Guarantee, surety liability etc

1. CONTRACT OF GUARANTEE
By
Dr.Sridevi Krishna
Asst. Professor
VVLC

2. CONTRACT OF GUARANTEE
 Section 126: “A contract of guarantee is a
contract to perform the promise, or
discharge the liability , of third person in
case of his default.”
 Person who gives guarantee is called
Surety
 The person in respect of whose default the
guarantee is given is called Principal
Debtor
 The person to whom the guarantee is given
is called the Creditor.

3. ESSENTIALS OF CONTRACT OF
GUARANTEE
 There are three parties in a contract of Guarantee
 The contract may be oral or in writing.
 There should be a principal debt.
 Consideration: Sec 127: 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.
 Consent of surety should not have been obtained
by misrepresentation or concealment.(section 142
&section143)

4. BANK GUARANTEE
 A bank gives performance guarantee on behalf of a party to a
contract.
 It is an independent contract and imposes an obligation on the bank.
 It is unconditional and no injunction can be issued to prevent the
enforcement.
 Pesticides India V State Chemicals & Pharmaceuticals Corp of
India.
 Facts: PI wanted to purchase some goods from SC&P and gave
earnest money and also bank guarantee by the State Bank of Bikaner
& Jaipur. The PI were not satisfied with the performance made by the
corp as it was wrongly done. The corp demanded the amount of the
bank guarantee from Bank but PI sought to restrain the bank from
making the payment. The bank had undertaken to pay on first
demand.
 Held: bank was bound to honor the guarantee and the PI cannot
prevent the bank from honoring its promise to pay.

5. HIMADRI CHEMICALS INDUSTRIES V COAL TAR REFINING COMPANY AIR 2007 SC2798
 Principles to be noted in the matter of injunction to restrain the
encashment of bank guarantee:
 When a bank guarantee has been given, the beneficiary is entitled to
realize it irrespective of any pending disputes relating to the terms of
the contract.
 The bank is also bound to honor it irrespective of any dispute between
the parties.
 The court should be slow to grant an order of injunction to restrain the
bank
 BG is an independent and separate contract and absolute in nature.
The existence of dispute between the parties is not a ground for
ordering injunction.
 Fraud of an egregious nature which violates the very foundation of
contract and beneficiary seeks to take advantage of such situation is
an exception.
 Allowing encashment of unconditional bank guarantee would result in
irretrievable harm or injustice to one of the parties to the contract.

6. LIABILITY OF SURETY
 Section 128- the liability of surety is co-extensive with that of the
principal debtor, unless it is otherwise provided. (surety can fix or limit
the liability)
 The surety becomes liable to pay the entire amount which the PD owes
to the creditor.
 Bank of Bihar Ltd V Dr. Damodar Prasad
 Facts: The plaintiff bank lent money to Damodar Prasad (PD) on the guarantee
of Paras Nath Sinha(surety). On the date of the suit Damodar Prasad was
indebted to the Bank for Rs. 11,723 on account of principal and Rs. 2769. on
account of interest. In spite of demands neither the principal debtor nor the
guarantor paid the dues. The plaintiff bank then filed suit claiming a decree for the
amount due. The trial court decreed the suit against both the defendants but while
passing the decree the trial court directed that the plaintiff Bank shall be at liberty
to enforce its dues against the defendant No 2 only after having exhausted its
remedies against defendant No.1. The plaintiff went in appeal challenging the
legality and propriety of its direction. The High Court dismissed the appeal, where
on, the matter came before the Supreme Court.
 Held: the liability of surety is immediate and cannot be deferred until the creditor
has exhausted all his remedies against the principal debtor.

7. SC ON LIABILITY
 Ram Kishan and others V State of UP & others
(2013) 1SCC 382
 It was laid down that:
 It is settled law under section 128 that the liability of
surety is co-extensive with that of the principal debtor.
Therefore, the creditor has the right to obtain a
decree against the surety and the PD.
 The surety has no right to restrain execution of the
decree against him until the creditor has exhausted
his remedy against the PD for the reason that it is the
business of surety to see whether the PD has paid or
not.
 The surety has no right to dictate terms to the creditor
as to how he should make the recovery and pursue
his remedies against the PD at his instance.

8. CONTINUING GUARANTEE
 Section 129: A guarantee which extends to a series of
transaction is called as a continuing guarantee.
 A guarantees payment to B, a tea dealer , to the amount of Rs
500 for any tea he may, from time to time supply to C. B
supplies C with tea to above the value of Rs 500 and C pays B
for it. Afterwards B supplies C with the tea to the value of Rs
500. C fails to pay. The guarantee given by A was a continuing
guarantee, and he is accordingly liable to B to the extent of Rs
500.
 A guarantees payment to B 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. The guarantee given by A was not
continuing guarantee and accordingly he is not liable for the
price of the four sacks.

9. DISCHARGE OF SURETY FROM LIABILITY
 Modes of discharge:
 By notice of revocation : section 130: A continuing
guarantee may at any time be revoked by the surety, as
to further transaction, by notice to the creditor.
 Revocation of continuing guarantee by surety’s
death: section 131: the death of surety operates, in the
absence of any contract to the contrary, as revocation
of continuing guarantee, so far as regards future
transactions.
 By variance: section 133: any variance made without
the surety’s consent in the terms of the contract
between the PD and Creditor, discharges the surety as
to transactions subsequent to the variance.

