was not that he never stood surety for defendant No. 1 but that he
stood surety for Rs. 25,000/- which was subsequently altered to Rs. 20,000/- and that any change
of figure was a material alteration resulting in the avoidance of the contract, even though the
alteration might have been advantageous to him, the obliger. As a obliger he has every right to
know the terms and conditions of the contract.howsoever innocent the obligee might be or

8
1963 AIR 746, 1963 SCR Supl. (1) 63

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howsoever innocent the alteration might have been made so far as it is material the non-
accepting obliger-the appellant in this case-cannot be held liable on the obligation in the altered
form because he never made be consented to such an obligation and he cannot be held liable on
the obligation in the original form because the obligation was never assented to by the creditor
respondent Bank. Now an unauthorised material alteration avoids a contract so that if a promisee
after a written contract has been executed materially alters it without the consent of the promisor
whether by adding anything to the contract or striking out any part of it or otherwise the contract
is avoided as against the person who was otherwise liable upon it.

Respondent’s contention:

The principal debtor was acting for and on behalf of the appellant because it was at his instance
that the appellant was standing surety and the appellant handed over the deed of guarantee to the
principal debtor for the pur- poses of being given to the balik, the respondent. In these
circumstances the avoidance of contract by material alteration is in applicable because the
document was not altered while in possession of the promisee or its agent but was altered by the
principal debtor who was at the time acting as the agent of the guarantor, the appellant. In these
circumstances the plea of material alternation is of no avail to the appellant and the appeal must
therefore fail and is dismissed but no order as to costs.

Reasoning:

The learned judges of the High Court thought it was and so held that the letter of guarantee as
altered could be enforced. The suit against the appellant as framed must fail. The altered
document was not binding on the appellant, for the alteration had not been made to carry
out the intention of the parties. If the alteration, is ignore the immaterial, then the document
creates no liability in the appellant, for the Bank refused to accept a guarantee on the terms
contained in it before it was altered and therefore there was no contract made between the parties
by the document. Further, the contract sued upon is different from the contract which might
have been made by acceptance of the document as it stood before the alteration. The document in
this case could not be said to have been materially altered because it was not altered in such
a manner as to change its nature The alteration was made by a co-executant who reduced
not only his own liability but that of the surety also. The document was altered while in the
possession of S, the very person who, as the agent of the surety, brought it to the Bank.

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The surety must be deemed to have held out S as his agent for this purpose and this created an
estoppel against the surety because the Bank believed that S had the authority.

Accordingly, the alteration of the document did not save the surety from liability under it.

According to section 144

Guarantee on contract that creditor shall not act on it until co-surety joins.—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. —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.

Bank Of Bihar Ltd vs Damodar Prasad & Anr 9

PETITIONER:

BANK OF BIHAR LTD.

Vs.

RESPONDENT:

DAMODAR PRASAD & ANR

Procedural history: First the case was filed in the trial court. Then to the High court of Patna. It
dismissed the appeal. In appeal on certificate to Supreme Court.

FACTS:

Defendant no.1 Damodar Prasad is the gurantor and the Defendant no.2 Paras Nath Sinha is the
principal debtor. The plaintiff bank lent money to defendant no.2 worth of Rs. 11,723.56 nP on
account of principal and Rs. 2,769.37 nP on account of interest. A default was taken place. The

9
1969 AIR 297, 1969 SCR (1) 620

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plaintiff filed a suit in Court of the Subordinate Judge, 1st Court, Patna, claiming a decree for the
amount due.

Trial court decision:

Trial Court decreed the suit against both the defendants. While passing the decree, the Trial
Court directed that the "plaintiff bank shall be at liberty to enforce its dues in question against
defendant No. 2 only after having exhausted its remedies against defendant No. 1"

Issue raised: Can the proceedings be filed against surety without exhausting remedies against
debtor?

