124. "Contract of indemnity" defined.---A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity."

Illustration

A, contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Indemnity.---English usage of the word "indemnity" is much wider than this definition. It includes promises to save the promisee harmless from loss caused by events or accidents which do not or may not depend on the conduct of any person, or by liability arising from something done by the promisee at the request of the promisor; in the latter case a promise of indemnity may be inferred as a fact from the nature of the transaction. Where a person invested with a statutory or common law duty of a ministerial character is called upon to exercise that duty on the request, direction or demand of another ..... and without any default on his own part acts in a manner which is apparently legal but is, in fact, illegal and a breach of the duty, and thereby incures liability to third parties, there is implied by law a contract by the person making the request to keep indemnified the person having the duty against any liability which may result from such exercise of the supposed duty. Bankers had innocently presented to a corporation a transfer of its own stock for registration, and transferees for value from them were registered as owners. The transfer to the bank turned out to be a forgery, and the true owner, in an action against the corporation, enforced restitution. The House of Lords, disagreeing with the Court of Appeal, held that the bankers must indemnify the corporation. Some good company lawyers regret the decision, thinking that the corporation's duly was not merely ministerial, since it was the guardian of its own register, having a discretion to make inquiries thought fit, and "in theory a company is bound to exercise an active supervision to keep its register correct". Again we say that a contract of insurance is a kind of contract of indemnity. But this language would, since the Contract Act, be improper.

Commencement and Extent of Indemnifier’s Liability.---The text of the Act leaves these matters undefined. Accordingly the Calcutta High Court has without citing the Contract Act at all has supposed that an indemnifier could not be called on till the indemnified had incurred actual loss, and this was at one time said to be the rule of English Common Law. But, according to the equitable principles which now prevail, to indemnify does not merely mean to reimburse in respect of moneys paid, but (in accordance with its derivation) to save from loss in respect of the liability against which the indemnity has been given .... if it be held that payment is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance. Accordingly the existence of a clear enforceable claim---as under a judgment recovered---suffices to call the indemnified or those who stand in his place. But "the case is otherwise where the party giving the indemnity is concerned with the application o the money which he pays." The High Courts of Calcutta, Madras, and Allahabad and Patna have taken the view that when a person contracts to indemnify another, the latter may compel the indemnifier to place him in a position to meet the liability that may be cast upon him, without waiting until he (the indemnity-holder) has actually discharged it. The High Courts of Bombay and Lahore and the Nagpur Judicial Commissioner’s Court as it then was, however have taken the view that the indemnifier does not become liable until the indemnified has incurred an actual loss. There is thus a distinct cleavage of opinion, between the different High Courts. It is submitted however that the view taken in Calcutta, Madras and Allahabad is the more correct. In a judgment of the High Court of Bombay where the whole subject is reviewed, the earlier decision of that Court just cited was not followed by Chagla, J. It had been argued that under S. 125 all that the promisee is entitled to recover from the promisor is damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; but the learned judge rejected the argument based on the language of S. 125, though he conceded that it would have considerable force if the whole law of indemnity were embodied in Ss. 124 and, 125; but, he observed, that was obviously not so, the Contract Act being both an amending and a consolidating Act and not exhaustive of the law of contract to be applied by the Courts: "It is true that under the English Common Law no action could be maintained until actual loss had been incurred. It was very soon realized that an indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to wait till a judgement was pronounced and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore, the Court of Equity stepped in and mitigated the rigour of the Common Law. The Court of Equity held that if his liability had become absolute then he was entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient money which would constitute a fund for paying off the claim whenever it was made...I have already held that Ss. 124 and 125, Contract Act, are not exhaustive of the law of indemnity and that the Court here would apply the same equitable principles that the Courts in England do. Therefore, if the indemnified had incurred a liability and the liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.

Contract of indemnity and guarantee---Distinguished.---There is a difference between a contract of guarantee and a contract of indemnity. For a contract of guarantee of suretyship there must be tripartite agreement between the creditor, the principle debtor and the surety. In the case of a contract of indemnity it is not necessary for the indemnifier to act at the request of the debtor, whereas, in the case of a contract of guarantee or surety it is necessary that surety or guarantor should give the guarantee at the request of the debtor. In the former case it is a direct engagement between the two parties thereto, whereas in the latter, there are three parties, the creditor, the debtor and the surety who undertakes at the request of the debtor to answer the default or miscarriage of the debtor.

