Discharge of the surety and co-sureties - Contract II

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1. Discharge by revocation
2. Discharge by conduct of the creditor
3. Discharge by invalidity of the guarantee
4. Co-sureties: sections 146 and 147
5. Problem
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The organising idea. A surety agreed to answer for a particular risk. If the creditor changes that risk without his consent, releases the debtor, gives the debtor time, or damages the surety's chance of getting his money back, the surety is set free. Group the sections into three heads: revocation, conduct of the creditor, and invalidity of the guarantee.

1. Discharge by revocation

By notice, section 130. A specific guarantee (for a single transaction) cannot be revoked once the liability has been incurred. A continuing guarantee may be revoked at any time by the surety, as to future transactions, by notice to the creditor. Illustration (a): A, in consideration of B discounting, at A's request, bills of exchange for C, guarantees for twelve months due payment of all such bills up to Rs 5,000. B discounts bills for C to the amount of Rs 2,000. Three months later A revokes. A is discharged from liability for any later discount, but remains liable to B for the Rs 2,000 if C defaults.

By death, section 131. The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee as to future transactions. His estate remains liable for transactions entered into before his death. No notice of death to the creditor is required by the section.

2. Discharge by conduct of the creditor

Variance in terms, section 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. It does not matter whether the change is beneficial or harmful to the surety; he is entitled to stand on the contract he guaranteed. Illustrations:

(a) A becomes surety to C for B's conduct as manager of C's bank. Later B and C agree, without A's consent, that B's salary will be raised and that he will be liable for one-fourth of losses on overdrafts. B allows a customer to overdraw and the bank loses. A is discharged by the variance and is not liable for the loss.
(d) C agrees to lend B Rs 5,000 on 1 March, and A guarantees repayment. C pays the money to B on 1 January. A is discharged, because the contract has been varied: C might sue B before 1 March.

Release or discharge of the principal debtor, section 134. The surety is discharged by any contract between the creditor and the principal debtor by which the debtor is released, or by any act or omission of the creditor the legal consequence of which is the discharge of the debtor. Illustration (c): A contracts with B to build a house for a fixed price, B to supply the timber; C guarantees A's performance. B omits to supply the timber. C is discharged. The section speaks of release by the creditor. Where the debtor is discharged by operation of law, as on insolvency or because the debt is time-barred against him, the surety is not discharged.

Composition, time or promise not to sue, section 135. A contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety unless the surety assents. Two limits follow:

Section 136. Where the contract to give time is made with a third person and not with the principal debtor, the surety is not discharged.
Section 137. Mere forbearance to sue the principal debtor or to enforce any other remedy against him does not, in the absence of a contrary provision in the guarantee, discharge the surety. Illustration: B owes C a debt guaranteed by A. The debt becomes payable and C does not sue B for a year. A is not discharged.

Release of one co-surety, section 138. Where there are co-sureties, the release of one by the creditor does not discharge the others, nor does it free the released surety from his responsibility to the other sureties to contribute.

Impairing the surety's eventual remedy, section 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, and the eventual remedy of the surety against the principal debtor is thereby impaired, the surety is discharged. Illustration (a): B contracts to build a ship for C, to be paid by instalments as the work reaches certain stages; A is surety for B's due performance. C, without A's knowledge, prepays the last two instalments to B. A is discharged by the prepayment.

Loss of security, section 141. Closely related: if the creditor loses or, without the surety's consent, parts with any security he held when the guarantee was given, the surety is discharged to the extent of the value of that security. In State Bank of Saurashtra v. Chitranjan Rangnath Raja, 1980 INSC 100, AIR 1980 SC 1528, goods pledged with the bank by the debtor were lost through the bank's negligence. The Supreme Court held that the sureties were discharged to the extent of the value of the goods lost.

Trap. The surety can contract out of these protections. Banks commonly put in the guarantee deed the surety's advance consent to variation, extension of time and release of securities. In Amrit Lal Goverdhan Lalan v. State Bank of Travancore, 1968 INSC 100, AIR 1968 SC 1432, the Supreme Court gave effect to such a clause and held the surety not discharged. Sections 133 and 135 themselves say “without the surety's consent” and “unless the surety assents”. Always check the deed before concluding that the surety is free.

3. Discharge by invalidity of the guarantee

Section 142. A guarantee obtained by misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.
Section 143. A guarantee obtained by the creditor by keeping silence as to a material circumstance is invalid. Illustration (a): A employs B as a clerk to collect money. B fails to account for some receipts, and A asks him to furnish security. C guarantees B's duly accounting, but A does not tell C of B's earlier default. B defaults again. The guarantee is invalid.
Section 144. A guarantee given on the understanding that the creditor will not act on it until another person has joined as co-surety is not valid if that person does not join.

Payment or performance by the principal debtor, of course, discharges the surety too, since there is nothing left to answer for.

4. Co-sureties: sections 146 and 147

Where two or more persons are co-sureties for the same debt, jointly or severally, under the same or different contracts, and with or without knowledge of each other, they are liable, as between themselves, to pay an equal share of the whole debt or of the part unpaid by the principal debtor, in the absence of a contrary contract (section 146).

Where co-sureties are bound in different sums, they pay equally as far as the limits of their respective obligations permit (section 147). The illustrations: A, B and C are sureties for D in penalties of Rs 10,000, Rs 20,000 and Rs 40,000.

D defaults for Rs 30,000: each pays Rs 10,000.
D defaults for Rs 40,000: A pays Rs 10,000 and B and C pay Rs 15,000 each.
D defaults for Rs 70,000: each pays the full amount of his penalty.

5. Problem

X guarantees a bank loan to Y repayable in twelve monthly instalments. When Y defaults, the bank, without telling X, agrees with Y to accept repayment over three years instead. The bank then sues X. Is X liable?

Issue. Whether a binding agreement between creditor and debtor to give time discharges the surety.

Law. Section 135: a contract by the creditor with the principal debtor to give him time discharges the surety unless the surety assents. Section 137 distinguishes mere forbearance. A prior consent in the guarantee deed may defeat the plea (Amrit Lal Goverdhan Lalan).

Application. This is not mere forbearance: the bank has bound itself by contract with Y not to demand the money before the new dates. X's right, on paying, to sue Y at once under sections 140 and 145 has been postponed without his consent.

Conclusion. X is discharged under section 135, unless the guarantee deed contains his advance consent to extension of time, in which case he remains liable.

How this is examined

“Explain the modes of discharge of a surety” was set in January 2026 and is a regular 10-mark question. Write it under the three heads above, give one statutory illustration for each of sections 133, 134, 135 and 139, and cite State Bank of Saurashtra for loss of security. Short notes: continuing guarantee and its revocation; rights of co-sureties with the section 147 arithmetic.