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Contract of Guarantee
SECTIONS 126-147 OF THE CONTRACT ACT

WHAT IS GUARANTEE?
Section 126 of the ICA

A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability of a third person in
case of his default.

The person who gives the guarantee is called the ‘surety’;

The person in respect of whose default the guarantee is given is called the ‘principal debtor’

The person to whom the guarantee is given is called the ‘creditor’

**A guarantee may be either oral or written.

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WHAT IS GUARANTEE?
Summarily speaking, a guarantee is a promise to answer for the payment of some debt, or the
performance of some duty, in case of the failure of another party, who is in the first instance liable to
such payment or performance.

Therefore, in case of a contract of guarantee, the primary liability is that of the principal debtor.
Surety’s liability is only secondary i.e. it arises only when the principal debtor fails.

Therefore, it can be said that a guarantee is an undertaking to indemnify if some other person does not
fulfill his promise.
[Please understand that the word ‘indemnify’ in this sentence is used casually, rather than being used
as a term defined under the ICA]

Note: A contract of guarantee must, therefore, involve a contract to which all three parties are privy!
Their express participation or implied assent to have such a contract must be proved by the person
who wants to rely on it.

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Consideration in a ‘Contract of
Guarantee’
Section 127
Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient
consideration to the surety for giving the guarantee.
a) This section is nothing but an application of the wider principle that in all cases of contract, the
really necessary element of consideration is the legal detriment incurred by the promisee at the
promisor’s request, and it is immaterial whether there is, any apparent benefit to the promisor.
b) The consideration for the Surety’s promise may move from either the Creditor or the Principal
Debtor.
c) The consideration may benefit the Surety, but, it is not necessary that the Surety should receive
any benefit under the contract.

Consideration in a ‘Contract of Guarantee’

The benefit may consist wholly of some advantage given to the Principal Debtor by the Creditor at the
Surety’s request.

The word ‘done’ in the section indicates that past benefit to the Principal Debtor can be good
consideration for a bond of guarantee.

Where the surety bond has been made after the original borrowing by the Principal Debtor, the
Creditor must prove that in consideration of the contract of guarantee, he did something, or refrained
from doing something.

Note: A contract of guarantee, without consideration, is void.

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Surety’s Liability
Section 128
The liability of the surety is co-extensive with that of the principal-debtor, unless it is otherwise
provided by the contract.
Meaning of co-extensive: The word ‘co-extensive’ is an adjective for the word ‘extent’ and relates to
the quantum of the principal debt. This section indicates that a surety is liable to the same extent as the
principal debtor.
So, for example, if the principal debtor is not liable on the principal debt for some reason, the surety is
also not liable. Also, if the principal debtor is discharged of his debt by the creditor for some reason,
the surety is also discharged.
This section only explains the quantum of surety’s obligation when the terms of the contract do not
limit it, as they often do.

Surety’s liability
Therefore, a surety’s liability depends upon the terms of his contract and cannot be made liable for
more than he has undertaken.
A surety is not entitled to any kind of notice of default of the principal debtor, unless the terms of the
guarantee so require.
It is not necessary for the creditor, before proceeding against the surety, to first call upon the principal-
debtor to pay, unless such a demand is necessary under the contract.
Note: The contract of guarantee may provide for conditions precedent to the surety’s liability. It may
provide, for instance, that the creditor shall first take proceedings against the principal debtor. Any
such express or implied conditions precedent to the surety’s liability must be fulfilled before recourse
may be had to him.

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Surety’s Liability
Note: The liability of the surety is joint and several with the principal debtor. It is not affected by the
death of the principal debtor. It is the choice of the creditor to recover the amount either from the
principal debtor after his default, or from the surety. He may file a suit against both the principal
debtor and the surety, or at his option, only against the surety, or only against the debtor, or against
any one of the co-sureties.

Note: The Courts are at loggerheads when it comes to figuring the liability of sureties in cases where
the contracts are void / voidable to begin with. If a surety knowingly guarantees the debt of a minor, it
is possible that the surety is off the hook as his liability is co-extensive with that of the minor.
However, there are cases whereby it was held that a surety remains liable.