Contention of the plaintiff:

The surety agreed to pay and satisfy the liabilities of the principal debtor upo Rs. 12,000/- and
interest thereon two days after demand. The bond provided that the plaintiff would be at liberty
to enforce and to recover upon the guarantee notwithstanding any other guarantee security or
remedy which the Bank might hold or be entitled to in respect of the amount secured. The
demand for payment of the liability of the principal debtor was the only condition for the
enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the surety
discharged the admitted liability of the principal debtor in spite of demands. Under sec. 128 of
the Indian contract act save as provided in the contract, the liability of the surety is coextensive
with that of the principal debtor. The surety became thus liable to pay the entire amount. His
liability was immediate. It was not deferred until the creditor exhausted his remedies against the
principal debtor

HELD: The direction must be set aside.

In the absence of some special equity the surety has no right to restrain execution against him
until the creditor has exhausted his remedies against the principal.

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REASONING:

As far as issue is concerned, First surety has no right as to how the creditor should ask him to
pursue his remedies against the principal. It is evident in the case of Wright vs. Simpson10 that
surety is a guarantee. His duty is only to check whether the debtor is paying the money or not
and in default he should pay the money and indemnify from him In the absence of some special
equity the surety has no right to restrain an action against him by the creditor on the ground that
the principal is solvent or that the creditor may have relief against the principal in some other
proceedings.

If the creditor has obtained a decree against the surety and the principal, the surety has no right
to restrain execution against him until the creditor has exhausted his remedies against the
principal. It is evident in the case of Lachhman Joharirmal V. Bapu Khandu and Surety Tukaram
Khandoji 11 The creditors having obtained decrees in two suits in the Court of Small Causes
against the principals and sureties presented applications for the, imprisonment of the sureties
before levying execution against the principals. The judge stated that the practice of his court had
been to restrain a judgment creditor from recovering from a surety until he had exhausted his
remedy against the principal but in his view the surety should be liable to imprisonment while
the principal was at large. Couch, C.J. and Melvell, J. agreed with this opinion and observed:-

"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal
debtor before suing the surety and that when a decree is obtained against a surety, it may be
enforced in the same manner as a decree for any other debt."

Judges took these two instances and decided the case. Court took the provision of Order XX r. 11
(1) and sec. 151 of the Code of Civil Procedure in which the Court passing the decree had the
power to impose the condition that the judgment-creditor would not be at liberty to enforce the
decree against 'the surety. Until the creditor has exhausted his remedies against the principal.

In the absence of some special equity the surety has no right to restrain execution against him
until the creditor has exhausted his remedies against the principal. For making an order under
O.XX r 11 (1) of C.P.C. the court Must give specific reasons. The direction postponing payment
of the amount decreed must be clear and specific.
10

11

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The injunction upon the creditor not to proceed against the surety until the creditor has exhausted
his remedies against the principal was of the vaguest character. It was not stated how and when
the creditor would exhaust his remedies against the principal. It is the duty of the surety to pay
the decretal amount.

On such payment he will be subrogated to the rights of the creditor under s. 140 of the Indian
Contract Act and he may then recover the amount from the principal. The very object of the
guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the
present case the creditor is banking company. A guarantee is a collateral security usually taken
by a banker. The security willbecome useless if his rights against the surety can be so easily cut
down. n the result, the appeal is allowed, the direction of the court below that the "plaintiff-bank
shall be at liberty to enforce its dues in question against defendant No. 2 only after having
exhausted its remedies against defendant No. 1" is set aside. The respondent Dr. Paras Nath
Sinha shall pay to the appellant costs in this Court and in the High Court.

Modes of Discharge of surety's Liability

          Following are the modes of Discharge of Surety's Liability

1. By Revocation: 

         According to Section 130 of the Indian Contract Act,  a may at any time be revoked by the
surety, as to future transactions, by notice to the creditor.

Illustrations -

(a) A, in consideration of B’s discounting, at, A’s request, bills of exchange for C, guarantees to
B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts
bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the
guarantee. This revocation discharges A from all liability to B for any subsequent discount. But
A is liable to B for the 2,000 rupees, on default of C.

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(b) 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.

2. By Death:

        According to Section 131 of the Indian Contract Act, 1872 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.

3. By Variance in the terms of the contract:

           Section 133 of the Indian Contract Act says that "any variance made without the surety’s
consent, in the terms of the contract between the principal debtor and the creditor, discharges the
surety as to transactions subsequent to the variance. It means Surety is not liable for the altered
contract.

