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DISCHARGE OF SURETY
Subject: Law of Contract II

Submitted to: - Submitted by:-
Dr. Vijay Kumar Vimal Adhish Prasad
Roll no: - 904
Semester: - 3rd
Session: - 2013-18
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TABLE OF CONTENTS

1. TABLE OF CASES3

2. AIMS & OBJECTIVE.4

3. HYPOTHESIS.....4

4. RESEARCH METHODOLOGY.....4

5. CHPTERISATION

i. INTRODUCTION..5-6
ii. ESSENTIAL ELEMENTS OF CONTRACT......7-11
iii. OFFER OF PROPOSAL........12-17
a. HOW AN OFFER IS MADE....14
b. REVOCATION OF OFFER..15
c. TYPES OF OFFER.16-17
iv. GENERSAL PROPOSAL...18
v. CASE LAWS.....19-22
vi. CONCLUSION23




BIBLIOGRAPHY

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TABLE OF CASES
1. Pratap Singh vs. Kesava Lal

2. Bonar vs. Macdonald

3. Kurian vs. The Alleppey C.C M.S society

4. M.R.Chakrapani vs. Canara bank

5. State of MP vs. Kalu Ram

6. C.K.Aboobacker vs. K.P.Ayishu

7. Kathun bibi vs. Abdullah

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AIMS AND OBJECTIVE
The researcher aims for making this project to:-
1. To find out the Suretys liability and how can he discharged from his liability.
2. To find out the different sections and different cases of the discharge of Surety.

HYPOTHESIS
The researcher hypothesis that whether Surety is completely discharged from his liability which
he had undertaken under the contract of guarantees or has some liability against the Principal
Debtor or Creditor.
1. General proposal is made in-rem (to world at large) but the contract is only made to the
person who comes forward and performs the conducts of the offer.
2. The acceptor need not to communicate his acceptance as it is done by his conduct.



RESEARCH METHODOLOGY
The various books, websites, magazines and newspaper are referred for this topic. The sources
from which the material for this research collected are primary and secondary. So the
methodology used in the research has been Doctrinal. No non-doctrinal method has been used by
the researcher in this project work.

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1. INTRODUCTION TO CONTRACT OF GUARANTEE
A guarantee can be many a things. It can be assurance of a particular outcome or that something
will be performed in a specified manner. A guarantee is a way of assuming responsibility for
paying anothers debts or fulfilling anothers responsibilities. It can be a promise for the
execution, completion, or existence of something. A guarantee can also be a promise or an
assurance attesting to the quality or durability of a product or service.
The English law defines a guarantee as a promise to answer for the debt, default or
miscarriage of another.
Section 126 of the Indian Contract Act, 1872 says that a Contract of Guarantee is a contract to
perform the promise or discharge the liability or a third person in case of his default.
Illustration: If A gives an undertaking stating that if 200 are lent to C by B and C does not
pay, A will pay back the money, it will be a contract of guarantee. Here, A is the surety, B is the
principal debtor and C is the creditor.
Surety is the person gives the guarantee, the Principal Debtor is one for whom the guarantee is
given and the creditor is the person to whom the guarantee is given. Contract Act uses the word
surety which is same as guarantor Prima facie, the surety is not undertaking to perform should
the principal debtor fail; the surety is undertaking to see that the principal debtor does perform
his part of the bargain. A contract of guarantee pre-supposes a principal debt or an obligation that
the principal debtor has to discharge in favor of the creditor.
Anything done, or any promise made, for the benefit of the principal debtor, is deemed sufficient
consideration to the surety for giving the guarantee. It is sufficient inducement that the person for
whom the surety has given guarantee has received a benefit or the creditor has suffered an
inconvenience. While Section 2 (d) of the ICA, 1872 says that past consideration is good
consideration, illustration (c) of Section 127 of the ICA, 1872 seems to negate this point. Those
who favor the validity of past consideration state that law is not supposed to be guided by
illustrations. But there have been conflicting judgments about whether past consideration is good
consideration.
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Illustration: 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 As promise to deliver the goods. This deemed sufficient
consideration for Cs promise.
Illustration: 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 agrees to forbear as requested. This is a sufficient consideration for Cs promise.
Illustration: A sells and delivers goods to B. C afterwards, without consideration, agrees to
pay for them in default of B. The agreement is void.
The most basic function of a contract of guarantee is to enable a person to get a job, a loan or
some goods as the case may be. In case, a person is desirous of buying a car on a hire- purchase
agreement by making monthly payments over a period of time but the car dealer asks for
guarantee. Then someone would have to assure him that he will make the monthly payments in
case of default by the person who is buying the care. Such an undertaking results in a contract of
surety ship or guarantee. Guarantee is security in form of a right of action against a third party
called the surety or the guarantor.








