This article has been written by Tanisha Gautam, pursuing a Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.
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As per Section 6 of the Indian Contract Act, 1972 a “Contract of Guarantee” is a type of a contract that deals with the performance of the promise, or discharge of the liability and breaches of a third party in case of their default. A guarantee can be either in oral or written form. Contract of Guarantee deals with 3 parties, wherein the surety is the one who acts as the party to fulfil the obligations and liabilities on 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 orange juice every day, provided if G acts as a surety to be liable on behalf of Y if the latter fails to make the payment for 10 litres of orange juice to T. Now, if Y fails to make payment to T, then G will have to make the necessary payment.
The article talks about a part of the Contract of Contract Act, specifying in detail what continuing guarantee means and what are its intricacies. The article states the nature of continuing guarantee, the surety’s liabilities and the modes of revocation of a continuing guarantee contract.
What is the continuing guarantee?
As per Section 129 of the Indian Contract Act, 1972, a Guarantee that extends to a series and multitudes of transactions is known as a “Continuing Guarantee” in a contract. These guarantees have a set time limit and time frame or are for a fixed duration, maybe one month, one year, etc. Continuing Guarantee does not come to an end after the discharge of a single promise or repayment of single debt or transaction. It is in the hands of the Surety to make sure that the liability regarding time or amount can be limited according to his wishes and interest. Under Continuing Liability, the Surety is liable for unpaid and left balance at the end of the guarantee.
Continuing Guarantee is of two types, (i) Prospective (ii) Retrospective. The former one is given for future debt(s) and the latter one is given for existing debt(s).
Illustrations of continuing guarantee
- T, in consideration that Y will employ G in collecting the rent of Y’s zamindari, promises Y to be responsible, to the amount of Rs. 50000 for collection and payment by G of the rents and therefore, this is a Continuing Guarantee Contract.
- T guarantees payment to Y of the price of ten sacks of wheat, to be delivered by Y to G and to be paid for the same in a month. Y delivers ten sacks to G. G pays for them. Later, Y delivers eight sacks to G which G did not pay for. The guarantee given by T was not a continuing guarantee, and thus he is not liable for the price paid for the eight sacks.
Specific and continuing guarantee
There are two types of Contracts of Guarantee:
(i) Specific Guarantee;
(ii) Continuing Guarantee.
The former is a type of guarantee which is given for a specific transaction or debt. For example – A borrowed Rupees 1 lakh from Yes Bank. The guarantee was given by C for the repayment of the loan. C’s liability ends as soon as A repays the amount of loan to Yes Bank. On the other hand, the latter is a type of guarantee which is given for more than a single transaction.
For example – A guarantees payment to B, a coffee-dealer, in the amount of Rs. 10000, for any coffee he may supply to C from time-to-time. B supplies C with coffee to above the value of Rs. 10000, and C pays B for it. Afterward, B supplies C with coffee to the value of Rs. 20000. However, C fails to pay and the guarantee given by A was a continuing guarantee, and thus, he is accordingly liable to B to the extent of Rs. 10000.
Nature of continuing guarantee contract
The vital aspect of a Continuing Guarantee is that it is applicable and pertains to a series and multitudes of separate, and distinct transactions. Therefore, when a guarantee is given for a whole consideration, it cannot be defined as a continuing guarantee. ‘
In the case of Nottingham Hide Co vs. Bottrill, it was stated that “the facts, circumstances, and intention of each case has to be looked into for determining if it is a case of continuing guarantee or not. If the contracts are entered into by misrepresentation or fraud made by the creditor regarding material circumstances or by concealment of material facts by the creditor, the contract will be considered invalid and void.
Once the guarantor commits to his liability by paying the required 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 are revoked by that security shall be subject to a continuing guarantee. A guarantee for future transactions can be 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
The principle of Surety’s liability is given down under Section 128 of the Indian Contract Act, 1972 which states that the liability of the Surety is co-extensive along with that of the Principal Debtor unless it is otherwise provided by the contract. The Surety continues to be liable for transactions given by the Creditor to the Principal Debtor. The Surety is liable for any amount which may become due from time-to-time dealings or transactions between the Creditor and the Principal Debtor. The Surety is discharged from his liability when he revokes his guarantee. Liability of the Surety is secondary to the contract and consequently, if the principal debtor is not liable, the surety will also not be liable.
Different modes of revocation continuing guarantee contract
- By giving a Notice – when a transaction has been made and it is in progress, the Surety’s liability with regards to that particular transaction cannot be cancelled or revoked. It applies to future transactions only. A Surety cannot revoke/waive off his liability just by giving notice. If a contract of guarantee involves a clause of certain time duration that is required to be met out before the contract can be revoked or stand cancelled, then at no chance can the Surety cannot avoid the liabilities.
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 was to be done for a period of 1-year up to the amount of $600. 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. “It was held that the surety was not liable for the bills discounted after he revoked the guarantee.”
- On death of the Surety – a continuing guarantee contract comes to an end by the death of the Surety. It automatically stands revoked as regards to future transactions. However, the Surety’s heirs can be held liable for those transactions that were made prior to his death. If there is any provision in the respective contract of guarantee stating that on Surety’s death, his property or legal representatives or heirs or agents can be held responsible and liable for any liability or breach incurred, then it would be a contract contrary to the meaning of Section 131 of the Indian Contract Act, 1972, and the guarantee is not revoked even after the death of the Surety.
In Durga Priya Chowdhury v. Durga Pada Roy, the Surety gave guarantee for the collection and the payment of rent of Creditor’s Zamindari by the Principal Debtor. An amount of Rs. 600 along with the consideration of the employment of the Principal Debtor as an agent was put forth. Later, on death of the Surety, the Principal debtor defaulted and the creditor sued him and legal representatives of the Surety. The legal representatives of the Surety pleaded that being a continuing guarantee, it stood cancelled automatically with the death of the Surety. “The provisions of the guarantee stated that the heirs and the representatives of the Surety would be bound and liable by the terms of the guarantee in the same way as the surety was bound by it. The learned judges held that the guarantee was not 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 continuing guarantee is revoked when there is any change and amendment made in the terms and conditions of the contract in between the Principal Debtor and the Creditor without the consultation and consent of the Surety. The Surety is freed from his liability on the transactions furtherance to the variations made.
In the case of Bishwanath Agarwal vs. State Bank of India, the Surety executed a continuing guarantee up to the extent of Rs 2,50,000 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 in the same loan account without the consent of the Surety. “The Surety was held liable only up to Rs 2,50,000 and he was not bound for the other overdraws allowed by the bank to the Debtor without the consent of surety.”
Contract of Continuing Guarantee is defined under the Indian Contract Act, 1972. The basic function here is to protect the Creditor from any kind of loss arising from the breach of contract on part of the Principal Debtor. Every Contract of guarantee, be it specific or continuing involves three parties- Principal Debtor, Creditor, and Surety. The burden of liability of the Principal Debtor. It is essential on part of the Surety to be careful while entering into such a contract. Contract of Continuing Guarantee plays a very prominent role in the English Law as well. Thus, it becomes very important for a contract of guarantee to exist in order to protect the creditor.
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