According to Section 126 of Indian Contract Act 1872 the ‘Contract of guarantee’ is a contract to perform the promise or discharge the liability of a third person in case of his default.
There are three parties involved in this transaction-
- Surety- The person who gives the guarantee.
- Principal debtor- The person in respect of whose default the guarantee is given. (The third person)
- Creditor- The person to whom the guarantee is given.
Guarantee may be either oral or written.
Example of guarantee-
A enters into the contract of guarantee with B that if she delivers the goods to C within the next 5 days, A himself will pay for this. Subsequently B delivers the goods to C in 5 days and then A pays for the goods.
This was a contract of guarantee and the consideration was the promise to pay for the goods when the order is complete. (Section 127 of Indian contract act, 1872)
According to section 129 of Indian Contract Act, ‘Continuing guarantee’ is the guarantee which extends to a series of transactions.
It means that the guarantor will be liable for the obligation of contract to the creditor in default of principal debtor for a series of contracts which are made and renewed over time.
- A enters into a contract of continuing guarantee with B that if she delivers the goods to C every 10 days, B will make the payments of goods when the delivery is fulfilled. Subsequently B delivers the goods to C every 5 days and A pays for them timely.
- A enters into the contract of continuing guarantee with B to deliver the goods for Rs 1000 every month to C on payment made by A. C delivers goods in the first month and payment is made. For the second month, she delivers the goods for Rs 2000. Here the liability of A is to only the goods worth Rs 1000.
REVOCATION OF CONTINUING GUARANTEE
The court of law safeguards the right of surety. Surety has the right to revoke the contract of guarantee by the notice to the creditor. Similarly the creditor is held in the position of good faith. If the creditor along with the principal debtor changes any terms of the contract without the knowledge of surety, the contract of continuing guarantee stands revoked.
There are three ways in which a continuing guarantee can be revoked-
- By the notice to the creditor
- In case of surety’s death
- When the terms of contracts are changed without the consent of surety.
REVOCATION BY THE NOTICE TO CREDITOR-
According to Section 130 of Indian Contract Act 1872, a continuing guarantee may be revoked by the surety, at any time, as to future transactions by the notice to the creditor.
This means that surety can revoke the contract of continuing guarantee recording any transaction by presenting a notice to the creditor. By giving the notice to the creditor, the surety is discharged from the future transactions but he is still bound to perform the present transaction.
For example, in case of Offord v Davies, it was held that surety has to withdraw from the contract of continuing guarantee before any transactions are made. He cannot withdraw when the agreement has been acted upon. Also in such cases of revocation the intention to withdraw must be communicated effectively otherwise it will not be valid.
There is no hard and fast rule to say that a particular guarantee is a continuing guarantee until and unless it is stipulated in the contract itself. Courts decide this based on the circumstances of the case and many times surety to a contract have revoked the contracts claiming them to be a continuing guarantee so it has to be decided by the facts of the case.
For example in case of Shiv Machine Tools vs Canara Bank , it was held that in deciding the question as to whether the guarantee is a continuing one, the whole of the surrounding circumstances have to be taken into consideration unless the wording of the guarantee is such that the Court is precluded from taking anything else into consideration. If the question of limitation had been raised in the Trial Court and if the guarantee being a continuing guarantee was put in issue, it would have been possible for the parties to adduce permissible evidence if they so wanted.
Payment in installments for a fixed period does not constitute a continuing guarantee. This was observed in the case of Hasan Ali v. Wali Ullah  , here the lease was signed for a fixed period of 5 years It was agreed that the lessee would pay the Government revenue, all expenses relating to the management of the property and Rs, 900 a year to the lessor in two installments. The surety executed an agreement of guarantee for the fulfillment of the due obligation. During the period of least the surety gave a notice to the creditor revoking his guarantee.
Creditor then sued the surety as well as principal debtor for the payment of the lease.
The surety defended himself on the ground that it was continuous guarantee and that he has the right to revoke it by issuing a notice to the creditor.
Court held that the payment of a certain sum in installment for a fixed period of time which in this case is five years, is not a continuing guarantee and that it will be considered as a single transaction.
REVOCATION BY THE DEATH OF THE SURETY-
According to Section 131 of Indian Contract Act 1872, revocation of continuing guarantee by the surety’s death- The death of the surety operates in the absence of any contract to the contrary, as the revocation of a continuing guarantee, so far as regards future transactions.
This means that the death of surety revokes the continuing guarantee in regards to the future transaction until unless there is some contract to the contrary.
For example- A guarantees the monthly payments to B for the delivery of the goods to C. After 5 months of this contract, A dies. The death of A revokes the contract of continuing guarantee.