BANK GUARANTEES
Bank Guarantees are performance guarantees given by banks to pay or to repay, a specified sum in the
event of any default in performance by the principal-debtor.
In simple words, a bank guarantee is a promise from a bank or other lending institution that if a
particular borrower defaults on a loan, the bank will cover the loss.
How it works?
Let’s assume Company ABC is a small, relatively unknown restaurant (new company) that wants to
purchase a Rs. 20 lakh kitchen equipment. Here, the equipment vendor may require Company ABC to
provide a bank guarantee in order to feel more confident that it will receive payment for the
equipment it ships to Company ABC.

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BANK GUARANTEES
… To obtain this bank guarantee, Company ABC requests one from its preferred lender (usually the
bank with which it keeps its cash accounts). The lender provides the guarantee in writing, which is
then passed on to Company ABC and its vendor. Company ABC’s lender essentially becomes a
cosigner on the purchase contract with the vendor.

Why it matters?

A bank guarantee enables companies to make purchases that they would otherwise not be able to
make; these guarantees thus serve to heighten business activity and expand entrepreneurial activity.

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BANK GUARANTEES
Bank guarantees are of two kinds: (a) Unconditional, and (b) Conditional.

An unconditional bank guarantee is one where the surety becomes liable to the party without proof of
breach. As soon as a demand of the amount is made in accordance with the guarantee document, the
surety becomes liable to pay.

A conditional bank guarantee is one where the surety becomes liable to the party only upon proof of
breach of terms underlying the contract or upon proof of loss occurring from breach

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Section 140
Rights of Surety
Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed
duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested
with all the rights which the creditor had against the principal debtor.
§The broad 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.
§It seems that the intention of the ICA is to keep alive for surety’s benefit any right of the creditor,
under a security or otherwise, which would otherwise have been extinguished at law by the payment
of the debt or performance of the duty.
§This right of the surety to step into the shoes of the creditor is known as the surety’s right of
subrogation.

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Rights of Surety
Automatic Subrogation: Once the surety has paid the guaranteed amount to the creditor, he can sue
the principal-debtor in his own name. The surety is invested with this right automatically, without any
pre-conditions attached to it.
All the rights of the Creditor: The surety is subrogated to all the remedies and rights which the
creditor has, not only against the principal, but also against all persons claiming under the principal,
and to all the securities and right of action generally which the creditor has in respect of the debt. He
(surety) is entitled to the same priority, as the creditor, in the event of insolvency or winding up of the
principal debtor. He is also entitled to the lien, where the creditor was so entitled over the property of
the principal-debtor given as security.

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Rights of Surety
Section 141
A surety is entitled to the benefit of every security which the creditor has against the principal debtor
at the time when the contract of suretyship is entered into, whether the surety knows of the existence of
such security or not; and, if the creditor loses or, without the consent of the surety, parts with such
security, the surety is discharged to the extent of the value of the security.
The basis of the above rule is that, as between the principal debtor and surety, the principal is under an
obligation to indemnify the surety; and it is, from this obligation that the right of surety to the benefit
of securities held by the creditor is derived.
Note: This section is also relevant for “Discharge of Surety”, which is discussed later in these slides.

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Rights of Surety
The expression ‘security’ in this section is not used in any technical sense; it includes all moveable,
immoveable properties of the principal debtor, to which the creditor had acquired rights at the time of
entering into the contract of suretyship.
Note: A creditor is not bound to insist upon any particular kind of security from the principal debtor.
It is only when he takes some security that the surety can claim a right to the benefit of that security.
Not otherwise.
Where the surety becomes a surety for one of the several debts owed by the debtor to the creditor, who
holds different securities for different debts, the surety is entitled to the benefit of only that particular
security for which the surety is liable for;

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Rights of Surety
The expression ‘when the contract of suretyship is entered into’, essentially limits the surety’s right to
securities held by the creditor at the date of his becoming surety. This expression also means that the
surety cannot claim the benefit of any security available to the creditor even before the date of the
suretyship agreement under this section. This may, however, be possible under Section 140.

Loses or parts with: A creditor can be said to have parted with the security when, by reason of what
he has done, he cannot give him the securities in exactly the same condition as they formerly stood in
his hands.

