Continuing Guarantee: Nature and Revocation

The present article is written by Priyanka Choudhary, currently pursuing BALLB from Mody University of Science and Technology, Lakshmangarh, Rajasthan.

INTRODUCTION

As per Section 6 of the Indian Contract Act, 1972 a “Contract of Guarantee” may be a sort of a contract that deals with the performance of the promise, or discharge of the liability and breaches of a 3rd party just in case of their default. A guarantee is often either in oral or written form. Contract of Guarantee deals with 3 parties, wherein the surety is that the one who acts because the party to fulfill the obligations and liabilities on a part of the defaulting party. The three parties to the Contract of Guarantee are:

Surety – the party who gives the guarantee.
Principal Debtor – the party in whose default the guarantee is given.
Principle Creditor – the party to whom the guarantee is given.

For example – T, comes in contract with Y to deliver to him 10 litres of fruit juice a day, provided if G acts as a surety to be liable on behalf of Y if the latter fails to form the payment for 10 litres of fruit juice to T. Now, if Y fails to form payment to T, then G will need to make the required payment.

WHAT IS CONTINUING GUARANTEE?

Under section 129 of the Indian Contract Act of 1872, the definition is of continuing guarantee is given which says an unbroken guarantee may be a sort of guarantee which applies to a series of transactions. It applies to all or any transactions entered into by the principal debtor until it’s revoked by the surety. Therefore Bankers always like better to have an unbroken guarantee in order that the guarantor’s liability isn’t limited to the first advances and would also reach all subsequent debts.

The most important feature of a unbroken guarantee is that it applies to a series of separable, distinct transactions. Therefore, when a guarantee is given for a whole consideration, it can’t be termed as a unbroken guarantee.

These guarantees have a group deadline and time-frame or are for a hard and fast duration, maybe one month, one year, etc. Continuing Guarantee doesn’t come to an end after the discharge of one promise or repayment of single debt or transaction. it’s within the hands of the Surety to form sure that the liability regarding time or amount is often limited consistent with his wishes and interest. Under Continuing Liability, Surety is responsible for unpaid and left balance at the top of the guarantee.

It is of two types, (i) Prospective (ii) Retrospective. The previous one is given for future debt(s) and therefore the latter one is given for existing debt(s).

Illustration

A person named ‘G’ gave his house to ‘L’ on a lease for ten years on a specified lease rent. ‘V’ guaranteed that ‘L’, would fulfill his obligations. After seven years ‘L’ stopped paying the lease rent. ‘G’ sued him for the payment of rent. ‘V’ then gave a notice revoking his guarantee for the remaining three years. ‘V’ wouldn’t be ready to revoke the guarantee because the lease for ten years is a whole indivisible consideration and can’t be classified as a series of transactions and hence isn’t an unbroken guarantee.

SPECIFIC AND CONTINUING GUARANTEE

(i) Specific Guarantee: It is a kind of guarantee which is given for a specific transaction or debt. For example – ‘V’ borrowed Rupees 1 lakh from Yes Bank. The guarantee was given by ‘P’ for the repayment of the loan. ‘P’s liability ends as soon as ‘V’ repays the amount of loan to Yes Bank.

(ii) Continuing Guarantee: It is a type of guarantee given for more than one transaction. For example – ‘P’ guarantees payment to ‘V’, a coffee-dealer, in the amount of Rs. 5000, for any coffee he may supply to ‘L’ from time-to-time. ‘V’ supplies ‘L’ with coffee to above the value of Rs. 5000, and ‘L’ pays ‘V’ for it. Afterward, ‘V’ supplies ‘L’ with coffee to the value of Rs. 5000. However, ‘L’ fails to pay and the guarantee given by ‘P’ was a continuing guarantee, and thus, he is accordingly liable to ‘V’ to the extent of Rs. 5000.

NATURE OF CONTINUING GUARANTEE CONTRACT

The vital aspect of a unbroken Guarantee is that it’s applicable and pertains to a series and multitudes of separate, and distinct transactions. Therefore, when a guarantee is given for an entire consideration, it can’t be defined as an unbroken guarantee.

In the case of Nottingham Hide Co vs. Bottrill, it had been stated that “the facts, circumstances, and intention of every case has got to be looked into for determining if it’s a case of continuous guarantee or not. If the contracts are entered into by misrepresentation or fraud made by the creditor regarding material circumstances or by concealment of fabric facts by the creditor, the contract are going to be considered invalid and void. Once the guarantor commits to his liability by paying the specified debt to the creditor, he steps into the shoes of the creditor and avails all the rights that the creditor had over the principal debtor.”

All transactions entered by the principal debtor until they’re revoked by that security shall be subject to a unbroken guarantee. A guarantee for future transactions are often revoked at any time by notification to the debtors. However, for transactions entered before such cancellation of the guarantee the liability of a guarantor shall not be reduced.

