CHAPTER 1 CONTRACTS OF INDEMNITY AND GUARANTEE SYNOPSIS Contract of Indemnity. Contract of Guarantee. Performance Guarantee by Banks. Main features of a Contract of Guarantee. Distinction between Contracts of Indemnity and Guarantee. Liability of Surety : Its nature and extent. Limit of surety’s liability by contract. Condition that there shall be a co-surety. Continuing Guarantee. Discharge of surety. Release of co-surety from liability. Contract of Indemnity According to dictionary meaning, indemnity is protection against loss, esp. in the form of a promise to pay, or payment for loss of money, goods, etc.! It is a security against, or compensation for loss, etc For instance, A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity? In a contract of indemnity, the person who promises to indemnify is known as “indemnifier’, and the person in whose favour such a promise is made is known as “indemnified” or “indemnity holder". According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity means "a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by conduct of any other person." This provision incorporates a contract where one party promises to save the other T.Longman’s Dictionary of Contemporary English. 2. Chambers New English Dictionary. 3. Mlustration to Section 124. (1)2 CONTRACT-I from loss which may be caused, either (i) by the conduct of the promisor himself or (ii) by the conduct of any other person, This definition covers indemnit for los agency only. It does not deal with those case, Of oe PY th, indemnity arises from loss caused by events or accu here eh not or may not depend upon the conduct of the inden’ hich tt other person, or by reason of lability incurred by sonnet Or by the indemnified at the request of the indemnifier 8 dav, Insurance contract, if contract of indemnity India It has been noted above that Section 124 contract as a contract of indemnity where there is a Promise to sa another person from loss which may be caused by the conduet of the promisor himself or by conduct of any other Person. It does not cover a promise to compensate for loss not arising due to human agency. Therefore, a contract of insurance is not covered by the definition of Section 124. Thus, if under a contract of insurance, an insurer promises to pay compensation in the event of loss by fire, such a contract does not come within the purview of Section 124, Such contracts are valid contracts, as being contingent contracts as defined in Section 31. In United India Insurance Company v. M/s. Aman Singh Munshilal? the cover note stipulated delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in a godown and thereafter to be carried to the destination. While the goods were in the godown, the goods were destroyed by fire. It was held that the goods were destroyed during transit, and the insurer was liable as per the insurance contract. Fecognizes only such Liability of insurer and breach of fidelity insurance contract Where insured bags of fertilizer stored in plaintiff's godown, were found missing due to act of embezzlement by the employees of plaintiff Company. Defendant Company had ensured to indemnify Plaintiff against loss sustained by such act. The alleged breach of condition in the contract notice to be given to defendant regarding discovery of such act could not be said to be fundamental breach. Held, that it would not permit the defendant to negate the legitimate claim of the plaintiff, “hence decreeing suit for declaration and 1. Gajanan- Moreshivar ~w, Mi at p. 303. 2A 1901 Fe Rare Madan, ALR, 1942 Bom. 302, at p 4CONTRACT-I! denny, acting eth the Scope OF Hs auth rity ina contract of i" 7 is entitled 10 recover from the promisor— (1) all damages which he may be compelled to pay in any sy, fn mespeet of ny matter 10 veh the prontise to indents applies; ity (2) all costs hich he may be compelled to pay in any su am in ringing oF seeding ‘t,he did not contre the orders of the promison and acted as it would ie been prudent for lint 0 act in the absence of any contract of indemnity, OF if the promisor authorized him to bring or defend the suit; (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise twas not contrary to the orders of the promisor, and was one which jit would have been prudent for the promise to make in the absence of any ontract of indemnity, oF Wf the promisor ‘quthorized him to compromise the suit." When can an indemnifier be made liable? Can he claim to be indemnified before he is demnified? There has been a controversy regarding the point, the indemnifier can be asked to indemnify before the indemnity-holder has actually cvffered the loss, or his liability arises only after the loss has been suffered by the jindemnity-holder. ‘According to English Common Law Be action could be brought inst the indemnifier until the indemnity-holder had suffer actual Joss. This situation created a great hardship in those cases where the jndemnity-holder was not in a position to meet the claim indemnity-holder in Sut of his pocket. Relief was pro Court of Equity. According to such cases by the by the Court of Equity, it was. no more necessary for ¢ indemmity-holder to be demnified before he could be indenznified. In other : eres the indemnily hold can now compel the indemnifier to save rom the loss i iabili i ich ii il ee ised ss in respect of liability against which indemnity has ‘There has bet i A é oe has been a difference of opi ween various High een i ia as to whether the in can claim rae fore he has actually suffered the loss. ' ling to the vit : i High Seer ee ee by the Lahore! and Nagpur? ust be demnified before he can be as to whether nion bet clemnity-holder 7 Shar Su iier wand 2 angen, Pacha ALR USS Neg Lite 7 ag, 117.CONTRACTS OF INDEMNITY AND GUARANTEE, 5 indemnified, i.e, no indemnity can be claimed until the indemnity-holder has already actually suffered the loss. The High Courts of Bombay,! Calcutta,? Madra:3 Patna,’ and Allahabad’ have expressed a different view, and they are in favour of the application of law similar to the one recognized in England by the Court of Equity. According to the decisions of these courts, an indemnity-holder can compel the indemnifier to indemnify even before the indemnity-holder has actually suffered the loss. Referring to the equitable principle and also the desirability of its being followed in India, Chagla, J. while delivering the judgment in the Bombay High Court decision of Gajanan Moreshwar v. Moreshwar Madan, observed : "The Court of equity held that if his (indemnity-holder’s) liability had become absolute, then he was entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient money which would constitute a fund for paying off the claim whenever it was made... have already held that Ss. 124 and 125, Contract Act, are not exhaustive of the law of indemnity and the Courts here would apply the same equitable principle that the Courts in England do. Therefore, if the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off." The Law Commission of India has expressed the opinion that “the view expressed by Chagla, J. is correct and should be adopted by the legislature."? The Law Commission recommended that as in English law, "the right of the indemnity-holder should be more fully defined and the remedies of an indemnity-holder should be indicated even in cases where he has not been sued."