NIRMA UNIVERSITY INSTITUTE OF LAW A PROJECT SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE FIVE YEARS INTEGRATED DEGREE OF LAW HONOURS ON
Analytical study of principle of revocation of Guarantee CONTRACT LAW-II
SEMESTER-IV JANUARY 2013 TO JUNE 2013
SUBMITTED TO
SUBMITTED BY
Mr. Hardik Parikh
Hardik sharma Roll no. 11BAL094 Semester IV B.A.LL.B (Hons.)
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Declaration The text reported in the project is the outcome of my own efforts and no part of this report has been copied in any unauthorized manner and no part in it has been incorporated without due acknowledgment.
Date:-25/01/2013 Roll No. 11BAL094 Name & Signature of the Student _____________________________
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Declaration The text reported in the project is the outcome of my own efforts and no part of this report has been copied in any unauthorized manner and no part in it has been incorporated without due acknowledgment.
Date:-25/01/2013 Roll No. 11BAL094 Name & Signature of the Student _____________________________
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Certificate This is to certify that Hardik Sharma(11bal094) a student of IV Semester of Institute of Law, Nirma University has completed this project on the Analysis Analytical study of principle of revocation of Guarantee for the subject of Contract Law II as a part of their course. This is original work done under my guidance & Supervision.
Date: ------------------------Mrs. Hardik Parikh Ass. Prof
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Acknowledgement I take the opportunity, while presenting this project report; to express my deep gratitude to all those who offered their valuable help to me in completing this project successfully. A number of people provided me with their assistance, encouragement and enthusiasm. Without them this project would not have been possible. First of all I am extremely grateful & thankful to the Nirma University, Institute of Law, Ahmadabad, for instilling in us new & lively subjects which are practically observed in the Society today. I am extremely thankful to Ass. Prof. Hardik Parikh sir for giving the view of this wonderful topic and helping me in the completion of this project. Sir has always been a perennial source of information for us and has always inspired me to embark upon this venture.
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Table of Contents
S. no.
Topic
Page no.
1
Introduction
6
2
Literature Review
6
3
Research Objective
7
4
Research Question
8
5
Statement of Problem
8
6
Research Hypothesis
8
7
Research Methodology
8
8
Chapter 1-“Contract of Indemnity”
9
9
Chapter 2- “Contract of Guarantee”
11
10
Chapter 3- “Difference between indemnity and Guarantee ”
17
11
Chapter 4- “Continuing Guarantee and its Revocation”
18
12
Chapter 5- “Case Laws”
26
13
Chapter 6- “Conclusion”
33
14
Chapter 7- “References”
34
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INTRODUCTION Section 126- 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.
Ordinarily a guarantee is not revocable when once it is acted upon. But section 130 provides for revocation of continuing guarantee
Sec 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. Sec 131: By death of surety- A continuing guarantee is also determined by the death of the surety unless there is a contract to the contrary. Once again, the termination becomes effective only for the future transactions. Sec 133: revocation by variance Sec 134: discharge of surety by release or discharge of principal Debtor Sec 135: discharge of surety when creditor compounds with, gives time to, or agree not to sue principal debtor. Sec 139: By impairing Surety‟s Remedy
REVIEW OF LITERATURE: How is Continuing Guarantee Revoked
A continuing guarantee can be revoked in any of the following ways: 1. By notice:
A continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditor (Sec. 130). Examples: 6|Page
(1) A gives a loan of Rs. 1,000 to B on the guarantee of C. C cannot revoke his guarantee. (2) A stands surety for any credit purchases upto Rs. 1,000 to be made by B from a shopkeeper. After the shop-keeper has supplied goods worth Rs. 500, A gives a notice to the shop-keeper not to sell goods to B in future. A is liable for the purchases already made. However, he will not be liable for any purchases made after the notice of revocation. 2. By death:
The death of a surety operates in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions (Sec. 131). However it should be noted that the notice of death is not necessary. Rights of Surety
A contract of guarantee confers the following rights on the surety: 1. Rights against the creditor :
(a) "Rights "before making payment: In case of continuing grantee or fidelity guarantee, a surety can ask the creditor not to sell goods on credit or to give credit in future. Similarly, in case of fidelity guarantee the surety can ask the creditor (employer) to dismiss the employee, where the surety discovers that the employee had misconducted himself in that post or had been dishonest. A surety can also file a suit for declaration that only the principal debtor shall be liable to pay the amount. (b) Rights at the time of making payment: At the time of making payment, a surety can compel the creditors to release those securities first, which are in the creditor's possession.
OBJECTIVES OF RESEARCH:
1. To understand the principle of Indemnity and guarantee and how guarantee can be revoked. 2. To check the areas of applicability of section 126, 130,131, 132, 133,134, 135, 136, 137, 138, 139 in the Indian contract act 1872.
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RESEARCH QUESTIONS:
1. What is the meaning and scope of indemnity, guarantee and revocation ? 2.
Is there any Liability of the surety after revocation?
STATEMENT OF PROBLEM
Understanding the principle of guarantee and revocation of guarantee and its importance and working in Indian contract act.
