EXTENT OF A SURETY’S LIABILITY

EXCEPTION OF THIS SECTION:

In this if the alteration is made in the agreement without the surety’s consent that is
beneficial to the surety, the surety is not discharged. The alteration should be
unsubstantial/immaterial, then surety is not discharged. In Anirudhan v The Thomco’s
Bank Ltd it was held that the surety is not discharged as the contract between the
principal debtor and creditor is beneficial to the surety.

Section 134 – Discharge of surety by release of Principal Debtor

In this section states that if the principal debtor is release because of any contract
between creditor and principal debtor or by any act or omission of the creditor, then the
surety is released. This section is connected with the section 128 of ICA which says that
the liability of the surety is co-extensive with that of principal debtor. The reason for
the discharge of surety is with the principal debtor that this release of the principal
debtor extinguishes the principal obligation, to begin with.

In this section 2 type of release are mentioned.

1. Express release: This is a situation in where an express contract between the

credit and the principal debtor results in discharge/release
2. Implied release: In the section the words “by any act or commission of the
creditor, the legal consequence of which is the discharge of the principal
debtor” refers to an implied release/discharge.

The acts or omissions by this section are referred to in section 39, 53, 54, 55, 67 of
ICA.
 1. Section 39- when a party to a contract has refused to perform or disabled
himself from performing his promise.
2. Section 53- when a contract contains reciprocal promises and one party to the
contract prevents the other from performing his promise.
3. Section 54- when a contract contains reciprocal promises such that one of
them cannot be performed till the other has been performed.
4. Section 55- When a party to a contract promises to do certain things at or
before a specific time and fails to do any such thing within that time
5. Section 67- If a promisee neglects to afford the promisor, reasonable facilities
for the performance of his promise.

Section 135–A contract between the creditor and the principal debtor without surety
assent to: to make a composition/compromise with

 promise to give time to

 not to sue the principal debtor
 discharges the surety

“To make composition with”- This essentially mean if the creditor makes any sort of
compromise with the principal debtor with respect to the debt them surety will be
discharged.

“Promise to give time to”- where the creditor extends time for the payment of debt
without the consent of surety, then surety will be discharged.

“Not to sue the principal debtor”- If the creditor agrees with the principal debtor to not
to ever sue against him, the surety will be discharged.

Section 136– 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, then the surety is not
discharged.
For example- A agrees with B to supply 500 tons of steel in consideration of Rs 5
Lakhs. C stands surety to A. A agrees with D (B’s father) to extends the delivery date.
C is not discharged as D is the third party and not the principal debtor.

Section 137– Mere Forbearance on the part of the creditor to sue the principal debtor or
to enforce any other remedy against him does not discharge the surety.

Mere forbearance means own its own. When creditor does not sue the principal debtor
on its own then the surety is not discharged.

Section 139– In this section consists of the following elements:

 The creditor either does something which is inconsistent with the rights of the
surety or omits to do his duty towards the surety
 And because of this the eventual remedy of the surety that he had against the
principal debtor is impaired(weakened), the surety is discharged.

The object of this section is to ensure that no arrangement different from that contained
in the surety’s contract is forced upon him. Duty of care is owned by the creditor.

Section 140– The meaning of this section is that the surety steps into the shoes of the
creditor after he has paid the guaranteed debt or performed whatever he was liable for.
This right of the surety to step into the shoes of the creditor is known as the surety’s
right of subrogation.

Automatic subrogation: Once the surety has paid the guarantee amount to the creditor.
The surety is invested with this right automatically without any pre-conditions attached
to it.

Section 141– A surety is entitled to every security which the creditor has against the
principal debtor at the time when the suretyship is entered into. Or if the creditor loses
or parts with such security the surety is discharged to the extent of the value of the
security. This section is applied even when the surety’s consent is not there. The words
“if the creditor loses security” refer to deliberate action by the creditor and not a
mistaken situation beyond the control of the creditor.

Extent of discharge: If the value of the security is less than the liability undertaken by
the surety, then the surety must be held to be discharged to the extent of the value of the
security and that he will still be required to discharged the liability which exceeds the
value of security. However, if the value of the security given is in far excess of the
liability, the surety must be held to be discharged wholly.

Section 142– Guarantee obtained by misrepresentation. Any guarantee obtained by

misrepresentation made by the creditor is invalid.

Section 143– Any guarantee which the creditor has obtained by means of keeping
silence as to a material circumstance is invalid.

Section 144– Guarantee on contract that creditor shall not act on it until co-surety joins.
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. 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.

Section 145– In every contract of guarantee there is an implied contract of indemnity in

between the surety and principal debtor. Principal debtor has to indemnify the surety
later with the rightfully sum. The surety can sue the principal debtor for the guarantee
amount as soon as his liability becomes absolute. The surety may recover all damages,
all costs and all sums in accordance with section 125 of ICA.

CO-SURETIES
Section 138– When one co-surety is released does not discharge other co-surety. A
release by the creditor of one of them does not discharge the others neither does it free
the surety so released from his responsibility to the other sureties.1

Section 146-This section defines co-sureties. Where two or more persons are co-
sureties for the same debt or duty 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. contribution of all the co-sureties should be equal, if not mentioned in the
contract. It should be according to the contract if the proportion is mentioned in the
contract.2

Section 147– Co-sureties are bond in different sums are liable to pay equally as far the
limits of their respective obligations permit.

For e.g. – A, B and C are sureties for D enter into 3 several bonds. A in the penalty of
Rs.10,000, B in that of Rs. 20,000 and C in Rs 40,000. D makes a default to the extent
of Rs. 40,000. So, the liability of A will be 10,000, B’s liability will be 15,000 and C’s
liability will be 15,000 as well.

1
Section 138, The Indian Contract Act

2
Section 146, The Indian Contract Act