There are lots of different types of bonds that exist in the world of business. One of the most well-known and well-used of these is the surety bond.
But what is a surety bond? And more importantly, what circumstances can cause the surety to be discharged from their liability?
In this article, we will be going over eight very important circumstances in which the surety is discharged from his liability.
Put simply, a surety bond is a written agreement that is there to guarantee performance, compliance, or payment of a specific act.
A surety bond is usually represented by an insurance company or between two parties. Surety bonds are unique however because they require a third-party agreement.
The surety is represented by either an organization or a person and they are responsible for paying the debt in case the debtor policy defaults or is unable to make the payments.
The party that guarantees the debt is referred to as the surety, or as the guarantor.
The three parties involved in a Surety Bond are usually referred to as the debtor, creditor, and surety.
In some cases though, the surety can be discharged from his liability. We will now tell you about 8 very important circumstances in which this can happen.
If the surety passes away, if there is no already existing contract regarding his death, he will no longer have to pay anything and is discharged from his liability.
Any of his legal representatives or heirs/survivors would not be responsible for continued payments and the surety’s involvement would come to a close. If the death is unexpected, this is also taken into account and not used against him.
If the principal debtor and the creditor make any alteration or variance in the terms of the contract without the consent of the surety, the surety is discharged from his contract as changes were made without his permission.
An example: Debtor, creditor, and surety come to a fixed agreement on the amount of rent someone is paying and they are all aware of the terms and conditions.
Then, the debtor and creditor get together and make a new contract to up the price of the rent without the surety’s knowledge or consent.
The surety would then be discharged from his liability as to the debtor and the creditor made a variance in the contract without his knowledge or consent.
If the creditor commits any act that isn’t consistent with the rights of the surety, the surety is discharged from his liability. This circumstance also covers the creditor's failure to perform any acts of his duty that are required by the surety.
If the contract becomes invalidated, the surety is discharged from his liability. A contract of guarantee becomes invalid in the following circumstances:
If any part of security is lost by the creditor, including parts with any of the security without the surety’s consent, the surety becomes discharged from his liability to the extent of the security which was lost.
It is irrelevant whether the surety was aware or unaware of such security.
If the creditor arrives at a settlement with the debtor, without the consent of the surety, the surety is discharged from his liability. This also covers if the creditor promises to give the debtor more time or promises not to sue him.
It is important to note with this circumstance that if a contract to give more time to pay the debt by the creditor is made with a third party/person, the surety is not discharged.
Novation, in this example, is the act of entering into a fresh contract between either the same parties or other parties and is another form of discharging a surety from his liability.
If the parties agree to substitute their existing contract with a new contract, the original contract is no longer needed and becomes invalid.
This makes the surety discharged from his original liability. For the surety, a fresh contract would have to be drafted and agreed upon also.
If the liability has already been accrued, the guarantee cannot usually be revoked. However, Section 130 provides the surety with the ability to revocation of the existing guarantee.
Once it is acted about an “ordinary guarantee” of a single and specific debt cannot be revoked. But a “continuing guarantee” can be revoked at any time by the surety, provided he has given notice to the creditor.
If the surety does this, any future transitions supplied by the surety will no longer be valid and he will be discharged from his liability.
In order for a surety to be discharged from his liability, these circumstances are some of the only ways he can be.
It is important when entering a contract or Surety Bond such as this that you all agree to a contract and stick to it.
Any new information or materials should be reviewed and discussed by all parties and you need to make sure that you are all on the same page in regards to where you stand.
The surety, debtor, and creditor must keep communication lines open and follow the contract they have agreed to down to the letter in order for the surety not to be discharged from his liability.