In case of Durga Priya Chowdhury v. Durga Pada Roy, the surety had guaranteed the due collection and payment of the rent of Creditor’s Zamindari by the Principal Debtor to the extent of Rs 600 in consideration of employment of Principal debtor as agent. Afterwards, the surety died. The Principal debtor defaulted and the creditor sued him and legal representatives of the surety. The legal representatives of the surety contended that being a continuing guarantee, it was revoked automatically with the death of the surety.
The provisions of the guarantee stipulated that the heirs and the representatives of the surety would be bound by the terms of the guarantee in the same way as the surety was bound by it. Referring to this provision, the learned judges held that the guarantee was not revoked even after the death of the surety and his heirs were liable for any act of the debtor during his continuance in the service.
In case of Muhammad Ubed Ullah vs Muhammad Inshah Allah Khan, the debtor had to furnish to two sureties for good conduct for his admission in postal services. One of the sureties died and other surviving surety had to pay for the some embezzled sum by the principal debtor.
The surviving surety instituted a suit for the recovery of half of the amount from the heirs of deceased co-surety. The court looked at the “contract to the contrary” part of section 131 of Indian Contract Act. In this contract of guarantee it was clearly stated that the bond should remain after the death of the sureties and to be continued during the period of service term of the principal debtor. The only exception was the voluntary termination for which the notice had to be given 6 months prior. It was contended that the last clause implies that the guarantee can be terminated after death of the surety.
The court held that the last clause of termination was only an exception and it doesn’t import that the death of one of the securities by itself would terminate the responsibility. If a notice had been issued during the lifetime of the surety or after his death by representatives, only then the contract of guarantee had been revoked.
In the case of S.N. Sen v. Bank of Bengal , the contract of guarantee of faithful service was signed by the father of the plaintiff on the consideration of the plaintiff being employed as a cashier. The father of the plaintiff died after sometime and the bank sued him for some misconduct.
It was contended that according to section 131 of Indian Contract Act, the death of the surety revoked the contract of continuing guarantee that was given on the default of the plaintiff.
The court held that the guarantee given by surety for the plaintiff was not a continuing guarantee, since his employment was a single transaction and not a series of transactions. Thus it was considered not a continuing guarantee and was not revocable as long as he continued in the job.
REVOCATION BY THE CHANGE IN TERMS OF CONTRACT WITHOUT THE CONSENT OF SURETY-
In the contract of guarantee the court puts the duty of good faith on the creditor. This safeguards the right of the surety and respects his position in the contract. Thus the contract of guarantee can be revoked when the creditor and the debtor makes the changes in the terms of the contract without the consent of the surety.
This has been given in Section 133 of Indian Contract Act as- 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 creditor, discharge the surety as to transaction subsequent to the variance.
For example- A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards B and C contacts, 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 overdraw, and the bank loses a sum of money.
A is discharged from his suretyship by the variance made by C without his consent, and is not liable to make good this loss.
In the case of- M S Anirudhan V Thomco’s Bank Ltd.(1963) , the defendant guaranteed repayment of Rs.25,000 which was refused by the bank later. Principal debtor reduced the amount to Rs.20,000 without the consent of surety and gave it to the bank which was then accepted by the bank. Later on the principal debtor failed to pay back the amount to the bank and they sued surety.
It was questioned, whether the alteration in the terms of contract would discharge the surety from this liability. But the court held by a majority that the surety was not discharged.
In the case Bishwanath Agarwal v. State Bank of India where a surety executed a continuing guarantee to the extent of Rs 2,50,000 for securing the loan amount and interest payable by the principal debtor to the creditor from time to time. The debtor defaulted in paying the loan and subsequently overdrawals were made by the principal debtor beyond that limit in the same loan account without the consent of the surety.
The surety was held liable only to the amount up to Rs 2,50,000 and he was not bound for the overdrawals allowed by the bank to the debtor without the surety’s consent.
Contract of continuing guarantee has been defined in Indian Contract Act 1872. It is a contract between the surety and creditor in default of the principal debtor. The court upholds the right of the surety in such contracts and puts the onus of good faith on the creditor. Thus the revocation of continuing guarantee can be done by the notice of the surety to the creditor and in case of surety’s death. Last one is when the creditor and principal debtor change the terms of contract would out the consent of surety. These ways the continuous guarantee can be revoked.
 (1862) 12 CBNS
ILR 1996 KAR 732, 1996 (5) KarLJ 406
 Shiv Machine Tools vs Canara Bank on Indiankanoon.com
AIR 1930 All 730
AIR 1928 Cal 204
(1921) ILR 43 All 132
S.N. Sen v. Bank of Bengal, AIR 1920 PC 35
 Section 133, Indian Contract Act 1872, illustration (a)
1963 AIR 746, 1963 SCR Supl. (1) 63
 80 COMPCAS 9 (BOM)
state bank of india v. vishwanath