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2. RIGHTS OF THE SURETY

Rights of the surety can be classified under three heads:
(i) Against the principal debtor.
(ii) Against the creditor.
(iii) Against the co-sureties.
1. Rights of the surety against the principal debtor
(a) Rights to be subrogated: When the principal debtor had committed the default and the surety
pays the debt to the creditor, surety will stand in the shoes of the creditor and will be invested
with all the rights which the creditor had against the debtor (Sec. 140).
(b) Right to claim indemnity: In every contract of guarantee, there is an implied promise by the
principal debtor to indemnify the surety and the surety is to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee but no sums which he has paid
wrongfully, e.g., cost of fruitless litigation (Sec. 145).
Examples: (i) B is indebted to C, and A is surety for the debt. C demands payments from A, and
on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing
so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount
paid by him for costs, as well as the principal debt.
(ii) A guarantees to C, to the extent of 2000 rupees, payment for rice to be supplied by C to B. C
supplies rice to a less amount than 2000 rupees, but obtains from a payment of the sum of 2,000
rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice
actually supplied.


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2. Rights of the surety against the creditor
A surety is entitled to the benefit of every security which the creditor has against the debtor at the
time when the contract of surety ship 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 (Sec. 141). But a
surety, however, cannot claim the benefit of the securities only on the payment of a part of the
debt.
3. Right against co-sureties
When two or more persons stand as sureties for the same debt or obligation they are termed as
co-sureties. The position of co-sureties is as follows.
Co-sureties liable to contribute equally (Sec. 146): 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 contract, and whether 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.
Example: A, B and C are sureties to D for the sum of 3,000 rupees lent to E.E makes default in
payment. A, Band C are liable, as between themselves, to pay 1,000 rupees each.
Liability of co-sureties bound in different sums (Sec. 147)
Co-sureties who are bound in different sums are liable to pay equally as far as the limits to their
respective obligations permit.
Example: (i) A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of
40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 30,000
rupees. A, B and C each are liable to pay 10,000 rupees.
(ii) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,
namely, A in the penalty of 10,000 rupees, B in that 20,000 rupees and C in that of 40,000
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rupees, conditioned for Ds duly accounting to E, D makes default to the extent of 40,000
rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupees each.

