CONTINUING GUARANTEE

Law of Contracts 105

Submitted By
Raghavendra Krishnaprasad Nadgauda
UID: SM0122049
I Year, I Semester, B.A. LL. B. (Hons.)

Faculty-In-Charge
Dr. Monmi Gohain
Associate Professor of Law

National Law University and Judicial Academy, Assam

November 12th, 2022
Contents
Index of Authorities ............................................................................................................... iii

I. Introduction .......................................................................................................................... 1

1.1 Aims..................................................................................................................................... 2

1.2 Objectives ............................................................................................................................ 2

1.3 Scope and Limitations ......................................................................................................... 2

1.4 Review of Literature ............................................................................................................ 2

1.5 Research Questions .............................................................................................................. 3

1.6 Hypothesis ........................................................................................................................... 3

1.7 Research Methods ................................................................................................................ 3

Ii. Continuing Guarantee: Evolution And Interpretation Of English Common Law...... 4

Iii. Difference Between Specific Guarantee And Continuing Guarantee ........................... 6

Iv. Revocation Of Continuing Guarantee.............................................................................. 7

4.1 By notice of revocation by surety ........................................................................................ 7

4.2 Revocation by death of surety ............................................................................................. 8

4.3 Revocation by variance in terms of contract. ...................................................................... 9

4.4 Waiver of Rights ................................................................................................................ 10

V. Conclusion ......................................................................................................................... 11

Bibliography ........................................................................................................................... 12
ii
 I. INTRODUCTION

A ‘continuing guarantee’ is given with respects to a series of transactions which are to be

undertaken between the principal or the debtor with the creditor over a specific period of time
and some transactions between them may be unknown, uncertain, or indefinite at the time of
providing guarantee. The surety, therefore becomes liable for the default of the debtor.1 The
vital aspect of a Continuing Guarantee is that it is applicable and pertains to a series and
multitudes of separate, and distinct transactions. Therefore, when a guarantee is given for a
whole consideration, it cannot be defined as a continuing guarantee.

In the case of Nottingham Hide Co vs. Bottrill, it was stated that “the facts, circumstances, and
intention of each case has to be looked into for determining if it is a case of continuing
guarantee or not. If the contracts are entered into by misrepresentation or fraud made by the
creditor regarding material circumstances or by concealment of material facts by the creditor,
the contract will be considered invalid and void.

Once the guarantor commits to his liability by paying the required debt to the creditor, he steps
into the shoes of the creditor and avails all the rights that the creditor had over the principal
debtor.” All transactions entered by the principal debtor until they are revoked by that security
shall be subject to a continuing guarantee. A guarantee for future transactions can be revoked
at any time by notification to the debtors. However, for transactions entered before such
cancellation of the guarantee the liability of a guarantor shall not be reduced.

1
Avtar Singh, Contract and Specific Relief, 623 (Eastern Book Company, lucknow,12th edn. 2019)
1.1 AIMS
The aim of this project is to examine the current challenges in the implementation of continuing
guarantee. To do so, the researcher would refer to The Indian Contract Act, 1872, judicial
precedents and review the existing literature by eminent scholars.

1.2 OBJECTIVES
The objectives of the project are to:

i. Make an assessment of the existing practice of continuing guarantee

ii. Gauge whether the sections relating to continuing guarantee in the Indian Contracts
Act, 1872 have any lacunas
iii. Mention the differences between specific guarantee and continuing guarantee, if any.

1.3 SCOPE AND LIMITATIONS

Owing to various subjects being discussed in the Indian Contract Act, the researcher has
limited the scope of his research to Continuing Guarantee and related aspects.

1.4 REVIEW OF LITERATURE

Avtar Singh’s Law of Contract and Specific Relief2 is an authoritative and most sought after
book on the subject. The book deals with the intricacies of contract law in a straightforward
and lucid style. It covers many new developing areas in contract law which are of practical and
academic importance.

Termination of a Continuing Guaranty 3 gave the researcher valuable insights into the
termination of continuing guarantee. The journal elucidates the concept through various case
laws. It explained the nuances of continuing guarantee through various sections of the Indian
Contract Act, 1872.

2
ibid
3
D., E.N. (1919). Termination of a Continuing Guaranty. Michigan Law Review, 17(5), p.416.
doi:10.2307/1278498.

2
1.5 RESEARCH QUESTIONS
1. How did the English Common Law interpret continuing guarantee?

2. What are the differences between specific guarantee and continuing guarantee?
3. What are the grounds of revocation in a contract of continuing guarantee?
1.6 HYPOTHESIS
A contract of continuing guarantee may have some aspects of specific guarantee and the
research and various interpretations of a contract may lead to difficulty in enforcing the
contract.