125. Rights of indemnity-holder when sued.---The promisee in a contract of indemnity acting within the scope of his authority, is entitled to recover from the promisor:---

(1) All damages which-he, may be compelled. to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) All Costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit;

(3) All sums which he may have paid-under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.

Sub-s. 1---As to sub-s, 1, it is obvious that when a person has....altered his position in any way on the faith of a contract of indemnity, and an action is brought against him for the matter against which he was indemnified, and a verdict of a jury obtained against him, it would be very hard indeed if when he came to claim the indemnity the person against whom he claimed it could fight the question over again, and run the chance of whether a second jury would take a different view and give an opposite verdict to the first. Therefore, by reason of that contract of indemnity, the judgment is conclusive, although the promisor was not party to it. This rule has been followed by the Courts.

Sub-s. 2---As to sub-s. 2, "in the case of contracts of indemnity, the liability of the party indemnified to a third person is not only contemplated at the time of the indemnity, but is the very moving cause of that contract; and in cases of such a nature there is a series of authorities to the effet that costs reasonably incurred in resisting or reducing or ascertaining the claim may be recovered." But the costs must be such as would have been incurred by a prudent man.

Sub-s. 3.---As to sub-s. 3, if a person has [expressly] agreed to indemnify another against a particular claim or particular demand, and an action is brought on that demand, he (the defendant) may then give notice to the person who has agreed to indemnify him to come in and defend the action, and if he does not come in, and refuses to come in, he may then compromise at once on the best terms he can, and then bring an action on the contract of indemnity. Even if the promisee has not given notice to the promisor, the compromise is conclusive against the promisor if it is effected bona fide, and without collusion, and is not impeached as an imprudent bargain.

Rights of promisor.---This section deals with the rights of a promisee in a contract of indemnity. There is no provision in the Act for the rights of a promisor in such a contract. The absence, however, of such a provision does not take away the rights which such a promisor has according to English law, and which are analogous to the rights of a surety declared in S. 141. Those rights constitute an essential part of the law of indemnity, and they are of general application, as they are based on natural equity. The promisor is not liable, if the promisee suffers damage owing to circumstances which do not-come within the scope of the contract of indemnity.⁴⁷

Sections 124 and 125 do not embody the whole law on the subject of contracts of indemnity.

Guarantor---Liability of---Liability of guarantors, held, remained intact in spite of transfer of shares and in spite of change in management---Liability of guarantor was co-extensive with borrower.

Compensation by Railway---Insurer cannot step into the shoes of the consignor in case of loss of goods---Only consignor can sue for loss, damages, etc.---In the event of loss destruction or deterioration of the goods represented by the railway receipt, the consignor would be the only person entitled to sue the railway company for compensation. The plaintiff, who is merely an insurer, cannot step into the shoes of the consignor by obtaining letters of suborgation from the latter.

Section 125 of the Contract Act, which deals with the contract of indemnity, states only the rights of the promisee but it is silent as regards the rights of the promisor. Therefore it does not help the plaintiff.

If section exhaustive for relief which indemnity holder may get.---Section 125 is not exhaustive and does not set out all the reliefs which an indemnity holder who has been. sued may get. It leaves untouched certain equitable reliefs which he may get.

Indemnity holder---When may sue for protection from claim by third party.---The stage at which the loss or injury may be deemed to be imminent must depend upon the particular facts of each case and no fixed rule can be laid down in this respect, it is not correct to say that the loss or injury can be said to be imminent only when a decree had been passed against the indemnity holder and not otherwise. Therefore, when the injury becomes imminent the indemnity holder can come to Court and ask that he be protected and the Court must decide whether or not the claim of the third party against the indemnity holder in respect of which protection is sought is well-founded; if it so decides it must grant relief to him and not postpone the indemnity holder until a decree has been passed against him.

'A' who was not only an indemnity holder but also a trustee held the shares in a company standing in his name in trust for B. The shares were not fully paid up and the Company brought a suit against A for the balance of the amount payable for the shares. Thereupon, A brought a suit against B for a declaration that he was entitled to be indemnified by the defendant B against all calls and liabilities in respect of the said shares and for being relieved forthwith from all such liabilities to the said company, which were the subject-matter of the suit filed by the company against him. In the alternative he prayed that B should be directed to set aside or deposit, with the Registrar of High Court a sum sufficient to meet the costs and claim of the company in the suit filed by it against him to be available to meet the decree that may be passed in that suit.