HYPOTHESIS
1. Surety is not liable for anything after revocation. 2. After the death of surety is heirs are liable.
RESEARCH METHODOLOGY
In order to carry out an extensive Research, the Researcher has espoused the Doctrinal Method of carrying out the Research. Doctrinal Research which provides a systematic exposition of the rules governing a particular legal category, analyses the relationship between rules, explains areas of difficulty and, perhaps, may even predict future developments. The researcher has tried to include rules or provisions or statistics available and applicable in the present scenario. The Researcher has used various sources of which Articles, websites, database are a major role to play. The Researcher has also used various Articles and cases on the aforementioned issue.
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Chapter 1 Contract of Indemnity
CONTRACTS OF INDEMNITY Definition
Section 124 of the Contract Act defines a contract of indemnity as a contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. P. contracts to indemnify Q against the consequences of any proceeding which R may . take against Q in respect of a certain sum of Rs. 200. This is a Contract of Indemnity: P is called the indemnifier and Q the Indemnity-holder. Characteristics
Characteristics (or the requisites) of a Contract of indemnity are as follows : l. A contract of guarantee must satisfy all the essential elements of a contract. For example, the object must be lawful, there must be free consent etc. 2. The Contract may be express or implied. An express contract is by word or by writing. An implied contract of indemnity comes from the circumstances of the` case or the relationship between the parties. 3. Section 69 implies a promise to indemnify Rights of the Indemnity-holder
Section 125 of the Contract Act lays down that the indemnity-holder is entitled to get from the indemnifier : 1. all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies ; 2. all costs which he may be compelled to pay in such suits (provided he acted prudently or with the authority of the indemnifier) ; 3. all sums which he may have paid upon compromise of such suit (provided the compromise was prudent or was authorized by the indemnifier). Comments : 9|Page
It has been held that the rights of the Indemnity holder, under Section 125, are not exhaustive. 1 The indemnity holder may be entitled to other equitable reliefs also. Bombay and Nagpur High Courts have held the indemnifier will be liable only after the actual loss was incurred. But according to the High Courts of Calcutta, Madras and Allahabad, the indemnity-holder can compel payment from the indemnifier even before he (the indemnityholder) has met his liability. Osman Jamal & Sons v. Gopal.
1
Avatar Singh. “Contract and Specific Relief.” 10
th
edition, Eastern book company. Pp 584-585
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Chapter 2 Contract of Guarantee
CONTRACTS OF GUARANTEE Definition
A contract of guarantee is a contract to perform the promise or discharge the liability, of a third person in case of his default.-Sec. 126. P lends Rs. 5,000 to Q and R promises to P that if Q does not pay the money R will do so. This is contract of guarantee. Q is called the Principal Debtor, P the Creditor, and R the Guarantor 2 or the Surety.
Points to Note
2
There are three parties in every Contract of Guarantee The liability arises right from the beginning. The surety becomes liable when the principle debtor commits default in meeting the liability. Surety has the right to sue the third party (Principle Debtor) directly. The Law puts him in the position of Creditor. Where as in Contracts of Indemnity, the Indemnifier cannot sue the third party in his name. He has to sue in the name of the Indemnity-holder or after obtaining the rights from him. 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. The guarantor need not personally derive any benefit from the guarantee. The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. The creditor can straightway proceed against the guarantor without first proceeding against the principal debtor.
Ibid p.590
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The liability of the surety can never be greater than that of the principal debtor. The surety can however may restrict his liability to part of the Principal debtor's liability by contract.
A contract of guarantee is a species of general contract and as such all the essentials of a valid contract must be present. However, it has the following special features: 1. Surety's obligation is dependent on principal-debtor's default:
There must be a conditional promise to pay on the default of the principal debtor. If the promise is not conditional on default, it will not be a contract of guarantee but of indemnity. Examples:
(1) A asks B to sell certain goods on credit to C promising "I will pay the amount in case C fails to pay." It is a contact of guarantee as the promise is contingent on the default of C. (2) A asks a shopkeeper (o sell certain goods to C promising, "I will see that you are paid." This is not a contract of guarantee as the promise of the guarantee is not conditional on default of the buyer. It is a contract of indemnity.
2. Separate consideration for guarantee not necessary:
For a contract of guarantee, like any other contract, consideration is necessary. But Sec. 127 provides that 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. Thus, there is no need for a separate consideration between the Principal debtor and the surety consideration received by the 3 Principal debtor is sufficient for the surety.
3. Principal debtor need not be competent to contract:
Although the creditor and the surety must be capable of entering into contract, yet, the principaldebtor need not be competent to contract. In such a case, the principal-debtor is not liable but the surety is liable as the principal- debtor. [Kashiba v. Shripat],
3
Ibid p.594
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4. There must be existing debt or promise whose performance is guaranteed:
For a contract of guarantee, there must be an existing debt or a promise whose performance is guaranteed. In case there is no such debt or promise, there cannot be a valid guarantee. Actually speaking, the debt or promise is the basis of guarantee, i.e., it is the consideration received by the debtor. Hence, if there is no consideration, there is no contract of guarantee. However, the debt may even be void. In that case, the surety himself will be liable to pay the debt Whether a contract of guarantee is a contract of Uberrimae Fidei, i.e., good faith? Strictly speaking, a contract of guarantee is not a contract of uberrimae fidei, i.e., a contract of good faith requiring full disclosure of material facts likely to affect the willingness of the guarantor. However, there should not be any misrepresentation or active concealment of material facts by the creditor.