1.7 RESEARCH METHODS

The researcher solely used the doctrinal type of research for this project. As doctrinal research
refers to “theory-testing” or “knowledge building” research, the researcher accordingly adopted
a method of study where secondary sources were scrutinized. His secondary sources ranged
from studying the work of leading figures in legal academia, authorities and judicial decisions.
In addition, the researcher employed the Harvard citation format.

3
 II. CONTINUING GUARANTEE: EVOLUTION AND INTERPRETATION OF ENGLISH COMMON
LAW

The English common law system bases the application of the term "continuing guarantee" on
the contract's language and the parties' intentions.

‘The court determined that the "continuing guarantee" principle would be applicable when a
guarantee was made to receive goods and the consideration was in the form of 200 pounds
worth of umbrellas and parasols as the consideration was legal and the parties intended to enter
into a legally binding contract.’4

‘The guarantee given for a specific transaction cannot bind the surety for the subsequent
transactions between the debtor and the creditor.’5

In a situation where "continuing guarantee," is not applicable, a guarantee for an employee's

faithful service during the course of his employment cannot be revoked by issuing a notice that
the surety shall no longer be liable after a certain amount of time. When the payment for a
guarantee is once given, it cannot be divided and cannot be revoked.

‘For example, employing a person whose integrity is guaranteed by a surety, then such a
guarantee cannot be revoked.’6

‘The interests of the surety can be at jeopardy if the guarantee is to extend throughout the
duration of the debtor’s employment with the creditor. Although, it is assumed that the surety
understands the nature of risk he is willing to undertake and, in a situation, where the surety
has revoked his guarantee as soon as the debtor leaves the employment, the surety will not be
liable.’7

Because the contract expressly stated that the surety would be responsible until he gave a notice
of revocation of the guarantee, it was determined that a guarantee for the regular payment of a
balance of credit given in exchange for the creditor providing a loan to the debtor was
irrevocable even after the surety's passing away.

4
Hargreave v Smee, (1829) 6 Bing 244
5
Kay v. Groves, (1829) 6 Bing 276
6
Coles v. Pack, (1869) LR 5 CP 65
7
Winfield v. De St Cronin, (1919) 35 TLR 432
4
 III. DIFFERENCE BETWEEN SPECIFIC GUARANTEE AND CONTINUING
GUARANTEE

A specific assurance is limited to one transaction within a given time period and terminates
together with the related responsibility. A specific guarantee ensures the payment of a certain
sum on a single occasion.

Specific and Continuing Guarantees can also be separated from one another based on the
consideration. If the consideration for it is varied and divided as a result of subsequent
transactions between the parties, the guarantee is continuous and revocable. Any promise that
is made in return for a single payment or an entire sum of money is specific and irrevocable.

‘The consideration was deemed to be indivisible and the concept of a "continuing guarantee"
was not applicable when a five-year lease was granted in place of providing the guarantee.
When a servant is hired with a promise of good behaviour, that promise is valid for the entire
time of the employment.’8.

Illustration

X consents to acting as a surety for Y for the payment of $5.00 to be delivered to Z and is due
within a month. The bags of flour were provided by the creditor, who was paid by the debtor.
Four bags of flour were later provided by the creditor when the debtor failed to make payment.
Because the surety's assurance was limited to a single transaction and of a simple character, he
was not held accountable for the transaction on which he had defaulted.

The surety ensures that the debtor will pay back the creditor's loan of Rs. 1,000. In this situation,
the specific guarantee principle will be in effect, and if the debtor pays off the loan, the surety's
obligation is discharged.

8
Lloyds v. Harper, (1880) LR 16 Ch D 290
5
 IV. REVOCATION OF CONTINUING GUARANTEE

Surety is said to be discharged when liability comes to an end. There are various modes in
which ‘continuing guarantee’ is revoked.

4.1 By notice of revocation by surety

Revocation of ‘continuing guarantee’ 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

J promised to compensate U for the tea leaves she sold to B for Rs 100. B received the Rs 500
worth of tea leaves from U. J informed U to stop providing the apples as a result. In this case,
J would be responsible for paying Rs 500 for the tea leaves, but not for the ones that would be
provided after the notice of revocation was sent.

In Offord v Davies9, The guarantor ensured that the debtor will repay the borrower for the
discounted bills up to a total of $600 over the course of a year. Before any expenses were
abated, the surety cancelled the guarantee. But the debtor continued to make late payments, and
the creditor continued to mark down the invoices. It was found that the surety was not
responsible for the invoices that were written off after his cancellation.

