In a contract of guarantee, a surety undertakes to pay the amount to the creditor in case the principal debtor is not able to pay the amount. The Indian Contract Act, 1872 through its different provisions ensures that it protects the interest of all the parties in a contract of guarantee, especially the interests of the surety. It may happen that initially when the contract of guarantee had been entered into, the contract was not entirely based on good faith. However, after entering into such a contract, our legal system makes it a point that good faith is imposed on the creditor.  It also ensures that there is no ambiguity related to the rights and liabilities of the surety.

Surety

A surety is a person or an organization that guarantees to pay the sum of money to the creditor in an instance where the principal debtor makes a default or is not able to pay. A surety is also called the ‘guarantor’. When the principal debtor fails to pay his debts, a surety assumes upon himself, the responsibility to pay the debts of the principal debtor. Section 126 of ICA, also defines the term ‘surety’ while defining the contract of guarantee. In a contract between two parties, where one party questions the ability of the other party to satisfy the requirements of the contract, a presence of surety is very common. A lender, in order to reduce risk, may require the debtor with a surety while entering into a contract. Therefore, a surety takes all the responsibility to pay the debts of the principal debtor if he is unable to pay them.

A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.

Discharge of surety

The Indian Contract Act, 1872 provides for the discharge of the liability of surety, in case of certain given circumstances. A surety is said to discharge from his liability if his liability to perform the promise, in case of a default by the principal debtor, comes to an end.  A surety is considered as a ‘favored debtor’ and the liability of a surety can be discharged or released. Discharge of surety’s liability means that the liabilities of the surety have come to an end and he is no longer under any obligation. A surety may be discharged or released from his liabilities by any agreement, operation of law, the performance of the principal debtor’s act, payment of principal debtor’s debt, or by any breach on the part of the creditor in the contract of guarantee. The ICA incorporates certain circumstances under which the surety is discharged from its liabilities. These circumstances are provided under Sections 130-144. They can be enclosed under the following heads:-

·         Discharge by Revocation

·         Discharge by Conduct

·         Discharge by Invalidation of a Contract

1.DISCHARGE OF SURETY BY REVOCATION:(1) Revocation of surety by giving a notice (sec-130):A specific guarantee cannot berevoked by the surety if the liability has already accrued. A continuing guarantee may at anytime, be revoked by the surety, as to future transactions, by giving notice to the creditor. Butthe surety remains liable for transactions already entered into.

(2) Revocation by Death (sec-131):The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.. The effect of the death of the surety is that it results in automatic revocation of the guarantee as to future transactions. But such revocation does not affect the transactions which were executed prior to the death of the surety.For example:in a contract of guarantee, it is mentioned that on the death of the surety, his property or his legal representatives will be responsible for such liability, in such a case, e guarantee is not revoked even if the surety dies.

Eg: A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.

3.Discharge by Invalidation of a Contract.

According to Section 142 of The Indian Contract Act, any Guarantee obtained by misrepresentation is invalid. Section 142 runs as follows:
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.

Eg: C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C, cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.

Conclusion

The Indian Contract Act, 1872 provides for the discharge of the liability of surety in case of certain given circumstances with the objective of securing the interests of the surety, who guarantees payment of the debt in case of a default. The situation under which the surety can be discharged from his liability can be categorised into three different heads i.e. by revocation, the conduct of the parties and invalidation of the contract.