A contract of guarantee, also called a contract of surety (S.126 of The Indian Contract Act) can be defined as a contract that is specifically entered into with the purpose of promising or discharging a liability incurred by a third person in case of default. The Kerala High Court in the case of P.J Rajappa vs Associated Industries, stated that “A contract of guarantee is a tripartite agreement, involving the principal debtor, surety and the creditor”. The individual who promises the guarantee is the ‘Surety’, the one who incurs liability in case of default is called the ‘Principal Debtor’ and lastly the person to whom the guarantee is promised to is the ‘Creditor’.
Revocation can be defined as the cancellation or annulment of a legal instrument, for example, a will, the withdrawal of an offer, power of attorney, etc.
There are two kinds of guarantees:
1)Specific Guarantee – A guarantee that is given in respect of a specific transaction or debt that comes to an end when the promise is duly performed or the debt incurred is paid off.
2)Continuing Guarantee (S-129)- A type of guarantee that extends to a series of transactions and each transaction acts as an individual transaction. In this form of guarantee , the liability of the surety extends to a number of transactions over a certain period of time. The surety’s interest is always safeguarded by the court through equitable principles as a surety is always considered to be a favoured debtor. The surety is given a choice to end the continuing guarantee by revocation.
There are 6 ways a continuing guarantee could be revoked are:
1)Discharge by notice (Section 130): Revocation can be done by the surety, by sending the creditor a notice hence ending the promise regarding the future transactions.
2)Revocation by death (Section 131): A continuing guarantee can be automatically revoked by the death of the surety unless there is a contract to the contrary present.
3)Variance of terms (Section133): When terms of the contract are changed between the principal debtor and creditor without informing or gaining consent from the surety, the guarantee is revoked.
4)Release or discharge of the principal debtor( Section 134): This section can be divided into two parts:- 1) when the creditor forms a contract that releases the principal debtor. 2) Does an act or an omission leading to the discharge of the principal debtor can lead to revocation of guarantee.
5)Discharge due to additional time given and promise not to sue debtor (Section 135): 1) If additional time is given to the principal debtor in order to perform the promise without the consent of the surety, the guarantee is revoked. 2) If the surety promises not to sue the principal debtor the surety is discharged.
6)Discharge due to impairing surety’s eventual remedy (Section 139): If any act or omission done by the creditor impairs the eventual remedy of the surety against the principal debtor leads to revocation of guarantee.
A continuing guarantee is a guarantee that extends to a series of transactions over a certain period of time. But, if we analyse the concept of payment of rent , in the case of Hasan Ali vs Wali Ullah, the learned judge of the Allahabad High Court stated that even though the due payment of rent is done in instalments, it is considered to be a single transaction hence isn’t a continuing guarantee. In the case of S.N. Sen vs Bank of Bengal it was contended that employment as consideration is considered to be a single transaction and not a series of transactions as the employee continued his job hence was not a continuing guarantee.
Discharge by notice under section 130 of the Indian Contract Act is a form of revocation that allows the surety to be discharged from all kinds of liability which would have been incurred due to future transactions, but he would be still liable for the transactions which have already been entered into. In the case of Offord vs. Davies it was held that once the transaction has taken place, the surety’s liability cannot be revoked.
Section 131 of the Indian Contract Act states “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”. In the case of revocation by death, the surety’s heirs are only liable for the transactions that were undertaken before the death of the surety unless there was a contract to the contrary. The Heirs are only liable to the extent of the surety’s property that has been inherited by them as mentioned in the case of RK Dewan v State of UP.
Variance as mentioned in Section 133 of the Indian Contract Act talks about changes made in the terms of a contract between the principal debtor and creditor without the consent of the Surety, which leads to revocation of the contract as seen in the illustration D of Section 133. In the case of Chandan Kumar vs The United Western Bank ltd. And ors, the limit of the loan was extended without informing the appellant hence the appellant was discharged as a surety. In the case of Lloyds steel Industries vs Indian oil corp, It was held that consent regarding variance should be taken either prior or subsequent to the alteration as advance authority given by the surety in invalid as it goes against the very crux of section 133 according to the case of Central Bank of India vs Ali Mohammed.
It was decided by the courts that ‘substantiality and materiality’ is the factor that determines the liability of the surety if discharged. It is on the discretion of the courts to decide whether variance is material in nature or not.
Section 134 of the Indian Contract Act talks about two kinds of releases, express and implied release, the contract between the creditor and the principal debtor which results into the surety being discharged is an express release and the act or omission of the creditor which leads to the discharge of the principal debtor is an implied release.
If we analyse section 135 and 137, we can see one section contradicting one and another. Section 135 of the Indian Contract Act talks about discharging the surety if the creditor promises not to sue the principle debtor but section 137 of the Indian Contract Act states that forbearance of creditor does not lead to the discharge of the principal debtor, hence contradicting each other. Continuing guarantee is extensively used in commercial activities as it is easier for the debtor to get goods on credit as he does not ready money hence continuing guarantee facilitates providing cash credit and as granting loans making it useful for traders and co-operations etc. who want to expand their commercial activities. The English laws on continuing guarantee mainly focus on the language used by the parties and their intentions.
The article above encompasses continuing guarantee, which is a type of guarantee that extends to a series of transactions that extend over a certain period of time and each transaction is treated as an individual transactions. There are six methods of revocation, 1Discharge by notice 2)Revocation by death 3)Variance of terms 4)Release or discharge of the principal debtor 5) Discharge due to additional time given and promise not to sue debtor and 6)Discharge due to impairing surety’s eventual remedy.
Payment of rent and an employee fidelity is not considered to be a continuing guarantee. In the case of Offered vs Davies it was contended that once the transaction has taken place, the surety’s liability cannot be revoked. The Heirs are only liable to the extent of the surety’s property that has been inherited by them as mentioned in the case of RK Dewan v State of UP.
Section 133 talks about variance in contract, if any changes are made in the contract between the surety and the principle debtor without informing the surety, the contract can be revoked. Consent of the surety should be taken before or subsequent to the alteration. Advance authority is not valid. Section 134 of the Indian Contract Act talks about two kinds of releases, express and implied release. Further an analysis between the contradiction of section 135 and 137 was done. Continuing contracts are widely used in commercial activities as obtaining loans and cash credit is extremely simple.
1)[Ak2001], [Continuing guarantee: Nature and modes of revocation],[Legal service India], [(4/5/2021)][http://www.legalserviceindia.com/legal/article-3950-continuing-guarantee-nature-and-modes-of-revocation.html].
2)[Blog ipleaders] [ https://blog.ipleaders.in/everything-need-know-contract-guarantee/],[(4/5/2021)].
3)[SRD law notes],[ https://www.srdlawnotes.com/2017/05/continuing-guarantee-and-revocation-of.html], [(4/5/2021)].
5) [Professor C.P.Singh Head & Dean Faculty of Law],[ Continuing Guarantee : Meaning and Revocation],[Ikouniv],[(4/5/2021)][https://www.lkouniv.ac.in/site/writereaddata/siteContent/202005252041344696CP-Continuing%20Guarantee-converted.pdf].
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