In Hasan Ali v. Wali Ullah10 The lease was for a term of five years with an annual rent payment
of a certain amount. The surety executed a contract of guarantee to ensure that the debtor's
obligations were carried out. Throughout the term of the lease, the guarantor informed the
landlord that he was withdrawing his assurance. A lawsuit was brought against the surety and
the debtor in order to recoup the arrears for the entire lease period.

The guarantor asserted that because his guarantee was a continuous guarantee and he had
terminated his contract of guarantee, he was immune from responsibility for rentals that were
due after the notice of revocation.

9
Offord v Davies (1862) 6 LT 579: 142 ER 1336
10
Hasan Ali v. Wali Ullah, AIR 1930 AII 730
6
In S.N. Senegal v. Bank of Bengal11 A promise was made regarding the prompt fulfilment of
duties as a bank cashier. The plaintiff's father gave the assurance in return for the plaintiff
working as a cashier. His father went away shortly after that. The plaintiff was additionally
sued by the bank for unlawful behaviour committed while working for the company.

The plaintiff argues that because the commitment was in the form of a continuous guarantee
under Section 129 of the Indian Contract Act, it was nullified by the surety's death as a result
of Section 131. The courts considered the plaintiff's hiring as a cashier to be a single transaction.

4.2 Revocation by death of surety

If there is a contract that stipulates that a "continuous guarantee" contract cannot be terminated
even after the death of the surety, then a continuing contract may be terminated when the surety
is no longer alive. The surety's heirs may be held accountable for the transactions made before
the surety passed away, but only to the extent of the property they inherited.

Section 131(6) of The Indian Contract Act, 1872 states that in absence of any contract contrary,
the death of the surety operates as ground for revocation of a ‘continuing guarantee’ contract.

Illustration: X is made liable for Y's repayment of a loan that Z has provided him. Y misses a
payment and X passes away. It is not possible to hold X's legitimate heirs accountable for Y's
loan repayment.

X is made liable for Y's repayment of a loan that Z has provided him. In their agreement, X and
Z stipulated that in the event of X's passing, the loan would be repaid by X's legitimate heirs.
Even after X's passing, Y may still be required to make repayment of the loan to its legal
successors.

In Durga Priya Chowdhury v. Durga Pada Roy12, X is made liable for Y's repayment of a
loan that Z has provided him. Y misses a payment and X passes away. It is not possible to hold
X's legitimate heirs accountable for Y's loan repayment.

11
S.N. Sen v. Bank of Bengal, AIR 1920 PC 35
12
Durga Priya Chowdhury v Durga Pada Roy, AIR 1928 Cal 204: ILR (1928) 55 Cal 154
7
Z gives Y a loan and holds X accountable for Y's repayment of the loan. Y fails to make a
payment, and X dies. It is not conceivable to make Y's loan repayment contingent upon the
legitimate successors of X.

Z gives Y a loan and holds X accountable for Y's repayment of the loan. X and Z agreed that
in the event of X's death, X's legal heirs would be responsible for repaying the loan. Y may still
be compelled to return the loan to X's legal heirs even after X passes away.

4.3 Revocation by variance in terms of contract.

According to section 133 of The Indian Contract Act, 1872, a surety is discharged of liability
by the principal and the creditor when there is any variance in the terms of the contract, without
the consent of the surety.

Illustration

B's wrongdoing while serving in the position to which C has appointed B is protected by A. B's
employment terms and conditions are outlined in a legislative act. C modifies the employment
conditions. B causes damage, which costs C money. A won't be held responsible because the
employment terms have changed.

In Bonar v. Macdonald13 One of the defendants agrees to serve as a bank's surety for another
defendant's actions while serving as the management of the bank. Later, a contract between the
manager and the bank states that the manager's pay will increase and that he will be responsible
for one-fourth of the losses from bank overdrafts. The manager permits a customer to overdraw,
costing the bank money. Due to the disagreement between the manager and the bank, the surety
is no longer obligated to compensate the bank.

‘In instances 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.’14

In Anirudhan v. Thomco’s Bank Ltd15. In order to safeguard the loan amount and interest that
will be routinely paid by the principal debtor to the borrower, a surety issued a continuous

13
Bonar v Macdonald (1850) 3 HL Cas 226: 10 ER 87
14
Khatun Bibi v Abdullah, ILR (1880) 3 All 9
15
Anirudhan v Thomco’s Bank Ltd AIR 1963 SC 746: (1963) 1 SCR 63: (1963) 33 Comp Cas
185

8
guarantee in the amount of Rs. 2,50,000. The primary debtor kept making overdrafts in the
same loan account that exceeded the limit after the borrower stopped making payments on the
loan without the surety's permission. The surety was exempt from liability for any overdrafts
the bank made without his consent and his liability was restricted to Rs. 2,50,000.

