Guarantee – Law of Contracts II – Notes

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  • Guarantee has four elements:-
    • Recoverable Debt
    • Consideration
    • Wilful consent
    • Oral or written form
  • Recoverable Debt – Bank gave overdraft facility. Law prohibited overdraft and considered them void. Thus bank sued the surety the court held that when nothing is due on the behalf of debtor only then liability of surety stands to nothing.  – Swan v. Bank of Scotland
  • Guarantee may be enforceable in case of a void debt when debt is void due to void contract rather than void due to statute.
  • In case of minor, surety knows of minor’s age then he is liable as contract then is not collateral but principal.
  • Consideration – Past consideration is valid consideration. – SICOM Ltd. v.  Padmashri Mahipat J. Shah (2005)
  • Third illustration depicts that anything done applies to only those scenario where creditor suffer deterrence due to the surety.
  • Consent – §142 talks about misrepresentation and §143 talks about concealment both absolving surety from its liabilities.
  • Gave guarantee for servant who had committed dishonesty earlier, was not told this by the employer so held not liable. – London General Omnibus Co v. Holloway
  • Writing not necessary – §126 states both written & oral guarantee are valid.
  • §128 states that surety’s liability is coextensive to that of principal debtor.
  • If principal creditor had some security with him and he sells it off then liability of surety gets reduced accordingly. – Harigopal Agarwal v. State Bank of India.
  • If surety signs only on the belief that there would be other co-sureties then if signature of one of surety is forged then other sureties are not liable if the premise of the contract was to make sureties jointly and severable liable. Plaintiff took guarantee of three directors, one of director’s signatures were forged. Held, not liable. – James Graham v. Southgate Sands
  • Principal creditor may directly go after surety instead of exhausting its means against the principal debtor. – Bank of Bihar v. Damodar
  • In case where surety could be prevailed over such as husband – wife relation surety could be absolved if it could be shown that there was undue influence. – Barclays Bank v. O’ Brien
  • Surety has the right to limit his liability or make it conditional.  In case surety liability was upto Rs. 15,000 and also the amount decreed by the court. It was held that the surety’s liability would be no more than Rs 15,000. – Bapanna v. Devata
  • If surety does not demand for another co-surety and merely has the knowledge that there are other co-sureties then in case of absence of these co-sureties surety’s liability will not dissolve. – Traill v. Gibbons
  • In case of impossibility of contract, surety’s liability is not dissolved.  Debtor took loan to develop and maintain bee culture but bees died due to infection. Surety was held liable. Florence Mabel v. State of Kerala
  • §129 – Continuing guarantee extend to series of transactions.
  • Bank guarantee is different and is independent of underlying transaction. In case of unconditional bank guarantee liability of bank is absolute and court won’t interfere unless there is element of fraud or possibility of irretrievable justice. – Hindustan Steelworks Corp. Ltd. v. Tarapore & Co.
  • Bank’s liability in bank guarantee is unconditional and court can only interfere in case where irretrievable injustice would be done. Hindustan Steelworks Corp. Ltd. v. Tarapore & Co.
  • Bank guarantee is unequivocal and unconditional. Beneficiary need not show loss suffered by non fulfilment of contract. – Amrok Logistics Ltd. v. Digvijay Cement Ltd.
  • Where contract was alleged to be impossible and there was allegedly concealment of important facts then also debtor was not able to prevent encashment of guarantee. – D.T.H. Corp. v. S.A.I.L.
  • Failure of party to point out exact amount of loss suffered despite having the means to know so was considered fraudulent and stay was provided. Banerjee & Banerjee v. H.S.W. Constructions Ltd.
  • If encashment of guarantee is contrary to law stay is provided. In case where person had to bid by putting security withdrew its bid before it could be accepted. – Kirloskar Pneumatic Co Ltd. v, N.T.P.C.
  • Enforcement of bank guarantee cannot be made subject-matter of arbitration proceeding. – National Project Constn. Corp. v. G. Ranjan
  • §132 provide if joint debtor has some arrangement amongst themselves and even if creditor knows about it then also their liability towards creditor remains unaffected.
  • Discharge of Surety’s Liability:-
    • Revocation §130
    • Death §131
    • Variance in Terms §133
    • Discharge of principal debtor §134
    • Act or Omission on part of creditor §139