10. CONTINUE..
 By release or discharge of PD: section 134: the
surety is discharged by any contract between the
creditor and the PD , by which the PD is released
or by an act or omission of the creditor, the legal
consequence of which is the discharge of the PD.
 Composition, extension of time and agreement
not to sue: section 135: a contract between the
creditor and the PD by which the creditor makes a
composition with or promise to give time to or not to
sue, the PD, discharges the surety, unless the
surety assents to such contract.
 Kurian V The Allepey CCMS society AIR
1975Ker 44

11. FACTS
 The respondent instituted suit claiming balance due in the price
of coir said to be purchased by the Firm (D1) where D2-5 were
partners. The R (P) had taken attachment of goods belonging to
the firm through court.
 The Appellant (D3) got attachments released by executing surety
bond, by making himself liable to pay the amount due by the D1
&D2 if they could pay it. The surety bond was filed in the court.
 Both P and D1&2 compromised suit filing a petition wherein D1&2
were given 9 months to make payment otherwise it would be
realized through the assets of D1&2. it was provided that the D3
liability as surety was to subsist though he was not a party to
compromise.
 When execution of compromise decree was sought against the
D3, he contended that he is not liable in view of the contract
made between P &D1&2 where they were given time for payment
without the consent of the Surety. He relied on Section 135

12. HELD
The executing court upheld
but District Court overruled.
The Div bench of Kerala HC
allowed appeal and held
arrangement meant giving
time to the debtor within the
meaning of section 135 and
that the surety was
discharged from liability.

13.  Promise not to sue: section 137:Mere forbearance on
the part of the creditor to sue the PD, 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.
 By creditor’s act or omission impairing surety’s
eventual remedy. Section 139: If the creditor does any
act or omission which is inconsistent to any act which
his duty requires him to do, and the eventual remedy of
the surety himself against the PD is thereby impaired,
the surety is discharged.
 By loss of security by the creditor: section 141: A
surety is entitled to the benefit of every security which
the creditor has against the PD at the time when the
contract of surety ship 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.

14. CASE LAW
 State of MP v Kaluram AIR 1967 SC1105
 Facts: the respondent Kaluram, was a surety for the
payment of felled trees which were sold by the
appellant to one Jagat Ram. The buyer of the trees
was to make the payment in 4 installments. He paid
one installment and then defaulted. The appellant had
a right under the contract to prevent the purchaser
from removing the trees when he was in default. The
appellant failed to do so.
 Held: by allowing the buyer to take away the trees,
had allowed the security to be lost, and the surety was,
therefore, discharged to that extent.

15. RIGHTS OF SURETY
 Right of subrogation: section 140: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 has against the PD.
 Right to Indemnity: section 145: in every contract of guarantee
there is implied promise by the PD to indemnify the surety; and
the surety is entitled to recover from the PD whatever sum he
has rightfully paid under the guarantee, but no sums which he
has paid wrongfully.
 Rights against co-sureties to contribute equally- section
146: 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 as equal share of the whole debt or of that part of it
which remains unpaid by the PD

16. ILLUSTRATIONS
 A,B and C are sureties to D for the sum of Rs 3000
lent to E. E, makes default in payment. A,B,C are
liable as between themselves to pay 1000 rupees
reach.
 A,B,C are sureties to D for the sum of 1000 rupees
lent to E and there is a contract between A,B,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 Rs. 250, B
Rs 250, and C Rs. 500.

17. CO-SURETIES
 Section 147- co-sureties who are bound in different
sums are liable to pay equally as far as the limits of
their respective obligations permit.
 A,B and C are sureties for D enter into three several
bonds in different capacities namely, A for Rs
10,000, B for Rs. 20,000 and C for Rs. 40,000,
conditioned for D’s duly accounting to E. D makes
default to the extent of 30,000. A,B and C are each
liable to pay 10,000 rupees.

18. RIGHTS CONTINUED..
 Section 138: 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.
 Surety’s Rights to benefit of creditor’s
securities: section 141: a surety is entitled to the
benefit of every security which the creditor has
against the PD at the time when the contract of
surety ship 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.

19. DIFFERENCE BETWEEN INDEMNITY & GUARANTEE
INDEMNITY GUARANTEE
THERE ARE 2 PARTIES THERE ARE 3 PARTIES
CONTRACT IS ENTERED INTO
FOR THE REIMBURSEMENT OF
LOSS ONLY
CONTRACT IS ENTERED INTO
FOR THE SECURITY OF THE
DEBT TO CREDITOR
ONE CONTRACT BETWEEN
INDEMNIFIER AND INDEMNITY
HOLDER
THREE CONTRACT BW
C&D; C&S; PD&S
IT IS A DIRECT AND ORIGINAL
CONTRACT
IT IS ONLY A CONSEQUENTIAL
CONTRACT
LIABILITY OF INDEMNIFIER IS
PRIMARY
LIABILITY OF SURETY IS
SECONDARY
THIRD PARTY CANNOT BE
SUED
RIGHT OF SUBROGATION IS
AVAILABLE TO SURETY