RAJIV GANDHI NATIONAL UNIVERSITY OF LAW

PATIALA, PUNJAB

Topic: Various Modes of Discharge of Surety from Liability

SUBMITTED TO- SUBMITTED BY-

Dr. Jaswinder Kaur Pushpendra Sharma

(19016)

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 ACKNOWLEDGMENT

I would like to take this opportunity to express my profound gratitude and regard to Dr.
Jaswinder Kaur for his guidance and valuable feedback and constant support throughout the
duration of the project. His suggestions were of monumental help in the rough work of my
project.

I would also like to express my gratitude to Rajiv Gandhi National University of Law, Patiala for
giving me the topic that enriched my knowledge. I also like to thank the library staff for constant
support.

Lastly, I am thankful to my parents and friends for their constant support and coordination in the
completion of the research work.

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 Certificate of Submission
 

This is to certify that this project (Various Modes of Discharge of Surety from

Liability) is submitted to the Rajiv Gandhi National University of Law, Patiala in partial
fulfillment of the requirement of the B.A. LLB (Hons.) course. It is an original and bonafide
research work carried under my supervision and guidance. No part of this project has been
submitted to any University for the award of any Degree or Diploma, whatsoever. 

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 Table of Contents

ACKNOWLEDGMENT.......................................................................................................................2
Introduction.....................................................................................................................................5
Introduction to Contract..............................................................................................................5
Introduction of Guarantee...........................................................................................................6
Surety’s Liability..........................................................................................................................6
Various Modes of Discharge of Surety from Liability......................................................................7
State of Madhya Pradesh v. Kaluram............................................................................................13
RadhaKanta Pal v. United Bank of India........................................................................................15
CONCLUSION.................................................................................................................................18
References.....................................................................................................................................19
Bibliography...............................................................................................................................19
Websites.....................................................................................................................................19

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 Introduction
Introduction to Contract

An agreement with specific terms between two or more persons or entities in which there is a
promise to do something in return for a valuable benefit known as consideration. Since the law
of contracts is at the heart of most business dealings, it is one of the three or four most significant
areas of legal concern and can involve variations on circumstances and complexities. The
existence of a contract requires finding the following factual elements: a) an offer; b) an
acceptance of that offer which results in a meeting of the minds; c) a promise to perform; d) a
valuable consideration (which can be a promise or payment in some form); e) a time or event
when performance must be made (meet commitments); f) terms and conditions for performance,
including fulfilling promises; g) performance, if the contract is "unilateral". A unilateral contract
is one in which there is a promise to pay or give other consideration in return for actual
performance. (I will pay you $500 to fix my car by Thursday; the performance is fixing the car
by that date.) A bilateral contract is one in which a promise is exchanged for a promise. (I
promise to fix your car by Thursday and you promise to pay $500 on Thursday.) Contracts can
be either written or oral, but oral contracts are more difficult to prove and in most jurisdictions
the time to sue on the contract is shorter (such as two years for oral compared to four years for
written). In some cases a contract can consist of several documents, such as a series of letters,
orders, offers and counteroffers. There are a variety of types of contracts: "conditional" on an
event occurring; "joint and several," in which several parties make a joint promise to perform,
but each is responsible; "implied," in which the courts will determine there is a contract based on
the circumstances. Parties can contract to supply all of another's requirements, buy all the
products made, or enter into an option to renew a contract. The variations are almost limitless.
Contracts for illegal purposes are not enforceable at law. 2) v. to enter into an agreement

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Introduction of Guarantee
1. A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third
person, in case of his default. The person who gives the guarantee is called the surety; the person in
respect of whose default the guarantee is given in ‘principal debtor’, and the person to whom the
guarantee is given is called the ‘creditor’.1 In a contract of guarantee, there are three parties
to a contract namely surety, principal debtor and creditor whereas in case of indemnity there
are only two parties to a contract, promisor, and promisee.

2. In case of the contract of guarantee, the liability of the surety is secondary whereas in a
contract of indemnity the liability of promisor is primary.

3. Surety provides guarantee only when requested by the principal debtor in a contract of
guarantee. Indemnifier is not required to act at the request of the debtor,  in a contract of
indemnity.

4. In a contract of guarantee, there is an existing liability for debt or duty, surety guarantees
the performance of such liability.  In a contract of indemnity, the possibility of incurring a
loss is contingent against which indemnifier undertakes to indemnify.

5. Surety is eligible to proceed against the principal debtor on payment of debt, in case
principal debtor fails to pay the debt. Indemnifier cannot sue third parties in his own name.

