CONTRACT OF

GUARANTEE

APARNA SHUKLA
 CONCEPT
 A Contract to perform the promise, or
discharge the liability, of a third person in case
of his default is called Contract of Guarantee. A
guarantee may be either oral or written.
 The person who gives the guarantee is called
the Surety.
 The person on whose default the guarantee is
given is called the Principal Debtor .
 The person to whom the guarantee is given is
called the Creditor.
 Birkmyr v. Darnell, 1704
 INDEPENDENT LIABILITY
DIFFERENT FROM GUARANTEE
 “Let him have the goods, I will pay your
master”.
 Taylor v. Lee, 1924
 “If he does not pay, I will pay”
 Birkmyr v. Darnell, 1704
 Essentials
 Principal Debt
 Recoverable Debt Necessary- Swan v. Bank of Scotland, 1836
 Guarantee for void debt, when enforceable- Yorkshire Railway Wagon Co. v.
Machure, 1881
 Guarantee of Minor’s Debt
 English Law- Coutts & Co. v. Browne Lecky, 1947
 India- Kashiba Bin Narsapa Nikade v. Narshiv Shripat, 1895

 Consideration
 Section 127
 Guarantee for Past debt and future debt

 Misrepresentation- s. 142 (not- UBERRIMAE FIDES)

 Shriniwas Shankar Pontis v. Raghukul, 2010
 Omnibus Co. v. Holloway, 1912
 Concealment- S. 143

 Written or oral- S.126

 ESSENTIALS
 Contract of Guarantee if a species of a contract, the general
principles governing contracts are applicable here. There must
be free consent, a legal objective to the contract, etc. Though all
the parties must be capable of entering into a contract, the
principal debtor may be a party incompetent to contract, i.e., a
minor. This scenario is discussed later in this chapter.
 A principal debt must pre-exist: A contact of guarantee seeks
to secure payment of a debt, thus it is necessary there is a
recoverable debt. There cannot be a contract to guarantee a
time barred debt.
 Consideration received by the principal debtor is sufficient for
the surety. Anything done, or any promise made for the
benefit of the principal debtor can be taken as sufficient
consideration to the surety for giving guarantee.
 Swan vs Bank of Scotland, 1836
 In the case of Swan vs Bank of Scotland 1836, it was held that
a contract of guarantee is a tripartite agreement between the
creditor, the principal debtor, and the surety.
 Distinct promise of surety - There must be a distinct promise
by the surety to be answerable for the liability of the
Principal Debtor.
 Liability must be legally enforceable - Only if the liability of
the principal debtor is legally enforceable, the surety can be
made liable. For example, a surety cannot be made liable for
a debt barred by statute of limitation.
 Consideration - As with any valid contract, the contract of
guarantee also must have a consideration. The consideration
in such contract is nothing but anything done or the promise
to do something for the benefit of the principal debtor.
HISTORICAL VIEW- ROMAN LAW
 There had been five types of contracts of suretyship in the
Roman law, namely, sponsio, fidepromiso, fidejussio,
constitutum, and mandatum.
 In a sponsio, the sponsor or surety could intervene only where
the parties were Roman citizens and the obligation was created
by stipulation. The formal verbal contract, typical of ancient
civil law, consisted in the solemn question and answer pattern.
The heir to the surety was not, however, bound.
 The fidepromiso, though an ancient form, was a latter
development. This form was resorted to when one of the
parties to the contract was an alien. Like the sponsio, the
fidepromiso also terminated on the death of the surety and did
not devolve upon his heirs.
 Fidejussio could be made accessory to contracts of every
kind, i.e., obligations contracted re, verbis, litteris
consensu (verbal or written) . It is, however, important to
note that the surety bound his heirs. Each co-surety was
liable for the whole debt.
 The fourth type of suretyship was the constitutum. It was
an informal agreement to discharge the debt of another
on a fixe 1 day. It was made actionable by the praetor
 The fifth and the most common form of suretyship was
mandalum qualificatum. In this form of suretyship, one
person, the mandator, requested another, the
mandatorim, to lend money to a third person. The
obligation was cast on the first person to indemnify the
second against any loss consequent upon the failure on
the part of the third person to redeem the loan with
interest.
 SURETY’S LIABILITY- s. 128
 1. Co-extensive
 Condition Precedent
 National Provincial Bank of England v. Brackenbury, 1906
 James Graham & Co. v. Southgate Sands, 1985
 Proceedings against surety without exhausting remedies
against debtor
 Bank of Bihar Ltd. V. Damodar Prasad, 1969
 Action against the Principal debtor/ surety alone
 Surety alone- N. Narasimahaiah v. Karnataka State Financial
Corp. 2004
 Proceeding against guarantor’s mortgaged property alone.
 Prakashwani Jain v. Punjab State Industrial, 2007
 2. Surety’s right to limit his liability or make it
conditional.
 Liability of the Surety when the principal contract is