Illustrations 

(a) A becomes surety to C for B’s conduct as manager in C’s bank. Afterwards, B and C
contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for
one-fourth of the losses on overdrafts. B allows a customer to over-draw, and the bank loses a
sum of money. A is discharged from his suretyship by the variance made without his consent and
is not liable to make good this loss.

(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of

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(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety
to C for B’s duly accounting for money received by him as such clerk. Afterwards, without A’s
knowledge or consent, C and B agree that B should be paid by a commission on the goods sold
by him and not by a fixed salary. A is not liable for the subsequent misconduct of B.

(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to
B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C
contract that C shall continue to supply B with oil for ready money, and that the payments shall
be applied to the then, existing debts between B and C. A is not liable on his guarantee for any
goods supplied after this new arrangement.

(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the
5,000 rupees to B on the 1st January, A is discharged from his liability, as the contract has been
varied, inasmuch as C might sue B for the money before the first of March.

4. Discharge of surety by release or discharge of principal debtor (Section 134 of I.C.A): 

       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.

Illustrations 

(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and

(b) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a fixed rate,
and C guarantees A’s performance of this contract. B diverts a stream of water which is

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necessary for irrigation of A’s land, and thereby prevents him from raising the indigo. C is no
longer liable on his guarantee.

(c) A contracts 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.

5. When Creditor Compounds with, gives time to, or agrees not to sue the principal debtor
(Section 135 I.C.A) :

         A contract between the creditor and the principal debtor, by which the creditor make a
composition with, or promises to give time, or not to sue, the principal debtor, discharges the
surety, unless the surety assents to such contract.

6. Discharge of surety by creditor's act or omission impairing surety's eventual remedy:

        According to Section 139 of the Indian Contract Act, If the creditor does any act which is
inconsistent with the right of the surety, or omits to do any act which his duty to the surety
requires him to do, and the eventual remedy of the surety himself against the principal debtor is
thereby impaired, the surety is discharged.

Illustrations 

(a) B contracts to build a ship for C for a given sum, to be paid by instalments 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 to B the last two instalments. A is discharged by this
prepayment.

(b) C lends money to B on the security of a joint and several promissory note made in C’s favour

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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, and apply the proceeds in discharge of the note. Subsequently, C sells the
furniture, but, owing to his misconduct and wilful negligence, only a small price is realised. A is
discharged from liability on the note.

(c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. 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.

7. By loss of Security by the Creditor (Section 141): 

            A surety is entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship entered into, whether the surety
knows of the existence of such security or not; and if the creditor loses, or without the consent of
the existence of such security or not; and if the creditor loses, or without the consent of the
surety, parts with such security, the surety, the surety is discharged to the extent of the value of
the security.

Illustrations 

(a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security
for the 2,000 rupees by a mortgage of B’s furniture. C, 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.

(b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that
advance from A. C afterwards takes B’s goods in execution under the decree, and then, without
the knowledge of A, withdraws the execution. A is discharged.

(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B.

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Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the
further security. A is not discharged.

8. By Invalidation of Contract: 

           According to Section 142 of The Indian Contract Act, any Guarantee obtained by
misrepresentation is invalid. Section 142 runs as follows:
           Any guarantee which has been obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the transaction, is
invalid.
 

9. By Novation: 

            Novation means substitution of an existing contract with a new one. Section 62 says that
If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the
original contract need not be performed. The surety is liable under the terms of old contract, but
if by novation old contract gets discharged then surety also automatically gets discharged.

Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C, that B shall
thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new
debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his
(A’s), estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and
extinguishes the old.

(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees, B orders A to credit C with

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1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1,000 rupees,
and no new contract has been entered into.

Babu Rao Ramchandra Rao and others vs. Babu Manaklal Nehrmal

FACTS: The facts of the case are that on 3rd August 1932 the defendant had guaranteed to pay
Rs. 400 out of a loan of Rs. 1100 borrowed by one Rajmal from the plaintiff. The defendant paid
Rs. 220 and left the balance of Rs. 180 outstanding. Rajmal applied to the Debt Conciliation
Board for settlement of his debts. Before the Board, the plaintiff excluded from his statement of
debts this debt of Rs. 400 declaring that he would recover it from the surety (defendant). The
plaintiff filed the suit out of which this revision application arises to recover Rs. 219 including
interest and cost of notice.