Surety’s Liability

According to section 128 of Indian Contract Act, 1872, the liability of a surety is co-extensive with
that of principal debtor’s unless the contract provides.

Liability of surety is same as that of the principal debtor. A creditor can directly proceed against the
surety. A creditor can sue the surety directly without sueing principal debtor. Surety becomes liable
to make payment immediately when the principal debtor makes default in such payment.

1
Sec 126 of Indian Contract Act, 1872.

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Various Modes of Discharge of Surety from Liability:-

1. Notice of revocation:
An ‘ordinary guarantee’ for a single specific debt or transaction cannot be revoked once it is
acted upon. But a ‘continuing guarantee’ may at any time, be revoked by the surety as to future
transactions, by giving notice to the creditor (Sec. 130).

Thus, in such a case, the liability of the surety comes to an end in respect of future transaction
which may be entered into by the principal debtor after the surety has served the notice of
revocation. The surety shall, however, continue to remain liable for transactions entered into
prior to the notice.2

2. Death of surety (Sec. 131):

In case of a ‘continuing guarantee’ the death of a surety also discharges him from liability as
regards transactions after his death, unless there is a contract to the contrary. The deceased
surety’s estate will not be liable for any transaction entered into after the death, even if the
creditor has no notice of the death.

3. Variance in terms of contract (Sec. 133):

“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.”

Although the words “as to transactions subsequent to the variance” are more pertinent in the case
of ‘continuing guarantee’, but the principle as laid down in the Section is equally applicable in
‘specific guarantee’ as well.

Thus a surety is discharged from liability when, without his consent, the creditor makes any
change in the terms of his contract with the principal debtor (no matter whether the variation is
beneficial to the surety or is made innocently or does not materially affect the position of the

2
Under What Circumstances is the surety discharged from liability, LEGALLY INDIA (Sept. 02, 2020, 01:00 PM),
https://www.owlgen.in/under-what-circumstances-is-the-surety-discharged-from-liability/.

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surety) because a surety is liable only for what he has undertaken in the contract. “Surety has a
right to say:

The contract is no longer that for which I engaged to be surety; you have put an end to the
contract that I guaranteed, and my obligation, therefore, is at an end”. It is important to note that
mere knowledge and silence of the surety does not amount to an implied consent (Polakvs
Everett). Again, accepting further security for the same debt is not treated as variance in terms of
contract.

Illustrations:
(Appended to Sec. 133). (a) C agrees to appoint B as his clerk to sell goods at a yearly salary,
upon A’s becoming surety to C for B’s duly accounting for moneys received by him as such
clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a
commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent
misconduct of B.

(b) C contracts to lend B Rs 5,000 on the first March. A guarantees, repayment. C pays the 5,000
rupees to B on the first January. A is discharged from his liability, as the contract has been varied
in as much as C might sue B for the money before the first of March.

4. Release or discharge of principal debtor (Sec. 134):

This Section provides for the following two ways of discharge of surety from liability:

(a) The surety is discharged by any contract between the creditor and the principal debtor, by
which the principal debtor is released. Any release of the principal debtor is a release of the
surety also.

(b) The surety is also discharged by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor.

Illustrations:
(Appended to Sec. 134). (a) A gives a guarantee to C for goods to be supplied by C to B. C
supplies good to B, and afterwards B becomes embarrassed and contracts with his creditors

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(including C) to assign to them his property in consideration of their releasing him from their
demands. Here B is released from his debt by the contract with C, and A is discharged from his
surety ship.

(b) A contracts 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 (because the contract stands discharged against
A, the contractor).

5. Arrangement by creditor with principal debtor without surety’s consent

(Sec. 135):
Where the creditor, without the consent of the surety, makes an arrangement with the principal
debtor for composition, or promises to give him time or not to sue him, the surety will be
discharged.

But in the following cases, a surety is not discharged:

(a) Where a contract to give time to the principal debtor is made by the creditor with a third
person, and not with principal debtor, the surety is not discharged (Sec. 136).

Illustration (To Sec. 136):

C, the holder of an overdue bill of exchange drawn by A as surety for B and accepted by B,
contracts with M to give time to B. A is not discharged.

(b) Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any
other remedy against him, does not discharge the surety, unless otherwise agreed (Sec. 137).

Illustration (To Sec. 137):

B owes to 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 the surety ship.