* In State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd. the respondent, a co-operative society, having a sugar factory, entered into a contract with one M/s. Pentagon Engineering Pvt. Ltd. for the installation of a paper plant. As per the agreement, the 1. Gajanan Moresinwar v. Moreshioar Madan, A.LR, 1942 Bom. 302. A different view was expressed by this Court in its earlier decision, Shankar v. Laxman, ALR. 1940 Bom. 161. Prafulla Kumar v. Gopee Ballabh Sen, L.L.R. (1944) 2 Cal. 318. Ramaligna v. Unnamolai, 38 Mad. 791 |. Chui Bai v. Nathu Bai, 22 Pat. 655. Abdul Majeed v. Abdul Rashid, ALR. 1936 All. 598, Gajanan Moreshnwar v. Moresiwar Madan, ALR. 1942 Bom, 302, at 304 13th Report, 1958, on Indian Contract Act, 1872, at Sl. id, 52. ALR. 2007 SC. 2361. eeNaasenrCONTRACT-I 6 i arantee/Indemnity for the releage, eee ee am STE Proforma Invoices of the ent retention ne site The operative portion of the Bank Guaranteg ea Se eanit Gd keep indemnified Mula Sahakari Saki! as "to pra eel all losses, claims damages actions and cost in Seer of mich Gina wih We supplier shall become liable (° a s Disputes and differences arose between ne ae and as . result, the respondent terminated the contract and oe ed the Bank Guarantee against the Pentagon, Holding at the document indemnifying the respondent was a contract of ini emnity and not guarantee, the Apex Court said that the claim made by the assured on termination of contract need not be honoured by the Bank ‘without the proof of loss, Contract of Guarantee Section 126 of the Indian Contract Act, 1872, defines a contract of guarantee as under : "A “contract of guarantee” is 4 contract to perform the promise, or discharge the liability, of a third Person in case of his default.” The Section further Provides that : "The person who Sives the guarantee is called the “surety”, the Person in respect of whose default the Suarantee is given is called “principal debtor”, and the person to whom the Suarantee is given is called the “creditor”. A guarantee may be either For example, 4 takes oO tae fulfiy 2 '° the cre ditt of guarantee is to provide additional ‘Ml a certain Obligation (8 form of a Promise by the surety to credit, ¥ery ae a 1 case the Principal debtor fails to do that. ina cou Princip debi YNtee, there. sre three parties, the a Prom Tact of arantee - © Surety, There are three contracts Secondly oe favour of he ly, the principal debtor himself makes Tee sures, ie ¢ creditor to perform a promise, etc,1 fakes. to be k. nes © liable towards the creditor ifCONTRACTS OF INDEMNITY AND GUARANTEE 7 the principal debtor makes a default.! Thirdly, an implied promise by the principal debtor in favour of the surety that in case the surety has to discharge the liability of the default of the principal debtor, the principal debtor shall indemnify the surety for the same.? When a borrower and a guarantor both sign an agreement in favour ofa bank, they are jointly and severally liable under that contract? ‘The contract of guarantee is no doubt tripartite in nature but it is not necessary or essential that the principal debtor must expressly be a party to that document. In a contract of guarantee, the principal debtor may be a party to the contract by implication. Thus, there is possibility that a person may become a surety without the knowledge and consent of the principal debtor. Surety ‘A surely is a person who comes forward to pay the amount in the event of the borrower failing to pay the amount. In the event of a decree in favour of the creditor against the principal borrower, the wings of the decree can also be extended against the sureties as their liability is coextensive with the principal debtor’ But when a suit against the principal debtor was dismissed for default and the aBtision became final, there being no liability surviving against the debtor, the surety’s liability gets automatically terminated? Main Features of Contract of Guarantee 1. The contract may be either oral or in writing ‘According to Section 126, a guarantee may be either oral or written. On this point, the position in India is different from that in England, According to English law, for a valid contract of guarantee, it ie necessary that it should be in writing and signed by the party to be charged therewith. 2. There should be a principal debt A contract of guarantee presupposes a principal debt or an obligation to be discharged by the principal debtor. The surety undertakes to be liable only if the principal debtor fails to discharge his obligation. If there is no such principal debt, but there is a Ibi Section M45, Also see Nagpur N.S. Bank v. Union of India, ALR. 1981 AP. 153, at 158. 3. State Bank of India v. Prem Dass, A.LR. 1998 Delhi 49. | See State Bank of India v. Messrs Indexport Registered, A.LR. 1992 S.C. 1740; oS aa ia Karnataka State Financial Corpn., ALR. 2004 Kant. 46. Kiurhool Chief runds (P) Ltd, v. P. Narasimha, ALR. 2008 A.P. 38 See Section 4, State of Frauds, 1677 (England).tae. — 4 CONTRACT-II ~ promise by one party in favour of another for eC cerlnin situation, and the performance of thig presatin dependent upon the default of somebody else, it ig Omigg 8 iy indemnity Thus, when A and B gO t0 a shop,’ A. p88 eng ny and tos the seller "iA coos not pay you, Tip? ip haseg tat orn, On the oer hand i tthe pring ae ak only B makes a promise to the shopkeeper to Pay, for dy tells the shopkeeper ‘Let him (A) have the goods, 7 wine eet ster’, it is a contract of indemnity,! paymaster’, it ty. mee 3. Benefit to the principal debtor is sufficient consig As in any other contract, the consideration ig also ation a contact of guarantee, For the surey’s promise, it sted that there should be direct consideration between the creat the surety, it is enough that the creditor had done Something benefit of the principal debtor. Benefit to the pris 7 constitutes a sufficient consideration to the surety for givin, guarantee. This is clear from Section 127, which reads as Sy “Anything done, or any promise made for the benefie Of te principal debtor may be a suficient consideration to the suty stving the guarantee.” Illustrations? (a) B requests A to sell and deliver to him goods on credit, A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise. (b) A sells and delivers goods to B.C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agree ‘0 forbear as requested. This is a sufficient consideration for C’s promise In Illustration (a) above, the basis of promise by the surety is sale of goods on credit fo the principal debtor. In Illustration o even though the goods have already been sold but C stands ae oe fr 5 if A forbears to sue B, In these Illustrations, te ie enefit to the principal debtor or detriment to the a ‘i oe nompls the surety to give the guarantee, If the promise the pitting the guarantee isnot on the basis of any benefit sub emit but independent of it, for instance, it 16 a TT binge peel contered by A upon B, it cannot 18 el OT Salk; 27 at 28, ; 2 Illustrations 10 Section 17,CONTRACTS OF INDEMNITY AND GUARANTEE 9 deemed to be a valid contract. The subsequent promise is deemed to be without consideration. This is clear from Illustration (c) to Section 127, which is as follows : A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void. 4, Consent of the surety should not have been obtained by misrepresentation or concealment The creditor should not obtain guarantee either by any misrepresentation or concealment of any material facts concerning the transaction. If the guarantee has been obtained that way, the guarantee is invalid. The position is explained by Sections 142 and 443, which are as under : "142. Guarantee obtained by misrepresentation invalid.—Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid." "143. Guarantee obtained by concealment invalid.