Guarantee

PRAMA MUKHOPADHYAY
(1) What is a guarantee, and what are the differences between an indemnity and a
guarantee?
(2) What is the extent of a surety’s/co-surety’s liability, and how does it get discharged?
(3) What are the rights of a surety against (i) the principal debtor, (ii) the creditor, and
(iii) co-sureties?
(4) What is a continuing guarantee?
(5) What is a bank guarantee? When can a beneficiary invoke a bank guarantee, and
under what circumstances can a party move to enjoin encashment of a bank
guarantee?

 Section 126-147
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”. A guarantee may be either
oral or written.
Example

You apply for a car loan to HDFC Bank. However, HDFC requires a guarantee
to be signed by one of your parents, stating that if you default on a payment,
they undertake to pay HDFC the unpaid amount. You are the principal
debtor. HDFC is the creditor. Your parent is the guarantor. The contract
between your parent and HDFC is the Contract of Guarantee.
Objective

 The object of contract of guarantee is to provide additional security to the

creditor in the form of a promise by the surety to fulfill a certain obligations,
in the case of principal debtor fails to do that
Parties

 Every contract of guarantee there are three parties: the creditor, the
principal debtor and the surety.
 There are three contracts in a contract of guarantee.
 First- the principal debtor himself makes a promise in favour of the creditor
to perform a promise.
 Second- The surety undertakes to be liable towards the creditor if the
principal debtor makes any default.
 Third- an implied promise by the principal debtor in favour of the surety
that in case the surety has to discharge the liability of the default of the
principal debtor, the principal debtor shall indemnify the surety for the
same.
Features of Contract of Guarantee

 The contract may be either oral or written.

 There should be a principal debt- A contract of guarantee pre-supposes a
principal debt or an obligation to be discharged by a principal debtor.
The surety undertakes to be liable only if the principal debtor fails to
discharge his obligation.
 Essentials of a valid contract
Features of Contract of Guarantee

Benefit to the principal debtor is sufficient consideration (section 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.
 Like any other contract, consideration is essential for a contract of
guarantee too. A contract of guarantee, without consideration is void.
 For the surety’s promise it is not necessary that there should be direct
consideration between the creditor and the surety, it is enough that the
creditor had done something for the benefit of the principal debtor.
Examples

(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 requests A to forbear to sue B
for the debt for a year, and promises that, if he does so, C will pay for them in
default of payment by B. A agrees to forbear as requested. This is a sufficient
consideration for C’s promise.
(c) A sells and delivers goods to B. C afterwards, without consideration,
agrees to pay for them in default of B. The agreement is void.
Features of Contract of Guarantee

Consent of the surety should not have been obtained by misrepresentation or

concealment
 The creditor should not obtain guarantee either by any misrepresentation or
concealment of any material facts concerning the transaction. If the
guarantee has been obtained in that way then that is invalid.
 Section 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.
 Section 143. Guarantee obtained by concealment invalid.—Any guarantee
which the creditor has obtained by means of keeping silence as to material
circumstances, is invalid.
Illustrations
(a) A engages B as clerk to collect money for him. B fails to account for
some of his receipts, and A in consequence calls upon him to furnish
security for his duly accounting. C gives his guarantee for B’s duly
accounting. A does not acquaint C with B’s previous conduct. B
afterwards makes default. The guarantee is invalid.
(b) A guarantees to C payment for 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
five rupees per ton beyond the market price, such excess to be applied
in liquidation of an old debt. This agreement is concealed from A. A is not
liable as a surety.
Indemnity v Guarantee

 Number of parties to a contract –

 A contract of guarantee involves three parties: (1) A Creditor, (2) A
Principal-Debtor, and (3) A Surety. A contract of indemnity involves two
parties: (1) An Indemnifier, and (2) An Indemnity Holder.
Indemnity v Guarantee