Also, the words ‘if the creditor loses security’ refer to deliberate action by the creditor, and not a mere
fortuitous situation beyond the control of the creditor. It is immaterial, whether the loss is due to a
positive act on the part of the creditor, or his inaction.

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Rights of Surety
Failure by the creditor to preserve the security given by the surety would discharge the surety.
However, a mere passive inactivity on the part of the creditor, by failing to realize the debt from the
collateral security, is not sufficient in itself to discharge the surety.

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 discharge 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.

Surety can sue the Creditor: If securities to which the surety is entitled are not voluntarily given up
to him by the creditor, he may bring an action to compel delivery or claim his share from the property.

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Rights of Surety
Section 145
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the
surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully
paid under the guarantee, but no sums which he has paid wrongfully.

Illustration: B is indebted to C, and A is surety for the debt. C demands payment from A and on his
refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but he is
compelled to pay the amount of the debt with costs. He can recover from B, the amount paid by him
for costs, as well as the principal debt.

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Rights of Surety
Now, given that there exists an implied promise of indemnity between the surety and the principal
debtor, all the rules of indemnity will apply as between them. For example: (1) The surety can sue the
principal debtor for the guarantee amount, as soon as his liability becomes absolute, unless the terms
of the guarantee provide otherwise. (2) The surety may recover all damages, all costs and all sums in
accordance with Section 125 of ICA. Rightfully paid: This term ‘rightfully paid has to be decided in
the context of the circumstances. Though, academics opine that the use of the words ‘reasonable’ and
‘unreasonable’ would have been more appropriate.
Express Indemnity: There is a possibility that the principal debtor enters into a formal agreement of
indemnity with the surety. In such a scenario, the precise extent of that indemnity will be determined
by the contract.

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Discharge of Surety
Sections 133 – 139 of the ICA provide certain circumstances in which the surety is “discharged”. i.e.
the law will not deem the surety liable on the guarantee any more.
Generally speaking, you may also call these the rights of the surety, as they are ultimately scenarios
where the surety will not be liable on the guarantee any more.
It is important to understand that a contract of guarantee is a “contract”. Therefore, it will be
discharged in any manner in which a contract can be discharged. For example: where a guaranteed
obligation is properly discharged by performance, the obligations of the surety are also discharged,
unless of course the surety has assumed greater liability than the principal debtor.

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Discharge of Surety
Section 133 (Discharge by variance)
Any variance, made without the surety’s consent, in the terms of the contract between the principal
debtor and the creditor, discharges the surety as to transactions subsequent to the variance.
This section essentially is a corollary to the general rule that all parties must be privy to the contract of
guarantee.
It states that as soon as the contract is amended without taking the surety on board, the surety is
discharged of his liability with respect to subsequent transactions.
Generally also, any party cannot be bound to something for which he has not contracted.

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Discharge of Surety
If unsubstantial / immaterial alteration is made to the agreement, then the surety is NOT discharged. If the
alteration benefits the surety, then also the surety is NOT discharged. However, this is so provided the
unsubstantial alteration / benefit to surety is SELF EVIDENT. If it is not self-evident that the alteration is
unsubstantial, or one which cannot be prejudicial to the surety, the Court will not inquire the effect of such
alteration, but will hold that in such a case the surety himself must be the sole judge of whether or not he will
consent to remain liable notwithstanding the alteration, and that if he has not so consented, he will be discharged.
Note: If the alteration is substantial and/or prejudicial (disadvantageous) to the surety, the surety stands
discharged.
Note: The surety continues to be liable for transactions effected before such variation! The surety is discharged
only as to the transactions subsequent to the variance.
Note: For a variation to be called “material”, it is necessary that this variation is such that it varies the rights,
liabilities or legal position of the parties as ascertained by the deed in its original state, or otherwise varies the
legal effect of the instrument as originally expressed.

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Discharge of Surety
Section 134 (Discharge by release 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.
This section is on the lines of Section 128 which says that the liability of the surety is co-extensive with
that of the principal debtor. The reason why the surety is discharged with the principal debtor is that
this release / discharge of the principal debtor extinguishes the principal obligation to begin with!
Express release / discharge: This is a situation where there’s an express contract between the creditor
and the principal debtor enunciating such release / discharge.
Implied release / discharge: The words “by any act or omission of the creditor, the legal consequence
of which is the discharge of the principal debtor” refer to an implied release / discharge.

