Continuing Guarantee under Indian Contract Act
As you know the contract becomes a part of our daily life. The contract made between people is of different types. For example contract of guarantee, bailment, pledge and contract of Agent, etc. Sometimes we listen that person A takes the guarantee of person B to person C for paying the loan if B fails to pay the loan on time. After listening to the term guarantee, a question pops up in our mind that what is the guarantee? The answer is quite simple the term guarantee means to make the contract to perform or discharge the liabilities of the third party in the case of failure of the third party in the discharge of his or her duties or liabilities.
In the case of the contract of guarantee, there is a three-party, that is named Principal debtor, creditor, and Surety. The contract of guarantee is defined under 126 of the Indian contract Act, 1872. As per section 126 of the Indian Contract Act 1872, A contract of Guarantee is a contract made to perform the promise or discharge the liabilities of the third party, in the case of failure of discharge of the liabilities by a third party. As I earlier mentioned, a contract of guarantee consists of third parties, these are a surety, principal debtor, the creditor. After listening to these three words a question arises in our mind that who are a surety, Principal debtor, and creditor? The answer to the question is given as below:-
A surety is a person who gives a guarantee of the principal debtor to the creditor in the contract of guarantee. Surety takes responsibility for the third party to pay a sum of money or perform the duty, in case of failure of the third party to perform their duty or such work.
A principal debtor is a person for whom the surety takes guarantee.
The creditor is the person to whom the guarantee is given by surety.
It is a common thing that a contract to have a minimum of two parties but in the case of a contract of guarantee, there are minimum of three parties. It is the exception of the common rule of contract that is the requirement of a minimum of two parties because in the contract of guarantee the minimum requirement is of three parties. Due to the involvement of three parties in a contract of guarantee, three agreements take place and as a result, three contracts take place these are commonly known as a principal contract, secondary contract, an implied contract. These three contracts are made between the parties are mentioned separately as below:-
Principal Contract:- It is a contract that takes place between the principal debtor and creditor.
Secondary Contract:- It is a contract that takes place between the surety and the creditor.
Implied Contract:- It is a contract that takes place between the principal debtor and surety. Because there is an implied consent that the principal debtor is liable to pay all the sums or liabilities that surety has paid or discharge in case of default of the principal debtor.
As we know that a surety is liable to discharge all the responsibility or liabilities of the principal debtor in case of failure of the debtor. Therefore we can say that the liabilities of surety are co-extensive with that of the principal debtor, unless and until it is provided in the contract, which is mentioned under section 128 of the Indian Contract Act, 1872. Therefore the liability of the surety is the same as that of the principal debtor. Due to co-extensive liability, the creditor can also directly proceed against the surety. The creditor can also sue the surety directly without sueing the principal debtor.
Types of guarantee taken in the contract of guarantee
Basically, there are two types of guarantee that are taken during the contract. Because the guarantee can be taken for existing liabilities or any future liabilities, these are given as below:-
- Specific Guarantee
- Continuing guarantee
This type of guarantee is taken for a single or any particular transaction. It is reflecting by its name that the guarantee taken for single debt or transaction is known as a specific guarantee. And this guarantee will come to an end when such debt has been paid.
It is reflecting by its name that a guarantee taken for a series of the transaction is known as a continuing guarantee.
A continuing guarantee will be applicable on all the transactions that are entered into by the principal debtor until and unless it is revoked by the surety. But a continuing guarantee can be revoked at any time by the surety for future transactions only but not for the transaction which is already made by giving notice to the creditor. However, the liability of a surety will be liable for transactions that entered into before the revocation of his guarantee. It is mentioned under section 130 of Indin contract Act 1872 that A continuing guarantee can be revoked at any time for the remaining future transection by the surety by giving notice to the creditor. For example, X in the consideration that Y will employ Z in collecting the rent of Y’s flat and promises to Y to be honest and responsible, to the amount of 1000/- for the due collection and payment by Z for those rents. Then this will be called a continuing gurantee.
Nature of continuing guarantee
The vital role of a Continuing Guarantee is that it is applicable to a series of future transactions. Therefore, when a guarantee is given for particular debt or transection then, it cannot be called a continuing guarantee. ‘
In the case of Nottingham Hide Co vs. Bottrill, it was held 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 any contract is entered into by fraud andmisrepresentation that is made by the creditor regarding subject matter or by concealment of material facts by the creditor then the contract will be considered as void.
Once the guarantor discharge or paid his liability by paying the required debt to the creditor, then the surety will steps into the shoes of the creditor this mean that the surety will have all the rights which the creditor had over the debtor. All transactions entered by the principal debtor until they are revoked by that security shall be considered as the subject matter to a continuing guarantee. However, the guarantee for future transactions can be revoked at any time by giving notice to the creditor but the surety will be liable to pay all the debts which are done before the notice of revocation, he can’t discharge from the already done transactions.
Revocation of Continuing Guarantee
There are various modes through which the continuing guarantee can be revoked at any time, These modes are given as below:-
- When the surety gives the notice of revocation of his guarantee then the guarantee will be revoked for the remaining future transactions at the moment when the surety gives the notice to the creditor. This is mentioned under section 130 of the indian contract act.
- As per section 131 of the indian contract act 1872, The continuing guarantee will revoke automatically for future transection on the death of surety, unless and until it is mentioned in the contract.
- A continuing guarantee will revoke for future transection if any changes are made in the terms and conditions of the contract without taking the consent the surety.
Discharge of surety
There are various ways through which the surety will discharge from his continuing guarantee, these are mentioned as below:-
- By giving the notice of revocation to the creditor.
- As per section 133 of the Indian contract Act, If any variance is made in the terms and conditions contract by the principal debtor and creditor without the consent of surety this will lead to the discharge of surety from his all liabilities.
- As per section 134 of the Indian contract act, the surety will discharge automatically on the discharge of the principal debtor.
- The surety will discharge when the principal debtor makes payment of debt.
- The surety will discharge as per section 135 when the creditor makes an arrangement with the principal debtor not to sue him or to provide extra time for payment of the debt,
- The surety will be discharged automatically when the creditor does any act which is inconsistent with the rights of surety.
After seen the concept of a continuing guarantee, I would like to conclude that the Contract of Continuing Guarantee is defined under the Indian Contract Act, 1872 which states that a continuing guarantee is a guarantee that is taken for the series of transactions. The main motive behind the concept of guarantee in the contract is to provide the belief that the paid amount is safe and protect the creditor from any kind of loss occurring from the breach of contract by the Principal Debtor. Every Contract of guarantee consists of three parties these are a surety, Principal Debtor, Creditor. But the principal debtor and creditor are liable to tell all the terms and conditions to the surety which are agreed between them. In case of a continuing guarantee, the surety will be liable for the series of transactions that is taken by the principal debtor from the creditor until the surety revokes. If surety wants to revoke his guarantee then he can revoke by giving notice but in case of surety death and any variance made in terms of the contract by creditor and principal without the consent of surety, then it will lead to automatic revoke in guarantee and surety will not be any more liable. The specific guarantee will end once the transaction is made for that it is made but the continuing guarantee will continue for future transaction till the surety want.
Author: AMIT SHEORAN,
Symbiosis Law School, Nagpur and second year