A surety who has been discharged ceases to be liable, wholly or in part. The Act sets out specific grounds of discharge in S.130 to S.141. The unifying principle is that the surety agreed to guarantee a particular obligation on particular terms, and any dealing between the creditor and the principal debtor that alters that bargain, or that impairs the surety's ability to recover, releases the surety to that extent.
Legal Framework
| Provision | Ground of Discharge | Effect |
|---|---|---|
| S.130 | Revocation by notice | Continuing guarantee revoked as to future transactions |
| S.131 | Death of surety | Continuing guarantee revoked as to future transactions, absent contrary contract |
| S.133 | Variance in terms of the contract | Surety discharged as to transactions after the variance |
| S.134 | Release or discharge of the principal debtor | Surety discharged |
| S.135 | Arrangement with the principal debtor | Composition, promise to give time, or promise not to sue discharges the surety |
| S.139 | Creditor's act or omission impairing the surety's eventual remedy | Surety discharged |
| S.141 | Loss or parting with security | Surety discharged to the extent of the value of the security |
Discharge by Revocation and Death
Revocation by Notice (S.130)
A continuing guarantee may at any time be revoked by the surety as to future transactions, by notice to the creditor. The surety remains liable for transactions already entered into before the notice took effect.
Why revocation operates only prospectively: The creditor has already altered its position on the faith of the guarantee in respect of past transactions. Allowing retrospective revocation would let the surety withdraw protection the creditor had already relied upon. Limiting revocation to future transactions balances the surety's freedom to cap ongoing exposure against the creditor's settled expectations.
A specific guarantee cannot be revoked once the guaranteed transaction has been entered into, because there is no future transaction left to withdraw from.
Death of Surety (S.131)
The death of the surety operates as a revocation of a continuing guarantee as to future transactions, in the absence of a contract to the contrary. Notice to the creditor is not required; the death itself has this effect. The surety's estate remains liable for transactions before death.
Discharge by Variance (S.133)
Where there is any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, the surety is discharged as to transactions subsequent to the variance.
Why any variance discharges, without proof of prejudice: The rule is strict. The surety guaranteed a specific bargain, and it is not for the creditor to say that the altered bargain is no worse for the surety. Requiring the surety to prove prejudice would place her in the difficult position of litigating hypotheticals about a contract she never agreed to. The strictness of S.133 protects the surety's right to define her own exposure.
What counts as a variance: A change in the rate of interest, the date of repayment, the mode of payment, the amount of the facility, or the identity of the security may each amount to a variance. A change that is purely for the surety's benefit, or one made with her consent, does not discharge.
Facts: A surety signed a guarantee for Rs. 25,000. The principal debtor, before delivering it to the bank, altered the figure to Rs. 20,000 to match the amount the bank was willing to lend. The bank accepted the altered document. On default the surety pleaded discharge by variance.
Issue: Does an alteration that reduces the surety's liability discharge the surety under S.133?
Held: The Supreme Court held the surety was not discharged. The alteration was not prejudicial; it reduced the surety's exposure and was made to give effect to the parties' intention. A variance that is beneficial to the surety, or immaterial, does not attract S.133.
Relevance: Establishes that S.133 is not mechanically applied to every textual change. The touchstone is whether the alteration is material and non-beneficial to the surety.
Discharge by Release or Arrangement
Release of the 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.
Why release of the principal debtor releases the surety: The surety's liability is accessory. If the principal obligation is extinguished, there is nothing left to guarantee. The surety would also lose her S.140 and S.145 rights of recourse against a debtor who has been released, so holding her liable would leave her without remedy.
Important qualification: Discharge of the principal debtor by operation of law, for example by insolvency or by the bar of limitation, does not discharge the surety. S.134 speaks of a contract or of the creditor's act or omission. Where the debtor's release results from a statutory process rather than the creditor's conduct, the surety remains liable.
Arrangement with the Principal Debtor (S.135)
A contract between the creditor and the principal debtor by which the creditor makes a composition with, promises to give time to, or promises not to sue the principal debtor, discharges the surety, unless the surety assents to it.
| Arrangement | Effect on surety |
|---|---|
| Composition (accepting less than the full debt) | Discharges the surety |
| Promise to give time to the principal debtor | Discharges the surety |
| Promise not to sue the principal debtor | Discharges the surety |
| Mere forbearance to sue (S.137) | Does NOT discharge the surety |
| Agreement with a third party to give time (S.136) | Does NOT discharge the surety |
Why forbearance is treated differently from a promise to give time: S.137 makes clear that mere inaction by the creditor does not discharge the surety. A promise to give time is a binding contractual variation that ties the creditor's hands and delays the surety's own recourse. Passive delay creates no such contractual alteration and leaves the surety free to pay and pursue the debtor at any time.
