Section 135 Contract Act: Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor

Section 135 of Indian Contract Act: Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Contract Sec 2(h)

Legal Commentary & Landmark Judgments: Section 135

A contract between the creditor and the principal debtor whereby the creditor compounds with, grants an extension of time to, or promises not to sue the principal debtor discharges the surety, unless the surety assents to such an arrangement. By unilaterally postponing the debt maturity or altering the enforcement timeline, the creditor compromises the surety's equitable right to pay off the debt and immediately seek recourse against the debtor.

Contract of Guarantee & Suretyship: In commercial banking, informal debt rescheduling, loan tenor extensions, and one-time settlements (OTS) executed behind the guarantor's back operate as fatal traps for lenders, automatically releasing the surety from liability.
Core Legal Standard: To neutralize this risk, institutional loan agreements invariably include comprehensive waiver covenants under which the guarantor expressly agrees that the lender may grant extensions of time, renew facilities, or compound with the borrower without notifying the guarantor or impairing the enforceability of the guarantee.

Key Landmark Precedents:

State Bank of Saurashtra v. Chitranjan Rangnath Raja (1980) 4 SCC 516: The Supreme Court held that where the creditor bank pledged securities and subsequently lost them or altered payment timelines without the surety's consent, the surety was discharged under Sections 135 and 141.
Punjab National Bank v. Sri Vikram Cotton Mills Ltd (AIR 1970 SC 197): The Supreme Court held that mere unilateral indulgence or passive delay in filing a suit does not amount to 'giving time' under Section 135, and does not discharge the guarantor.

Legal Commentary:

There is a vital statutory distinction between 'giving time' under Section 135 (a binding contract binding the creditor not to sue for a period) and 'mere forbearance' under Section 137 (passive inaction). Passive delay never discharges a surety, whereas a binding loan restructuring agreement without the surety's joinder will.

Section 135: Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor

Section 135 of Indian Contract Act: Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor

Legal Commentary & Landmark Judgments: Section 135