Special Contracts:

Guarantee
WEEK 3-5
PALLAVI GOEL
 CONTRACT OF GUARANTEE
Raj: Guarantor
Contract of Guarantee means a
contract to perform the promises
made or discharge the liabilities
of the third person in case of his
failure to discharge such
liabilities.
e.g., Radha wishes to purchase a
car from Ravi. Raj promises Ravi
that in the event Radha fails to
make the payment he will pay for
the car. Radha: Principal Debtor
Ravi: Creditor
 EXAMPLE

If A gives an undertaking stating that if Rs. 55,000/- are lent to C by

B and C does not pay, A will pay back the money, this is a contract of
guarantee.
Here, A is the surety (person gives the guarantee) surety = guarantor
B is the principal debtor (one for whom the guarantee is given)
C is the creditor (the person to whom the guarantee is given)
Prima facie, the surety is not undertaking to perform should the PD
fail; the surety is undertaking to see the PD perform his part of the
bargain.
PARTIES
SURETY/GUARANTOR: The
person who gives the guarantee
PRINCIPAL DEBTOR: The
person in respect of whose
default the guarantee is given
CREDITOR: The person to whom
the guarantee is given
Guarantee may be expressed or
implied
 Section 126: “Contract of guarantee", "surety", "principal
debtor" and "creditor"

A "contract of guarantee" is a contract to perform the

promise, or discharge the liability, of a third person in case
of his default.
The person who gives the guarantee is called the "surety";
the person in respect of whose default the guarantee is given
is called the "principal debtor", and the person to whom the
guarantee is given is called the "creditor".
CONSIDERATION
FOR A guarantee may be either oral or written.

GUARANTEE Illustrations
S. 126
(a) B requests A to sell and deliver to him goods on credit. A
agrees to do so, provided C will guarantee the payment of
the price of the goods. C promises to guarantee the payment
in consideration of A’s promise to deliver the goods. This is a
sufficient consideration for C’s promise.

(b) A sells and delivers goods to B. C afterwards, without

consideration, agrees to pay for them in default of B. The
agreement is insufficient consideration.
 LIABILITY
Primary Liability: of the
principal debtor

Secondary Liability: of the

Surety; i.e., it arises when the
principal debtor fails

Guarantees are usually taken

to provide a second pocket to
pay if the first should be
empty
 Birkmyr vs Darnell
1704

Two persons come to a shop, one

person buys, and to give him
credit, the other person promises,
"If he does not pay, I will"
 Held that a contract of guarantee is a
tripartite agreement between the creditor, the
principal debtor, and the surety. The contract
has the following features:
Distinct promise of surety - There must be
a distinct promise by the surety to be
answerable for the liability of the Principal
Debtor.
Swan vs
Liability must be legally enforceable -
Bank of Only if the liability of the principal debtor is
Scotland legally enforceable, the surety can be made
liable. For example, a surety cannot be
1836 made liable for a debt barred by statute of
limitation.
Consideration - As with any valid contract,
the contract of guarantee also must have a
consideration. The consideration in such a
contract is nothing but anything done or the
promise to do something for the benefit of
the principal debtor.
 Indemnity Guarantee

Guarantee is when a person assures the other party

Indemnity is when one party promises to
that he/she will perform the promise or fulfil
Meaning: compensate the other for the loss suffered due
the obligation of the third party, in case he/she
to the act of the promisor or any other party.
default

Parties: Indemnifier + Indemnity Holder Creditor + Principal Debtor + Surety

Three: [I] between creditor and principal debtor. [II]

Number of One: between the indemnifier and the
between creditor and the surety. [III] between
Contracts: indemnity holder
principal debtor and surety.

Secondary: because the obligation of the surety

Primary: because the indemnifier undertakes
depends substantially on the principal debtor’s
Nature of an independent obligation which does not
default.
liability: depend upon the existence of any other
This liability will only arise if the principal debtor
obligation of any other obligor.
fails.

Purpose: To compensate for the loss To give assurance to the promisee

Maturity: When contingency occurs Liability already exists / when PD defaults

Indemnifier cannot sue a third party for the

Indemnity
Right to Sue v. Guarantee
loss suffered. Surety can sue the principal debtor.
Mr. Joe is a shareholder of Alpha Ltd.
lost his share certificate. Joe applies
for a duplicate one. The
company agrees, but on the condition
that Joe compensates for the loss or
damage to the company if a third
person brings the original certificate.

❑ Indemnity or Guarantee?
❑ Who is Who?
Mr. Harry takes a loan from the bank
for which Mr. Joesph has given the
assurance that if Mr. Harry default in
the payment of the said amount he will
discharge the liability.

❑ Indemnity or Guarantee?
❑ Who is Who?
Anil and Kamal have entered into a contract
whereby Anil agrees to supply to Kamal, 100
kgs of rice for a consideration of Rs.
50,000/-. Sunder is a friend of Kamal.
When Anil tells Sunder of his contract with
Kamal, Sunder makes an oral promise to Anil
and Kamal that if Kamal does not pay as per
the contract, he will pay Rs. 50,000/- to Anil.
❑ Indemnity or Guarantee?
❑ Who is Who?
ESSENTIALS OF A VALID
CONTRACT OF GUARANTEE
Essentials of a Valid Contract: It must
have all the essentials of a valid
contract such as offer and acceptance,
intention to create a legal relationship,
capacity to contract, genuine and free
consent, lawful object, lawful
consideration, certainty and possibility
of performance and legal formalities.
Agreement of all the parties: All the 3
parties must agree to make such a
contract. Express or Implied.
 The guarantor, having not signed the contract of
guarantee, wanted to wriggle out of the situation. He
said that he did not stand as a surety for the
performance of the contract. Evidence showed the
involvement of the guarantor in the deal and had
promised to sign the contract later.
AGREEMENT Is evidence of the involvement of the guarantor, w/o a
written agreement sufficient to demolish any evidence that
OF PARTIES: the guarantor guaranteed the due performance of the
contract by the principal debtor?

P.J. Rajappan Kerala High Court held that a contract of guarantee is a

tripartite agreement, involving the principal debtor,
v. Associated surety and the creditor.
In a case where there is evidence of the involvement of
Industries the guarantor, the mere failure on his part in not signing
(1983) the agreement is not sufficient to demolish otherwise
acceptable evidence of his involvement in the transaction
leading to the conclusion that he guaranteed the due
performance of the contract by the principal debtor.
When a court has to decide whether a person has
actually guaranteed the due performance of the
contract by the principal debtor all the circumstances
concerning the transactions will have to be necessarily
considered.
ESSENTIALS OF A VALID
CONTRACT OF GUARANTEE
Liability: Here, the liability of the
Surety is secondary

Existence of a Debt: A contract of

guarantee pre-supposes the existence
of a liability, which is enforceable at
law. If no such liability exists, there can
be no contract of guarantee.
 If there is no principal debt but still a
promise by one party in favor of another
EXISTENCE for compensating in a certain situation,
OF A DEBT and the promise for this compensation is
not dependent upon someone else’s
default – is it a contract of guarantee?
 ARE THE FOLLOWING CONTRACTS OF
GUARANTEE?

1. A and B go to a shop. A purchases

EXISTENCE goods and B tells the seller “if A
OF A DEBT doesn’t pay, I will.”