Held; that the suit for indemnity by A was not premature and was maintainable, and that he was entitled to the reliefs prayed for as the suit filed by the company against A was a good one and bound to succeed.

126. "Contract of guarantee," "surety," "principal debtor," and "creditor".---A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surely"; the person in respect of whose default the guarantee is given is called the "principal debtor," and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written.

There can be no contract of guarantee unless there be a principal debtor; the surety’s obligation must be substantially dependent on a third person's default. A promise to be primarily and independently liable is not a guarantee, though it may be an indemnity.⁵¹ In England, however, this last distinction is material chiefly because a guarantee is within the Statute of Frauds, and therefore not actionable without such a "memorandum or note" as is required by S. 4 of that Act; whereas the present section expressly declares that an oral guarantee is not less valid than a written one. As to the difference in principle between indemnity and suretyship, the Act does not depart from English law. "Contracts of suretyship .... require the concurrence of three persons, namely, the principal debtor, the creditor and the surety. The surety undertakes his obligation at the request express or implied of the principal debtor;" .on the true construction of S. 141 as well as s. 126. Accordingly, if A enters into a contract with B and C, without any communication with B, undertakes for a consideration moving from A to indemnify A against any damage that may arise from a breach of B's obligation, this will not make C a surety for B, or give him a right of action in his own name against B in the event of B's default.

The mere transfer by a debtor of his property to a trustee for the benefit of his creditors, the trustee not undertaking any personal liability to the creditors, does not Constitute the relation of principal and surety as between the debtor and the trustee.

The definition of the word "surety" in the section is not however exhaustive and the High Court of Bombay have held that it would include a person who, without undertaking a personal liability on behalf of the principal debtor, merely deposits documents of his property by way of security.

A person may become a surety without the knowledge and consent of the principal debtor, but the only rights Which he acquires in the case are those given by Ss. 140 and 141, and not those given by S. 145.

"Liability".---By the word "liability" in this section is intended a liability which is enforceable at law, and if that liability does not exist, there cannot be a contract of guarantee. A surety, therefore, is not liable on a guarantee for the payment of a debt which is barred by the law of limitation.

Validity of guarantee challenged---Guarantor had undertaken to guarantee repayment of loan advanced to borrower---Filling in the blank in letter of guarantee so far as amount of loan is concerned, held, could not be challenged---Even though amount was written in letter of guarantee afterwards; from contents thereof, intention of parties could be ascertained which refers to payment of all moneys due from borrower---Principal amount claimed by plaintiff having been accepted, even if space would have been left blank in letter of guarantee, there would be no uncertainty of such a nature which would invalidate document of guarantee.

Pakistan Penal Code (XLV of 1860), Ss. 30 & 405---Document of guarantee a valuable security and property with involvement of criminal liability wherefore essential ingredient being the manner of transfer in violation of a legal contract express or implied.

Time for repayment of loan extended within stipulation contained in agreement---Surety, held, could not take plea that lime for repayment of loan was extended without his knowledge and consent.

Deed of guarantee, executed, jointly---Letter of guarantee indicated that defendants had jointly and severally guaranteed due repayment of loan and money due from borrower defendant exclusive of interest and charges---Guarantee being always by a third person and not by borrower himself, person signing as guarantor, held, would be deemed to be guarantor far all intent and purposes---Plea of guarantor that he had signed document of guarantee not in personal capacity but in official capacity would be of no effect where such guarantor did not testify before Court that he had not executed letter of guarantee in his personal capacity.

Surety---Liabilities of sureties and principal debtor held, distinct---Liability of surety arise immediately on failure of principal debtor and unless otherwise provided in contract creditor cannot be compelled to first exhaust his remedy against principal debtor before initiating action against surety---Even in cases where liabilities of both parties arise from same transaction or same document liabilities are distinct.

Expression 'liability of surety co-extensive with that of principal debtor'---Context in which expressions used explained---Existence of liability in first instance, held, must be established and liability cannot occur until there exists a default or failure or breach on part of principal debtor---Until Such time that a liability against principal debtor determined any action against surety, held further, would be premature.

Remedy against guarantor---Contract of guarantee to be strictly construed as to point of time when liability of guarantor arises---Question, held, depends on terms of contract of guarantee by which guarantor bound himself for repayment of loan advanced to principal borrower.

