Revocation of Continuing Guarantee and its Ways

Revocation of Continuing Guarantee:

Continuing guarantees are widely utilized in commercial transactions. Because of this guarantee, it is easier for a debtor to obtain goods on credit even if he does not have the money available. In this blog, we have discussed the meaning of a contract of continuing guarantee and how and when can it be revoked.

What is a contract of continuing guarantee?

A contract of guarantee is a specific type of contract for which the Indian Contract Act, 1872 lays down specific rules. It is a contract to perform a promise or to settle down the liability of a third person in the event that he makes default. The person who provides the guarantee is called the “surety”, the person whose liability is being settled down or for whom the guarantee is given is called the “principal debtor”, and the person to whom such guarantee is given is called the “creditor”.

The objective of such contracts is to enable a person to secure employment, a loan, or goods on credit. For example, assume A and his friend B visit a trader’s shop and A asks the trader to “supply the goods required by B and if B does not pay for them, I will”. This is a contract of guarantee wherein the principal liability to pay is that of B (the principal debtor) but if he fails to pay, then A (the surety) becomes liable to pay to the trader (the creditor).

Now, a contract of guarantee is further divided into two types: specific and continuing.

A specific guarantee is one that relates to a single transaction whereas a continuing guarantee is one that relates to a series of transactions. A specific guarantee (also known as a simple guarantee) is provided in respect of a single debt or transaction and it comes to an end when the debt is paid or the promise is performed. On the other hand, as per Section 129 of the Indian Contract Act, a continuing guarantee extends to a series of transactions. Here, the liability of the surety continues till the time all the transactions are completed or until the guarantee is revoked as to the future transactions.  

Revocation of Continuing Guarantee

A surety is regarded as a preferred debtor, and the court of law would always protect the surety’s interests through equitable principles. He is given the option of withdrawing or revoking his guarantee, which will eliminate his ongoing liability. Revocation of continuing guarantee can take place in any of the following ways:

By notice to the creditor

The surety can, at any time, revoke his guarantee in respect of the future transactions, by giving proper notice to the creditor. However, he remains liable for all the transactions that have already taken place between the principal debtor and the creditor. For instance, A guarantees to B that C shall pay for all the goods bought by him from B during the next three months. The guarantee given by A is up to Rs. 20,000. Now, C buys goods worth Rs. 16,000 from B. After that, A gives notice of revocation. Hence, A shall be liable only to the extent of Rs. 16,000 in case C fails to meet his obligations. In no case shall A be liable for the goods sold to C after the notice of revocation. 

On the other hand, when it comes to specific guarantees, if the liability has already accrued, a specific guarantee cannot be cancelled. As a result, if A lends B a particular sum on C’s guarantee, C cannot revoke the contract of guarantee. However, if A has not yet paid the money to B, despite the fact that C has executed the guarantee, C may revoke the contract by giving notice.

By the death of the surety

The surety’s death acts as a ground for revocation of continuing guarantee unless there is a contract to the contrary. This revocation will be in respect of all the transactions that take place after the death of the surety.

The estate of the deceased surety, on the other hand, is liable for transactions that occurred during the deceased’s lifetime. Surety’s estate is not liable for transactions that occur after surety’s death, even if the creditor had no knowledge of surety’s death.

By variation in the terms & conditions of the contract between the principal debtor and creditor

According to Section 133 of the Indian Contract Act, a surety is released from liability when the creditor’s actions have the effect of materially modifying the terms of the contract of guarantee. C, for example, agrees to lend B Rs. 2,000 on January 1st. A guarantees repayment, C pays the sum to B on August 30th, and A is released from liability as the contract has been modified. A surety is only accountable for what he has expressly agreed to in the guarantee; any change made in the terms of the contract between the principal debtor and the creditor without the surety’s approval will discharge the surety as to subsequent transactions. Thus, the guarantee will be revoked as the contract is varied.

To take another example, suppose A becomes a surety to C in respect of B’s behaviour as a manager at C’s bank. Following that, B and C agree, without A’s approval, to raise B’s income and make him liable for one-fourth of overdraft losses. Thereafter, B enables a customer to overdraw, and the bank suffers a financial loss. Here A gets released from his suretyship as a result of the terms being altered without his approval.

Revocation of Continuing Guarantee By novation (Section 62)

A contract of continuing guarantee can also be cancelled through novation, which occurs when a new contract is entered into, either between the same parties or between other parties, with the consideration being the mutual discharge of the old contract. The original contract expires, and so the surety is released from liability in relation to the previous contract.

Relevant case laws

In the case of Hasan Ali v. Wali Ullah (1930), a five-year lease was provided in exchange for the payment of a particular amount of money as annual rent. The surety signed a contract of guarantee to ensure that the debtor’s obligations were met. During the lease’s term, the guarantor gave the landlord a notice to the effect that he was withdrawing his guarantee. A lawsuit was brought against the surety and the debtor to recover the arrears for the whole lease period.

The surety argued that because his guarantee was a continuing guarantee and he had cancelled his contract of guarantee, he was not liable for rents due after the notice of revocation.

The learned Judges of the Allahabad High Court concluded that the guarantee for the timely payment of rent, even if paid in installments, was a one-time transaction rather than a continuing guarantee. Based on these observations, it was determined that such a guarantee could not be cancelled while the lease was in effect. As a result, the surety was held accountable.

In another case of S.N. Sen v. Bank of Bengal (1920), a guarantee was executed for the faithful performance of duties as a bank cashier. Plaintiff’s father granted the guarantee in exchange for the plaintiff’s employment as a cashier. His father died shortly after that. Furthermore, the plaintiff was sued by the bank for misbehaviour while working for the company.

The plaintiff claimed that the guarantee was in the nature of a continuing guarantee under Section 129 of the Indian Contract Act and that as such, it was revoked by the death of the surety following Section 131.

The Courts determined that the plaintiff’s appointment as a cashier was a single transaction. There was no chain of events. As a result, it was seen not to be a continuing guarantee and was not revocable as long as he remained on the job.

Conclusion

A continuing guarantee is defined by the fact that it covers a series of transactions, each of which establishes a responsibility on the surety until it is repaid. To protect the surety’s interests, he has also been granted the authority to revoke the continuing guarantee at any moment by providing notice for subsequent transactions.

List of references:

  • Hasan Ali v. Wali Ullah, AIR. 1930 All 730
  • S.N. Sen v. Bank of Bengal, AIR. 1920 P.C. 35
  • Section 62 of the Indian Contract Act, 1872
  • Section 129 of the Indian Contract Act, 1872
  • Section 131 of the Indian Contract Act, 1872
  • Section 133 of the Indian Contract Act, 1872

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Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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