KSLU Solved Question Papers
Contract II
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 5
2015 Jun Examination
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Mumbai
B.A. LL.B. (Five Years) Sem 5 Contract II 2015 Jun Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2015 Jun examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2015 Jun examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1Define contract of guarantee and discuss the modes of discharge of surety from liability.[16]
Answer
For full marks, cover: the definition in section 126 and the three parties; discharge by revocation (sections 130 and 131); discharge by the creditor's conduct (sections 133, 134, 135, 139 and 141); discharge because the guarantee was invalid (sections 142 to 144); what does not discharge (sections 136 to 138); Amrit Lal Goverdhan Lalan and State Bank of Saurashtra; the illustrations to sections 133, 134 and 139; a worked example.
What a contract of guarantee is
Section 126 of the Indian Contract Act 1872 defines it: "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 the surety. The person whose default is guaranteed is the principal debtor. The person to whom the guarantee is given is the creditor. A guarantee may be oral or written.
Under section 128 the surety's liability is co-extensive with that of the principal debtor. Bank of Bihar Ltd. v. Damodar Prasad, AIR 1969 SC 297, held that the creditor may proceed against the surety without first suing the principal debtor.
"Discharge" means the surety is freed from liability. It happens in three broad ways.
1. Discharge by revocation
- By notice (section 130). A continuing guarantee covers a series of transactions. The surety may revoke it "at any time" as to future transactions by notice to the creditor. He stays liable for transactions already entered into.
- By death (section 131). The surety's death revokes a continuing guarantee as to future transactions, unless the contract says otherwise. His estate stays liable for past transactions.
A specific guarantee, given for one transaction, cannot be revoked once that transaction has been entered into.
2. Discharge by the creditor's conduct
The law protects the surety because he never agreed to carry a risk larger than the one he accepted. Whatever the creditor does to change, release or weaken the position the surety agreed to answer for may free him.
(a) Variance in the terms (section 133). "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."
- In illustration (a), a bank manager's salary is raised and he is made liable for a share of overdraft losses, without his surety's consent. The surety is discharged.
- In illustration (c), a clerk paid a fixed salary is switched to commission without the surety's knowledge. The surety is not liable for later misconduct.
- In illustration (e), a loan due on 1 March is paid out on 1 January. The surety is discharged, because the creditor could now sue earlier than the surety agreed.
(b) Release or discharge of the principal debtor (section 134). The surety is discharged by any contract releasing the principal debtor. He is also discharged by any act or omission of the creditor whose legal result is the debtor's discharge.
- In illustration (a), the debtor assigns his property to his creditors in return for their releasing him. The surety is discharged.
- In illustration (c), a builder's surety is discharged because the owner failed to supply the timber he had promised.
(c) Composition, time or promise not to sue (section 135). A contract between creditor and principal debtor by which the creditor compounds with the debtor discharges the surety. So does a binding promise to give the debtor time, or not to sue him. The exception is where the surety assents. The contract must be with the debtor; a promise to a third person does not count (section 136).
(d) Act or omission impairing the surety's eventual remedy (section 139). The creditor may do an act inconsistent with the surety's rights, or omit a duty he owes the surety. If that impairs the surety's eventual remedy against the debtor, the surety is discharged.
- In illustration (a), a shipbuilder's employer prepays the last two instalments without the surety's knowledge. The surety is discharged.
- In illustration (c), an employer promises to check his apprentice's cash monthly and does not, and the apprentice embezzles. The surety is not liable.
(e) Loss of security (section 141). The surety is entitled to every security the creditor held when the guarantee was given, whether he knew of it or not. If the creditor loses it, or parts with it without the surety's consent, the surety is discharged to the extent of its value. In illustration (a), a landlord cancels his mortgage on the tenant's furniture, and the surety is discharged to the value of the furniture.
The two leading cases
Amrit Lal Goverdhan Lalan v. State Bank of Travancore, AIR 1968 SC 1432, shows that these grounds are separate. A firm had a cash credit of Rs 1,00,000 secured by goods pledged with the bank, and the appellant guaranteed it. Goods worth Rs 35,690 went missing from the pledge through the bank's negligence. The surety pleaded variance and the giving of time. The Supreme Court rejected both. Internal entries in the bank's books were not a variance under section 133. Time given to make up the stock was not time to pay under section 135. But the surety succeeded under section 141. The bank had lost part of the security, so he was discharged to that extent.
State Bank of Saurashtra v. Chitranjan Rangnath Raja, AIR 1980 SC 1528, applied the same rule more strongly. A cash credit of Rs 75,000 was secured by 5,000 tins of groundnut oil under the bank's lock and key, and by the surety's guarantee. The tins were lost through the bank's negligence in custody. The Supreme Court held the surety discharged under sections 139 and 141 read together. It did not matter that the bank called the guarantee an independent contract.
3. Discharge because the guarantee was invalid
- Misrepresentation (section 142). A guarantee obtained by misrepresentation by the creditor, or with his knowledge and assent, about a material part of the transaction is invalid.
- Concealment (section 143). A guarantee obtained by keeping silence about material circumstances is invalid. In illustration (a), an employer does not tell the surety that the clerk has already failed to account. The guarantee is invalid.
- Co-surety not joining (section 144). A guarantee may be given on the term that the creditor will not act until another person joins as co-surety. If that person does not join, the guarantee is not valid.
What does NOT discharge the surety
| Section | Situation | Result |
|---|---|---|
| 136 | Creditor agrees with a third person, not the debtor, to give time | Surety not discharged |
| 137 | Creditor merely forbears to sue the debtor | Surety not discharged |
| 138 | Creditor releases one co-surety | Other co-sureties not discharged |
The illustration to section 137 makes the point. C does not sue B for a year after the debt is payable, and A, the surety, is not discharged.
A worked example
A bank lends Rs 10 lakh to a trader, repayable in one year, and S guarantees the loan. The bank also takes a pledge of the trader's stock worth Rs 4 lakh.
- The bank and the trader agree, without telling S, to double the interest rate. S is discharged as to later transactions (section 133).
- The bank agrees with the trader to give him two more years to pay. S is discharged, unless he assented (section 135).
- The bank merely waits a year without suing. S is not discharged (section 137).
- The bank carelessly loses the pledged stock. S is discharged to the extent of Rs 4 lakh (section 141).
Discharge by the ordinary law
The surety is also discharged when the principal debt itself ends. This happens when the debtor pays or performs, or when the main contract is discharged by agreement or becomes void. The surety's liability follows the principal debt under section 128.
Conclusion. A contract of guarantee is a promise under section 126 to answer for a third person's default. The surety is discharged by revocation of a continuing guarantee (sections 130 and 131). He is also discharged by the creditor's conduct (sections 133, 134, 135, 139 and 141). He is also freed where the guarantee was invalid (sections 142 to 144). Mere forbearance, time given through a third person or release of a co-surety does not free him. The two Supreme Court cases show that a careless creditor who loses the security loses the surety too.
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