  • §130 provide in revocation of continuing guarantee, guarantor is absolved only from future transactions. Provided guarantee of 600 pounds for 12 months and revoked it before credit was provided and accordingly surety was not liable. – Offord v. Davies
  • Death of surety becomes effective only for future transactions and estate is liable for existing debts. – Durga Priya Chowdhury v. Durga Pd Roy
  • The liability of deceased surety could be extended to its heirs but only to extent of property inherited by them. – R.K. Dewan v. State of U.P.
  • Surety is discharged as soon as original contract is altered without his consent. – Pratapsingh v. Keshavlal
  • If change in terms is not material say guarantee is lowered from Rs 25,000 to Rs 20,000 then it would not absolve surety. – M.S. Anirudhan v. Thomco Bank Ltd.
  • Any alteration that absolves surety also releases property of surety if given as guarantee.  Debtor took further loan than told to surety and then consolidated previous and new loans in a new deed. The surety’s property was released. – Bolton v. Salmon
  • Guarantee is absolved of its liability if substituted by another guaranteed bond signed by other guarantors. – P.N.B. v. Yarlapadda
  • Extension of cash limit does not absolve surety as its liability is limited to its guarantee. – M.V. Shantanarasimhaiah v. Dena Bank
  • Advance authorisation of surety for alteration of terms in contract is contrary to what is stated in §133 and hence void. Consent may be prior or subsequent to alteration though.
  • If creditor obtains a decree against debtor and in it accepts a payment less than he is entitled to then that does not absolve surety. – U.O.I. v. Manku Narayana
  • If creditor accept compromise and discharge debtor then surety is also discharged. – Kahn Singh v. Tek Chand
  • Liability of surety is coextensive to that of debtor. Debt Relief Act case – Mani v. Devassy
  • Act or omission on part of creditor leading to discharge of debtor’s liability also discharges surety’s liability.
  • Composition of debt by parties and not by court discharges surety.
  • Extension of time without surety’s consent even if it is for benefit of surety discharges surety.
  • If creditor promises not to sue debtor then surety is discharged but this is to be distinguished from forbearance to sue.
  • Prevailing view in India is that the surety is not discharged even if creditor fails to sue debtor within limitation period.
  • If creditor fails to realise the proper value of goods put as security then liability of surety is reduced accordingly. – State Bank of Saurashtara v. Chitranjan
  • Surety’s right against debtor:-
    • Right of Subrogation §140
    • Right to indemnity §145
  • Surety is vested with all rights which creditor had against debtor after he has paid all he is liable for. – Babu Rao Ramchandra Rao v. Babu Manaklal
  • If debtor is selling off his personal property lest surety after paying his debt seize them then surety is entitled to an injunction by the court to prevent debtor from doing so. – Mamata Ghose v. Union Industrial Bank
  • Surety is only entitled to be indemnified for the amount he paid rightly. Anything paid wrongfully would not be indemnified.
  • Surety is entitled to any security given to creditor by debtor after paying off the debts even if the surety doesn’t know about existence of such security.
  • There are different view  (Pg 653 &654) when surety has paid its part of debt and demands proportionate share in security in cases where surety’s liability is less than value of security. In some cases it was held that interest of creditor is paramount whereas in others it was held that all power of creditor are vested in surety from the moment he makes the payment as per §140.
  • Surety can only claim reduction in payment if there has been a voluntary act on part of creditor in loosing security.  Industrial Finance Corp. v. Cannaore Spg
  • If creditor or some third party has some goods in his hands as lien then surety after paying debt has right against creditor and such third party to lien these goods.
  • §138 – Release of one co surety does not discharge other
  • §146 – Co sureties liable to contribute equally
  • §147 – Liability of co sureties in different sum
  • It does not matter whether co-surety knows or not about other co-sureties.
  • Liability under indemnity is contingent whereas in guarantee it is subsisting in the sense that once a guarantee has been acted upon liability of surety automatically arises, though it remains suspended animation till principal debtor commits default.
  • Undertaking in a guarantee is collateral in an indemnity it is original.
  • Indemnity has two parties guarantee has three parties.
  • Indemnity has only one contract whereas in a guarantee there are three contracts, debt, between creditor and surety, debtor and surety.

Continue to learn more about the Law of Contracts by clicking here. You can grab notes for other law subjects from here.


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