 Number of Contracts:
 In a contract of guarantee, there ought to be three contracts ideally. First,
between the creditor and the principal debtor, second, between creditor
and the surety, and third, between the principal debtor and the surety.
 In a contract of indemnity, there’s only one contract – between the
indemnifier and the indemnity holder.
Indemnity v Guarantee

 Nature of Liability
 In a contract of guarantee, the obligation of the surety depends
substantially on the principal debtor’s default. Therefore, the nature of
liability of the surety is secondary. This liability will only arise if the principal
debtor fails.
 Under a contract of indemnity, the indemnifier undertakes an
independent obligation which does not depend upon the existence of
any other obligation. Therefore, the nature of liability of the indemnifier is
primary.
 The liability of the surety presupposes the existence of a principal-debtor
and the surety’s liability is thus secondary.
Indemnity v Guarantee

 Purpose
Indemnity- to compensate for the loss and Guarantee- to give assurance to the
promise
 Maturity- In case of indemnity, when contingency arises. In case of guarantee,
liability already exists (when the PD defaults)
 Right to sue: Indemnifier cannot sue a third party for the loss suffered. After the
surety had discharged his liability and paid to the creditor, he steps into the
shoes of the creditor. The Surety can sue the PD to realize the payment made
by him.
 English law- In England Contract of indemnity may be oral or written. A
contract of guarantee should be written. No such distinction exists in India.
Example:

 Example: A and B have entered into a contract whereby A agrees to supply to

B, 100 tons of olive oil at his factory on 25th February, 2016, for a consideration
of Rs. 10 Lakh. C, is a friend of B. When B tells C of his contract with A, C makes
an oral promise to B that if A does not deliver as per the contract, he will pay
Rs. 10 Lakh to B. Identify who is the Creditor, the Principal Debtor and the
Surety.

 In this example, C makes an oral promise to B to compensate him for A’s

default. The problem here is that A is not privy to this conversation between B
and C. Therefore, C is a total stranger to this contract. This is not a contract of
guarantee. This may be construed as a contract of indemnity between A and
C, depending on other facts.
Minor

 Though all the parties must be capable of entering into a contract, the
principal debtor may be a party incompetent to contract (minor). In such
a case, the surety will be regarded as the principal debtor and will be
liable to pay personally even thought he principal debtor is not liable.
English Law

 In English law a guarantee is defined as "a promise to answer for the debt,
default or miscarriage of another.
 The words “debt, default or miscarriage” is descriptive of failure to perform
legal obligations, existing or future, arising from any source, not only from
contractual promises, but in any other factual situations capable of giving
rise to legal obligations, such as those resulting from bailment, tort, or
unsatisfied judgments.
 Under English Law, for a valid contract of guarantee, it is necessary that it
should be in writing and signed by the party to be charged therewith.
Types of Guarantee (on the basis of
transaction)

 Specific guarantee and continuing guarantee.

Specific Guarantee
 Means a guarantee given for one specific transaction. In this case the
liability of the surety extends only to a single transaction.
 Example- P taken a loan of Rs 5000 from C, which is guaranteed by S. P
repays the loan in time. The guarantee comes to an end. If P takes a loan
from C again, it would require a fresh guarantee.
Continuing Guarantee

 Section 129. “Continuing guarantee”.—A guarantee which extends to a

series of transactions, is called a “continuing guarantee”.
Examples

 A guarantee payment to B of the price of 5 sacks of flour to be delivered

by B to C and to be paid in a month. B delivers sacks to C. C pays for
them. Afterwards B delivers four 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 four sacks.
 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 above
the 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 B to the extent of
£100.
 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 does 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 guarantee, the subject matter, the intention of the parties
and the surrounding circumstances.
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, in consideration of B’s discounting, at A’s request, bills of exchange for C,
guarantees to B, for twelve months, the due payment of all such bills to the extent
of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at
the end of three months, A revokes the guarantee. This revocation discharges A
from all liability to B for any subsequent discount. But A is liable to B for the 2,000
rupees, on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, 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.
Section 130

