1. Facts of the Case
- ‘A’ stands as a surety for the good conduct of ‘B’, who is employed in a cooperative society (the Bank).
- The guarantee given by A is a continuing guarantee, meaning it covers B’s conduct over time during his employment.
- During the course of employment, B misappropriates some money belonging to the society.
- The Bank excuses or condones this first act of misappropriation without informing A, the surety.
- Later, B again misappropriates ₹50,000 from the society.
- The society files a suit against A, demanding that he pay ₹50,000 under the contract of guarantee.
- The question is whether A is liable for the second misappropriation after the Bank had excused B’s earlier misconduct without A’s knowledge or consent.
2. Issues in the Case
- Whether A’s liability as surety continues after the Bank condoned B’s previous act of dishonesty without informing A.
- Whether the Bank’s omission to disclose B’s earlier misconduct amounts to variance in the terms of the guarantee or release of the surety.
- Whether a continuing guarantee can be revoked or discharged when the creditor (the Bank) fails to inform the surety about the principal debtor’s (B’s) misconduct.
- Whether A is legally bound to compensate the Bank for B’s second act of misappropriation amounting to ₹50,000.
3. Legal Principles Covered
a) Section 133 – Discharge of Surety by Variance in Terms of Contract
- According to Section 133 of the Indian Contract Act, 1872, any material 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 all transactions subsequent to the variance.
- By excusing B’s earlier misappropriation, the Bank varied the implied terms of good conduct without consulting A. This act changes the nature of the risk that A had agreed to guarantee.
b) Section 139 – Discharge of Surety by Creditor’s Act or Omission Impairing Surety’s Remedy
- Section 139 states:
“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 thereby the eventual remedy of the surety himself against the principal debtor is impaired, the surety is discharged.” - In this case, the Bank’s failure to inform A about the first misappropriation impaired A’s ability to protect himself against B’s misconduct (for example, by withdrawing the guarantee or demanding stronger control).
- Hence, A is discharged from liability for any subsequent misconduct by B.
c) Section 142 – Guarantee Obtained by Misrepresentation
- If a guarantee is obtained by misrepresentation made by the creditor regarding a material part of the transaction, it is invalid.
- By concealing the fact of B’s first misappropriation, the Bank in effect misrepresented the true risk to A for the continuing guarantee. Thus, any liability for later losses cannot stand.
d) Section 143 – Guarantee Obtained by Concealment
- Section 143 provides that “any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.”
- Here, the Bank’s silence about B’s first misconduct is a material concealment, since it directly affects the risk guaranteed by A.
- Therefore, the guarantee becomes void as to subsequent acts after such concealment.
e) Relevant Case Laws
- London Guarantee Co. v. Fearnley (1880) 5 AC 911
- A surety for an employee’s good conduct was held not liable when the employer, after discovering misconduct, continued the employee in service without the surety’s consent.
- This condonation discharged the surety from further liability.
- Bonar v. Macdonald (1850) 3 HLC 226
- A surety was discharged because the creditor failed to inform him of the principal debtor’s earlier dishonesty, thereby altering the risk.
- State Bank of India v. Premco Saw Mill (1983 AIR 121)
- The court held that non-disclosure of material facts which affect the surety’s liability renders the guarantee unenforceable.
4. Possible Judgement
- The Bank (cooperative society), by condoning B’s first act of misappropriation and failing to inform A, has altered the terms of the contract of guarantee and impaired A’s rights under Sections 133, 139, and 143 of the Indian Contract Act, 1872.
- This conduct discharges A from any liability for subsequent acts of misappropriation by B.
Therefore:
- A’s guarantee was for B’s good conduct, but once B’s misconduct was discovered and excused without A’s knowledge, the continuing guarantee stood revoked as to future acts.
- The second misappropriation of ₹50,000 occurred after A’s discharge; hence, A cannot be held liable for it.
- The Bank’s omission to inform A was a breach of duty under Section 139, and the surety’s eventual remedy was impaired.
Final Decision:
The surety (A) is not liable for the ₹50,000 misappropriated by B after the Bank’s failure to disclose B’s prior misconduct.
The Bank’s condonation and concealment release A from liability for future acts under Sections 133, 139, and 143 of the Indian Contract Act, 1872.
Hence, the society’s suit against A should be dismissed.
Supporting Provisions:
- Section 133 – Discharge by variance
- Section 139 – Discharge by act/omission impairing remedy
- Section 143 – Guarantee obtained by concealment
About lawgnan:
Discover how a surety’s liability changes under the Indian Contract Act, 1872, only on Lawgnan.in. This detailed explanation of Sections 133, 139, and 143 helps law students and professionals understand when a surety is discharged due to the creditor’s omission or concealment. Learn how cases like London Guarantee Co. v. Fearnley (1880) and SBI v. Premco Saw Mill (1983) shape modern interpretations of continuing guarantees and misrepresentation. Visit Lawgnan.in today for expert summaries, LLB notes, and real case-based insights designed to simplify complex contract law principles for better academic and practical understanding.