Nature of Surety's Liability:
Quantum of 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 (Sec. 128). Example:
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. The liability of the surety is equal to that of the principal-debtor. In the absence of a contract to the contrary it can neither be more nor less. However, by a special contract, the liability of the surety can be made less than that of the principal-debtor, but never greater.
Time when the Liability of the Surety Arises:
In some cases, the surety's liability may being simultaneously with the liability of the principaldebtor. In case the guarantee is contingent upon the happening of an event, the surety is liable when the contingency has actually happened. [Subhan Khan v. Lai Khan]. The liability of the surety arises only on default by the principal debtor. Therefore, the surety will not be liable unless there is a default by the principal-debtor. However, when the default has 13 | P a g e
been committed, then immediately the liability of the surety begins. A suit can be filed against the surety without suing the principal-debtor.
Liability of Surety when Principal-debtor not Liable :
The law regards surety and principal-debtor as two distinct persons. Therefore, liability of the surety is independent of the liability of the principal-debtor. Thus, if the original contract between the principal- debtor and the creditor is void, e.g., when the debtor is a minor incapable of entering into contract, then the surety is not discharged from the liability but is liable as a principal-debtor. Again, if the creditor does not file a suit against the principal-debtor within the period of limitation although the principal-debtor is not liable in such a case, yet the surety is not discharged and he continues to be liable to the creditor under his contract of guarantee. [ Mahant Singh v. Bayi], Even the operation of law will not discharge the surety from his liability. For example, where the principal-debtor dies or becomes insolvent before paying the debt, the surety is liable for the debt. Further any admission by the principal-debtor or judgment obtained against the principal-debtor will not be enforceable against the surety. A creditor cannot ask the surety to pay any sum when he himself (creditor) has failed to carry out the terms of the contract, e.g., conveyance of the property to the purchaser. A surety is discharged from his liability when there is variation in the terms of the contract without his (surety's) consent.
Essentials of a Valid Guarantee
1. A contract of guarantee must satisfy all the essential elements of a contract. (For example, the object must be lawful ; there must be free consent etc.) But the following points are to be noted. 2. A contract of guarantee may be either oral or written. Sec 126. 3. In a contract of guarantee there are three parties i.e., the creditor, the principal . debtor and the surety. All the parties must join the contract. 4. In a contract of guarantee, the primary liability is that of principal debtor. The liability of surety arises only when there is a default of the principal debtor. Therefore, the liability of the surety is secondary.
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5. in a contract of guarantee the principal debtor may be a minor. In this case the surety is liable to pay even though the minor may not be. The contract will be enforced as between the surety and the creditor. 6. Consideration: In a contract of guarantee, the consideration received by the principal debtor is taken to be sufficient consideration for the surety. “Anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration to the surety for giving guarantee.”-Sec.127. Examples : (i) B requests P to sell and deliver to him goods on credit. P agrees to do so, provided C willguarantee the payment of the price of goods. C promises to guarantee the payment in consideration of P’s promise to deliver the goods. This is a sufficient consideration for C’spromise. (ii) P sells and delivers goods to B. C afterwards requests P 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, P agrees to forbear as requested. This is a sufficient consideration for C‟s promise. (iii) P sells and delivers goods to B. C afterwards, without consideration agrees to pay for them in default of B. The agreement is void.
Contracts of Guarantee which are invalid
A contract of guarantee is invalid in the following cases : 1.misrepresentation : Any guarantee which has been obtained by means of misrepresentation mode by the creditor, or with his knowledge and assent, concerning a material part of the 4 transaction, is invalid.-Sec. 142. ,
2. Concealment : Any guarantee which the creditor has obtained by means of keeping silence as 5 to material circumstances is invalid. Sec. 143. Examples :
(a) D engages B as clerk to collect money for him. B fails to account for some of his receipts, and D in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B‟s duly accounting. D does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid. (b) G guarantees to C payment for iron to be supplied by him to B to the amount of 2000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such
4
Ibid p.597
5
Ibid p.597
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excess to be applied in liquidation of an old debt. This agreement is concealed from G. G is not liable as a surety. 3.when Co-surely does not join : 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.-Sec. 144. 4. Lack of essential elements : A contract of guarantee is invalid if it lacks one or more of the essential elements of a contract (e.g., if there is want of free consent or if the object is illegal).
