Guarantee is a word used to denote assurance, surety if better called. Both the word can be used interchangeably in English language. But in terms of contract they hold little distinction in themselves. Guarantee in terms contract is called contract of guarantee. Section 126 of Indian contract act defines contract of guarantee as:-
A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
From the above section the difference of the two terms can be cleared that, a contract of guarantee is contract where a person promise to save or assure other from any damage inflicted by human conduct. It is a type of legal relationship between two persons. The person who gives this assurance is called surety and to whom this assurance is given is called principle debtor. Surety is the one who secure the creditor from facing any loss if the principle debtor makes any default.
Contract of guarantee is broadly of two types which are specific guarantee and continuing guarantee. Specific contract of guarantee is a type of contract of guarantee where guarantee is given for a specific or particular transaction. The guarantee is implied to extinguish after the completion of the transaction. The reason for the above stated rule is that the ultimate aim of contract of guarantee is to save the creditor from any loss that could arise in future so if the creditor has provided both time and work, the guarantee will stand as long as the principle debtor has not paid all his liabilities.
A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does riot pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.
In this illustration, A gives surety to B for the delivery of goods to C for a specific purpose. Once the specific purpose is achieved i.e. 5 sacks were delivered and all the liabilities were paid by the principle debtor, the guarantee for C were extinguished and further when B delivers more goods than specified A was not responsible.
A continuing guarantee is guarantee which extends to a series of transaction. these continuous transaction may be in respect of a series of transaction during a specific period of time lets say one year. Section 129 of the Indian contract acct talks about the continuing contract and it reads as:-
A guarantee which extends to a series of transactions, is called a “continuing guarantee”.
A, in consideration that B will employ C in collecting the rent of B‟s zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee.
In the above illustrations, a contract of guarantee is formed between A and B for the employment of C. here, the creditor has not specified any time limit for the contract and there may arise infinite number of transactions between B and C. here is why it is called a continuing guarantee.
A guarantees payment to B, a tea-dealer, to the amount of £ 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of £ 100, and C pays B for it. Afterwards, B supplies C with tea to the value of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of £ 100.
This illustration is also an example of continuing guarantee. Here A gives guarantee for the delivery of tea to C for the amount that may exceeds to £ 100. Here no time or specific purpose was given neither the number of transaction consequently any number of transaction can occur. Once the principle debtor defaulted A will pay the defaulted amount that may exceed to £100.
Once the guarantee is given, then comes the question of revocation of such given guarantee. Section 130 and 131 talks about the revocation of continuing guarantee and they reads as :-
A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
The above section makes it clear that a revocation can be made for a continuing guarantee and the revocation can only be made for the future transaction. The transaction that may have occurred or the liabilities that may arise out of those transactions will not be affected by this. The revocation can be made by informing the creditor about the revocation. Section 131 of Indian contract act also talks about the revocation of continuing contract in case of contingency which reads as :-
The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.
It makes it clear that until there exist a contract in this regard, death of the surety will act as a revocation in continuing contract for all the future transaction.
Author: Ajay Singh Tomar,
Amity University Madhya Pradesh