CONTRACT-II
Contract of Indemnity
Q. 1. Define the Contract of Indemnity and discuss the rights of an indemnity-holder against promisor.
Or
What do you understand by “Indemnity”? What are the rights of an indemnity-holder against his promisor, on being sued within the scope of his authority?
Ans. Definition of Indemnity [Section 124]. The term “Contract of Indemnity” has been defined under Section 124 of the Indian Contract Act, 1872. Section 124 of the Act provides-
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 the conduct of any other person, is called “Contract of Indemnity”.
Illustration. A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs. 2,000. This is a contract of indemnity.
“An indemnity is a contract express or implied to keep a person, who has entered into or who is about to enter, into, a contract or incur any other liability, indemnified against loss, independently of the question whether a third person makes a default” alsbury’s Laws of England Vol. 15, Para 870].
A contract of indemnity is a direct engagement between two parties whereby one promises to save another harmless from the result of the conduct of the promisor himself or of any third person. In Section 124 of the Indian Contract Act, expression “Contract of Indemnity” has a narrow connotation. Section 124 includes only-
(a) express promises to indemnify;
(b) those cases where the loss arises from the conduct of the promisor or of any other person.
In Gajanan Moreshwar v. Moreshwar Madan Mantri, AIR 1942 Bom. 302 at p.304, the Bombay High Court held-This section is concerned only with a particular kind of indemnity which arises from a promise by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person. It does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.
In Sumitomo Heavy Industries Ltd. v. ONGC Ltd.. AIR 2010 SC 3400, the Supreme Court held-An agreement to compensate loss due to change of law is not a contract of indemnity as defined in Section 124 of the Contract Act since such loss is neither due to conduct of promisor nor due to the conduct of any third party.
Under English law, the indemnity has been defined as a promise to save a person without any harm from the consequences of an act. This promise may be express or implied from the circumstances of the case.
In Dudgale v. Lovering, (1975) 10 L. R. C. P. 196, certain trucks were in possession of the plaintiff. The defendant as well as a company claimed them. The plaintiffs demanded an indemnity bond, but no reply was received. Yet they delivered the trucks to the defendants. Held-The defendants were liable to indemnify the plaintiff as the indemnity bond led to the creation of an implied promise.
Rights of the indemnity-holder [Section 125]. The indemnity- holder, ie, the promisee acting within the scope of his authority has the following rights against the promisor :-
(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies:
(2) all costs which he may be compelled to pay in any such suit if. in bringing or defending it. he did not contravene the orders of the promisor. and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised 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 was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.”
Commencement of liability of indemnifier. There is a divergence of opinion amongst the High Courts as to when the liability of indemnifier commences. According to some High Court, the indemnifier can be compelled to indemnify the indemnity holder without waiting for actual loss but some High Courts have held that indemnifier cannot be compelled to indemnify the indemnity-holder until the actual loss arises. In Gajanan Moreshwar v. Moreshwar Madan Mantri, AIR 1942 Bom 302, Bombay High Court took the view that the indemnifier would be liable to pay the indemnity holder without waiting for actual loss. Justice Chagla of the Bombay High Court held-
It is true that under the English common law, no action could be maintained until the actual loss had been incurred. It was very soon realised that an indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid the loss……. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore, the Court of Equity stepped in and mitigated the rigour of the Common law. The Court of Equity held that if his liability had become absolute then he was entitled 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… Sections 124 and 125, Contract Act are exhaustive of the law of indemnity and the Courts here would apply the same principles that the courts. in England do.”
The Law Commission of India in its 13th Report (1958) has supported this view.
Contract of Guarantee
Q. 2. What do you understand by Contract of Guarantee? How does it differ from Contract of Indemnity?
Ans. Definition of “Contract of Guarantee” [Section 126].- Section 126 of the Indian Contract Act, 1872 defines the term “Contract of Guarantee” Section 126 of the Act provides-
“A “Contract of guarantee” is a contract to perform the promise, or discharge the liability, of third person in case of his default”. This section again provides “The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
Therefore, a “contract of guarantee” is a contract by which one person (the surety) agrees to answer for some liability of another (the principal debtor) to a third person (the creditor). It involves three parties, the creditor, the principal debtor and the surety.
