Contract of Gurantee – 2

EXTENT OF SURITIES AND LIABILITIES

The fundamental principles of about the surety’s liability as laid down in Section 128 of the Indian Contract Act is that the liability of surety is co-extensive with that of the Principal Debtor. The Surety may however by an agreement place a limit upon his liability.

Section 128 respectively talks about surety’s liability and states that the liability and states that the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided in the contract.

ILLUSTRATION- A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable, not only for the amount of the bill, but also for interest and charges which may have become due on it.

1) Co-extensive –The first principal governing the surety liability is that it is Debtor. This expression means the maximum extent of the surety’s liability. He is liable for the surety’s liability. He is liable for the whole of the amount for which the Principal Debtor is liable. Where the Principal Debtor acknowledges liability and this has the effect of extending the period of limitation against him, the surety also becomes affected by it.

Co-Surety- Section 144 of the Indian Contract Act talks about the guarantee on a contract that creditor shall not act on it until co-surety joins.

This Section states that where a person gives a guarantee upon a contract that creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid it states that other person is not joined.

2) Surety’s Right to Limit His Liability or make it conditional- The above principle applies only when the surety undertakes to be liable for the whole debt. But it is open to him to place a limit upon his liability. He may expressly declare his guarantee to be limited to a fixed amount. For instance, the surety says that my liability under this guarantee cannot exceed a sum of $250. ‘’In this case whatever be the amount of recovery from the principal debtor, creditor cannot make the surety liable from amount which exceeds $250.

A surety can attach any other condition to his liability. Surety has a right to his liability. Surety has a right to put any condition during a creation of a contract.

Liability under Continuing Guarantee (Sec 129) Continuous Guarantee refers to a guarantee which extends to a series of transaction.

ILLUSTRATION (a) (b)

(a) A, in consideration that B will employ C is collecting the rents of B’s zamindari, promises B to be responsible to the amount of Rs 5000 for due collection and payment by C of those rents. This is a continuing guarantee.

(b) 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 with the tea of above the value of $100, and C pays B for it. Afterwards, B supplies C with tea of 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.

A guarantee of this time is intended to cover a number of transactions over a period of time. Surety undertakes answerable to the creditor for his dealings with the debtor for a certain time. On the other hand, a guarantee for a single specific transaction

The essence of continuing guarantee is that it applies not to a specific number of transactions but to any number of them and makes the surety liable for the unpaid balance at the end of the guarantee.

A guarantee for a cash credit transaction has been held to be a continuing guarantee. The Surety could not claim to be discharged from their liability by the reason of fact that the goods in the hypothetic store was clamed.

LIABILITY UNDER BANK GUARANTEE

A Bank guarantee is a sought of a absolute undertaking to pay the amount whenever demanded by the guarantee holder. It has nothing to do with the state of relation between a guarantee holder and the person on whose behalf the guarantee was given. While ordinary guarantee are linked to and dependent upon the underlying transaction, a bank guarantee is an arrangement where the guarantee is independent of the underlying transaction.

DISCHARGE OF LIABILTY FROM LIABILTY

A surety is said to be discharged from liability when his liability comes to an end.

a) By revocation (Section 130) – Ordinarily a guarantee is not revocable but Section 130 provides for revocation of continuing guarantee. Section 130 states that the continuing guarantee may at any time are revoked by the surety as soon as the transactions by giving a notice to the creditor.

ILLUSTRATION- A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C, C accepts the bill. A gives notice of revocation C dishonors the bill at maturity. A is liable upon his guarantee.

Revocation becomes effective for the future transactions while the surety remains liable for transactions already entered in.

The employment of a servant is one transaction. A guarantee for his good behavior is not a continuing one and is not revocable as long as the continuous in the job. At any rate, the employer is entitled to such a notice as it will enable him to determine the employment without liability.

Nor is such a guarantee determined by the surety debt until and unless there is an agreement to the continuing guarantee.

‘’ Notice to the creditor’’ means clear and specific notice intended to terminate liability under the guarantee. A denial of liability in a previous suit was held to be not serving as a notice.

