Guarantee

2. Discuss the nature, rights and liabilities of a surety. INTRODUCTION:- The surety who is entitled to be reimbursed by the principal debtor for the amount paid by him on his behalf. The liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract under section 128. NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of the principal debtor which means that on a default having been made by the principal debtor the creditor can recover from surety the all what he could have recovered from the principal debtor. Example:- The principal debtor makes a default in the payment of a debt of Rs.10,000.00, the Creditor may recover from the surety the sum of Rs.10000/- plus interest becoming due thereon as well as the amount spent by him in recovering that amount. LIABILITY OF SURETY:- A bare perusal of section 128 of the Contract Act would make it clear that the liability of a surety is co-extensive with that of he  principal debtor. The word co-extensive denotes that extent and can relate only to quantum of the principal debt. Refer a case of Industrial Financial Corporation of India v/s Kannur Spinning & Weaving Mills Ltd, 2002: However the liability of the surety does not cease merely because of discharge of the principal debtor from liability. Bank of Bihar Ltd. v/s Damodar Prasad, 1969:  The Supreme Court held that the liability of the surety is immediate and cannot be defended until the creditor Electricity y has exhausted all his remedies against the principal debtor.Maharashtra Electricit Board Bombay v/s Official Liquidator and Another, 1982 : under a letter of guarantee the bank undertook to pay any amount not exceeding Rs.50000/- to the Electricity Board. It was held that the Bank is bound to pay the amount due under the letter of guarantee given by it to the Board. RIGHTS OF SURETY:- The surety has certain rights against the principal debtor, the creditor and the the co-sureties. His right against against each one of them are being discussed as under :1. Right of Subrogation : Under section 140 when a principal debtor makes a default in the performance of his duty and on such default the surety makes the necessary  payment or makes performance of all what he is liable. Firstly the surety can claim indemnity from the principal debtor secondly he is also entitled to the benefits of every security which the creditor has against the principal debtor. Case of Mukesh Gupta v/s Sicorn Ltd. Mumbai, 2004. 2. Right of Indemnity against the principal debtor : Similarly as above when a  principal debtor makes makes a default the surety has to make the payment payment to the creditor. After making the payment he can recover the same from him under section 145 of the act.

3. Right against Creditor to take back the securities deposited by the Principal debtor:- After making the dues dues the surety has all the the rights which are available available to the creditor against the principal debtor under section 141 of the act. He is entitled to the benefit of every security which the creditor has against the principal debtor. 4. Surety has no right to goods in hypothecation hypothecation::-  In case there is hypothecation of the goods the goods remain in the possession of the borrower the surety cannot invoke the provision of section 141 in such case. Refer a case of Bank of India v/s Yogeshwar Kant Wahhera, 1987. CONCLUSION:- Keeping in view the above facts it is revealed that the surety’s nature, liabilities and rights are of such types once he stands surety for any debt he will remain bound till till the amount is repaid by the principal debtor. debtor. Although the surety has some rights such as right of subrogation, indemnity and to taking back the securities but even even though there are more more complications in this this regard. So one should stand surety for a person who have some some qualities of good pay master. master.

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3 The liability of the surety is co-extensive with that of Principal debtor . INTRODUCTION:- Surety’s Liability : The liability of the surety is co-extensiv co -extensivee with that of the principal debtor, unless it otherwise provided by the contract for example A guarantees to B for the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. DEFINITION OF CO-EXTENSIVE:- Section 128  of the Indian contract Act  provides the following following definition definition in respect of the surety liability:“It  says that the liability of the surety is co-extensive with that of the principal debtor unless it otherwise provided by the Contract.” A case of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel1991: It was held by the court that where there were joint promisors and consideration was paid by only one of them the other piomisors were equally liable to pay amount. The liability of son was was co-extensive with his father who was  principal debtor in view of section 127 and 128 of the Indian contract Act. The gist of some the leading cases in which the liability of the surety is coextensive are given below to strengthening the answer of the question:Kellappan Nambiar v/s Kanhi Raman-1957 : In this case that if the principal debtor happens to be a minor and the agreement made by him is void, the surety too cannot be made liable in respect of the same because the liability of the surety is coextensive with that of principal principal debtor. It has been held that the guarantee guarantee of the loan or an overdraft to an infant is void because the loan to the infant itself is void. That in case of State Bank of India v/s V .N. Anantha Krishnam-200 Krishnam-2005: 5: that in view of the provision of section 128 of Act the Presiding officer was not correct in