If the surety (guarantor) does not mention the name of article in hypothecation deed, he cannot say that there was no hypothecation of goods is favour of Bank when he nowhere pleaded about non-hypothecation of goods [C. Gangadhara v. Shanti Narasaiah, (NOC) 81 (Kar) (CJ)].
Essentials of a valid “contract of guarantee”.-Essentials of a valid guarantee are as follows:
(1) There must be a principal debt. A contract of guarantee pre- supposes the existence of a validly enforceable liability or debt. There can be no contract of guarantee unless and until there is a principal debt.
In Swan v. Bank of Scotland, (1836) 10 Bigh N. S. 627, the overdraft from the bank was prohibited. The contract of guarantee for the repayment of overdraft taken by a customer was held to be void as there was no principal debt and therefore the surety was not liable to the Bank.
(2) There must be consideration. – A contract of guarantee must be supported by consideration. Benefit to principal debtor is sufficient consideration, Section 127 provides “Anything done or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving 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 a 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 the default of payment by ‘B’. ‘A’ agrees to forbear as requested. This is sufficient consideration for C’s promise.
(c) A’ sells and delivers goods to ‘B’. ‘C’ afterwards without consideration agrees to pay for them in default of B. The agreement is void.
In Ram Narayan v. Lt. Col. Hari Singh, AIR 1964 Raj. 76, the Court held that past benefit to the principal debtor would not be a good consideration within the meaning of Section 127.
In Transcone v. Union of India, AIR 2007 SC 712, the Supreme Court held-The security in the form of a right of action against a third party (i.e. guarantor) is known as guarantee.
(3) Consent of Surety must not be obtained by misrepresentation or concealment (Sections 142 and 143). – According to Section 142, “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.
Similarly, according to Section 143, “Any guarantee to which the creditor has obtained by means of keeping silence as to material circumstances 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 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 2000 tons. B and C have privately agreed that B should pay five rupees per ton beyond 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.
Difference between a contract of guarantee and contract of indemnity.
There are following main points of difference between contract of guarantee and contract of indemnity.
1. In a case of a contract of guarantee, gua there are three parties but in case of contract of indemnity there are two parties, one, who is indemnified and the other, the indemnifier.
2. A contract of guarantee presupposes a principal debtor, but a contract of indemnity is an original and direct engagement and may be made independently of the existence of a third party.
3. A contract of guarantee exists for security of the creditor whereas a contract of indemnity is brought about for reimbursement of loss.
4. As regards a contract of guarantee, where a surety discharges a debt payable by the principal debtor to the creditor, he, on such payment, becomes entitled in law to proceed against the principal debtor in his own right. But in the case of contract of indemnity, the indemnifier cannot bring a suit against third parties in his own name, unless there be an assignment.
5. A guarantor’s liability is secondary, therefore, if principal debtor is not liable, the surety (guarantor) will also be not liable. In a contract of indemnity the liability of indemnifier is primary.
Q. 3. What is Continuing Guarantee? Under what circumstances continuing guarantee can be revoked?
Or
What do you know by Continuing Guarantee? Explain when can it be revoked.
Or
Compare the continuing guarantee with special guarantee. Discuss the circumstances in which continuing guarantee can be revoked.
Ans. Continuing Guarantee [Section 129]. Section 129 of the Indian Contract Act defines “continuing guarantee”. It provides-
A guarantee, which extends to a series of transactions is called a “continuing guarantee”.
A guarantee may be an ordinary guarantee or a continuing guarantee. A continuing guarantee is different from an ordinary guarantee.
In Syndicate Bank v. Channaveerappa Belari, AIR 2006 SC 1874, the Supreme Court held-In case of ordinary guarantee the surety is liable only in respect of a single transaction whereas in case of continuing guarantee the liability of the surety extends to any successive transactions which comes within its scope.
Illustrations. (a) A, in consideration that B will employ C in collecting the rent of B’s zamindari, promises B to be responsible, to the amount of 5,000 rupees for the due collection and payment by C of those rents. This is a continuing guarantee.
(b) A guarantees payment to B of the price of five sacks or 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 C delivers four sacks to C, which A does 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.
But it is sometimes difficult to determine whether a guarantee is concerned to one particular transaction only or it extends to a series of transactions. In such cases, the proper course always is to ascertain the intention of the parties and the intention is best ascertained by looking at the relative position of the parties at the time of the instrument.
