Contract of guarantee

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 G uarantee 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 b e delivered by B to C and to be paid for in a mon th. 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 R s 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