 This section permits revocation of guarantee by surety:

(i) When it is a continuing guarantee
(ii) As regards future transactions only
Section 131:Revocation of continuing
guarantee by surety’s 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.
Section 128: 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.
 Surety’s liability is coextensive with that of a principal debtor means that his
liability is exactly same as that of the principal debtor. However, a surety may
limit or restrict his liability by contract.
 It means that on a default of having been made by the principal debtor, the
creditor can recover from the surety all what he could have recovered from
the principal debtor.
 Example- A takes a loan of Rs 10,000 from B. C acts as a surety. In case A
defaults in the payment of Rs 10,000 to B. B, the creditor may recover from C,
the surety the sum of Rs.10,000 plus interest plus the amount spent by him in
recovering that amount.
 A surety is not entitled to any kind of notice of default of the principal
debtor, unless the terms of the guarantee so require.
 It is not necessary for the creditor, before proceeding against the surety, to
first call upon the principal-debtor to pay, unless such a demand is
necessary under the contract.
 The liability of the surety is joint and several with the principal debtor. It is
not affected by the death of the principal debtor.
 It is the choice of the creditor to recover the amount either from the
principal debtor after his default, or from the surety.
 He may file a suit against both the principal debtor and the surety, or at
his option, only against the surety, or only against the debtor, or against
any one of the co-sureties.
Bank of Bihar v. Damodar Prasad

 The bank of Bihar (Plaintiff) lent moneys to Damodar Prasad (Defendant No 1)

on the guarantee of Paras Nath Sinha (Defendant No 2).
 On the date of the suit Damodar Prasad was indebted to the plaintiff for Rs.
11,723.56 on account of principal and Rs. 2,769.37 on account of interest.
 In spite of demands neither he nor the guarantor paid the dues.
 The Trial Court decreed the suit against both the defendants.
 While passing the decree, the Trial Court directed that the "plaintiff bank shall
be at liberty to enforce its dues in question against defendant No. 2 only after
having exhausted its remedies against defendant No. 1".
 The plaintiff filed an appeal to HC.
 The HC dismissed the appeal.
Bank of Bihar v. Damodar Prasad,
(1969) 1 SCR 620

Held
 The Court ruled in favor of the Plaintiff.
 The very object of guarantee is defeated if the creditor is asked to
postpone his remedies against the surety. The liability of the surety is
immediate.
 The Creditor is not bound to exhaust his remedy against the principal,
before suing the surety and a suit may be maintained against the surety
even though the principal has not been sued.
Limit on Surety’s Liability

 As per section 128 the liability of the surety is coextensive with that of the
principal debtor.
 However, if the contract provides that a surety will not be liable to the full
extent of the principal debtor’s debt but small than that, then he will be
liable only to that extent.
Discharge of Surety From
Liability
The modes of discharge of surety

 Revocation by surety (Section 130)

 By surety’s death (Section 131)
 By variance in the terms of the contract (Section 133)
 By release or discharge of principal debtor (section 134)
 When creditor compounds with, gives time to, or agrees not to sue, the
principal debtor (Section 135)
 By creditor’s act or omission impairing surety’s eventual remedy (Section
139)
 By loss of the security by the creditor (Section 141).
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.
 When a surety has undertaken liability on certain terms, it is expected that
they will remain unchanged during the whole period of guarantee.
 If there is any variance in the terms of the contract between the principal
debtor and Surety, the Surety gets discharged as regards transactions
subsequent to such a change.
 Anirudhan v. Thomco’s Bank, AIR 1963
SC 746
 The defendant guaranteed the repayment of a loan of Rs 20,000 given by the
plaintiff bank to the principal debtor.
 The guarantee paper showed the loan to be Rs25,000. The bank refused to
accept.
 The principal then reduced the amount to Rs20,000 and without intimation to
the surety gave it to the bank which was then accepted.
 (a) The figure “5” in the amount of guarantee of Rs. 25,000 appeared to have
been altered to “0” so that the new guarantee amount is Rs. 20,000. (b) Also,
the word “five” was struck out resulting in the sum being “Rupees Twenty
Thousand only”

 The principal debtor failed to pay and the bank sued the surety.
Anirudhan v. Thomco’s Bank, AIR 1963
SC 746

 Issue- Whether the alteration had discharged him?

