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

Under a contract, Rao builds a godown for Sethi for a fixed price, with Sethi to supply the cement. Nair guarantees Rao's due performance. Sethi fails to supply the cement and Rao cannot complete the work. Nair is:

Nair is discharged. Section 134 releases a surety where the creditor's act or omission legally discharges the principal debtor, and the illustration on a creditor failing to supply timber matches this case. Sethi's failure to supply cement prevented Rao's performance.

  1. ALiable, because the guarantee was given for Rao's performance and Rao defaulted
  2. BLiable only for half the contract price
  3. CDischarged, because Sethi's omission, the legal consequence of which is Rao's discharge, releases the suretyCorrect
  4. DDischarged only if Nair had been notified of the cement arrangement beforehand

Explanation

Section 134 discharges a surety by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. Its illustration (c) is the same: the creditor omitted to supply timber and the surety was discharged. Rao's default was caused by Sethi, so Nair is not liable.

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