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Chapter 3 Difference between Indemnity and Guarantee
DIFFERENCES BETWEEN INDEMNITY AND GUARANTEE
1. In a contract of indemnity, there are ‘two parties : the indemnifier and the indemnity-holder. In a contract of guarantee there are three parties : the creditor, the principal debtor, and t surety. 2. In a contract of indemnity it is necessary to have only one contract, i.e., between the indemnity-holder and the indemnifier ; in a contract of guarantee it is necessary to have three contracts, between the parties, i.e., between the creditors, the principal debtors and the surety. 3.in a contract of indemnity, the liability of the indemnifier is primary ; in a contract of guarantee, the liability of the surety is secondary i.e., the surety is liable only if the principal debtor fails to perform his obligations. 4. in a contract of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety. In a contract f indemnity, the liability of the indemnifier arises only on the happening of a contingency. 5. In a contract of indemnity the indemnifier can sue only the indemnity older for his loss, because there is no contract between the indemnified and other parties unless there is an assignment on his favour ; in a contract of guarantee the surety can proceed against principal debtor. 6. in a contract of guarantee the surety, after he discharges the debt owing to the creditor, can proceed against the principal debtor; in a contract of indemnity the loss falls on the indemnifier except in certain special cases.
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Chapter 4 Continuing Guarantee and its Revocation
Classification
Contracts of guarantee may be of three types : (1) for payment to the Creditor to the Principal Debtor by the Guarantor ; (2) payment of price for goods sold, and (3) fidelity guarantee i.e. to discharge the liability of a person for good conduct of a service-holder. A contract of guarantee may be for (1) a future debt or obligation or for (2) an existing debt. A guarantee can also be (1) a Simple Guarantee or (2) a Continuing Guarantee
CONTINUING GUARANTEE Definition
A guarantee which extends to a series of transactions is called a Continuing Guarantee. (Sec. 129). A guarantee covering a single transaction may be called a Simple -Guarantee or Specific 6 Guarantee. Examples : (i) D. in consideration that Q 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 rents. This is a continuing guarantee. 6
Ibid p.611
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(ii) P guarantees payment to B a tea dealer, to the amount of Rs. 100 for any tea he may from time to time supply to C. B supplies C with tea to the value of Rs. 1000 and C pays B for it. After-ward B supplies C with tea to the value of Rs. 2000. C fails to pa The guarantee given by P was a continuing guarantee, and is accordingly liable to B to the extent of Rs. 1000. (iii) P guarantees payment to B of the price of five sacks of flour o be delivered by B to C to be paid for in a month. B delivers re sacks to C. C pays for them. Afterwards B delivers four sack to C. which C does not pay for. The guarantee given by P was, of a continuing guarantee, and accordingly he is not liable for the rice of the four sacks.
How a Continuing Guarantee is Revoked
A continuing guarantee is revoked under the f owing circumstances. I. By notice of revocation by the surety : The notice operates to revoke the surety‟s liabilities as regards transaction is entered into after the notice. He continues to be liable for transactions entered into prior to the notice.-Sec. 130. 2. By the death of the surety : “The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far a regards future transactions.”-Sec. 131
The estate of the surety is liable for all transactions entered into prior to the death of the surety unless there was a contract to the contrary. It is not necessary that the creditor must have notice of the death. A continuing guarantee is terminated under the same circumstances unde r which a surety‟s liability is discharged. THE EXTENT OF THE LIABILITY OF THE SURETY 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. Sec. 128. Example :
G guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. G is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. A creditor is not bound first to proceed against the principal debtor. He can sue the surety without suing the principal debtor 3r without making the principal debtor a co-defendant. When the ?principal debtor is a minor, the surety alone is liable to the creditor. 19 | P a g e
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 e 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 much third person may have been aware of its existence.-Sec. 132. Example
A and B made a joint and several promissory note to C A makes it, in fact, as surety for B and C. knows this as the time when the note is made. The fact that .4, 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. WHEN IS A SURETY DISCHARGED FROM LIABILITY ?
The liability of a surety under a contract of guarantee comes to an end under any one of the following circumstances : 1. Notice of revocation
In the case of a continuing guarantee, a notice by the surety to the creditor stating that he will not be responsible, will revoke his liability as regards all future transactions. He will remain liable for all transactions entered into prior to the date of the notice.-Sec. 130. 2. Death of surety
In the case of a continuing, guarantee the death of a surety discharges him from all liabilities as regards transactions after his death unless there is a contract to the contrary .sec 131 3. variation 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.Sec. 133. examples : (a) .a becomes surety to C for B’s conduct as a manager in C‟s bank. Afterwards B and C contract, without A‟s consent, the B‟s salary shall be raised and that he shall become liable for one-fourth of the losses on overdraft. B allows a customer to overdraw, and the bank loses a sum of money. :I is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.
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(b) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon ,4′s becoming surety to C for B’s accounting for moneys received b y him as such clerk. Afterwards. without A‟s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary a is not liable for subsequent misconduct of B. (c) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and without the knowledge of A. B and C contract that C.‟ shall continue to supply B with oil for ready money and that the payments shall be applied to the then existing debts between B and C. .4 is not liable on his guarantee for any goods supplied after this new arrangement. st
(d)C contracts to lend B 5,000 rupees on the 1 March. A guarantees repayment. C pays the st 5,000 rupees to B on the 1 January. A is discharged from his liability, as the contract has been st varied inasmuch as C might sue B for the money before the 1 March.