Guarantee for performance of definite engagement---Held: Guarantee when given for performance of definite engagement not contingent in nature and consideration for which not to vary as result of future dealings between parties, contract, not to be that of continuing guarantee.

No principal debtor in existence---Loans granted to fictious persons--- Guarantor cannot be used for recovery of debt.---If there never was any other person who can be properly described as the principal debtor, there cannot be said to have been any guarantee either in its technical or ordinary meaning. Where overdraft which was guaranteed by joint guarantors arose out of transaction which were fictitious, it was held that no debt had been incurred and the guarantors could not be successfully sued in respect of the alleged debt which was not a debt at all.

Name of guarantor not required by law to appear in body of guarantee.---It is neither the requirement of law nor of any trade usage or banking practice that ;the name of the guarantor should appear in the body of the guarantee.

127. Consideration for guarantee.---Anything done, or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee.

(a) B request A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A's promise to deliver the goods. This is a sufficient consideration for C's promise.

(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C's promise.

(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.

Consideration for a contract of guarantee.---This is nothing but an application of the wider principle that in all cases of contract the really necessary element of consideration is the legal detriment incurred by the promisee at the promisor's request and it is immaterial whether there is or is not any apparent benefit to the promisor.

Like any other contract, a contract of suretyship may be invalidated by total failure of the consideration, as where the considers, lion for an intended guarantee was postponing the sale of the debtor's goods, but the creditor was unable to stop the sale for want of the consent of other necessary parties, or where the consideration was withdrawal of criminal prosecution against the debtor, but the Court would not sanction the withdrawal, the offence being non-compoundable.

Where after a lease had been executed a person became surety for the payment of the rent due by the lessee, the contract of suretyship was for consideration, on the ground that the word "done" in S. 127 showed that past benefit to the principal debtor could be good consideration for a bond of guarantee. This scents to attribute an unnatural meaning to the word, which, it is submitted and as the rest of the section shows, refers to an executed as distinguished from an executory consideration. The facts in the Privy Council case on which the Court relied are not very clearly set out in the judgment of their Lordships, but apparently the surety bond, though executed at a date subsequent to the principal agreement (a compromise approved by the Court) was executed in pursuance of one of the terms of that agreement.

This section does not, of course-exclude the possibility of other kinds of consideration. However, lending money or supplying goods to the principal debtor and forbearing to sue him are by far the commonest forms of consideration for a surety’s contract. In India forbearance to execute a decree against the debtor is also a common form.

128. Surety's liability.---The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of the bill, but also for any interest and charges which may have become due on it.

Proof of surety's liability.---The liability must be proved against the surety in the same way as against the principal debtor. A judgment or award against the principal is not admissible as against the surety without a special agreement to that effect: "In an action against a surety the amount of the damage cannot be proved by any admissions of the principal."

It is not open to a creditor to call upon the surety to pay under the contract of suretyship unless the creditor had performed his part of the contract.

Liability for whole or part of debt.---There is an important distinction to be observed as to guarantees limited in amount. A man may make himself a surety, "with a limit on the amount of his liability, for the whole of a debt exceeding that limit"; and a guarantee of limited amount for an ascertained debt is presumed to be a guarantee for the whole.

But where the surety has given a continuing guarantee, limited in amount, to secure the floating balance .which may from time to time be due from the principal to the creditor, the guarantee is as between the surety and the creditor to be construed, both at law and in equity, as applicable to a party only of the debt co-extensive with the amount of his guarantee, and this upon the ground, at first confined to equity, but afterwards extended to law, that it is inequitable in the creditor, who is at liberty to increase the balance or not, to increase it at the expenses of the surety. Evidence of contrary intention is of course admissible in either case. But, in the absence of such evidence, the surety who has guaranteed the Whole debt with a limit of his liability does not acquire any rights of subrogation or contribution, until he has paid tip to that limit, whereas the guarantor of a floating balance up to a limited amount is deemed to be surety only for that part of the debt, and is entitled to the benefit in rateable proportion, of any dividends paid by the estate of the principal debtor.

A surety's liability to pay the debt is not removed by reason of the creditor's omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued. But where the liability arises only upon the happening of a contingency, the surety is not liable until that contingency has taken place.