By Debt of Surety(Section131). A continuing   guarantee is also determined by the debt of surety unless there is a contract to the contrary. Once again, the termination becomes effective, only for the future transactions. The sureties legal heirs can be sued for liability already incurred.

Section 131 says that the continuing guarantee will revoke from the death of the surety regarding all future transactions in the absence of any contract. The liability of the decease surety can be imposed against his legal heirs but only to the extent of the property inherited by them.

3) Revocation by Variance- Court of Law and equity has always being taking care of the surety’s interest. Consequently the surety is held discharged when the creditor makes any change or amendment in the nature or terms of a contract with the principal debtor without the consent of the surety. Hence the surety is discharged as soon as the original contract is changed/ altered without his consent. Section 133 states the revocation of surety’s liability by variance in the terms of contract between the principal debtor and creditor without the consent of the surety will discharge the surety from all liabilities after such an alteration is made.

Section 133 (a) ILLUSTRATIONS

A becomes surety to C for B’s conduct as manager in C’s bank. Afterwards, Band C contract without A’s consent that B’s salary shall be raised and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to over-draw and the bank loses a sum of money. A is discharged from his surety ship by the variance made without his consent, and A is not liable to make good this loss.

4) Discharge of Surety By Release or Discharge of Principal Debtor (Section 134) – This section states that the surety is discharged by any contract between the creditor and principal debtor, wherein the principal debtor is released by any act or omission of the creditor, the legal consequence of which the discharge of the principal debtor.

This section provides for two kinds of discharge from liability-

1) If the creditor make any contract, the principal debtor by which the principal debtor is released then the surety is also discharged.

2) Second thing/ground of discharge under Section 134 is that when the creditor does any act or omission the legal consequence of which is the discharge of the Principal Debtor. The Surety would also be discharged from his liability. For example, there is a contract for the construction of a building. The performance of which is guaranteed by surety, under this contract, the creditor has to supply the building material. And omission on his part to do so would discharge the contractor and so would the surety be discharged as well.

CASE LAWS RELATED TO CONTRACT OF GUARANTEE

CASE- LONDON GENERAL OMNIBUS COMPANY VS HALLOWWAY

The defendant was invited to give a guarantee for the fidelity of servant. The employer had earlier dismissed him for dishonesty but he did not disclose this fact to the surety. The servant committed another embezzlement . Hence the surety was not held liable because he was not aware of this fact as there was the concealment on the part of the defendant.

CASE- MS ANIRUDDHAN VS THOMCO’S BANK LIMITED

One of the questions that concern the court is that where the variation is not material or is beneficial to surety, will he be discharged? The facts of the case were such that the defendant guaranteed the repayment of loan of Rs 20,000 given by the plaintiff’s bank to the principal debtor. Guarantee Papers showed the loan to be of Rs 25,000. The bank refused to accept. The Principal then reduced the amount to Rs 20,000 and without any intimation to the surety given to the bank which was then accepted. Principal Debtor failed to pay and the bank filed a case against the surety. The question was whether the alteration had discharged him. It was held by a surety that the surety was not discharged.

EXPLANATION- An alteration which will not disturb the basic structure of liability created a guarantee would not render the guarantee unenforceable.

CASE- AMRITLAL VS STATE BANK OF TRAVANCORE

The Supreme Court explained the principle laid down in Section 141 and stated ‘’ It is true that Section 141 has limited the surety’s right to securities held by the creditor at the date of his becoming surety and has modified the English Rule that the surety is entitled to securities given to the creditor both before and after the contract of guarantee. But subject to this variation section 144 incorporates the rule of English Law relating to discharge from liability of surety when the creditor loses the security held by him.

CASE- HOPSON VS BASS

The facts of the case are such that J gave a guarantee to B in the following words- ‘’ I hereby guarantee to you the payment of all goods you may supply to E.H. but so as my liability to you under this or any other guarantee shall not at any time exceed the sum of $250. C gave a similar guarantee. B supplied goods to E.H. to the amount of $657. E.H. becomes bankrupt. B proved the whole sum in the insolvency of E.H. and then called on the guarantees that paid him $250 each. Subsequently, B received from the receiver a sum of $657. It was held by the Court that each of the guarantees was entitled to a part of the dividend bearing to the whole same proportion as $250 to $657.

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