UNIVERSITY OF PETROLEUM AND ENERGY STUDIES

COLLEGE OF LEGAL STUDIES

DEHRADUN

CONTRACT PROJECT ON:

DISCHARGE OF THE SURITY LIABILITY

Submitted to: Yasha sharma

Course : BALLB Criminal Law B2 [ 2ndsem]

SUBMITTED BY:
NAME ROLL NO SAP ID

NISHANT KUMAR R154216075 500054867

PALLAVI R154216076 500054844

MANASVI BHATT R154216067 500055125

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 CONTEXT

S.NO TOPIC PG.NO

1 Discharge of surety 3-5

2 Discharge of surety by revocation 6

2.1 By giving a notice 6

2.2 Death of surety 6

2.3 Novation 6

3 Discharge of surety by the conduct of the creditors 7

3.1 Variance in the terms of contract 7

3.2 Discharge of principal debtors 7

3.3 Compounding by creditors with principal debtors 7

3.4 Creditors act or omission impairing surety eventual remedy 8

3.5 Loss of security 8

4 Discharge of surety by invalidation of contract 9

4.1 By misrepresentation 9

4.2 By concealments 9

4.3 By failure of a co-surety to join 9

4.4 By failure of consideration 9

5 Conclusion 10

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 1. Discharge of surety

Introduction: The surety who is entitled to be reimbursed by the principal debtor for the
amount paid by him on his behalf. The liability of the surety is co-extensive with that of the
principal debtor unless it is otherwise provided by the contract under section 128.

Nature of surety: Section 128 surety liability is co-extensive with that of the principal debtor
which means that on a default having been made by the principal debtor the creditor can
recover from surety the all what he could have recovered from the principal debtor.

Example:- The principal debtor makes a default in the payment of a debt of Rs.10,000.00, the
Creditor may recover from the surety the sum of Rs.10000/- plus interest becoming due
thereon as well as the amount spent by him in recovering that amount.

Liability of surety: A bare perusal of section 128 of the Contract Act would make it clear
that the liability of a surety is co-extensive with that of the principal debtor. The word co-
extensive denotes that extent and can relate only to quantum of the principal debt. Refer a
case of Industrial Financial Corporation of India v/s Kannur Spinning & Weaving Mills
Ltd, 2002: However the liability of the surety does not cease merely because of discharge of
the principal debtor from liability.

Bank of Bihar Ltd. v/s Damodar Prasad, 1969: The Supreme Court held that the liability
of the surety is immediate and cannot be defended until the creditor has exhausted all his
remedies against the principal debtor. Maharashtra Electricity Board Bombay v/s Official
Liquidator and Another, 1982: under a letter of guarantee the bank undertook to pay any
amount not exceeding Rs.50000/- to the Electricity Board. It was held that the Bank is bound
to pay the amount due under the letter of guarantee given by it to the Board.

Rights of surety: The surety has certain rights against the principal debtor, the creditor and
the co-sureties. His right against each one of them are being discussed as under:

a. Right of Subrogation: Under section 140 when a principal debtor makes a default in the
performance of his duty and on such default the surety makes the necessary payment or
makes performance of all what he is liable. Firstly the surety can claim indemnity from the
principal debtor secondly he is also entitled to the benefits of every security which the
creditor has against the principal debtor. Case of Mukesh Gupta v/s Sicorn Ltd. Mumbai,
2004.

b. Right of Indemnity against the principal debtor: Similarly as above when a principal
debtor makes a default the surety has to make the payment to the creditor. After making the
payment he can recover the same from him under section 145 of the act.

c. Right against Creditor to take back the securities deposited by the Principal debtor:
After making the dues the surety has all the rights which are available to the creditor against
the principal debtor under section 141 of the act. He is entitled to the benefit of every security
which the creditor has against the principal debtor.

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d. Surety has no right to goods in hypothecation: In case there is hypothecation of the
goods the goods remain in the possession of the borrower the surety cannot invoke the
provision of section 141 in such case. Refer a case of Bank of India v/s Yogeshwar Kant
Wahhera, 1987.

The liability of the surety is co-extensive with that of Principal debtor

Surety’s Liability: The liability of the surety is co-extensive with that of the principal
debtor, unless it otherwise provided by the contract for example A guarantees to B for the
payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable not
only for the amount of the bill but also for any interest and charges which may have become
due on it.