—Any guarantee which the creditor has obtained by means of keeping silence as to material circumstance is invalid. Illustrations (a) A engages B as clerk to collect money for him. B fails to account for some of his receipts and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid. (b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety." According to the above stated provision, obtaining a person’s consent to act as a surety cither by misrepresentation, or keeping silence as to material circumstances, renders such .a contract invalid. Keeping silence as regards material circumstances, which could affect the surety’s mind to stand as surety or not, would render the guarantee void. Thus, if a cashier has been found guilty of embezzlement, but this fact is not disclosed when a surety has been made to guarantee the future conduct of the cashier, the surety willCONTRACT-I » pot file esc, under these cumstances, Sng it aarantee an employce’s existin larly, if g ye made to guarantee B and’ a oy is made ang informed thatthe said employes tee Tg is al iti ent more than that of the guarantee, ad is, ° {oa ee © the guaranteed is invalid" tee Distinction between Contracts of Indemnity ang Gu, 1, There are {wo parties in a contract of 7 indemnifier and the indemnity-holder, or indemnified’ ™™ the three parties in a contract of guarantee, the creditor, the Re are debtor and the surety. Princip 2. Contract of indemnity consists of only one contr; which the indemnifier promises to indemnify the indemnificy Under event of a certain loss. There are three contracts in A ern ing guarantee. One contract is between the principal debtor " en of creditor in respect of a certain promise or obligation undertak th be performed by the principal debtor. By @ second contract. to surety undertakes to perform the same obligation which the maa debor has undertaken, incase the principal debtor makes atPe The third contract, which is an implied one, is between the pring I debtor and the surely. By ths contract, the principal debtor hae to indemnify the surety for whatever sum the surety has rightfulh paid under the guarantee? It means that after the surety discharges his obligation, he is invested with all the rights which the creditor had against the principal debtor? 3. The object of a contract of guarantee is the security of the creditor. It presupposes a principal debtor and a certain debt or an obligation for which the principal debtor is primarily liable. A contract of indemnity is made to protect the promise against some likely Joss, 4, Ina contract of guarantee, the liability of the a secondary one. Surety’s liability arises only when debtor makes a default. The liability of the indemnifier of indemnity is a primary one, He undertakes to be liable contemplated situation is there. 4 discharged his eae, 2 Comeact of guarantee, afler the surly es ofthe is Habilily and paid to the creditor, he steps into Ne." aaa Tae can realize the payments made joss ae de lor. In a contract of indemnity, the and, therefore, after the indemnifier ha Tones, 2 See Section 4. See Section 140, atantee surety is only the principal in a contract when theCONTRACTS OF INDEMNITY AND GUARANTEE "1 indemnity-holder, he cannot recover the amount from anybody. 6. In England, a contract of guarantee should be in writing, whereas a contract of indemnity may be cither oral or in writing. There is no such distinction in India. In India, whether it is a contract of indemnity or guarantee, the same may be either oral or in writing. Liability of Surety : Its Nature and Extent According to Section 128, "The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract." The provision that the surety’s liability is coextensive with that of the principal debtor means that his liability is exactly the same as that of the principal debtor. It means that on a default having been made by the principal debtor, the creditor can recover from the surety all what he could have recovered from the principal debtor. For instance, the principal debtor makes a default in the payment of a debt of Rs. 10,000/-. The creditor may recover from the surety the sum of Rs. 10,000/- plus interest becoming due thereon as well as the amount spent by him in recovering that amount. This may be further explained by the following example. A guaranteed .to B the payment of a bill of, exchange by C, the acceptor. The bill is dishonoured by C, the“acceptor. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.’ If the principal debtor's liability is reduced, e.g., after the creditor has recovered a part of the sum due from him out of his property, the liability of the surety is also reduced accordingly2 In Narayan Singh v. Chattarsingh,? it has been held that if the principal debtor’s liability is scaled down in an amended decree or otherwise extinguished in whole or in part by a statute, the liability of the surety would also pro tanto be reduced or extinguished. In this case, the liability of an agriculturist, who was the principal debtor, was scaled down under the Rajasthan Relief of Agricultural Indebtedness Act, 1957. It was held that the effect of scaling down the principal debtor's liability was that the surety’s liability had also been reduced accordingly. The ‘surety’s liability was considered to be reduced for another reason also, and that was that if the surety is made liable for the full amount, he in his turn will become entitled to recover ie nee the principal debtor, and this will eventually negative ‘onferred upon the agriculturist principal debtor under 1. Mlustration to Section 128, 2. Harigopal Agarwal v. State Bank of India, ALR. 1956 Mad 3. ALR. 1973 Raj. 347. Inia “ aeCONTRACT-II 12 the statute. if the pr iso that of the si is held to be no’ legal, there is RO f the principa e by him is t of the same becaust coextensive with that of the principal debtor. It has been held j English case? that the guarantee of the loan or an overdraft in infant is void, because the loan to the infant itself is void. 0 an Liability of guarantor coextensive with that of principal debto, On going through guarantee letter executed by appellant ang oh Ter informing Bank 2904 resignation of He Director an jeve him from guarantee amply proved at he relinquished his post as Director requested. As O.A. him from guaranteeship as time and claim against appellant barred by time, 5 not liable to pay any ‘amount to any extent! { debtor's liability is affected by ip torr, where the liability of (eats ple on the ground of the .? tines question of surety being made liable beg | debtor happens to tee ae 8 ‘void, the surely too cannot be ai, abl, ¢ the liability of the sure is incipal surety. Th al t enforceal als¢ roquestin| appel and also to relieve was not file hence, appellant wa Surety’s liability for loan transaction The loan was advi jpal borrower under hat bank shall not ask certain scheme with a clause in for borrower's contribution in the form of margin money ot seek third party guarantee. There was execution of collateral security or document by borrower and surety for had voluntarily agree’ instant case as surety therefore, he was liable to repay such loan jointly and se" t mean that if any! ody borrower as clause in scheme did no} voluntarily agreed to repay loan, it should be refused.