157

CHAPTER - V

DISCHARGE OP A SURETY

The ways In which a surety is discharged

from nis suretyship are exceedingly numerous/ for a
surety is a favoured debtor. Speaking generally,
however, under the law of principal and surety, a
creditor must not either act in a manner inconsistent
with the contract of guarantee itself, or do anything
to prejudice the right of contribution between the co-
suret ••s for should he do so, the surety will be
released, either wholly or protanto,

A guarantor may be discharged or released from .

his liability under the guarantee by a subsequent
release or agreement, by operation of law, by payment
or by performance of the principal debtor obligation or
by a breach of the contract of guarantee and it may be
stated as a general rule that any act or omission on the
part of the creditor in breach of his duty under the
guarantee, that increases the guarantor's risk or other-
wise injures his rights and remedies, discharges the
guarantor from his liability under the guarantee, at
least to the extent of the injury so occasioned.
 lb:

Variance

Indian law provides for the discharge of surety

in different sets of circumstances. The surety is dis-
charged when any variance is effected to the main con-
tract between the principal debtor and the creditor.
However the variance must be without the consent of the
surety. When surety has undertaken liability on certain
termS/ it is expected that they will remain unchanged
during the whole period of guarantee. If there is any
variance In the terms of the contract between the prin-
cipal debtor and the creditor, without the consent of
the surety, the surety gets discharge as regards tran-
sactions subsequent to such a change. The reason for
such a discharge is that the surety agreed to be liable
for a contract which is no more there, and he is not
liable on the altered contract because it is different
from the contract made by him. This principle has been
incorporated in section 133 of the Indian Contract \ct,
Thi3 section refers to a contract which consists of
series of transactions extended over a period of time.
It does not purport to make any change in the law in the
2
case of a contract consisting of a single, transaction.
 lb.

But what is variation in the contract of

guarantee has been the subject matter of Judicial
3
interpretation. In N. Sulo Ghana v. State, the peti-
tioner's husband ( along with some other person ) was
the highliest bidder for some shops. But no licence
was granted by the government for these shops, unless
a surety bond in respect of the previous year's arrears
of !?s. 75,928/- was granted. The wife accordingly stood
as a surety for the amount. The court held the surety
bond , as regarding the arrears, it was not confined
to the amount. Merely because the amount of the
arrears was not determined and could be different from
the above figure did not mean that there was a varia-
tion in the contract of guarantee, rne correct inter-
pretation, the court said ) was that the wife cannot
be made liable for any amount over ^nd above 3s. 75,928
but certainly she is liable for that amount, or for
any lesser amount. This obviously is the correct
exposition of law.
The principle of law on the discharge of sure-
ties is that the surety, cannot be held bound to some
thing for which he has not contracted. If the original
parties have expressly agreed to vary the terms of the
original contract no further question arises. The
 lb

original contract nas gone, and unless the surety

has assented to the new terms« there is nothing to
which he can be bound, for the final obligation of the
principal debtor will be something different from the
4
obligation which the surety guaranteed.

If an alteration is made in a material part

of a deed after its execution, by or with the consent
of any party there to or person entitled thereunder,
but without the consent of the party or parties liable
there under, the deed is thereby made void. The
avoidance, however, is not abinitio or so as to nullify
any conveyancing effect which the deed has already had,
but only operates as from the time of such alteration
and so as to prevent thepperson who has made or autho-
rised the alteration and those claiming under him,
from putting the deed in suit to enforce against any
party bound thereby who did not consent to the altera-
tion, any obligation, covenant or promise thereby
undertaken or made.

In the field of law relating to the alteration

of documents, the strict rule at one time was that the
slightest alteration makes the document void. The
5
leading case for a long time was Pegot's case, where
 lb:

Lord Coke stated the doctrine as follows:

"These points were resolved, where

any deed is raised, whereby it
becomes void, the obligar may plead
nonest factum , and give the matter
in evidence, because at that time
of the plea pleaded, it is not his
deed". Secondly, it was resolved
that when any deed is altered in a
point material by the plaintiff him-
self, or by any stranger, without
the privity of the obligee, be it by
interlineation, addition, raising
or by drawing of a pen through a
line, or through the midest of any
material word, that the deed thereby
becomes void. So if the obligee
himself alters the deed by any of the
said ways, although it is in wards
not material, yet the deed is void.
But if a stranger, without his privity,
alters the deed by any of the said
ways in any point material, it shall
not avoid the deed".

The principle as to discharge of surety was

6
stated by Lord V/estbury L.C. in Blest v. Brown, in the
followiny words:

" It must always be recollected in

what manner a surety is bounds Jfou
bind him to the letter of his
engagement. Beyond the proper inter-
pretation of that engagement you have
no hold upon him. He receives no
benefit, no consideration. He is
bound, therefore, merely according
to the proper meaning and effect of
the written engagement that he has
entered into. If that written
 Ib2

engagement la altered In a
single lin«, no matter whether
the alterat^n be Innocently made,
he has a right to say, the con-
tract Is no langer that for which
I engaged to be surety, you have
put an end to the contract that i
guaranteed and my obligation,
therefore, is at end."

Material Alteration

A material alteration is one which varies

the rights, liabilities or legal position of the
parties ascertained by the deed in its original state
or otherwise varies the legal effect of the Instrument
as originally expressed or reduced to certainty some
provisions which were originally unascertained and as
such void. The effect of making such an alteration
without the consent of the surety is exactly the same
as that of cancelling the deed. In Lakshman Mai v.
7
Narasinharaghava Iyengar, the Madras High Court held
that " an alteration in a document which has the eff'=>ct
of enabling the payee to sue on the document in a
court where he could not have sued on it in its ori-
ginal form is a material alteration and as such des-
troy© the right of action on the document".

Where a compromise decree was passed against

the debtor providing for the payment of debt by instal-
ments and a certain person stood surety for the due
payment of such Instalments on the strength of the
 lb..

property that was attached before judgment and

subsequently permission to mortgage and sell the
property privately was granted to the judgment
debtor. It was held that under the circumstances
the moment permission was granted to the judgment
debtor to effect private mortgages or sales, the
whole position was changed and the surety stands
8
discharged on the ground of material alteration.
Likewise where a certain partnership, stipulating
to be dissolved where losses occur. The firm carries
on a business with a certain specified capital. The
firm sustains losses and the partners instead of
dissolving the partnership, further enlarge the capital
and extended the business by amalgamating it with a
rival concern. The firm also undertakes another
business not originally contemplated. The new changes
and liabilities in the business has thus totally changed
the character of the business in the original contract
of suretyship. This amounts to a material variation
and, therefore, the surety cannot be made liable for
9
tne losses tnat may occur in the newly formed business
where the variation of the contract has the result of
laying an additional burden on the surety, the surety
will be discharged. An unauthorised material altera-
tion by the promisee whether that is by adding anything
 lb

to or by striking out any part of a written contract

avoids the contract against the person otherwise
liable upon it. In a printed foxnm of guarantee, if
the signature of tne guarantor is obtained prior to
the filling up of the blanks relating to the material
particular of the contract, the filling up of the
blank spaces in the form of the guarantee amounts to
material alteration. In S, Perumal Reddiar v. Bank of
10
Baroda, the plaintiff, the Bank of Baroda was the
creditor having advanced Rs. 15,000 as crop loan to the
first defendant who was the principal debtor. The
second and third defendants were the guarantors. In
the printed foirm the introduction by way of filling up
the blank spaces, relating to the date of execution,
name of the principal debtor, names of the sureties,
the description of the land for which the loan is
advanced, as loan, and the rated of interest. It was
held that these were material alterations made without
the consent of the surety. The surety was, therefore,
discharged from his contract of guarantee. The court
did not expressly condemn tne practice of obtaining
signature of a party on blank ( printed ) forms. But
the legal effect of the decision would put the obtainers
( of signatures) to serve test of consensus ad idem
 16

( meeting of minda) of which the problem of variation

11
of the deed of guarantee is only an off-shoot. In
12
Rananund v. Choudhey Soonder^ where, under a consent
decree, it was provided that in the default of one
instalment, the properties in suit may be sold, and
the surety proceeded against for any deficiency, the
privy council held that the decree- holders' delay in
actually bringing the properties to sale had the effect
of discharging the surety protanto, as to Interest due
from the date of the order for sale, because the act
of the creditor in postponing the sale laid an addi-
tional burden on the surety by increasing the interest.

