Continuing Guarantee
A continuing guarantee is a type of contract in which a surety agrees to be responsible for a series of transactions, rather than for just a single, specific debt or event. This type of guarantee is common in commercial settings where there are ongoing dealings, such as a supplier regularly providing goods on credit to a manufacturer.
Key characteristics
Series of transactions: A continuing guarantee covers multiple, distinct transactions that occur over time.
Duration: The guarantee remains in effect until it is revoked, or until the agreed-upon series of transactions is completed or the liability limit is reached.
Parties: Like a standard contract of guarantee, it involves three parties:
Creditor: The party to whom the guarantee is given (e.g., a supplier).
Principal Debtor: The party on whose default the guarantee is given (e.g., a manufacturer receiving credit).
Surety/Guarantor: The party who gives the guarantee and is responsible for the principal debtor's default.
Example of a continuing guarantee
A classic example demonstrates the difference between a specific and a continuing guarantee:
Scenario: A guarantees payment to B, a coffee dealer, for any coffee supplied to C over time, up to a limit of $10,000.
Event 1: B supplies C with coffee worth $12,000, and C pays for it. A's guarantee remains active.
Event 2: Later, B supplies C with another $20,000 worth of coffee, but C fails to pay.
Result: A is liable for the amount of $10,000, the maximum stated in the continuing guarantee.
Revocation of a continuing guarantee
A continuing guarantee can be terminated under certain conditions, though the surety remains liable for any transactions that occurred before the revocation.
Common methods of revocation include:
By notice: The surety can provide notice to the creditor to revoke the guarantee for all future transactions. The surety will still be liable for any transactions that took place before the notice was given.
By death of the surety: The death of the surety automatically revokes the guarantee for future transactions, unless the contract specifies otherwise. The surety's estate is still liable for transactions that occurred before their death.
By changes in the contract: The surety is discharged from any liability for future transactions if the principal debtor and creditor make a change to the terms of their contract without the surety's consent.
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Indian Contract Act, 1872.
# 126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.—A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
# 127. Consideration for guarantee.—Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A‟s promise to deliver the goods. This is a sufficient consideration for C‟s promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C‟s promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.
# 128. Surety’s liability.—The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.
Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it.
# 129. “Continuing guarantee”.—A guarantee which extends to a series of transactions, is called a “continuing guarantee”.
Illustrations
(a) A, in consideration that B will employ C in collecting the rent of B‟s zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee.
(b) A guarantees payment to B, a tea-dealer, to the amount of £ 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of £ 100, and C pays B for it. Afterwards, B supplies C with tea to the value of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of £ 100.
(c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does riot pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.
# 130. Revocation of continuing guarantee.—A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
Illustrations
(a) A, in consideration of B‟s discounting, at A‟s request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee.
# 131. Revocation of continuing guarantee by surety’s death.—The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.
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