° ty coextensive wi Cash Credit Facility—Liability of sure th that of principal debtor Presiding Of by bank’s aoe had unduly placed reliance upon statem¢ hiypothecation Ss a her Wee that bank was not Kray pplication, Presiding Oli they were not shown, in Schedule Contract “Act to. defendant sought to give bene 139, Toe te atefendant No. 6 relying on is 5 Kelappan ios Nadar, ATR. 196 Lean Near Ku ae eevee 419. ay Venkatesh y, = Lecky, (1947) K.B, ah Mad. 164. Saks ¥. Coma Bank, 008) (2) BC 1 Mase ni oe ca DRAT—Chenna Sr. tementCONTRACTS OF INDEMNITY AND GUARANTEE 13 Proceedings revealed that Bank had sold hypothecated goods and secured Rs. 25 lacs. There was no question of any negligence. In view of provision of Section 128 of Contract Act, Presiding Officer was not correct in giving direction to Bank to proceed against ‘C’ Schedule property of defendant No. 6 only as ‘last resort’. Property of defendant No. 6 was also liable and accessible and available for execution of decree against defendant Nos. 1 to 5 and decree ought to have been joint and several against all defendants including defendant Ne. 6.1 Creditor can sue the surety without exhausting remedies against the principal debtor The liability of the surety is joint and several with the principal debtor. It has already been noted that according to Section 128, "the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract.” It means that if the principal debtor makes a default, i.e., he fails to perform his obligation, the creditor can sue either the principal debtor, or the surety or both of them. The creditor can sue the surety even though he has not exhausted his remedies against the principal debtor. Unless the parties, expressly or impliedly so agree, the contract should not be construed as "imposing any condition precedent upon the decree-holder to exhaust all his remedies against the principal debtor before proceeding against the surety for realizing the decretal amount."? The position on this point was thus explained by the Supreme Court in Bank of Bihar v. Damodar Prasad! : "Before payment, the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. In the absence of some special equity, the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor. may have relief against the principal in some other proceedings. Likewise, where the creditor has obtained a decree against State Bank 9) inv. VN. Kris 173 me oak Tra N. Anantha Krishnan, (2005) (2) BC 173 Suresh Narain y, Akhauri, ALR. 1957 Pat. 256. 5 ae le applies in equal measure to a guarantor who has furnished a guarantee in connection with any credit facilities obtained by a corporate entity, See Rohit Nath v. KEB Hana Bank Lid, ALR. 2021 Mad 241. See also SBI Bombay y. Prallad Ram, A.LR. 2018 Chh ISP 1 ALR. . 67; Nagpur N.S. Bank y. Union of India, ALR. P. 5 is J Gina : a ae 153, 159. See also N. Narasimahaiah v. K.S.F. Corpn., 4 ALR. 1969 S.C. 297, at 298, per Bachawat, J. 2) 3.AacT-l E CONTR: the surety has no right 1 the principal re antl the creditor anc agains nat the principal. seasad,! the plaintiff bank Ig Damodar ET aige of Paras Nath Sinh, in Bank of Bragad, on the Guar as neither repaid} noney to Damodar | by the oe nor by Paras Nath Sinha (th, in spite of Soy cprincipal debtor . Jrinat both tHe principal del” Damodar, een hen fed & St ae eof the bank but St any decree WAS Ree Dele Gare, te enict. i and the sire pat the plaintiff ban avila exfiauaied tle rece the condition " surety only after ha I before tid Suprenia Cee se aetine incipal debtor. In its appeal tf ie eee i gainst the the a " : the plain oe challenged enforce the decree against the surety dceree that the bank ee the’ renediés agaist ffie principe, 1 ving exha' only after having ak d, liability of guarantor wa in z antee deed, a 5 ‘Where with eae principal debtor. No clause in guarantes Seach! provided contrary to contract. Liability of guarantor was ns aiscian ed. Suit filed by appellant was decreed against defendant Nos 2. and°3. Appellant-Bank was at liberty to recover loan amoung jointly and severally from all the defendants? to hag 44 the surely in execution a restt dies ag? Bihar Vv. Prior action against principal debtor not necessary In Ram Bahadur Singh v. Tehsildar Bisli; Supreme Court in State Bank of India v. Index; followed and it was held that the guaranto’ creditor must first proceed against the princi the guarantor. In other words, it is open to f for making recovery against the guarantors wi 8 the decision of the port Registered! was TS cannot insist that ipal borrower and not i without first proceeding against the principal borrower. In Mukesh G, ‘act had enable ‘out instituting aa d creditor to institut 7 € a suit against guarantor Suit against principal debtor. The guarantor had so Bank of India v. S ee turendra Kumar Mishra, (2003) necnand High Court held the guarantor was bound © sociely even aphtincipal debtor and the creditor could proceed id apa uit against guarantor was barred by time pal debtor. Haigh outhary Parkash Chand, 1 (2006) BC 8 0 liah y, KS.F Corpn., ALR. 2004 Kant. 46.CONTRACTS OF INDEMNITY AND GUARANTEE. 15 waived his right under Sections 133, 140 and 141 regarding discharge of surety under the terms of contract. The Bombay High Court held that guarantor could not contend that surety stood discharged pecause of alleged failure of creditor to take timely steps to preserve security to call for additional security, prior action against pledged goods not necessary It has been held in State Bank of India v, Gautmi Devi Gupta that if there is a decree in favour of the creditor bank in his favour, certain goods have been hypothecated, it is not necessary that the decree holder bank should proceed to recover the decretal amount first from the hypothecated goods and then proceed against the surety. Even without proceeding against the hypothecated property, the bank can proceed against the surety. The liability of the principal debtor and the surety is joint and several. The creditor can, therefore, sue either both of them together or either of them individually. If after an action against both, the creditor obtains a decree against both of them, he is free to enforce the decree in the first instance against the surety. When the creditor files a suit against both the principal debtor and the surety, and the suit against the principal debtor is dismissed, that would not automatically discharge the surety from liability, and the suit can proceed against the surety? In Union Bank of India v. Manku Narayan,} it has been held by the Supreme Court that when there is a decree against the principal debtor, the guarantor and also against the mortgaged property, the decree holder bank should first proceed against the mortgaged property and then against the guarantor. Limit on surety’s liability by contract It has already been noted that Section 128 declares that the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract. It means that if the contract between the parties so provides, surety’s liability may not be there to the full extent as that of the principal debtor but smaller than that. Thus, if the surety undertakes to be liable to the extent of £ 250, his liability is limited to that extent.‘ Similarly, in Yarlagadda v. Devata China Yerakayya; the bond executed by the surety limited his liability to the tune of Rs. 15,000 with a stipulation that he might . A.LR. 2002 MP. 81 pI 2. Orissa Agro Industries v. Sarbeswar Guru, A.LR. 1985 Orissa 270. 3 AIR. 1987 SC. 1078. 5. Hobson v. Bass, LR. (1871) 6 Ch. 792. Yarlagadda Bapanna v. Devata China Yerakayya, ALR. 1966 A.P. 151.a » CONTRACT-II ight be finally decreed. 