Held
 The surety was not discharged.
 When the alteration is to the benefit of the surety, that is no material
alteration. Such as alteration is unsubstantial and that does not discharge
the surety from liability.
 For a variation to be considered “material”, it is necessary that this
variation is such that it varies the rights, liabilities or legal position of the
parties as ascertained by the deed in its original state, or otherwise varies
the legal effect of the instrument as originally expressed.
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

 (a) A gives a guarantee to C for goods to be supplied by C to B. C supplies

goods to B, and afterwards B becomes embarrassed and contracts with his
creditors (including C) to assign to them his property in consideration of their
releasing him from their demands. Here B is released from his debt by the
contract with C, and A is discharged from his suretyship.
 (b) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B
at a fixed rate, and C 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.
 (c) 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.
 The acts or omissions contemplated by this section are possibly those
referred to in Sections 39, 53, 54, 55 & 67. If the principal debtor is
discharged from his obligation by reason of any acts or omissions specified
in these sections, the liability of the surety also stands extinguished.
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
creditor makes a composition with, or promises to give time to, or not to sue,
the principal debtor, discharges the surety, unless the surety assents to such
contract.
 According to this section, a contract between the creditor and the
principal debtor discharges the surety in the following three
circumstances-
(i) when the creditor makes composition with the principal
(ii) When the creditor promises to give time to the principal debtor, and
(iii) When the creditor promises not to sue the principal debtor
Section 136. Surety not discharged when agreement made
with third person to give time to principal debtor

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.

 Example: Ashok agrees with Bikash to supply him 20 Kg rice for Rs. 5000.
Chintu stands surety to Ashok under this valid contract of guarantee.
Ashok agrees with Dinesh (Bikash’s father, who’s approached Ashok
voluntarily out of love for his son) to extend the delivery date of Bikash’s
contractual obligations by a week. Is Chintu discharged in this scenario?
Section 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.
Example- B owes to C a debt guaranteed by A. The debt becomes payable.
C does not sue B for a year after the debt has become payable. A is not
discharged from his suretyship.
Section 139: Discharge of surety by creditor’s act
or omission impairing surety’s eventual remedy

If the creditor does any act which is inconsistent with the rights of the surety, or
omits to do any act which his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged.
 Section 139 consists of the following elements:

1. The creditor either does something which is inconsistent with the rights of
the surety OR omits to do his duty towards the surety, AND BECAUSE OF
THIS…
2. The eventual remedy of the surety that he had against the principal
debtor, is impaired,

If these two conditions are fulfilled, the surety is discharged.

Illustrations

(a) B contracts to build a ship for C for a given sum, to be paid by instalments as the
work reaches certain stages. A becomes surety to C for B’s due performance of the
contract. C, without the knowledge of A, prepays to B the last two instalments. A is
discharged by this prepayment.
(b) C lends money to B on the security of a joint and several promissory note made in
C’s favour by B, and by A as surety for B, together with a bill of sale of B’s furniture,
which gives power to C to sell the furniture, and apply the proceeds in discharge of the
note. Subsequently, C sells the furniture, but, owing to his misconduct and wilful
negligence, only a small price is realized. A is discharged from liability on the note.
(c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B prom ises
on his part that he will, at least once a month, see M make up the cash. B om its to see
this done as promised, and M embezzles. A is not liable to B on his guarantee.
Section141: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, without the consent of the surety, parts with
such security, the surety is discharged to the extent of the value of the
security.
Illustrations:

(a)C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has

also a further security for the 2,000 rupees by a mortgage of B’s furniture. C
cancels the mortgage. B becomes insolvent and C sues A on his guarantee.
A is discharged from liability to the amount of the value of the furniture.
(b)C, a creditor, whose advance to B is secured by a decree, receives also a
guarantee for that advance from A. C afterwards takes B’s goods in
execution under the decree, and then, without the knowledge of A,
withdraws the execution. A is discharged.
(c)A, as surety for B, makes a bond jointly with B to C, to secure a loan from C
to B. Afterwards, C obtains from B a further security for the same debt.
Subsequently, C gives up the further security. A is not discharged.
Amrit Lal v. State Bank of Travancore

 On February 27, 1956, a partnership firm entered into an agreement with

the then Travancore Forward Bank Ltd. (now replaced by State Bank of
Travancore) for a Cash Credit Account to the extent of Rs. 1 lakh, secured
by goods to be pledged with the Bank.
 They also agreed that in case of their defaulting in payment of loan, the
bank was at liberty to sell or dispose of their goods pledged as securities to
adjust the sale proceeds so obtained against their outstanding loan
amount.
 The appellant stood as surety for the respondents up to the entire cash-
credit limit of Rs one lac and promised to pay the bank in case
respondents defaulted in payment.
Amrit Lal v. State Bank of Travancore

 Issues

i) Whether there was a variation in he terms of the contract and would that
lead to discharged of surety as per section 133 of contract act?
ii) Whether giving time to the respondents to make good the loss of Rs 35690
on account of shortage of good absolves the suret of all liability of
guarantee under section 135 of Contract Act?
iii) Whether a portion of the security was lost by the creditor-Bank without
surety’s consent and whether the surety is discharged of liability to the
extent that security is lost?
Amrit Lal v. State Bank of Travancore

Held
 No variation was found. Therefore, the surety is not discharged as per
section 133.
 The Court held that this extension of time was not the same as has been
contemplated under Section 135. The Court stated, “What really
constitutes giving of time is the extension of the period at which (by
contract between them) the principal debtor was originally obliged to pay
the creditor, by substituting a new and valid contract between the
creditor and the principal debtor to which the surety does not assent.”
Held
 The Supreme court held that under section 141 of the Indian contract Act,
1872, the creditor without the consent surety loses the part of security, the
liability of A was released to the extent of the value of the security so lost.
Subramania Chettiar v. Narayanswami

 The Principal Debtor’s debt was scaled down by the Madras Agriculturists’
Relief Act.

 Issue- The only question before the court was whether such scaling down
of the Principal Debtor’s debt will also ensure that the liability of the Surety
is equally scaled down?
Subramania Chettiar v. Narayanswami

Held
 Section 128, Contract Act, says that the liability of the surety is co-extensive
with that of the principal debtor unless it is otherwise provided by contract. It is
a settled principle of law that the surety's- liability is only accessory and
secondary.
 Under the express provisions of Section 128 his liability is made only co-extensive
with that of the principal debtor. That can only mean that his liability, is no less
or no more than that of the principal debtor. If the amount payable by the
principal debtor is discharged in part, the surety's liability also is pro tanto
reduced.
 Surety will not be liable for the entire debt when the principal debt has been
scaled down under the Madras Agriculturists' Relief Act, and that his liability will
only be co-extensive with that of the agriculturist principal debtor.
Right of Surety
Against the Principal Debtor
Section140: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.
Right of Subrogation

 In other words, the surety steps into the shoes of the creditor and by an
action against the principal debtor, he can recover from him all that,
which could have been recovered by the creditor.
 This is known as surety’s right of subrogation.
 Once the surety has paid the guaranteed amount to the creditor, he can
sue the principal debtor in his own name. The surety is invested with this
right automatically, without any pre-conditions attached to it.
 The surety is entitled to the same priority, as the creditor, in the event of
insolvency or winding up of the principal debtor.
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.
 B is indebted to C, and A is surety for the debt. C demands payment from
A, and on his refusal sues him for the amount. A defends the suit, having
reasonable grounds for doing so, but is compelled to pay the amount of
the debt with costs. He can recover from B the amount paid by him for
costs, as well as the principal debt.
Example