4. 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.-Sec. 134. Effect of Debt Relief Acts :
The Madras High Court held that if the liability of the principal debtor is reduced under the provisions of an Act for debt relief, the surety is liable only for the reduced amount. Subramania Chettiar v. M. P. Naravarrswami Gounder. The Nagpur and the Kerala High Courts have held similar decisions. Examples : (a) G gives a guarantee to C for goods to be supplied by C to B. C supplies goods to 8 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 G is discharged from his suretyship.
(b) A contracts with B to grow a crop of sugarcane on .4′s land and to deliver it to B at fixed rate, and C guarantees A‟s performance of this contract. B diverts a stream of water which is necessary for irrigation of A‟s land and thereby preven t him from raisin; the crops. C is no longer liable on his guarantee.
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(c) D contracts with B for a fixed price to build a house for B within a stipulated time. Bsupplying the necessary timber. C guarantees D’s performance of the contract. B omits to supply the timber. C is discharged from hit suretyship. 5. Arrangement with 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.-Sec. 135. With a third person
But 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.-Sec. 136. Example :
C, the holder of an overdue bill of exchange drawn by D as surety for B, and accepted by B, contracts with M to give time to B. D is not discharged. 6. 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. – Sec. 137. Examples : (i) B owes to C a debt guaranteed by G. The debt becomes payable. C does not sue B for a year after the debt has become payable. G is not discharged from his suretyship.
(ii) Failure to sue the principal debtor until recovery is barred by Statute of Limitation does not operate as a discharge of the surety. mohant Singh v. Ba yi 7. Release of one co-surety
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. Sec. 138. 8. 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.-Sec. 139. Examples : 22 | P a g e
(a) B contracts to build a ship for C for a given sum, to be paid by installments as the work reaches certain stages. S becomes surety to C for B‟s due performance of the contract. C, without the knowledge of S prepays to B the last two installments. S is discharged by the prepayment.
( b) C lends money to 8 on the security of a joint and several promissory note made in C‟s favour by B and by S 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 willful negligence, only a small price is realized. S is discharged from liability on the note. (c) S puts M as apprentice to B, and gives a guarantee to B, for M‟s fidelity. B promises on his part that he will, at least once a month. see M make up the cash. 8 omits to see this done as promised, and M embezzles. S is not liable to B on his guarantee.
9. Loss of security
If the creditor loses or parts with any security given to him by the principal debtor at the time the contract to guarantee was entered into, the surety is discharged to the extent of the value of the security, unless the surety consented to the release of such security.-Sec. 141. 10. Miscellaneous
A contract of guarantee is invalid if it is obtained by means of misrepresentation (Sec. 142), silence as to material circumstances (Sec. 143), or if a co-surety fail; to join according to the terms of the contract (Sec. 144). See-pp. 150-151.
THE RIGHTS OF THE SURETY
A surety has the following rights : Against the Principal Debtor 1. Right of Subrogation : Upon payment of performance of all that he is liable for, he is invested with all the rights which the creditor had against the principal debtor.-Sec. 140. 2. Right to Indemnity : in every contract of guarantee there is 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.-Sec. 145.
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Examples :
(a) 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. (b) C lends 8 a sum of money and A. at the request of B accepts at bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from .a. and on .4′s refusal him upon the bill. .a not having reasonable grounds to pay, sues defends the suit, and has to pay the amount of the for so doing, costs. He can recover from B the amount of the bill, but bill and sum paid for costs, as there was no real ground for defending the action. (c)A surety settled with the creditor by paying a can recover only what he paid. Reed v. Norris.
sum smaller
than the
amount
guaranteed. Held, he
Against the Creditor
A surety is entitled to the benefit If every Right of Security: which the creditor has against the principal debtor at security when the contract of suretyship is entered into. Whether the time knows of the existence of security or not is immaterial -Sec. 141. “The expression `security‟ in Section 141 is not used in any sense ; it includes all rights which the creditor had technical s of the principal debtor at the date of against the property contract.” State of M P. v. Kalurum examples :
(a) advances to B his tenant, 2000 rupees on the guarantee of A.C has also a further security for the 2000 rupees by a mortgage of B‟s furniture. B cancels the mortgage. 8 becomes insolvent, and of B to the („ sues .4 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 is Sure for B, makes a bond jointly with B to C. to secure a from C to B. Afterwards, C obtains from B a further security loan the same debt. Subsequently, C gives up the further security. A it is not discharged
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Against the Co-surety CONTRIBUTION BETWEEN CO-SURETIES Definition
Where several persons guarantee a debt or duty, they are called co-sureties. 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 debtor.-Sec. 146. examples : (a) 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 1000 rupees each.
(b) .4, B and C are sureties to D for sum of 1000 rupees lent to F_ and there is a contract between .4. B and („ that .q 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 .4 is liable to pay 250 rupees, B 250 rupees and C 500 rupees. . 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.-Sec. 147. Examples: (a) .A, B and C as sureties for D, enter into three several bonds, each in a different penalty, namely .9 in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 30,000 rupees. .4. B and C are each liable to pay 10,000 rupees.
