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Continuing guarantee: Nature and modes of revocation

Continuing guarantee: Meaning
A continuing guarantee is given in respect of a series of transactions to be undertaken between the principal debtor and the creditor over a period of time and some of the transactions to be made between the debtor and the creditor may be unknown, indefinite or uncertain at the time of giving the guarantee. The surety becomes liable for the unpaid balance on the default of the debtor at the end of the guarantee.[1]

For eg- The surety guarantees payment to the creditor who is a tea dealer, to the amount of Rs 100 for any amount of tea supplied by him to the Principal debtor. Afterwards, the creditor supplies tea of above Rs 100 which was paid by the debtor. Subsequently, he supplies tea to the amount of Rs 200 which was unpaid by the debtor. Accordingly, the surety is liable to pay Rs 100 to the creditor as it was a continuing guarantee.[2]

According to Section 129, a continuing guarantee extends to a series of transactions which means that continuing guarantee is concerned with continuing transactions and not the time period of such transactions. Hence, such a guarantee may be confined to a series of transactions, but restricted or limited to a certain period of time, e.g. for one year.[3]

Whether a guarantee is a continuing guarantee or not simply depends on the facts and circumstances as well as terms and conditions prescribed in the guarantee. There is no hard and fast rule for the determination of the same. It is difficult to know whether a guarantee for the payment of goods to be supplied up to a specific amount, is given for a single or definite number of transactions between the creditor and the debtor or whether it is a continuing guarantee.[4]

In the former event which is a simple guarantee, the surety�s liability come to an end as soon as payment is made by principal debtor for the goods sold. While in the continuing guarantee, the surety remains liable for future transactions to the extent of his guarantee.

Specific guarantee and continuing guarantee
A specific guarantee covers only a single transaction within a fixed period of time and it comes to an end when the liability under that transaction ends. Where the payment of a single specific sum is guaranteed, it is a simple guarantee.

For eg- A agrees to be answerable to B for the amount of five bags of flour to be delivered to C payable in one month. Afterwards, the creditor supplied five bags of flour and the debtor paid for them. Further, creditor supplied four bags of flour during the same month and the debtor failed to pay. The surety was not held liable for the four bags of flour because the guarantee given by him was a simple guarantee for a single transaction.[5]

The surety guarantees the repayment of loan of Rs10,000 taken by the debtor from the creditor. It is a specific guarantee and the liability of the surety ends if the debtor has paid his loan.

Specific and continuing guarantee can also be differentiated on the basis of nature of consideration given for these guarantees. If the consideration for the guarantee is divisible and variable as the result of future dealings between the parties, the guarantee is continuing and revocable.[6] If the consideration for the guarantee is given once for all or it is indivisible, such guarantee is a specific guarantee. When a lease was granted for five years in lieu of furnishing the guarantee, the consideration for it was held to be indivisible and hence not a continuing guarantee.[7] If a servant is employed on the basis of guarantee as to his good conduct, the guarantee is not revocable so long as the servant continues in service.[8]

Liability of surety under continuing guarantee
In the continuing guarantee, surety continues to be liable for further goods or loans given by the creditor to the principal debtor. He is liable for any amount which may become due from time to time dealings or transactions between the creditor and the debtor. However, he is discharged from his liability when he revokes his guarantee. Whereas in a simple guarantee, the liability of surety is in respect of only one transaction and this liability comes to an end as soon as the debtor paid his debt but in a continuing guarantee, the surety is liable until the transactions or credits contemplated by the parties and covered by the guarantee have been exhausted or until the guarantee itself has been revoked.[9]

Revocation of continuing guarantee
A surety is considered a favoured debtor and the court of law through equitable principles always safeguard the interests of the surety.[10] He is given a choice to end his continuing liability by revoking his guarantee. Also, a duty of good faith is imposed upon the creditor. So, when the creditor makes any changes in the terms of the contract with the principal debtor without the consent of the surety, the surety is discharged from his liability as to future transactions and the guarantee is deemed to be revoked.

A continuing guarantee is said to be revoked as regards to the future transactions to be entered between the debtor and the creditor, in the following ways:
  1. By notice of revocation by the surety (Section 130)
  2. By death of the surety (Section 131)
  3. Any changes made in the terms of contract without surety�s consent (Section 133)
After giving notice of revocation to the creditor, the surety is discharged from the liability for future transactions but he remains liable for transactions already entered into.[11]

Revocation by notice
When a transaction has already been made, the surety�s liability with regards to that transaction can�t be revoked.[12] In a case, the surety guaranteed the repayment of bills to be discounted by the creditor for the debtor for 1 year upto the amount of $600. The surety revoked the guarantee before any bills was discounted.[13] But the creditor continued to discount bills and further the debtor defaulted on paying bills. It was held that the surety was not liable for the bills discounted after his revocation of guarantee.

There is a plethora of cases in which the guarantors defend the suit against themselves by claiming that they had furnished a continuing guarantee and hence has a right to revoke it. But on many instances, the court has ruled otherwise. The court examines the facts and circumstances of each case to distinguish between a specific and continuing guarantee and accordingly declares whether the surety has right to revoke his guarantee or not.

