Report No. 11

91. Section 39.-

No change is recommended in section 39.

The section gives the holder the power to expressly reserve his rights to charge the other parties when he enters into such a contract with the acceptor as would have the effect of discharging the surety under section 134 or 135 of the Contract Act. This variation from the law in section 134 or 135 of the Contract Act is restricted only to the case of a contract between the holder and the acceptor of a bill of exchange. It was, however, suggested that this liberty to reserve the right to charge the other parties and prevent the discharge of the surety when there is an alteration of the contract between the principal debtor and the principal creditor should be extended to other cases also, such as the holder and the maker of a promissory note.

Curiously, in a decision of the Madras High Court1 it was held that section 39, though it is confined to bills of exchange, has not abrogated the common law principle, namely, that when a contract between the principal creditor and the principal debtor which discharges the latter reserves the right of the creditor against the surety, the surety is not discharged by the variation of the contract between the principal debtor and the creditor. This view makes the section otiose. Neither section 134 nor section 135 of the Contract Act recognises such a right of reservation.

1. Bank of Hindustan v. Govindarajulu, (1933) 57 Mad 482.

In fact, if the law has been correctly laid down in the Madras decision, there is really no need to extend the provisions of section 39 to other cases. If, on the other hand, the law in India be different from the English common law, we see no reason to extend the privilege to other cases as it would result in great hardship to the surety if the entire burden were to be thrown upon him either by discharging the principal debtor or by giving up rights against him in any other manner. The right of contribution which accrues under section 140 of the Contract Act to the surety after he discharges the debt is no consolation to him if he should be treated as the principal debtor. Under section 134, the surety is automatically discharged whether there is a reservation or not. We think, therefore, that there is no justice or equity in favour of the extension of the scope of section 39 to other cases.