(c) Where there are co-sureties, a release by the creditor of one of them does not discharge the
others; neither does it free the surety so released from his responsibility to the other sureties (Sec.
138).
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6. Creditor’s act or omission impairing sureties eventual remedy (Sec. 139):
“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 the eventual remedy of the surety himself
against the principal debtor is thereby impaired, the surety is discharged.”3

In short, it is the duty of the creditor to do every act necessary for the protection of the rights of
the surety and if he fails in this duty, the surety is discharged.

Thus, where the integrity of a cashier is guaranteed, it is the duty of the employer to give
information to the surety if any dishonest act is done by the employee.

If the employer continues to employ him after an act of dishonesty (which is proved), the surety
is discharged, if he is not informed within a reasonable time, because then the surety’s right
(eventual remedy) to inform police for necessary recovery action is lost or damaged, i.e., may
not be so fruitful as it would have been, had a report been lodged earlier.

Illustrations:
(Appended to Sec. 139). (a) B contracts to build a ship for C for a given sum, to be paid by
installments as the work reaches certain stages, (the last installment not to be paid before the
completion of the ship).

A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A,
prepays to B the last two installments. A is discharged by this prepayment.

(b) A puts A/as an apprentice to B and gives a guarantee to B for A is fidelity. B promises on his
part that he will, at least once a month, see M make up the cash. B omits to see this done as
promised, and M embezzles. A is not liable to B on his guarantee.

7. Loss of security (Sec. 141):

If the creditor loses or, without the consent of the surety, parts with any security given to him, at
the time of the contract of guarantee, the surety is discharged from liability to the extent of the
value of security. The word ‘loss’ here means loss because of carelessness or negligence.
3
Discharge of Surety, (Sept 01, 220, 05:00 PM), https://accountlearning.com/discharge-of-surety-circumstances-
when-liability-of-surety-comes-to-end/.

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Thus if the security is lost due to an act of God or enemies of the state or unavoidable accident,
the surety would not be discharged. Again, if the securities lost or parted with, were obtained
afterwards as a further security, the surety would not be discharged (BhushayyavsSuryanarayan).

State Bank of Saurashtra vs. ChitranjanRangnath Raja and Anr4

Facts:

The appellant-bank allowed a cash credit facility limited to Rs. 75,000/- to the Principal Debtor
(PD) on his pledging 5,000 tins of groundnut oil under the lock and key of the Bank and on
personal guarantee of the Respondent-Surety. However, afterwards when the Bank lost the
pledged tins and sued the legal representative of PD (after the death of PD) and the Surety to
repay the debt, Surety contested discharge of his liability.

Judgment

In order to attract section 141 of the Contract Act, it must be shown that the creditor had taken
more than one security from the principal debtor at the time when the contract of guarantee was
entered into and irrespective of the fact whether the surety knew of such other security offered by
the principal debtor, if the creditor loses or without the consent of the surety parts with the other
security, the surety would be discharged to the extent of the value of the security. The letter of
guarantee executed by the Surety and the pledging of the goods evidenced one composite
transaction; such that, as found by the High Court, the principal debtor had offered two
securities, (i) the pledge of goods, (ii) personal guarantee of the Surety. The Surety himself
agreed to give personal guarantee on the specific understanding and with the full knowledge of
the Bank that the principal debtor was offering another security, namely, pledge of goods. First
security, namely, the pledged goods are lost to the Bank on account of its negligence. As the
current market price of 5000 oil tins would have satisfied the Bank’s entire claim, the Surety
would be released to the whole extent.

4
980 AIR 1528, 1980 SCR (3) 915.

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With regard to contention upon, release of security implies a volitional act on the part of the
Bank. In the present case, the bank had lost the security on account of negligence which cannot
be equated with release. Further, w.r.t Cl.7, the expression ‘any other guarantee, security or
remedy’ therein mentioned to be security other than the pledged goods

8. Invalidation of the contract of guarantee (in between the creditor and the

surety):

A surety is also discharged from liability when the contract of guarantee (in between the creditor
and the surety) is invalid. A contract of guarantee is invalid in the following cases:

(i) Where the guarantee has been obtained by means of misrepresentation or fraud or keeping
silence as to material part of the transaction, by the creditor or with creditor’s knowledge and
assent (Sees. 142 and 143). Notice that under these Sections the guarantee remains valid if the
misrepresentation or concealment is done by the debtor without the concurrence of the creditor.5

Illustrations:
(Appended to Sec. 143). (a) 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.

(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B
and C have privately agreed that B should pay five rupees per ton beyond the market price, such
excess to be applied in liquidation of an old debt.

This agreement is concealed from A. A is not liable as a surety.