Surety's liability where original contract is void or voidable.---This section only explains the quantum of surety's obligation when the terms of the contract do not limit it, as they often do. It does not follow, conversely, that a surety can never be liable when the principal debtor cannot be held liable. Thus a surety is not discharged from liability by the mere fact that the contract between the principal debtor and creditor was voidable at the option of the former, and was avoided by the former. And where the original agreement is void, as in the case of minor's contract in India, the surety is liable as a principal debtor; for in such a case the contract of the so-called surety is not a collateral, but a principal contract. A discharge of the principal debtor by operation of law does not discharge the surety.

In a Lahore case a dispute was referred to arbitration and a person stood surety for any amount that might be awarded against one of the parties to the reference. The surety paid and sued the debtor for the money paid by him on the debtor's behalf. The reference to arbitration was illegal and void in law, but the surety was held entitled to recover. This decision is difficult to understand, since the supposed debtor was not, as it turned out, a debtor at all or liable to pay the sum which the supposed surety had paid for him.

In the case of an agreement guaranteeing an employer against loss by the misconduct of a person employed as agent of the guarantor, the loss to be recoverable in a suit against the guarantor must be shown to have arisen from misconduct on the part of the agent in connection with the business of the agency, and to be within the scope of the agreement.

Administration and surety bonds.---The liability of sureties under an administration bond does not depend tin the validity or invalidity of the grant. Nor is the bond void merely because administration was obtained by misrepresentations of which neither the Court nor the sureties were aware.

Limitation.---This section must be read together with the Limitation Act, and not so as to nullify its provision limiting the time within which a suit must be brought after the accrual of a cause of action. The payment of interest, therefore, by a debtor before the expiration of the period of limitation does not give a fresh starting print for limitation against the surety under S. 20 of the Limitation Act even in the absence of a prohibition by the surety against the payment of interest by the debtor on his account. Payment of interest by the debtor could not be regarded as made by a person liable to pay the surety's debt, nor can the surety be, for the purpose of that section, considered the agent of the principal duly authorised to pay the interest. "The fact that the interest was paid with the knowledge and consent of the surety and even; it his request, makes no difference unless the circumstances could be said to render the payment one on behalf of the surety."

See also the commentary on S. 134, below.

Liability of surety would be co-extensive with that of principal debtor, unless otherwise provided by contract. Suit for recovery of amount due, could be filed within three years from date when borrowers was found liable to pay. Suit filed beyond period of three years would be barred by limitation.

Liability of surety to be coextensive with that of principal debtor until and unless otherwise provided for in contract of guarantee---Held further; Right of action against surety generally to arise at same time as fight of action against principal debtor.

129. "Continuing guarantee."---A guarantee which extends to a series of transactions is called a "continuing guarantee."

(a) A in consideration that B will employ C in collecting the rent of B's zamindari, promises B to be responsible to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee.

(b) A guarantees payment to B, a tea-dealer, to the amount of Rs. 100, for any tea he may from time to time supply to C B supplies C with tea to above the value of Rs. 100, and C pays B for it. Afterwards B supplies C with tea to the value of Rs. 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of Rs. 100.

(c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.

Continuing guarantee.---Whether in a particular case a guarantee is continuing or not is a question of the intention of the parties, as expressed by the language they have employed, under-standing if fairly in the sense in which it is used; and this intention is best ascertained by looking to the relative position of the parties at the time the instrument is written. Surrounding circumstances must be looked to see what was the subject-matter which the parties had in their contemplation when the guarantee was given.

In construing the language of the parties the whole of their expressions must be looked to, not merely the operative words. Thus the followings words were held to show that a guarantee, which otherwise might have been confined to a single transaction, was intended to be continuing: "Having every confidence in him, he has but to call upon us for a cheque and have it with pleasure for any account he may have with you; and when to the contrary we will write you."

A guarantee of the fidelity of a person appointed to a place of trust in a bank is not continuing guarantee. Nor is a guarantee for the payment by installments of a sum certain within a definite time.

Bond executed in favour of Court---Not covered by the sections---Principle of sections applicable---Surety may be discharged by Court when he prays for It and produces the judgment debtor in Court---The provisions of sections 129 and 130 of the Contract Act do not apply to the surety bond executed in favour of the Court in the same way as they apply to a guarantee given in favour of a private party because the creditor in the case of surety bond executed in pursuance of S. 55 in the Court and the obligation of the surety can not come to an end merely by giving a notice of revocation as contemplated in section 130 of the Contract Act.