LIABILITY OF THE SURETY CONTINUING GUARANTEE CONTRACT

Under Section 128 of the Indian Contract Act, 1872, the principle of Surety’s liability is given which states that the liability of the Surety is co-extensive alongside that of the Principal Debtor unless it’s otherwise provided by the contract. The Surety continues to be responsible for transactions given by the Creditor to the Principal Debtor. The Surety is responsible for any amount which can become due from time-to-time dealings or transactions between the Creditor and therefore the Principal Debtor. But whenever the Surety revokes his guarantee, he discharged from his liability. Liability of the Surety is secondary to the contract and consequently, if the principal debtor isn’t liable, the surety also will not be liable.

DIFFERENT MODES OF REVOCATION CONTINUING GUARANTEE CONTRACT

By giving a Notice – When a transaction has been made and it’s ongoing, the Surety’s liability with regards thereto particular transaction can’t be canceled or revoked. It applies to future transactions only. The liability cannot be revoked or waived off by the Surety just by giving notice. If a contract of guarantee involves a clause of a certain time duration that’s required to be met out before the contract is often revoked or stand canceled, then the Surety cannot avoid the liabilities, at no chance.

In the case Offord v. Davies, the surety had guaranteed the repayment of bills that were to be discounted by the Creditor for the Debtor. It had been to be finished a period of 2-year up to the quantity of $800. The Creditor continued to discount the bills even when the Surety had revoked his guarantee before any bill was discounted, the Debtor defaulted on paying bills. The court held that after the surety revoked for the bills he wasn’t responsible for it as it was discounted after he revoked the guarantee.

On the death of the Surety – A continuing guarantee contract involves an end by the death of the Surety. As regards future transactions, it automatically stands revoked. However, the Surety’s heirs are often held responsible for those transactions that were made before his death. If there’s any provision within the respective contract of guarantee stating that on Surety’s death, his property or legal representatives or heirs or agents are often held responsible and responsible for any liability or breach incurred, then it might be a contract contrary to the meaning of Section 131 of the Indian Contract Act, 1872, and therefore the guarantee isn’t revoked even after the death of the Surety.

In Durga Priya Chowdhury v. Durga Pada Roy, the Surety gave a guarantee for the gathering and therefore the payment of rent of Creditor’s Zamindari by the Principal Debtor. An amount of Rs. 700 alongside the consideration of the utilization of the Principal Debtor as an agent was put forth. Later, on the death of the Surety, the Principal debtor defaulted and therefore the creditor sued him and the legal representatives of the Surety. The legal representatives of the Surety pleaded that being an unbroken guarantee, it stood canceled automatically with the death of the Surety. “The provisions of the guarantee stated that the heirs and therefore the representatives of the Surety would be bound and liable by the terms of the guarantee within the same way because the surety was bound by it. The learned judges held that the guarantee wasn’t revoked even after the death of the Surety and his heirs were liable.”

Changes made in the terms and conditions of the contract without Surety’s Consent – A contract of continuous guarantee is revoked when there’s any change and amendment made within the terms and conditions of the acceptance between the Principal Debtor and therefore the Creditor without the consultation and consent of the Surety. The Surety is free of his liability on the furtherance of the transaction to the variations made.

In the case of Bishwanath Agarwal vs. depository financial institution of India, the Surety executed an unbroken guarantee up to the extent of Rs. 1,75,000 for securing the loan amount and interest payable by the Principal Debtor to the creditor from time to time. The Debtor defaulted in paying the loan and overdraws were made beyond that limit within the same loan account without the consent of the Surety. “The Surety was held liable only up to Rs. 1,75,000 and he wasn’t bound for the opposite overdraws allowed by the bank to the Debtor without the consent of surety.”

CONCLUSION

Contract of continuous Guarantee is defined under the Indian Contract Act, 1972. the essential function here is to guard the Creditor against any quite loss arising from the breach of contract on a part of the Principal Debtor. Whether it is specific or continuing, every contract of guarantee involves three parties- Principal Debtor, Creditor, and Surety. The burden of liability of the Principal Debtor. It’s essential on a part of the Surety to take care while getting into such a contract. Contract of continuous Guarantee plays a really prominent role within the English Law also. Thus, it becomes vital for a contract of guarantee to exist so as to guard the creditor.

BIBLIOGRAPHY

Avtar Singh, Contract & Specific Relief Act (12^th Edition).
Continuing guarantee. http://www.legalserviceindia.com/legal/article-3950-continuing-guarantee-nature-and-modes-of-revocation.html.
Rachit Garg, Continuing guarantee: nature and modes of revocation, https://blog.ipleaders.in/continuing-guarantee-nature-modes-revocation/.
Srishti Chawla, What is Contract of Guarantee, https://blog.ipleaders.in/contract-of-guarantee/.

LATEST POSTS