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Revocation of Continuing Guarantee

Revocation of Continuing Guarantee
Surety is said to be discharged when liability comes to an end. There are various modes in which a continuing guarantee is revoked:

Continuing Guarantee:
Section 129[1], defines continuing guarantee “as a guarantee which extends to a series of transactions.”

Illustration:
X guarantees payment to Y for selling apples costing Rs 100 at the end of every month to Z. Therefore, Y started supplying it to Z with payment for the same. Later, Y started supplying the apples at Rs 200 to Z causing Z unable to pay the amount. Here, the guarantee being continuing guarantee, X will be liable for payment but only to the extent of Rs 100.

Revocation of Continuing Guarantee
Surety is said to be discharged when liability comes to an end. There are various modes in which a continuing guarantee is revoked:

  • By notice of revocation by surety.
  • By death of the surety
  • By changing of terms and conditions of contract without the consent of the surety.


The most fundamental question which arises in every case is whether the surety had the rights of revocation and in order to prove this, an essential requisite is establishing whether it was a continuing guarantee or a specific guarantee.

The following is the difference between a continuing guarantee and a specific guarantee:
Specific guarantee is limited only to a single transaction and guarantee comes to and end when the liability comes to an end while continuing guarantee continues for a series of transactions.
The period of limitation in order to enforce the guarantee is three years starting from the date of execution of notice of guarantee.

Revocation by notice of revocation by surety:
Revocation of continuing guarantees as provided in Section 130[2], states that “a continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.”

Illustration:
X guarantees payment to Y for selling apples for Rs 100 to Z. Y supplied the apples of Rs 500 to Z. Thus, X gave a notice to Y not to supply the apples any further. Here, X would be liable for the payment of Rs 500 apples but not for the ones which would be supplied after the notice of revocation.

In Offord v Davies[3], the surety ensured the debtor's repayment of bills discounted by the borrower up to $600 for 1 year. Before any bills were discounted, the surety cancelled the guarantee. However, the creditor continued to discount bills, and the debtor continued to default on payments. The surety was found not to be responsible for the bills discounted after his revocation.

Payment of rents in installments are not taken as a series of transactions thus do not come under continuing guarantee. This was held in Hasan Ali v Wali Ullah[4].

The case of S.N. Sen v. Bank of Bengal[5], gave a judgement that the guarantee given for employee’s fidelity will not be considered as a continuing guarantee.

Revocation by death of surety:
A continuing contract can be revoked with the death of the surety unless there is a contract contrary to it with being effective for future transactions only. The heirs of the surety can be made liable for the transactions already incurred before the death but only to the extent of property inherited by the heir.

Section 131[6], dealing with this states that in the absence of any contrary contract, the death of the surety would operate as revocation of continuing guarantee for future transactions.

In, Durga Priya Chowdhury v Durga Pada Roy[7], the terms of the assurance were to be binding on the surety's heirs and members in the same way as they were on the surety. In light of this clause, the learned judges held that the surety's guarantee was not revoked even after his death, and that his heirs were responsible for any act committed by the debtor during his tenure.

Revocation by variance in terms of contract:
Section 133[8], states that in case of any variance in the contractual terms between the principal debtor and the creditor, without the consent of the surety will lead to discharge of the liabilities of the surety for the transactions occurring after such variance.

Illustration:
X guarantees payment to Y for selling apples costing Rs 100 at the end of every month to Z. Therefore, Y started supplying it to Z with payment for the same. Later, Y and Z, without the consent of X decided that the apples must be supplied at the end of every 2 month that too at Rs 400. Here, there was change in the terms of the contract without the consent of X.

Thus, X is discharged from any liability arising after the variance.
The judgement of Bonar v Macdonald [9], cleared that in cases where the fresh agreement was a substitution of the new agreement, the surety is not liable to make good the loss.
In cases like where a person guaranteed the payment of rent but it was increased without surety’s consent, the liability of surety was said to be discharged.[10]

In Anirudhan v Thomco’s Bank Ltd.[11], for the purpose of securing the loan amount and interest payable by the principal debtor to the borrower from time to time, a surety executed a continuing guarantee in the amount of Rs 2,50,000. The debtor defaulted on the loan, and the principal debtor made subsequent overdraws in the same loan account in excess of the limit without the permission of the surety. The surety was only liable up to Rs 2,50,000, and he was not responsible for any overdraws made by the bank without the surety's permission.

The difference which arose after the contrary judgements given in Blest v Brown[12], and Holme v Brunskill[13], was cleared out with the rule that if the substantial altercations were for the benefit of the surety, he won’t be discharged from liability.

Advance Authorization of alteration
In Central Bank of India v Ali Mohd.[14], the court held that the consent of the surety must be taken at the time of variance of the terms and consent given in advance would be contrary to the provisions of Section 134, 135, 139, 141.

Effect of Decree against surety
In Charan Singh v. Security Finance (P) Ltd.[15], it was held that if the liability has been converted into a decree, the settlement with the principal debtor followed by it will not discharge the surety from the liability.

Waiver of rights
Whether the surety can give up the benefits which has been given to him through the provisions has always been debatable. In Sita Ram Gupta v Punjab National Bank and Others, the Supreme Court held that the plaintiff does not have a right to give up the benefits given to him and revoke the guarantee any time when he was bound by the terms of guarantee.