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Discharge of Surety
The acts or omissions contemplated by this section are possibly those referred to in Sections 39, 53,
54, 55 & 67. If the principal debtor is discharged from his obligation by reason of any acts or
omissions specified in these sections, the liability of the surety also stands extinguished.
Section 39 (when a party to a contract has refused to perform, or disabled himself from performing his
promise in entirety)
Section 53 (when a contract contains reciprocal promises, and one party to the contract prevents the
other from performing his promise)
Section 54 (when a contract contains reciprocal promises, such that one of them cannot be performed
till the other has been performed)
Section 55 (When a party to a contract promises to do a certain thing at or before a specified time and
fails to do any such thing within that time)

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Discharge of Surety

Section 67 (If any promisee neglects or refuses to afford the promisor, reasonable facilities for the
performance of his promise)
Note: The majority of Courts have held that if the creditor fails to sue the principal debtor within the
period of limitation, it does not amount to “an act or omission, the legal consequence of which is to
discharge the principal debtor”.
Therefore, the surety is not discharged solely for the reason that the creditor failed to initiate action
against the principal debtor within the limitation period. This rationale is based on the well
established distinction between the barring of the remedy and the complete extinction of debt. (See
Section 137 also)
Note: If there is an express term in the guarantee which preserves the liability of the surety even if the
creditor releases the principal debtor, then the surety is not discharged.

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Discharge of Surety
Section 135
A contract between the creditor and the principal debtor, by which the creditor makes a composition
with, or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the
surety assents to such contract.
This section is a natural extension of Section 133.
Meaning of “makes a composition with”: It essentially means that if the creditor makes any sort of
compromise with the principal debtor (without the consent of the surety) with respect to the debt in
question, it discharges the surety.
Note: Not all compromises will discharge the Surety! It depends on the facts and circumstances of
each case. If the compromise is prejudicial to the Surety, it will definitely release him.

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Discharge of Surety
Meaning of “promises to give time to”: Where a creditor, without the consent of the surety, extends time for the
payment of debt, surety stands discharged.
The principal basis for such a provision is that the surety’s right, at any time, to pay the debt and then sue the
principal debtor in his own name is also delayed. Moreover, the analogy drawn is that in a situation where the
creditor gives time to the principal debtor, creditor can sue the surety and the surety can then claim the money
from the principal debtor in breach of the original agreement.
Note: Even if the giving of such time does not injure the surety (say the deadline is extended only by an hour), by
the principles of equity, the surety will still stand discharged!
Meaning of “promises not to sue”: If the creditor agrees with the principal debtor to not to ever pursue any legal
recourse against him, the surety stands discharged.
Meaning of “unless the surety assents to such contract”: The section is very clear in saying that if the instrument
creating the debt and the suretyship declares that the surety shall not be released by reason of time being given or
any other forbearance, act of omission of the creditor, then the surety is not discharged.

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Discharge of Surety
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, the surety is not discharged.
It is clear that when the creditor enters into a binding contract with the principal debtor to give him
time without the assent of the surety, such giving of time discharges the surety. But, to produce this
result, two things are necessary: (a) there must be a binding contract to give time, and (b) the contract
must be made with the principal debtor.
This section contemplates a situation where the creditor makes an agreement to give time to the
principal debtor, with a third party. And this, does not discharge the surety.

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Discharge of Surety
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, in the absence of any provision in the guarantee to the contrary, discharge the
surety.
This section deals with a case of ‘mere forbearance’ to sue or to enforce any other remedy. This
forbearance may be exercised for a period – short period or until the expiry of period of limitation.
Section 139
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.
This section in continuation of the previous few sections, builds upon the theory that the surety must
not be subjected to something that he originally did not agree to, to begin with.
Note: This section is worded very broadly. Therefore, make sure you interpret the words “inconsistent
with the rights” and “which his duty to the surety requires him to do” and “impaired” very liberally!

