Rights and Liabilities of Surety and Discharge of Surety

Understand Rights and Liabilities of Surety and Discharge

Key formulas to remember

Extent of surety's liability

Surety's liability = Principal debtor's liability (co-extensive), unless the contract provides otherwise

This is Section 128. The surety is liable together with the debtor, and the creditor can sue the surety without first suing the debtor.

Surety's right against principal debtor (subrogation)

On paying, surety steps into the creditor's shoes and may recover the amount paid from the principal debtor

This is Section 140. It applies after the surety pays or performs what the debtor was bound to.

Surety's right to creditor's securities

Surety is entitled to the benefit of every security the creditor had against the debtor when the guarantee was given

This is Section 141. The right holds whether or not the surety knew of the security. If the creditor loses or parts with it without the surety's consent, the surety is discharged to the extent of its value.

Contribution among co-sureties (Sections 146 and 147)

Section 146: where co-sureties guarantee the same debt, they contribute equally, unless they agreed otherwise. This applies whether they are bound jointly or severally, under the same or different contracts, and with or without each other's knowledge. Section 147: where their guarantees have different maximum sums, they contribute equally, subject to those limits.

Section 146 gives equal contribution in all those situations. Section 147 applies when the limits differ: no surety pays more than the maximum of that surety's own guarantee. Check the amounts carefully.

Discharge by release or discharge of principal debtor

Surety is discharged when the creditor, by a contract with the debtor, releases the debtor, or by an act or omission of the creditor the debtor is discharged

This is Section 134. It covers only release by contract and discharge by the creditor's act or omission. Discharge by operation of law, for example on the debtor's insolvency, is outside Section 134 and does not discharge the surety.

Discharge by compromise or giving time (Section 135)

A contract between the creditor and the principal debtor to compound with the debtor, to give the debtor time, or not to sue the debtor, discharges the surety, unless the surety assents to it

This is Section 135. The trigger words are compromise and time given. If the surety agreed to the arrangement, there is no discharge.

Discharge by creditor's act or omission impairing the surety's remedy (Section 139)

If the creditor does an act inconsistent with the surety's rights, or omits an act that the creditor's duty to the surety requires, and the surety's eventual remedy against the principal debtor is impaired, the surety is discharged

This is Section 139. It applies only where the surety's remedy against the debtor is impaired. A creditor's act that does not impair that remedy is not covered by this section.

Revocation of continuing guarantee (Sections 130 and 131)

Section 130: a continuing guarantee may be revoked by the surety by notice to the creditor as to future transactions. Section 131: a continuing guarantee is revoked by the surety's death as to future transactions, unless the contract provides otherwise

Revocation by notice (Section 130) and by death (Section 131) affect only future transactions. Past transactions remain the surety's liability.

Discharge by variance in terms

Any variance made without the surety's consent in the terms of the contract between creditor and debtor discharges the surety as to transactions after the variance

This is Section 133. By its words, it discharges the surety as to transactions after the variance. For a guarantee of a single loan, a material alteration of the terms without the surety's consent is treated as discharging the surety from that guarantee.

Co-surety and the creditor (Section 144)

Where a guarantee is given on the condition that the creditor shall not act on it until another person joins as co-surety, the guarantee is not valid if that other person does not join

This is a rule on the validity of a conditional guarantee, not a discharge of the surety. The creditor cannot enforce the guarantee if the co-surety never joined.

How to solve Rights and Liabilities of Surety and Discharge questions

1. 1Identify the three parties: creditor, principal debtor and surety. Note any co-sureties.
2. 2Decide what the question asks: the extent of liability, a right of the surety, or whether the surety is discharged.
3. 3For liability, apply the co-extensive rule first, then check if the contract limits it.
4. 4For rights, match the fact to the right: paying the debtor's debt gives a right to recover from the debtor, securities give the right to the creditor's securities, and shared guarantees give the right to contribution.
5. 5For discharge, scan the facts for a trigger: notice of revocation, death, changed terms without consent, release of the debtor, a compromise or time given to the debtor, or loss of security.
6. 6Check consent. If the surety agreed to the change, there is usually no discharge.
7. 7For co-sureties, calculate equal shares under Section 146, then apply Section 147: cap each share at that surety's limit and share the remainder equally among the others, again within their limits.
8. 8State the conclusion in one line and link it to the rule.

Quickest way: Trigger-word scan for surety questions

Common mistakes in Rights and Liabilities of Surety and Discharge

• Thinking the creditor must first sue the principal debtor before suing the surety.

  Students confuse the surety's secondary role with a requirement to exhaust the debtor first.

  Fix: Remember the liability is co-extensive and immediate on default. The creditor may go directly against the surety unless the contract says otherwise.

• Saying the surety is discharged whenever the principal debtor is released.

  Students overlook the difference between release by the creditor's contract and release by operation of law.

  Fix: Section 134 covers only release by contract and discharge by the creditor's act or omission. Discharge by operation of law, such as the debtor's insolvency, is outside Section 134 and does not discharge the surety.

• Treating revocation of a continuing guarantee as ending past liability.

  Students read 'revocation' and assume the whole guarantee ends.

  Fix: Revocation by notice or death affects future transactions only. The surety stays liable for earlier ones.

• Splitting co-surety liability equally without checking each limit.

  Students memorise 'equally' and skip the limits.

  Fix: Section 146 gives equal contribution, but under Section 147 no surety pays more than the limit of that surety's own guarantee. Redistribute the remainder among the others, within their limits.

• Confusing Section 134 and Section 144.

  Both sound technical and both can end the creditor's claim against a surety.

  Fix: Section 134 is a discharge rule: release or discharge of the principal debtor. Section 144 is not a discharge rule. It makes a guarantee invalid if it was conditional on a co-surety joining and that person did not join.

Worked examples