DEFINITION OF CO-EXTENSIVE: Section 128 of the Indian contract Act provides the
following definition in respect of the surety liability:-

“It says that the liability of the surety is co-extensive with that of the principal debtor
unless it otherwise provided by the Contract.”

A case of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel-1991: It was
held by the court that where there were joint promisors and consideration was paid by only
one of them the other promisors were equally liable to pay amount. The liability of son was
co-extensive with his father who was principal debtor in view of section 127 and 128 of the
Indian contract Act.

The list of some of the leading cases in which the liability of the surety is co-extensive are
given below to strengthening the answer of the question:-

Kellappan Nambiar v/s Kanhi Raman-1957: In this case that if the principal debtor
happens to be a minor and the agreement made by him is void, the surety too cannot be made
liable in respect of the same because the liability of the surety is co-extensive with that of
principal debtor. It has been held that the guarantee of the loan or an overdraft to an infant is
void because the loan to the infant itself is void.

That in case of State Bank of India v/s V.N. Anantha Krishnam-2005: that in view of the
provision of section 128 of Act the Presiding officer was not correct in giving directions to
the Bank to proceed against the property because cash credit facility and the liability of surety
was co-extensive with that of principal debtor.

· In a case of Bank of Bihar Ltd. v/s Dr.Damodar Prasad -1969: The Supreme Court
held that the liability of the surety is immediate and cannot be defended until the creditor has
exhausted all his remedies against the principal debtor.

· A case of Industrial Financial Corporation of India v/s Kannur Spining & Weaving
Mills Ltd.-2002: It was held that the liability of surety does not cease merely because of
discharge of the principal debtor from liability.

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· In a case of Harigobind Aggarwal v/s State Bank Of India-1956: It was held that the
principal debtor liability is reduced e.g. after the creditor has recovered a part of the sum due
from him out of his property the liability of the surety is also reduced accordingly.

When the liability of the surety is extinguished, he is said to be discharged; a surety may
be discharged:

(i) By revocation.

(ii) By the act or conduct of the creditor.

(iii) By invalidation of the contract of guarantee.

I. Discharge of surety by revocation:

(a) Revocation by notice (Sec. 130)

(b) Revocation by death (Sec. 131)

I Discharge of surety by novation (Sec. 62)

II. Discharge of surety by the act or conduct of the creditor:

1. By variation in terms of contract (Sec. 133)

2. By release or discharge of principal-debtor (Sec. 134)

3. By compounding by the creditor with the principal debtor (Sec. 138)

4. By creditor’s act or omission impairing surety’s eventual remedy (Sec. 139)

5. By loss of surety (Sec. 141)

III. Discharge of Surety by Invalidation of the Contract:

(i) By obtaining guarantee by misrepresentation (Sec. 142)

(ii) By obtaining guarantee by concealment (Sec. 143)

(iii) By the failure of the co-surety to join (Sec. 144)

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 2. Discharge of surety by revocation

Under discharge of surety by revocation the surety can be discharged by three ways:

2.1- By giving notice (sec.130)

2.2- By death of surety (sec. 131)

2.3- By novation (sec.62)

2.1 By giving a notice (sec.130)

A specific guarantee cannot be revoked by the surety if the liability has already accrued. A
continuing guarantee may at any time be revoked by the surety as to future transaction by the
notice to the creditor. But the surety remains liable for transaction already entered into.

For e.g. Ram guarantee to Sham, to the extent of Rs.10,000 that Laxman shall pay all the bills
that sham shall draw upon him. Sham draws upon Laxman . Laxman accepts the bills. Ram
gives notice of revocation. Laxman dishonors the bills at maturity. Ram is liable upon his
guarantee.

2.2 Death of surety (sec.131)

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 future transactions. The deceased surety’s estate will not
be liable for any transaction entered into between the creditor and the principal debtor after
the death of surety, even if the creditor has no notice of death.

2.3 Novation (sec.62)

Novation means substitution of a new contract of guarantee for an old one either between the
same parties or between one of the old parties and a new party, the consideration for the new
contract being the mutual discharge of the old contract. The original contract of guarantee in
such a case comes to an end.