Payment of rents in installments not considered as series of transactions
In the case of Hasan Ali v. Wali Ullah[14], a lease was granted for a fixed period of five years in consideration of the payment of a certain sum of money as annual rent. The surety executed a contract of guarantee for the due performance of the obligations of the debtor. During the continuance of the lease, the guarantor gave a notice to the landlord revoking his guarantee. A suit was filed against the surety and the debtor for the recovery of the arrears of the entire period of the lease.

The surety defended the suit on the ground that since his guarantee was a continuing guarantee and having revoked his contract of guarantee, he was not liable for the rents due after the notice of revocation.

The learned judges of the Allahabad High Court came to the conclusion that the guarantee for the due payment of the rent, even if it was paid in installments, was a single transaction and not a continuing guarantee. On these observations, it was held that such a guarantee can�t be revoked during the continuance of the lease. Hence, the surety was held liable.

Guarantee for a employee�s fidelity not a continuing guarantee

In S.N. Sen v. Bank of Bengal,[15] a guarantee was executed for the faithful discharge of duties as a cashier in a bank. The guarantee was provided by plaintiff�s father on consideration of the plaintiff being employed as a cashier. Afterwards, his father died. Further, the bank sued the plaintiff for committing misconduct during his employment.

The plaintiff contended that the instrument of security was a continuing guarantee under Section 129 of the Indian Contract Act, and as such it was revoked by the death of the surety in line with Section 131.

The Lordships held that the appointment of the plaintiff as a cashier was one and single transaction[16]. There was no series of transactions. Hence, it was considered not a continuing guarantee and was not revocable as long as he continued in the job.

Revocation by death of the surety
A continuing guarantee is automatically revoked by the death of the surety as regards for future transactions unless there is a contract to the contrary.[17]However, the surety�s heirs are liable for the transactions executed prior to his death. If there is a express provision in the contract of guarantee that on the death of the surety, his property or legal representatives can be made responsible for any liability incurred, then it would be deemed as contract to the contrary within the meaning of Section 131, and the guarantee is not revoked even if the surety dies.[18]

In Durga Priya Chowdhury v. Durga Pada Roy,[19] the surety had guaranteed the due collection and payment of the rent of Creditor�s Zamindari by the Principal Debtor to the extent of Rs 600 in consideration of employment of Principal debtor as agent. Afterwards, the surety died. The Principal debtor defaulted and the creditor sued him and legal representatives of the surety.

The legal representatives of the surety contended that being a continuing guarantee, it was revoked automatically with the death of the surety.

The provisions of the guarantee stipulated that the heirs and the representatives of the surety would be bound by the terms of the guarantee in the same way as the surety was bound by it. Referring on this provision, the learned judges held that the guarantee was not revoked even after the death of the surety and his heirs were liable for any act of the debtor during his continuance in the service.

Revocation by variance in the continuing guarantee
A continuing guarantee is revoked when there is any variance made in the terms of the contract between the Principal debtor and the creditor without the consent of the surety. The surety is discharged from his liability as regards to transactions subsequent to the variance.[20]

The surety gives a continuing guarantee to the extent of Rs 3000 for oil supplied by creditor to debtor from time to time on credit. Afterwards debtor became embarrassed and contracts with creditor, without the knowledge of the surety, that he would purchase oil for ready money and the payment would be applied to the existing debts between them. The surety is not liable for any goods supplied after this variance in the contract.[21]

In a case[22], where a surety executed a continuing guarantee 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 subsequently overdrawals were made by the principal debtor beyond that limit in the same loan account without the consent of the surety.

The surety was held liable only to the amount up to Rs 2,50,000 and he was not bound for the overdrawals allowed by the bank to the debtor without the surety�s consent.

Waiver of rights by surety

It is a debatable question whether a surety can give up the benefit of provisions conferred upon him to relieve him from liability. There is a contradiction in the judgements of Courts regarding this situation.

This situation arose in the case of Sita Ram Gupta v. Punjab National Bank.[23] Here, the appellant had entered into a contract of guarantee with the respondent bank for the advancement of loan to the company. Afterwards, the appellant wrote a letter to the Bank Manager revoking his guarantee, before the loan was in fact advanced by the bank. Subsequent to the revocation of guarantee by the plaintiff, the loan was given to the company. The suit was filed for recovery of loan by the Bank against the Plaintiff.

There was an express provision in this contract of guarantee declaring that the guarantee shall be a continuing guarantee and shall not be considered as cancelled in any way and shall remain in operation in respect of all subsequent transactions.[24]

Referring to this provision, the Supreme Court held that it was not open to the plaintiff to turn around and revoke his guarantee as he was bound by the terms and conditions of the said guarantee. By making such provisions, he had waived the benefit of Section 130 i.e. his right to revoke the guarantee as to subsequent transactions.