1 j wF gpte 10 any STOUT Shad undertaken ter ecole y oniek be Table onsdemyo and the clause rendering himself Hable to gy® that er hl be Oy eae should be constructeg = hat Fy Ss. rs = li amount a oxcocdling Re aaresia v, Bank of India it meanin ‘Aditya Neneh Court that if the guarantors bind themseny held by the ve ash limit, their liability cannot go be: up to a certa tant case, the guarantors undertook to be liable yy 7 In the if Rs, 25,000 plus interest payable thereon, Tt was held a maximum peony liability could not extend beyond that limi! that their UERerSrOKS, held liable for the part of the debt only, They were, ©, a Bank Ltd. v. Deputy Director, Dz Dee ern aaa amount was not agreed oe the amoun “the liability of guarantor mainly flows from the term? parties. eal of the guarantee bond", the Andhra Pradesh High and hold that the’ guarantor could not'be inade liable to pay court interest. Condition that there shall be a co-surety Sometimes, there may be a condition in a contract of Buaranty that there shall be a co-surety also. Where a person Bives a guaran upon a contract that the creditor shall not act upon it until anothe, person has joined in it as co-surety, the guarantee is not valid if that other person does not join.3 It means that in such a contract, liabili of the surety is dependent on the condition Precedent that a CO-surety will join. The surety can be made liable under such a contract only if the co-surety joins, otherwise not. Liability of co-surety Tt has been noted above that the liability of Sureties is coextensive with that of the Principal debtor. It implies that the creditor can proceed against the principal debtor or the surety, at his discretion, unless it is otherwise provided in the contract. The same Principle is applicable with regard to the rights and liabilities of the ies. Si i the co-sureties is joint and several, & ‘co-surety cannot insist that the creditor should proceed either against the principal debtor Or against any other surety befor Proceeding against him. a d , ee 2004 AP. 10,” 3 Section 144, : ~~CONTRACTS OF INDEMNITY AND GUARANTEE 17 in state Bank of India v. GJ. Herman,’ it has been held that there is a composite decree against the principal debtor and wher aties, the creditor has the discretion to decide against whom “ a to proceed. Neither the court nor a co-surety can insist that ” woritor should first proceed against another surety before the ing against him. Such a direction would go against the pees eiveness of the liability of the sureties with that of the cental debtor: ne Continuing Guarantee A guarantee which extends to a series of transactions is called continuing, guarantee.” Such guarantee may be in respect of a comy transactions during a fixed period, ¢.g., for one year? sof e surety may either guarantee the conduct of the principal ijn respect of a particular transaction, for example, he debtor 60s the repayment of loan of Rs. 5,000 which the principal gue may have taken from the creditor, or he may undertake to debt" erable for the conduct of the principal debtor in respect of as of transactions. The former is known as ‘Specific Guarantee’, as the latter is known as ‘Continuing Guarantee.’ a a se where’ jilustrations of continuing guarantee* 2) A, in consideration that B will employ C in collecting the of B's zamindari promises B to be responsible, to the amount 5000 rupees, for due collection and payment by C of those rents. This is a continuing guarantee. (b) A guarantees payment to B, a tea dealer, to the amount of £100, for any tea he may from time to time supply to C. B supplies C with tea to the above value of £ 100 and C pays B for it. Afterwards, B supplies C with tea to the value of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to the extent of £ 100. | () A guarantees payment to B of the price of five sacks of flour, to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards, B delivers four sacks to C which C did not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the Price of the four sacks. The surety has been empowered to revoke a continuing eee AIR. 1998 Ker. 161. . Section 129, 3. Eastern Bank Ltd. v. Parts Services of India Lid., ALR. 1986 Cal. 61. | Illustrations to Section 129,CONTRACT-I1 18 + transactions, by giving a not; ec as to future trans § '& a Notice to th : Byeiabitity in respect of the transactions which have alregtcitor, Fils Mavi ates tO. exiat, whereas his liability for {ety been Contract 4q\'tty mactions comes 0 an end, Unless there i trans - rary, the death of a surely also automaticalt 8 ‘Oo centilag Bearankce, as regards future transactione’® amend to in The Apex Court in Syndicate Bank v, Channaveerappa p underlying the fact that the extent of liability under a ler}, also the question as to when the liability of a guarantor Would °.% would depend purely on the terms of the contract, explained. Tie, "A guarantor’s liability depends upon the > : inui "Pc en contract. A ‘continuing guarantee’ is different “ty, of bi, ordinary guarantee, There is also a differenceyfM © guarantee which stipulates that the guarantor 1 aber? 4 only on a demand by the creditor, and @ guarantee to Pay does not contain such a condition. Further, dependin Which terms of guarantee, the liability of a 6 " 7 guarantor the limited to a particular sum, instead of the liability pe, the same extent as that of the principal debtor, “ing to pay may arise, on the principal debtor and thetéatne tne oF at different points of time. A claim nt even time barred against the Principal debtor, ba pau be enforceable against the guarantor. The Parties may agree ia the liability of a guarantor shall arise at a later point of ti : than that of the principal debtor." ame It may, however, be noticed that a guarantee in res one facility of specified sum of money, is not at a guarantee within the meaning of Section 129. A Continuing guaranty cannot be mistaken as perpetual Suarantee or perennial Suarantee Where only loan facility is granted to the debtor, it wor uld be Wrong to call this guarantee as not amenable to limitation period, "Pet of on} Il continuin Discharge of surety from liability When the liability of surety, which he had undertaken under: contract of guarantee, is extinguished or comes to an end, he is said to be discharged from liability. The modes of discharge of a surely, as recognized by the Indian Contract Act, are as under : 1. Revocation by the surety. (Section 130). 2. By surety’s death. (Section 131). 3._By variance in the terms of the contract. (Section 133). 1. Section 130, 2. Section 131, 3. ALR. 2006 S.C. 1874,CONTRACTS OF INDEMNITY AND GUARANTEE 19 4, By release or discharge of principal debtor. (Section 134). 5. When creditor compounds with, gives time to, or agrees not to sue, the principal debtor. (Section 135). 6. By creditor’s act or omission impairing surety’s eventual remedy. (Section 139). 7. By loss of the security by the creditor, (Section 141). above stated modes of discharge of surety are being The giscussed below : 1. BY revocation by the surety (Section 130). * “according to Section 130 : “A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor." This Section permits revocation of guarantee by the surety : (i) when it is a continuing guarantee; and Gi) as regards future transactions only. This can be done by a notice by the surety to the creditor in that regard. Once notice revoking guarantee is issued, the liability of the surety would fasten only upto that date and not thereafter.’ The following illustrations? make it clear that when the surety ives a notice of revocation, his liability continues to exist for the transactions already made, but is revoked as regards future transactions, i.e., the transactions made subsequent to the notice. A, in consideration of B’s discounting at A’s request, bill of exchange for C guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bill for C to the extent of 2,000 rupees. Afterwards, at the end of three months, ‘A revokes the guarantee. This revocation discharges C from all liability to B for any subsequent: discount. But A is liable to B ‘or the 2,000 rupees, on default of C. When a transaction has already been made, surety’s liability with regard to that transaction cannot be revoked by a subsequent notice. The point may be explained by referring to the following illustration 3 A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill St reir 4 ie tebe oan Ny Gusta. 