Negotiable Instruments Act, Section 39

Negotiable Instruments Act, Section 39: Suretyship

Section 39 of the Negotiable Instruments Act, 1881 deals with the principle of suretyship in relation to negotiable instruments, particularly bills of exchange that have been accepted. 

This provision explains the effect of certain agreements between the holder and the acceptor on the liability of other parties, and it provides a mechanism by which the holder may preserve his rights against such parties.

1. Principal Debtor and Sureties

In the case of an accepted bill of exchange, the acceptor is regarded as the principal debtor, while the drawer and indorsers are treated as sureties for the acceptor. 

Their liability is secondary and arises upon default by the acceptor, and the relationship among these parties resembles that of principal debtor and surety under general contract law.

2. Effect of Sections 134 and 135 of the Indian Contract Act, 1872

Section 39 refers to Sections 134 and 135 of the Indian Contract Act, 1872, which provide that a surety is discharged if the creditor releases the principal debtor or enters into a binding agreement with him to give time for payment or to compound the debt without the surety’s consent. 

In the context of a bill of exchange, the acceptor is treated as the principal debtor while the drawer and indorsers act as sureties. 

Therefore, if the holder enters into such a contract with the acceptor, the drawer and indorsers would ordinarily be discharged from liability.

3. Rule Under Section 39 Reservation of Rights

Section 39 modifies the above general rule in the context of negotiable instruments. 

It provides that when the holder of an accepted bill enters into a contract with the acceptor which would otherwise discharge the other parties under the Contract Act, the holder may expressly reserve his right to proceed against those other parties.

If the holder clearly states that, despite granting time or entering into an arrangement with the acceptor, he reserves his rights against the drawer and indorsers, then those parties are not discharged.

4. Requirement of Express Reservation

The key requirement under Section 39 is that the reservation of rights must be express and clearly indicate that the holder does not intend to release or discharge the other liable parties.

A mere understanding or implication is insufficient, and the reservation must be explicit to preserve the liability of the drawer and indorsers.

5. Purpose of the Provision

The purpose of Section 39 is to protect the interests of the holder and to maintain the negotiability and enforceability of bills of exchange. 

It prevents the unintended discharge of secondary parties merely because the holder has made an arrangement with the principal debtor.

At the same time, it ensures fairness by requiring the holder to clearly declare his intention to preserve his rights.

6. Commercial Significance

This provision balances two important principles by protecting sureties under general contract law while also maintaining certainty and security in negotiable instrument transactions. 

By allowing an express reservation of rights, the Act enables the holder to negotiate with the acceptor without automatically losing remedies against other liable parties.