Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.— 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, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.
Illustrations
(a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this prepayment.
(b) C lends money to B on the security of a 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’s fidelity. B promises on his part that he will, at least once a month, see M make up the cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee.
Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy
If a creditor (the person who gives loan or benefit) does something wrong, or fails to do something they should do, and because of that the surety (guarantor) loses their right to recover money from the main borrower (principal debtor) later, then the surety is freed from responsibility.
In short: If the creditor’s action or negligence harms the surety’s right to get reimbursement from the debtor, the surety is discharged.
Examples
(a) B agrees to build a ship for C, and C will pay in parts as work progresses. A becomes guarantor for B. But C pays the last two instalments early, without telling A. Because of this, A loses control and security. So, A is no longer responsible (discharged).
(b) C gives a loan to B. A is guarantor. B also gives furniture as security, which C can sell if needed. Later, C sells the furniture carelessly and gets a very low price. Because C was careless, the value of security reduced. So, A is not liable anymore.
(c) A guarantees that M (an apprentice) will behave honestly while working for B. B promises to check M’s accounts every month. But B does not check, and M steals money. Because B failed to do his duty, the loss happened. So, A is not responsible.