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CMA Foundation · Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Meera guarantees Kapoor Steel's dues from Anand Works. Without Meera's knowledge, Kapoor Steel signs a contract with Anand Works promising to give Anand Works six more months to pay, in return for a fee. What is the legal effect on Meera?

Meera is discharged. When the creditor and principal debtor make a contract giving the debtor extra time, the surety is released unless she assents to it. Meera did not know of or agree to the arrangement, so her liability under the guarantee ends.

  1. AShe remains liable because she was never a party to the new contract
  2. BShe is discharged, since the contract giving time was made without her assentCorrect
  3. CShe is liable only for half the debt
  4. DShe is discharged only if Anand Works fails to pay within six months

Explanation

A contract between the creditor and principal debtor by which the creditor promises to give time to the principal debtor discharges the surety unless the surety assents to it (Section 135). Meera did not assent, so she is discharged. Saying she stays liable because she was not a party ignores that the rule exists precisely to protect a non-assenting surety.

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