SECTION 126 AND 139 OF INDIAN CONTRACT ACT
BY: Bishrant khatiwada, SLS, Pune
Email: bishrantkhatiwada0@gmail.com
According to section 126 of Indian Contract act, 1872, a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. Three parties involved in a contract of guarantee are, surety, who gives the guarantee; principal debtor, the person in respect of whose default the guarantee is given and creditor, to whom the guarantee is given.
The liability of surety can be discharged by:
Revocation: Section 130 of Indian contract Act, 1872 states, “A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
Death of surety: : Section 131 of Indian contract Act, 1872 states,” The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.”
Novation in terms of the contract: Section 133 of Indian contract Act, 1872 states,” Any variance, made without the surety's consent, in the terms of the contract between the principal [debtor] and the creditor, discharges the surety as to transactions subsequent to the variance”
Release or discharge of principal debtor: Section 134 of Indian contract Act, 1872 states,” The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.”
When creditor compounds with, gives time to, or agrees not to sue, principal debtor: Section 135 of Indian contract Act, 1872 states,” A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.”
Impairing guarantor’s remedy: Section 139 of Indian Contract act, 1872 states,” If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.”
By Revocation: In ordinary circumstances, the contract of ensure cannot be denied; it can as it were be repudiated within the case of proceeding ensure. It is given beneath segment 130 of the Indian Contract Act i.e., “Revocation of proceeding guarantee”. Section 130of Indian Contract Act states that “A proceeding ensure may at any time be disavowed by the surety, as to future exchanges, by take note to the creditor.” In the case of Indian Abroad Bank v. Goh Teng Hoon, it was held, “Revocation becomes effective for end of the exchanges whereas the surety remains obligated for exchanges as of now entered into.” In the case of Bhikabhai v. Bai Bhuri, the court clarified with respect to the “Notice to the Creditor”
By death of Surety: It is as it were appropriate within the case of proceeding ensure. In case the guarantor kicks the bucket and there's no contract of continuation after his passing, the contract of ensure will come to a conclusion. It is given in Section 131 of the Indian Contract Act, 1872 i.e. “Revocation of proceeding ensure with surety’s death”. Section 131 of the Indian Contract Act, 1872 states that “The passing of the surety works, within the nonappearance of any contract to the opposite, as a disavowal of a proceeding ensure, as distant as respects future transactions.” The end of obligation will be in regard of future exchanges and the heirs can be sued for those liabilities which has as of now caused. Within the case of R.K. Dewan v. the State of U.P, the court watched, “of the expired surety can be forced against his legitimate beneficiaries but as it were to the degree of the property acquired by them.”
By Variance: In case of Rouse V. Bradford banking Co ltd, it was held that, the surety is considered a favoured debtor and his liability is in srictissimi juris. Which means In general, when a person receives an advantage, as the grant of a license, he is bound to conform strictly to the exercise of the rights given him by it, and in case of a dispute, it will be strictly construed. Whereas in T. raju Shetty V bank of Baroda, it was held that a surety is discharged when, without his consent, the creditor makes any changes in the nature of the terms of his contract with the principal debtor. Relying upon which under the given circumstances, where the interest rate was changed the surety can be discharged.
Furthermore, within the case of Pratapsing Moholalbhai v. Keshavlal Harilal Setalwad, it was held that the surety is discharged as before long as the first contract is changed without his assent. Too, within the case of Bonar v. Macdonald and Brahmarya & Co v. K. Srinivasan Thangirayar, it was held, “the surety might not be called on to form great the misfortune as the new assertion was a substitution of an unused assertion for the previous which released the surety.”
By discharge of principal debtor: In case there's any contract between the bank and the central indebted person by which the indebted person is discharged will have the impact of discharging the underwriter as well. In the event that the central indebted person who is the capable individual for which the surety is paying is released, at that point there's no ground on which the underwriter must be rebuffed. It is given beneath section 134 of the Indian Contract Act, 1872 i.e. “Discharge of surety by discharge or release of the vital debtor”. This section releases the underwriter firstly in case the foremost indebted person is discharged by any contract with the bank or on the off chance that there's any act by which the vital indebted person is released. In the case of Ramswaroop & Anr. v. State Bank of Bikaner & Jaipur & Anr, the Hon’ble court stated, “when the creditor himself agrees to accept entire decretal amount from the borrower (defendant) only, then it amounts to voluntarily entering into a new contract by the creditor with the principal debtor.” This new compromise (agreement), by necessary implication, discharges the guarantor. Whereas In the case of Kahn Singh v. Tek Chand, the Indian Contract Act 1872 provides that if the creditor makes any arrangement with the principal debtor by which the latter is released, the surety is discharged. The learned judges held, “the decree-holder gave up the idea of seeking any remedy against the sureties and remained content to realize the decretal amount from the principal debtor and that too in instalments fixed with him.
By Composition : According to section 135 of Indian Contract Act, 1872, “A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the surety assents to such contracts.” Within the case of Bolton v. Salmon, it was held that composition unavoidably involves a variety of the first contract of the guarantee and thus the surety is released. Taken after within the following case of Mahomedalli Ibrahimji v. Laxmibai, it was held that compromise of the suit by the vital indebted person undertaking to pay the levy by portion, releases the surety. Such a compromise was not one which he mulled over when he entered into the suretyship.
Promise not to sue: In case an agreement is shaped between the lender and principal debtor in which the lender guarantees not to sue the foremost indebted person, at that point the surety will be released. In this sort of circumstance, the surety can inquire the leaser to constrain the vital indebted person for the obligation which could be an infringement of the correct and thus the surety is discharged.
By Impairing Guarantor’s Remedy: If there's an act done by the lender which is conflicting with the guarantor’s rights, this moreover incorporates exclusion of an act by the leaser which is required by the underwriter to be done, at that point the surety will be released from the obligation. It is given in section 139 of the Indian Contract Act i.e. “Discharge of surety/guarantor by creditor’s act or exclusion disabling surety’s inevitable remedy”. Within the case of SBI v. Praveen Tanneries, the court held that the leaser must protect any securities he had against the vital indebted person. Coming up short to do the same, the underwriter will be released to the degree of the securities. “If the creditor’s act or exclusion denies the surety of the advantage of this cure, the surety is discharged.”
The following above mentioned things were the differences between Contract of indemnity and Contract of Guarantee and the above mentioned ways are the ways in which the liability of surety can be discharged.
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