 A guarantees to C, to the extent of 2,000 rupees, payment for rice to be

supplied by C to B. C supplies to B rice to a less amount than 2,000 rupees,
but obtains from A payment of the sum of 2,000 rupees in respect of the
rice supplied. A cannot recover from B more than the price of the rice
actually supplied.
 Expressed promise to indemnify
 Implied promise to indemnify
About Co-sureties
Section 132: Liability of two persons, primarily liable, not affected by
arrangement between them that
one shall be surety on other’s default

Where two persons contract with a third person to undertake a certain

liability, and also contract with each other that one of them shall be liable
only on the default of the other, the third person not being a party to such
contract, the liability of each of such two persons to the third person under
the first contract is not affected by the existence of the second contract,
although such third person may have been aware of its existence
Example:

 A and B make a joint and several promissory note to C. A makes it, in fact,
as surety for B, and C knows this at the time when the note is made. The
fact that A, to the knowledge of C, made the note as surety for B, is no
answer to a suit by C against A upon the note.
 where two persons (Sureties) simultaneously gives a guarantee to the third
person (Creditor). In such cases, 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, and where the Creditor is not a party to the
said Contract although he may be aware of such Contract, the joint
liability of the said two Sureties towards the Creditor is not diluted in
anyway due to the existence of any such Contract between the Sureties.
Section 144: Guarantee on contract that creditor shall not act on it until co-

surety joins .

Where a person gives a guarantee upon a contract that the creditor shall not
act upon it until another person has joined in it as co-surety, the guarantee is
not valid if that other person does not join.
 If a person has given a guarantee on condition that it shall not be
effective until another person has joined as co-surety, the guarantee is not
valid if another person does not join as surety.
 A contract contemplated under this section can be oral, written, and
contemporaneous or anterior to the surety bond in point of time or it may
even be incorporated in the surety bond itself.
Section 138: Release of one co-surety does not
discharge others

Where there are co-sureties, a release by the creditor of one of them does
not discharge the others; neither does it free the surety so released from his
responsibility to the other sureties.
Right against Co-sureties
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 which
remains unpaid by the principal debtor.
 The duty of the co-sureties is to contribute equally. This is so when they are
co-sureties for the same debt.
 It is immaterial that they have undertaken a duty either jointly or severally,
or under the same or different contracts, or with or without the knowledge
of each other.
 Example- A, B and C are sureties to D for the sum of 3,000 rupees lent to E.
E makes default in payment. A, B and C are liable, as between
themselves, to pay 1,000 rupees each.
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.
 The co-sureties can agree among themselves that their liability will not be
equal, but will be according to certain other proportions.
 Example-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 one-quarter, B to the extent of one- quarter, and C to the
extent of one-half. E makes default in payment. As between the sureties, A
is liable to pay 250 rupees, B 250 rupees, and C 500 rupees.
Contribution

 Sometimes one of co-sureties may have paid more than his share of
liability to the creditor.
 When that is the case, he can claim contribution from his co-sureties in
accordance with the above stated provision.
 Example-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 one-quarter, B to the extent of one- quarter, and C to the
extent of one-half. E makes default in payment. As between the sureties, A
is liable to pay 250 rupees, B 250 rupees, and C 500 rupees. However, D
recovers the whole of Rs 1000 from A. A can claim contribution of Rs 250
from B and Rs 500 from C.
Bank Guarantee
 “Bank Guarantee” is a commercial instrument that has emerged as a
contemporary solution for securing payment of money in a commercial
dealing.
 A bank guarantee is a financial instrument provided by a bank or financial
institution on behalf of a customer (usually a business or individual) to
guarantee payment or performance to a third party in case the customer
fails to fulfill a contractual obligation. It is a form of financial security often
used in business transactions to reduce risk and build trust between parties.
 Three parties in a Bank Guarantee-
1) Beneficiary: The beneficiary is the party to whom the guarantee is provided.
This can be a supplier, contractor, or any other entity that wants assurance that
the customer will fulfill its obligations under a contract.

