Contract of Guarantee means a contract to perform the promises made or discharge the liabilities of the third person in case of his failure to discharge such liabilities. As per section 126 of Indian Contract Act, 1872, a contract of guarantee has three parties: –

Surety: A surety is a person giving a guarantee in a contract of guarantee. A person who takes responsibility to pay a sum of money, perform any duty for another person in case that person fails to perform such work.

Principal Debtor: A principal debtor is a person for whom the guarantee is given in a contract of guarantee.

Creditor: The person to whom the guarantee is given is known as the creditor.

A surety is discharged when his liability comes to an end. In simple words, when the liability of surety, which he had undertaken under a contract of guarantee, comes to an end or is extinguished, he is said to be discharged from liability.

A surety can be discharged from the liability in following ways-

  1. Revocation by the surety

As per section 130 of Indian contract act, specific guarantee cannot be revoked by the surety if the liability has already accrued. A continuing guarantee may be revoked by the surety by giving notice to creditor as to future transaction only.  surety cannot be discharged for Past transactions, in other words, surety remains liable for transactions already entered into.

  1. Discharge by death of surety

As per  Section 131 of Indian contract act, in absence of any other provisions to the contrary, if the death of surety operates, the surety gets discharged from future transactions in case of continuing guarantee. The effect of the death of surety results in automatic revocation of the guarantee to future transactions but such revocation does not affect transactions made by surety in past.

  1. Discharge by variance in terms of contract

As per section 133 of Indian contract act, if a variation is made in terms of the contract between the principal debtor and the creditor, without the surety’s consent and knowledge, the surety becomes discharged from the liability as to the transactions made after the variance. But the variance must affect the material position of the surety.

  1. Discharge by release or discharge of principal debtor

As per section 134 of Indian contract, in a case where the primary liability of the principal debtor is released or discharged, the liability of the principal debtor can be discharged either by entering into a contract with the creditor or by any act or omission on the part of the creditor. Thus, in these cases, where the principal debtor itself is released from his liabilities, the surety’s liability is also discharged.

  1. When creditor compounds with/or gives time to/or agrees not to sue principal debtor

As per  section 135 of Indian contract act provides for the discharge of surety’s liability when the creditor compounds with or promises the principal debtor that he will not sue the principal debtor on the occurrence of default in performance. In such a scenario, the liability of the surety is released unless he consents to such a contract.

  1. By creditor’s act or omission impairing surety’s eventual remedy

As per section 139 of Indian contract act, the surety is discharged from its liabilities, if the creditor has done any act or omission which is inconsistent with the rights of the surety. Also, if the said act or omission impairs the eventual remedies of the surety against the principal debtor, the surety’s liabilities are said to be discharged.

  1. By Novation

Novation means substitution of a new contract of guarantee for an old one/ existing contract of guarantee. Novation may be either between one of the old parties or a new party. Though, the surety is liable for the old contract he entered into.  As per  Section 62 of Indian contract act, if the parties to a contract agree to substitute a new contract for it, or rescind / alter it the old contract need not to be performed. The consideration for the new contract being the mutual discharge of the old contract. The original contract of guarantee in such a case comes to an end.

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