Explain the nature and extent of surety liability. State the circumstances in which surety is discharged from his liability. Therefore, where the liability of the principal is held to be not enforcement on the ground of the contract being illegal, there is no question of surety being made liable. If the principal debtor happens to be 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 coextensive with that of the principal debtor.

 

Liability of Surety:-

According to Section 128, “The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract.” The provision that the surety’s liability is coextensive with that of the principal debtor means that his liability is exactly the same as that of the principal debtor. It means that on a default having been made by the principal debtor, the creditor can recover from the surety all what he could have recovered from the principal debtor. 

For instance, the principal debtor makes a default in the payment of a debt of Rs. 10,000/-. The creditor may recover from the surety the sum of Rs. 10,000/- plus interest becoming due thereon as well as the amount spent by him in recovering that amount. This may be further explained by the following 

Example. 

A guaranteed to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C, the acceptor, is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. If the principal debtor’s 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. 

Case Law 

 Narayan Singh v. Chattarsingh,

Nature and extent :-

It has been held that if the principal debtor’s liability is scaled down in an amended decree or otherwise extinguished in whole or in part by a statute, the liability of the surety would also portent be reduced or extinguished. In this case, the liability of an agriculturist, who was the principal debtor, was Act, 1957. It was held that the effect of scaling down the principal debtor’s liability was that the surety’s liability had also been reduced accordingly. The surety’s liability was considered to be reduced for another reason also, and that was that if the surety is made liable for the full amount, he in his turn will become entitled to recover the same from the principal debtor, and this will eventually negative the benefit conferred upon the agriculturist principal debtor under the statute. 

If the principal debtor’s liability is affected by illegality, so is also that if the surety. Therefore, where the liability of the principal is held to be not enforcement on the ground of the contract being illegal, there is no question of surety being made liable. If the principal debtor happens to be 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 coextensive with that of the principal debtor. It has been held in an English case, that the guarantees of the loan or an overdraft to an infant are void, because the loan to the infant itself is void.

Discharge of surety from liability:-

When the liability of surety, which he had undertaken under a contract of guarantee, is extinguished or comes to an end, he is said to be discharged from liability. The modes of discharge of a surety, as recognized by the Indian Contract Act, are as under:

1. By Revocation

2. By Notice Sec.(130)

3. By Death of Surety Sec.(131)

4. By Novation Sec.(62)

5. By Notice (Section 130)

According to Section 130:“A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.” This Section permits revocation of guarantee by the surety:

A. When it is a continuing guarantee, and

B. As regards future transactions, only.

This can be done by a notice by the surety to the creditor in that regard. Once notice revoking guarantee is issued, the liability of the surety would fasten only up to that date and not thereafter. 

The following illustrations make it clear that when the surety gives a notice of revocation, his liability continues to exist for the transactions already made, but is revoked as regards future transactions, i.e., the transactions made subsequent to the notice.

A. in consideration of B’s discounting at A’s request, bill of exchange for C guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees . be discounted bill for C to the extent of 2000 Rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges C from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C. (Sita Ram Gupta v/s Punjab National Bank)

B. By Surety’s death (Section 131) :-

According to Section 131 “The death of a surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.”

C. By Novation ( Section 133) :-

A contract of guarantee is said to be discharged by novation when a fresh contract is entered into either between the same parties or between others parties, the consideration being the mutual discharge of the old contract. The original contract of gurantee comes to an endand the surety under original contract is discharged.

2. By conduct of creditor

A. Variance in terms of contract, Sec. (133)

B. Release of the principal debtor, Sec. (134)

C. Arrangement between principal debtor and creditor, Sec. (135)

D. creditor act or omission impairing surety eventual remedy, Sec. (139)

E.  Loss of security, Sec. (141)

By variance in the terms of contract (Section 133) :-

When the surety has undertaken liability on certain terms, it is expected that they will remain unchanged during the whole period of guarantee. If there is any variance in the terms of the contract between the principal debtor and the creditor, without the consent of the surety, the surety gets discharged as regards transactions subsequent to such a change. The reason for such a discharge is that the surety agreed to be liable for a contract which is no more there, and he is not liable on the altered contract because it is different from the contract made by him. Section 133, which makes a provision in this regard, is as follows: “Any 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 transactions subsequent to the variance.”

Illustration: 

A, becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent that B’s salary shall be raised and that he shall become liable for one-fourth of the loses on overdrafts, B allows a customer to overdraft and the bank loses a sum of money. A is discharged from his surety ship by the variance made without his consent, and is not liable to make good this loss.

By release or discharge of the principal debtor (Section 134) :-

The provision concerning the discharge of the surety on the release or discharge of the principal debtor as contained in Section 134 and its 

Illustrations, is as under:

134. Discharge of surety by release or discharge of principal debtor.-

 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 consequence of which is the discharge of the principal debtor.

Example

A Contract with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber, C is discharged from his surety ship.”

C. By Arrangement:-

Section 135 mentions further circumstances when a contract between the creditor and the principal debtor can result in the discharge of the surety. The Section is as under:

 “135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor. – 

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.”

According to this Section, a contract between the creditor and the principal debtor discharges the surety in the following three circumstances:-

1. When the creditor makes composition with the principal debtor,

2. When the creditor promises to give time to the principal debtor, and

3. When the creditor promises not to sue the principal debtor.

“137 Creditor’s forbearance to sue does not discharge surety.- 

Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.

Illustration

B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his surety ship.”

(D)  By creditor’s act or omission impairing surety’s eventual remedy (Section 139):-

Section 139 incorporates the rule that when the act or omission on the part of the creditor is inconsistent with the interest of the surety, and the same results in impairing surety’s eventual remedy against the principal debtor, the surety is discharged thereby. Section 139 is as follows:

“139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy. If the creditor does any act which is inconsistent with the right of the surety, or omits to do an 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.”

(e) By loss of the security by the creditor (Section 141) :-

According to Section 141, the surety is entitled to all the securities which the creditor has against the principal debtor at the time when the contract of surety ship is entered into. If the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. For instance, the seller of the goods allows the buyer to take away the goods without insisting for the payment of the price for the same the surety who guarantees the payment of the price by the buyer, is discharged from his liability.     

3. By invalidation of Contract

A. Guarantee obtain by misrepresentation  Sec(142)

B. Guarantee obtained by concealment Sec(143)

C. Failure of co-surety to join surety Sec(144)

Guarantee obtain by misrepresentation Sec(142) :- 

Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.

Guarantee obtained by concealment invalid Sec (143) :-

Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid. Illustrations

A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B' s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.

Failure of co-surety to join surety Sec(144) 

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