Page 87 - DCOM103_COMMERCIAL_LAW

Commercial Law

Notes Case: A banker contracts to lend X ` 5,000 on March 4. A guarantees repayment. The
banker pays X ` 5,000 on January 1. A in this case is discharged from his liability as the
contract has been varied as much as the banker might sue X before March 4, but it cannot
sue A as the guarantee is from March 4.
2. Not to release or discharge the principal debtor: The creditor is under an obligation not
to release or discharge the principal debtor. Section 134 states: “The surety is discharged
by a contract between the creditor and 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”.

Example: A gives a guarantee to banker C for repayment of the debt granted to B.
B later contracts with his creditors (including C, the banker) to assign to them his property
in consideration of their releasing him from their demands. Here B is released from his
debt by the contract with C and A is discharged from his surety ship.
3. Not to compound, or give time to, or agree not to sue the principal debtor: Section 135
provides, “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 use the principal debtor,
discharges the surety, unless the surety assents to such contract”.
If the time for repayment is extended, the debtor may die or become insane or insolvent

or his financial position may become weaker in the meanwhile, with one effect that
the surety’s remedy to recover the money in case the principal debtor defaults, may be
impaired. However, there are certain exceptions. These are:
(a) Section 136 states that if the creditor makes an agreement with a third party, but not
with the principal debtor, to give extension of time to the principal debtor, surety is
not discharged even if his consent has not been sought.

Example: C the holder of an overdue bill of exchange, drawn by A as surety
for B and accepted by B, contracts with M to give time to B. A is not discharged.
(b) Mere forbearance on the part of creditor to sue the principal debtor, or to enforce any
other remedy against him, does not, in the absence of a provision to the contrary,
discharge the surety (s.137).

Example: B owes C (a banker) a debt guaranteed by A and the debt becomes
payable, but C does not sue B for a year after debt becomes payable. A is not
discharged from his surety ship.
(c) If the creditor releases one of the co-sureties, the other co-surety (or co-sureties)
thereby is not discharged. The co-surety released by the creditor is also not released
from his liability to the other sureties (s.138).
4. Not to do any act inconsistent with the rights of the surety. (s.139): Where C lends money
to B on the security of a joint and several promissory note made in C’s favour by B and by
A as surety for B, together with a bill of sale of B’s furniture, which give power to C to sell
the furniture and apply the proceeds in discharge of the note. Subsequently, C sells the
furniture, but owing to his misconduct and wilful negligence, only a small price is realized,
then A is discharged from liability on the note.

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