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

Under a contract, Asha is to build a warehouse for Brij Ltd within a fixed time, and Brij Ltd is to supply the steel. Chetan guarantees Asha's performance. Brij Ltd fails to supply the steel, so Asha cannot complete the work. Which statement is correct?

Chetan is discharged. Under Section 134, a surety is discharged by any act or omission of the creditor whose legal consequence is the discharge of the principal debtor. Brij Ltd's failure to supply steel excuses Asha, which releases Chetan, as in Illustration (c).

  1. AChetan remains liable because Asha has defaulted
  2. BChetan is liable only for half of the contract value
  3. CChetan is discharged, because Brij Ltd's omission discharges the principal debtor and so the suretyCorrect
  4. DChetan is discharged only if he gives notice to Brij Ltd

Explanation

Section 134 discharges the surety by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. Illustration (c) is on similar facts: the creditor omits to supply the timber and the surety is discharged. Asha's inability to perform results from Brij Ltd's omission, so Chetan is not liable.

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