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

Ravi Traders supplies goods on credit to Mohan on the guarantee of Suresh. Later Mohan, being in financial trouble, enters into a contract with his creditors, including Ravi Traders, under which his property is assigned to them in consideration of their releasing him from their demands. What is the effect on Suresh's liability?

Suresh is discharged. Under Section 134, a contract between the creditor and the principal debtor that releases the principal debtor also discharges the surety. The arrangement here, assigning property in return for release from demands, matches the statutory illustration, and the surety's consent is not required.

  1. ASuresh remains liable because he gave the guarantee independently of Mohan's arrangement
  2. BSuresh is discharged, because a contract between the creditor and the principal debtor released the principal debtorCorrect
  3. CSuresh remains liable only for half of the debt
  4. DSuresh is discharged only if he had consented to the arrangement in writing

Explanation

Section 134 provides that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released. Illustration (a) covers precisely this situation of an assignment of property in return for release. The surety's consent is not required for the discharge.

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