In Margaret Lalita Samuel v. Indo Commercial Bank Ltd., AIR 1979 SC 102, the Supreme Court held-If the surety bond is a continuing guarantee, the question of limitation does not crop at all.
Continuing “guarantee” and special guarantee.-“Continuing guarantee” is a guarantee that extends to a series of transactions. (Section 129) This guarantee is not limited to any particular transaction. When the guarantee is limited to fixed transactions or it is for a fixed period for fixed transactions it is also called as a ‘continuing guarantee’. When the guarantee is specific or it is for a specific transaction, it is called as specific or special” guarantee.” The Calcutta High Court has held that where guarantee is given for a fixed period relating to continuing transactions, the guarantee will not extend after that period.
Determination of surety’s liability. – The liability of surety is determined in the following cases:-
(1) By notice of revocation [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.
But he will remain liable for past transactions entered into by him. This is clear by Illustration (a) of Section 130 which is as follows:
‘A’ in consideration of B’s discounting at A’s request, bill of exchange for C, guarantees to ‘B’ for twelve months, the payment of all such bills to the extent of 5,000 rupees. ‘B’ discounts bills for ‘C’ to the extent of 2,000 rupees, Afterwards, at the end of three months, ‘A’ renvokes the guarantee. This revocation discharges ‘A’ from all liabilities to ‘B’ for any subsequent discount. But ‘A’ is liable to ‘B’ for the 2,000 rupees on the default of ‘C’.
In an English case, Oxford v. Davies, (1962) 12 CBN 748, the defendants had guaranteed for 12 months the payment of bills for Davies & Co. which the plaintiffs would discount. Before discounting of any bill, the guarantee was revoked by the defendants. The defendants were held entitled to revoke the guarantee.
(2) By surety’s death [Section 131]. According to Section 131, the death of the surety operates, in the absence of any contract to the contrary. as revocation of continuing guarantee, so far as regards future transactions.
In this case, it is not necessary to give notice of death of surety to the creditor. The rule is, however, different in England where for any valid revocation of continuing guarantee, the death of surety must come to the notice of the creditor.
The representative of a surety is liable for all transactions guaranteed by the surety before his death.
In English law, for revocation of contract of guarantee on a surety’s death, it is necessary that the death of surety must be in the knowledge of the creditor. In India, there is no such rule.
In Hasan Ali v. Wali Ullah, (1930) ALJ 1771, the Court held-When the consideration for continuing guarantee is indivisible, it can not be revoked even by the death of the surety and his estate continues to be liable to future obligations.
Under this section, the liability of the surety is revoked with his death but if there is a contract to the contrary, the liability will not be revoked with the death of surety. Such contract may be express or implied. If it is so, the contract continues after the death of surety. [Durga Priya v. Durga Pada, AIR 1928 Cal 204, 206].
(3) By variation in terms of contract [Section 133]. If any variation has been made in the terms of contract between the principal debtor and creditor without surety’s consent, the surety stands discharged as to transactions subsequent to the variance.
(4) By release or discharge of principal debtor [Section 134].– According to Section 134, when creditor discharges principal debtor from the liability, the surety also gets discharged.
(5) By Composition, Extention of time and Agreement not to sue [Section 135].-According to Section 135, a contract between the creditor and principal debtor, by which the creditor makes a composition with, or promises to give time to or not to sue, the prinicipal debtor, discharges the surety, unless the surety assents to such contract.
(6) By Creditor’s act or omission inpairing surety’s eventual remedy (Section 139]. Any act or omission by the creditor which impairs the eventual remedy of the surety against the principal debtor discharges of the surety.
(7) Loss of security under the contract [Section 141].-when a creditor loses or without consent of the surety parts with the security under the contract, the surety gets discharged to the extent of the value of that security.
Surety
Q. 4. Do you agree with the proposition that ‘Surety is a favoured debtor’?
Or
“A surety is undoubtedly and not unjustly an object of some favour both at law and at equity”. Explain.
Or
“Liability of surety is secondary. It is co-extensive with that of principal debtor.” Discuss.
Ans. Surety’s liability [Section 128].-Section 128 of the Indian Contract Act, 1872, deals with the nature and extent of surety’s liability. It provides:
“The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided, by the contract”.
Illustration. A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. 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.
The liability of the principal-debtor and guarantor is co-extensive, not alternative. [Investment Bank India Ltd. v. Biswanth Jhunjhunwala, (2009) 9 SCC 478].
In Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297, it was held- The creditor can proceed against surety without proceeding against the principal debtor first. In such eventuality, the surety would be invested with all the rights of creditor against the principal debtor.
In State Bank of India v. Indeexport Registered, AIR 1992 SC 1740, it was held-Unless there is a contract to the contrary, the liability of the surety is co-extensive with the principal debtor. Therefore, when a suit can be instituted against the surety without invoking the remedy against the principal debtor first, mortgagee need not institute proceeding against mortgagor first. He can directly sue the surety. Even where the mortgage decree is passed, the decree holder is not bound to proceed against surety only after taking action against the mortgaged property.
In Industrial Financial Corporation of India v. Kannur Spinning & Weaving Mills Ltd.. AIR 2002 SC 1841, the Court held-If the liability of the principal debtor is scaled down in an amended degree or otherwise extinguished in whole or in part by a statute, the liability of the surety would also pro tanto be reduced or extinguished. However, the liability of the surety does not cease merely because of discharge of the principal debtor from liability.
In S. N. Prasad, Hitek Industries (Bihar) Ltd. v. Monnet Finance Ltd. and others, (2011) | SCC (Cri.) 141, the Court held-Where the letter of guarantee issued by a guarantor guarantees repayment of only the principal sum and does not guarantee the payment of any interest, he could not be made liable for the interest.
In Maharashtra Electricity Board, Bombay v. Official Liquidator and Another, AIR 1982 SC 1947, under a letter of guarantee, the Bank undertook to pay any amount not exceeding Rs. 50,000 to the Electricity Board. Held-The Bank is bound to pay the amount due under the letter of guarantee given by it to the Board. On such payment being made the Bank can make use of the securities given by the Company in liquidation.
Bank guarantee. In case of unconditional bank-guarantee, no injunction can be invoked on the ground of any dispute between the parties. [M.G.S. Sakkar Karkhana v. National Heavy Engg. Corp. Ltd., AIR 2007 SC 2716). It is only in case of egregious fraud and irretrievable loss that the Court can grant injunction. [Adani Agri Fresh Ltd. v. Mahaboob, AIR 2016 SC 92].
The Surety is a favoured debtor. The position of an ordinary debtor and that of surety is different. The liability of an ordinary debtor is only to pay his debt and after he fulfils his liability, he gets no right. But the surety is a favoured debtor in the sense that after he pays off the principal debt, he acquires certains rights under the Contract Act, for example-
(a) Right of subrogation (Section 140)
(b) Right of indemnity (Section 145)
(c) Right against co-sureties to contribute equally (Section 146)
(d) Right to get benefit of creditor’s securities (Section 141)
Q. 5. Who is surety? Discuss the rights of surety against the creditor, principal debtor and co-surety.
Ans. Surety. – According to Section 126 of the Contract Act, “Surety” is the person who gives the guarantee to perform the promise or discharge the liability of the “principal debtor” in case of his default.
(1) Right of surety against the creditor. Surety’s right against the creditor is provided in Section 141 which is as follows:
“A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not, and, 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.”
In State of M.P. v. Kaluram, AIR 1967 SC 1105, the State sold felled timber for which the buyer agreed to pay in four instalments and the defendant guaranteed the payment thereof. Agreement clause allowed the State not to allow the removal of timber in case of default in payment and to sell the timber. Despite default, the state allowed the buyer to remove the timber. The surety was held not liable to the creditor because the creditor had parted with the security by allowing the removal of timber without the consent of the surety.
(2) Right of surety against principal-debtor-
Right of subrogation. When surety performs the promise or discharges the liability of the principal debtor, he stands in the shoes of the creditor and has all the rights against the principal debtor which the creditor had. This principle is laid down in Section 140 which is as follows:-
“Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.”
In England, on the obligation of the surety to pay becoming absolute. he becomes entitled to be exonerated by the principal debtor. This principle is provided in Section 145 of Contract Act which is as follows :
“In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.”
(3) Right of surety against co-surety. A surety has a right to contribution equally from other co-sureties unless there is a contract to the contrary. Section 146 provides:
“Where two or more persons are co-sureties for the same debt or duty, either jointly or severally and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt or of that part of it which remains unpaid by the principal debtor.”
