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Continuing Guarantee And Its Revocation

The Contract of Guarantee, as enshrined in Section 126, Indian Contract Act, 1872, enshrines the provisions for pivotal financial transactions in today's world. At the same time, it ensures a mechanism to secure debts and liabilities. This legal provision defines a Contract of Guarantee as an "agreement wherein a third party undertakes to fulfill the promise or discharge the liability of a debtor in the event of the debtor's default. This arrangement involves three essential entities.

Principal Debtor-individual for which assurance is made.

Creditor-party who is provided with the guarantee

Surety-the party offering the guarantee.

Section 126 of the Act provides comprehensive definitions for each of these roles, establishing a clear framework for the understanding and execution of guarantee contracts.

Furthermore, the Contract of Guarantee is categorized into two types:
  1. Specified Guarantee:
    A specified guarantee is tailored for a particular transaction and ceases to be in effect once that transaction concludes. This type of guarantee ensures that Surety's responsibility is limited to the specific terms and conditions of the designated transaction.
  2. Continuing Guarantee:
    Continuing Guarantee extends its coverage over multiple transactions spanning a period of time. This type of guarantee is enduring and underscores the Surety's commitment to cover liabilities arising from various transactions during the agreed-upon timeframe.

The Contract of Guarantee provides a legal mechanism that not only protects creditors by ensuring repayment in case of default but also facilitates smoother financial transactions by instilling confidence among parties involved in lending and borrowing arrangements. It serves as a vital tool in the domain of contract law, promoting trust and accountability in the dynamic landscape of economic transactions.

Continuing Guarantee

Section 129 of Indian Contract Act, 1872 sheds light on intriguing concept of Continuing Guarantee, an aspect that sets itself apart from the more straightforward specific guarantee. Unlike its counterpart, a continuing guarantee doesn't confine itself to a solitary transaction but, rather, extends its coverage across a sequence of transactions. This distinctive feature implies that the contractual obligation persists beyond the culmination of a single transaction, encompassing a series of engagements spread over a period.

In practical terms, this means that surety remains obligated by provisions of guarantee for the entirety of series of transactions until the contract is terminated or revoked. It's crucial to note that even if the surety decides to revoke the guarantee, the liability extends to all the transactions initiated before the revocation. Interestingly, the surety cannot mitigate their responsibility for transactions undertaken before the termination of the contract, leaving them fully accountable for those dealings.

An illustrative case that elucidates the nuances of Continuing Guarantee is Kay Vs Groves. The contract in question stipulated, "I hereby agree to be answerable to K for the amount of five sacks of flour to be delivered to T, payable in one month." In this scenario, the initial five sacks were delivered and duly compensated by T. Subsequently, additional sacks were supplied within the same month, but T could not fulfill the corresponding payment. When the surety was pursued for the outstanding amount, court stated that guarantee did not qualify as a continuing guarantee.

Continuing Guarantee can be classified into two categories:
  1. Prospective Continuing Guarantee
    Prospective Continuing Guarantee is guarantee provided for future loans of the principal debtor from the creditor.
  2. Retrospective Continuing Guarantee:
    Retrospective Continuing Guarantee is guarantee provided for past debts obtained by the principal debtor from creditor.

Surety's Liability In Continuing Guarantee

Section 128 of Indian Contract Act, 1872 establishes a significant principle regarding the liability of sureties in contracts of guarantee. The provision asserts that surety's responsibility is coextensive with responsibility of principal debtor, unless the contract specifies otherwise. This means that as long as principal debtor remains accountable, the surety is also held accountable under the same terms.

There are two primary ways in which a surety can be relieved of their responsibilities in contract of guarantee.

The section provides that surety's responsibility is directly linked to principal debtor's responsibilities. Consequently, if principal debtor is dismissed from his responsibilities, surety is also dismissed from the same liabilities.

The surety can opt to revoke guarantee, providing another avenue for the termination of their obligation.

It is evident from Section 128 that surety's obligation is considered secondary to that of principal debtor. The surety becomes liable only when debtor fails to pay.