(b)A, B and C as sureties for D, enter into three several bonds each in a different penalty, namely A in the penalty of 10,000 rupees, B in the that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D‟s duly accounting to E. D makes default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupee.
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Chapter 5 Case Laws
Anil Kumar v Central bank of India A co-surety gave notice to the bank and cancelled his guarantee. It was held that no liability for anything after such notice, the liability of the other co sureties not affected. The question was whether the surety had a right to revoke. The court said:”We are of opinion that they had and consequently they were not liable. In the case of a simple guarantee for a proposed loan, the right of revocation before the proposal has been acted on did not appea r to be disputed.” In the case of a continuing guarantee, every credit given is a separate transaction which makes the surety 7 irrevocably liable, but he may free himself from further liability.
Canara Bank vs A. Chidambaram III (2003) BC 21
The Bank filed original application (TA) before the DRT for recovery of the amount. The TA was disposed of by the Presiding Officer, DRT-II, Chennai, and the TA was allowed and decree was passed as against defendants 1 to 5 and D-6 was discharged from the loan liabilities. Aggrieved against the order passed by the Presiding Officer, DRT-II, discharging D-6, the Bank has preferred this appeal. Counsel for the appellant Bank submitted that the respondent D-6 executed continuing guarantee under Ex. A9 and as it is a continuing guarantee. D-6 is liable till he revoked that guarantee and any revocation letter sent by D-6 will operate only with regard to the future transactions after the revocation notice and for the prior transactions this continuing guarantee will hold good and D-6 will be liable for the suit claim until it was revoked and only for the future transactions D-6 may not be held liable. Counsel for the respondent D-6 submitted that it is not a continuing guarantee and as D-6 has sent revocation letter revoking the continuing guarantee, he is discharged from this liability immediately when he sent that revocation letter and the order passed by the 7
Ibid p.629
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Presiding Officer, DRT-II, discharging D-6 is perfectly justified. Section 129 of the Contract Act deals with continuing guarantee which states that a guarantee which extends to a series of transactions is called a 'continuing guarantee'. A continuing guarantee is one which extends to a series of transactions and is not exhausted by or confined to a single credit or transaction. A continuing guarantee is usually given as security for an overdraft facility, since the overdraft fluctuates in amount and will often continue for an indefinite period. Guarantees for bank overdrafts usually state in terms that they are to be by way of continuing security, and that they are not to be satisfied, discharged or affected by any intermediate payment or settlement of account. Ex. A-9 the document executed by D-6 the guarantor, the guarantee executed by D-6 is a continuing guarantee, the loan transaction being that overdraft facility. So, it goes without saying that it is a continuing guarantee. In Ex. A9 also it is specifically stipulated that the guarantee is a continuing guarantee and the guarantor can give notice and revoke his guarantee by issuing six months' notice and it shall be binding on the representatives and estates of the guarantor until the expiry of six months after a notice in writing of revocation of guarantee is received by the Bank. Since the loan transaction is for an overdraft facility and the recital in the document also shows that it is a continuing guarantee, it is only a continuing guarantee and D-6 has executed the document for continuing guarantee only. The clause pertaining to this is mentioned in the guarantee letter executed by the guarantor D6 which reads as follows: "Whereas the Guarantor has requested the Bank to grant financial assistance to the Borrower by way of facilities, including guarantees subject to the specific condition that the Guarantor shall unconditionally guarantee the repayment of all amounts advanced and all liabilities guaranteed by the Bank as also all amounts which may be advanced and all guarantees which may be issued by the Bank from this day till the expiry of a period of six months of the actual service on the Bank of a specific notice of revocation in writing." As per the contract entered into between the guarantor and the Bank under the guarantee letter, it is a continuing guarantee and it is binding on the guarantor notwithstanding the death 27 | P a g e
of the guarantor; and it is thereby binding on the representatives and the estates of the deceased guarantor until the expiry of six months after notice in writing of revocation of the guarantee is received by the Bank. D-6 mainly rests on the letter of revocation sent by him in the years 1992 and 1993 and contends that he is discharged of his liability because he sent the revocation letter. The letter sent by the guarantor dated 22.9.1992 is marked as Ex. A16. Under Ex. A1 6, D-6 has admitted that he has given guarantee but he is not in a position to extend the guarantee any more and requested the Bank to relieve him from the guarantee and to arrange some other guarantor and has requested the Bank not to connect his business with the above guarantee. In Ex. A16, D-6 has stated that under the present condition he is not in a position to extend the guarantee and requested to relieve him from the guarantee. D-6 also relies upon another letter Ex. A18 dated 22.5.1993. This letter Ex. A18 is only a reply notice sent by D-6 to the Bank for the notice issued by the Bank with regard to the recovery of the amount. In Ex. A18, D-6 has nowhere stated that he is revoking the