1. A and B go to a shop, and B makes a

promise to the seller, “Let A have the
goods, and I will be your
paymaster.”
 ESSENTIALS OF A VALID
CONTRACT OF GUARANTEE
Consideration: There must be lawful
consideration.
There doesn’t need to be a direct
consideration between the creditor and
surety, it is enough that the creditor has
done something for the benefit of the
debtor.
Benefit to the debtor constitutes a sufficient
consideration to the surety for giving a
guarantee
Anything done or any promise made for the
benefit of the principal debtor provides
sufficient consideration to the surety for
giving the guarantee to the creditor [Sec
127].
 Section 127: Consideration for guarantee.
Anything done, or any promise made, for the benefit of
the principal debtor, may be a sufficient consideration to
the surety for giving the guarantee.

Illustrations
CONSIDERATION
FOR (a) B requests A to sell and deliver to him goods on
credit. A agrees to do so, provided C will guarantee the
GUARANTEE payment of the price of the goods. C promises to
S. 127 guarantee the payment in consideration of A’s promise
to deliver the goods. This is a sufficient consideration for
C’s promise.

(b) A sells and delivers goods to B. C afterward, without

consideration, agrees to pay for them in default of B.
The agreement is insufficient consideration.
 Consideration for guarantee:
 Anything done, or any promise made,
 for the benefit of the principal debtor,
 may be [considered] a sufficient
CONSIDERATION consideration to the surety for giving the
FOR guarantee.
GUARANTEE
S. 127 “Anything” meaning it is immaterial whether there is,
any apparent benefit to the person making the
promise

“Done” indicates that a past benefit to PD can be

good consideration for a bond of guarantee.
 Consideration for guarantee:
 Anything done, or any promise made,
 for the benefit of the principal debtor,
 may be [considered] a sufficient consideration
PAST to the surety for giving the guarantee
CONSIDERATION
S. 127 A guarantee for past as well as future debt is
enforceable provided some further debt is incurred
after the guarantee. But there should be a clear
undertaking to be liable for a past debt and as soon
as some fresh obligation is incurred, the liability for all
obligations is coupled up.
 This trend of past debt as invalid consideration is still unsettled:
In Chakkan Lal v. Kanhaiya Lal, the court considered a past debt
to be a valid consideration for a surety because of reasons like re-
acknowledgment of debt from time to time through the renewal of
promissory notes by PD, joint execution of some promissory notes by
PD, and surety and creditor’s promise to lend further sums to the PD
if surety would act as a surety.
Taluk Board Of Koilpatti v. Senthattikalai Pandia, held that if a
seller grants credit/goods based on the guarantee given, the
PAST guarantee may be extended to cover both the credit transaction as
CONSIDERATION well as prior debts if the language of the guarantee deed is clear
enough.
S. 127
Gulam Hussain v. Faiyaz Ali, took up the question of whether the
phrase “anything done… for the benefit of principal debtor” will
include in its ambit, the acts done by the creditor in past as valid
considerations. The court held that past benefits can constitute good
consideration for a guarantee. The fact that the guarantee was
given to the Creditor because it had passed a resolution requiring
the PD to furnish some security, failing which, the lease would be
canceled – held as a valid guarantee. This decision has been
criticized as one attributing unnatural meaning to the phrase
“anything done”.
 Thus, the current situation is that a past debt can be a
valid consideration if:
1. there is a subsequent guarantee for the past act done
on request.

PAST 2. additional benefits are being advanced to the PD and

CONSIDERATION the guarantor’s liability is being extended to the prior
S. 127 debts of the PD with a clear understanding of the
same.
3. where the creditor demands the benefit to be
returned unless the debtor can furnish some security
because the debtor fails in fulfilling certain contractual
obligations.
 TRUE OR FALSE
The Surety will be liable as a surety
for a loan advanced to a third party
by the Creditor on Surety’s
recommendation.
- Juggot Indur Narain Roy Choudhry
v. Nistarinee Dassee
A sells and delivers goods to B. C
requests A not to sue B for the debt
for at-least 1 year and promises
that if he does so, C will pay in case
B defaults. A agrees. Is this sufficient
consideration?
A sells and delivers goods to B.
C afterwards, without
consideration, agrees to pay for
them in defaut of B. Is the
agreement valid?
 • There needs to be a consideration in a contract of
guarantee
• It is not necessary that Surety himself be benefitted

RULE FOR • Creditor and Surety must be competent to enter into

CONSIDERATION a contract.
S. 127 • Guarantees for past and future debts are
enforceable provided that some further debt is
incurred after the guarantee. Once fresh obligations
are incurred, the liability for all obligations becomes
coupled up.
 ESSENTIALS OF A VALID
CONTRACT OF GUARANTEE
No Concealment of Facts: The creditor should disclose
to the surety the facts that are likely to affect the
surety’s liability.
S. 143. Guarantee obtained by concealment
invalid.—Any guarantee which the creditor has
obtained by means of keeping silence as to material
circumstances, is invalid.

No Misrepresentation: The guarantee should not be

obtained by misrepresenting the facts (that are likely to
affect the extent of surety’s liability) to the surety.
S. 142. Guarantee obtained by misrepresentation
invalid.—Any guarantee which has been obtained by
means of misrepresentation made by the creditor, or
with his knowledge and assent, concerning a
material part of the transaction, is invalid.
A engages B as a clerk to collect
money for him. B fails to account
for some of his receipts. A in
consequence asks B to furnish
security for his duly accounting.
C gives a guarantee for B’s duly
accounting. A doesn’t acquaint C
of B’s previous conduct. B again
makes a default. Is C liable?
A guarantees to C payment
of iron to be supplied by him
to B to the amount of 2,000
tons. B and C have privately
agreed that B should pay Rs.
5 per ton extra, towards
liquidation of an old debt.
Keeping silent as to
material circumstances that
would have affected the
guarantor’s consent –
whether he wishes to stand
as guarantor or not – will it
affect the contract of
guarantee?
A valid contract of guarantee exists between the
Creditor, Principal Debtor and the Surety for the
repayment of the Principal Debtor’s loan (Rs. 10 lakhs)
back to the Creditor.
The Principal Debtor approaches the Creditor to seek
permission to pay this amount in installments of 5 lakhs
each, with the first installment within the original
deadline and the second installment within a few days
after the lapse of the original deadline. The Creditor
agrees to the arrangement in lieu of which the Principal
Debtor had to pay Rs. 25000 over and above his debt.
The Surety is not a part of this discussion/arrangement,
however he’s informed of this decision immediately
thereafter. The Surety now claims that he stands
discharged. Is he discharged? How?
Will your answer change if the Creditor and the
Principal Debtor testify “even though the Creditor and
the Principal Debtor enter into this arrangement but
never intend to implement it?”
 Section128. Surety’s liability.—The liability
of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided
by the contract.
LIABILITY OF
SURETY:
Nature and Illustration
Extent A guarantees to B 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.
 CO-EXTENSIVE = means exactly the same as
that of PD.
LIABILITY OF The surety is liable (unless specified
SURETY: unconditionally) for what the PD is liable. The
liability of the surety can neither be more nor
Nature and less than that of the PD, though by a special
Extent contract, it may be made less than that of the
PD , but never greater.
“Coextensive with that of the PD“ shows the
maximum extent of the surety’s liability.
LIABILITY OF ❑ The creditor can proceed against the
principal debtor alone.
SURETY:
Action against
❑ His suit cannot be rejected on the ground
PD alone that he has not joined the guarantor as a
defendant to the suit.
 ❑ A suit against the surety without impleading
the principal data is maintainable.

LIABILITY OF ❑ However, the courts may rescue a surety

SURETY: where the consent of surety was not free.
Action against
surety alone ❑ Surety may be described as vulnerable
where there is a relationship of trust and
confidence between surety and debtor.