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Discharge of Surety
Section 139 consists of the following elements:
1. 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…

2. The eventual remedy of the surety that he had against the principal debtor, is impaired,
If these two conditions are fulfilled, the surety is discharged.

Note: Sections 133, 134 and 135 deal with some of the acts / omissions of the creditor with the principal debtor, which
discharge the surety. Now, Section 139 is a residuary provision. The object of this section is to ensure that no arrangement
different from that contained in the surety’s contract is forced upon him and that the surety, if he pays the debt, has the
benefit of every remedy which the creditor has against the principal debtor.

Note: The substance of Section 139 is that it is the duty of the person who has secured a guarantee, to do every act
necessary for the protection of the rights of the surety. In essence, a “duty of care” is owed by the creditor. This duty of
care is owed to the mortgagor (the principal debtor), as well as to the surety.

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Discharge of Surety
Meaning of “acts inconsistent with the rights of the surety” and “omission to do any act which his duty to the
surety requires him to do”: As discussed already, Section 139 is a residuary provision. i.e. to cover aspects that
may not categorically fall under some of the previous sections. Therefore, there’s no per se list of rights / duties
that have been provided. Each case must be dealt according to its own circumstances.
You may use the following indicators:
(a) any variance made in the contract, without taking the surety on board – Sec 133;
(b) if the principal debtor is released, without taking the surety on board – Sec 134;
(c) any compromise between the principal debtor and the creditor, without taking the surety on board – Sec 135;
(d) any extension of time given by the creditor to the principal debtor, without taking the surety on board – Sec
135;
(e) any promise that the creditor makes to the principal debtor about not suing him, without taking the surety on
board – Sec 135;

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Continuing Guarantee (Meaning)

Section 129
A guarantee which extends to a series of transactions is called a ‘continuing guarantee.’
Meaning of continuing guarantee: A continuing guarantee is one which extends to a series of transactions, and is not exhausted
by or confined to a single transaction. In essence, the surety undertakes to be answerable to the creditor for his dealings with
the debtor, over a certain period of time.

Why is it important for us to find out if a particular guarantee is a continuing one or not: A continuing guarantee may be
revoked either by notice to the Creditor, or until the death of the Surety. On the other hand, one may not revoke a simple
guarantee under any circumstances. Also, a continuing guarantee will run for a longer period of time and for more than one
transaction. Therefore, the Surety could be held liable for longer and/or more!

Note: A guarantee is not continuing one merely because the guarantee says so. The question, whether the guarantee is for a
single or a definite number of transactions, or a continuous one, is a question of construction, based on the specific set of
circumstances.
Note: In order to understand the nature of a guarantee, one must look at: (1) the intention of the parties as expressed by the
language they have employed in the contract, (2) surrounding circumstances, to see what was the subject matter which the
parties contemplated, (3) the use of the expression “ultimate balance to be paid by surety” or “from time to time”, among other
indicators.

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Continuing Guarantee (Revocation by notice)

Section 130
A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the
creditor.
Given that a continuing guarantee extends to a series of transactions, it is obvious that the surety has a right to
withdraw such guarantee.
Note: The Courts usually disallow revocation during the continuance of the relationship, where a continuing
relationship is constituted and taken forward on the faith of a guarantee
Note: A material change in the situation will justify revocation.
Meaning of “as to future transactions”: As soon as the surety sends across the notice of revocation to the
creditor, the surety does not remain liable for any transaction that happens after he has given notice. However, the
surety continues to remain liable for any transaction that has already taken place.

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Continuing Guarantee (Revocation by notice)

Mode of Revocation by “notice”: The section does not prescribe a set mode of giving notice to the
creditor. Therefore, when the contract of suretyship prescribes a particular mode of giving notice of
termination of continuing guarantee by surety, notice must be given in that mode and no other mode
will be effective. Whereas, if no such mode is prescribed in the contract of suretyship, the notice may
be given in any form in which such notices are usually given in that trade.
Section 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 liability for any transaction that took place prior to the death of the surety will be borne by his
heirs. This contract to the contrary need not be in express terms in the contract. It could also be
implied from the circumstances.
Note: Only a continuing guarantee may be revoked by death / notice. Therefore, in the facts, its
important to first figure if the guarantee is of a continuing nature or not!