guarantee and he is discharged from his liability. In Ex. A1 8, D-6 has stated that on 22.9.1992, D-6 sent another letter revoking his guarantee and the Bank has received it. Counsel for the appellant Bank states that no such letter revoking the guarantee was received by the Bank. Counsel for the appellant Bank submits that what he meant by non-receipt of letter is only with regard to the letter dated 16.3.1991 alleged to have been sent by the respondent to the Bank. He fairly submits that the alleged letter dated 16.3.1991 was not received by the Bank but the Bank is in receipt of the letter dated 22.9.1992 Ex. A16. Ex. A16 clearly indicates that the appellant is not in a position to extend the guarantee any more and he has requested the Bank to relieve him of the liability. This letter Ex. A16 dated 22.9.1992 clearly amounts to revocation of guarantee. So, from 22.9.1992 the appellant has not guaranteed for the repayment of the loan. The condition stipulated in Ex. A9 indicates that the continuing guarantee will be in force for a period of six months from the date of the guarantee revocation letter. So, from the date of letter Ex. A16 i.e. 22.9.1992, the continuing guarantee will be in force for a period of six months i.e. 21.3.1993. Till such period i.e. 21.3.1993, D-6 guarantor is liable under the continuing guarantee. Counsel appearing for the appellant Bank submitted that there was no more transaction after 1992 and the Bank has filed the O.A. on the outstanding as 28 | P a g e
in the year 1992 since no further transactions took place after the revocation of guarantee letter dated 22.9.1992. The appellant is liable for the claim by the Bank for the amount due till 21.3.1993 and after that date D-6 guarantor will not be liable. Section 130 of the Contract Act deals with revocation of continuing guarantee Section 130 states that "A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor". So, it implies that only for future transactions the continuing guarantee will not apply after issuance of revocation notice. As per the agreement, even for the period of six months after issuance of notice the continuing guarantee will be in force. D-6 guarantor remains responsible for any sum incurred by the principal debtor governed by the guarantee upto the time of six months after notice was given. As per Section 130 of the Contract Act, even if any revocation letter is given, it will operate only for the further transactions and not for the past transactions. Viewed at any angle, there is no ground to discharge D-6 from his liability. The argument advanced by the Counsel for the respondent D-6 does not hold good. D-6 is liable for the suit claims upto 21.3.1993. The order passed by the Presiding Officer, DRT-II, discharging D-6 from the loan liability is liable to be set aside and it is set aside. The order passed by the Presiding Officer, DRT-II, Chennai, in other respects is not disturbed. Counsel for the respondent submits that the claim as against the respondent D-6 is barred by limitation since the suit was not filed immediately after the revocation letter was sent in 1992. The revocation letter by D-6 was sent on 22.9.1992. Counsel for the appellant Bank submitted that the period of limitation is three years from the date of revocation of the agreement as per Section 55 of the Limitation Act. Under Section 55 the period of limitation runs upto three years from the date of revocation of that guarantee i.e. from 22.9.1992. Even the six months' time provided under the notice expires by 21.3.1993. The suit having been filed on 15.3.1994, the OA as against D-6 is not barred by limitation and it is in time. So, the period of limitation has to run from March, 1993.
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Appeal allowed. Decree is passed as against D-6 also for the amount due to the Bank on the said loan transaction till 21.3.1993 and decree is passed as against D-6 accordingly.
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Canara Bank vs Arbeit Platz (India) Pvt. Ltd.IV (2004) BC 109
1. Aggrieved against the order dated 31.1.2003 passed by the PO, DRT-I, Chennai, in dismissing the TA as against D4 and D5 after 13.8.1990 and awarding simple pendente lite and future interest @ 10% p.a., the Canara Bank has come forward with the appeal RA-34/2003. The defendants 4 and 5 have preferred the appeal RA-6/2004 challenging the final order passed against them. The PO, DRT has found that D4 and D5 are jointly and severally liable to pay the amount due as on the date of their registration i.e. on 13.8.1990 and afterward they are not liable. The PO, DRT has found that D4 and D5 have resigned from the D1 Company from 13.8.1990 and so they cannot be held responsible to pay the loan liability of the Company which was availed after their resignation from the company. 2. Arguments of the Canara Bank's Counsel already heard and the matter was again posted today for arguments on the defendants' side. No representation for the defendants. Counsel for the Bank alone present. Order is being passed on merits. 3. Counsel for the Canara Bank pointed out that D4 and D5 have executed Continuing guarantee and as per the terms and conditions of the Continuing guarantee if the guarantors D4 and D5 want to revoke the guarantee they must follow the terms and conditions set out in the continuing guarantee and their Continuing guarantee can be revoked only as per the condition imposed therein. The terms and conditions set out in the continuing guarantee read as follows: "The liabilities of the guarantors under these presents shall be construed as joint and several. This guarantee shall be a continuing guarantee notwithstanding the death of any one or more of the guarantors and shall be binding on the representatives and the estates of the deceased guarantors until the expiry of six months after a notice in writing of revocation of the guarantee as hereinafter provided is received by the Bank."