Immaterial alteratiofa

Unsubstantial alterations in an instrument of

guarantee which are to the benefit of the surety do not
discharge the surety from the liability. An alteration
made in an instrument after its execution, in some
particular which is not material, does not, in any way
effect the validity of the instrument. An alteration
is not material, if it carries out the intention of the
parties already apparent on the face of the deed.
Cotton L. J. stated the Law in Halme v. Brunskill, 13
as follows:
 1^~i

" The true rule in my opinion is,

that if there is any agreement
between the principals with refe-
rence to the contract guaranteed,
the surety aught to be consulted,
and that if he nas not consented
to the alterations although in
cases where it is without inquiry
evident that the alteration is
unsubstantial, or $;hat it cannot
be otherwise than beneficial to
the surety, the surety may not be
discharged. Yet that if it is not
self-evident that the alteration
is unsubstantial, or one which cannot
be prejudicial to the surety, the
Court will not in an action against
the surety go into an inquiry as to
the effect of the alteration."

An instrument is not discharged by an immaterial

alteration, that is to say, one which does not alter
the legal effect of the instrument or increase a greater
liability on the promisor. \n unauthorised material
alteration by the promisee whether by adding anything
to or by striking out any part of a written contract,
avoids the contract against the person otherwise liable
upon it.

The strictness of the rule was that any alte-

ration without the surety's consent even for his benefit
will discharge the surety, tempered in subsequent
14
cases and was departed from in Aldous v. Carnwill,
where Lush J. after referring to numerous authorities,
observed:
 lb?

" This being the state of authorities,

we think we are not bound by the
doctrine in Piqots case ^or authority
cited for it and not being bound, we
are certainly not disposed to lay it
down as a rule of law that the addi-
tion of the words which cannot possibly
prejudice any one, destroys the vali-
dity of the note. It seems to us repug-
nant to justice and common sense to hold
that the maker of the promissory note
is discharged from his obligation to pay
it because the holder has put in writing
on the note what the law would have
supplied if the words had not been
written".

The question whether a document jointly executed

by the two persons creating a joint liability is to be
regarded as materially altered ±f the liability is
reduced equally for both but the alteration is made by
only one of them. Such an alteration must be regarded
as unsubtantial and not otherwise than beneficial to
the surety and it cannot attract the strict rule.

The rule was applied by the Supreme Court of

16
India in M.S. Anirudhan v. Thomco's Bank Ltd., the facts
of the case were that the respondent bank allowed an
overdraft of 8s, 20,000 to the pribcipal debtor on the
guarantee of the appellant. Originally the guarantee
paper showed the sum of '?s. 25,000 which the bank refused
to accept. The principal debtor took it back and
altered the sum to Ss, 20,000 and gave to the bank. Th e
 Ibj

bank brought an action against the surety on the

default of the principal debtor. The surety appellant
contended that the sum w^a unauthorisedly altered and,
therefore, he was not liable. The Bench consisted of
J.L, Kapur, A.K. Sarkar and M. Hidayatullah , JJ. The
Supreme Court was divided In this case. It was held
by a majority that the surety was not discharged.

As per Kapur J., (as he then was ): where a

guarantor entrusts a letter of guarantee to the principal
debtor and the principal debtor makes an alteration
without the assent of the guarantor, then the guarantor
Is liable because It Is due to the act of the guarantor
that the letter of guarantee reinalns with the principal
debtor and what the principal debtor did well estop the
17
guarantor from pleading the want of authority. In the
same case, Hidayatullah J., (as he then was ) said that
the particular document, could not be said to have been
materially altered, because It had not been altered In
such a manner as to change Its nature, the alteration
does not save the sure.ty from liability arising under
it, the alteration was made by co-executant who reduced
not only his own liability but that of the surety also.
Sarkar J., ( as he then was )differed and held, that
 lb

the altered document was not binding on the surety

for the alteration had not been made to carry out
the intention of the parties. If .the alteration was
Ignored, then the document created no liability in
the surety, because the bank refused to accept the
guarantee on the terms contained in the document before
it was altered.

It is submitted that the majority view does not

appear to be logical interpretation of section 133,
The minority view appears to be in confirmity with
the provisions contained in section 133. it is sub-
mitted with respect that if the bank had handed over
the guarantee form to the borrower asking him to get
it signed by tfee guarantor and then return it to the
bank, the borrower was acting as the bank's agent. Even
assuming that the borrower was acting as the agent of
the guarantor, there was no evidence to show that the

borrower was authorised by the guarantor to make the

18
alteration. The principle under section 237 of the
Indian Contract Act, is not applicable on the ground
that was the alteration within the apparant authority
of the borrower so that the principal was bound by it
vis-a-vis the third party, the bank in this case.
 1/J

It is difficult to think that the apparent authority

of an agent who was authorised merely to deliver a
guaranteed document to the bank, extended to an alte-
ration of the amount guaranteed. Assuming that the
borrower had the apparent authority to alter the amount,
the authority of such as would cover not merely a
reduction in the amount but an increase also-in other
words, any change of the amount.' If the amount had
been raised, would the learned Judge still have held
that the surety was bound by the altered amotint T

It should be noted here that the Indian Sontract

Act which was enacted some year after the Holmes v.
19
Brunskill decision, provides that any varaince made
without tne surety's consent in tne terms of the con-
tract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to
the variance. The section 133 makes no distinction
between a variation that is to the advantage of the
surety and one that goes against him.

The moral is that any alteration in the guarantee

should be got duly authanticated by the guarantor.
Further as a general rule, the guarantor should be
required to sign the guarantee in the presence of an
official or officials of the bank. Prom replies to
the questionnaire by various banks this practice is
 iv:.

20
followed. The practice of entrusting the guarantee
form to the borrower with a request to get it signed
by the guarantor shoudid be discouraged. Once the
banks follow this practice a lot of litigation can be
avoided between the parties.

Release or Discharge of Principal debtor

A surety is discharged by an arrangement or by

a contract between a creditor and a principal debtor
whereby the principal debtor is released. Release of
the principal debtor also operates as a release of the
surety. It has been already noted that the liability
of the surety is co-extensive with that of the principal
debtor. Therefore, if by any contract between the cre-
ditor and the principal debtor the principal debtor is
released, or by any act or omission of the creditor,the
principal debtor is discharged, the surety will also be
discharged from his liability accordingly.

Another reason for the discharge of the surety

on the release or discharge of the principal debtor is
that according to section 140, after payment or perfor-
mance of his obligation the surety can seek re-imburse-
ment from the princi^ al debtor. If the principal debtor,
is no more liable the surety's Jtemedy would be affected
 172

thereby. If surety's remedy against the principal

debtor Is affected that should also result In the
discharge of the surety. The law concerning the dis-
charge of the surety on the release or discharge of
the principal debtor is contained in section 134 of
21
the Indian aContract Act,

If the creditor, by any contract with the

principal debtor releases him, *he cannot place his
remedies at the disposal of the surety without a
breach of his arrangement with the principal debtor
to release him. To carry out that arrangement, the
surety should have right to take action against the
principal debtor in respect of the debt, engagement or
liability. This cannot be done without the surety's
consent. He is, therefore, held discharged altogether
Likewise, where the surety guaranteed the due performance
by the debtor of his obligations under a hire-purchase
agreement in accordance with its terms and paid the
full amounts due under the agreement, the surety is held
to be discharged, even though the hire-purchase company
did not receive the full amount it might have expected
to receive had the agreement run its full course.
Difficulty sometimes arises in deciding whether a
 173

performance by the principal debtor discharges him in

respect of the guaranteed liability or in respect of a
separate obligation which is not subject to the guarantee
For example, the principal debtor owes two distinct
debts to the creditor, only one of which is guaranteed
by the surety, and the principal debtor pays part of
the money to the creditor the question may arise as to
whicn debt is discharged. In these circumstances the
general rule is that the contract of suretyship does not
affect the normal rights which the principal debtor and
creditor have of appropriating the payment to a particular
debt. Thus if the principal debtor pays without making

any appropriation the creditor is entitled to appropriate

the money to the debt which is not guaranteed.22

An express release of the principal debtor from

all future will discharge the guarantor since such
release extinguishes the guaranteed debt. This is so
whatever the express reservations there may be, except
where the principal debtor obtained the release by
fraudulent means. However, a mere covenant not to sue
the principal debtor with a reservation of the bank's
rights against a guaranter, does not discharge the
guarantor.
 1'/^

23
In Kearaley v. Cole, where the principal debtor
compounded with his creditors, who covenated not to sue
the principal debtor,but the composition was expressed
to be without prejudice to any security ( which included
guarantees) or to any guarantors rights against the
principal debtor. One of the creditor's then sued the
guarantor successfully, and the guarantor in turn sued
the principal debtor. It was held that where the prin-
cipal debtors, creditors expressly reserve their rights
against the guarantor, the guarantor automatically
retains his himplied right to an indemnity from the
principal debtor. Even though the guarantor was not a
party to the composition, the principal debtors consent
for the creditor to have recourse to the guarantor
constituted an implied consent for the guarantor to
have recourse to the i^rincipal debtor and consequently
the principal debtor could not complain when the guarantor
sought to enforce his rights against the principal debtor.