2) Applicant: The applicant is the party requesting the bank guarantee. This is
typically the customer who needs to demonstrate their financial responsibility and
ability to meet their contractual commitments.

3) Issuing Bank: The issuing bank is the financial institution that issues the
guarantee. The bank essentially takes on the obligation to pay the beneficiary if
the applicant fails to meet their contractual obligations.
 As per law a Bank Guarantee is an “independent contract” between the
bank and the beneficiary, separate from the underlying contract between
the beneficiary and the person (debtor) at whose instance the BG is given.
 The bank has to honour its undertaking when the guarantee is invoked,
without reference to the party on whose behalf it has been issued,
notwithstanding any disputes or disagreements that might have arisen in
the mean time between the debtor and the beneficiary.
 The doctrinal basis for this principle is that a Bank Guarantee is intended to
secure the beneficiary by allowing it to immediately claim from a party in
terms of the Bank Guarantee and therefore it cannot be qualified by the
contract on performance of the obligations.
 Example: Masala Junction is a small, relatively unknown restaurant (new
company) that wants to purchase a Rs. 20 lakh kitchen equipment. Here,
the equipment vendor may require Masala Junction to provide a bank
guarantee in order to feel more confident that it will receive payment for
the equipment it ships to Masala Junction.
 Bank guarantees are of two kinds: (a) Unconditional, and (b) Conditional.

 An unconditional bank guarantee is one where the surety becomes liable

to the party without proof of breach. As soon as a demand of the amount
is made in accordance with the guarantee document, the surety
becomes liable to pay.

 A conditional bank guarantee is one where the surety becomes liable to

the party only upon proof of breach of terms underlying the contract or
upon proof of loss occurring from breach
 There are two types of Bank Guarantee on the basis of the nature of
transaction-
 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.
 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.
Hindustan Steel Work Corp. v. Tarapore
& Co

 The HSCL awarded a contract to the contractor for construction of civil

works in its Visakhapatnam Steel Plant. On 16.3.84 a letter of intent was
issued and the formal contract was signed on 25.10.84.
 It was a lumpsum contract for Rs. 19,21,36,804 and was to be completed
on or before 15.11.1985.
 The contractor was not able to complete the work within the stipulated
time and at its request the time for completion of the work was extended
till 31.3.87.
 Even during this extended period the contractor could not complete the
work.
Hindustan Steel Work Corp. v.
Tarapore & Co

 Some disputes arose between and the parties referred it to arbitration.

 In August, 1988 by mutual agreement the contract work was reduced and
the contract price was fixed at Rs.4.5 crores.
 This reduced work also was not completed within the extended time and
at the request of the contractor the time for completing the work was
extended till 30.9.1988.
 As the contractor did not complete the work by that time the HSCL
rescinded the contract on 17.10.1988.
 In between 30.1.84 and 8.12.87, Bank of India gave 14 guarantees in
favour of HSCL at the instance of the contractor.
Hindustan Steel Work Corp. v.
Tarapore & Co

 By these bank guarantees, the bank has undertaken to indemnify HSCL against
any loss or damage caused to or suffered by it by reason of any breach by the
contractor of any term and condition of the contract.
 It is also stipulated in the bank guarantees that HSCL shall be the sole Judge on
the question as to whether the contractor has committed any breach of the
contrast and what is the extent of loss or damage.
 It is further stipulated therein that the decision of HSCL in this behalf shall be
treated as final and binding on the bank.
 By furnishing Bank guarantee, the bank has undertaken to pay HSCL on
demand any amount payable by the contractor without any demur and
protest, without any reference to the contractor and such demand by HSCL
has to be regarded as conclusive and binding on the bank notwithstanding
any difference between the HSCL and the contractor.
Hindustan Steel Work Corp. v.
Tarapore & Co

 After rescinding the contract, HSCL invoked guarantee.