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4. The PO, DRT, has relied upon the letter of the company dated 8.11.1990 wherein it is stated that the company has accepted the resignation of D4 and D5 at the meeting of the Board of Directors held on 8.11.1990 and thereafter the other two persons Mr. S. Viswanathan and Mrs. V. Bhavani are the only Directors of that company. It has further been reiterated in the minutes of the meeting that it is resolved to accept the resignations of D4 and D5 Mr. D. Magesh and Mr. M.B. Mohideen in pursuance of the resignations submitted by them on personal grounds on 13.8.1990 from the Additional Directorship and to relieve them of their responsibility with effect from 8.11.1990. So, The company has relied upon those resignation letters and has passed the minutes passing resolution that with effect from 13.8.1990, D4 and D5 ceased to be the Directors of the company and (hey me not liable. D4 and D5 did not send any letter to the Canara Bank with regard to the revocation of their guarantee. The Bank has sent letter dated 12.11.1996 to D4 and D5 stating that the Bank reserves its right to proceed against them for all their advances/loans granted to M/s. Arbeit Platz India (P) Ltd., and Ist defendant company and they do not take cognizance of their resignation from the said Company and they shall treat them as Directors of the company as long as the company's liability is with them. 5. The terms and conditions set out in the guarantee document clearly indicate that the guarantors must issue a notice in writing of revocation of guarantee as provided in the conditions and is received by the Bank and the period of six months is prescribed for that: The wording in the guarantee that the "revocation of guarantee is received by the Bank", clearly indicate that the guarantors must send their revocation to the Bank in writing. Then only the guarantee will be revoked. D4 and D5 had chosen to send any revocation of guarantee to the Bank. On the other hand, they have sent letter only with regard to their resignation from the company and the company have accepted the resignation and have passed resolution. Nothing is sent to the Bank by the guarantors with regard to the revocation of guarantee. Any amount of resignation from the company by sending resignation letter to the company will not absolve the liability of D4 and D5 so long as the guarantee executed by D4 and D5 continues to be a Continuing guarantee and it will be valid until the expiry of six months after the issue of notice in writing of revocation issued by the guarantors and is received by the Bank. The terms and conditions set out in the guarantee with regard to the revocation of the guarantee were not followed by the guarantee and D4 and D5 did not revoke the guarantee as set out in the guarantee executed by them. So, any
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amount of resignation even though it was accepted by the Company will not absolve the liability of D4 and D5 in asmuchas the continuing guarantee executed by them in favour of the Bank continues and D4 and D5 will continue to be liable until they revoked the guarantee set put in the guarantee document. So, the finding of the PO, DRT, holding D4 and D5 not liable after 13.8.1990 is not sustainable and it is liable to be set aside and it is set aside. As for the terms and conditions set out in the guarantee, D4 and D5 continue to be liable for the entire suit claim. 6. Counsel for the Canara Bank submitted that the Bank is also aggrieved with regard to the award of interest by the PO, DRT. The PO, DRT, has found that D1, D2, D3 and D6 are jointly and severally responsible to pay the sum till the date of filing of the TA and at 10% per annum simple pendente lite and future interest till the date of realization. The suit was decreed for Rs. 1,23,20,762.17 p. and the PO, DRT, has granted interest at 10% p.a. simple pendente lite and future interest from the date of filing of the suit till the date of realisation with costs. Counsel for the Canara Bank submits that even for this period the Bank is entitled for the contractual rate of interest. 7. The Hon'ble Supreme Court (Civil Appellate Jurisdiction) in SLP(C) No. 9298/2000 (State Bank of India v. Material Marketing Co. and Ors.) has held that Presiding Officers of the DRTs are empowered under the RDDB and FI Act, 1993 to exercise their discretion with regard to the award of rate of interest pendente lite and future interest. By exercising such discretionary power the PO, DRT has awarded interest at 10% simple pendente lite and future interest. So, there is nothing wrong in passing such order by the PO, DRT Section 19 Sub-section (20) of the RDDB and FI Act, 1993 states that the PO, DRT can pass order with regard to the payment including payment of interest in the interest of justice. 8. So, following the decision of the Apex Court, I find that the discretionary power is vested in the PO, DRT with regard to the award of interest pendente lite and future interest. 9. In the result, appeal RA 34/2003 is partly allowed. Appeal RA 6/2004 is dismissed.
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CHAPTER-6 Conclusion
A contract of guarantee is a contract to perform the promise or discharge the liability, of a third person in case of his default.-Sec. 126. Ordinarily a guarantee is not revocable when once it is acted upon. But section 130 provides for revocation of continuing guarantee. A guarantee is revoked under following conditions I. By notice of revocation by the surety : The notice operates to revoke the surety‟s liabilities as regards transaction is entered into after the notice. He continues to be liable for transactions entered into prior to the notice.-Sec. 130. 2. By the death of the surety : “The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far a regards future transactions.”-Sec. 131.
Hypothesis 1- Surety is not liable for anything after revocation. The hypothesis is proved to be correct. As after revocation surety is not liable for any future transactions he is only liable for transactions that have taken place before revocation. Hypothesis 2-After the death of surety is heirs are liable. The hypothesis is proved to be correct. In cases of continuing guaranty, the death of the guarantor stops the liability for subsequent indebtedness. In cases of absolute surety ship, as on a note or a bond, the death of the surety does not operate to extinguish the liability, but the estate is bound even for defaults arising after the surety's death, and also, the heirs are bound in so far as the estate of the principal comes to their hands.
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