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CMA Foundation · Fundamentals of Business Laws and Business Communication · Discharge of Contracts

Anita guarantees Bharat Constructions' performance of a contract to build a warehouse for Zenith Ltd, payable in instalments as work reaches set stages. Without Anita's knowledge, Zenith Ltd prepays the last two instalments to Bharat Constructions, who then fails to complete the work. Which reasoning correctly decides Anita's liability?

Anita is discharged. When a creditor does an act inconsistent with the surety's rights, such as prepaying instalments contrary to the payment-by-stages arrangement, and this impairs the surety's eventual remedy against the principal debtor, the surety is discharged. Proof of fraud is not required.

  1. AShe is discharged, because the creditor's act inconsistent with the surety's rights impaired her eventual remedy against the principal debtorCorrect
  2. BShe is liable, because prepayment helps the principal debtor
  3. CShe is liable, because a guarantee may be oral and needs no notice of changes
  4. DShe is discharged only if she proves Zenith Ltd acted with fraud

Explanation

Section 139 discharges the surety where the creditor does an act inconsistent with the surety's rights, or omits a duty owed to the surety, and the surety's eventual remedy against the principal debtor is impaired. Prepaying the final instalments removes the creditor's hold over the debtor's performance, as in the section's ship-building illustration. Fraud need not be proved.

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