The reason why the surety is discharged if the

princij^al debtori. .is discharged is that the courts took
the view that any other rule would lead to one or other
of two strange results, having regard to the surety's
normal rights to an indemnity for the principal debtor.
 IVo

If the surety were compelled to meet the liability,

any attempt by him to sue the principal debtor for an
indemnity might be met by the plea that the debt had
gone and the principal debtor was no longer liable. If
this were a good answer to the surety he would be
deprived, by the unilateral act of the creditor,of a
right which he would have expected to have. On the
other hand, if the principal debtor remained liable to
indemnify the surety despite his own discharge, the
effect would be to render the discharge nugatory. In
the result it is treated that the discharge of the
surety as a necessary consequence of the discharge of
principal debtor. Whatever may be thought of this
reasoning it has been the rale to have no application
where the creditor reserves his rights against the
surety at the time when he discharges the principal
debtor, for this is a sufficient notice to the principal
debtor that the surety remains liabdbe, and that, there-
fore, the surety's right to an indemnity remains
intact.

Discharge of Principal debtor by operation of law

A surety isliable for the debt, default or

miscarriage of the principal debtor. A contract of
guarantee means a contract to perform the promise or
to discharge theliability of a third person in case of
his default. There is nothing in the section to
 173

restrict the wQrd default to a voluntary default.

Naturally, it should be taken to Include an involun-
tary default. The surety is not discharged by the
24
discharge of the principal debtor by operation of law.

Opinion is divided on the question that where

a debt is acaled down, does the liability of the surety
extend to the whole of the original debt, or is limited .
to the reduced amount? The Nagpur High Court has ruled
that the liability extends to the whole of the original
debt. The court held that "The debt Relief Court pro-
ceedings had nothing to do with Balkrishna ( the surety)
They will hold good as between the principal judgment
debtor and the decree-holder by operation of law, but
any orders passed therein will not operate in connection
25
with the surety, who was not a party to them. In
26
Keshearao v. Laxman, pollock J. laid down that "The
liability of the surety and the liability of the
principal debtor are separate liabilities although
arising out of the same transaction. Hence, while the
application of the principal debtor under the debt
Conciliation Act is before the Board, the debt of the
surety cannot be said to be a matter before the board".
But the Madras High Court has held that the surety is
 2 r j rn»-

27
liable only for the reduced amount. It is submitted
that the Madras opinion is correct as it is clear
under section 128 that the liability of the surety is
co-extensive with that of the principal flebtor. It
cannot be higher than that of the principal debtor,
28
Pollock and Mulla while prCfering the view taken by
29
the Full Bench decision of the Madras High Court observed
that", the judgment of the Court is, however, remarkable,
for the curious interpretation placed upon section 140,
and the ccxnplete failure to mention section 145, The
Court considers that to hold the surety liable in solidum
would be injust, as he has no recourse against the
principal debtor, in as much as section 140 confines
his rights against him to those the creditor has with
respect, this is to misread section 140 which is an
unabling section, and does not purport to confine the
rights of the surety to those possessed by the creditor.
The talk of its imposing the burden is a misconception,
the right of the recourse against the principal debtor
is provided by section 145",

Section 145 gives the surety a right of re-

imbursement from the principal debtor. If this is so the
debtor has no real relief under the Debt Relief Act whose
object is thus defeated on the Madras view, the law is
 17J

at least clear that the loss caused by scaling down

falls uj-on the creditor. As per the Nagpur view, it
is uncertain whether the surety or the principal
beStor bears the loss, apparently the latter in the
absence of any fresh proceedings under the Debt Relief
Act.

The Kerala High Court has expressed its full

agreement with the view of the Madras High Court.
The Kerala High Court observed:

" It appears to us that section 128 of

the Indian Contract Act states the
ambit of liability of the surety
when it enacts that the liability is
co-extensive with that of the principal
debtor. It has nothing to do with the
consequences of recovery of the debt.
Such being the scope and intendment
section we fell that a statutory reduc-
tion or extinguishment of the principal
debtor's liability will operate as a
protanto reduction or extinguishment of
the surety's debt. A reduction or ex-
tinguishment of the debt is quite diffe-
rent from its unenforceability against
the principal debtor by operation of
the law of Bankruptcy or the statute of
limitation.
It appears to us that to hold other-
wise, would altogether deny the benefit
of the aneliorative provisions of the Act
to the agriculturist-debtor. On any other
view, it would be open to the creditor to
recover the debt as scaled down from the
agriculturist debtor, and the latter in
his turn could seek reimbursement from
the principal debtor(vide S.145). Such
a construction would completely nullify
the benefits of the ameliorative legis-
lation to indebted agriculturist". 30
 17

Act or Omission of the Creditor

The acts or omissions of the creditor« which

have the effect of discharging the principal debtor,
autOTiatlcally discharges the surety as well , The
act or omission on the part of the creditor roust be
such the legal consequences of which Is the discharge
of the principal debtor. Such act or omission of
the creditor may be those arising under sections 39,
53, 54, 63 and 67 of the Contract Act, Thus the
mere fact that the creditor, after having filed a
suit against the principal debtor and the surety
allows the suit against the former to oLbate on his
31
death, will not operate to discharge the surety. On
the same principle, where the principal debtor by
not taking proper steps for service of summons on the
principal debtor allows the suit as against him to be
dismissed, the surety's liability on the account is
32
not discharged. The reason being that the plaintiff
can yet bring a fresh suit against the same person.
The Supreme Court has very recently explained the
scope of section 134 in M.S»E«B, Bombay v. Official
T5
Liquidator, H,C, Ernakulan, and observed:
 i:•Ja

"The bank cannot take the plea that

It is liable to the extent of any
loss that may have been sustained
by the Electricity Board oweing to
any default on the part of the
supplier of the goods,i»e«, the
company in liquidation. The liabi-
lity is absolute and unconditional.
The fact that the company in liquida-
tion also would not have any effect
on the liability of the bank i,e, the
guarantor. Under section 128 the
liability of the surety is co-exten-
sive with that of the principal debtor
unless it is otherwise provided by the
contract, A surety is no doubt dis-
charged under section 134 by any con-
tract 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
consequences of which is the discharge
of the principal debtor, but a discharge
which the principal debtor may sectxre
by operationoof law in bankruptcy does
not absolve the surety of his liability".

Omission to sue principal within limitation

Generally, the liability of a surety is made

depend upon the liability of the principal debtor.
A positive action of the creditor which discharges
the principal debtor releases the surety. However,
the laxity of the creditor in pressing his claim
against the principal debtor may not be pleaded as a
 18x

defence by the surety, although he thereby suffers

a detenknent. Now can a s\irety plead a defence which
is in essence personal to a principal debtor. Like-
wise can a surety avoid liability on the ground that
a debt is barred by limitation as against the
principal debtor.

There was distinct cleavage of opinion among

the various High Courts on the point that omission by
the creditor to sue the principal debtor will or will
not discharge the surety. The majority of the High
34 3f 36 3-
Courts, namely, Bombay, Calcutta, Lahore , Madras ,
38 39
Rangoon and Nagpur were of the view that the surety
40
is not discharged. While the Allahabad High Court
took the view that the surety was discharged. The
conflict has, however, been set at rest by the opinion
41
of the privy council, which accepted the view of the
42
majority of High Courts, The Allahabad High Court also
in its subsequent Full Bench decision accepted the
majority opinion by over-ruling its earlier decision.

The reasons in support of the minority view

were that it is obvious that any act or CMnission of
the creditor, the legal consequences of which is the
discharge of the principal debtor, discharges the
surety, and mere for-bearance an the part of the creditor
 ]S

to sue the principal debtor does not absolve the

surety from the liability. If we were to interpret
the plain words of these two statements, we should
have no difficulty in coming to the conclusion that
the act of the creditor in allowing his suit to be
barred against the principal debtor would amount to
an act the legal consequences of which is to discharge
the principal debtor and, therefore, such act would
automatically exonerate the surety from his respon-
sibility. The court also held •• we would have no hesi«
tation in interpreting the words • mere forbearance '
to mean forbearance of the creditor from suing the
principal debtor within the period of limitation.
The simple reason for this latter interpretation is
that a person can only forbear to do a thing as long
as he has got a right to do it. Directly the suit of
the creditor becomes time-barred, he loses his power
to enforce his claim . Forbearance after the expiry

of the period of limitation would therefore be meaning-

43
less". It could not be conceived for a mcmient that
the draftsman who framed the Contract Act proceeded
to undo in section 137 what ne had done for the surety
in section 134, Moreover we must stress the words
Legal conset^-iences in section 134, To relieve the
 IH n

surety, the act or omission of the creditor should

be such that Its legal consequence would be the
discharge o£ the principal debtor. It clearly Includes
the omission to sue within the period o£ limitation
because It is purely legal consequence of such emission
that the principal debtor is absolved from payment.
Again the Importance of the word'mere' before the
word •forbearance( shows that the legislature meant
a forbearance by itself that is to say, a forbearance
which would lead to no serious consequence*.