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giving directions to the Bank to proceed against the property because cash credit facility and the liability of surety was co-extensive with that of principal debtor. In a case of Bank of Bihar Ltd . v/s Dr.Damodar Prasad -1969: The Supreme Court held that the liability of the surety is immediate and cannot be defended until the creditor has exhausted all his remedies against the principal debtor. A case of Industrial Financial Corporation of India v/s Kannur Spining & Weaving Mills Ltd.-2002: It was held that the liability of surety does not cease merely because of discharge of the principal debtor from liability. In a case of Harigobind Aggarwal v/s State Bank Of India-1956: It was held that the principal debtor liability is reduced e.g. after the creditor has recovered a part of the sum due from him out of his property the liability of the surety is also reduced accordingly. CONCLUSION:- On deeply going into depth of provisions laid down in the Act it is revealed that surety liability is co-extensive with that of principal debtor means that his liability is exactly the same as that of the principal debtor. Suppose if the default having made by the principal debtor the creditor can recover the same from the surety all what he could have recovered from the principal debtor.

4. What do you understand by contract of guarantee? How does it differ from contract of Indemnity? INTRODUCTION: - The contract of guarantee may be an ordinary or some different type of guarantee which is different from an ordinary guarantee. Guarantee may be either oral or written. Basically it means that a contract to perform the  promise or discharge the liability of third person in case of his default and such type of contracts are formed mainly to facilitate borrowing and lending money which  based on the following following facts :i) Surety is the person by the whom the guarantee is given. ii) Principal debtor is the person from whom the assurance is given. iii) Creditor is the person to whom the guarantee is given. g iven. DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge the liabilities liabilities of a third person person in case of his default. The person who gives gives the guarantee is called surety, the person in respect of whose default the guarantee is given is called Principal Debtor and the person to whom the guarantee is given is called creditor. A guarantee may be either oral or written.”

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ILLUSTRATION: - A promises to a shopkeeper C that A will pay for the items  being bought by B if B does not pay this is a contract of guarantee. In In case if B fails fails to pay C can sue A to recover the balance the same was held in the case of Birkmyr v/s Darnell-1704, the court held that when two persons come to shop one person  buys and to give him credit credit the other person promises, promises, “ if he does not pay, I will ”, this type of a collateral undertaking o be liable for the default of another is called a contract of guarantee. ESSENTIALS: - The following are the essential elements of Guarantee:Existence of Creditor, Surety, and Principal debtor: - The economic function of a guarantee is to enable a credit-less person to get a loan or employment or something something else. Thus there must must exist a principal debtor for a recoverable debt for for which the surety is liable in case of the default of the principal debtor. In the case of Swan v/s Bank of Scotland -1836, It was held that a contract of guarantee is a triplicate agreement between the creditor, the principal debtor and the surety. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable for the liability of the Principal debtor. Liability must be legally enforceable: - Only if the liability of the principal debtor is legally enforceable, the surety can be made liable. For example a surety cannot be made liable for a debt barred by Statute of Limitation. Consideration: Consideratio n: - As with any valid contract the contract of guarantee also must have a consideration. The consideration in such such contract is nothing but anything anything done or the promise to do something something for the benefit benefit of the principal debtor. The section 127 of the Act clarify as under :“Anything done or any promise made for the benefit of principal debtor is sufficient consideration to the surety for giving the guarantee.” Illustrations:: - 1. A agrees to sell to B certain goods if C guarantees for payment of Illustrations the price of the goods. C promises to guarantee the payment in consideration of A’s  promise to deliver deliver goods to B. B. This is sufficient consideration for C’s promise. 2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for an year and promise if A does so he will guarantee the payment if B not pay. A forbears to sue B for one year. This is sufficient consideration for C’s guarantee. 5. It should be without misrepresentation or concealment:  - Section 142 of the Act specifies that a guarantee obtained by misrepresenting facts that are material to the agreement is invalid, and section 143 specifies that a guarantee obtained by concealing a material fact is invalid as well. Illustration :- 1. A appoints B for collecting bills to account for some of the bills. A asks B to get a guarantor for further employment. C guarantees B’s conduct but C is not made made aware of B previous mis-accounting by A. B afterwards afterwards defaults. C cannot be held liable.

