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

Vikram stands surety for Ishaan's due performance of a contract with Patel & Co, under which Patel & Co will pay Ishaan in instalments as work reaches certain stages. Without informing Vikram, Patel & Co prepays Ishaan the last two instalments before the work reaches those stages. What is the effect on Vikram's liability?

Vikram is discharged. The creditor's prepayment of the final instalments, made without his knowledge, is an act inconsistent with the surety's rights and impairs his eventual remedy against the principal debtor. The law therefore releases the surety entirely, not merely in part.

  1. AHe is discharged, because the creditor's act is inconsistent with the surety's rights and impairs his eventual remedyCorrect
  2. BHe remains fully liable, as prepayment benefits the debtor only
  3. CHe is liable only for the instalments not prepaid
  4. DHe is discharged only if Ishaan later defaults

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 (Section 139). Illustration (a) covers prepayment of the last instalments without the surety's knowledge. Hence Vikram is wholly discharged, not just partly.

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