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

Nikhil guarantees repayment of a loan given by Bharat Finance to Ocean Traders. Without consulting Nikhil, Bharat Finance agrees with Ocean Traders to give it two extra years to repay, and does not agree to sue in the meantime. Nikhil did not assent to this arrangement. What is the position of Nikhil?

Nikhil is discharged. When the creditor makes a contract with the principal debtor giving time or promising not to sue, the surety is released unless the surety assents to it. Since Nikhil did not assent, his liability as surety ends.

  1. AHe remains liable because the principal debt still exists
  2. BHe is liable only for half the loan amount
  3. CHe is discharged because the creditor promised to give time to the principal debtor without his assentCorrect
  4. DHe is discharged only if Ocean Traders becomes insolvent

Explanation

Under Section 135, a contract between the creditor and the principal debtor by which the creditor promises to give time to, or not to sue, the principal debtor discharges the surety unless the surety assents. Nikhil did not assent, so he is discharged. The continued existence of the debt, as in the first option, does not preserve the surety's liability.

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