Recent Case Laws on revocation of continuing guarantee
In P.S. Chakrapani vs Indian Bank[16], it was established that there was continuing guarantee and surety has rights of revocation, however inspite of issuing a notice, revocation was not allowed as the suit was barred by time i.e., not filed within the period of limitation that is 3 months.

In Narinder Pal Agarwal of Mumbai, Indian Inhabitant v Saraswat Co-operative Bank Ltd., A Multi State Co-operative Bank and Others[17], the petitioner argued that the terms of contract were varied without surety’s consent, hence he should be discharged from any liability further, while the defendants claimed that the terms were only ‘renewed’ and it was consented by the surety while signing the contract. The court denied the rights of revocation by establishing the existence of consent here.

In Sita Ram Gupta v Punjab National Bank and Others[18], the court held that appellant cannot revoke the guarantee as he agreed to treat this guarantee as continuing guarantee. Thus, he is also bound by the law which states that there should be no contrary contract for the notice of revocation to be accepted.

Conclusion
In commercial transactions, a continuing guarantee is usually applied. Because of this guarantee, it is simpler for the debtor to obtain products on credit even if he lacks the necessary funds. On the one hand, continuing guarantee makes it easier to grant loans and open a cash credit account; on the other hand, it ensures that bills of exchange and promissory notes are paid.

It is a crucial tool for traders and organisations looking to expand their operations. The consideration for a continuing guarantee should not be indivisible, which is a key criterion. In terms of future transactions between the creditor and the debtor, it should be variable. When a person is given a job in exchange for the surety's guarantee of his integrity, the consideration for the guarantee is said to be granted once and for all and is not reversible. The number of transactions should not be fixed and certain when the guarantee is given.

Bibliography
Cases Referred:

  1. Offord v Davies (1862) 6 LT 579: 142 ER 1336
  2. Hasan Ali v. Wali Ullah, AIR 1930 AII 730
  3. S.N. Sen v. Bank of Bengal, AIR 1920 PC 35
  4. Durga Priya Chowdhury v Durga Pada Roy, AIR 1928 Cal 204: ILR (1928) 55 Cal 154
  5. Bonar v Macdonald (1850) 3 HL Cas 226: 10 ER 87
  6. Khatun Bibi v Abdullah, ILR (1880) 3 All 9
  7. Anirudhan v Thomco’s Bank Ltd AIR 1963 SC 746: (1963) 1 SCR 63: (1963) 33 Comp Cas 185
  8. Blest v Brown (1862) 4 De Gf & J 367:45 ER 1225
  9. Holme v Brunskill (1877) LR 3 QBD 495 (CA)
  10. Central Bank of India v Ali Mohd. (1993) 2 Mah LJ 1092
  11. Charan Singh v. Security Finance (P) Ltd. AIR 1988 Del
  12. P.S. Chakarapani vs Indian Bank III (2006) BC 223
  13. Narinder Pal Agarwal of Mumbai, Indian Inhabitant v Saraswat Co-operative Bank Ltd., A Multi State Co-operative Bank and Others 2019 SCC OnLine Bom 45
  14. Sita Ram Gupta v Punjab National Bank and Others (2008) 5 SCC 711

Sections Referred:

  • Section 129, Indian Contract Act, 1872
  • Section 130, Indian Contract Act, 1872
  • Section 131, Indian Contract Act, 1872
  • Section 133, Indian Contract Act, 1872

Books Referred:

  • Singh, Avtar. (2019) Law of Contract and Specific Relief (12th edition) EBC

Websites Referred:

End-Notes:

  1. Section 129, Indian Contract Act, 1872
  2. Section 130, Indian Contract Act, 1872
  3. Offord v Davies (1862) 6 LT 579: 142 ER 1336
  4. Hasan Ali v. Wali Ullah, AIR 1930 AII 730
  5. S.N. Sen v. Bank of Bengal, AIR 1920 PC 35
  6. Section 131, Indian Contract Act, 1872
  7. Durga Priya Chowdhury v Durga Pada Roy, AIR 1928 Cal 204: ILR (1928) 55 Cal 154
  8. Section 133, Indian Contract Act, 1872
  9. Bonar v Macdonald (1850) 3 HL Cas 226: 10 ER 87
  10. Khatun Bibi v Abdullah, ILR (1880) 3 All 9
  11. Anirudhan v Thomco’s Bank Ltd AIR 1963 SC 746: (1963) 1 SCR 63: (1963) 33 Comp Cas 185
  12. Blest v Brown (1862) 4 De Gf & J 367:45 ER 1225
  13. Holme v Brunskill (1877) LR 3 QBD 495 (CA)
  14. Central Bank of India v Ali Mohd. (1993) 2 Mah LJ 1092
  15. Charan Singh v. Security Finance (P) Ltd. AIR 1988 Del
  16. P.S. Chakarapani vs Indian Bank III (2006) BC 223
  17. Narinder Pal Agarwal of Mumbai, Indian Inhabitant v Saraswat Co-operative Bank Ltd., A Multi State Co-operative Bank and Others 2019 SCC OnLine Bom 45
  18. Sita Ram Gupta v Punjab National Bank and Others (2008) 5 SCC 711