1. ey Industrial Investment Corpn. Ltd. v. Sudarsnam Industries, A.LR. 2009 Mad. 2. Illustrations (a) to Section 130. 3. Illustrations (b) to Section 130.\, - 20 CONTRACT-II The point may be further explained by the Davien! In this case, A promised in favour of Biante Daviet cA would guarantee the payment of bills tec discge bl OF ing, a period of 12. calendar nt of bills t0 the exten 4 epunted by B and the payment ka antiatwvestemaa bills "4 Payiild tio more guarantee the dig’ 7 he discoumn!: ‘A gave notice to B that Jr day bills. In spite of th pills not having been paid ¢ made liable as a sure’ A could not b B, after A's notice to B. Revocation as to fu stinct transactions contemplated in the contract. Wher, “ indivisible, for instance, when ", Where js single and Jationship is established on the faith of a a Certaj, guarantee, revocation of the same is possible. Thus, if a js employed on the basis of a guarantee as lo his good conduc ™ is not revocable so long as the servant ential the s in e notice, B continued to di 1, B sued A for the Paitteltl wee bills ty for the bills discoun thy ly he bills dliscounteg i by ture transactions is possible, whe separate di n there consideration continued re! guarantee ii service.” Again, where the surety has entered into a continu arantee agreement in terms that jt is to continue and remain 4 transactions, it would not be open ; operation for all subsequent him to tum around and revoke the guarantee. In Sita Ram Gupta v. Punjab National Bank,’ the agreemen: of guarantee rea as ; "The guarantors hereby declare that this arantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that a any time the said accounts may show. no liability against the borrower or may even show a credit in his favour but shall continue to be guarantee and remain in operation in respect of all subsequent transactions.” The appellant having entered into an agreement of uarantee with the respondent bank revoked by a letter written to the Manager of the Bank, before the Joan was in fact advanced by the bank. Referring to the manner in which the agreement was entered into, it was held that it was not open to the appellant to revoke the guarantee. The Apex Court said that the agreement not being unlawful, would override the statutory provision contained in eon 130 of the Contract Act, 1872, since he had waived the benefit a: ction 130 by entering into agreement of guarantee with the bank e appellant was thus held not entitled to deny li bili the lia! ility to pay Nn iy. Wali Ullah, (1930) ae T (1862) 12 CBNS. 748 : 133 RR. 491. 10 All. 531. 2. Lloyd Loy ie Hae (1806) 16 Ch. D. 290; Hasan Al ; Gopal Singh v. Bhawani Prasad, (1880) 3. ALR. 2008 ‘S.C. 2416.anced bY the bank. Vi sety’S death (Section 131) y ding to Section 131 :— co : : ne death of a surely operates, in the absence of any contract to trary, as a revocation of a continuing guarantee, so far as ards future transactions." pegards ‘ effect of the death of the surety is that if results in Tevocation of the continuing guarantee as to future tomate. There may, however, be no revocation of guarantee on rant of the surety, if there is a contract to that effect. For tne dem eg contract of guarantee, it is stipulated that on the death his property or his legal representatives will be «ible for such liability. In such a case, the guarantee is not el even if the surety dies. revo! py variance in the terms of contract (Section 133) a When the surety has undertaken liability on certain terms, it is ted that they will remain unchanged during the whole period get * 1 the con ey ante. If there is any variance in the terms of the contract een the principal debtor and the creditor, without the consent of the surety, the surety gets discharged as regards transactions subsequent to such a change. The reason for such a discharge is that the surety agreed to be liable for a contract which is no more there, and he is not liable on the altered contract because it is different from the contract made by him. Section 133, which makes a provision in this regard, is as follows : “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.” Section 133 has been explained with the help of the following illustrations : @) A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent that B’s salary shall be raised and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss. 0) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the dutiesSZ are defined by an Act of the Legislature, By a Subseg, Act, the nature of the office is materially ane Afterwards, B miscondutcts himself. A is discharged ber change from future liability under his guarantes, tha n ‘bh leg 22 CONTRACT=HI the misconduct of B is in respect of a duty not afer by the later Act. (©) C agrees to appoint B as his clerk to sell goods at salary, upon A’s becoming surety to C for prs accounting for money received by him as such Afterwards, without A’s knowledge or consent, C agree that B should be paid by a commission on the ge sold by him and not by a fixed salary. A is not list. for subsequent misconduct of B. (a) A gives to Ca continuing guarantee to the extent of 3,00 rupees for any oil supplied by C to B on credit Afterwards, B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that tt Payments shall be applied to the then existing “debt between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement. (€) C contracts to lend B 5,000 rupees on the Ist March, A guarantees repayment. C pays the 5,000 rupees to B on the Ist January. A is discharged from his liability, as the contract has been varied, inasmuch as C might sue B for the money before the first of March. In Bonar v. Macdonald,' the defendant was a surety for the conduct of a bank manager. Subsequent to this agreement, the bank enhanced manager’s salary and the manager agreed to be liable for 1/4 of the losses on discounts allowed by him. This arrangement between the bank and its manager had been made without the knowledge of the surety. It was held that this arrangement had resulted in the discharge of surety. Lord Cottenham observed : “Any variance in the agreement to which the surety has subscribed, which ig made without the surety’s knowledge oF consent, which may prejudice him, or which may amount to a substitution of a new agreement for a former agreement, even though the original agreement may, notwithstanding such variance, be substantially performed, will discharge the surely.” One such illustration where variance in the contract would 1 (1850) 3CONTRACTS OF INDEMNITY AND GUARANTEE 23 discharge the surety, is found in the Indian Partnership Act. According to Section 38 of that Act, a continuing guarantee given to a partnership firm, or to a third party in respect of the transactions of a firm is revoked as to future transactions from the date there is a change in the constitution of the firm. The reason for this provision in the Indian Partnership Act is that every guarantee given in relation ith a partnership firm is on the assumption that the constitution MF the firm will remain unchanged during the period of guarantee. If in spite of such a change, the guarantee already given