1. Facts of the Case
‘B’ is indebted to ‘A’ for a certain amount. To secure this debt, ‘C’ acts as a surety for ‘B’s obligation towards ‘A’. Later, ‘A’ (the creditor) makes a verbal promise to a neighbour of ‘B’ (not to ‘B’ himself) to give additional time to ‘B’ for repayment of the debt. No formal or written agreement is made between ‘A’ and ‘B’ to extend the payment period. Subsequently, ‘B’ defaults in payment, and ‘A’ seeks to recover the amount from ‘C’, the surety.
The question arises — Does ‘C’ remain liable as surety, or is he discharged due to ‘A’s promise to extend time to ‘B’?
2. Issues in the Case
- Whether the surety ‘C’ is discharged from liability when the creditor ‘A’ makes a promise to give time to the debtor ‘B’, not directly to ‘B’ but to a third person (neighbour).
- Whether the promise made to a third person (not to the debtor himself) constitutes a valid contract of giving time under Section 135 of the Indian Contract Act, 1872.
- Does the absence of a binding agreement between the creditor and debtor affect the surety’s obligation?
3. Legal Principles Covered
- Section 133 – Discharge of Surety by Variance in Terms of Contract
If 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 transactions subsequent to the variance. - Section 135 – Discharge of Surety When Creditor Compounds, Promises to Give Time, or Not to Sue
If the creditor makes a binding agreement with the principal debtor to give him time, or not to sue him, or to compound with him, the surety is discharged unless the surety assents to such contract.
However, the key phrase here is “makes a contract with the principal debtor.” - Section 137 – Mere Forbearance to Sue Does Not Discharge Surety
The mere act of the creditor forbearing to sue the principal debtor or giving him time, without a binding agreement, does not discharge the surety.
Illustrative Case Laws:
- Bishop & Another v. Elliott (1849) – A mere promise to a third person to give time to the debtor does not affect the surety’s liability.
- Sita Ram Gupta v. Punjab National Bank (2008) 5 SCC 711 – The surety’s liability is co-extensive with that of the principal debtor unless otherwise provided by the contract.
- Indian Contract Act, 1872 – Commentary by Pollock & Mulla: The discharge of surety under Section 135 applies only when there is a valid, enforceable agreement between creditor and debtor.
4. Possible Judgement
The promise made by ‘A’ (the creditor) to a neighbour of ‘B’ does not constitute a valid or enforceable contract between the creditor and the principal debtor. As there is no binding agreement between ‘A’ and ‘B’ for granting time, the situation does not fall under Section 135 of the Indian Contract Act, 1872.
Therefore, the surety ‘C’ is not discharged from liability.
The court would likely hold that:
- The surety ‘C’ remains liable for the debt, since the creditor’s promise was merely informal and made to a third person, not the debtor.
- The act of “giving time” in this context is not legally enforceable and thus does not affect the surety’s contractual obligation.
Hence, ‘C’ continues to be bound by the guarantee and is liable to pay the debt if ‘B’ fails to do so.
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