❑ E.g., parents, spousal relations, etc.

A and B entered into an
agreement, where A agreed to
loan B Rs. 10,000/- plus interest
@10% p.a. This transaction was
guaranteed by C. B failed to
pay the debt amount and
refused any liability. A had to
initiate litigation to recover the
amount. What is C’s liability?
A guaranteed to B the
payment of a cheque by
C. The cheque is
dishonored by C. What is
A’s liability?
 If the Principal Debtor’s liability is reduced the
liability of the Surety is also reduced
accordingly.

LIABILITY OF
SURETY:
Co-extensive to Where the Creditor
recovers a part of the
that of Principal amount due from the
Debtor Debtor from the Debtor’s
property, then what is
the liability of the
Surety?
 The liability of the surety is joint and several
with the PD.

LIABILITY OF Where the PD makes a default,

SURETY: which of the below statements
are True:
Co-extensive to 1. Creditor cannot go after
that of Principal the guarantor before.
2. Sue the debtor and
Debtor guarantor together
3. Sue the guarantor without
exhausting remedies
against the debtor first
A is a debtor agriculturist, farming in Alwar. In
Alwar, many financial institutions give easy payment
loan options for agriculturists and small size
businesses only. A avails this benefit with Lakshmi
Finances and takes a loan of Rs. 1 Lakh. C (a non-
farmer) is A’s guarantor who has agreed to
guarantee the payment in case of A’s non-payment.
In the year 2023, there was severe draught and to
help their farmers, the Govt. of Rajasthan passed a
Rajasthan Relief of Agricultural Indebtedness Act,
scaling down all the agriculturists’ (only) debts by
30%.
A too faces financial constraints and is able to pay
Rs. 20,000/- only. He defaults on his remaining
payment obligation. What is C’s liability? Lakshmi
Finances makes a demand on two grounds:
A. C is the guarantor in the agreement and has
been rightly called upon to pay.
B. Since C is a non-farmer, he cannot avail of the
benefit under the Act, and the original 1 Lakh
is outstanding.

- Ref: Narayan Singh v. Chattarsingh

In January 2024, A, a 14-
year-old boy to pay for his
school fees takes a loan of Rs.
50,000/- from B. This
payment is guaranteed by C.
In February 2024, A pays Rs.
10,000 to B. In March 2024,
he pays Rs. 5000/- and
thereafter defaults on his
payment obligations. What is
the liability of C?
 Section 128, the liability of the surety is co-extensive with that of
the PD

E.K. Kelappan Nambiar Vs. Moolakal Kunhi Raman (1956),

held that on the basis of s. 128, the surety cannot be held liable
to the creditor for a debt which the PD himself was not liable.
CO-EXTENSIVE
LIABILITY IN
The judges, despite S.128, have held surety liable, because of:
CASE OF A i) The surety concealed the fact of minority from the creditor
MINOR DEBTOR (misrepresentation by surety); or
ii) the minor was supplied with necessities of life for which the
(law still not settled) creditor is bound to be reimbursed

Yeoman Credit Ltd. Later, (1961) 1 WLR 828, Many judges have
proposed that on the occasion of the debt being void, the
contract transforms into a principal contract between the creditor
and surety, leaving aside the PD. It is treated as a contract of
indemnity and thus, the surety can still be held liable.
 KT Sutochana Vs Orissa SFC AIR1992 Ori 157
The section says that if the payment of a loan
bond is guaranteed, the surety is liable not only
for the loan amount but also for any interest and
charges that may have become due.
Industrial Finance Corporation of India Vs PVK
Papers Ltd (AIR1992)
ADDITIONAL
A creditor is not bound to proceed first against the
CASE LAWS PD before suing the surety unless otherwise
agreed. He can sue the surety without suing the
PD.
CO-EXTENSIVE
Union Bank of India vs Mukku Narayan
(AIR1987SC1078)
When there is a decree against the PD, the
guarantor and also against the mortgaged
property, the decree-holder bank should first
proceed against the mortgaged property and
then against the surety.
▪ The liability of surety is secondary/contingent
- surety is liable only on default of the PD. If
PD fulfills his obligation, the question of
surety’s liability does not arise.

▪ The liability of the surety arises immediately

on default of the PD - So the creditor may file
a suit against the surety without suing the
principal debtor or without even exhausting his
remedies against the PD.
▪ The law does not treat PD and surety as one
person and so it is possible that in a particular
case one is liable while the other may not be
liable. For example –

WHEN SURETY IS NOT WHEN SURETY IS LIABLE

LIABLE BUT PD IS BUT NOT PD

The surety will not be liable The PD on becoming

where creditor has insolvent, is discharged by
obtained operation of law but surety
guarantee by still remains liable for the
fraud/misrepresentation amount of debt.

If any variation in the When PD is a minor, he is

contract is done later on by not liable on that
the creditor and PD, transaction, but surety is
without surety’s consent liable
State Bank of India vs. G.J. Herman (1998)
Where there is a composite decree against the PD
and the sureties, the Creditor has the discretion to
decide against whom he wants to proceed.
Neither the court nor a Co-Surety can insist that
the Creditor should first proceed against another
Surety before proceeding against him.
Such a direction would go against the Co-
extensiveness of the liability of the sureties with
that of the PD.
 ▪Under S.128, the liability of surety is co-
extensive.
▪Creditor can sue Surety w/o exhausting his
remedies against the PD, unless otherwise agreed
in the contract.
CREDITOR
CAN SUE Bank of Bihar v. Damodar Prasad
SURETY W/O Before payment, the Surety has no right to dictate
EXHAUSTING the terms to the Creditor and ask him to pursue his
remedies against the PD in the first instance. The
REMEDIES Surety has no right to restrain and action against
AGAINST THE him by the Creditor on the ground that the PD is
solvent or the Creditor may have relief against PD
PD in some other proceedings.
Similarly, where the Creditor has obtained a
decree against the Surety and the PD, the Surety
has no right to restrain the execution against him
until the Creditor has exhausted his remedies
against the PD.
 Ram Bahadur Sigh v. Tehsildar Bisli (2002)
Guarantors cannot insist that the Creditor must first
proceed against PD and not the guarantor. It is open
to the creditors to against the PD or the surety.
ADDITIONAL State Bank of India v. Gautami Devi Gupta (2002)
CASE LAWS If there is a decree in favour of the Creditor, and in
Creditor’s favor certain goods have been
hypothecated -- it is not necessary that the Creditor
SURETY’S should proceed to recover the decretal amount first
from the hypothecated goods and then proceed
LIABILITY IN against the Surety. Even without proceeding against
the hypothecated property, the Creditor can proceed
CASE OF against the Surety.
DEFAULT The liability of the debtor and the surety is joined
and several. The creditor can therefore sue either
both of them together or either of them individually.
If after an action against both, the creditor obtains a
decree against both of them, he is free to enforce the
decree in the first instance against the surety.
A signed an Rs.15,000/- surety bond for
B, who was liable for a payment of Rs.
50,000/- The said surety bond read as
under:
“I, Mr. A, aged 54 years, residing at 1233
Africa Ave., Delhi, agree to act as a surety
for Mr. B's payment obligations and any
amount that may be finally decreed. I agree
to be liable for the amounts, limited to Rs.
15,000/-”

What is the liability of A?