is to continue, the parties are free to make a contract to that effect. If there is a written contract of guarantee and there is no variance of the same in writing, the validity of the contract is not affected. In Amrit Lal v. State Bank of Travancore, the credit limit of the debtor, which had been fixed at Rs. 1,00,000 was first reduced to Rs. 50,000 and then again raised to Rs. 1,00,000 without consulting the surety. This was done by oral instructions to the cashier only (and not by altering any document). It was held that in this case there was no variation in the terms of the contract within the meaning of Section 133, and, therefore, the surety had not been discharged thereby. In Anirudhan v. Thomco’s Bank, the alteration was not prejudicial to the interest of the stirety, and the question which had arisen was whether the surety was discharged in such a case. The facts of the case are as follows : The appellant agreed to stand as surety to the tune of Rs. 25,000 for an overdraft to be allowed by the respondent bank to the principal debtor, Shankran. The bank agreed to allow the overdraft only for Rs. 20,000 and not for Rs. 25,000. The principal debtor altered this amount of guarantee from Rs. 25,000 to Rs. 20,000. The alteration in this case, which was made by the principal debtor, was not to the prejudice of the surety. The question before the Supreme Court was whether such an alteration, which was to the benefit of the surety, had discharged the surety. The majority decision (2 : 1) was that when the alteration is to the benefit of the surety, that is not a material alteration. Such an alteration is unsubstantial and that Cass i discharge the surety from liability.’ Hidayatullah, J. served! : “The question before me is whether a document jointly AIR: 1968 S.C. 1432, » ALR. 1963 S.C. 746. . Hidayatullah and xk, oe Sarkar, J. discenag@PtY Je held that the surety was not discharged, but 4 Ibid. at 753, 754, per Hidayatullah.“| 24 CONTRACT-I executed by two persons creating a liabili is to be regarded as initerially ialtctea re ee for 4, reduced equally for both but the alteration is maq lity * one of them. In my opinion, such an alteration be, only as unsubstantial and not otherwise....dn my judg ncBare) particular document, in this case, cannot be said to ment, t materially altered...The alteration does not save tev from liability arising under it, es It may be submitted that this decision does not appea logical interpretation of Section 133. According to Section’ 135, ° be variance” in the contract, made without surety’s consent disch, ‘Any the surety. The Act does not draw any distinction betwe ate, variances beneficial or prejudicial to the surety in material partic as compared to the original one. If the terms of the contrac changed, the person who signed the original contract cannot bem," liable either on the basis of the original contract, because that 4° been destroyed by alteration, or on the basis of altered cont, because he never agreed to that. act, The surety, it is held, would be liable for all transactions whic, had taken place prior to variation. Variation can discharge surety only with regard to such of those transactions which take place subsequent to variation.? ' *) Urey Novation of Contract In Satish Chandra Jain v. National Small Scale Industries Corpn. Ltd.? the appellant stood as guarantor to funding done to his son’s property business venture. Later on, the son converted his proprietary business into private limited company. The respondent-creditor gave his consent to such change and fresh agreement was entered into under which the company became hirer and appellant's son with one another became guarantors. On default by company, suit for recovery was filed against it and the two guarantors under the subsequent agreement but appellant was not made a party to the suit. Plaint neither referred to the first agreement of guarantee nor asked any relief against the appellant. The Apex Court held, that inclusion of property of appellant recovery certificate issued was not proper because subsequent agreement amounted to novation of contract by which the guarantee of appellants stood alteration . The majority view does not appear to be convincing. Whether the is material or not should not depend on the fact whether it was beneficial or prejudicial to the surely. The minority view expressed by Sarkar, J- appears to be in consonance with the provision contained in Section 133. 2. State Bank of Bikaner & Jaipur v. G.P. Goyal, (2005) (2) BC 49 (DRAT—Del.) 3. A.LR. 2003 S.C. 623.CONTRACTS OF INDEMNITY AND GUARANTEE 25 od. See oh A MNUINGG of Unt gaa toe ec nan git facility in favour of the principal debtor up to the extent of ee, 2,50,000/- and overdrawals were made by the principal debtor Reyond that limit. It was held that the guarantor was not bound by prdawals allowed by the Bank. ‘The plea that guarantee was SNfended to series of transaction and, therefore, the gearantor being eXiie was held not tenable," 4, By release or discharge of the principal debtor (Section 134). "The provision concerning the discharge of the surety on the jease or discharge of the principal debtor as contained in Section woh and its illustrations, is as under : "134. Discharge of surety by release or discharge of principal debtor.—-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. Illustrations (a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his suretyship. (b) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation of A’s land, and thereby Prevents him from raising the indigo. C is no longer liable on his guarantee. (©) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber, C guarantees A’s performance of the contract. B omits to fupply the timber, C is discharged from his suretyship." _ it has already been noted that according to Section 128, the debt if by any contract bet the can’ Principal debtor is released ‘reditor, the principal debtor is discharged, the surety will also 1, Bishwanath Agarwal v. State Bank of India, A.LR. 2005 Jhar. 69.26 CONTRACT-II be discharged from his liability accordingly. Another reason for the discharge of the surety on tl or discharge of the principal Mebtor is 28 follows. “Acereatet ion 140, after payment or performance of his obligation®," surety can seek reimbursement from the principal debtor. Ye principal debtor is no more liable, the uy te affected thereby. Tf surety’s remedy against the principal debto, * affected, that should also result in the discharge of the surety oo Where there are co-sureties, @ release by the creditor of on, them does not discharge the ict ag! ven if one of the co-surei, is released by the creditor, he does not thereby become released fron his responsibility to contribute to the other sureties.” No discharge after the decree is passed In Charan Singh v. Security Finance Pvt. Ltd.’ the questig Pe err route vices eter cere er renee the creditor and the principal debtor after a joint decree has been passeq against the principal ‘debtor and the surety would result in the discharge of the surely. It was held that the provisions of Sections 133 to 139 apply only where the s of the parties have not crystallized and merged in a decre hey do not apply to the judgment-debtors. In the above case, the creditor obtained a decree for Rs. 30,155 jointly against the two principal debtors and the surety. After that, the creditor entered into an agreement with one of the principal debtors that if he paid a sum of Rs. 10,000/-, the creditor (decree-holder) will not proceed further against him. After this amount had been paid, the creditor sought to recover the balance from the surety. It was held that such a compromise after the decree had been passed did not discharge the surety and, therefore, the creditor was held entitled to recover the balance of the amount from guarantors was the surety. Since the liabilities of principal debtor and independent of each other; as responsibility to repay Joan was joint and several, hence same could be enforced against guarantors even without initiating any proceedings against principal debtor.