Illustration: 2- A promise to sell Iron to B if C guarantees payment. C guarantees  payment however, C is not made aware of the fact that A and and B had contracted that that B will pay Rs.5/- higher that the market price. B defaults. C cannot be held liable A case of London General Omnibus V/s Holloway- 1912: A person person was invited guarantee an employee, who was previously dismissed for dishonesty by some employer. This fact was not told to the surety. Later on the employee embezzled funds but the surety was not held liable. CONCLUSION It is noted from the above mentioned facts that the contract of guarantee is a triplicate agreement between Creditor, Surety and the Principal debtor. A person who stands for surety known as guarantor for a third person (principal debtor) who in case of his default to fulfil his promise or to discharge the liabilities. The surety or guarantor has to make a distinct promise for payment of the liabilities of the Principal debtor which must be legally enforced.

5. What is continuing Guarantee? Under what circumstances it can be revoked? INTRODUCTION: - A guarantee which extends to a series of transactions is called continuing guarantee. A guarantee may be an ordinary guarantee or a continuing guarantee is almost different from an ordinary guarantee. EXAMPLE:- A in consideration that B will employ C in collecting of Rent of B’s Zamidari. B promises that he is responsible responsible to the amount of of Rs.5000/- for due collection and payment payment by C of those rents. This is a continuing guarantee. guarantee. 2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time to time amount amount of Rs.100/-. Afterwards, B supplies supplies C tea for the amount amount of Rs.200/- and C fails to pay. A’s guarantee is a continuing con tinuing guarantee and so A is liable for Rs.100/-. It is clearly noted from the above examples that continuing guarantee is given to allow multiple transactions without having to create a new guarantee for each transaction. DEFINITION:- Section 129 of the Contact Act, continuing guarantee means a guarantee which extends to a series of transactions without creating a new guarantee for another transaction is called continuing guarantee. Illustration:- A guarantees payment payment to B for 5 sacks of rice rice to be delivered by B to C over the period of one month. month. B delivers sacks sacks to C and C pays for it. Later on on B delivers 4 more sacks but C fails to pay. A’s guarantee is not a continuing guarantee and so he is not liable to pay for the 4 sacks.

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REVOCATION OF CONTINUING GUARANTEE:- Section 130 of the Act a continuing guarantee can be revoked at any time by the surety by a notice to the creditor. Once the guarantee is revoked the surety is not liable for any future transaction however he is liable for all the transactions that happened before the notice of revocation is given. A promises to pay B for all groceries bought by C for a period of 12 months if he fails to pay. In the next three months C buys 2000/- worth of groceries. After 3 months, A revokes revokes the guarantee by giving giving a notice to B. C further purchases purchases 1000 Rs of groceries. groceries. C fails to pay. A is not liable for 1000/- rupees of purchase purchase that was made after the notice but he is liable for 2000/- of purchase made before the notice Lloyd’s v/s Harper-1880 Harper-1880: It was held that employment of a servant is one transaction. The guarantee for for a servant is thus thus not a continuing guarantee guarantee and cannot be revoked as long as the servant is the same employment. Wingfield v/s De St Cron-1919: it was held that a person who guaranteed the rent payment for his servant but revoked it after the servant left his employment was not liable for the rents after revocation. A guarantees to B to the amount of Rs.10,000/- that C shall pay for the bills that B may draw upon him. B draws upon C and and C accepts the bills. Now A revokes the guarantee. C fails to pay the bill upon its maturity. maturity. A is liable for the amount upto upto Rs. 10,000.00. As per provisions laid down in Section 131 of the Act that the death of the surety acts as a revocation of continuing guarantee with regards to future transactions if there is no contract to the contrary. It is pertinent to mention here that there must not be any contract that Durga Priya v/s Durga keeps the guarantee guarantee alive even after after the death. In the case of Durga Pada -1928 :  It was held by the court that in each case the contract of guarantee  between the parties must must be looked into to determine determine whether the contract has been been revoked due to the death of the surety or not. It there is a provision that says that death does not cause the revocation then the contract of guarantee must be held to continue even after the death of the surety. Conclusion:- A guarantee which extends to a series of transactions is called continuing guarantee. A guarantee may be an ordinary guarantee or a continuing guarantee is almost different from an ordinary guarantee. In Contract of guarantee  between the parties must must be looked into to determine determine whether the contract has been been revoked due to the death of the surety or not. It there is a provision that says that death does not cause the revocation then the contract of guarantee must be held to continue even after the death of the surety.