3. DISCHARGE OF SURETY

Surety will be discharged from his liability in the following cases:
1. By notice or death (Secs. 130 & 131): A contract of continuing guarantee may be terminated
at any time by notice to the creditor. The death of the surety brings an end to continuing
guarantee. No notice of death need to given to the creditor. The surety will not be responsible for
acts done after his death.
2. Variations in terms of the original contract between the principal debtor and the
creditor (Sec. 133): If the contract between the creditor and the principal debtor is materially
altered without the consent of the surety, the surety is discharged as to transactions subsequent
for the alteration.
Example (i): A becomes surety to C for Bs conduct as a manager in Cs
bank. Afterwards, B and C contract, without As consent that Bs 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 surety ship
by the variance made without the consent, and is not liable to make good this loss.
(ii) C contracts to lend B Rs. 5,000 on first March. Guarantees to repayment. C pays the amount
to B on first January. A is discharged from the liability, as the contract has been varied in as
much as C might sue B for the money before the 1st March.
3. By release or discharge of the principal debtor (Sec. 134). The surety is discharged by any
contract between in 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 a surety
on one agreement will not release the other surety bound for the same debtor by a separate
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agreement from his engagement, unless the effect of such release is to adversely affect the others
right to contribution.
Example (i) : 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 inconsideration 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 surety ship.
(ii) A contracts with B fro to grow crop of indigo on his (As) land and to deliver it to B at a
fixed rate. C guarantees As performance of his contract. B diverts a stream of water which is
necessary for irrigation of As land and thereby prevents him from raising the indigo. C is no
longer liable on his guarantee.
Compounding by creditor with the principal debtor (Sec. 135). 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 sue to the principal debtor discharges the surety unless the surety assents to
such contract.
But 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 (Sec. 136).
Example: C, the holder of an overdue bill of exchange drawn by as surety for & and accepted by
B, contracts with A to give time to B, is not discharged.
Similarly, mere forbearance on the part of the creditor to sue the principal debtor within the
limitation period 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 (Sec. 137).
Example: 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 surety ship.
Where there are co-sureties a release by the creditor of one of them does not discharge the other;
neither does it free the surety so released from his responsibility to other sureties (Sec. 138).
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5. Creditors act or omission impairing sureties eventual remedy (Sec. 139). If the creditor does
any act which is inconsistent with the rights of the surety, or omits to do any act which his duty
to the surety requires him to do, any the eventual remedy of the surety himself against the
principal debtor is thereby impaired, and the security is discharged.
Example: (i) B contracts to build a ship for C for a given sum to be paid by installments as the
work reaches certain stages. A becomes surety to C for Bs performance of the contract. C
without the knowledge of A prepays to B the last two installments. A is discharged by his pre-
payments.
(ii) A puts M as apprentice to B, and gives a guarantee to B for Ms fidelity. B promises on his
part that he will, at least once a month, see M to make up the cash. B omits to see M as
promised, and M embezzles. A is not liable to B on his guarantee.
6. Loss of security (Sec. 141). If the creditor losses on, without the consent of the surety, parts
with any security given to him at the time of the contract of guarantee, the surety is discharged
from liability to the extent of the value of security.
Example: C advances to B; his tenant Rs. 2,000 on the guarantee of A. C has also further a
security of Rs. 2,000 by a mortgage of Bs furniture. C cancels the mortgage. B becomes
insolvent, and C sues A on his guarantee. A is discharged from his liability to the amount of the
value of the furniture.
7. by invalidation of the contract of guarantee (Secs. 142, 143 and 144). A contract of guarantee
becomes invalid if guarantee was obtained by fraud or concealment etc. about material facts as
discussed before. Surety in such a case will be discharged from his liability.




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4. CASE LAWS

I. Pratap Singh vs. Kesava Lal

Fact of the Case
X agreed to give a loan to A on the security of four properties. A gave guarantee for this.
Actually X gave a loan of smaller amount on the security of three properties.

The court held that as there was change in the terms of the original contract the guarantor
was discharged from the contract of liability.



II. Bonar vs. Macdonald

Fact of the Case
In this case the defendant was surety for the conduct of a bank manager. Subsequent to this
agreement, the bank enhanced managers salary and the manager agreed to be liable for one
fourth of the losses on discounts allowed by him. This agreement between the bank and its
manager had been made without the knowledge of the surety.

It was held that this agreement had resulted in the discharge of surety.


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III. Kurian vs. The Alleppey C.C M.S society
Fact of the Case
In this case the creditor filed the suit against debtor for the recovery of some money due from the
debtor. Then there was a compromise between the two parties to the suit according to which the
debtor was allowed to pay the debtor money within nine months from the date of compromise.
This happened without the knowledge or consent of the surety.

It was held that this agreement meant giving time to debtor within the meaning of sec. 135,
and the surety was therefore discharged from his liability


IV. M.R.Chakrapani vs. Canara bank

Fact of the Case
In this case the property hypothecated (promise to keep) to the bank was sold by the principal
debtor. The surety immediately furnished particulars of the sail of the bank, but the bank took no
steps either to trace seize the property or failed to take any action against the principle debtor by
lodging a complaint with the police or filing a case in a criminal court for tracing and attachment
of property and recovering the dues. It was In this case the property hypothecated (promise to
keep) to the bank was sold by the principal debtor. The surety immediately furnished particulars
of the sail of the bank, but the bank took no steps either to trace seize the property or failed to
take any action against the principle debtor by lodging a complaint with the police or filing a
case in a criminal court for tracing and attachment of property and recovering the dues.