On the other hand the majority view is based

on the ground that a debt does not cease td be a debt,
because its recovery is barred by the law of limitation.
The right subsists, though the remedy comes to an end.
Shadi Lai, C.J. observed, that the balance of judicial
authority is decidedly in favour of the view, that the
cvnission of the creditor to sue the principal debtor
44
does not discharge the surety".

The controversy has been, however, resolved by

45
the privy Council, where the Judicial committee have
affirmed the majority view of the High Courts and
46
observed that the view of the Allahabad High Court is
inconsistent with the English Law also. It was held
that not every unenforceable contract is declared void
 IS^

but not those unenforceable by reason of some

procedural regulation but unenforceable by the
substantive law« A mere failure to sue within
the time specified by the statute of limitation or
an inability to sue by reason of the provisions of
one of the orders under the civil procedure code
would not cover a contract to became void.

It is submitted that the majority view

appears to be in confirmity with Justice, The law
47
Commission in its 13th Report suggests that an
explanation shall be inserted in section 134 of the
principal Act to adopt the majority view. The Supreme
48
Court has also held that a creditbr is entitled to
recover the debt from the surety even though the
suit against the principal debtor is barred, A time
barred debt does not become extinguished but only
becomes unenforceable in a court of law. If a debt
subsists even after it is barred by limitation, in
law, there is no discharge therefoom. The modes in
which an obligation under a contract becomes discharge
are well defined and the bar of limitation is not
one of them. If the law requires that a debtor can be
discharged before he can be compelled to pay that
 18o

requixonent is not satisfied. If he is merely told

that in the normal caurse he is not likely to be
imposed to action by the creditor. A barred debt
is a valid consideration under sec. 25(3) of the
Contract Act for a written promise to pay signed by
the party liable to be charged therewith. Equally
when section 60 of the Contract Act speaks of barred
debt as lawful debt actually due and payable it cannot
be considered to be discharged* Surety, as a prudent
guarantor, to avoid the risk and the cloth himself
with all the creditor's rights under S, 140 of the
Contract Act, himself is to pay or perform the obli-
gation within limitation lest he is himself to blame.

Hence by mere failure or forbearance to sue

the principal debtor, the surety is not discharged
from the liability unless there is an express covenant
in that regard or a release by the principal debtor
by novation or otherwise. Therefore the ommission to
sue the principal debtor by the creditor within the
period of limitation does not discharge the surety.
 IS

Composition

The word composition means an agreement, or

an arrangement, or a compromise, A contract between
the creditor and the principal debtor, by which the
creditor makes a composition with the principal debtor,
discharges the surety unless the surety assents to
such contract.

This rule is founded on the principle stated

50
by Lord Laugh borough in Ress v« Bessingtan thusj

" It is the clearest and the most

evident equity not to carry on
any transaction without the
privity of him who must necesseurlly
have a concern in any transaction
with the principal debtor. You
cannot keep him bound and transact
his affairs ( for they are as much
his as your own ) without consulting
him-.

When the creditor makes composition with the

principal debtor without the consent of the surety
this means variation in the original contract. The
composition must tend to aggravate the surety's
sufferings. The idea underlying S. 135 of the Indian
Contract Act, is that where the creditor does something
behind the back of the surety, and does to his prejudice ,
by advancing facilities to principal debtor, which are
 IS

likely to harm the surety, the surety is no more to

be bound by his undertaking. Accordingly a surety
who seeks to be relieved of the obligation upon him
as surety and to be absolved from liability must
not only show that the creditor has, by his acts or
conduct, either prevented the principal debtor from
doing the things which he undertook to do, or has
connived at the principal debtor's omission to do
those things, or has enabled him to do something
which he ought not to have done, but he must also
show that the creditor has done some act inconsistent
51
with the rights of the surety.

The question as to whether a surety is dis-

charged on a comprcxnise being entered into between
the Judgment, debtor and the decree-holder and a consent
decree being passed en such compromise depends on the
facts and circumstances of each case arrcl particularly
on the terms of the bond executed by the surety in
each case. Where, therefore, the compromise is effected
without the consent of the surety by which he is
seriously prejudiced and where such a compromise was
not where such a compromise was not contemplated by
the surety, when he executed the bond. A consent
 18c">

decree under these circumstances discharges the

surety and absolves hJLm of his liability. However,
a mere passing of a consent decree does not absolve
the surety because when the surety undertakes to be
bound by any decree that may be passed such a recital
includes a bonafide compromise which is entered into
by the parties without anjc fraud, but in cases where
there is an express recital in the surety bond or by
necessary implication by which the liability is res-
tricted only to a decree on contest, the surety will
stand discharged if a compromise decree is passed.

The above view is supported by a decision in

52
Trilok Nath v, Kehar Singh, wherein the bond executed
by the surety provided that he will be liable only if
a decree is passed against all the defendants and if
all the defendants are unable to pay the amount, A
compromise was entered into whereby the decree-holder
absolves all other defendants and restricts his claim
only to the principal defendant, it was held that
such a contract on the part of the decree-holder is
inconsistent with the rights of the surety, it impairs
the remedy of the surety against other defendants.
The surety stands discharged.
 18^

In order to determine whether a surety stands

discharged or continues to be liable under the surety
bond the real test to apply Is to find out the terms
of the bond and Its scope. Therefore, where there
Is nothing In the decree which shows that the compromise
is at variance with the terms of the surety bond« then
notwithstanding the fact that the surety was not at
the time of the compromise entered Into between the
parties to the suit and the consent decree Is passed,
the surety continues to be liable and does not stand
53
discharged, in Citibank N,A., New Delni v« J,K« Jute
Mills Co<i Ltd.« Kanpur, the Delhi High Coxirt held that
the consent decree did not hit the provisions of section
135 and was not a compromise, stemning out of a contract
to which the section makes reference. The Court said
" It would not make the slightest difference if the
decree is consent decree especially in this case
when the creditor by way of the consent decree got
100% relief"! in fact the consent did not in any way
impair or prejudice the right of the defendant surety.
 193

A^yement to give time

It has long been a rule o£ suretyship that 1£

a creditor releases or extends the time for payment
by the principal debtor, or Impair the collateral for
^lw,4©bt> knowing of the siirety's right of recourse
against the other party* and falls either to reserve
his rights against the surety or to obtain his consent
for the extension or release, the liability on the
guarantee will be discharged If the surety should pay
all or part of the debt- as he has a right to do at
any time after it matured- he then can sue his principal
for reimbursement on the theory that the surety was
subrogated to the creditor's cause of action.

Therefore, a valid binding agreement between

the creditor and the principal debtor to extend time
for payment, although affecting only one material
element of the existing indebtedness, stripped the
surety of his rights to exoneration, reimbursement,
subrogation and contribution because the debt simply
was not due at the time originally contemplated by
55
all the parties*

Promise to give the time to the principal

debtor means extending the period of payment which was
 19.

not contemplated in the contract of guarantee* The

surety expects that the creditor will take the per-
formance from the principal debtor without any delay*
A binding agreement between the creditor and the
principal debtor to give more time to the principal
debtor or to repay his debt will discharge the guarantor
from liability if made without his consent^ whether or
not he is in fact prejudiced by the agreement. The
reason appears to be that in theory such an agreement
necessarily prejudices the guarantor by preventing him
from exercising his right to require the creditor to
call upon the principal debtor to pay off the debt or
his right to pay off the debt himself, and then sue
the principal debtor. Because he himself is the fit
Judge of what is or is not for his own benefit. If you
agree with the principal debtor to give him time, it
is contrary to that agreement that you 'should sue the
surety, because if you sue the surety you immediately
turn him upon the principal debtor and, therefore, yotir
act breaks the agreement into which you have entered

into with the principal debtor* The point was explained

56
by Smith, L.J* in Reuse v, Bradfor- ::^>>.cing COy, as
followsI
 1H2

" A surety is entitled at any

time to require the creditor
to call upon the principal
debtor to pay off the debt,or
himself to pay off the debt«
when he has paid it off, he
is at once entitled in the
creditor's name to sue the
principal debtor, and if the
creditor has bound himself to
give time to the principal
debtor, the surety cannot do ^
either the one or the other of
these things until the time so
given has elapsed, and it is
said that by reason of this the
surety's position is altered to
his detriment without his consent".