 The Contractor on coming to know of this demand, filed a suit praying for
an injunction restraining Hindustan Steel from encashing the bank
guarantees.
 The ground urged was that there are genuine disputes between the
parties and that the disputes are referred to Arbitrators.
 The Court refused to grant an injunction.
 The Contractor appealed to the High Court arguing that the guarantee
will be encashable only when the Arbitrators conclude that the Contractor
was in breach and the amount of loss / damages are quantified.
Hindustan Steel Work Corp. v.
Tarapore & Co

 The High Court (in its revision petition) held that unless there is fraud or
special circumstances, the beneficiary cannot be restrained from
encashing the bank guarantee even if there are disputes between the
beneficiary and the person at whose instance the guarantee is given by
the bank.
 After stating the foregoing, the High Court went on to consider if there
were “special circumstances” in this case. It then held that any term in the
agreement that one of the parties shall be the sole judge to quantify the
damages has to be held invalid. The Court further held that such a duty
was of the Arbitrators in this case.
 The High Court also held that the liability to pay damages would arise only
after it is established that there is a breach of the contract.
Hindustan Steel Work Corp. v.
Tarapore & Co

 The High Court therefore restrained Hindustan Steel from encashing the
 Bank Guarantees.
 Now, the argument of the Appellants is that the Court should not as a rule
interfere unless it is a clear case of fraud and it is likely to result in irretrievable
injustice.
 The argument of the Respondents is that Court should interfere where special
circumstances exist leading to irretrievable injustice(as held by the High Court
in this case).
 Issue:
Whether or not special circumstances exist in this case to warrant an injunction
against encashing bank guarantees?
Hindustan Steel Work Corp. v.
Tarapore & Co

Supreme Court
 The correct position of law is that commitment of banks must be honoured free from
interference by the courts and it is only in exceptional cases, that' is to say, in case of
fraud or in a case where irretrievable injustice would be done if bank guarantee is
allowed to be encashed, the court should interfere. In this case fraud has not been
pleaded and. the relief for injunction was sought by the contractor/Respondent No.1 on
the ground that special equities or the special circumstances of the case required it.
 The special circumstances and/or special equities which have been pleaded in this case
are that there is a serious dispute on the question as to who has committed breach of the
contract, that the contractor has a counter claim against the appellant, that the disputes
between the parties have been referred to the arbitrators and that no amount can be
said to be due and payable by the contractor to the appellant till the arbitrators declare
their award.
 These factors are not sufficient to make this case an exceptional case justifying
interference by restraining the appellant from enforcing the bank guarantees.
Answer the Questions

1) Anand sells and delivers goods to Ruchi. Yamini requests Anand not to sue
Ruchi for the debt for at-least 1 year and promises that if he does so,
Yamini will pay in case Ruchi defaults. Anand agrees. Is this sufficient
consideration for Yamini’s promise?
2) Harish gave his house to Satyam on a lease for ten years on a specified
lease rent. Mihir guaranteed that Satyam, would fulfil his obligations. After
seven years Satyam stopped paying the lease rent. Harish sued him for the
payment of rent. Mihir then gave a notice revoking his guarantee for the
remaining three years. Can Mihir revoke the guarantee?
 X guarantees the payment of a debt by Y to Z. The due date of the debt
arrives, but Y does not pay. Can Z immediately claims payment from X?
 M advances money to R. S has given guarantee to M. What would be the
consequence if 1. R is a minor. 2. S is a minor
 G gives guarantee to H regarding J’s conduct as an accountant at his firm
on 8 August 2022. On 9 January 2023 G sends an email to H revoking his
guarantee. On 15 March 2023 J commits fraud. Can H still sue G?