* _ Section 1 . See Section 146. ATR, 1988 Delhi 130. Velappd Kumar v. Kosmatlam Chit Funt 10; Urban Bank v. Akili, ALR, 1948 Mad. 252 relied on: Kahn Sing) Chand, A.LR. 1968 J. & K. 93 dissented. SICOM Ltd. v. Padnashri Mahipatrai J. Shah, 11 (2006) BC 304 (Bom). surety’s remedy woulq te right e of the Court, and d, 1978 Ker Ll hv. Tek eralCONTRACTS OF INDEMNITY AND GUARANTEE 27 When creditor compounds with, gives time to, or agrees not ¢ the principal debtor (Section 135) action 135 mentions further circumstances when a contract ween the creditor and the principal debtor can result in’ the ErscharBe of the surety. ‘The Section is as under : "135. Discharge of surely when creditor compounds with, gives time to, or agrees not to sue, principal debtor: A Sntract between the creditor and the principal debtor by which the creditor makes a composition with, or prontises to give time fo, or not to sue, the principal deblor, discharges the surety, unless ihe surety assents to such contract." According to this Section, a contract between the creditor and principal debtor discharges the surety in the following three astances — () When the creditor makes composition with the principal debtor; (ji) When the creditor promises to give time to the principal debtor; and (iii), When the creditor promises not to sue the principal debtor. : be noted that in the above stated circumstances, the surety is discharged if the creditor and the principal debtor make Such contract without the consent of the surety. If such a contract is made with the consent of the surety, he would not be discharged. to the circu It may @) Creditor compounding with the principal debtor. When the creditor makes compositions with the principal debtor without the consent of the surety, this means variation in the original contract. Its obvious consequence, therefore, is the discharge of ihe surety from the liability. For example, A borrows Rs. 10,000 from B. C siands as a surety as regards the repayment of loan by A to B. Thereafter, A and B agree that A may repay Rs. 5,000 instead of Rs. 10,000. C is thereby discharged from liability as a surety. (ii) Creditor promising to give time to the principal debtor Promise to give time to the principal debtor means extending the period of payment which was not contemplated in the contract of guarantee. The surety expects that the creditor will take the performance from the principal debtor without any delay. If the ae the delay by giving more time to the principal debtor aaa i he surety is asked to be liable on the debtor’s default, this lelay the surety’s action for reimbursement against thea CONTRACT-I 28 debtor, and, therefore, such’ an. arrangement Works, principal surely, When the creditor gives time to the pra th, | ae ete iiajesneentlotiiie surety, the surety is dle bg aan though the extension of time is for the benefit of the suet The reason for such discharge was thus explained by the pe Council in Mahanth Singh v. U Ba Yi: ; vy “A surety is discharged if the creditor, without his Conse cither releases the principal debtor or enters into a bing agiement with him to give him time. In each casei, ground of discharge is that the surety ‘s right to Pay the tet at any time and after paying it, to sue the principal in x name of the creditor is interfered with. le In Kurian v. The Alleppey C.C.M.S. Society,* the creditor ip, ' a suit against the debtor for the recovery of some money due from the debtor. Then there was a compromise between the two Pattie to the suit according to which the debtor was allowed to Pay the decretal money within nine months from the date of Compromise, This happened without the knowledge or consent of the surely. was held that this arrangement meant giving time to the debto, within the meaning of Section 135, and the surety was, therefor, discharged from his liability. . | Agreement by the creditor with the principal debtor to take the payment in instalments instead of in lump sum, amounts to giving time to the principal debtor and that results in the discharge of the surety. The position is the same even after a joint decree is Passed | against the principal debtor and the surety. Thus, if after the Passing of the decree, the creditor decree-holder without the consent of the surety, grants instalments to the principal debtor, that amounts to giving time to the principal debtor and the surety is thereby | discharged. For the discharge of the surety under Section 135, it is necessary _ that there should be a contract between the creditor and the principal debtor whereby the creditor gives time to the principal debtor. Where a contract to give time to the principal debtor is made by the creditor with a third person and not with the principal debtor, the surety is not discharged.* For example, C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts Samuel v. Howarth, 3 Mex 273; Polak D. 669. LAIR 829 MC. tno, arma ‘gegen OP Se . ALR. 1975 Kerala 44, Meant al v. Stale Bonk of Travancore, ALR. 1968 S.C. 1439 - Maharash v. Mahara ia pex Corp. v. Poowmppa Salian, ALR. 1985 Kant. 116, ae awnCONTRACTS OF INDEMNITY AND GUARANTEE 298 with M to give time to BLA harged.' In this illustration, C, who is the creditor agrees with a third party (M) to give time to the principal debtor (3). Even though the same is without the consent of the surety but that does not discharge the surety (A). ii) Creditor promising not to sue the principal debtor A contract between the creditor and the principal debtor whereby the creditor promises not to sue the principal debtor, also results in the discharge of the surety. The surety has a right to sue soon after the payment becomes due, the creditor will take action against the principal debtor to recover the same. Therefore, the promise by the creditor not to sue the principal debtor is inconsistent with the right of the surety, and, therefore, this results in the charge of the surety. Mere forbearance to sue not enough Although a promise by the creditor not to sue the principal gebtor discharges the surety, but a mere forbearance to sue on his art does not discharge the surety.? The reason is that by promising not to sue, the creditor’s right of suing is given up and the right to sue is thereby extinguished, whereas by mere forbearance to sue, the right to sue can still be exercised. Section 137 explains the position in this regard in the following words : "137. Creditor’s forbearance to sue does not discharge surety—Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety. Illustration B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship.” Forbearance to sue until the end of the period of limitation Sometimes, there is forbearance to sue the principal debtor by the creditor for such a long time that because of the law of limitation, the action against the principal debtor becomes time barred. In such a case, the question which arises is that whether the surety is discharged in such a situation? Under English law, in such a situation, the surety is not 7. Mlustration to Section 136, 2, Section 137. See also Princess Ushadevi v. Bhagwandas, A.LR. 1967 M.P. 250. f