(ii) 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 (Sec. 144).
5
Discharge of Surety Liability, IPLEDERS (04 Sept. 2020, 02:00 PM), https://blog.ipleaders.in/discharge-suretys-
liability/.

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(iii) Where it lacks one or more essential elements of a valid contract, e.g., surety is incompetent
to contract or the object is illegal.

9. By Novation:

Novation means substitution of an existing contract with a new one. Section 62 says that
If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the
original contract need not be performed. The surety is liable under the terms of old contract, but
if by novation old contract gets discharged then surety also automatically gets discharged.

Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C, that B shall
thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new
debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his
(A’s), estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and
extinguishes the old.

(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees, B orders A to credit C with
1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1,000 rupees,
and no new contract has been entered into.

State of Madhya Pradesh v. Kaluram6

FACTS
At an auction for sale of felled trees, Jagatram (J) was awarded the sale, on payment of a security
and subsequent payment of installments. He executed a contract in favour of the Governor of
M.P. which specified, (among other terms), that the contractor had to furnish a coupe boundary
certificate which concerned the area from which contractor was allowed to take away the trees.
Nathuram and Kaluram (K), the defendants, stood sureties for J. J removed the entire quantity of

6
1967 SCR (1) 266.

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the trees, paid the first installment but failed to pay the rest. State of M.P(S) claimed for
recovery. K filed an action against the S claiming that he was not liable to pay the arrears of
forest dues recoverable from J.

SUPREME COURT (SHAH J.)

1. (w.r.t K’s 2nd contention) S had a charge over the goods sold as well as the right to
remain in possession till full payment of the installments. When the goods were
completely removed by J that security was lost and to the extent of the value of the
security lost the surety stood discharged. Since S parted with the goods before receiving
due payments s.83(2) can’t be enforced.
2. (w.r.t 1st contention of K & S) As soon as the contract was entered into and the coupe
boundary certificate was produced, the property in the goods passed to J and s.83 was
attracted. The Divisional Forest Officer had authority to stop removal of those goods
until the amount was paid. They however allowed J to remove the goods sold and
thereafter were paid.
3. (w.r.t 2nd contention of S) The terms of the statute do not apply only to cases in which
by positive action on the part of the creditor the security is parted with. Even if the
security is lost by the creditor, the surety is discharged.
4. Kaluram stood discharged from all liability to pay.

LAW POINT
Scope of S.141 of Indian Contract Act: The expression “security” in s.141is not used in any
technical sense : it includes all rights which the creditor had against the property at the date of
the contract. The surety is entitled on payment of the debt or performance of all that he is liable for, to the
benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives
rise to the right or liability
[1] “A surety is entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered into, whether the surety
knows of the existence of such security or not; and, if the creditor loses, or, without consent of
the surety, parts with such security, the surety is discharged to the extent of the value of the
security.”

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[2] S.83(1)When any such money is payable for or in respect of any forest-produce, the amount
thereof shall be deemed to be a first charge on such produce, and such produce may be taken
possession of by a Forest-officer until such amount has been paid.
(2) If such amount is not paid when due, the Forest Officer may sell such produce, by public
auction, and the proceeds of the sale shall be applied first in discharging such amount.

Exceptions:
In the following cases, the surety is not discharged:
(i) Death: Death of the principal-debtor does not discharge the surety from his liability.
(ii) Insolvency: Similarly, insolvency of the principal debtor does not discharge the surety.
(iii) Omission to sue within the period of limitation:

The omission of the creditor to sue within the period of limitation does not discharge the surety.

Example:

B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for more than
3 years after the debt has become payable. Although the debt has become time-barred, yet the
surety is not discharged from his liability as surety.

RadhaKanta Pal v. United Bank of India7

FACTS:
The case concerns a contract in the nature of a fidelity bond or a guarantee. A (deceased)
executed a security bond in favour of a Bank, B, in consideration of the Bank employing N.
Later N was found to be guilty of mismanaging a certain amount of money. Hence the bank
wanted to enforce the bond and get the money. A’s heir (R), filed a suit against the bank
claiming the security back as A had been discharged of his liability as the Bank had continued to
employ N even after finding out the mismanagement without notice to him. R also denied any
knowledge of the defalcation or breach of duty committed by N.

(A-Rajanikant Pal; N-Nishikant Pal, 2nd defendant; B-Comilla Banking Corporation &

1st defendant; R-Radhakant Pal, plaintiff &Rajanikant’s son)
7
AIR 1955 Cal 217.