- Yarlagadda v. Devata China Uerakayya (1966)
 Aditya Narayan Chauresia v. Bank of India
(2000)
If the guarantors bind themselves upto a certain
ADDITIONAL maximum limit their liability cannot go beyond
CASE LAWS that.
Here the guarantors undertook to be liable up to
SURETY’S a maximum amount of ₹25,000 plus interest
payable thereon. It was held that their maximum
LIABILITY IN liability cannot exceed beyond that limit. They
CASE OF were therefore held liable for the part of the
DEFAULT debt only.
The case reinforced the principle that a surety's
liability is contingent upon the terms of the surety
bond. The surety is only responsible for the
amount mentioned in the bond, and not for any
amount beyond what was agreed upon.
 Where there is a condition precedent to the
surety’s liability, the surety will not be liable
unless the condition is first fulfilled.

SURETY’S E.g., S.144: condition regarding other co-surety

joining and where such co-surety does not join
LIABILITY IN the sureties are not liable.
CASE OF
DEFAULT This means that in such a contract, the liability of
the surety is dependent on the condition precedent
that the co-surety will join.
- Conditions
Precedent The surety can be made liable under such a
contract only if the Co-surety joins otherwise, it
cannot.
 SECTION 144: GUARANTEE ON CONTRACT
THAT CREDITOR SHALL NOT ACT ON IT UNTIL
CO-SURETY JOINS
SURETY’S
LIABILITY IN
Where a person gives a guarantee upon a
CASE OF contract that the creditor shall not act upon it
DEFAULT until another person has joined in it as co-surety,
- with a the guarantee is not valid if that other person
does not join.
conditions
precedent that
there shall be Example A agrees with B to stand as a surety
co-sureties for C for a loan of Rs. 10,000 provided D also
joins him as surety. D refuses to join. A is not
liable as a surety.
 S.144 partially recognizes that the surety has
the right to set certain conditions, and only if
those conditions are met he will join as a surety.
SURETY’S
LIABILITY IN
The National Provincial Bank of England vs
CASE OF Brackenbury, where the defendant only agreed
DEFAULT to become the surety if three other co-sureties
- with a joined alongside him. Two co sureties joined but
the third one did not.
conditions
precedent that Held that since there was no new agreement to
there shall be do away with the third co-surety and since the
original agreement had a condition for three co-
co-sureties sureties, the defendant is not liable.
▪The guarantee given by the surety could be
specific or continuing - Specific guarantee means
guarantee given for a single specific transaction
and it comes to an end as soon as the liability
under that transaction ends.
▪Continuing guarantee means it extends to a
number of transactions over a period of time. It
may be revoked at any time by the surety as to
future transactions.
Types of Guarantee
 Means a guarantee given for one specific transaction.

In this case the liability of the surety extends only to a

single transaction.

Exampe: A guaranteed payment to B of the price of 5

sacks of flour to be delivered by B to C and to be paid
SPECIFIC in a month. B delivers 5 sacks to C. C pays for them.
GUARANTEE This is one single transaction a.k.a specific guarantee
transaction

Now if afterwards B delivers 4 sacks to C, which C

does not pay. The guarantee given by A was only a
specific guarantee and accordingly he is not liable for
the price of the 4 sacks.
 Section 129: “Continuing guarantee”
A guarantee which extends to a series of transactions,
is called a “continuing guarantee”.

Illustration
(a) A, in consideration that B will employ C in collecting
CONTINUING the rent of B’s zamindari, promises B to be
responsible, to the amount of 5,000 rupees, for the
GUARANTEE due collection and payment by C of those rents. This
is a continuing guarantee.
(b) 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, for which C does not pay. The guarantee given
by A was not a continuing guarantee, and
accordingly he is not liable for the price of the four
sacks
 ❑ A continuing guarantee is a series of continuing
offers to guarantee future performances, binding only
insofar as it is acted upon.
❑ Surety undertakes to be answerable to the creditor
for his dealings with the debtor, over a certain period.
❑ It may at any time be revoked by the surety, as to
future transactions between the creditor and principal
CONTINUING debtor, by notice to the creditor.

GUARANTEE ❑ To determine whether or not a guarantee is a

Continuing Guarantee, we need to see the intent of
the party and the nature of guarantee provided.
❑ It all depends on:
o Intention of parties. E.g., “ultimate balance to
be paid by surety” or “from time to time”
o construction and nature and circumstances: we
see the subject matter of the construction.
 ORDINARY OR CONTINUING?

1. Guarantee for the conduct of a

servant appointed to collect rents.

2. 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.
PD took a loan from Carl (creditor)
and Sam guaranteed the payment.
On 1st August, PD defaults and
declares himself insolvent. On the
same day, at 10 pm, Sam is involved
in an accident and passes away.
Given that the Sam is no more, does
the contract of guarantee still
remain?
 Section 130: Revocation of continuing guarantee: A
continuing guarantee may at any time be revoked by
the surety, as to future transactions, by notice to the
creditor.
Illustrations
(a) A guarantees to B, to the extent of 10,000 rupees,
REVOCATION that C shall pay all the bills that B shall draw upon
OF him. B draws upon C. C accepts the bill. A gives
notice of revocation. C dishonours the bill at
CONTINUING maturity. A is liable upon his guarantee.
GUARANTEE (b) “A” guarantees payment of Rs. 10000 to “B” on
purchase of coal to be made by “C”. Then “B”
supplied the coal of Rs. 5000 to “C”, “A” gives a
notice to “B” coal dealer not to supply coals to “B”
further. In this case, A is liable for the payment of
supply of coal worth Rs. 5000. But “A” won’t be
liable for any further supply made after the notice
of revocation.
 ❑ Guarantee given for an existing debt cannot be
revoked, as once an offer is accepted it becomes
final.
❑ However, a continuing guarantee can be revoked
REVOCATION for future transactions by giving notice to the Creditor
but this applies only to future transactions. Surety still
OF remains liable for all the transactions that have
CONTINUING happened before the notice.

GUARANTEE ❑ Any notice requirements provided in the contract

needs to be complied.
 Section 131: Revocation of continuing
guarantee by surety’s death: The death of the
REVOCATION surety operates, in the absence of any contract
OF to the contrary, as a revocation of a continuing
CONTINUING guarantee, so far as regards future
GUARANTEE transactions.
 ❑ Unless there is a contract to the contrary, the
death of surety operates as a revocation of the
continuing guarantee in respect to the
transactions taking place after the death of
surety due to the absence of a contract.

❑ Deceased Surety’s legal representatives will

REVOCATION continue to be liable for transactions entered
OF into before his death.
CONTINUING ❑ The estate of the deceased surety is,
GUARANTEE however, liable for those transactions which had
already taken place during the lifetime of the
deceased.

❑ Surety’s estate will not be liable for the

transactions taken after the death of surety
even if the creditor did not know about surety’s
death.
 FAC T S
Syed Zahur-ul-Hasan was a candidate for service in the Postal
Department and had to furnish two sureties for good conduct
during his term of service.
MUHAMMAD He complied with the requirements. The two sureties were:
INSHA ALLAH 1. Hafiz Abdul Rahim and
2. Insha Allah Khan
KHAN
VS Hafiz died in 1910, and in 1916 Sayed embezzled a sum of Rs.
482-20.
MUHAMMAD
UBED-ULLAH The postal authorities recovered the amount from the surviving
surety; Insha.
AND ORS.
(1921) ILR 43 ALL 132 The present suit is by Insha to recover half of this amount from
the heirs of Hafiz.

