Guarantee - Law of Contracts II - Notes
- Guarantee has
four elements:-
- Recoverable
Debt
- Consideration
- Wilful consent
- Oral or written
form
- Recoverable
Debt - Bank gave overdraft facility. Law prohibited overdraft and
considered them void. Thus bank sued the surety the court held that when
nothing is due on the behalf of debtor only then liability of surety stands to
nothing. - Swan v. Bank of Scotland
- Guarantee may
be enforceable in case of a void debt when debt is void due to void contract
rather than void due to statute.
- In case of
minor, surety knows of minor's age then he is liable as contract then is not
collateral but principal.
- Consideration
- Past consideration is valid consideration. - SICOM Ltd. v. Padmashri Mahipat
J. Shah (2005)
- Third
illustration depicts that anything done applies to only those scenario where
creditor suffer deterrence due to the surety.
- Consent
- §142 talks about misrepresentation and §143 talks about concealment both
absolving surety from its liabilities.
- Gave guarantee
for servant who had committed dishonesty earlier, was not told this by the
employer so held not liable. - London
General Omnibus Co v. Holloway
- Writing not
necessary - §126 states both written & oral guarantee are
valid.
- §128 states
that surety's liability is coextensive to that of principal debtor.
- If principal
creditor had some security with him and he sells it off then liability of
surety gets reduced accordingly. - Harigopal
Agarwal v. State Bank of India.
- If surety
signs only on the belief that there would be other co-sureties then if
signature of one of surety is forged then other sureties are not liable if the
premise of the contract was to make sureties jointly and severable liable. Plaintiff
took guarantee of three directors, one of director's signatures were forged.
Held, not liable. - James Graham v.
Southgate Sands
- Principal
creditor may directly go after surety instead of exhausting its means against
the principal debtor. - Bank of Bihar v.
Damodar
- In case where
surety could be prevailed over such as husband - wife relation surety could be
absolved if it could be shown that there was undue influence. - Barclays Bank v. O' Brien
- Surety has the
right to limit his liability or make it conditional. In case surety liability was upto Rs. 15,000
and also the amount decreed by the court. It was held that the surety's liability
would be no more than Rs 15,000. - Bapanna
v. Devata
- If surety does
not demand for another co-surety and merely has the knowledge that there are
other co-sureties then in case of absence of these co-sureties surety's
liability will not dissolve. - Traill v.
Gibbons
- In case of
impossibility of contract, surety's liability is not dissolved. Debtor took loan to develop and maintain bee
culture but bees died due to infection. Surety was held liable. Florence Mabel v. State of Kerala
- §129 -
Continuing guarantee extend to series of transactions.
- Bank guarantee
is different and is independent of underlying transaction. In case of
unconditional bank guarantee liability of bank is absolute and court won't
interfere unless there is element of fraud or possibility of irretrievable
justice. - Hindustan Steelworks Corp. Ltd.
v. Tarapore & Co.
- Bank's
liability in bank guarantee is unconditional and court can only interfere in
case where irretrievable injustice would be done. Hindustan Steelworks Corp. Ltd. v. Tarapore & Co.
- Bank guarantee
is unequivocal and unconditional. Beneficiary need not show loss suffered by
non fulfilment of contract. - Amrok
Logistics Ltd. v. Digvijay Cement Ltd.
- Where contract
was alleged to be impossible and there was allegedly concealment of important
facts then also debtor was not able to prevent encashment of guarantee. - D.T.H. Corp. v. S.A.I.L.
- Failure of
party to point out exact amount of loss suffered despite having the means to
know so was considered fraudulent and stay was provided. Banerjee & Banerjee v. H.S.W. Constructions Ltd.
- If encashment
of guarantee is contrary to law stay is provided. In case where person had to
bid by putting security withdrew its bid before it could be accepted. - Kirloskar Pneumatic Co Ltd. v, N.T.P.C.
- Enforcement of
bank guarantee cannot be made subject-matter of arbitration proceeding. - National Project Constn. Corp. v. G. Ranjan
- §132 provide
if joint debtor has some arrangement amongst themselves and even if creditor
knows about it then also their liability towards creditor remains unaffected.