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Contract of Guarantee
(Obtained by misrepresentation)
Section 142
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.
Section 143
Any guarantee which the creditor has obtained by means of keeping silence as to a material
circumstance, is invalid.
The sections provide that a guarantee is invalid if it has been obtained by means of:
Misrepresentation concerning a material part of the transaction:
a) by the creditor, or
b) with his knowledge and assent.
Keeping silent as to material circumstances.
It doesn’t matter if the misrepresentation is made willfully or innocently!

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Contract of Guarantee
(Obtained by misrepresentation)
Misrepresentation may consist of direct assertion of a fact which is not a fact, or may consist of
statements by the creditor which only tell only such part of the truth as is likely to mislead, or a
statement made by the creditor believing it to be true, but later discovered to be untrue. (Please see
Section 18 of ICA which was a part of “Law of Contract I” for a better understanding)
Meaning of “with his knowledge and assent”: It means that the misrepresentation as to material facts
may in fact also come from a third party, provided the creditor knows or assents to such an act. Thus, if
a third party is acting as an “agent” of the creditor or the creditor had notice (actual or constructive) of
the misrepresentation by this third party, then equity stands against the creditor to set aside the
transaction.

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Contract of Guarantee
(Obtained by misrepresentation)
Meaning of “keeping silence as to material circumstances”: To avoid a guarantee under this section, it
must be proved not only that there was silence as to a material circumstance, but that the guarantee
was obtained by means of such silence.
Note: The expression “keeping silence” has been interpreted to mean intentional concealment as
distinguished from mere innocent non-disclosure.
Meaning of “material”: Something that strikes right at the heart of the transaction! A tentative test to
apply here is to figure whether the misrepresentation is such that a reasonable person in the position of
the surety will reconsider being a surety for the said transaction. If the answer to this question is ‘yes’
under the circumstances, it is material. If the answer to this question is ‘no’ under the circumstances, it
is not material. This test, however, may not always be helpful.

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About Co-Sureties
Section 146
Where two or more persons are co-sureties for the same debt or duty, [either jointly or severally, and
whether under the same or different contracts, and whether with or without knowledge of each other,
the co-sureties, in the absence of any contract to the contrary], 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.
The essence of this section is that if the creditor calls upon one of the co-sureties to pay the debt or
any part of it, that surety has a right, on principles of equity, to call upon his co-sureties for
contribution. (Sometimes called as a “right of contribution”)

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About Co-Sureties
Section 147

Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their
respective obligations permit.
Illustration: A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,
namely, A in the penalty of Rs. 10,000, B in that of Rs. 20,000 and C is that of Rs. 40,000. D makes a
default to the extent of Rs. 30,000. What is the liability of A, B and C?
Illustration: A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,
namely, A in the penalty of Rs. 10,000, B in that of Rs. 20,000 and C is that of Rs. 40,000. D makes a
default to the extent of Rs. 40,000. What is the liability of A, B and C?

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About Co-Sureties
Section 144
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 138
Where there are co-sureties, a release by the creditor of one of them does not discharge the
others…

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Discharge of Surety
Conduct of Invalidation
Revocation
Creditor of Guarantee

Variation in terms Fraud /

By surety – S.130 – S.133 Misrepresentation –
S.142
Release of
Discharge of
Debtors – S.134 Concealment –
Death – S. 131
S.142
Compounding with
Creditor – S.135
Novation – Co-surety doesn’t
General Rule Impairing surety’s join – S.144
remedy – S.139
Failure of
Loss of Security – Consideration –
General Rule
S. 141

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Cases for Guarantee

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Amrit Lal v. State Bank of Travancore

Facts:
1. On February 27, 1956, a partnership firm entered into an agreement with the then Travancore
Forward Bank Ltd. (now replaced by State Bank of Travancore) for a Cash Credit Account to
the extent of Rs. 1 lakh, secured by goods to be pledged with the Bank.
2. The Appellant executed the letter of guarantee in favor of the Bank guaranteeing the liability
of the borrowers in respect of the Cash Credit Account on March 07, 1956.
3. The respondent firm neglected to pay the amount due to the Bank in time and the goods
pledged with the Bank were consequently sold with notice to the partnership firm and the
proceeds applied to the line of credit.
4. As of May 21, 1958, the balance due to the Bank stood at Rs. 40,856. Consequently, the Bank
sues the Surety and the Borrowers in a civil suit. The Surety however, zealously takes up the
following arguments to defend the suit.