This is a revision suit, contending that the court below erred in

decreeing the suit, as the security bond ceased to be
operative as against the deceased surety S1 after his death.
 The important portions of the security bond
are:

❑ that the sureties bound "ourselves, our heirs,

MUHAMMAD executors, administrators and the representatives
INSHA ALLAH jointly, and each of us binds himself, his heirs,
KHAN executors, administrators and representatives
severally, formally etc." and
VS
MUHAMMAD ❑ "provided always that neither of the two sureties
shall be at liberty to terminate his suretyship except
UBED-ULLAH upon giving to the head of the said postal circle for
AND ORS. the time being 6 calendar months' notice in writing of
(1921) ILR 43 ALL 132 his intention so to do, etc." and in the event of any
such notice being given, the liability of the surety
by whom it shall be given, shall be thereby
determined in respect only of acts and omissions
happening after the expiration of the said period
of months.
 Law in Focus:

Section 131 of the Indian Contract Act:

MUHAMMAD
INSHA ALLAH The death of the surety operates, in the absence
of any contract to the contrary, as a revocation of
KHAN a continuing guarantee so far as regards future
VS transactions.
MUHAMMAD
UBED-ULLAH
AND ORS.
(1921) ILR 43 ALL 132
 Main Focus of Argument:
The surety bond should remain operative after
the sureties’ deaths and their estate, if any,
MUHAMMAD would remain liable for the embezzlements of
Hasan (PD), and the operation of the bond
INSHA ALLAH would continue so long as he was in service.
KHAN
VS It was contended that the insertion in the latter
MUHAMMAD part of the agreement, that a surety could
terminate his liability by giving 6 months'
UBED-ULLAH previous notice shows that this Agreement
AND ORS. could be terminated at any time, and
(1921) ILR 43 ALL 132 therefore, would ipso facto terminate with the
death of the surety.

The Judges did not decide in that case whether it

was a case of continuing guarantee within the
meaning of Section 131 of the Indian Contract Act.
 Court’s Observation: Judge 1

We do not think that this contention is a sound one.

The only exception to the previous part of this bond,
which was to ensure during the whole of the period of
the service of PD, was that 6 months' notice to terminate
MUHAMMAD it.
INSHA ALLAH
There was no other contingency contemplated and we
KHAN will not be justified in importing another condition, that
VS the death of one of the sureties, by itself, would
terminate the responsibility.
MUHAMMAD
UBED-ULLAH This case illustrates what is meant by the words in the
absence of any contract to the contrary used in Section
AND ORS. 131.
(1921) ILR 43 ALL 132
The death of one of the sureties during the
continuance of the service did not affect the contract
of guarantee, and in our opinion, the claim of the
plaintiff-respondent was rightly decreed by the court
below. We, therefore, dismiss this application with
costs.
 Court’s Observation: Judge 2

We have to interpret the bond and gather from it the

intention of the parties.

MUHAMMAD It is quite clear that the postal authorities would never

INSHA ALLAH have admitted the peon into their service unless his
honesty during the whole course of his employment had
KHAN been guaranteed by two approved guarantors, who
VS bound themselves, not only jointly and severally but
MUHAMMAD also their estate, that they would, to the extent of Rs.
1,000, be responsible in case of the peon's default.
UBED-ULLAH
AND ORS. Unless and until the period of 6 months had elapsed
(1921) ILR 43 ALL 132 after a notice to revoke, their liability, the contract of
indemnity remained and the estate of both was liable.
Therefore, as no notice was given by Hafiz Rahman as
contemplated in the bond during his life or after his
death by his representatives, his estate must be held
liable in this suit.
 In my view, a legal heirs and representatives are
entitled to raise an issue that the deceased has left no
assets, or that they were not in a possession of any
property left by the deceased and thus it was wrong
on part of arbitrator to pass an award attaching
personal property of such legal heirs to discharge the
M/S.TECHNICA deceased surety’s liability.
INTERNATIONA The learned arbitrator however was bound to decide
L VS KOKAN the issue whether properties sought to be attached
MERCANTILE were inherited by the legal heirs from the debtors or
not. In my view part of the award by which the
CO-OP. BANK personal properties of the legal heirs are attached
and the attachment order having been allowed to
April 2013 continue till recovery of the entire amount by the bank
from the parties is perverse and patently illegal and
that part of the award deserves to be set aside.
 The contention raised was that: Respondent's husband
Mahendran, who was the guarantor in respect of the
loan advanced to one M/s. Somerset Tea Plantation,
died and therefore, on his death, the liability as
against the guarantor stands extinguished.
STATE BANK OF Held: This is not correct understanding of law.
INDIA AND Section 131 of the Contract Act clearly provides that in
ANR. VS. MRS. case of death of Guarantor, the date of
JAYANTHI & guarantee/continuing of the guarantee executed in
favour of the bank stands revoked in respect of future
ORS transactions. Hence, we have no hesitation in holding
that the liability of the guarantor cannot be
extinguished on his death so far the liability which
Madras; 2011 existed on the date of the death of the guarantor.

It is well settled that on the death of the guarantor, the

liability exists and such liability can be fastened on the
estate of the deceased, being inherited by his legal
heirs, and the creditor can recover the dues out of the
estate of the deceased."
A enters into a contract for purchase of
100kgs coal sacks with B. C agrees to be
the guarantor securing A performance;
payment of the purchase price of 100kgs of
coal. B supplies the coals per the terms of
the contract. C on his way to office meets
with an accident and passes away. A
defaults in the payment of the purchase
price of coal.
C is survived by his wife and son. B sends
several reminders and requests to A for
payment, failing with B decides to sue C’s
wife and son. C’s legal heirs contend that the
contract of guarantee between A, B and C
ceases to exist on death of C. Comment.
 The period of limitation of enforcing a
LIMITATION guarantee is 3 years from the date on
PERIOD ON which the letter of guarantee was
GUARANTEE executed.
 S. 142
S.143
INVALID
GUARANTEES S. 144
 S.130: by revocation (for continuing
guarantee)
S.131: by death of surety
S.133: by variance
DISCHARGE OF
S.134: by release or discharge of principal
THE SURETY debtor
S.135- by Composition, extension of time
137: and promise not to sue
S.139: by impairing surety’s remedy
 S.130: Revocation of continuing guarantee.—
A continuing guarantee may at any time be revoked by
the surety, as to future transactions, by notice to the
creditor.
✓As the surety sends the notice of revocation to the
creditor, the surety does not remain liable for any
DISCHARGE OF transaction that happens after the notice.
THE SURETY BY ✓However, surety continues to be liable for transactions
before notice.
REVOCATION ✓If the mode of revocation by notice is mentioned in the
(only for contract, then notice must be given in that mode only.
continuing S.131: Revocation of continuing guarantee by surety's
guarantee) death.— 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.
The liability for any transactions that took place before
the death of the surety will be borne by his heirs unless
otherwise agreed.
 OFFORD v. DAVIES
The Defendants guaranteed the repayment of bills to be
discounted by Plaintiffs for Davies & Co. for 12 months
not exceeding GBP 600. The Defendants revoked the
guarantee before any bill was discounted.
DISCHARGE OF Issue: Whether surety had a right to revoke?
THE SURETY BY
REVOCATION ****
(only for
ANIL KUMAR v. CENTRAL BANK OF INDIA
continuing (1997)
guarantee)
A co-surety gave notice to the bank and canceled his
guarantee before the proposal was acted upon.
Issue: Whether the co-surety is released from his
liability? How is the liability of remaining co-sureties
affected?
A guaranteed the payment of the rent
by his servant. But revoked his consent
as soon as the servant left his
employment. Is the employer liable?
 RK Dewan v. State of UP
(2005)

The liability of the deceased

surety can be imposed against
his legal heirs but only to the
extent of the property inherited
by them.
 Section:133. Discharge of surety by variance in terms
of contract: Any variance, made without the surety’s
consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety
as to transactions subsequent to the variance.

