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CMA Intermediate · Business Laws and Ethics · Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Ajay guaranteed to Gupta Traders the payment for goods to be supplied to Binod. Gupta Traders later contracted with Binod, who was in difficulty, to accept an assignment of his property in return for releasing him from all their demands. What is the effect on Ajay's liability?

Ajay is discharged. A surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released. Binod was released from the debt by contract with Gupta Traders, so Ajay's guarantee ends.

  1. AAjay remains liable since the release was for consideration
  2. BAjay is discharged because the principal debtor was released by a contract with the creditorCorrect
  3. CAjay is liable for half of the debt
  4. DAjay is discharged only if he consented to the release

Explanation

The surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released. Here Binod is released by contract with the creditor, so Ajay is discharged. His consent is not required for this discharge.

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