Discharge Of Surety From Liability

The surety can get rid of his liabilities through the following modes:
  1. Through Revocation:
    • A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor, says Section 130 of Indian Contract Act, 1872. The surety can repeal continuing guarantee at the time he pleases. He would be held accountable only for the dealings that happened before the revocation and not for the ones which happened after it. "Notice to the creditor refers to a distinct and explicit notice with the purpose of ending responsibility under the guarantee.
    • In case, Offord V Davies, the surety provided guarantee for paying off the bills to the creditor for 12 months not exceeding the amount of six hundred pounds. The surety revoked the guarantee before the first transaction itself. But the creditor kept discounting the bills and the debtor kept defaulting it. When the surety was sued for the repayment of bills, he contended that he revoked the guarantee even before the first transaction. The court held that the surety is not accountable for payments which took place after notice of revocation.
    • A guarantee provided for the ethical behavior of an employee is not a continuing one but a single transaction. The guarantee can not be revoked until he continues to be employed in the employment.
    • Whether guarantee for the payment of a rent is a continuing one or not depends on the facts and circumstances of case.
    • In Windfield V De St. Coin, it was held that revocation of guarantee by the employer relating to the deposition of rent of servant after he left his employment will lead to the release of the surety's responsibility.
  2. By the Death of the Surety:
    • Section 131 of the Indian Contract Act, 1872 states death of surety as a mode of discharge of responsibility of surety in continuing guarantee. The demise of guarantor functions as the cancellation of an ongoing guarantee, unless the contract indicates a different intention. The surety will not be responsible for future dealings but for the liability which has already been incurred before the death of the surety, his legal heir can be sued. But the liability can only be forced against their legal heir to extent of the property inherited by them.
  3. By variation in terms of contract:
    • According to Section 133, surety can be released from his responsibility if any variation in the contract is made without his prior assent. The surety is discharged as soon as the original contract is altered without his consent. In Bonar Vs Macdonald, surety guaranteed the good conduct of a manager to the bank. Some changes were introduced in the contract relating to increase in salary of the manager as well as his liability. This was neither communicated to the surety nor his consent was obtained. The bank suffered some loss due to the conduct of the manager. The court held that the surety is not obligated to cover for the loss suffered by the bank. There is still some ambiguity as to whether the surety is released from the liability if the alterations made are unsubstantial or benefit the surety in some way or other.
    • The divergence in the contract terms not only relieves the surety from contractual responsibility but also exempts their included property from the contractual obligations.
  4. Through release or discharge of principal debtor:
    • The liability of a surety is co-extensive with that of principal debtor's unless the contract provides as provided in the Section 128 of Indian Contract Act, 1872. So, if principal debtor is released from his responsibilities, then the surety is also dismissed from the same. Section 134 provides two ways in which the Principal Debtor can be dismissed from his obligations. First, when both Principal Debtor and Creditor agree and contract to release the debtor of his responsibilities under the contract, the surety is also released from the obligations. Second, when as a legal consequence of the act/omission by the creditor, the principal debtor is dismissed from his responsibilities, the same would apply to the surety too.
    • In Aypunni Mani v Devassy Kochouseph, it was held by the court that certain reduction in the liability of Principal debtor will also reduce the liability of the surety to that extent.
    • But in case where principal debtor is dismissed from his responsibility due to his insolvency, the surety would still be held accountable.
  5. Composition, extension of time and promise not to sue:
    • In Section 135 of Indian Contract Act, 1872 three ways of dismissal from obligations are provided- (i) Composition (ii) Promise to give time (iii) Promise not to sue the principal debtor.
    • If a composition is made to the contract by the creditor with the principal debtor without the assent of the surety, then he is released from his obligations under the continuing guarantee. But in case where the compromise is made in the form of a court decree, the surety will still be held accountable under the contract.
    • The surety has a right to ask principal debtor to repay loan when time of repayment comes. The creditor is obliged to surety to deny principal debtor more time for payment. It is immaterial whether it benefits the surety or not. Hence if the creditor agreeing to provide time to Principal debtor, surety is dismissed from the liability. But according to Section 136 of the same act the surety is not dismissed of his responsibilities if the contract to provide time to principal debtor is made by creditor with a third party.
    • If creditor and the principal debtor enter into an agreement through which creditor promises that he will not file a suit against him, the surety is released of his responsibility. The promise not to sue is different from forbearance to sue. Mere forbearance to sue does not discharge the surety from his liability.
  6. By impairing surety' remedy:
    • According to Section 139 of Indian Contract Act 1872, if creditor commits any action which infringes the right of surety, fails to do his duty towards the surety or impairs the surety's remedy against principal debtor, then surety is released from his obligation.
Contracts of continuing guarantee are entered into by numerous guarantors or transactors in their daily transits. They, therefore, make the surety bound to a long series of contracts concluded by the principal debtor. This coverage is however not like a specific guarantee but replaces the coverage to a sequence of transactions over a given time frame and assures that surety remains responsible beyond a single transaction. A surety may get discharged from a continuing guarantee by the:
  1. Revocation of the guarantee
  2. Death of the surety
  3. Alterations in the contract terms
  4. The release or discharge of the principal debtor
  5. The composition of the debt, extension of time and promise not to sue
  6. Impairing surety's remedy against the principal
These ways of the revocation are highlighted in Sections 130 to 139 of Indian Contract Act, 1872.

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