DISCHARGE OF Illustrations
THE SURETY BY (a) A becomes surety to C for B’s conduct as a manager
VARIANCE in C’s bank. Afterward, B and 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 overdraw, and the bank loses a
sum of money. A is discharged from his suretyship by the
variance made without his consent and is not liable to
make good this loss.
 ✓ This provision is to protect the interest of the
surety.

✓ A surety is considered a favored debtor and

his liability requires the strictest interpretation of
law.
DISCHARGE OF ✓ Blest v. Brown: held that the surety is bound by
THE SURETY BY the letter of his engagement. He cannot be
VARIANCE bound beyond the proper interpretation of his
engagement.

✓ A guarantee is not a contract w.r.t the primary

transaction. It is an independent transaction
containing independent and reciprocal
obligations.
A guarantees C against the misconduct
of B in an office to which B is appointed
by C, and of which the duties are
defined by an Act of the Legislature. By
a subsequent Act, the nature of the
office is materially altered. Afterwards,
B misconducts himself. Comment on A’s
liability.
D guaranteed the repayment of the
loan of Rs. 20,000/- given by P to PD.
The guarantee paper showed the loan
to be Rs. 25,000/- The bank refused to
accept it. The PD on his own reduced the
amount from 25,000 to 20,000 without
intimation to D. P accepted and PD later
defaulted.
What is the liability of D? Post demand
from P, D claims discharge, can he?
- M.S. Anirudham v. Thomco’s Bank Ltd.
(1963)
 ✓ The main question is whether the variance is
substantial or material or beneficial to the surety?
Will he be discharged?
✓ In Anirudham case: The courts decided on following
basis:
▪ The surety is bound by the letter of engagement. Surety
cannot be held liable beyond the interpretation of the
engagement. He receives no consideration and no benefit.
DISCHARGE OF ▪ If the written engagement is altered even in a single line no
THE SURETY BY matter whether the alteration be innocently made he has the
VARIANCE right to say “The contract is no longer for which I engaged to
be the surety, you have put an end to the contract that I
guaranteed, and my obligation therefore has ended.”
▪ The true rule is that if there is an agreement between the
principal w.r.t the contract guaranteed. The surety ought to be
consulted. If the alteration is unsubstantial or otherwise
beneficial to the surety, the surety may not be discharged. If it
is not self-evident that the alteration is unsubstantial or
beneficial or harms the surety, the court will not go into an
inquiry as to the effect of the alteration and surety can claim
discharge.
 ✓ Advance Authorization: MP High Court held that an
authority given by the surety in advance enabling the
creditor and the PD to make any alteration in the terms
and conditions of the transaction guaranteed would be
contrary to the provision of S.133 and therefore will have
no effect.

✓ Section 133 talks about consent taken at the time of

variance to be simultaneous with the proposed variance.
DISCHARGE OF Quotes said sections 134,135,139 and 141 cannot be
THE SURETY BY nullified in advance.
VARIANCE ✓ Consent may be either prior or subsequent to the
alternation but not in advance. There should not be consent
to variation in a vacuum.

✓An alteration that does not disturb the basic structure of

liability created by a guarantee would not render the
guarantee unenforceable.
 ✓ Decree passed against Surety and PD: the creditor
obtained a decree against PD and the surety making
them collectively and severally liable. The creditor then
entered into a settlement with PD agreeing to accept
from him a lesser amount and not enforce the decree
against him for the balance. The guarantor, based on
the above, claimed discharge on the basis of variance.
DISCHARGE OF The court disagreed and held that once the liability is
converted into a decree debt the earlier constraints of
THE SURETY BY the underlining contract cease to be applicable. After
VARIANCE the passing of the decree, the surety is no longer liable
as a surety but as a joint debtor.

✓ Provisions of Sections 133-139 no longer apply once

the decree has been passed.

- Charan Singh v. Security Finance (P) Ltd. (1988)

 Section 134: Discharge of surety by release or
discharge of principal debtor: The surety is discharged
by any contract between the creditor and the principal
debtor, by which the principal debtor is released, or by
any act or omission of the creditor, the legal consequence
of which is the discharge of the principal debtor.

Illustrations
DISCHARGE b/c (a) A contracts with B to grow a crop of indigo on A's
OF RELEASE OF land and to deliver it to B at a fixed rate, and C
PD guarantees A's performance of this contract. B diverts
a stream of water which is necessary for the irrigation
of A's land and thereby prevents him from raising the
indigo. C is no longer liable on his guarantee.

(b) A contracts with B for a fixed price to build a house

for B within a stipulated time, B supplying the
necessary timber. C guarantees A's performance of
the contract. B omits to supply the timber. C is
discharged from his suretyship.
 ▪ If the PD is released because of any contract between
creditor and PD or by any act or omission of the
creditor, then the surety is released.

▪ This section is on the lines of Section 128 which states

that the liability of the surety is co-extensive with that of
DISCHARGE b/c the PD.
OF RELEASE OF
PD ▪Reason: The release/discharge of the PD extinguishes
the principal obligation.

▪If there is an express term in the guarantee which

preserves the liability of the surety even if the creditor
releases the PD, then the surety is not discharged.
 Implied release/discharge: Where the discharge is
through actions: by any “act or omission” of the creditor.
The acts or omissions contemplated can be actions
omissions referred in Sections 39, 53, 54, 55 & 67.
▪Section 39: party to a contract refuses to perform, or
disabled himself from performing his promise in entirety.
▪Section 53: contract contains reciprocal promises, and
one party to the contract prevents the other from
DISCHARGE b/c performing his promise.
OF RELEASE OF
▪Section 54: when a contract contains reciprocal
PD promises, such that one of them cannot be performed till
the other has been performed.
▪Section 55: party to a contract promises to do a certain
thing at or before a specified time and fails to do any
such thing within that time.
▪Section 67: If promisee neglects or refuses to afford the
promisor, reasonable facilities for the performance of
his promise.
 Section 135: Discharge of surety when creditor
compounds with, gives time to, or agrees not to
sue, principal debtor: A contract between the
creditor and the principal debtor, by which the
DISCHARGE BY creditor makes a composition with, or promises to
ARRANGEMENT give time to, or not to sue, the principal debtor,
BETWEEN discharges the surety, unless the surety assents to
PRINCIPAL such contract.
DEBTOR AND
CREDITOR This Section is an extension of S.133 (discharge
by variance)
 Composition means any compromise with the principal
debtor (without the consent of the surety) with respect to
the debt in question, it discharges the surety.
Not all compromises will discharge the Surety. It depends
on the facts and circumstances of each case: If the
compromise is w/o consent [of surety] and prejudicial to
DISCHARGE BY the Surety, it will definitely release him.

ARRANGEMENT “Promises to give time to” means where a creditor,

BETWEEN without the consent of the surety, extends time for the
payment of debt, surety stands discharged.
PRINCIPAL
DEBTOR AND Even though giving such time does not injure the surety by
the principles of equity, the surety will still stand
CREDITOR discharged.

“Promises not to sue the PD” If the creditor agrees with

the principal debtor to not to pursue any legal recourse
against him, the surety stands discharged. [liability of PD
is co-extensive with Surety]
 Section 136: Surety not discharged when agreement
made with third person to give time to principal
debtor.

