Lecture-5

Law of Contracts-II
(Law of Guarantee)
Discharge of Surety from Liability
• Meaning:
Modes
1. By notice of revocation (S. 130).
2. By death of surety (S.131).
3. By variance in the terms of contract (S.133).
4. By release or discharge of principal debtor (S.134).
5. When creditor compounds with, gives time to, or agrees not
to sue, principal debtor(S. 135).
6. By creditor's act or omission impairing surety's eventual
remedy (S. 139).
7. Loss of securities by the creditor (S.141).
Date: 11/07/2013 Slide-2
 Lecture-5
Law of Contracts-II
(Law of Guarantee)
Discharge by Revocation (S. 130)
• A continuing guarantee may at any time be revoked by
the surety, as to future transactions, by notice to the
creditor. Offord v Davies (1862) 6 LT 579. [A, 513-14]
defendant guaranteed for repayment of bills- revoked guarantee
before any bill was discounted- plaintiff nevertheless discounted-
not liable
Discharge by Death of Surety (S. 131)
• The death of the surety operates, in the absence of any
contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions.

Date: 11/07/2013 Slide-3

 Lecture-5
Law of Contracts-II
(Law of Guarantee)

Liability of two persons, primarily liable, not affected by

arrangement between them that one shall be surety on
other's default (S. 132)
• Where two persons contract with a third person to
undertake a certain liability, and also contract with each
other that one of them shall be liable only on the default
of the other, the third person not being a party to such
contract, the liability of each of such two persons to the
third person under the first contract is not affected by
the existence of the second contract, although such third
person may have been aware of its existence.
 Lecture-5
Law of Contracts-II
(Law of Guarantee)
Discharge by variance in the terms of contract (S.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.
• Meaning:
• Illustrations.
 Bonar v Macdonald (1850) 3 HLC 226: 88 RR 60: 10 ER 87. [A,
516] defendant guaranteed for conduct of manager of bank-
later, raised salary of manager and made him liable for one
fourth losses- contract altered-no communication to surety-
surety not liable to pay

Date: 11/07/2013 Slide-5

Where variation is unsubstantial or beneficial
to surety
 MS Anirudhan v Thomco’s Bank Ltd AIR 1963 SC 746. [A,
516-17] defendant guaranteed repayment of loan of
25,000 (on guarantee paper)- loan reduced to 20,000
without intimation to surety- surety not discharged
 Other English Law authorities:
 Blest v. Brown- [A, 517]- if written engagement changed even
slightly- surety has right to discharge himself from liability
 Holme v. Brunskill- [A, 517]- unsubstantial changes which benefit
surety do not discharge him of liability to pay- changes evidently
disadvantageous, right to discharge himself

Date: 04/07/2012 Slide-1

• Advance authorization of Alteration [A, 518]
 Central Bank of India v Ali Mohd (1993) Mh LJ 1092. [A,
518] such authorization would be contrary to the provision
u/s 133- consent must be taken at the time of proposed
variance
• Effect of Decree against Surety:
 Charan Singh v Security Finance Pvt Ltd AIR 1988 Del 130.
[A, 518-19] creditor obtained decree against principal
debtor and surety to pay- subsequently, entered into
settlement with debtor to accept less amount- surety
contended that this is variation which discharges him of
liability to pay- HELD- after obtaining decree, surety is no
longer liable to pay under contract but under decree-
surety held liable to pay
Date: 04/07/2012 Slide-1
 Lecture-5
Law of Contracts-II
(Law of Guarantee)
Discharge of surety by release or discharge of principal
debtor (S. 134)
• 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.
• By contract [A, 520- first para of Release of Principle Debt]
• By act or omission [A, 522]

• Application of Insolvency laws [A, 521]

– Read with S. 128. liability of surety is co-extensive
– Illustrations
Date: 11/07/2013 Slide-6