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Discharge of Surety

The discharge of a surety refers to the termination of the surety’s liability under a contract of guarantee. A surety can be discharged from their obligations through various legal provisions outlined in the Indian Contract Act, 1872. Below are the circumstances and methods by which a surety is discharged:

1. Discharge by Revocation (Section 130)

A surety can revoke their liability under the following circumstances:

(a) Revocation for Future Transactions

  • In the case of a continuing guarantee, the surety can revoke the guarantee for future transactions by giving notice to the creditor.
  • Past transactions remain unaffected, and the surety continues to be liable for them.

(b) Revocation by Death of Surety

  • The death of a surety automatically revokes their liability for future transactions under a continuing guarantee unless stated otherwise in the contract.
  • However, the surety’s estate remains liable for transactions made before their death.

2. Discharge by Conduct of the Creditor

(a) Release or Discharge of Principal Debtor (Section 134)

  • If the creditor releases the principal debtor from liability or enters into an agreement to discharge them, the surety is automatically discharged.
  • Example: If the creditor forgives the debt owed by the principal debtor, the surety is no longer liable.

(b) Arrangement Without Surety's Consent (Section 135)

  • If the creditor makes a material arrangement with the principal debtor, such as granting an extension of time or altering repayment terms, without the surety’s consent, the surety is discharged.
  • Example: The creditor extends the loan repayment period for the debtor without consulting the surety.

(c) Act or Omission by Creditor (Section 139)

  • If the creditor acts in a way that impairs the surety’s right to recover from the principal debtor or reduces the value of security held, the surety is discharged.
  • Example: The creditor releases collateral held against the debt without the surety’s consent.

3. Discharge by Variance in Contract Terms (Section 133)

  • A material alteration in the terms of the contract between the creditor and the principal debtor, without the surety’s consent, discharges the surety.
  • Example: If the amount of the loan guaranteed by the surety is increased without their consent, the surety is discharged.

4. Discharge by Performance of the Contract

  • If the principal debtor fulfills their obligations or the contract is performed as agreed, the surety is discharged from liability.
  • Example: If the debtor repays the entire loan, the surety has no further liability.

5. Discharge by Invalidation of the Guarantee

A surety is discharged if the guarantee becomes invalid due to the following:

  • Misrepresentation (Section 142): If the surety was induced to enter the guarantee by fraud or misrepresentation, they are discharged.
  • Concealment (Section 143): If material facts are concealed by the creditor at the time of the guarantee, the surety is discharged.
  • Failure of Consideration (Section 144): If the guarantee is given without consideration or the consideration fails, the surety is discharged.

6. Discharge by Operation of Law

A surety can be discharged by the following:

  • Insolvency of the Principal Debtor: If the debtor is declared insolvent, the surety may be discharged from liability.
  • Insolvency of the Surety: The surety’s liability may cease if they are declared insolvent.
  • Merger of Rights: If the creditor acquires rights over the debtor’s property, which merges with their own rights, the surety is discharged.

Summary Table

Method of Discharge Description
Revocation Surety can revoke liability for future transactions by notice or on their death.
Conduct of Creditor Release of debtor, alteration of terms, or impairment of security discharges surety.
Variance in Contract Terms Material changes in contract terms without the surety’s consent discharge them.
Performance of Contract Fulfillment of the debtor’s obligations discharges the surety.
Invalidation of Guarantee Misrepresentation, concealment, or lack of consideration invalidates the guarantee.
Operation of Law Insolvency, merger of rights, or legal provisions may discharge the surety.
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