Where a contract to give time to the principal debtor is

made by the creditor with a third person, and not with
the principal debtor, the surety is not discharged.
DISCHARGE BY Illustration
ARRANGEMENT
C, the holder of an overdue bill of exchange drawn by A
BETWEEN as surety for B, and accepted by B, contracts with M to
PRINCIPAL give time to B. A is not discharged.
DEBTOR AND S.135 vs. S.136
CREDITOR S.135: A contract between the creditor and the
principal debtor, to give time to the principal debtor,
discharges the surety, unless the surety assents to such
contract.

S.136: Creditor makes an agreement to give time to the

principal debtor, with a third party. It will not discharge
the surety.
 137. Creditor's forbearance to sue does not discharge
surety: Mere forbearance on the part of the creditor to
sue the principal debtor or to enforce any other remedy
against him does not, in the absence of any provision in
the guarantee to the contrary, discharge the surety.

Illustration

B owes to C a debt guaranteed by A. The debt

DISCHARGE BY becomes payable. C does not sue B for a year after the
CREDITOR’S debt has become payable. A is not discharged from his
suretyship.
FORBEARANCE
This section deals with a case of ‘mere forbearance’ to
sue or to enforce any other remedy. This forbearance may
be exercised for a period – short or until the expiry of
period of limitation.

When creditor does not sue the principal debtor on its

own then the surety is not discharged.
 S.139, Discharge by act or omission by creditor: Act
or omission by the creditor which results in harming the
rights of the surety, and also impairs the eventual
remedy of the surety himself against the principal
debtor, discharges the surety.

Elements: Surety is discharged when:

✓ The creditor either does something inconsistent with

DISCHARGE BY the rights of the surety; OR
✓ omits to do his duty towards the surety,
CREDITOR’S ✓ AND BECAUSE OF THIS: The eventual remedy of the
ACT OR surety that he had against the PD, is impaired
OMISSION The object of this section is to ensure that no
arrangement different from that contained in the
surety’s contract is forced upon him.

Duty of care is owned by the creditor.

 Sections 133, 134 and 135 deal with some of the
acts/omissions of the creditor with the principal debtor,
which discharge the surety.

The object of 139 is to ensure that no arrangement

different from that contained in the surety’s contract is
forced upon him and that the surety, if he pays the
debt, has the benefit of every remedy which the
DISCHARGE BY creditor has against the principal debtor.

CREDITOR’S The substance of Section 139 is that it is the duty of the

person who has secured a guarantee, to do every act
ACT OR necessary for the protection of the rights of the surety.
OMISSION
 • Rights against Principal Debtor
RIGHTS OF
SURETY • Rights against Creditor
• Rights against Co-Sureties
 Section 140: Rights of surety on payment or
performance: Where a guaranteed debt has
become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the
surety upon payment or performance of all that
he is liable for, is invested with all the rights which
the creditor had against the principal debtor.
S.140
RIGHTS OF I.E., Surety can now sue the PD for the amount of debt
SURETY paid by him to the creditor due to the default of the
AGAINST PD PD.

Where a guaranteed debt has become due, or

default of the principal debtor to perform a
guaranteed duty has taken place, the surety, upon
payment or performance of all that he is liable for, is
invested with all the rights which the creditor had
against the principal debtor.
 The meaning of this section is that the surety steps
into the shoes of the creditor after he has paid
the guaranteed debt or performed whatever he
was liable for. This right of the surety to step into
the shoes of the creditor is known as the surety’s
right of subrogation.
S.140
RIGHTS OF Automatic subrogation: Once the surety has
SURETY paid the guarantee amount to the creditor. The
surety is invested with this right automatically
AGAINST PD without any pre-conditions attached to it.

In a case where the PD on discovering that the debt

has become due, starts disposing of his properties
to prevent seizure by the surety, the surety can
compel the debtor to pay the debt and discharge
him from his liability to pay.
 Section 141: Surety’s right to benefit of
creditor’s securities: A surety is entitled to the
benefit of every security which the creditor has
against the principal debtor at the time when
the contract of suretyship is entered into,
whether the surety knows of the existence of
such security or not; and if the creditor loses, or,
S.141 without the consent of the surety, parts with such
security, the surety is discharged to the extent
RIGHTS OF of the value of the security.
SURETY
AGAINST PD Illustration

A, as surety for B, makes a bond jointly with B

to C, to secure a loan from C. Afterwards, C
obtains from B a further security for the same
debt. Subsequently, C gives up further security.
A is not discharged.
 It is important to note that S.141 applies even
when at the time of entering into the contract of
guarantee the surety was unaware of the
existence of such a security.

When the creditor loses or parts with such

security without the consent of the surety, this
S.141 discharges the surety to the extent of the value
of such security.
RIGHTS OF
SURETY Right to set off: When the creditor sues the
AGAINST PD surety for the payment of PD’s liabilities, the
surety can claim set off, or counterclaim if any,
which the PD had against the creditor.
 Section 145: Implied promise to indemnify
surety: In every contract of guarantee there is
an implied promise by the principal debtor to
indemnify the surety, and the surety is entitled to
recover from the principal debtor whatever sum
he has rightfully paid under the guarantee, but,
no sums which he has paid wrongfully.
S.145
RIGHTS OF Illustrations
SURETY C lends B a sum of money, and A, at the request
of B, accepts a bill of exchange drawn by B
AGAINST PD upon A to secure the amount. C, the holder of
the bill, demands payment of it from A, and, on
A’s refusal to pay, sues him upon the bill. A, not
having reasonable grounds for so doing,
defends the suit, and has to pay the amount of
the bill and costs. He can recover from B the
amount of the bill, but not the sum paid for
costs, as there was no real ground for
defending the action.
On the guarantee of Priya, Anita lent
Rs 1,00,000 to Sita. This debt is
further secured by mortgaging Sita’s
small dental clinic. Sita defaults in
paying the debt and Priya has to pay
the debt.
What are the rights Priya?
Kavi, advances to his tenant Brijesh Rs.
20,000/- on the guarantee of Aryan.
Kavi also took Brijesh’s Recliner chair as
a security for the said loan. Brijesh
convinced Kavi to return his favorite
recliner chair and also gave evidence of
Aryan’s very strong financials ensuring
that Kavi would be re-paid.
Kavi decides to cancel the mortgage
and return the recliner. Brijesh defaults
on his payment obligation and Kavi sues
Aryan.
What is Aryan’s liability?
 Section 146: Co-sureties liable to contribute equally:
Where two or more persons are co-sureties for the same
debt or duty, either jointly or severally, and whether under
the same or different contracts, and whether with or without
the knowledge of each other, the co-sureties, in the absence
of any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt,
or of that part of it which remains unpaid by the principal
debtor1.
S.146
RIGHTS OF CO- Illustrations
(a) A, B and C are sureties to D for the sum of 3,000 rupees
SURETY lent to E. E makes default in payment. A, B and C are liable,
as between themselves, to pay 1,000 rupees each.

(b) A, B and C are sureties to D for the sum of 1,000 rupees

lent to E, and there is a contract between A, B and C that A
is to be responsible to the extent of 1/4, B to the extent of
1/4, and C to the extent of 1/2. E makes default in
payment.
As between the sureties, A is liable to pay 250 rupees, B
250 rupees, and C 500 rupees.
 The essence of this section is that if the creditor calls
upon one of the co-sureties to pay the debt or any part
of it, that surety has a right, on principles of equity, to
call upon his co-sureties for contribution. (Sometimes
called as a “right of contribution”)

Section 138: Release of one co-surety does not

discharge others: Where there are co-sureties, a
S.146 + 138 release by the creditor of one of them does not
discharge the others; neither does it free the surety so
RIGHTS OF CO- released from his responsibility to the other sureties.
SURETY
Co-sureties are liable to contribute as per the amount
secured. Thus, when the payment of a debt or
performance is guaranteed by co-sureties and the
principal debtor has defaulted and the creditor
compels only one of the co-sureties to perform the
whole contract, the co-surety surety performing the
contract is entitled to claim contribution from the
remaining co-sureties.
 Section 147: Liability of co-sureties bound in
different sums: Co-sureties who are bound in different
sums are liable to pay equally as far as the limits of
their respective obligations permit.