rendered impossible.
 Florence Mabel v. State of Kerala, 2001

 Syndicate Bank v. Naraayana Iyer, 2003

3. Liability under continuing guarantee

 Eg- 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.
 Two types of guarantee
 Specific
 Kay v. Groves, 1829

 Continuing
 Liability of a bank guarantee
 Bank guarantee is a tripartite agreement between banker, the
beneficiary and the person or the creditor in which "Bank"
becomes the surety for the transactions between the Debtor
and Creditor.
 llustrations: Mr. 'A' leases his flat to Mr. 'B' for Rs. 100,000 per
month. Mr. 'A' insists on a bank guarantee from Mr. 'B' 's
bankers, the Bank of India for Rs.250,00,000 to compensate him
in case Mr. 'B' refuse to hand over possession at the end of the
lease period. Here, 'B' is the principal debtor, The Bank of
India is the surety and 'A' is the creditor. For any default of 'B'
Mr. 'A' can indemnified directly by the bank of India.

 Maharashtra SEB v official liquidator, Ernakulam (AIR 1982 SC 14

 Period of Limitation
 Bank guarantee and Letter of Credit
 A bank guarantee and a letter of credit are both promises
from a financial institution that a borrower will be able to
repay a debt to another party, no matter what the debtor's
financial circumstances. While different, both bank
guarantees and letters of credit assure the third party that
if the borrowing party can't repay what it owes, the
financial institution will step in on behalf of the borrower.
 Letter of credit:- Doesn't wait for applicant's default and
beneficiary to invoke undertaking.
 HAMZEH MALAS & SONS v. BRITISH IMEX
INDUSTRIES LTD., 1958
 Bank guarantee- Becomes active only when the applicant
defaults in making payment.
 Nature of Surety’s liability can be summed up
as:-
 (a) Liability of surety is of secondary nature as
he is liable only on default of principal debtor.
 (b) his liability arises immediately on the
default by the principal debtor.
 (c) The Creditor has a right to sue the surety
directly without first proceeding against
principal debtor.
Joint debtors and Suretyship- S.132
 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.
 DISCHARGE OF SURETY FROM
LIABILITY
 By revocation (S. 130-REVOCATION OF
CONTINUING GUARANTEE)
 OFFORD V. DAVIES, 1862
 By Death
 By Variance
 By release or discharge of Principal Debtor
 Composition, Extension and Promise not to sue
 By impairing surety’s remedy
 By misrepresentation and concealment
 Condition Precedent
 Rights of Surety
 Right of Subrogation (Against Principal
Debtor)
 Right of Indemnity

 RIGHTS AGAINST CREDITOR

 Right to securities
 Right to share reduction
 Right to set-off
 Right against co-sureties
 Effect of releasing a surety
Release of co-surety- Anil Kumar v. Central Bank
of India, 1997
 Right to contribution

1. Section 146- Co-sureties liable to contribute

equally.
2. Section 147- Liabilities of co-sureties bound in
different levels
INDEMNITY AND GUARANTEE
 Liability under Indemnity is Contingent in
nature whereas in guarantee the liability is
subsisting .