Circumstances Under Which Surety Is Discharged From Liability

A contract of guarantee is widely used in business transactions and is thought to have enormous commercial viability. This is due to the fact that a contract of guarantee serves as a backup source of funding in the event that the original source of funding or the borrower defaults on the loan. A surety agrees in a contract of guarantee to reimburse the creditor for the amount in the event that the principal debtor is unable to do so. Through a variety of provisions, the Indian Contract Act, 1872 guarantees the protection of all parties involved in a contract of guarantee, particularly the interests of the surety. It is possible that the contract of guarantee was not entirely formed in good faith when it was first entered into. But our legal system makes it clear that the creditor must act in good faith after entering into such a contract. It also makes sure that the surety's rights and obligations are crystal clear.

Following are the circumstances stated under Indian Contract Act, which allows the discharges the liability of a surety, under circumstances:

1. Notice of revocation: Once it is put into action, a "ordinary guarantee" for a single, particular debt or transaction cannot be taken back. However, the surety may revoke a "continuing guarantee" at any time with regard to future transactions by providing notice to the creditor.

2. Death of surety: Unless there is a contract to the contrary, a surety's death releases him from liability with regard to transactions made after his death in the event of a "continuing guarantee." Even if the creditor is unaware of the death, the estate of the departed surety will not be held responsible for any transactions made after the death

3. Terms of the contract variation: "Any modification made in the terms of the agreement between the principal debtor and the creditor, without the surety's approval, releases the surety with respect to transactions that occur after the modification."

4. Release or discharge of principal debtor: This Section outlines the two methods by which a surety may be released from liability.
   1. Any agreement between the creditor and the principal debtor that releases the principal debtor discharges the surety. When the principal debtor is released, the surety is released as well.
   2. Any action or inaction on the part of the creditor that results in the principal debtor's discharge legally also releases the surety.

5. Creditor arrangement with principal debtor without surety's consent: In the event that the creditor enters into a composition agreement with the principal debtor or promises to refrain from suing him without the surety's consent, the surety will be released. However, in the subsequent scenarios, a surety is not released:
   1. The surety is not released when the creditor enters into a time-sharing agreement with a third party rather than the principal debtor.

6. A creditor's action or inaction affecting the surety's ultimate remedy: "The surety is discharged if the creditor engages in any activity that conflicts with the surety's rights or fails to take any action that the surety needs him to take, thereby impairing the surety's eventual remedy against the principal debtor." In short, it is the duty of the credi¬tor to do every act necessary for the protection of the rights of the surety and if he fails in this duty, the surety is discharged.

Therefore, in cases where a cashier's integrity is assured, the employer has an obligation to notify the surety in the event that the employee commits any dishonesty.

The surety is fired if the employer keeps him on after an act of dishonesty (which is proven), if he is not notified within a reasonable amount of time. This is because the surety's right (eventual remedy) to notify the police for required recovery action is lost or damaged, meaning it might not be as successful as it would have been, had a report been filed earlier.

7. Loss of security: The surety is released from liability to the extent of the value of the security if the creditor forfeits or, without the surety's consent, parts with any security provided to him at the time of the guarantee contract. Here, "loss" refers to a loss brought on by negligence or carelessness.

Therefore, the surety would not be released in the event that the security was lost as a result of an unavoidable accident, an act of God, or enemies of the state. Once more, the surety would not be released if the securities that were lost or parted with were later acquired as additional security (Bhushayya vs Suryanarayan).

8. The contract of guarantee (between the surety and the creditor) is deemed invalid.

• In the event that the surety and the creditor have an invalid contract, the surety is also released from liability. A guarantee contract is void in the following situations:
  1. 1. In cases where the creditor, or with the creditor's knowledge and consent, obtained the guarantee through deception, fraud, or by remaining silent about a material aspect of the transaction. Be advised that under these Sections, the guarantee is still enforceable even in cases where the debtor engages in deception or concealment without the creditor's consent.
     2. If someone guarantees in a contract that the creditor won't take action until a second party joins as a co-surety, that guarantee is null and void if the second party doesn't.
     3. When it is devoid of one or more necessary components, such as when the surety is unable to enter into a contract or the purpose is unlawful.

In the case of Bonar v. Macdonald, it was stated that any material changes in the contract can discharge the duty of the surety, as is evident from the above case law. In the event that the manager defaulted, the surety was required to cover the manager's one-fourth share of the firm's loss.

In the Punjab National Bank v. Sita Ram Gupta case, the case's identified facts were that the appellant withdrew his guarantee before the principal debtor received the money. But the contract of guarantee that was entered into contained a clause that stated the guarantee is perpetual and cannot be cancelled or revoked. According to the court, the appellant cannot revoke the contract because it was his own responsibility to waive his own rights.

In conclusion, in order to protect the interests of the surety, who promises to pay the debt in the event of a default, the Indian Contract Act, 1872 allows for the discharge of the surety's liability under specific circumstances. Three circumstances fall into one of three categories: revocation, party conduct, or contract invalidity. All three relate to the surety's release from liability.