Illustrations
S.147
RIGHTS A, B and C, as sureties for D, enter into three several
bonds, each in a different penalty, namely, A in the
AGAINST CO- penalty of 10,000 rupees, B in that of 20,000 rupees,
SURETIES C in that of 40,000 rupees, conditioned for D’s duly
accounting to E. D makes default to the extent of
70,000 rupees. A, B and C have to pay each the full
penalty of his bond.
▪ S.132: where two sureties (or more)
simultaneously give a guarantee to the creditor,
and where the said two sureties enter into a
contract between themselves that one of the
surety will pay in case of default of the other
surety. Even if the creditor is not a party to such a
contract (he may or may not be aware of it), the
joint liability of the said two sureties towards the
creditor is not diluted in any way due to the
existence of any such contract between the
Sureties.
A, B and C, sureties for D, enter into
three separate bonds, each in a
different penalty, A for Rs. 10,000, B
for Rs. 20,000 and C for Rs. 40,000. D
makes default to the extent of Rs.
30,000.
What is individual liability of A, B and
C?
Suppose this default was to the extent
of Rs. 40,000. Then what is the
individual liability of A, B and C?
BANK
GUARANTEE
BASICS ONLY
 ❑ It is a promise made by the bank to a third party
(creditor) undertaking the payment on behalf of its
customers.

❑ The bank guarantee means that the lender will ensure

that the liabilities of a debtor will be met.
WHAT IS BG?
❑ A bank guarantee enables the customer (or debtor) to
acquire goods, buy equipment, or draw down a loan.

❑ The main aim of the BG is to protect the third party

(creditor) from the financial losses and help the Bank’s
customer in the growth and promoting the business
activity.
 ❑ A payment guarantee assures a seller the purchase price is
paid on a set date.
❑ An advance payment guarantee acts as collateral for
reimbursing advance payment from the buyer if the seller
does not supply the specified goods per the contract.
EXAMPLES OF BG ❑ A rental guarantee serves as collateral for rental agreement
payments.
❑ A confirmed payment order is an irrevocable obligation
where the bank pays the beneficiary a set amount on a
given date on the client’s behalf.
❑ There are two key types of bank guarantees—financial
bank guarantee and performance guarantee. Financial
bank guarantees are for debts owed, while performance-
based guarantees are for obligations laid out in a contract,
such as particular tasks.
 XYZ Co. is newly established textile factory that wants to
purchase Rs. 1 Cr worth raw materials. The raw material vendor
requires XYZ Co. to provide a bank guarantee to cover
payments before the shipment of the raw materials to the
company. XYZ Co. requests and obtains a bank guarantee from
EXAMPLE leading financial institution keeping its cash accounts. If the
company defaults the vendor can receive the money from
bank.

XYZ Co. Vendor

Bank
 Company A is a new restaurant that wants to buy $3 million in
kitchen equipment. The equipment vendor requires Company A
to provide a bank guarantee to cover payments before they ship
the equipment to Company A. Company A requests a guarantee
from the lending institution keeping its cash accounts. The bank
essentially cosigns the purchase contract with the vendor.
EXAMPLE
$ 3M Kitchen Equip

Co. A Equip.
Vendor

Bank
 ❑ The bank guarantee can be invoked anytime by the beneficiary
when the terms of guarantee are fulfilled, all that bank is to
verify the all terms of the guarantee have been fulfilled.

❑ However, in case of an unconditional guarantee the

beneficiary has to realise the BG irrespective of the fact the
INVOCATION dispute is pending.

❑ Only exception when the Banker may refuse to encash the BG

is in the event of fraud.

In the normal BG the surety’s liability is as per Section 128 of

the Contract Act which is co extensive with that of principal
debtor i.e. the liability of the BG is to the same extent as that
of principal debtor.
 The Piano Man Jazz Club restaurant wishes to
purchase new furniture from Bent Chair. The
new furniture is worth Rs. 20 lakh. Bent Chair
asks for a bank guarantee in order to feel more
confident that it will receive the payment for
the equipment it ships to The Piano Man.

Who is Who?

How will the transaction proceed?

 BASIS FOR
LETTER OF CREDIT BANK GUARANTEE
COMPARISON

Meaning Letter of credit is an financial A bank guarantee is a guarantee

document for assured payments, i.e. given by the bank to the beneficiary
an undertaking of the buyer's bank to on behalf of the applicant, to effect
make payment to seller, against the payment, if the applicant defaults in
documents stated. payment.

COMPARISON
Liability Primary Secondary

Default Doesn't wait for applicant's default Becomes active only when the
and beneficiary to invoke applicant defaults in making
undertaking. payment.

Payment Payment is made only when the Payment is made on the non-
condition specified is fulfilled. fulfillment of obligation.
 SAMPLE QUESTION
Creditor agrees to sell 5000 bottles of coke to the Principal Debtor for
Rs. 10 Lakhs. The delivery of these bottles had to be done in two
instalments of 2500 each with one batch to be delivered on April 1,
2017 and the other on April 3, 2017. The payment was to be made in
lump sum by the Principal Debtor on April 10, 2017. The Surety was
responsible to pay on behalf of the Principal Debtor on April 11, 2017
in case of the latter’s failure. After the first batch of bottles is delivered,
the Surety gives notice to the Creditor on April 2, 2017 that he’s
revoking his guarantee. The Creditor delivers the second batch to the
Principal Debtor as promised. The Principal Debtor fails to pay his
dues. What is the liability of the Surety, if any?
 SAMPLE QUESTION
C (a service professional who’s 23 years old) lends Rs. 25000 to B on the
security of a joint and several promissory note made in C’s favor by B and
A (Surety) together. This promissory note was executed along with a bills
of sale of B’s furniture, which gives power to C to sell the furniture (worth
Rs. 15000 at the time), and apply the proceeds in discharge of the note.
This latter arrangement was made as B had no money in his account left
other than what he got from C. Now, when B fails to pay up the money he
owed after a couple of months, C puts all the furniture he had from B
outside his house for sale. The first customer that comes to him to buy all
the furniture offers him Rs. 5000 for it and he accepts the offer. C now
sues the Surety on the promissory note for the remainder of the amount.
Surety claims that he stands discharged from all liability. What do you
think?
 SAMPLE QUESTION
A valid contract of guarantee exists between a Creditor (Bank), Principal
Debtor (Cashier in that Bank) and a Surety (Guaranteeing the good
conduct of the Cashier). The Cashier while giving cash to one of its
customers gave her a fake Rs. 2000 note and kept the original one with
himself. A few days later when the customer brings this to the Bank’s
attention, the Bank reprimands the Cashier and makes him pay Rs. 2000
to the customer. The Surety is not informed of this incident. A year later,
the Cashier repeats what he did earlier and this time swaps a whooping
Rs. 2 lakh worth of Rs. 2000 notes. The Bank fires the Principal Debtor
and asks the Surety to pay up Rs. 2 lakhs to them. Can the Surety claim
he’s been discharged?