The Supreme Court of India has held that what

really constitutes giving of time is the extension of
period at which, by the 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. Accordingly where
a bank gave time to the principal debtor to make up
the deficiency of the goods pledged, it did noc ten-
tament to giving of time within the meaning of section
135."

Where a joint decree Is passed against the

principal debtor and the surety and after the passing
of decree, the creditor decree-holder without the
 19

consent of the surety, grants Instalments to the

principal debtor, that amounts to the principal
debtor, that amounts to giving time to the principal
58
debtor and the surety is discharged thereby.

An agreement to pay money in Iximp sum or six

instalments is not the something as one to pay it in
instalment or ten instalments, if the creditor by a
valid agreement with the principal debtor, extends
the time of performance from the shorter to the longer
time, he supersedes the old obligation by the new,
and cannot enforce payment until the longer period
has elapsed , If the surety is sued upon the old
agreement, to which alone his undertaking was accessory,
he has only to show that has ceased to exist, and no
longer binds his principal debtor and if he l^s sued
upon the substituted agreement, he is entitled, both
at law and in equity to make the short and conclusive
answer non hou in foredera veni* The agreement exten-
ding the time of payment or performance must be valid
and enforceable by the principal debtor in order to
affect the surety's liability, and if it be void for
want of consideration or for illegality or Is voidable
because of fraud or undue influence practiced upon the
creditor or if for any other cause it is insufficient to
 19

say the hand of the creditor as against the

principal debtor, the surety Is not released. The
time for which the extension Is granted to the
principal debtor without the surety's consent must
be definite and fixed,otherwise the surety is not
discharged. The reason for this rule is that if
no definite time is fixed, the surety may pay the
debt and proceed against the principal debtor at
any time after its maturity.

Reservation of Right

But any binding agreement between the creditor

and the principal debtor, extending the time of
payment or performance for any period, however,short,
entered into without the consent of the surety will
release the surety. Unless the creditor reserves his
rights against the surety. The reason being that nor
does the extentlon constitute a material alteration
or variation of the contract, so that Itls no longer
the surety's undertaking, but it deprives the surety
of the right to pay the debt when it is due according
to the original contract or at any time thereafter
and there upon enforce his rights of indemnity and
subrogation.
 195

59
In Atijaadanajadaya v. Konamma^ the Madras
High Court observed!

"If a creditor agrees to discharge

the principal debtor it would be
breach of the agreement to entered
into for the creditor to pursue
his remedy against the surety, for
the latter would in his turn enforce
his remedy against the principal
debtor, and thus the creditor's
agreement to discharge would be
rendered inoperative, but if the very
agreement to discharge the principal
debtor contains a reservation of
rights against the surety, the agreement
cannot operate as absolute release for
the obvious reason that the principal
debtor has notice that the creditor's
remedy against the surety is preserved
and that the letter's right of re-
course against him is not extinguished".

The early development of the right of reserva-

tion grew outof an unreported English opinion, Richard
BurXen's case, which involved an action by a creditor
against a co-surety after the former had given an
extension of time to the principal debtor Lord Thur-
Law in Burken's case, suggested, by way of dictiim,
that the surety was released only if he were denied
remedy against the principal debtor and that if the
creditor had reserved his rights against the surety,
the action would have been successful for them the

surety would have had recourse against the principal

60
debtor.
 IS.3

The orthodon rationale advanced by the Courts

to upheld the reservation clause In either extension
of time or release Is premised onichthe assumption that«
In as much as the principal debtor has specifically
agreed to accept a conditional release from the cre-
ditor, he thereby Impliedly agreed that the surety's
right to reimbursement should not be Impaired, Thus
he cannot complain If the surety, after fulfilling
his obligations to the creditor, seeks redress frcan
him. The reason for the existence of these rules were
criticized, Coherldge J. disliked It so much that he
would have passed long before upholding any saeh rule;
but he was bound by the authorities that established.
The reason why this should prevent the release of the
surety is difficult to understand. It is said that
by reserving the rights the principal debtor agrees
that the surety could go against hlm« the securities
are Intact, the remedy is gone between the creditor
and the debtor. In as much as the creditor cannot sue

the debtor but as against all other persons the rights

^ 61
of the creditor are reserved.

The most serious objection to the rationale

offered in support of reservation clause is that it
ignores completely the principal debtor's purpose of
 1S7

entering Into the transaction. Literally interpreted,

the agreement unqualifidely absolves the principal
debtor from the performance of his former obligations
to the creditor«i£ the reservation has the effect of
merely forcing the creditor to send another collector
after the principal, the value of the particular
agreement to the principal debtor would to a large
extent be destroyed.

It has been said that when the principal debtor

obtains a release from the creditor, he is defrauded
if the creditor Is allowed to collect from the surety,
who in turn will collect from him, and that the surety
must be released. Conversely, if the principal debtor
consents to a reservation of rights against the surety
he impliedly consents to this indirect enforcement of
the released obligation. This argument, however, rests
upon the doubtful premise that the principal debtor
did not consent to this circuitous enforcement when
62
he was released without reservation of rights, Thts
view is also supported by professor Arant as he pointed
out, the parties contracted with reference to perfor-
mance by the principal, and since the agreement between
the principal and the creditor makes non-performance
 1^3

by the principal inevitable, such waa clearly not

within tha contemplation of parties, and imposes
upon the aurety an entirely different risk than that
63
which he assumed.

In addition, the simple 4bV>edient of the reserva-

tion clause effectively nullifies the rule which has
been declared to be desirable, namely that a surety is
discharged by any alteration in the original contract
which varies his risk. Hence direct action against
the principal debtor is precluded, and the result well
may be that the debtor will lose all efforts to fulfill
his obligations to the material disadvantage of the
surety.
When the reservation rule is applied to releases,
however, the surety is likely Jo be injured, for the
creditor must bring any action that he may start directly
against the surety Thus the affirmative burden to take
action against the principal debtor is thrown enterely
upon the surety, A reservation of rights in an agree-
ment to release the principal debtor so substantially
increases the surety's burden as to reach an equitable
result and should be disregarded.

Thus viratlon in the surety's risk, affording one

basis for discharging the surety when the principal
 193

debtor is released, is equally present whether the

rights against the surety are or are not reserved.
An agreement between the creditor and the principal
debtor* tojwhich the surety is not a party, should in
no way be allowed to prejudice the surety's rights.
The Courts should follow the lead of the Ohio Supreme
Court in refusing to give effect to the reservation
64
clause in a discharge of the principal debtor.

Mere Forbearance

Mere voluntary forbearance of the creditor or

his mere passive indulgence in favour of the principal
debtor, however, long continued, will not, in general,
discharge a surety when such forbearance constitutes
no violation of special contract terms, or involves no
fraud, collusion or breach of good-faith. The reason
usually given for this rule is that a surety is in
default the moment his principal debtor is in default
and may pay at any time and persue his remedies against
the principal debtor. The surety is subrogated to
the rights, remedies and securities of the creditor
against him.
 2UJ

65
Section 137 clarifies in express terms what
is clearly implied in section 135. what is required
to cause the discharge of the surety Is not mere for-
bearance on the part of the creditor to sue the
principal debtor, but a positive Act, a prcwnise or a
contract, to give time, or not to sue. In view of
section 137 the surety's liability towards the cre-
ditor remains unaffected even when the creditor has
66
chosen not to sue the principal debtor.

The scope of section 137 and 141 has been explained

67
in Hukum Chand Insurance Co« Ltd» v. The Bank of Baroda.
It has been held that what emerges from a reading of
sections 139 and 141 is that while a mere forbearance
to enforce the security against the principal debtor
will not discharge the surety, any act by which the
creditor loses, or without the consent of the surety,
parts with the security, has the effect of discharging
the surety to the extentof the value of the security.
Whether any particular act on the part of the creditor
constitutes mere forbearance without more or constitutes
an act by which the creditor puts it out of his power
to hand over the security to the surety, will depend
upon the facts and circumstances of the particular
case.
 2lL

Then another question arising for considera-

tion is what is the difference between forbearance
to sue and omission to sue? Forbearance to sue means
refraining or abstaining from suing which may arise
out of an agreement or because of the protection given
under law« omission signifies breach of an obligation
or duty either under law or agreement. Falling to do
what ought to have been done results in omission.
From a plain perusal of the meaning of the aforesaid
terms it is clear that forbearance to sue normally does
not result in penal consequences whereas omission to
sue may result in penal consequences because there
is breach of duty or legal obligation either under law
or contract.

