Understanding the Concept of Surety
In the world of commercial transactions and credit-based dealings, a contract of guarantee plays a significant role in ensuring trust and financial security. Under Section 126 of the Indian Contract Act, 1872, a contract of guarantee is defined as “a contract to perform the promise, or discharge the liability, of a third person in case of his default.”
Here, the person who gives the guarantee is called the Surety, the person on whose behalf the guarantee is given is the Principal Debtor, and the person to whom the guarantee is given is the Creditor.
A surety’s liability, however, is not permanent. The law recognizes several circumstances where the surety can be discharged—that is, released—from his obligations. These situations may arise from the actions or omissions of the creditor, changes in contract terms, or operations of law.
This essay explains in detail the actions and omissions that discharge a surety, supported by statutory provisions, judicial interpretations, and real-life examples.
Legal Foundation: Sections 133 to 139 of the Indian Contract Act, 1872
The discharge of surety is governed by Sections 133 to 139 of the Indian Contract Act, 1872. These provisions specify when and how a surety’s liability comes to an end.
The main principle is that a contract of guarantee is built on utmost good faith and mutual understanding. If the terms are altered without the surety’s consent, or if the creditor acts negligently, the surety cannot be held responsible for consequences beyond his agreed obligation.
In simpler terms, the surety is bound only by the original terms of the contract. Any deviation — whether through action (like altering the terms) or omission (like failing to preserve securities) — can discharge the surety from his liability, wholly or partly.
Actions That Discharge a Surety
1. Variance in Terms of the Contract (Section 133)
If the creditor and principal debtor make any change in the terms of the original contract without the surety’s consent, the surety is discharged.
This rule exists because the surety agreed to guarantee a specific contract — not a modified one.
Example:
In Bonar v. Macdonald (1850), a surety was discharged because the creditor and principal debtor varied the repayment terms without informing the surety.
2. Release or Discharge of the Principal Debtor (Section 134)
If the creditor releases the principal debtor from liability through an act or contract, the surety is also released. However, mere forbearance to sue the debtor (i.e., choosing not to sue) does not discharge the surety.
Illustration:
If A guarantees B’s debt to C, and C agrees to discharge B without A’s consent, then A is automatically released.
3. Compounding with, Promising to Give Time to, or Not to Sue the Principal Debtor (Section 135)
When the creditor makes an agreement with the principal debtor to give more time for repayment, compounding the debt, or not suing the debtor, without the surety’s consent, the surety is discharged.
However, if such acts are done with the surety’s consent, the surety remains liable.
Case Law:
In M.S. Anirudhan v. Thomco’s Bank Ltd. (1963), the Supreme Court held that a surety is not discharged if the creditor gives time to the debtor with the surety’s consent or under court order.
4. Agreement by Creditor to Give Time to Principal Debtor (Section 136)
An agreement between the creditor and a third party (not the debtor) to give time to the debtor does not discharge the surety. However, if the agreement is made directly with the debtor, it does.
Omissions That Discharge a Surety
1. Creditor’s Act or Omission Impairing Surety’s Eventual Remedy (Section 139)
If the creditor does any act inconsistent with the rights of the surety, or fails to do his duty, resulting in loss to the surety, the surety is discharged.
This includes situations where the creditor’s negligence prevents the surety from recovering the amount from the debtor after paying the debt.
Example:
If the creditor fails to preserve collateral security that could have been used by the surety to recover the amount later, the surety is discharged.
Case Law:
In Amrit Lal Goverdhan Lalan v. State Bank of Travancore (1968), the Supreme Court held that the surety was discharged because the bank failed to maintain pledged securities properly, impairing the surety’s rights.
2. Loss of Security by Creditor (Section 141)
If the creditor loses or parts with any security given by the principal debtor without the surety’s consent, the surety is discharged to the extent of the value of the security lost.
Illustration:
A guarantees B’s loan to C. If C releases part of B’s collateral (like property or stock), A is discharged from liability up to that amount.
Additional Grounds of Discharge (Beyond Creditor’s Acts or Omissions)
1. Revocation by Surety (Section 130)
In the case of a continuing guarantee, a surety can revoke his future liability by notice to the creditor. However, this does not affect transactions already entered into.
2. Death of Surety (Section 131)
The death of a surety automatically revokes a continuing guarantee for future transactions unless there is a contract to the contrary.
3. Novation or Change in Contract
When the old contract is substituted by a new one (novation) between the creditor and principal debtor, without the surety’s consent, the surety is discharged.
Real-Life Example
Imagine A guarantees B’s car loan from XYZ Bank for ₹10 lakhs. Later, XYZ Bank and B agree to extend the repayment period by two years without informing A.
If B defaults after the extension, A (the surety) cannot be held liable because the terms of the original contract were varied without his consent.
Similarly, if XYZ Bank fails to maintain proper records or loses the vehicle’s ownership papers (which are security), A is discharged to the extent of the loss caused by the bank’s negligence.
This real-life example highlights the importance of transparency and consent in maintaining the surety’s liability.
Mnemonic to Remember: “S.U.R.E.T.Y.”
Use the mnemonic S.U.R.E.T.Y. to easily recall the grounds for discharge of a surety:
- S – Security lost or released (Section 141)
- U – Unauthorised variance in contract terms (Section 133)
- R – Release of principal debtor (Section 134)
- E – Extension of time or promise not to sue (Section 135)
- T – Third-party agreement giving time – no discharge (Section 136)
- Y – Your omission impairs remedy – discharge applies (Section 139)
Mnemonic Sentence:
“Surety Understands Release Every Time – Yes, Fairness Matters.”
This catchy phrase helps recall that actions or omissions by the creditor—like changing terms, releasing the debtor, or losing security—discharge the surety’s obligation.
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Master the topic Discharge of Surety under the Indian Contract Act, 1872 with comprehensive explanations, legal provisions, and case laws at Lawgnan.in. Learn how actions or omissions by the creditor—such as varying terms, releasing the debtor, or losing security—can release the surety from liability under Sections 133–141. Ideal for LLB students, law aspirants, and legal professionals, Lawgnan provides simplified study notes, previous question papers, and exam-oriented materials. Strengthen your understanding of Contract of Guarantee and Suretyship today. Visit Lawgnan.in, your trusted platform for clear and concise legal learning.