A surety has a right to contribution from co-sureties when he pays more than what he should have paid [Shirley v. Burdett. (1911) 2 Ch. 418] Section 147 incorporates this principle. Which provides
“Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit”
Q. 5-A. Under what circumstances surety is discharged from his liability?
Or
Explain when a surety is discharged or not discharged from his liability?
Ans. Discharge of surety. A surety is said to be discharged when his liability under the contract of guarantee comes to an end.
Following are the modes through which the liability of a surety may be discharged
(1) Discharge by revocation of continuing guarantee. In case of continuing guarantee, a surety is discharged from liability by revocation of guarantee
(a) Revocation by notice [Section 130].-According to Section 130 of the Contract Act, a continuing guarantee may at any time be revoked by the surety as to future transaction, by notice to the creditor.
Under Section 130 such revocation will be effective only as to future transactions. The surety will remain liable for past transaction entered into by him.
(b) Revocation by Surety’s Death [Section 131].-According to Section 131 of the Contract Act, the death of the surety operates, in the absence of any contract to the contrary, as revocation of continuing guarantee, so far as regards future transactions.
Such revocation does not affect past transactions entered into by the surety Under Section 131, it is not necessary that the death of surety come to the notice of creditor.
(2) Discharge of surety by variance in terms of contract [S. 133]. According to Section 133 of the Contract Act. if a variation is made in the terms of the contract between the creditor and principal debtor. without the consent of surety, the surety is discharged from liability as to the transactions made after such variance.
Illustration. –А’ 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.
(3) Discharge of surety by release or discharge of principal debtor [Section 134]. Surety’s liability is co-extensive with that of the principal debtor, if principal debtor is discharged, he is also discharged from his liability. Section 134 of the Contract Act provides two modes of discharge from liability:
(a) If a creditor makes a contract with the principal debtor by which the principal debtor is released, the surety is discharged from his liability. Therefore, release of the principal debtor is a release of the surety also.
(b) The surety is also discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
Illustration. 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 supply the timber. “C’ is discharged from his suretyship.
(4) Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor. [Section 135].-According to Section 135 of the Contract Act, a surety may also be discharged from his liability in the following three modes:
(a) If creditor and principal debtor contract for composition; or
(b) If creditor promises to give time to the principal debtor; or
(c) The creditor contracts not to sue principal debtor.
If the surety does not give his assent to any of the above three, he is discharged from his liability.
In M. Venkataramaiah v. M/s. Margdarchi Chit Funds, AIR 2009 NOC 940 (A.P.), the Court held-Where creditor made arrangement with debtor in form of promise to give time or agreed not to sue him. It was novation of contract. Surety would stand discharged.
Exceptions to Section 135.- Under Sections 136, 137 and 138 certain exceptions to the rule contained in Section 135 are given.
Section 136 provides. 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.
Section 137 provides.-“Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him, doe snot, in the absence of any provision in the guarantee to the contrary. discharge the surety.
Illustration. ‘B’ owes to ‘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 the suretyship.
Section 138.- Release of one co-surety does not discharge other co- sureties. It also does not free the surety so released from his responsibility to the other sureties.
(5) Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy [Section 139]. According to Section 139 if the creditor does any act which is in consistent 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 himself against the principal debtor is thereby impaired, the surety is discharged.
(6) Discharge of surety where creditor loses his security [Section 141]. According to Section 141 where the creditor loses or parts with the securities without the consent of the surety, the surety is discharged to the extent of the value of securities.
In State of M.P. v. Kaluram, AIR 1967 SC 1105, huge quantity of felled timber was sold by the State to a person at certain price on the guarantee of ‘A’ a surety. The buyer was to make payment in four instalments. After paying one instalment he defaulted. Under the contract, the appellant (the State) had right to prevent buyer from removing the trees but it failed to do so. The surety i.e. ‘A’ was held discharged due to loss of security.
(7) Discharge by misrepresentation or concealment made by the creditor [Sections 142 and 143].- Where any guarantee has been obtained by means of misrepresentation or concealment made by the creditor as to a material circumstances or a material part of transaction, such guarantee is invalid and operates as discharge of the surety from his liability on the guarantee.
However. Sections 142 and 143 will not apply, if the misrepresentation or concealment is made by the debtor and the creditor has no knowledge of it.
Illustration. 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.
(8) By the failure on the part of some person or persons to join the surety [Section 144]. According to Section 144, where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join. In such a case the surety is wholly released.