Supposing the surety reasonably apprehending that

the principal debtor is trying to leave the local limits
of Jurisdiction of country informs the creditor by
letter to proceed against him without fail and the
creditor ignores the letter of the surety and keeps
quit , this will be a positive omission in which case
the STorety will be absolved from his liability. The
negative act,i.e., deliberate negligence ( omission )
is mentioned in E, venkateran's Mercantile Law, where
the author says, "that section 141 does not only apply
 n 02

to cases in^hlch by positive action of the creditor,

he has lost or parted with security without consent
of the surety* This implies a negative act or negli-
gence on the part of the creditor which would absolve
the surety.

Mere forbearance to sue is not omission on the

part of the creditor either by positive or negative
acts. Section 137 has got to be read with section 128.
According to section 128 the liability of the surety is
co-extensive, meaning thereby that the creditor can
straight way proceed against the principal debtor.
Hence forbearance to sue hinges very much on the right
of the creditor which gives him power to proceed against
the surety. The v^ry purpose of the co-extensive
liability of the guarantor will be stultified if section
137 is misinterpreted as omission. So let us not read
section 137 in isolation which is very much coupled
69
with section 128,

Recently it has been observed in Bank of India v,

70
Matha Goundra, that the mere factxim of forbearance to
sue is not sufficient to constitute consideration for a
person becoming a surety for the debt but there must be
a promise, an undertaking to forbearer or an actual for-
bearance at the sxirety*s express or implied request and
such promise of the creditor must be capable of being
enforced.
 Zi}.

Imparlnq Surety's Remedy

It ia a very well known rule governing a contract

of guarantee that a person in whose favour a guarantee
is given is bound to a faithful observance of the rights
of the surety and to the perfozroance of every duty
necessary for the protection of those rights. Section
71
139 ircorporates in substance the rule 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. It is the duty of the creditor not to do
anything which is inconsistent with the surety's rights
or omit to do any act which his duty to the surety
requires him to do. If the violation of the aforesaid
duties impairs the surety's eventual remedy against the
principal debtor, the surety is discharged.

Section 139 is a residuary provision, its object

being to enstire that no arrangement different from that
contained in the suretyship contract is forced upon
him and that if the surety pays the debt he has the
benefit of every remedy which the creditor has against
72
the principal debtor. The basic principle of section
is that it is the duty of the person who has secured
a guarantee to do every act necesssury for the protection
of the rights of the surety, as a surety is a person who
 ^u

receives no benefit and no consideration out of the

transaction but has voluntarily accepted the liability
of the principal debtor to the creditor. By the
application of this section surety is discharged,
when a 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 is impaired as a
consequences thereof. The dUnpairment of the eventual
remedy of the surety is essential for application of
the section in addition to the acts of commission and
omission on the part of the creditor, in order to
attract section 139 there must not only be an act
inconsistent with the rights of the surety or any anission
to do any act which his duty to the surety requires

him to do, toot also the impairment of the eventual

remedy of the surety against the principal debtor,73
74
In Darshan Ram Ganesh Das v, Khair Din Allah Buksh
a canpromise decree was passed against the principal
debtors providing for the payment of the debt by
instalments, A person stood surety for the due payment
of such instalments. Subsequently permission was
granted to the Judgment-debtors to mortgage and sell
the property that was attached before Judgment, Abdul
 zu

Raoof, J., said, " when the surety undertook the

liability to pay the entire property belonging to
the Judgment-debtor was under attachment and the
surety must have felt secure when he undertook the
liability* The moment permission was granted to the
Judgment-debtors to effect private mortgages or sales
the whole position was changed, and in my opinion,
the surety was Justified in applying to the court to
be relieved of his undertaking"»

A person standing as a surety, for several

defendants in respect of a decree that may be passed
against them, is discharged if the plaintiff with the
leave of the court proceeds against one of them alone
exonerating the rest of the defendants. In a recent
case decided by the Supreme Court as surety was held
75
discharged due to the action of the Government, The
facts of the case whre that the Government allowed the
purchaser even after the default in the payment of the
price was made to remove the fallen trees which the
purchaser according to the terms of the contract was
authorised to remove only on full and final payment.
In allowing the pvirchaser to remove the fallen trees
the Government had omitted to do what the surety^ was
required to do and BO, the surety's eventual remedy
against the security was lost.
 20u

The conunission or omission on the part of the

creditor must prove injurious to the surety. There
must be the impairment o£ surety's iir«nedy. As in
76
Ramanand v, GhdWdhry Soondar Narain, the decree-holder
postponed the sale of properties under a decree which
resulted in ieusreased burden of the interest on the
sureties who had executed a bond undertaking to pay
any deficiency after sale. It was held that the
sureties were discharged frcxn liability for interest
subsequent to the court's order for sale.

Mere laches on the part of the creditor or a

mere passive acquiescence by the creditor in acts
which are contrary to the conditions of a bond, is not
sufficient of itself to relieve the sureties. Mere
non-exercise of their rights of super-intendence by
the people having that right does not discharge persons
standing surety for those who are under supervision
from their liability as sureties.

To sum up, if there is a contract, express or

implied, that the creditor shall acquire or preserve
any right against the principal debtor, and the creditor
deprives himself of that right which he has stipulated
to acqxiire, or does anything to release any right which
 20 7

he has, that discharges the surety unless he can show

that he has received some Injury in consequences o£
creditor's conduct.

In order to attract this section there must not

be either an act Inconsistent with the rights of the
surety, or an omission to do an act which it is the
creditor's duty to do# but also the impairment of the
eventual remedies of the surety against the principal
debtor* The last point is kost crucial, so that if
there is no such impairment the surety is not discharged,
77
Lord Longdall observed in Calvert v, London Dock Coyf

"In almost every case where the surety

has been released either in conse-
quence of time being given to the
principal debtor or of a comprc»nise
being with him, it had been contended
that what was done was benefient to
the surety, and the answer has edways
been that the surety himself was the
proper Judge of that, and that no
arrangement different from that eon-
tained in his contract is to be forced
upon him, and beeuring in mind that
the surety, if he pays the debt, ought
to have the benefit of all the secxirities
possessed by the creditor, the question
always is whether what has been done
lessons the security".
 03

Losing or Parting with the Security

78
Section 140 enshrines the general common law
principle relating to cases where a guaranteed debt
has become due, or default o£ the principal debtor to
perform a guaranteed duty has taken place. A surety,
who pays off the guaranteed debt or performs the
promise is entitled to be subrogated to all the rights
of the creditor which he had against the principal
79
debtor. Section 141 contains the most practical appli-
cation of the principle laid down in section 140.
Because under the section a surety is entitled to the
benefit of "every security" which the creditor has
against the principal debtor at the time when the con-
tract of suretyship is entered into whether the surety
knows the existence of such security or not, the sec-
tion also provides that if the creditor loses, or with-
out the consent of the surety, parts with such security,
the surety is discharged to the extent of the value of
80
security. It has been observed in Craythorns v, Swinburm,

" The whole doctrine of principal and

contribution,etc, rests upon the
established principles of a court
of equity, not upon contract,except
it may be so represented ^pon the
implied knowledge of these principles.
There is no express contract for
contribution of bonds generally, if
not universally being joint and
 2 fJ J

several-creating several obligations

by in as surety is to be entitled
to evttzry remedy which the creditor
has against the principal debtor;
to eiUforoe every security and all
means o£ payment to stand in the
place of creditor, not only through
the medium of contract, but even by
means of securities entered into
without the knowledge of the surety,
having a right to have for that, and
to avail himself of all those secu-
rities against the debtor. This
right of a surety also stands, not
upon contract, but upon a principle
of natural Justice".

On the scope of section 141 Ramaswami, J,, of

the supreme Court in Amrit Lai v. State Bank of
81
Travancore, said, that as pointed out by the Court
82
in State of Madhya Pradesh v, Kalusan, the expression
security* in this section is not used in any technical
sense, it includes all rights which the creditor has
against the property at the date of contract. The
surety is entitled on the payment of the debt or per-
formance o^all that he is liable for the benefit of
the rights of the creditor against the principal
debtor which arise out of the transaction which gives
rise to the right or liability. The surety is, there-
fore, on payment of the amount due by the principal
debtor entitled to be put in the same position in which
 2ia

the creditor stood in relation to the principal debtor.

If the creditor has lost or parted with the security
without the consent of the surety the latter is by the
express provision contained in section 141 discharged
to the extent of the value of the security lost or
parted with.