- Discharge of
Surety's Liability:-
- Revocation
§130
- Death §131
- Variance in
Terms §133
- Discharge of
principal debtor §134
- Act or Omission
on part of creditor §139
- §130 provide
in revocation of continuing guarantee, guarantor is absolved only from future
transactions. Provided guarantee of 600 pounds for 12 months and revoked it
before credit was provided and accordingly surety was not liable. - Offord v. Davies
- Death of
surety becomes effective only for future transactions and estate is liable for
existing debts. - Durga Priya Chowdhury
v. Durga Pd Roy
- The liability
of deceased surety could be extended to its heirs but only to extent of
property inherited by them. - R.K. Dewan
v. State of U.P.
- Surety is
discharged as soon as original contract is altered without his consent. - Pratapsingh v. Keshavlal
- If change in
terms is not material say guarantee is lowered from Rs 25,000 to Rs 20,000 then
it would not absolve surety. - M.S.
Anirudhan v. Thomco Bank Ltd.
- Any alteration
that absolves surety also releases property of surety if given as guarantee. Debtor took further loan than told to surety
and then consolidated previous and new loans in a new deed. The surety's
property was released. - Bolton v. Salmon
- Guarantee is
absolved of its liability if substituted by another guaranteed bond signed by
other guarantors. - P.N.B. v. Yarlapadda
- Extension of
cash limit does not absolve surety as its liability is limited to its
guarantee. - M.V. Shantanarasimhaiah v.
Dena Bank
- Advance
authorisation of surety for alteration of terms in contract is contrary to what
is stated in §133 and hence void. Consent may be prior or subsequent to
alteration though.
- If creditor
obtains a decree against debtor and in it accepts a payment less than he is
entitled to then that does not absolve surety. - U.O.I. v. Manku Narayana
- If creditor accept compromise and
discharge debtor then surety is also discharged. - Kahn Singh v. Tek Chand
- Liability of surety is
coextensive to that of debtor. Debt Relief Act case - Mani v. Devassy
- Act or omission on part of
creditor leading to discharge of debtor's liability also discharges surety's
liability.
- Composition of debt by parties
and not by court discharges surety.
- Extension of time without
surety's consent even if it is for benefit of surety discharges surety.
- If creditor promises not to sue debtor
then surety is discharged but this is to be distinguished from forbearance to
sue.
- Prevailing view in India is that
the surety is not discharged even if creditor fails to sue debtor within
limitation period.
- If creditor fails to realise the
proper value of goods put as security then liability of surety is reduced
accordingly. - State Bank of Saurashtara
v. Chitranjan
- Surety's right against debtor:-
- Right of Subrogation §140
- Right to indemnity §145
- Surety is vested with all rights
which creditor had against debtor after he has paid all he is liable for. - Babu Rao Ramchandra Rao v. Babu Manaklal
- If debtor is selling off his
personal property lest surety after paying his debt seize them then surety is
entitled to an injunction by the court to prevent debtor from doing so. - Mamata Ghose v. Union Industrial Bank
- Surety is only entitled to be
indemnified for the amount he paid rightly. Anything paid wrongfully would not
be indemnified.
- Surety is entitled to any
security given to creditor by debtor after paying off the debts even if the
surety doesn't know about existence of such security.
- There are different view (Pg 653 &654) when surety has paid its
part of debt and demands proportionate share in security in cases where
surety's liability is less than value of security. In some cases it was held
that interest of creditor is paramount whereas in others it was held that all
power of creditor are vested in surety from the moment he makes the payment as
per §140.
- Surety can only claim reduction
in payment if there has been a voluntary act on part of creditor in loosing
security. Industrial Finance Corp. v. Cannaore Spg
- If creditor or some third party
has some goods in his hands as lien then surety after paying debt has right
against creditor and such third party to lien these goods.
- §138 - Release of one co surety
does not discharge other
- §146 - Co sureties liable to
contribute equally
- §147 - Liability of co sureties
in different sum
- It does not matter whether
co-surety knows or not about other co-sureties.
- Liability under indemnity is
contingent whereas in guarantee it is subsisting in the sense that once a
guarantee has been acted upon liability of surety automatically arises, though
it remains suspended animation till principal debtor commits default.
- Undertaking in a guarantee is
collateral in an indemnity it is original.
- Indemnity has two parties
guarantee has three parties.
- Indemnity has only one contract
whereas in a guarantee there are three contracts, debt, between creditor and
surety, debtor and surety.
0 comments :
Post a Comment