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 3 Discharge of the surety by the conduct of the creditors

Under this liability of the surety can be discharged by five ways:

3.1. Variance in the terms of contract (sec.133)

3.2. Discharge of principal debtors (sec.134)

3.3 Compounding by creditors with principal debtors (sec.135)

3.4. Creditor’s act or omission impairing surety eventual remedy (sec.139)

3.5. Loss of security (sec.141)

3.1 Variance in the terms of contract (sec.133)

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.

For e.g. X contracts to lend Y Rs.5000 on 1st March. Z guarantees repayment. X pays the
amount to Y on 1stJanuary. Z is discharged from his liability, as the terms of the contract
have been varied.

3.2 Discharge of principal debtors (sec.134)

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
consequences of which is discharged of the principal debtor. But the surety is not discharged
by operation of law.

For e.g. K contract with L for a fixed price to build a house for L within a stipulated time, L
supplying the necessary timber. M guarantees K’s performance of the contract. L omits to
supply the timber. M is discharged from his suretyship.

3.3 Compounding by creditors with principal debtors (sec.135)

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

For e.g. X purchased a motor car from Y under hire-purchase agreement on guarantee of Z
for the due performance of the agreement. Y for the valuable consideration gives X further
time for payment of one of the instalments. Held the giving of time to X discharged Z from
any further liability under the guarantee.

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 3.4 Creditor’s act or omission impairing surety eventual remedy (sec.139)

If the creditor does any act which is inconsistent with the rights 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.

For e.g. P puts Q as apprentice to R and gives a guarantee to R for Q’s fidelity. R promises on
his part that he will, at least once a month see Q make up the cash. R omits to see this done,
as promised, and Q embezzles. P is not liable to R on his guarantee.

3.5 Loss of security (sec.141)

If the creditor loses or, without the consent of the surety, parts with the security he has
against the principal debtor at the time when the contract of suretyship is entered into, the
surety is discharged to the extent of the value of the security.

For e.g. Akshey advances to Nishant, his tenant Rs.2,000 on the guarantee of Gaurav. Akshey
has also further security for Rs.2,000 by a mortgage of Nishant’s furniture. Akshey cancels
the mortgage. Nishant becomes insolvent and Akshey sues Gaurav on his guarantee. Gaurav
is discharged to the extent of the value of the security.

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 4. Discharge of surety by invalidation of contract

Under this liability of surety can be discharged by four ways:

1. by misrepresentation

2. by concealments

3. by failure of a co-surety to join

4. by failure of consideration

4.1 By misrepresentation ( sec.142)

Where a creditor misrepresents to the surety regarding the material facts, the guarantee is
invalid and therefore the surety is discharged.

4.2 By concealments (sec.143)

When a creditor obtains guarantee by concealing or keeping silent over the materials facts,
the surety is discharged as the guarantee is invalid.

For e.g. 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. C does not acquaint s with p’s previous contract.
P afterwards makes default. The guarantee is invalid.

4.3 By failure of a co-surety to join (sec.144)

Where a person gives a guarantee upon a contract that a creditor shall not act upon it until
another person has joined in it as co-surety the guarantee is not valid if that person does not
join.

For e.g. A signed a guarantee given to a bank which on the face of it was intended to be joint
and several guarantee of B,A,C and D. D did not sign and afterwards died. The bank did not
agree with B, A and C to dispense with D’s signatures. Held A was not liable.

4.4 By failure of consideration

Where in a contract of guarantee there is a failure of consideration as between the creditor

and the principal debtor, the surety is discharged.

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 Conclusion:

Keeping in view the above facts it is revealed that the surety’s nature, liabilities and rights are
of such types once he stands surety for any debt he will remain bound till the amount is
repaid by the principal debtor. Although the surety has some rights such as right of
subrogation, indemnity and to taking back the securities but even though there are more
complications in this regard. So one should stand surety for a person who have some
qualities of good pay master.

On deeply going into depth of provisions laid down in the Act it is revealed that surety
liability is co-extensive with that of principal debtor means that his liability is exactly the
same as that of the principal debtor. Suppose if the default having made by the principal
debtor the creditor can recover the same from the surety all what he could have recovered
from the principal debtor.

There are some circumstances too in which liability of the surety get discharged.

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