Section 141 deals with a situation when the

principal debtor has offered more than one secxxrity.
Even if the surety is not aware of any other security
offered by the principal debtor yet once the right of
the surety against the principal debtor is impaired by
any action or in action which JLmplies negligence appearing
from lack of supervision undertaken in the contract,
the surety will be discharged under the combined ope-
83
ration of sections 139 and 141,

Section 141 embodies the equitable principle

in favour of the surety. This is one of the instances
of some favour shown to the surety. Section 137, however,
make quite clear that by'mere forbearance* the surety
is not discharged. The difficult question is whether
there is a mere forbearance' by the creditor or whether
he has lost or parted with the securities to the pre-
judice of the security. The Supreme Court decided" in
84
favour of the sureties under section 141,
 V
1^

On the contrary In Karnataka Bank Ltd. v, Gajana

35
Sharkara Rao Kalkarnl^ the Karnataka High Court has
ccMne to the conclusion that the surety was not dis-
charged under section 141. The bank had financed the
instalmental purchase of a truck by way of security,
besides providing two sureties for the repayment of
the loan. Under the hypothecation bond, the creditor
was entitled to seize the truck and sell it, if the
principal debtor conmiitted default in the payment of
any one hinstalment. Though all the instalments have
become overdue, the creditor bank did not seize the
truck. In the mean-while, the truck deteriorated in
value and was reduced to a mere scrap. The creditor
sued the principal debtor and sureties for the amount
due. The sureties invoked the protection of section 141
and contended as the creditor bank had allowed the
security to be Impaired and lost owing to its own negli-
gence, they stattd discharged. The trial court found
favour with their claim but the Division Bench on appeal,

held that section 141 would not apply to the case,

86
Venkatachaliah J,, stated the reasons thus:

" A mere passive inactivity or passive

negligence on the part of the creditor
by falling to realise the debt from
the collateral security is not suffi-
cient in itself to discharge the
 21

surety, for the reason the surety

can himself avoid consequences of
such passivity by himself paying
the debt and becoming subrogated
to the rights of the creditor, in
the absence of a contract to the
contrary, the creditor is under no
obligation of active diligence for
the protection of the surety, so
long as the surety himself remains
inactive. Thus tested, the inaction
on the part of the bank will not of
itself, mitigate sureties liability".

The court distinguished the Supreme Court

decisions on the ground that unlike the present case,
the creditors there had physical custody of the secu-
rity and that they were not cases of • mere forbearance'
but of security lost owing to the negligence of the
creditors. There was a unsuccessful contention that
a hypothecation of goods was only an entended idea of
the pledge and that the obligation to preserve the
security enjoined by law upon a creditor extended not
merely to the security which was in his actual passession
but also that which he ought to have taken Into his
actual possession by exercising the right to seize
the goods upon default. The decision which, it is
submitted with respect, is eminently soui^d and is

bound to be welcomed by bankers and other instalment

credit financeries.87
 /I '
4. J_ u

The same High Court reached the same conclusion

88
In R. Lllavatl v. Bank of Baroda« The Punjab and
Haryana High Court in a recent decision while over-
89
ruling its earlier decision has in Bank of JB8)dia«Bom«
90
v# Yeoeshwar Kantwadhera/ held that a surety in the
case of hypothecation is not entitled to invoke section
141 of the Contract Act for his benefit. Under the
said section if the creditor loses or without the
consent of the surety, parts with the security pledged,
the surety is discharged to the extent of the value of
the security. Such a question cannot arise In the case
of hypothecation, of goods for the simple reason that
when the goods are not in possession of the hypothecatee,
there is no question of his losing or parting with the
same. Therefore, the sureties could not claim the
benefit of section 141 of the Act,

Section 141 of the Indian Contract Act has

limited the suret^S right to securities held by the
creditor at the date of his becoming surety and has
modified the English rule that the surety is entitled
to the securities given to the creditor both before and
after the contract of surety.

According to section 141 a surety Is entitled

to the benefit of every security which the creditor had
 'dli

against the principal debtor and section 140 lays

down that the rights should have been available to
the surety upon payment or performance of all that
he is kiable for. But the Act no where lays down at
what point of time the creditor*s securities should
be made over to the surety. Whether when the debt is
paid off, or when the surety pays the sum guaranteed ,
91
In Goverdhandas v. Bank of Bengal, it was held that
the surety was not entitled to the creditor's securities
until the whole of the debt was paid off. Parran,J,,
said:

•' It seems to me to be a strange

doctrine that a creditor not
fully secured by a mortgage who
obtains the benefit of a surety
for part of his mortgage debt in
order to further sec\ire himself
by that very act is deprived of
portion of the security the in-
adequacy of which was a reason
for demanding the surety; or that
a person advancing say P3« 10«000
on a mortgage which is valued
only at rts, 5,000 and has ^s, 5,000
of his advance guaranteed by a
surety is only in reality secured
to the extent of Rs, 7,500 by
reason of the surety's right to
claim the benefit of half the
mortgage security on paying his
half of the debt. To hold so
would, I think, defeat the inten-
tion of the parties to such a
transaction, A principle offequlty
is seldcwi adopted which had that
effect. If such were the result of
 215

section 141 of the Contract Act,

I should exp«ct to find the wording
In section 140 repeated In section
141, The striking difference In
the language of the two sections Is
a strong argument against the plain-
tiff's contention",
92
In Porvatenenl Bhushayya v, Pootlurl Suryanasayana«
a different view has been taken while In the case only
section 141 was Invoked, In the Madras case both sections
140 and 141 were relied upon. But in the Madras case
the security was given subsequent to the contract of
guarantee. In this case the surety had guaranteed only
part of the debt. This guaramtee he discharged and so
the coxirt held that as against the subsequent assignee of
the creditor he was entitled to a proportionate share In
the security held by the creditor at the time the surety
discharged his liability. This was so even if the cre-
ditor wasmnot fully paid. The Madras High Court held*

•• There is little doubt on the language

of section 140 that the surety Is
entitled to demand all the securities
held by the principal debtor at the
time of the payment . whether they
had been received simultaneously with
the loan advanced or subsequently
What Is Important to Jpem^aber In this
connection is that section 141 does
not enable the creditor to withhold
from the surety any security actually
held by him at the time when the debt
is paid or in any way to detract from
the rights of the creditor as declared
by section 140, Section 141 only gives
 213

him liberty in action in respect

of sectirities not held by him at
the time of the contract of surety-
ship provided he exercises it
before payment",93
94
Pollock and Mulla, agreed with the opinion
expressed by Faran J.« when they state t

" The Madras Court doubts the view

of Faran J, but no attempt is
made to deal with his argtiment on
the equities. Further, the solu-
tion in the Madras case, it is
submitted, is inequitable. The
Coxirt considers that any other
view would enable a creditor to
make an appropriation to the detei-
ment of the surety who has already
paid. But it is submitted that if
the creditor has negligently sold
the security to H at least than its
market value the sxurety is protanto
released«95 If on the other hand
H has paid the full market value,
it is inequitable that he should be
called upon to share it with B,
Further, the very basis of the
svirety's right to securities rests
upon the obligation of the principal
debtor to indemnify the surety. It
would be strange if the surety could
use these rights to hamper the cre-
ditor in recovering the debt,96
It is submitted that the creditor's
right to hold securities until the
whole debt has been paid is peura-
mount to any claim of the surety
whether based on section 140 or sec-
tion 141, "
 217

The above view is In con£innity with the

provisions of law and no surety can step Into the
shoes of the creditor until he has discharged his
liability and until the entire debt due to the
creditor has been paid In full. This rule shall
apply also where the surety Is only for the part of
the debt,
97
The Law Commission has also taken the same view
Another question worth eHamlning relates to the
case where more than one security Is available to the
creditor. In case the creditor takes more than one
security on the basis of which the advance was made. It
shall not mean that section 141 would not be attracted
and the surety will not be discharged. Even If It Is
found that sxirety gave personal guarantee on the good-
faith of the other security being offered by the principal
debtor, which Itself may be a consideration for the
surety offering his personal guarantee, and the creditor
by his own negligence lost the securities. In case such
an interpretation is provided, it would mean that law
is rewarding negligence and that law is putting a premium
on the negligence of the creditor to the detriment of
the surety who is usually described as a favoured debtor.
 21S

In any case the bank should exercise the care of

a prudent man one would eacpect In management o£ Its
own a££alrs«

The next cjuestlon for consideration Is that

whether under section 141 of the Contract Act, a
surety undertaking to pay the amount due to the credi-
tor under a particular debt or account is entitled
to the benefit of the secxxrity held by the creditor
against the same debtor to secure the same amount under
other debt due to him. This matter came up for
decision in the Raj as than High Court in Bank of Baroda
98
V, Krishna Ballabh and others, the court heldi