Lower court Judgement:

It is held that the defendant's right as a surety to have recourse to his remedy against the principal
debtor was impaired by the plaintiff's act of withholding the debt in suit from the statement of his
debts submitted to the Debt Conciliation Board and that the legal consequence under Sec. 15(3),
Debt Conciliation Act, was that the defendant was discharged from liability in view of S. 134,
Contract Act.

Issues raised:

1. Whether the release of principal debtor from liability discharges Guarantor from liability or
not?

Contention of the appellants:

The liability of the surety is co-extensive with that of the principal debtor, that the plaintiff had
before the Debt Conciliation Board expressly reserved his remedy against the Board, and that
nothing provided in the Debt Conciliation Act can be construed to impair the plaintiff's right to
recover the debt from the surety.

Contention of the respondents:

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An express release of the principal debtor coupled with a reservation of the creditor's right to
proceed against the surety does not discharge the principal debtor. The learned counsel for the
plaintiff says: I have two debtors, the principal debtor and the surety. I choose to forgo my claim
against the former but how does it affect my right to recover my debt from the surety? That is
indeed a valid and effective argument if there had been two independent debts. Is that the case
here? Manifestly not, because the liability of the surety, though distinct, postulates the existence
of the liability of the principal debtor.

Reasoning:

It may be easily conceded that an express release of the principal debtor coupled with a
reservation of the creditor's right to proceed against the surety does not discharge the principal
debtor. In such a case the debt is not destroyed and the remedy of the surety against the principal
debtor is not impaired. The position of the surety is two-fold: on the one hand he is liable to pay
the debt, on the other hand, when he pays the debt, he stands in the shoes of the creditor and he is
entitled to enforce against the principal debtor all the remedies which were available to the
creditor. If the liability of the surety is so co-extensive with that of the principal debtor, his right
is not less co-extensive with that of the creditor after he satisfies his debt. To enable the surety to
enforce his right against the principal debtor, there are two essential conditions: (i) that the debt
itself must subsist, (ii) that his remedy against the principal must remain unimpaired.
Consequently the creditor will be entitled to compel the surety to perform his promise only if the
debt subsists and the surety's remedy is unimpaired. It is at this stage that we have to turn to the
relevant provisions of the C.P. Debt Conciliation Act. S. 8(2) of that Act runs as follows:

Every debt of which a statement is not submitted to the Board in compliance with the provisions
of sub-s. (1) Shall be deemed for all purposes and all occasions to have been duly discharged.

4. Section 15(3) runs as follows:

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Where, after the registration of an agreement under sub-s. (2) of S. 12, any unsecured creditor
sues for the recovery of a debt, other than a debt incurred subsequent to such agreement, in
respect of which a certificate has been granted.

Reliance is placed on Nandlal v. Surajmal12, Gokulchand v. Laxminarayan13,Bagha Co-operative

In view of S. 8(2), Debt Conciliation Act, is it open to the creditor to contend that the debt still
subsists. It is argued for the plaintiff that the Debt Conciliation Act itself has no application. As
pointed out in Periyamianna Marakkayar & Sons v. Banians & Co.15 a contract of suretyship
requires the concurrence of three persons, viz. the principal debtor, the creditor and the surety.
To express in terms of S. 126, Contract Act, the surety enters into a contract of guarantee to
perform the promise or discharge the liability of a third person in case of his default. The surety
undertakes his obligation at the request, express or implied, of the principal debtor. It is because
the surety pays the principal debtor's debt that he is entitled to enforce the debt against the
principal debtor after he discharges it

12
AIR (1932) 19 Nag 62=138 IC 879=28 NLR 325
13
AIR (1933) 20 Nag 287=160 IC 685
14
AIR (1937) 24 Pat 410=170IC 130=16 Pat 27=18 PLT 309

15
AIR (1926) 13 Mad 544=96 IC 154=49 Mad 156 at pp. 172, 185

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