Q: "B" Contracts to build a ship for "C" for a given sum, to be paid by instalments as the work reaches certain stages. "A" becomes the Surety to "C" for "B"s - due performance of the contract. "C" without the knowledge of "A" prepays to "B" the last two instalments. Discuss A's position ?

Ans: Sec. 133 of the Indian Contract Act, 1872 is regarding variance in terms of contract'. It states that if any variance is made in the terms of the contract without the consent of the Surety, then the Surety is discharged for the future transactions (which is the reason for the Surety being termed as a favoured debtor.

Sec. 135 states further that if the creditor and the principal debtor make a collusive agreement, then the Surety is discharged. 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.

Keeping the above legal provision in view, 'A', the Surety of 'C' for payment to 'B'for building the ship, is discharged of his surety-ship as regards the last two instalments since the prepayment of the instalments was not within his knowledge. The payments were agreed to be made as per the stage of completion of the building of the ship whereas C had prepaid the last two instalments notwithstanding the stage of completion without the knowledge of A.