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HELD (Calcutta High Court, P.B. Mukharji, J.)
1. Answered all the questions raised in the first issue & 1 st part of the 2nd issue in
AFFIRMATIVE.
2. (w.r.t. s.139 of ICA) Section 139, cannot be maintained. In order to attract that section
there must not only be either an act inconsistent with the rights of the surety or an
omission to do an act which it is the creditor’s or employer’s duty to do but also the
impairment of the eventual remedy of the surety against the principal debtors.
[2]Nothing in evidence showed that the plaintiff’s eventual remedy against the principal
debtor N had in any way been impaired. The plaintiff, in his very action sued and was
suing the defendant N. Therefore the plaintiff’s own act of suing the principal debtor in
the suit itself goes against the plaintiff’s contention that his eventual remedy against the
principal debtor is impaired.
3. (w.r.t ‘bank continued to employ…’) Bank cannot dismiss its employee merely on
suspicion or merely because some shortage in the cash of which he was in charge is
reported without investigation. When N was found responsible under the investigation,
the bank duly intimated this to the plaintiff. 
4. (w.r.t 3rd issue) R can recover from N but not from the Bank.

LAW POINTS:
1. The surety’s liability, for the faithful discharge by another, of his duties depends on the
exact terms of that guarantee. The surety is not discharged from liability for the default of
the person whose fidelity has been guaranteed, on the ground that the default would not
have happened if the creditor had used all the powers of superintending the performance
of the debtor’s duty, which he could have exercised, because the employer of that servant
does not contract with the surety, that he will use utmost diligence in checking the
servant’s work.
A contract of guarantee unlike a contract of insurance is not one ofuberrimaefidei but a
contract strictissimajuris.

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[1]Section 139, Contract Act, says that 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 the
eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety
is discharged.
[2] These concluding word are the qualifying words which qualify the act or omission mentioned
in this section.
Whether Failure of Consideration between the Creditor and Principal debtor discharged
the Surety:

It has already been discussed that there is, no need of separate consideration for a contract of
guarantee between the creditor and surety. But there must be consideration between the creditor
and the principal debtor. Therefore, on the failure of such consideration, surety will be
discharged from his liability.8

CONCLUSION

A contract of guarantee is considered to be of huge commercial viability and has been greatly in
use in case of any commercial transactions. This is because a contract of guarantee acts as a
second pocket to repay the amount if the first pocket or the person to whom the loan is advanced
fails to pay. In a contract of guarantee, a surety undertakes to pay the amount to the creditor in

8
When is Surety Dischrged From his Liability, LAW NOTES (Sept. 05, 2020, 05:00 PM),
https://www.srdlawnotes.com/2017/07/when-is-surety-discharged-from-his.html.

17
case the principal debtor is not able to pay the amount. The Indian Contract Act, 1872 through its
different provisions ensures that it protects the interest of all the parties in a contract of
guarantee, especially the interests of the surety. It may happen that initially when the contract of
guarantee had been entered into, the contract was not entirely based on good faith. However,
after entering into such a contract, our legal system makes it a point that good faith is imposed on
the creditor. It was apparent from the very beginning of the discharge of the surety from his
liability shows the safety and security to the surety drafting process for what has become the
Restatement (Third) of Suretyship and Guaranty that the worlds of financial guarantees and are
quite different, despite the fact that the basic relationships are similar. In each there is an
underlying obligation with a debtor-principal and a creditor-obligee, and a secondaryobligation
with a guarantor-surety running to the creditor-obligee. The basic rights among the parties are
quite similar. That there are differences in the two worlds may have prompted the decision, made
subsequent to add the words “and Guaranty” to the title of the discharge of the surety.

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 References:
Bibliography-

 Bare act “ The Indian Contract Act, 1872” (9 of 1872).

 Law of specific Relief By S.C.Banerjee “12th Edition 2013, 105th year of publication”.
 Contract and specific relief By Avtar Singh “11 th Edition 2013, Eastern Book Company
Publication”.

Websites-

 http://www.ehow.com/info types-contract-indemnity.html
 http://www.fin.gov.bc.ca/
 https://www.tarion.com/
 https://www.vakilsearch.com
 https://www.scconline.com
 https://accountlearning.com/discharge-of-surety-circumstances-when-liability-of-surety-comes-
to-end/
 https://www.owlgen.in/under-what-circumstances-is-the-surety-discharged-from-liability/
 https://blog.ipleaders.in/discharge-suretys-liability/
 https://www.srdlawnotes.com/2017/07/when-is-surety-discharged-from-his.html

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