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Contd.
Now, the borrower firm had pledged some goods (as security) with the Bank with the following
conditions / disclaimers:
1. The borrowers were responsible for the quantity and quality of the goods pledged with the
Bank.
2. The borrowers were responsible for the correctness of Statements (dealing with market value
of the goods / balance due to the bank etc.) to be provided to the Bank.
3. At the time of pledging the goods, the borrowers declared that the goods had not been
weighed or valued and that the Bank could do so at any time. If the goods were lacking in any
manner whatsoever, the borrower promised to recoup them.

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Contd.
Arguments by Surety:
1. There has been variation in the contract between the borrower firm and the Bank and therefore in line
with Section 133 he stands discharged. The variation pointed out by the Surety was the change in the
limit of Cash Credit Account from Rs. 1 lakh to Rs. 50 thousand and then back again to Rs.1 lakh. The
only evidence in support of this condition was entries in the accounts maintained by the Bank with the
title “limit”.
2. The Bank had given time to the partnership firm to make up for the shortage of goods pledged to the
value of Rs. 35,000 (approx.) and therefore the Surety stands discharged under Section 135.
3. Weekly statement on March 15, 1957 shows that the stock of pledged goods was valued at Rs. 1 lakh.
However, in the weekly statement on April 18, 1957 shows that the stock of pledged goods was approx.
Rs. 65,000.
Based on the above, the Surety argues that the Bank must be deemed to have lost the security under Section
141 and that the Surety should stand discharged of up to Rs. 35,000.

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What did the Court say?

1. Argument No. 1:
◦ The Court held (agreeing with the High Court) that this might be a private instruction to the cashier
that advances were not to be made beyond Rs. 50 thousand.
◦ The Court further held (in light of the exhaustive written agreements in place between the borrower
firm and the Bank) that it is unlikely that the Bank and the borrower firm changed the credit limit
under their contract, without another written arrangement.

2. Argument No. 2:
◦ The Court held that this extension of time was not the same as has been contemplated under Section
135.
◦ The Court stated, “What really constitutes giving of time is the extension of the period at which (by
contract between them) the principal debtor was originally obliged to pay the creditor, by substituting a
new and valid contract between the creditor and the principal debtor to which the surety does not
assent.”

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What did the court say -

3. Argument No. 3:
◦ The agent / employee of the bank was unable to give an appropriate explanation of how exactly the
shortfall of the goods was created, the Court held that the shortage was possibly brought about either
by the negligence of the Bank or for some other reason, and to that extent there must be deemed to be a
loss by the Bank of the securities under Section 141.

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Bank of Bihar v. Damodar Prasad

FACTS:
1. The Plaintiff Bank lent money to Dr. Damodar Prasad (Defendant No. 1) on the guarantee of
Mr. Paras Sinha (Defendant No. 2).
2. In spite of repeated reminders, neither Defendant No. 1 nor Defendant No. 2 paid up their
dues of Rs. 14,500 (approx.).
3. Interestingly, the Surety (Defendant No. 2) had agreed to pay and satisfy the liabilities of the
principal debtor up to Rs. 12,000 and interest thereon, two days after demand.
ISSUE:
Whether or not the court was justified in issuing the following direction to the Plaintiff “plaintiff
bank shall be at liberty to enforce its dues in question against Defendant No. 2 only after having
exhausted its remedies against Defendant.

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What did the court say?

The Court ruled in favor of the Plaintiff.
Rationale:
1. Solvency of the principal-debtor is not a sufficient ground for restraining execution of the decree
against the surety. It is the duty of the Surety to pay to the Creditor.
2. The very object of guarantee is defeated if the creditor is asked to postpone his remedies against
the surety. The liability of the surety is immediate!
3. The Creditor is not bound to exhaust his remedy against the principal, before suing the surety and a
suit may be maintained against the surety even though the principal has not been sued.
4. Ideally, the Creditor should have been allowed to go against the Surety. The Surety could have then
claimed the said amount from the principal-debtor.
5. Even though the Court had the inherent power to postpone the execution of the decree under
Section 151, the ends of justice did not require such postponement.