Discharge by Creditor's Conduct
Act or Omission Impairing the Surety's Remedy (S.139)
If the creditor does any act 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 against the principal debtor is thereby impaired, the surety is discharged.
Why this ground is framed around the surety's eventual remedy: The surety accepts exposure on the footing that if she pays, she can recover from the principal debtor. Conduct by the creditor that destroys or weakens that recourse changes the bargain fundamentally. S.139 is the general residual protection where the creditor's mismanagement, rather than any formal variation, has prejudiced the surety.
Loss of Security (S.141)
The surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time the contract of suretyship is entered into, whether the surety knows of the existence of the security or not. 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.
Facts: The bank held goods as security for a guaranteed loan and released a portion of them to the principal debtor without the surety's consent.
Held: The surety was discharged to the extent of the value of the security released. S.141 protects the surety's entitlement to the creditor's securities, and the creditor cannot diminish that entitlement unilaterally.
Relevance: The leading authority on partial discharge under S.141. Note that the discharge is pro tanto, not total.
Illustrations
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Revocation of a continuing guarantee: C guarantees supplies to B on a running account. C serves notice on the supplier on 15 March. Goods supplied up to 15 March remain guaranteed; supplies after that date do not. S.130 permits only prospective revocation.
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Variance without consent: C guarantees B's loan repayable in 24 monthly instalments at 12 percent interest. Without consulting C, the bank and B agree to extend the term to 48 months at 9 percent. This is a variance in the terms of the contract. Under S.133, C is discharged as to transactions after the variance, even though the reduced rate might appear favourable, because the extension materially changes the risk period.
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Beneficial alteration does not discharge: C signs a guarantee for Rs. 25,000. Before delivery the figure is corrected to Rs. 20,000, the amount actually advanced. Applying M.S. Anirudhan v Thomco's Bank (1963), C is not discharged: the alteration reduced her liability and was not material against her interest.
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Promise to give time discharges: A bank agrees with B to defer repayment by one year in exchange for additional interest, without consulting the surety C. Under S.135, C is discharged. Contrast with the bank simply taking no action for a year, which under S.137 does not discharge C.
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Loss of security is partial only: A creditor holds a vehicle worth Rs. 4 lakhs as security for a Rs. 10 lakh guaranteed debt and negligently allows it to be lost. Applying S.141 and Amrit Lal Goverdhan Lalan, the surety is discharged to the extent of Rs. 4 lakhs and remains liable for Rs. 6 lakhs.
Recall Check
- Why does revocation of a continuing guarantee operate only as to future transactions?
- Does every textual alteration in the principal contract discharge the surety under S.133?
- Distinguish a promise to give time to the principal debtor (S.135) from mere forbearance to sue (S.137).
Key Cases
M.S. Anirudhan v Thomco's Bank Ltd (1963) MS Anirudhan v Thomcos Bank 1963
Issue: Whether an alteration reducing the surety's liability discharges the surety under S.133.
Rule: S.133 applies to material variances that are not beneficial to the surety.
Held: The surety was not discharged. The alteration reduced her exposure and gave effect to the parties' intention.
Amrit Lal Goverdhan Lalan v State Bank of Travancore (1968) Amrit Lal Goverdhan Lalan v State Bank of Travancore 1968
Issue: Effect on the surety of the creditor parting with security without consent.
Rule: S.141 entitles the surety to the benefit of the creditor's securities.
Held: The surety was discharged to the extent of the value of the security released.
Distinctions
| Basis | Discharge by Variance (S.133) | Discharge by Arrangement (S.135) |
|---|---|---|
| Trigger | Alteration in the terms of the principal contract | Composition, promise to give time, or promise not to sue |
| Extent of discharge | As to transactions subsequent to the variance | Complete discharge |
| Proof of prejudice | Not required, but the variance must be material and non-beneficial | Not required |
| Consent of surety | Consent prevents discharge | Assent prevents discharge |
| Basis | Discharge under S.134 (release) | Discharge by operation of law |
|---|---|---|
| Source | Contract between creditor and principal debtor, or creditor's act or omission | Statute, for example insolvency or limitation |
| Effect on surety | Surety discharged | Surety remains liable |
| Rationale | Creditor's own conduct extinguished the principal obligation | Extinction is not attributable to the creditor |
| Basis | Total Discharge | Partial Discharge (pro tanto) |
|---|---|---|
| Grounds | S.134 release, S.135 arrangement, S.139 impairment of remedy | S.141 loss of security |
| Result | Surety ceases to be liable at all | Liability reduced by the value of the security lost |
| Example | Creditor releases the principal debtor by agreement | Creditor loses hypothecated stock worth Rs. 5 lakhs |
Flashcards
How may a continuing guarantee be revoked?
