A Contract to perform the promise, or discharge the liability, of a third person in case of his default is called Contract of Guarantee. A guarantee may be either oral or written.
The person who gives the guarantee is called the Surety.
The person on whose default the guarantee is given is called the Principal Debtor.
The person to whom the guarantee is given is called the Creditor.
A surety will be discharged from his liability to the creditor under the following circumstances :-
1. Discharge by variation is the terms of contract:-A variation in the terms of the contract between the principal debtor an the creditor without the consent of the surety would absolve the surety from liability as to transactions subsequent to the variance (Section 133, Indian Contract Act). But the variation must be such materially affects the position of the surety. But, where a surety is responsible for the performance of several and distinct contracts of duties, change in one of those contracts or duties will not affect the surety' liability as to the rest.
If the alteration is in favour of and to the benefit of surety he cannot avoid it. [Aniruddin v. Thomee's Bank Ltd., AIR 1963 S. C. 749].
2. Discharge by contract with the principal debtor:- Where a creditor enters Into a contract with the principal debtor and contract has the effect of discharging the principal debtor, the surety is also dischared (Section 139, Indian Contract Act). The suspension of debt and stipulation that the period of limitation will not during the period of suspension, Will be In effectual as regards the liability of the guarantor (Gopal v. Trade Industries, AIR 1978 Mad. 134). .
3. Discharge where a creditor does not, act or makes any omissions:-Where a creditor does not act or makes any omission the legal consequence of which is the discharge of the principal debtor, the surety is also discharged. (Section 134). A surety is not discharged if the creditor allows the execution of his decree against the principal debtor to be barred by limitation-[Shah Ahmed v. Sher Ali and others 1965 A L J. 629 (FB).] "
4. Compounding with the principal debtor:-When a creditor compounds with or gives time to, or agrees not to sue the principal debtor, the surety is discharged unless he surety assent to such contract (Section 135, Indian Contract Act).
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.
5. An agreement not to sue the principal debtor:-Under Section 135 of Indian Contract Act an agreement not to sue the principal debtor has the effect of discharging the surety; but mere forbearance on the part of the creditor to sue the principal debtor or enforce any other remedy against him does not discharge the surety unless there is anything to the contrary in the suretyship agreement.
B owes to C a debt guaranteed by A. The debt becomes payable. C does not pay B for a year after debt has become payable. A is not discharged from the suretyship.
6. Release by creditor of one of co-sureties:-A release by the creditor of one of the co-sureties does not discharge the others neither does. 11 free the surety so released from his responsibility to the other Sureties (Section 138, Indian Contract Act).
In this connection English Law differs from that of Indian Law. Under English Law, there is difference between co-sureties who are bound jointly & co-sureties who are bound severally. The release of a surety results in the release of co-sureties but in the case of sureties bound severally such release will not release will not release the other co-sureties.
On the other hand, in India the release of co-surety does not result in the release of others in any circumstance.
7.Effect of creditor doing anything inconsistent with the rights of surety:- Where the creditor does anything which is inconsistent with the rights of the surety and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged (Section 139, Indian Contract Act.
8.Omission to do any act by the creditor:- Where the creditor omits to do any act which his duty is to the surety require him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired the surety is discharged. (Section 139, Indian Contract Act).
A puts M as apprentice to B, and given a guarantee to B for M’s fidelity. B promises on his part that he will atleast once a month see M make up the case. B omits to see this done, as promised, and M embezzles. A is not liable to b on his guarantee.
To the above stated circumstances following two more circumstance may be added where the guarantee can be considered to have been discharged-
i) By revocation of continuing guarantee:- Once a guarantee has been acted upon it cannot be revoked. But as exception to this general rule Section 130 of the Indian Contract Act clearly providers that a continuing guarantee can be revoked any time by the surety. Such revocation will apply to the future transaction. Notice of this intention is to be given to the creditors then only it will be effective.
Thus it can be said that when a guarantee is continuing guarantee the surety can be discharged by revocation.
ii) By death of surety:- This second mode also applies where the guarantee is of continuing type.
When the surety of a continuing guarantee dies guarantee comes to an end in relation to future transactions. Such death determines the guarantee and the surety is discharged.
So far as regards the past transactions are concerned the legal heirs of the surety can be sued can be sued for such transactions.
The provisions of Section 131 of the Indian Contract Act are clear on this point.
Courtesy:- Legal Point Foundation