Discharge of surety by release or discharge of principal debtor.— The surety is discharged by any contract between the 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 the principal debtor.
Illustrations
(a) 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 in consideration 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 suretyship.
(b) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of water which is necessary for the irrigation of A’s land and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his suretyship.
Discharge of Surety When the Principal Debtor Is Released
A surety (person who gives a guarantee) is freed from responsibility if the person they guaranteed (the principal debtor) is released from the debt. This can happen in two ways:
- By an agreement between the creditor and the principal debtor that releases the debtor.
- By the actions or mistakes of the creditor that legally free the debtor.
If the principal debtor is legally freed from the debt, or the creditor prevents the debtor from fulfilling the contract, the surety is automatically discharged.
Examples:
(a) A guarantees a debt of B to C for some goods. C supplies goods to B. Later, B cannot pay and makes an agreement with C (and other creditors) to give them his property in exchange for being freed from paying his debts.
- Here, B is released from the debt.
- So, A is no longer responsible as a guarantor.
(b) A promises B to grow indigo on A’s land and deliver it to B. C guarantees A will do this. B blocks a stream of water that A needs for farming, so A cannot grow the crop.
- Because B’s action stops A from fulfilling the contract, C is not responsible anymore as a guarantor.
(c) A agrees to build a house for B at a fixed price and time, with B supplying the timber. C guarantees A’s work. If B does not provide the timber,
- Then A cannot complete the house, and
- C is freed from the guarantee.
(d) A owes ₹50,000 to B. C promises B that if A does not pay, he will pay (this is called a guarantee). Later, B decides to fully forgive A’s debt. Now, A does not have to pay anything. Because the main debt is finished, C is also not responsible anymore.
(e) A agrees to deliver 100 sacks of rice to R. T guarantees A’s promise. R refuses to accept the rice even though A is ready to deliver. Because R prevented A from performing, T is discharged from her guarantee.
(f) V borrows ₹1,00,000 from M. A guarantees the loan. Later, M increases the interest rate or changes the repayment terms without telling A. A is no longer responsible because the contract was changed without his consent.
(g) A supplier guarantees that a builder will pay for cement. The supplier accepts a partial payment from the builder without the surety’s agreement and forgives the rest. The surety cannot be asked to pay the remaining debt.