As a general rule, any person can enter into a binding contract to waive the rights conferred upon him by a statute unless it can be shown that such an agreement is contrary to the public policy by referring its provisions of the agreement.[25]

English law on continuing guarantee

In English laws, whether a guarantee is a continuing one is established by the language employed by the parties as well as their intention. Where a guarantee was to secure the payment of goods to be delivered in umbrellas and parasols in the sum of 200 pounds, it was held to be a continuing guarantee.[26]

In one case, the guarantee was given for a single specific transaction and it was held that the liability of the surety was only for that single transaction and not subsequent transactions made thereof.[27] A guarantee for the faithful service of an employee, during term of his employment, can�t be revoked by giving notice that after a certain period the surety will no longer be responsible because it was not a continuing guarantee. When the consideration for a guarantee is indivisible and is given once for all, for example, giving job to a person whose integrity is guaranteed, that guarantee can�t be revoked.[28]

There can be argument that it would be prejudicial to the interests of the surety if his liability must necessarily continue during the whole time that the debtor remains in the office but little can be done if the intention of the surety itself is to enter into this unlimited engagement.

But where the surety had revoked the guarantee as soon as the servant left his employment, he was held not liable for the rents which became due after the revocation.[29]

A guarantee for the regular payment of the credit balance in consideration of the creditor giving the credit to the debtor, was held to not have been revoked even after the death of the surety because there was an express provision in the contract that surety will be liable until he gives a notice of revocation of the guarantee.

The essence of a continuing guarantee is that it covers a series of transactions and each transaction is a separate transaction which creates a liability on the surety till it is repaid. The liability of the surety changes with every further advance by the creditor to the debtor.

Continuing guarantee is extensively used in commercial transactions. Because of this guarantee, it becomes easier for the debtor to get goods on credit if he doesn�t have the ready money. So, continuing guarantee facilitates the granting of loans, cash credit account, on the other hand, it secures the re-payment of bills of exchange, promissory notes etc. It is an important tool for the traders, corporations to expand their business.

To protect the interests of the surety, he has also been given right to revoke the continuing guarantee at any time by notice for subsequent transactions. Also he can provide a continuing guarantee with a fixed time limit due to which his liability will be restricted to such time limit. In the same way, if there is any variance made in the contract without the surety�s consent, he is discharged from his liability to protect his interest as he is considered a favoured debtor in the court of law.

An important requirement for a continuing guarantee is that the consideration for it should not be indivisible. It should be variable as to future transactions between the creditor and the debtor. If a person is given a job in consideration of his integrity being guaranteed by the surety, then the consideration for the guarantee is said to be given once for all and is not revocable. The number of transactions should not be definite and certain at the time of giving the guarantee. If the guarantee is given for the performance of definite arrangement between the creditor and the debtor, it is not a continuing arrangement.

  1. Avtar Singh, Contract and Specific Relief, 623 (Eastern Book Company, lucknow,12th edn. 2019)
  2. The Indian Contract Act, 1872 (Act No. 9 of 1872), s.129
  3. Eastern Bank Ltd v Parts Services of India Ltd, AIR 1986 Cal 61
  4. Joseph Chitty, II Chitty on Contract, (Sweet & Maxwell, London 24(1977)
  5. The Indian Contract Act, 1872 (Act No. 9 of 1872), s.129
  6. Hasan Ali v. Wali Ullah, AIR 1930 All 730
  7. Ibid.
  8. Lloyds v. Harper, (1880) LR 16 Ch D 290
  9. Pollock and Mulla, Indian Contract Act, 1872 ,1530 (Lexis Nexis, 15th edn. 2018)
  10. Avtar Singh, Contract and Specific Relief, 640 (Eastern Book Company, lucknow,12th edn. 2019)
  11. Indian Overseas Bank v Goh Teng Hoon, (1989) 1 CLJ 554
  12. Offord v. Davies, (1862) 6 LT 579
  13. Ibid.
  14. Supra note 6 at 2
  15. S.N. Sen v. Bank of Bengal, AIR 1920 PC 35
  16. Ibid.
  17. The Indian Contract Act, 1872 (Act No. 9 of 1872), s.131
  18. R. K. Bangia, Contract II, 21 (Allahabad Law Agency, 7th edn. 2017)
  19. AIR 1928 Cal 204
  20. The Indian Contract Act, 1872 (Act No. 9 of 1872), s.133
  21. Ibid.
  22. Bishwanath Agarwal v. State Bank of India, AIR 2005 Jhar. 69
  23. Sitaram Gupta v. Punjab National Bank, AIR 2008 SC 2416
  24. Ibid.
  25. Lord Halsbury, VIII Halsbury�s Laws of England 143 (Lexis Nexis Butterworths, U.K. 3rd edn. 1969)
  26. Hargreave v Smee, (1829) 6 Bing 244
  27. Kay v. Groves, (1829) 6 Bing 276
  28. Coles v. Pack, (1869) LR 5 CP 65
  29. Winfield v. De St Cronin, (1919) 35 TLR 432

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