Understanding Suretyship and Discharge
In the world of business and credit transactions, suretyship plays a vital role in building trust between lenders and borrowers. A contract of guarantee, as defined under Section 126 of the Indian Contract Act, 1872, involves three parties — the principal debtor, the creditor, and the surety. The surety guarantees the performance or repayment of the debt by the principal debtor.
However, there are circumstances under which the surety is released from liability, either wholly or partially. This process is known as the discharge of surety. The law recognizes various ways in which a surety can be discharged — such as by conduct of the creditor, by the operation of law, or by the act of the parties. Understanding these methods is essential to safeguard both the surety’s rights and the creditor’s interests.
1. Discharge by Revocation of Guarantee
Section 130 – Revocation of Continuing Guarantee
A continuing guarantee can be revoked by the surety at any time for future transactions by giving notice to the creditor. However, the surety remains liable for all transactions already made before such notice.
Example:
A guarantees B’s loan transactions with C’s company. Later, A gives written notice revoking the guarantee. A will not be liable for future loans, but will still be responsible for previous ones.
Section 131 – Revocation by Death of Surety
The death of a surety automatically revokes a continuing guarantee concerning future transactions, unless there is a contract stating otherwise. The deceased surety’s estate remains liable for transactions done before death.
2. Discharge by Variance in Terms of Contract (Section 133)
A surety is discharged if there is any material alteration in the terms of the original contract between the principal debtor and the creditor without the surety’s consent. This is because the surety’s liability is based strictly on the terms agreed at the time of giving the guarantee.
Example:
If a creditor agrees to increase the rate of interest for the principal debtor without consulting the surety, the surety is discharged from further liability since the risk has been altered.
3. Discharge by Release or Discharge of Principal Debtor (Section 134)
When the principal debtor is released or discharged by the creditor — either through a contract, by operation of law, or by composition — the surety also stands discharged. The rationale is that the surety’s liability is secondary and depends on the existence of the principal debtor’s obligation.
Example:
If the creditor agrees to release the principal debtor by entering into a settlement or compromise, the surety’s liability automatically ends.
4. Discharge by Composition, Extension of Time, or Promise Not to Sue (Section 135)
If the creditor, without the surety’s consent, makes an agreement with the principal debtor to:
- Compound (settle) the debt,
- Give time for repayment, or
- Promise not to sue the debtor,
the surety is discharged. This is because such arrangements may affect the surety’s right to immediate recovery from the debtor.
Example:
If a bank gives a debtor six additional months to repay without informing the surety, the surety is discharged as this extension alters the contract’s terms.
5. Discharge by Creditor’s Act or Omission Impairing Surety’s Remedy (Section 139)
A surety has the right to recover from the principal debtor any amount paid to the creditor. If the creditor does any act or omission that impairs this right of subrogation, the surety is discharged.
Example:
If the creditor negligently releases securities or collateral held against the debtor’s loan, the surety is discharged to the extent of the value of that security.
6. Discharge by Loss of Security (Section 141)
If the creditor loses or parts with the security that was available at the time of the contract, the surety is discharged to the extent of the value of the lost security. The law ensures fairness since securities serve as protection for both creditor and surety.
Example:
If the creditor had the debtor’s property as collateral but sells it without the surety’s consent, the surety is released proportionally to the property’s value.
7. Discharge by Invalidation of Contract (Sections 142–144)
a. Misrepresentation by the Creditor (Section 142)
If the guarantee was obtained by misrepresentation made by the creditor or with his knowledge, the contract is invalid, and the surety is discharged.
b. Concealment of Material Facts (Section 143)
If the creditor conceals material facts that would have influenced the surety’s decision, the guarantee is invalid.
For instance, if the creditor fails to disclose that the debtor is already in default, the surety is not bound.
c. Failure of Condition Precedent (Section 144)
If the suretyship agreement depends on certain conditions being fulfilled before taking effect, and those conditions are not met, the surety is not liable.
Example:
If A agrees to act as surety only if B and C also join as co-sureties, but C never joins, A cannot be held liable.
8. Discharge by Novation
Under Section 62 of the Indian Contract Act, if a new contract replaces the original contract between the parties (novation), the surety is discharged.
If the principal debtor and creditor agree to substitute a new debtor or alter the contractual terms substantially, the surety’s obligation ceases.
Example:
If a creditor replaces the original debtor with another person through a fresh contract, the old surety stands discharged unless he consents to the change.
9. Discharge by Creditor’s Conduct
Even if none of the statutory conditions apply, a surety can be discharged when the creditor’s conduct is inconsistent with the terms of guarantee or causes prejudice to the surety.
Courts have recognized that any fraudulent, negligent, or unfair act by the creditor affecting the surety’s rights can lead to discharge.
Example:
If the creditor delays taking legal action against the debtor, leading to the debtor’s insolvency, the surety may be discharged due to prejudice caused by the creditor’s inaction.
Real-Life Example
In Punjab National Bank v. Bikram Cotton Mills Ltd. (1970 AIR 1970 SC 1973), the Supreme Court held that when the creditor gave the debtor time to repay the loan without the surety’s consent, the surety was discharged from liability under Section 135.
This case reinforced the principle that any alteration or extension of time without the surety’s approval affects his right of subrogation and releases him from obligation.
Mnemonic to Remember the Methods of Discharge of Surety — “R.V.V.C.C.L.M.N.C.”
Use the mnemonic “R.V.V.C.C.L.M.N.C.” to recall all methods:
- R – Revocation (Section 130–131)
- V – Variance in contract (Section 133)
- V – Release of principal debtor (Section 134)
- C – Composition or giving time (Section 135)
- C – Creditor’s act impairing remedy (Section 139)
- L – Loss of security (Section 141)
- M – Misrepresentation or concealment (Sections 142–143)
- N – Novation (Section 62)
- C – Creditor’s conduct (General principle)
Mnemonic Sentence:
“Responsible Vigilant Victors Carefully Check Legal Mistakes, Not Contracts.”
This mnemonic makes it easy to remember all the methods by which a surety can be discharged under the Indian Contract Act, 1872.
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