DISCHARGE OF SURETY
Discharge of surety :
The general rule is that "the liability of the surety is coextensive with that of the principal debtor". However, the surety's liability is only secondary and he becomes liable only when the principal debtor fails to pay. In regard to the discharge of a surety, provisions, are made to protect the interests of the surety. The general principle is that the "discharge of the debtor, automatically discharges the surety".
Any variation made, without surety's consent, in the terms of the contract, discharges the surety in respect of all subsequent transactions.
A is a surety to C for B's conduct in C's Bank. Later B and C contract, without A's consent, to raise B's salary and B's liability in case of overdraft loses. Held, that 'A' was discharged. Polak V Everett, Homes V Brunkskill are the leading cases. The reason for this rule is that the variation is done behind the back of the surety.
Release of Principal Debtor :
If by a contract, between the principal debtor and the creditor the Principal debtor is released by act or omission the surety is also discharged. A contracts with B for Rs.50,000/- to build a house for B within a stipulated time. C is the surety. B is to supply the necessary timber. B omits to ; supply. C is discharged.
Discharge by granting time :
If the creditor, under a contract, agrees for a compromise or to grant time or not to sue the principal debtor, then the surety is discharged. The exception is that if the surety accepts to such a contract, he becomes liable and is not discharged.
If a contract to give time to the principal debtor is made by the creditor with a third person, the surety is not discharged. Mere forbearance to sue will not discharge the surety.
A owes to C, a debt and S is the surety. The debt becomes payable. C does not sue A, when the debt became payable. S is not discharged from liability.
Release of one of the sureties will not discharge the others from their liability. They are also not discharged inter se.
Discharge by impairing surety's right:
When the creditor does any act inconsistent with surety's rights, or omits to do any act which was his duty to do, and, the eventual remedy to the surety is impaired thereby, then the surety is discharged.
Rights of surety :
The surety has certain rights against the principal debtor, the creditor and the co-sureties.
1. Rights against principal debtor :
(i) Right of Subrogation (Sn. 140).
The surety gets the right of subrogation on payment of amounts or performance of a duty.He actually steps into the shoes of the principal debtor and hence becomes vested with all the rights and remedies which the creditor had against the principal debtor. The question is whether the surety should pay all that is due, or may sue the principal debtor even before so paying. In a Calcutta Case (Ghose's case), the high court, held that if the principal debtor was disposing of his properties, with the ultimate obective of defeating the rights of the surety, an induction may be issued not to dispose of the properties.
ii) Right to indemnity (Sn. 145) :
In every contract of Guarantee there is an implied promise by the principal debtor to indemnify the surety. Hence the surety is entitled to all the moneys he has rightfully paid.
But he is not entitled, if he has paid wrongfully e.g. (a) C is the Creditor to P. S is the surety. C sues A and recovers the debt amount, interest and court costs. S can recover not only the debt and interest amounts, but also court costs from P, as the court costs are rightfully paid.
(b) S stands as surety for supply of rice valued Rs. 20,000 by C to P. C supplies less quantity for Rs. 12000/- but recovers Rs. 20,000 from S. S can recover from P only Rs. 12,000 but not the balance as he has paid it wrongfully.
2. Right against creditor :
(i) When the surety pays off to the creditor he gets into the shoes of the creditor, and, becomes entitled to the benefit of all those securities, which the creditor was entitled to, against the principal debtor. The surety may or may not know the existence of such securities.
In Forbes V Jackson, P borrowed £ 200 from C on his life insurance policy and a mortgage. S stood as surety. P borrowed further sums on the same securities, but without knowledge of S. P. failed. S paid £ 200 and claimed both securities insurance policy and mortgage. Held, S was entitled to both. The surety may claim reduction or set-off if the principal debtor had such rights against the creditor.
3. Rights against Co-sureties :
(i) Release of one surety; Sn. 138.
Release of one surety will not discharge the other Co-sureties. Further such a surety is not freed from the liability to other sureties.
(ii) Right to contribution : B contracts to build a ship for C for a fixed sum to be paid in instalments. A is the surety. C without A's knowledge pays two advance instalments. A is discharged.
(iii) Contribution or Liability of sureties among themselves :- In respect of liability of sureties among themselves, Sns. 146 and 147 have laid down the rules.
According to Sn. 146 where sureties are bound jointly and severally, they become liable to each other for an equal share or for that part which remains unpaid. Hence, they are to contribute equally. A, B and C are sureties for Rs.3,000/- D is the debtor. D makesdefault. Hence, A, B and C are liable for Rs.3000/- In regard to the extent of liability, the above section makes it clear that they are to contribute equally. Hence, A, B and C are to pay Rs. 1,000/- each.
According to Sn. 147, Co-sureties, who are bound in different sums are liable to pay equally as far as their limits allow.
Problem : A, B and C are sureties for Rs. 10,000, 20,000 and 40,000 respectively. Debtor D makes default of Rs.40,000/- A : B : C : = 10,000 : 20,000 : 40,000 Default is for Rs.40,000/- Hence A, B and C are liable to the extent of Total Rs. 40,000/- The extent of their liability is determined according to this section. They are liable to pay equally as far as their limits allow.
Hence, A is liable to the extent of Rs. 10,000 Balance : Rs. 40,000 - Rs. 10,000 = Rs. 30,000 Therefore B and C are equally liable for Rs. 15,000/- each