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CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation

Urban Infra Ltd was building a bridge for a bank-funded project under a contract with Metro Authority, payable in stages as work reached milestones. Mr. Rao guaranteed Urban Infra's due performance to the Authority. Without Mr. Rao's knowledge, the Authority prepaid the last two instalments to Urban Infra before the work reached those stages. Urban Infra abandoned the work. Which statement is correct?

Mr. Rao is discharged. The creditor's act of prepaying instalments without his knowledge was inconsistent with the surety's rights and impaired his eventual remedy against the principal debtor, which discharges a surety.

  1. AMr. Rao is discharged because the prepayment impaired his eventual remedy against the principal debtorCorrect
  2. BMr. Rao stays liable because the prepayment benefited Urban Infra
  3. CMr. Rao is discharged only for half the prepaid amount
  4. DMr. Rao stays liable because he was not a party to the payment terms

Explanation

If the creditor does an act inconsistent with the surety's rights and the surety's eventual remedy against the principal debtor is thereby impaired, the surety is discharged. Prepaying later instalments removes the creditor's hold over the contractor and prejudices the surety. Partial discharge is not the rule here.

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