Contract of Guarantee

Difference between specific and

continuing guarantee
Specific Guarantee Continuing Guarantee
 A single transaction is  A series of transactions
guaranteed are guaranteed
 Comes to an end when  Extended over the whole
the transaction is series of transactions,
complete therefore called continuing
 Can not be revoked by the  Can be revoked as a
surety future
 Rights of Surety

Against the Against the Against the

creditor principal debtor co-sureties

Right to Right to Right to Right to Right to claim

securities claim set subrogation Indemnity contribution
off
 As against the creditor
 Ask the creditor to sue the debtor
 On the guaranteed debt having fallen due for payment,
surety may ask the creditor to sue the debtor to collect the
due amount

 Require the creditor to terminate the debtor’s

services
 If the principal debtor’s dishonesty comes to light, the
surety can require the creditor to terminate the principal
debtor’s services
 As against the creditor
 Claim to any set off
 The surety on being called upon to pay, can claim any set-
off to which the principal debtor is entitled to pay

 Access to the securities of the debtor with the

creditor
 After paying the guaranteed debt, compel the creditor to
assign to him all the securities taken by the creditor
 As against the creditor

 Right to equities
 On payment of the guaranteed debt, the
surety is entitled to all equities which the
creditor could have enforced
 As against the Principal debtor
 Right to subrogation
 After paying the debt, the surety steps into the shoes of
the creditor and acquires all the rights which the creditor
had against the principal debtor

 Right as to securities with the creditor

 The surety has the right to proceed against securities of
the principal debtor, as the creditor could himself proceed
 As against the Principal debtor
 Right of indemnity
 In all contract of guarantee, there is an implied promise by the
principal debtor to indemnify the surety
 The surety is entitled to be indemnified by the principal debtor for
all payments rightfully made by him

 Compel the principal debtor to perform the promise

 Surety has the right to insist the principal debtor to perform the
promise
As against the Principal debtor

 Prove the Debt in Bankruptcy of the

Debtor
 In case of the bankruptcy of the principal
debtor, the surety may prove the debt in
respect of contingent ability even if he has not
been called upon to pay a definite amount
 As against the Co-securities

 Co-securities
 When two or more persons guarantee the same debt
jointly or severally, whether under the same or
different contracts, they are known as co-securities
 Co-securities share the liabilities, so they have in
equity also the right to share the means of recovery
 As against the Co-sureties

 Right to share the Securities Proportionately

 If they are liable in equal amounts, they will be entitled
to share equally the securities belonging to the
principal debtor in possession of the creditor
 When their liabilities are unequal, they share the
securities proportionately
 As against the Co-sureties
 Right to contributions
 If any one of the sureties has to pay more than his
share, he has a right to call upon his co-sureties for
such contribution

 Right to counter security

 Co-surety has also the right to benefit of a counter-
security given to another surety by the principal
debtor
 Extent of Surety’s Liability
 Nature of surety’s liability – It is co-extensive
 According to sec.128 The liability of the surety is co-
extensive with that of the principal debtor, unless it is
otherwise provided by the contract.
e.g.: A guarantees to Bank for the loan by C. C does not repay the
loan. A is liable not only for the amount of the loan but also for
any interest and charges which may have become due on it.
 Extent of Surety’s Liability
 The surety is liable for what the principal debtor is liable
 The liability of the surety is equal to the liability of the
principal debtor
 By a special contract the surety’s liability may be made
less than that of the principal debtor
 Surety’s liability must not be made liable beyond the
terms of his engagement
 Limitation of Surety’s Liability
 The surety can limit his liability
 In case the guarantee is only for a part of the entire debt,
the creditor will recover the full guaranteed amount from
surety and 1/4th of the balance amount from Principal
debtor’s estate
 Surety after making the payment will step into Creditor’s
shoes and recover1/4th of guaranteed amount from
Principal debtor’s estate
 Limitation of Surety’s Liability
 If the guarantee is for the entire debt subject to a
limit Creditor will recover up the guaranteed limit
from surety and 1/4th of the entire debt amount
from Principal debtor’s estate
 Surety will not get any dividend from principal
debtor’s estate till the full amount of debt is paid
to creditor
Surety’s Liability under continuing guarantee

 Where the original agreement is void, the surety is liable

to as a principal debtor
 The creditor can fall back on the contract of guarantee
and enforce the liability of the surety, if the contract
between the principal debtor ad the creditor is found for
any reason void or voidable
 The death of principal debtor or discharge of principal
debtor by operation of law does not release the surety
from his obligations