"Keeping in view the leuiguage of

section and illustration appended
to it, it is clear that the principle
in-corporated in section 141 applies,
so as to discharge the security
from the liability, only in a case
where the creditor loses or parts
with the security held by himkto
secure the same debt for which the
contract of suretyship was entered
into. If there are two or more debts
each secured by security the sxirety
for one of the debts is not discharged
if the creditor loses or parts with
the security relating to other debts.
In view of the above, i do not agree
with the learned Additional District
Judge that the plair^tiff's liability
as surety was discharged on account
of the release of the goods pledged
 219

with the Bemk to sec\ire the

amount \xnder cash credit
Account o£ H/B Jem Chemical
and Pharmaceutical Works"*

In every contract of guaramtee there is an

implied promise by the principal debtor to Indemnify
the surety. In fact the contract of suretyship has
the foundecion of indemnity. The surety can claim
from the principal debtor whatever sum he has right-
fully paid under the guarantee. He however, cannot
claim any amount which may have been paid by him wrong-
fully. In case surety pay less than what is due from
the principal debtor he is entitled to receive the sum
actually paid by him*
 220
REFERENCES

1, Appendix - I
2. Keshav Lai v« Pratab Singh, A«Z.R, 1932« 6om«168
3, A.I.R, 1984 A.P« 173
4. Partab Singh v» Keshav Lai, A.I.R. 1935,P.C,21
5« 11 Coke, 266; Wllllstan, Discharge of
Contracts 18 Harvard Law Review, P, 105
6, (1862) 45 E«R. 1225
7, A.I»R« 1916 Mad, 284i Verco Private Ltd, Padi
V, Newandson Narain Das, A,I,R, 1974 Mad, 4
8, Darshan Rai Ganesh Das v, Kharl Din Allah Daksh,
A.I.R, 1924 Lah. 194
9, Jowand Singh v, Tirath Ram , A.I.R, 1939 Lah,193
10, A.I.R. 1981 Mad. 180
11, I.e. Saxena, XVII A.S. I,L, 11981) P.40
12, (1878) 4 Cal, 331 ( P,C, )
13, (1878) 3 Q,B,D, 495
14, (1868) 3 Q.B.O. 573
15, Supra Note 5
16, A.I,R, 1963 S.C. 746
17, Ibid, P. 748
18, Section 237 is ast
When an agent has, without authority, done
acts or incurred obligations to third persons
on behalf of his principal, the principal is
bound by such acts or obligations if he has by
his words or conduct induced such third persons
to believe that such acts and obligations were
 22

within thie scope of the agent's authority,

illustrations
(a) A consigns goods for B for sale and gives
him instructions J**^*^ to sell under a fixed
price, C being ignorant of B»s instructions,
enters into a contract with E to buy the goods
at a price lower than the received price, A is
bound by the contract,
(b) A entrusts B with negotiable instruments
endorsed in Blank, B sells then to C in viola-
tion of private orders frc»n A, The sale is good,
19, supra note 12
20, Appendix-ZI
21, Annexure- I
22, Chitty on Contracts, vol, 11 Ed, 24th,, p, 4832
23, (1846) 16 M & W 128
24, Khushalchand v, Gauri Shankar, A.I.R, 1835
Lah. 906
25, Bal Krishna v, Atma Ram, A,I,R,,1948 Nag,277
26, A.I.R, 1940 Nag, 91
27, Subramanyan v, Narayana Swami, A.I.R, 1951
Mad, 48.
28, Indian Contract and Specific Relief Acts,9th
Revised Ed, 1972, P, 629
29, Supra note 26
30, Aypunni Mani v , Kochoiweph, A , I . R , 1966 Ker.203
a t P, 204
 <- c ^

31, Hur Din v. Allah Ditta* A.Z.R. 1932 Lah. 419

32, Bharat National Bank v« Thakar Das, A,Z,R. 1935
Lah, 729
33, A,I.R, 1982 S.C, 1497
34, Hazarimal v« Krishna Rao, (1880) 5 Bom* 647
35, Kaishto Kishori v, Radha Raman, A.Z,R, 1918
Cal. 707
36, Dil Mohamad v, SanidaS/ A.I.R. 1927 Lah, 396
37, Subsananya v, Gopal, A«I,R. 1920 Mad, 216
38, Kanahai v. Sukanen, (1937) 14 Rai . 594
39, Abdeali v. Askaran, A,I*R« 1924 Nag. 411
40, Radha v, Kinlock, A,I,R, 1928 All. 46
41, Mahanth Singh v, Uhayi , A.I.R. 1939 D.C.llO
42, Aziz Ahmad v, Sher Ali, A.I.R. 1956 All. 8 (F.B.)
43, Chattar Singh v. Makhan Singh, A,I.R. 1936,Per,20
P. 72
44, Supra Note 30
45, Supra Note 40
46, Ranjit v, Naubal, (1902) 24 All. 504
47, Annexure- III
48, Bombay Dyeing & Manufacturing Co, Ltd, v.
State of Bombay, A.I.R. 1958 S.C, 328
49, P, Anjaiah v. State Bank of India, (1987)
8 Reports (A,P, 33
50, 2 Vergs 540
 22

51. Subramanla v. Shaw Wallace & co«« A.I.R, 1920

Mad« 259
52« A«I.R. 1962 J & K. 72
53, Mohan Lai v« SuraJ Manl« A.X.R. 1973 J.& K,
29 ( P.B.)
54, A*X.R. 1982 Del. 487
55, Agreements not discharging sureties, on,
when to take up the whip. Arkansas L.R* Vo. 30
P. 544
56, ( 1894 ) 2 Ch. 32
57, Amritlal v. State Bank of Travancore,A.I.R,
1968 S.C, 1432
58, Maharashtra Apen Corp, v, Poovappa Sallan,
A.I.R, 1985 Karl. 116
59, A.I.R. 1933 Mad, 309
60, The effect upon the surety of a Reservation
clause In a Release of the Principal debtor,
Yale L,J. Vol, 50 P, (1485),

61, R,R, Seyhu, Release of securities Journal of

Malaysian and Comparative Law vol, 12, P«53 ,
1985
62, Raynmand H, Rapaport . Effect of Release of
Principal debtor with Reservation of rights
against the surety- Michigan L.R, Vol,40 P,317
63, Arant , suretyship (1931) , p, 264
64, Referred in Mote 57 Gholsan v, Savim, 31 N.E,
(2 d, ) 858
 2 2 :•

65« Appendix * I
66* Punjab National Bank v, Mehra Brothers (?)
Ltd*, A«I.R« 1983 Cal. 335f Charan v. Abdur
Rahman, A«I«R« 1918 P« C* 226; Bank of Bihar
V* Damodar Prasad, A.I.R. 1969 S.C. 297;
Asharfibai v* Parshadi Lai, A.Z.R. 1959 M.P.
26; Suresh Narain v, Akhauri, A.I.R, 1957 Pat,
256,
67, A.I.R. 1977 Kart,14
68, 1975, 8th Ed. P, 119
69, M,R, Srunivasan whether Forbearance to sue
amounts to omission to sue 160 MLJ 17 (1981).
70, T,L.N.J, 117 (1980)
71, Appendix- I
72, Venkata Brahma Rao v, Andhra Bank Ltd, A.I.R,
1964 A,P, 555
73, Central Bank of India v. B.K, Nayar, A.I.R.
1985 P & H. 161; B,S, Patra v. State Bank of
India, A.I.R, 1986 Ori, 247,
74, A.I.R. 1924 Lah. 194; Jana Kiran v, Punjab
National Bank, A.I,R. 1968 Mys« 56
75, State of M.P. v, Kuluram, A.I.R. 1967 S.C. 1105
76, ( 1878) 4 Cal, 331 (PC)
77, 44 P. 304 Illustrates illustration (a) of S,139
78, Appendix - I
79, Ibid.
80, (1807) 14 ves 160
 22:
81, A . I . R . 1968 S.C. 1432
82, A.X.R. 1967 S,C» 1105
83• S t a t e Bank of Sausashtra v . Chitranjan
Ragn«th« A.Z.R, 1980
84, Supra 78#78
85, A.X.R. 1972 Kart« 14
86, Id, at P« 18 S.C, 1528
87, K, PonnTiswaml, XIII A,S, I,L. (1977) 142
88, A,I,R, 1987 Kart, 2; B,S| Patra v. State
Bank of India, A,I,R, 1986 Ori, 247
89, M/s Quality Baread Factory, A,I,R, 1983 P.& H,244
90, A,I,R, 1987 P.& H, 176
91, (1890) 15 Bom, 48 at 64
92, A.I.R. 1944 Mad, 195
93, Id, at P, 200
94, Indian Contract Act etc,, 9th Ed, Pages 642-643
95, Penal v. Deacon, (1857) 24 B, 156
96, Parej, J, Supra Note 87
97, Thirteenth Report (1958) P, 54
Appendix - III
98, A,I,R, 1975 Raj,