Continuing Guarantee

In this article, we will discuss meaning of continuing guarantee. We will also discuss that how continuing guarantee can be revoked.

The function of a contract of guarantee is to enable a person to get a loan, or goods on credit, or an employment. A guarantee may therefore, be given for (i) the repayment of a debt, or (ii) the payment of the price of the goods sold on credit, or (iii) the good conduct or honesty of a person employed in a particular office (‘fidelity’ guarantee).

Kinds of Guarantee

When a guarantee extends to a single transaction or debt, it is called a ‘specific/ simple’ guarantee.

According to Section 129 of Indian Contract Act, “A guarantee which extends to a series of transactions is called a continuing guarantee.”

Such guarantee may be in respect of a series of transactions during a fixed period, e.g., for one year.

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The surety undertakes to be answerable to the creditor for his dealings with the debtor for a certain time; in other words, surety is liable for the unpaid balance at the end of the guarantee [Margaret Lalita Samuel v Indo Commercial Bank Ltd. AIR 1979 SC 102]. The liability of such surety extends to all the transactions contemplated until the revocation of the guarantee.

A specific guarantee provides for securing of a specific advance or for advances up to a fixed sum, and ceases to be effective on the repayment thereof, while a continuing guarantee covers a fluctuating account such as an ordinary current account at a bank, and secures the balance owing at any time within the limits of the guarantee.

The surety may either guarantee the conduct of the principal debtor in respect of a particular transaction, for example, he guarantees the repayment of loan of Rs. 5,000 which the principal debtor may have taken from the creditor, or he may undertake to be answerable for the conduct of the principal debtor in respect of a series of transactions. The former is known as ‘Specific Guarantee’, whereas the latter is known as Continuing Guarantee.

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Illustrations of Continuing Guarantee

(a) A, in consideration that B will employ C in collecting the rent of B’s zamindari promises B to be responsible, to the amount of 5,000 rupees, 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 C with tea to the above value of £ 100 and C pays B for it. Afterwards, B supplies C with tea to the value of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to the extent of £ 100.

(c) A guarantees payment to B of the price of five sacks of flour, to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards, B delivers four sacks to C which C did not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.

Whether a guarantee is a continuing guarantee or not depends on the language of the guarantee, the subject matter, the intention of the parties and the surrounding circumstances. For example, a guarantee reads: “I agree to be answerable to K for the amount of five sacs of flour, to be delivered to T, payable in one month”. Five sacs were actually supplied and T paid for them. Further supplies were made during the same month, for which T failed to pay. The surety was then sued. It was held to be a guarantee for five sacs delivered at one time, but not a continuing guarantee to cover subsequent deliveries [Kay v Groves (1829) 80 ER 1274].

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A guarantee for a cash-credit account has been held to be a continuing guarantee. A guarantee for the conduct of a servant appointed to collect rent has been held to be a continuing guarantee [Durga Priya Chowdhury v Durga Pada Roy AIR 1928 Cal. 204]. However, a guarantee for the conduct of a tenant in paying rent due under the tenancy, whether it be a repeated payment or a single lump sum, has been held to be a guarantee for one transaction and not of continuing nature [Hasan Ali v Waliullah AIR 1930 All 730]. A guarantee for the appointment of an agent has been held to be not a continuing guarantee [Mohd. Nazeer v Economic Transport Organisation (2005) 3 ALD 527 (A.P.].

A personal guarantee provided that the guarantee was to remain in force till the borrower paid the loan amount on demand. This was regarded as a continuing guarantee [C.P. Sree Lal v District Collector, Thiruvananthapuram AIR 2007 Ker 131]. There can be a continuing guarantee for a fixed period (e.g. for one year). A guarantee regarding the conduct of a cashier in respect of transactions during a period of one year is a continuing guarantee. A continuing guarantee only speaks of continuing transactions and not the period of such transactions [Eastern Bank Ltd. v Pats Services of India Ltd. AIR 1986 Cal. 61].

Revocation of Continuing Guarantee

Section 130 of Continuing Guarantee empowers the surety to revoke a continuing guarantee as to future transactions, by giving a notice to the creditor. His liability in respect of the transactions which have already been made continues to exist, whereas his liability for the future transactions comes to an end.  According to Section 131, Unless there is a contract to the contrary, the death of a surety also automatically puts an end to the continuing guarantee, as regards future transactions.

Continuing guarantee can be revoked by any of the following modes:

(a) By giving a notice by surety

(b) On death of Surety

(c) Changes made in the terms and conditions of the contract without Surety’s Consent.

When the surety gives a notice of revocation, his liability continues to exist for the transactions already made, but is revoked as regards future transactions i.e. the transactions made subsequent to the notice. For example, A promised in favour of B that if B discounted bills for C, A would guarantee the payment of bills to the extents of £600, during a period of one year. Some bills were discounted by B and the payment for the same was made. Thereafter A gave notice to B that A would no more guarantee the discounting of any bills. But B continued to discount bills. The bills not having been paid, B sued A for the same. A could not be made liable as a surety for the bills discounted by B, after A’s notice to B [Offord v Davies (1862) 12 C.B.; Illust. (a), Sec. 130].

A guarantees to B, to the extent of Rs. 10,000, 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 dishonours the bill at maturity. A is liable upon his guarantee [Illust. (b), Sec. 130]. Thus, a transaction already made cannot be affected by a subsequent notice of revocation.

It may be noted that when the consideration is single and indivisible, no revocation is possible. The employment of a person is one transaction and the guarantee for his good conduct is not a continuing guarantee and is not revocable as long as he continues in the job [Sen v Bank of Bengal (1920) 47 LA 164]. Thus, if a servant is employed on the basis of a guarantee as to his good conduct, the guarantee is not revocable so long as the servant continues in service. When a person guaranteed the payment of rent by his servant and revoked the guarantee as soon as the servant left the employment, he was held not liable for rents which became due after the revocation [Wingfield v De St Croin (1919) 35 TLR 432].

Where the directors of a company guaranteed the payment of the company’s overdraft and subsequently resigned their office and the bank was informed, it was held that the liability of the directors would be confined to the amount due up to the date of their resignation [Harigopal Agarwal v SBI AIR 1956 Mad 15].

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The Apex Court in Syndicate Bank v. Channaveerappa Baleri  A.I.R. 2006 S.C. 1874 underlying the fact that the extent of liability under a guarantee as also the question as to when the liability of a guarantor would arise, would depend purely on the terms of the contract, explained:

“A guarantor’s liability depends upon the terms of his contract. A ‘continuing guarantee is different from an ordinary guarantee. There is also a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a guarantee which does not contain such a condition. Further, depending on the terms of guarantee, the liability of a guarantor may be limited to a particular sum, instead of the liability being to the same extent as that of the principal debtor. The liability to pay may arise, on the principal debtor and guarantor, at the same time or at different points of time. A claim even time barred against the principal debtor, but still enforceable against the guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor.”

It may, however, be noticed that a guarantee in respect of only one facility of specified sum of money, is not at all continuing guarantee within the meaning of Section 129. A continuing guarantee cannot be mistaken as perpetual guarantee or perennial guarantee. Where only loan facility is granted to the debtor, it would be wrong to call this guarantee as not amenable to limitation period.

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