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Anirudhan v. The Thomco’s Bank Ltd.

Facts:
1. The Principal Debtor Mr. Sankaran approached the Bank for a loan of Rs. 20,000. The Bank
approved the loan in principle, however, insisted on having a Surety for the same.
2. Mr. Sankaran approached the Surety and sought a Rs. 25,000 guarantee. The Surety gave the
letter to Mr. Sankaran.
3. Mr. Sankaran then approached the Bank for a Rs. 25000 loan, which was rejected by the
Bank.
4. Mr. Sankaran then took back the letter of guarantee and made the following changes to the
letter:

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Contd.
◦ The figure “5” in the amount of guarantee of Rs. 25,000 appeared to have been altered to “0” so that the
new guarantee amount is Rs. 20,000. (b) Also, the word “five” was struck out resulting in the sum being
“Rupees Twenty Thousand only”
◦ These changes were NOT approved or known to the Surety, however, it was accepted by the Bank.

5. After Sankaran defaulted on his dues, the Bank sued the Appellant and he took up a defense
that originally he had guaranteed Rs. 25000, whereas the deed was altered to now state his
liability to Rs. 20,000.
Issue: Whether or not the Surety stands discharged, where he himself hands over the possession
of the letter of guarantee to the sole custody of the principal debtor and some immaterial change
is made to the same, without taking the Surety on board?

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What did the court say?

Decision: The Court held that the Surety will not be discharged.
1. Under the circumstances, the Surety handed over the letter of guarantee solely to the Principal
Debtor, thereby giving birth to a relationship of agency between the two.
2. It is necessary that the variation made in a contract (without the consent of the Surety) under
Section 133 is such that it varies the rights, liabilities or legal position of the parties as
ascertained by the deed in its original state, or otherwise varies the legal effect of the
instrument as originally expressed.
3. Also, such an alteration was in no way detrimental to the surety as the reduced sum was
already included in the amount of guarantee originally furnished i.e. if the amount stood at Rs.
25,000, the Surety would have had to anyways cover the amount of Rs. 20,000 while paying
off the debt of Rs. 25,000. Thus, a reduction of an amount already consented to be paid would
not.

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… require a distinct consent and such consent can be taken as implied. Thus, the alteration made
by Mr. Sankaran in the letter of guarantee cannot be considered as a material one.
4. In such a case the principal debtor is deemed to be acting on behalf of the surety as it is at his
instance that the surety is furnishing the guarantee and also has entrusted his letter of guarantee
with him. This entrusting is important.
5. Entrusting means – Handing over the letter of guarantee to the Principal Debtor instead of
handing it themselves to the creditor.

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Subramania Chettiar v. MPN Gounder

Facts:
1. The Principal Debtor’s debt was scaled down by the Madras Agriculturists’ Relief Act.
2. The only question before the court was whether such scaling down of the Principal Debtor’s debt
will also ensure that the liability of the Surety is equally scaled down?
3. The Court after quoting Section 128 of ICA, held that this results from the definition of the surety's
engagement as being accessory to a principal obligation and that the extinction of the principal
obligation necessarily induces that of the surety, it being the nature of an accessory obligation that
it cannot exist without its principal.
4. "Ordinarily the liability of a surety is co-extensive with that of the principal debtor unless it is
otherwise provided for.”
5. It was observed that if an amount recoverable by a plaintiff, from a defendant debtor is diminished
in appeal, the surety's engagement, being one of indemnity, would diminish in like proportion. So,
if the sum recoverable became zero, owing to the decree being reversed, the surety's liability would
also be reduced to nothing."

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Contd.
6. The Court further added that if the release of the surety did not follow from that of the debtor,
the latter's release would be purely illusory because the consequence would be that the surety on
being compelled to pay would immediately turn round on the debtor.
Note: The liability of the Surety is always co-extensive with that of the Principal debtor!

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