The difference which arose after the contrasting judgemnts in Blest v. Brown16and Holme v.
Brunskill17 was imposed by a rule that if substantial alterations were for the benefit of the
surety then the surety will not be discharged from his liability.

4.4 Waiver of Rights

There has been discussion regarding the surety's rights that were granted to him under the terms
of the 1872 Indian Contracts Act. The Supreme Court ruled in SitaRam Gupta v. Punjab
National Bank and Others that the surety does not have the power to forfeit the benefits and
renounce the guarantee while he is subject to the terms of the guarantee.

16
Blest v Brown (1862) 4 De Gf & J 367:45 ER 1225)
17
Holme v Brunskill (1877) LR 3 QBD 495 (CA)
9
 V. CONCLUSION

The Indian Contract Act, 1972 defines a contract of continuing guarantee. Here, the primary
purpose is to safeguard the creditor against any form of loss brought on by the Principal
Debtor's breach of contract. There are three parties involved in every guarantee agreement,
whether it is one-time or ongoing: the principal debtor, the creditor, and the surety. the Principal
Debtor's burden of liability. It is crucial for the surety to use caution while signing such a
contract. The Contract of Continuing Guarantee also has a significant impact on English law.
Therefore, having a contract of guarantee is crucial to the creditor's protection.

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.

10
 BIBLIOGRAPHY

BOOKS

1. Avtar Singh, Contract and Specific Relief, 623 (Eastern Book Company,
lucknow,12th edn. 2019)

CASE LAWS
1. Hargreave v Smee, (1829) 6 Bing 244
2. Kay v. Groves, (1829) 6 Bing 276
3. Coles v. Pack, (1869) LR 5 CP 65
4. Winfield v. De St Cronin, (1919) 35 TLR 432
5. Anirudhan v Thomco’s Bank Ltd AIR 1963 SC 746: (1963) 1 SCR 63: (1963) 33
Comp Cas 185
6. Blest v Brown (1862) 4 De Gf & J 367:45 ER 1225)
7. Holme v Brunskill (1877) LR 3 QBD 495 (CA)
8. Durga Priya Chowdhury v Durga Pada Roy, AIR 1928 Cal 204: ILR (1928) 55 Cal
154
9. Bonar v Macdonald (1850) 3 HL Cas 226: 10 ER 87
10. Khatun Bibi v Abdullah, ILR (1880) 3 All 9
11. S.N. Sen v. Bank of Bengal, AIR 1920 PC 35
12. Lloyds v. Harper, (1880) LR 16 Ch D 290
13. Offord v Davies (1862) 6 LT 579: 142 ER 1336
14. Hasan Ali v. Wali Ullah, AIR 1930 AII 730

JOURNAL
1. D., E.N. (1919). Termination of a Continuing Guaranty. Michigan Law Review, 17(5),
p.416. doi:10.2307/1278498.

WEBSITES
1. Garg, R. (2021). Continuing guarantee : nature and modes of revocation. [online]
iPleaders. Available at: https://blog.ipleaders.in/continuing-guarantee-nature-modes-
revocation/#:~:text=As%20per%20Section%20129%20of [Accessed 12 Nov. 2022].
2. legalserviceindia.com. (n.d.). Continuing guarantee: Nature and modes of revocation.
[online] Available at: https://www.legalserviceindia.com/legal/article-3950-
continuing-guarantee-nature-and-modes-of-revocation.html [Accessed 12 Nov. 2022].
3. www.advocatekhoj.com. (n.d.). Indian%20Contract%20Act | Bare Acts | Law Library
| AdvocateKhoj. [online] Available at:
https://www.advocatekhoj.com/library/bareacts/indiancontract/129.php?Title=Indian
%20Contract%20Act [Accessed 12 Nov. 2022].

11
4. ComplyBook. (n.d.). Continuing Guarantee under Indian Contract Act, 1872. [online]
Available at: https://complybook.com/blog/continuing-guarantee-under-indian-
contract-act-1872 [Accessed 12 Nov. 2022].

12
jdk
ORIGINALITY REPORT

15 %
SIMILARITY INDEX
15%
INTERNET SOURCES
7%
PUBLICATIONS
8%
STUDENT PAPERS

PRIMARY SOURCES

1
lawtimesjournal.in
Internet Source 9%
2
Submitted to Damodaram Sanjivayya
National Law University
3%
Student Paper

3
www.legalserviceindia.com
Internet Source 3%

Exclude quotes On Exclude matches < 3%

Exclude bibliography On