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PROJECT WORK ON REVOCATION OF

CONTINUING GUARANTEE

ANIKET RANJAN

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CONTENT

1. INTRODUCTION___________________________________________04

2. GUARANTEE______________________________________________05

3. CONTINUING GUARANTEE_________________________________06

4. REVOCATION OF CONTINUING GUARANTEE_______________07-09

5. CONCLUSION______________________________________________10

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INTRODUCTION

Literally guarantee means a formal promise or assurance that certain conditions will be
fulfilled. As assurance that certain conditions will be fulfilled. As far as contract law is
concerned, such kind of guarantee is usually established through a contract of guarantee.
Under contract law, guarantee can be classified into different kinds. One of its kinds one
is continuing guarantee.Continuing guarantee can be defined as a guarantee, which
extends to a series of continuing transactions. Generally, indefinite numbers of
transactions are dealt in continuing guarantee. Such guarantee can be in respect of future
transactions, which is to be conducted during fixed period of time. A Continuing
Guarantee cannot be revoked except in certain conditions, but it will be applicable only to
future transaction and surety will still be liable for the past transactions.

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GUARANTEE

Guarantee is a legal term more comprehensive and of higher importance than either
warranty or "security". It most commonly designates a private transaction by means of
which one person, to obtain some trust, confidence or credit for another, engages to be
answerable for him. It may also designate a treaty through which claims, rights or
possessions are secured.

Guarantee is an undertaking to answer for the payment or performance of another


person's debt or obligation in the event of a default by the person primarily responsible
for it.1

A “Contract of Guarantee” is a contract to perform the promise, or discharge the liability,


of a third person in case of his default.2

There are three parties involved in the ‘Contract of Guarantee’. 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’. The contract of guarantee may be either written or oral. Contract of
Guarantee is usually entered into to secure the honesty and fidelity of someone who is to
be appointed to some offce, or to secure some one from injury arising out of some wrong
committed by another. It must satisfy all the essential features of a valid contract.

There are two types of guarantee:

I. Specific Guarantee.

II. Contuining Guarantee.

1
https://dictionary.cambridge.org

2
The Indian Contract Act, 1872, Section 126.

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CONTINUING GUARANTEE

Continuing guarantee refers to a guarantee in which the surety will not be liable unless a
specified event occurs. This guarantee relates to a future liability of the surety under
successive transactions that either continue the surety’s liability, or from time to time
renews it, after it has been satisfied is called a continuing guaranty.

A guarantee which extends to a series of transactions is called a “Continuing Guarantee”.3

For example- A, in consideration that B will employ C in collecting the rents of B's
zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due
collection and payment by C of those rent. This is a continuing guarantee.

It was stated in case of Liberty Bank vs Shimokawa that continuing guaranty may be
revoked at any time by the guarantor in respect to future transactions, unless there is a
continuing consideration as to the transactions that the guarantor does not give up.

A continuing guaranty may be revoked at any time by the guarantor in respect to future
transactions, unless there is a continuing consideration as to the transactions that the
guarantor does not give up.

3
The Indian Contract Act, 1872, Section 129

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REVOCATION OF CONTINUING GUARANTEE

A continuing guarantee can be revoked in any of the following ways:

1. By Notice (Section 130):At any time, a continuing guarantee about future


transactions can be revoked by the surety by notice to the creditor.No specific time
has been provided under contract act for giving notice in respect of revocation of
continuing guarantee. Therefore, such notice can be given at any time. Contract law
provides no specific manner for giving a notice about revocation of continuing
guarantee. Therefore, it is left for parties to choose the manner for giving such notice.
It is essential that notice about revocation of continuing guarantee should be given by
surety. It is also necessary that notice about revocation of continuing guarantee should
be given to creditor. As far as revocation of continuing guarantee through notice is
concerned, an important point is that guarantee should be about future transaction.
2. By Death of Surety (Section 131):In case of a continuing guarantee if the surety
dies the contract is automatically revoked even if no notice of death of surety is given.
But, under Section 131 of the Act the surety is liable for the existing transactions to
which he had given a guarantee before his death.
For example- Mulla guarantees the payment of Rs. 500 to Asraf a book seller for any
book that he supplies to Braj from time to time. Asraf supplies to Braj a book whose
price is Rs. 200. After this transaction Mulla dies. After the death of Mulla, Asraf
supplies another book priced at Rs. 100. Mulla’s representative is liable only for the
payment for the book of Rs. 200 to Asraf and not for the book of Rs. 100 because that
book was supplied after his death.
As far as revocation of continuing guarantee through surety’s death is concerned, an
important point is that guarantee should be about future transaction.
Revocation of continuing guarantee through surety’s death greatly depends
uponnature of guarantee-contract. If it is incorporated into guarantee-contract that
continuing guarantee will be revoked with the death of surety, then continuing
guarantee is revoked at the surety’s death. Contrary to this, if such condition is not

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incorporated into the guarantee-contract, then continuing guarantee remains continued
even after death of surety.

BY OTHER MODES

3. BY novation(Section 64):Novation, i.e., entering into a fresh contract, either


between the same parties or between other parties, constitutes another mode of
discharging a surety from the liability. If the parties to a contract (of guarantee) agree
to substitute it with a new contract, the original contract need not be performed and so
the surety stands discharged with regard to the old contract. For the surety, too, a fresh
contract would have to be drafted.
4. By variance in the terms of the contract between debtor and creditor
(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.
For example- A becomes surety to C for B’s conduct as manager in C’s bank.
Afterwards, 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 over-draw, 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.

5. ByRelease or discharge of principal debtor(Section 134):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.
For example: A contracts with B to build a house for B for a fixed price within a
stipulated time, B supplying the necessary timber. C guarantees A’s performance of the
contract. B fails to supply the timber. C is thus discharged from his surety.

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6. Compounding by Creditor with the Principal Debtor(Section 135): Where the
creditor, without the consent of the surety arrives at a settlement with the principal debtor,
or promises to give him more time, or promises not to sue him by a contract between the
creditor and the principal debtor, the surety is absolved from the liability, unless the
surety assents to such contract.
Where, however, 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.

For example C, the holder of an overdue bill of exchange drawn by A as surety for B, and
accepted by B, contracts with M to give time to B. A is not discharged.

7. Creditor’s Act or Omission Impairing Surety’s Eventual Remedy (Section


139):If the creditor commits any act, which is inconsistent with the rights of the surety,
or fails to perform any act that his duty to the surety requires him to do, such that the
eventual remedy of the surety himself against the principal debtor is impaired; the surety
is discharged.

For example- B contracts to build a ship for C for a given sum, to be paid in installments
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 the last two installments to B. A is
discharged by the prepayment.

8. By Loss of Security: 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. It is
immaterial whether the surety was or is aware of such security or not. For instance, C
advances to B, his tenant, Rs 2,000 on the guarantee of A. C has also a further security for
Rs 2,000 by a mortgage of B’s furniture. C, however 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.

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CONCLUSION

A Contract of Guarantee is a tripartite contract including three parties i.e. the principal
debtor, creditor, and the surety and must follow all the essentials of a valid contract for its
validity. Continuing Guarantee is a type of contract of guarantee which extends to a series
of transactions. A continuing guarantee includes series of transactions and the surety is
liable for each of them but it can be revoked through eight ways. The continuing
guarantee can be revoked as to future transactions only and the surety will still be liable
for the past transaction.

So, we can conclude that continuing guarantee is an essential part of contract and it
cannot be revoked but to certain exceptions.

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