Contract act 134 to 140
Section 134-----discharge of surety by release of discharge of principal debtor-----
The surety is discharged by any contract between the creditor and principal debtor
By which the principal debtor is released or by any act or omission of creditor
The legal consequences of which is the discharge of the principal debt
1. Mahanth Singh v. U Ba Yi, AIR 1939 PC 110
Principle: Mere expiry of the limitation period does not automatically discharge the surety under Section 134. The Privy Council distinguished a debt becoming unenforceable because of a procedural limitation from a substantive discharge of the principal debtor.
Easy facts:
The creditor failed to sue within the limitation period. The question was whether the surety was consequently discharged.
Held:
The surety was not discharged merely because the remedy against the principal debtor became time-barred
2. Hazari Lal v. Chunni Lal, ILR (1886) 8 All 256
This is an important illustration of the second part of Section 134.
Facts:
The creditor obtained a decree against the principal debtor and sureties. The creditor was required to take steps to execute the decree but failed to do so. The decree subsequently became time-barred.
Held:
Because the creditor's omission resulted in the principal debtor being legally released from the decree, the sureties were also discharged.
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 embarassed and contracts with his creditors to assign to them his property in consideration of this releasing him from their demands .here B is released from his debt by the contracts with C and A is discharged from his suretyship .
B. A contracts with B to grow crops of indigo on A 's land and so it 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 to growing indigo.C is no longer liable on his guarantee.
C.A contracts with B for a fixed 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 .
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Section 135. Discharge of surety when creditor compounds with ,gives time to or agrees not to sue , principal debtor --- A contract between the creditor and the principal debtor by which the creditor makes a composition with
Or promise to give time to or not to sue
The principal debtor
Discharge the surety
Unless the surety assent to such contract.
There are three basis to discharge of a surety
A.compound
Where creditor compounds with principal debtor without consent of surety then conditions of contract is changed.surety is discharged.
B.promise to extend time
Example 1
Where a principal was to give price of gas within 14 days . He could not pay this payment within 14 days .creditor took promise letter instead of this payment .the effect of this to extend time .so surety had discharged from his liability.
Example 2
In this case creditor bank had given the time to fulfil scarcity of pledged goods .there is not intention to extend the time .so in this case liability of surety is not discharged.
C.promise not to sue
Where creditor contracts with principal debtor not to sue .then liability of surety is automatically discharged.
Section 136 -----surety not discharged when agreement made with third
Person to give time to 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.
Illustrations
C the holder of an overdue bill of exchange drawn by A as surety for B and accepted by B contract with M to give to B .A is not discharged.
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Section 137 ---creditors 's forbearance to sue does not discharge surety ----mere forbearance on the part of the creditor to sue the principal debtor is or to enforce any other remedy against him ,does not
In the absence of any provision in the guarantee to the contrary , discharge the duty .
Section 138
Release of one co surety does not discharge others
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Where there are co sureties a release by the creditors of one of them does not discharge the others
Neither does it free the ,surety so released from his responsibility to the other sureties
Section 139 -----Discharge of surety by creditor 's act or omission impairing surety 's eventual remedy ----
if the creditor does not any act which is inconsistent with the right 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 discharged .
Land mark decision
D Darwain and pears
Principle debtor is a share holder in a company .he paid some amount for shares . respondent had taken surety for remaining amount . principal debtor did not pay and company had seized that shares .here surety had discharged due to this seizure .if company had not seized these shares then surety had not been discharged.
Illustrations
A.B contracts to build a ship for C for a given sum ,to be paid by instalment as the work reaches certain stages .A becomes surety to C for B 's due performance of the contract .C without knowledge of A prepays to B the last two instalment .A is discharged by his prepayment.
B.C lends money to B on the security of joint and several promissory note made in C's favour by B and by A as surety for B together with a bill of sale of B 's furniture which gives power to C to sell the furniture and apply the proceeds in discharge of the note subsequently.C sells the furniture but owing to his misconduct and wilful negligence only a small price is realized .A is discharged from liability on the note .
C.A puts M as apprentice to B and gives a guarantee to B for M fidelity .B promises on his part that he we will at least once a month see M make up the cash .B omits to see this done promised and M embezzled .A is not liable to B on his guarantee
Example
1.if pledged property had been lost due to carelessness of bank then surety had been discharged from his liability .
Union Bank of India versus suresh bhai lal Mehta air Gujrat 1997
2.when pledged property had been sold by principal debtor and bank was informed but bank did not take any action .in this condition surety had been discharged .
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Section 140 ---right of surety on payment of performance ----where a guaranted debt has become due or default of the principal debtor to perform a guaranteed duty has taken payment
The surety upon payment or performance of all that he is liable for
Is invested with all the right which the creditor has against the principal debtor
Landmark decision
Re lamplay iron ore company ltd.
A company was being dissolved .a director had taken guarantee for this rent .and paid the rent it had been decided that the right of land lord had been transferred into that director against company .now he could have taken that amount of rent
Section 141 -----surety 's right to benefit of creditor 's securities ----
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 surety parts with such security
The security ,the surety is discharged to the extent of the value of the security.
Land mark judgement
Forbes versus jackson
The principal debtor had mortgaged his leased property and insurance policy for 200 dollar . respondent had become surety for this debt .the principal debtor had taken more debt over these securities .the surety did not know about this .the principal debtor could not pay for this .the surety had paid the entire debt .and demanded securities .it had been decided that sureties would have got both securities.
Illustrations
A.C advances to B his tenant 2000/ on guarantee of A .C has also a further security for 2000 rupees by a mortgage of B' s furniture .C cancels the mortgage.B becomes insolvent and C sues A on the amount of the value of furniture.
B.C , creditor whose advance to B is secured by a decree ,receives also a guarantee for that advance from A .C afterwards takes B's goods in execution under the decree and then without the knowledge of A , withdraw the execution A is discharged.
C.A as surety for B makes a bond jointly with B to C to secure a loan from C to B . afterwards C obtains from B a further security for the same debt . subsequently C gives up the further security.A is not discharged.
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