The Hindu Business Line : The third side to contract

A CONTRACT of guarantee is a contract to perform the promise, or discharge the liability, of a third person (principal debtor) in case of his default.

It is a trilateral contract, that is, among three persons — the surety, the principal debtor and the creditor.

The person who gives the guarantee is called the surety/guarantor. The person in respect of whose default the guarantee is given is called the principal debtor. The person to whom the guarantee is given is called the creditor.

A guarantee may be either oral or written. A written guarantee sustains all attacks, whereas an oral one is difficult to prove.

Surety — consideration, liability

Anything done, or any aid provided by the creditor, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee to the creditor. In a contract of guarantee, a guarantor is also a debtor. The liability of a guarantor towards the creditor cannot exceed the terms specified in the contract of guarantee.

The liability of the surety towards the creditor is co-extensive with that of the principal debtor, unless it is otherwise provided in the contract of guarantee. A guarantor, in common law, is in no better footing than the principal debtor. It is open to the creditor to proceed legally against the guarantor first for remedy.

In the case of a loan, if a guarantor binds himself to a maximum limit of the principal debt, his liability towards the creditor would not be beyond that.

Continuing guarantee

A guarantee which extends to a series of transactions between the creditor and principal debtor is called continuing guarantee. It may at any time be revoked by the surety, as to future transactions between the creditor and principal debtor, by notice to the creditor.

In a contract of continuing guarantee, the death of the surety operates, in the absence of any condition to the contrary (in the contract), as a revocation of the guarantee, so far as future transactions between the creditor and the principal debtor are concerned.

Discharging a surety

Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety from the contract of guarantee as to transactions between the creditor and principal debtor subsequent to the variance.

The surety is relieved of his liability, by any contract between the creditor and the principal debtor, by which the principal debtor is relieved of his liability, or by any act or omission of the creditor, the legal consequence of which results in the discharge of the 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 and relieves the surety of his contractual liability, unless the surety gives consent to such a contract.

If the creditor does any act which is inconsistent with the right of the surety, and which impairs the right of the surety available against the principal debtor, the surety is discharged.

If the creditor loses, or, without the consent of the surety, parts with any security which the principal debtor has given to the creditor, the surety is discharged to the extent of the value of the security lost or parted with.

A surety will get discharged from the contract of guarantee if the decree holder (creditor) grants instalments to the judgment debtor (principal debtor) for payment of the decretal amount without the consent of the surety.

If a contract (not being the contract of guarantee) 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 from the contract of guarantee.

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 provisions in the contract of guarantee to the contrary, discharge the surety. If there is more than one surety, a release by the creditor of one of them does not discharge the others.

A discharge (from the contract of guarantee) which the principal debtor may secure by operation of law (insolvency or liquidation) does not absolve the surety of his liability towards the creditor.

The passive inactivity or negligence of the creditor in realising the debt from the collateral security provided by the principal debtor does not absolve the surety/guarantor of his liability towards the creditor under the contract of guarantee.

A surety will not be discharged if hypothecated goods (hypothecated by the principal debtor) left in the possession of the principal debtor are sold by him (principal debtor) without the knowledge of the creditor.

The creditor's enforcement of surety bond against one of the sureties for satisfaction of debt does not discharge other sureties from the contract of guarantee.

If, after passing money decree based on a contract of guarantee, there is a settlement between decree holder (creditor) and principal debtor (judgment debtor) where some lesser amount is agreed, such settlement will not have any effect of discharging the surety from the guarantee.

Mere passive conduct on the part of the creditor in not suing the principal debtor based on the contract of guarantee will not discharge the surety from the contract.

Invalid guarantee

Any guarantee which the creditor has obtained from a surety by means of misrepresentation (made by the creditor), concerning a material part of the contract of guarantee, is invalid.

Any guarantee which the creditor has obtained from a surety by being silent as to material conditions forming part of the contract of guarantee is invalid.

If a surety gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined the contract of guarantee as co-surety, the guarantee is not valid if that other person does not join.

Co-sureties

In a contract of guarantee, where two or more persons are co-sureties for the same debt, they, in the absence of any condition to the contrary in the contract, are liable to the creditor to pay each an equal share of the whole debt, or that part of it which remains unpaid by the principal debtor.

If guarantee is in plural number but signed only by one surety, it is binding on him unless it is shown that he would be liable to the creditor only if other surety or sureties sign the contract.

Co-sureties who are bound in different sums are liable to pay equally to the creditor, notwithstanding the limits of their respective obligations permit.

In a contract of guarantee, if two sureties contract with a creditor to undertake a certain liability, and also contract with each other (between sureties) that one of them shall be liable only on the default of the other, to the creditor, the creditor not being a party to such a contract between the two sureties, the liability of each of such two sureties to the creditor under the first contract is not affected by the existence of such a contract between the two sureties, even though the creditor may have been aware of its existence.

Bank guarantee

A bank guarantee is an independent and distinct contract between the beneficiary and the bank, and the rights and obligations therein are to be determined on its own terms.

A bank guarantee which is payable on demand implies that the bank is liable to pay when a demand is made upon the bank by the beneficiary. The bank is not concerned with any disputes between the beneficiary and the person at whose instance the bank had issued the bank guarantee.

A bank guarantee need not be honoured by the bank if it is vitiated by fraud. For encashment of conditional bank guarantee, the beneficiary must establish that conditions for invoking bank guarantee exist. Commitments of the banks (bank guarantee) arc to be honoured free from interference by the courts.

Surety's right

If a guaranteed debt has become due for payment, the surety, upon payment of it, is equipped with all the rights which the creditor had against the principal debtor under the contract of guarantee.

Such a right is called right of subrogation, that is, the surety steps into the shoes of the creditor and proceeds against the principal debtor.

Article E-Mail :: Comment :: Syndication

Stories in this Section
The third side to contract

What is the fate of MAOCARO?

E-governance and the role of CAs

File by wire to e-clean your conscience

Our leadership pipelines are broken