By notice to the creditor as to future transactions (S.130), or by the surety's death as to future transactions (S.131). Past transactions remain guaranteed.
What is the effect of a variance in the principal contract made without the surety's consent?
Under S.133 the surety is discharged as to transactions subsequent to the variance.
Does an alteration beneficial to the surety discharge her?
No. M.S. Anirudhan v Thomco's Bank (1963) held that a beneficial or immaterial alteration does not attract S.133.
Does the principal debtor's insolvency discharge the surety?
No. Discharge by operation of law is outside S.134, which requires a contract or the creditor's act or omission.
Does mere forbearance to sue the principal debtor discharge the surety?
No. S.137 expressly provides that mere forbearance does not discharge the surety, unlike a binding promise to give time under S.135.
To what extent is a surety discharged when the creditor loses a security?
To the extent of the value of the security lost (S.141). The discharge is partial, not total.
Is a surety entitled to securities she did not know existed?
Yes. S.141 applies whether or not the surety knew of the security.
Exam Scenario
Problem: Farida guarantees a bank's term loan of Rs. 20 lakhs to Hameed, repayable in 36 monthly instalments at 11 percent interest, secured by a hypothecation of Hameed's machinery worth Rs. 6 lakhs. Two years later, without informing Farida, the bank and Hameed agree to reschedule the loan over a further 48 months and to release the machinery so Hameed can sell it to fund working capital. Hameed defaults with Rs. 14 lakhs outstanding. The bank sues Farida. Advise Farida.
Step 1: Plead the grounds of discharge in this order
There are two independent grounds on these facts, one complete and one partial. Plead them as follows:
- S.133 variance, on the rescheduling of the loan. This is the primary ground because it is a complete defence.
- S.141 loss of security, on the release of the machinery, as a pro tanto discharge in the alternative.
- S.139 impairment of the surety's eventual remedy, reinforcing the second ground.
Step 2: Run the variance ground under S.133
Rescheduling the loan from 36 instalments over a further 48 months, without Farida's consent, is a variance in the terms of the contract between creditor and principal debtor. It materially alters the risk period Farida underwrote.
Distinguish M.S. Anirudhan v Thomco's Bank (1963). The alteration there was beneficial and immaterial, whereas an extension of the repayment period substantially enlarges the period of exposure and is not for the surety's benefit.
Farida is therefore discharged under S.133 as to transactions subsequent to the variance.
Step 3: Run the security grounds under S.141 and S.139
Farida was entitled to the benefit of the hypothecated machinery. The bank parted with it without her consent.
| Ground | Provision and authority | Extent of discharge |
|---|---|---|
| Variance in the principal contract | S.133, distinguishing M.S. Anirudhan v Thomco's Bank (1963) | Complete, as to transactions after the variance |
| Loss of the hypothecated machinery | S.141 with Amrit Lal Goverdhan Lalan v State Bank of Travancore (1968) | Pro tanto, Rs. 6 lakhs |
| Act inconsistent with the surety's rights | S.139 | Complete, where the eventual remedy is impaired |
The release of the security may additionally be characterised under S.139 as an act inconsistent with the rights of the surety that impairs her eventual remedy against Hameed, since her subrogation right under S.140 would have carried the benefit of that hypothecation.
Step 4: Answer the bank's best argument
The bank's strongest point is that the rescheduling was an accommodation for Hameed rather than a variance of Farida's guarantee.
That argument fails. S.133 is strict and does not require the surety to prove prejudice.
Do not treat the rescheduling as harmless because the terms look softer. M.S. Anirudhan is confined to alterations that are beneficial or immaterial to the surety. An extension of the repayment term enlarges the period of exposure, so it is a material variance and discharges under S.133.
Conclusion. Farida has a complete defence on the variance ground under S.133, and in the alternative a pro tanto discharge of Rs. 6 lakhs under S.141, reinforced by S.139.
See Also
- Rights and Liabilities of Surety : the S.140 and S.141 rights whose impairment underlies several grounds of discharge.
- Contract of Guarantee : the distinction between specific and continuing guarantee which determines whether revocation is available.