But that does not mean that the principle laid down in Sections 129 and 130 of the Contract Act does not apply to the surety bond executed in favour of Court. In my opinion, the principle does apply, but the surety can only be discharged if the Court is of the opinion that his case falls within the principle laid down in section 129 of the Contract Act and consent to his discharge for that reason.

Held further: that a surety bond executed in pursuance of section 55 (4) of the Civil Procedure Code is in the nature of a continuing guarantee and if a surety comes forward and produces the judgment-debtor in Court and prays that he may be discharged from his further obligation to produce the judgment-debtor in Court as and when he is required to attend, there is not the slightest doubt that the Court will be acting according to law in accepting such prayer and in discharging the surety from his obligations.

Continuing guarantee--,What is---Guarantee relating to one transaction---Not a continuing guarantee.---In law a guarantee in order to be continuing guarantee must refer to a Series of transactions, of which when the guarantee was given, some are unknown and not certain to come into existence. The question whether or not a particular transaction is a continuing guarantee, depends on the terms of the instrument. Where the guarantee related to a single transaction, the view that it is a continuing guarantee cannot be upheld and must be repelled.

130. Revocation of continuing guarantee.---A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

(a) A, in consideration of B's discounting at A's request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months. A revokes the guarantee. This revocation discharges A three months. A revokes the guarantee. This revocation discharges A to B for the 2,000 rupees on default of C.

(b) A guarantees to B to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee.

Future transactions.---The words "future transactions" must be taken to imply that the operation of this section is confined to cases where a series of distinct and separate transactions is contemplated. it is otherwise in the case of an entire consideration. "Where a continuing relationship is constituted on the faith of a guarantee ..... the guarantee cannot be annulled during the continuance of that relationship"; and as the surety could not determine it himself by notice, so his death does not relieve his estate from liability; the nature of the transaction implies a contract to the contrary under S. 131.

Notice.---The mere denial of liability by the surety in a previous suite instituted by the creditor against him and the principal does not operate as a notice under this section.

Sureties for guardians and administrators.---The High Court of Bombay holds that this section does not apply to a surety bond required by the Court on the appointment of a guardian of the property of a minor. The surety in that case applied to the Court to be released from his obligation as such on account of the guardian's maladministration of the minor’s estate, but the Court refused the application, stating that "the very object of requiring such security was to guarantee the minor against such misconduct or mismanagement on the part of the guardian." The Calcutta High Court, however, has held that this section applies to a surety bond passed under the Probate and Administration Act. 1881 (see now the Succession Act, 1925) and that a surety for the administrator of an estate can as. to future transactions, by giving notice, be released from his obligation as surety on account of maladministration of the estate by the administrator. As to the Bombay case it was said that, though it was similar in principle, the surety there had a remedy inasmuch as he might have applied to the Court as the next friend of the minor for the discharge of the guardian, while in the Calcutta case the surety was absolutely without remedy, for, being neither a legatee nor a creditor, he could not take any steps to protect either the estate or himself by instituting administration proceedings.

131. Revocation of continuing guarantee by surety's death.---The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

"Contract to the contrary."---It is by no means clear that the present section states the rule rather than an exception; at any rate, the "contract to the contrary" need not be in express terms.

132. Liability of two persons primarily liable, not affected by arrangement between them that one shall be surety on other's default.---Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence.

A and B make a joint and several promisory note to C. A makes it in fact, as surety for B, and C knows this at the time when the note is made. The fact that A., to the knowledge of C, made the note as surety for B, is no answer to a suit by C. against A upon the note.

Joint debtors and suretyship.---This rule is elementary so far as it goes; but it is material to observe that it does not extend beyond its literal terms. Where one of two joint debtors is, to the knowledge of the creditor, in fact a surety for the other as between themselves, his immediate liability to the creditor is not qualified, but he is entitled to the rights of a surely under sections 133, 134 and 135. "When two or more persons bound as full debtors arrange, either at the time when the debt was contracted or subsequently, that inter se one of them shall only be liable as a surety, the creditor after he has notice or the arrangement must do nothing to prejudice the interests of the surety in any question with his co-debtors.

There need not be any assent by the creditor, much less a new agreement to accept the secondary debtor in the relation of surety.

The provisions of this section do not apply where the liability undertaken is not the same. A party who accepts bills of exchange for the accommodation of another is not precluded by this section from pleading that he was an accommodation acceptor only. The liability undertaken by the acceptor and drawer of a bill is in no sense a joint liability, and though they each contract to pay the same sum of money, they contract severally in different ways, and subject to different conditions.