The court held that the It was held that surety was discharged due to inaction of the bank.
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V. State of MP vs. Kalu Ram

Fact of the Case
In this case the surety was discharged by the loss of security by the creditor. The facts of the case
are as follows. The respondent kalu ram was a surety for the payment failed trees which were
sold by the appellant to one jagat ram. The buyer of the trees was to make the payment in four
installments. He paid only one installment and the defaulted. The appellant had a right under the
contract to prevent the purchaser from removing the trees when he was In default. The appellant
failed to do so.

The court held that the appellant, by allowing the buyer to take away the trees, had allowed
the security to be lost, and the surety was therefore discharged to that extent.
According to sec. 141, surety has a right to demand from the creditor, all the
securities which the creditor had, if he paid the debt in full against the default of the
principle debtor. The surety cannot exercise the right over the security for making part
payment as laid in the case of Goverdhandas vs. Bank of Bengal.


VI. C.K.Aboobacker vs. K.P.Ayishu
Fact of the Case
In this case it has been held by the Kerala high court that a guarantor is liable for any payment or
performance or any obligation only to the extent the principle debtor has defaulted. If a
substantial portion of the loan has been paid by the principal debtor, the guarantor is to pay only
the balance due. According to sec. 145, after the surety has paid the amount, the principle debtor
should indemnify the surety for everything the surety had rightfully paid under the contract of
guarantee.
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VII. Kathun bibi vs. Abdullah

Fact of the Case
A guaranteed the payment of rent by B under the lease granted by C. subsequently C enhanced
the rent.
It was held that A was discharged from his surety ship in respect of the arrears of rent that
accrued subsequent to such variance.
.















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5. CONCLUSION

After going through various books, online materials and other data sources, the researcher has
concluded that, the position of the surety is a very delicate in the contract of guarantee.
Therefore, the law says there are certain circumstances in which the surety will be completely
free from his liability and the first and foremost point is that surety will be free from the
responsibility by giving a notice to the creditor. Now this right is available with the surety only
in case of continuing guarantee. Now surety can revocate his liability by giving a notice of
revocation to the creditor. Another point when the surety will be free from responsibility is by
death of the surety. As you know death itself is a notice, so surety will be free if he dies, but he
will be free from the transaction or from the liability, which occur after his death, the another
point when the surety will be free from the liability is the variance in terms of contract. When
we say the variance in terms of contract means, if debtor and the creditor after entering into a
contract change the contract without the consent of the surety, The researcher would like to
emphasize this point by saying again and again that suretys liability is very delicate in the
contract of guarantee. If anything is done by the debtor and the creditor in the contract of
guarantee and without the consent of the surety, please underline this point without the consent
of the surety, surety will be free from responsibility. Now in this contract, when the researcher
was mentioning there are variance in the contract of guarantee, debtor and the creditor enters into
the contract and the surety has given the guarantee and without the knowledge of the surety,
without the consent of the surety if later on they change the terms and condition of the contract,
surety will be free from responsibility.






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BIBLEOGRAPHY
WEBSITES

1. http://www.businessdictionary.com/definition/contract.htm
2. http://www.law.cornell.edu/wex/contract
3. www.smallbusiness.wa.gov.au
4. en.wikipedia.org/wiki/Contract
5. www.lawhandbook.org.au
6. www.lawnotes.in
7. http://www.hobartlegal.org.au/tasmanian-law-handbook,
8. http://en.wikipedia.org/wiki/Offer_and_acceptance,
9. www.bms.co.in/explain-the-types-of-offer
10. http://chestofbooks.com/business/law/Law-Of-Contracts-3/Sec-32,
11. http://www.mbanotesworld.com/offer-may-be-specific-or-general.html



BOOKS

1. Bare Act of I ndian Contract Law, 1872, universal publication,
2. Bare Act of I ndian Contract Law, 1872, professional publication,
3. I ndian Contract Act, by Sir Dinshaw Fardunji Mulla, 13 Edition, Published in 2011 by
Lexis Nexis
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4. Pollock and Mulla: The I ndian Contract Act, 1872, by Nilima Bhadbhade, 14 Edition,
Published in 2012 by Lexis Nexis
5. Contract I, Edition 6 Ed Rep 2013, by R.K. Bangia, Published by Allahabad Law
Agency
6. Contract and Specfic Relief, by Avtar Singh, 11 Edition, Published by Eastern Book Co.









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