|Name of the Case||Bonar v. Macdonald|
|Citation||3 H. L. C. 226|
|Year of the Case||1850|
|Appellant||Bonar (Trustee of the Edinburgh and Leith Bank)|
|Respondent||William Macdonald and Others|
|Act Involved in India context||Indian contract Act, 1872|
|Important Sections (relevant to the Indian Act)||Section 133|
In a contract of guarantee, the surety is liable to pay the loss in case the principal fails to discharge his obligation properly, there are also several modes of discharge of surety liability. In this case, the court states the opinion regarding the discharge of surety liability, in case any material variance takes place in the terms of the agreement to which sureties have subscribed, without their consent or knowledge.
A guarantee means a promise to fulfill the promise of others in case of default of his promise by that other. A contract of guarantee is generally made in any commercial transaction. This is because in case the first person fails to perform his obligation as per the term of the contract the second person who has given guaranteed act as a second pocket and discharge the liability incurred by the first person.
In English law, a guarantee is defined as “a promise to pay for the debt, default or failure of another”. “Guarantees are a backup when the principal fails the guarantee act as second pockets”.
Background of the Case
The case was an appeal against a judgment of the First Division of the Court of the session, it is related with the contract of guarantee in which securities liability is in question as to parties to the contract made the variance in terms of the contract, without informing the securities who were respondent in this case.
Facts of the Case
In the month of January 1839, David Baird had obtained the appointment of teller in the bank, and a bond was executed. The bond constitutes David Baird as principal, William Macdonald, Archibald Torrance, and William Ballantyne as sureties for Baird. And hereby declaration was made that “I David Baird as principal and we, the said sureties and full debtors, bind and oblige ourselves, to make good, refund, and pay to the said Edinburgh and Leith Bank, or the manager for sustaining or incurring a said loss, damage, or expenses, with a fifth part more of penalty over and above the payment, and the legal interest of all such loss, damage, or expenses incur by or through the principal i.e David Baird.” The sureties also declared that “we, the said cautioners, are and shall only be liable, by virtue of this present bond of cautionary.”
After some time, Baird was appointed as a manager of a branch bank at Dalkeith. A memorandum effected with the necessary changes in the original bond. The change thus made was duly communicated to the sureties.
In April 1840 another change took place in Baird’s situation; his salary was raised and liabilities were increased, and he agreed to undertake the liability of one-fourth of the losses on the discount at the bank, on receiving a proportionate increase of pay. This change was not communicated to his sureties.
During the year 1840 and 1850, Baird allowed a customer of the bank to overdraw his account, being the amount of his deposits, and the customer had given a bond to cover such advances, Baird well knew that the bond, which was in his possession, though executed by the customer, but was not executed by any surety on his behalf. After some time, the customer incurred a debt of one thousand pounds.
To recover the debt appellant as the trustee of the bank brought an action against the respondent, who was Baird’s sureties.
Whether the surety is bound to pay the amount of debt as variation in the bond takes place without the knowledge or consent of sureties or is it material variation?
Arguments on behalf Appellant
In the case of a bill, the materiality of the alteration is considered in relation to the acts and liabilities of other parties, – a fact which shows that the rule against alterations is one which is not inflexible, but which does admit of exceptions. The same observations may be applied to bonds.
It was contended that there was no substantive alteration made in the situation of Baird, which will release the sureties from their liability, for they assented to his performing his duties as a bank agent, as they guaranteed the bank against loss from his conduct in the branch bank.
In Mactaggart v. Watson, the house held that the negligence of the person to whom the bond was given, by which negligence the principal obligor enabled the debt regarding which his surety was sued, it does not lead to discharge his surety.
It was further contended that the loss does not arise from a defect of judgment in erroneously discounting, but due to improperly allowing a customer to overdraw his account. This is a matter of conduct for which the sureties should be answerable.
In Hamilton v. Watson, it was held that employment of funds raised on security different from that which the surety expected, will not relieve him from the effect of his bond. As the former agreement remains in force, the sureties are liable for the conduct of the principal.
Arguments on behalf of Respondent
It was contended that an alteration in a bond does vitiate the bond and it is clearly established, and cases which are cited on the other side do not affect this fact.
In Rees v. Berrington, the doctrine was laid down which has been never impeached, that there the obligee in a bond with the surety, and changes in the bond without communication with the surety, discharged the liability of the surety.
In Nisbet v. Smith, where the creditor sued the principal, but, without the knowledge of the surety, a warrant of attorney took from him, and gave him time, and therefore held that surety has discharged from the liability.
The contention was made that this case is stronger, as the alteration has been made in the deed itself. The alteration is a substantive one, it constituted the principal obligor as an agent to the banking house, the nature of the contract was changed and it would not incur any liability on the part of the sureties.
Related Provision under Indian Contract Act, 1872
Section 133, Indian Contract Act,  Discharge of surety by variance in terms of the contract
Any variance made without the surety’s consent, in terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.
It was held that sureties entered as a party in the bond for the faithful discharge of the duties of the principal as a bank agent, these were the terms of the surety obligation. Thereafter bank entered into an agreement with the Baird, whereby he became liable for one-fourth of the losses arising from the discount, and his salary was increased, but the sureties were not informed regarding this agreement. Baird also objected to apply to his cautioners, and they remain in ignorance, and certainly not a party to, this alteration in the contract which took place between the Baird and his employers.
The Court ruled that in Evans v. Whyle, Archer v. Hale, Whitcher v. Hall,from which the rule extracted that, any variance in the terms of the agreement to which surety has subscribed, which is made without the surety’s knowledge, which amount to the substitution of a new agreement for a formal one, even though the original agreement may, notwithstanding such variance, he substantially performed, will discharge the surety.
The court held that in respect of alteration made by the bank in Baird’s position, the sureties were not liable for the losses caused by the misconduct of the agent, as the variation in the terms of the contract which is obviously material variation was made without considering surety.
Lastly, the appeal was dismissed, with costs.
From this case, it can be inferred that any material changes in the terms of the agreement to which surety has subscribed, without communicating the surety can discharge the duty of the surety.
 (2 Ves., jun. 540): https://en.wikisource.org/wiki/Page:Harvard_Law_Review_Volume_9.djvu/84
 (5 Bing. 485; Moody and M. 468)
 (4 Bing. 464)
 (5 B.and C.269; Dowl. And Ryl. 22)