133. Discharge of surety by variance in terms of contract.---Any variance, made without the surety's consent in the terms of the contract between the principal [debtor] and the creditor, discharges the surety as to transactions subsequent to the variance.

(a) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards, B and C contract, without A's consent, that B's salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to. make good this loss.

(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.

(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A's becoming surety to C for B's duly accounting for money received by him as such clerk. Afterwards, without A's knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B.

(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards B becomes embarrased, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payment shall be applied to the then existing debts between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement.

(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st January. A is discharged from his liability, as the contract has been varied inasmuch as C might sue B for the money before the 1st March.

Variation of contract between creditor and principal.---This is a rule of long standing, thus expressed by Lord Cottenham: Any variance in the agreement to which the surety has subscribed, which is made without the surety's knowledge or consent, which may prejudice him, or which may amount to a substitution of a new agreement for a former agreement, even though the original agreement may, notwithstanding such variance, be substantially performed, will discharge the surety.

The party who is surety for another for the performance of an engagement can only be called upon to guarantee the performance of that engagement when the engagement is carried into complete, literal, and strict effect.

The only qualification (for it is not an exception) to the generality of the rule is that, where a guarantee is for the performance of several and distinct contracts or duties, a change in one of those contracts or duties will not affect the surety's liability as to the rest. The intention of a "settlement" contract, for repurchase of goods by the seller from the buyer, is not that the original contract shall be discharged but that the two contracts shall stand together, accordingly, a contract of resale to the vendor does not discharge a surety from his original contract. A stipulation in a contract of guarantee whereby the surely purports to waive all his rights, legal, equitable, statutory or otherwise which may be inconsistent with the guarantee, will not deprive him of his right to discharge under this section.

Where a company was entitled under its articles to forfeit shares for default in paying up unpaid installments, and by another article the owners of a forfeited shares were made immediately liable for the amount of the calls due and incidental expenses with interest until payment, the company's election to forfeit shares was held to discharge sureties who had guaranteed payment of the calls; for a new and more onerous obligation was imposed on the debtor, and the sureties were deprived of their right of lien on the shares.

Attempts have been made to confine the rule to the cases where the variance materially affects the surety's interest, and to treat it as a question in each case whether the change is material for this purpose. There may be cases where it is without inquiry evident that the alteration is insubstantial or that it cannot be otherwise than beneficial to the surety, and in such cases the surety may not be discharged, but if it is not self-evident that the alteration is insubstantial, or one which cannot be prejudicial to the surety, the Court will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question whether the surety is discharged or not to be determined by the finding of a Court as to the materially of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.

Where by the terms of a consent decree for the payment by installments of a sum of money with interest passed against certain defendants as principal debtors, and against other defendants as sureties, it was stipulated that on default of payment of any one installment the decree-holder should sell the properties of the principal debtors for the whole amount remaining due under the decree, and the liability of the sureties was limited to the deficiency, it was held by the Privy Council that the omission of the decree-holder to sell the properties until several years after the first order for sale for the purpose of increasing the interest payable to him under the decree discharged the sureties to the extent of the interest that had accrued due after the date of that order.

Where a tax collector's son was allowed to collect the tax and misappropriated the moneys, the collector’s surety was discharged. A surety for a partner was held to be discharged where the partners had extended the business and increased its capital thus making the partner for whom the surety stood guarantee liable for greater losses than was contemplated at the date of the bond.

Debtors execution of promissory notes--:-No discharge of guarantors by Principal debtor executing fresh promissory notes to save period of limitation and for acknowledgement of liability of debit balance on particular date---Held, execution of such documents neither in any manner alters original contract, nor substitutes it nor in any manner discharges guarantors from liability.

Contract of guarantee---Liability of surety---Contract of guarantee implies existence of three parties, creditor, principal debtor and surety---Contract between creditor and principal debtor is foundation of contract of guarantee---Surety in such a contract, held, bound to things he has guaranteed---Surety cannot be held bound for things he has not contracted---Once a variance in contract between creditor and principal debtor is made their obligations are governed by new terms and unless surety has consented to such terms he cannot be bound for variation.

Principal debtor not sued---Liability of surety not discharged.---Mere forbearance, on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him, would not, in the absence of any provision in the guarantee to the contrary, discharge the surety.

134. Discharge of surety by release or discharge of principal debtor.---The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by an act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his ownership.

(b) A contracts with B to grow a crop of indigo on A's land and to deliver it to B at a fixed rate, and C guarantees A's performance of this contract. B diverts a stream of water which is necessary for irrigation of A’s land, and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.

(c) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his suretyship.

Creditor's discharge of principal debtor.---The law upon this subject is clear and well settled. If the creditor, without the consent of the surety, by his own act destroy the debt, or derogate from the power which the law confers upon the surety to recover it against the debtor in case he shall have paid it to the creditor, the surety is discharged.

But it is to be observed, with regard both to this and to the following section, that if the creditor expressly reserves his remedies against the surety, or generally his securities and remedies against persons other than the principal debtor, the surety is not discharged. For the reason of the doctrine is that a nominal release of the debtor, subject to a reservation of securities, is not a release destroying the debt, but operates only as a covenant not to sue the principal debtor, who remains, however, liable to indemnify the surety. The surety's right to indemnity against the principal debtor is a necessary result of such a reservation. Like effects may be produced without an express reservation. Where the whole debt has not been discharged; but the debt as to part remains undischarged, but the principal debtor cannot be pursued by the creditor for the balance, the surety may by apt words be left liable although the principal debtor has as regards such balance been released as between himself and the creditor.

A creditor, without ceasing to hold the principal debtor liable, prefers to sue the more solvent of two sureties for the debt: this, still more obviously, does not discharge the other surety.

Effect of Debt Relief Acts---Where a decree has been obtained against the principal debtor and a surety, and thereafter the principal debtor applies to a Debt Conciliation Board, which discharges him from the debt on the failure of the decree-holder to prove his debt, the surety is not discharged: the surety has now become liable as a judgment-debtor and provisions such as S. 134 have ceased to apply. Provisions such as S. 145 still operate however, as they do not govern the creditor's rights; thus the surety has a right to be reimbursed by the principal debtor.

In a case of true suretyship, where no decree has yet been passed, or the surety has been provided after the decree, the surety is discharged under S. 134 if the principal debtor applies to a Debt Conciliation Board, and the creditor fails to prove his debt, or declares that he will recover the debt from the surety and not from the principal debtor.

On that view, the surety is liable in full. S. 145 enables him, however, to recover what he has laid from the principal debtor.

"Act or omission of the creditor."---The acts or omissions contemplated by this section may be those referred to in Ss. 39, 53, 54, 55, 63, and 67 (ante). The facts of illustration (c) to this section are similar to those of illustration (b) to S. 54. If the principal debtor is discharged from his obligation by reason of any acts or omissions specified in those sections, the liability of the surety will determine. But the act or omission must be one of which the legal consequence is the discharge of the principal debtor. The mere omission, therefore, of a creditor, in a suit by him against a principal debtor and a surety, to effect service of summons on the principal debtor, does not discharge the surety, for the principal debtor is not thereby discharged from liability to the creditor. The only consequence of such an omission is to enable the Court to dismiss the suit as against the principal debtor after the expiration of one year under S. 99-A of the Code of Civil Procedure, 1882 [now Code of 1908, O. 9, r. 5]; but the plaintiff would still be at liberty to bring a fresh suit against the principal debtor under the provisions of that section. The same principle applies where the suit against the principal debtor has abated on his death during the pendency of fire suit.

Creditor's omission to sue principal within limitation period.---The question whether a surety. is discharged when a creditor allows his remedy against the principal debtor to become barred by limitation may be considered at this stage. On this point there have been two opposite views taken by the Indian High Courts; the majority however holding that the surety is not in such circumstances discharged. The conflict arises in great part from the provisions of S. 137 (infra) and especially the words "mere forbearance" occurring in that section. It was conceded by the Bombay and Calcutta High Courts, that, if S. 134 stood alone, the omission of a creditor to sue the principal debtor within the period of limitation would discharge the surety under that section, as having the legal consequence of discharging the principal debtor.

In the case of parties to a negotiable instrument their rights and liabilities are governed by the Negotiable Instruments Act. Accordingly the omission on the part of an indorsee of a hundi to sue the acceptor within the period of limitation does not discharge the drawer where the suit has been instituted as against him in time.

In the case of an agreement being void because of the disability of one of the parties thereto to enter into it, the surety would be held liable as a principal.