Continuing Guarantee: Section 129 of Indian Contract Act

According to Section 6 of the Indian Contract Act, 1972, a "Contract of Guarantee" is a type of contract that deals with the performance of a promise or the discharge of a third party's liability and breaches in the event of their default.

What is the Meaning of Guarantee?

A guarantee is frequently either oral or written. A guarantee contract has three parties, with the surety acting as the party to fulfill the obligations and liabilities of the defaulting party. The three parties to the guarantee contract are −

• Surety − the person or entity who gives the guarantee.

• Principal Debtor − the person to whom the guarantee is given in the default scenario.

• Principal Creditor − The party to which the guarantee is given.

A guarantee may be provided in two ways, and there are two types of guarantees based on these methods: specific and continuing.

Specific Guarantee

A specific or simple guarantee is one that is given for a single transaction or debt. It comes to an end when the debt is discharged or the promise is fulfilled.

Continuing Guarantee

The term "continuing guarantee" is defined under Section 129 of the Indian Contract Act of 1872. A continuing guarantee is one that extends over a series of transactions. That does not apply to a single transaction. The surety is liable to pay the creditor for all transactions covered by this guarantee. Therefore, it is important to decide if the guarantee is continuing.

A continuing guarantee is unique in that it applies to a series of separable, distinct transactions. As a result, a guarantee given for full consideration cannot be called a continuing guarantee.

These factors are especially important in terms of continuing guarantees.

• The continuing guarantee continues after the discharge of a single promise or the redemption of a single obligation.

• Surety can limit liability with regard to time or amount.

• Under this guarantee, the surety is liable for any unpaid balance at the end of the guarantee.

• Such a guarantee might be either prospective or retrospective.

• A prospective guarantee is given for future debt, whereas retrospective guarantees are given for existing debt.

Features of a Continuing Guarantee

• The guarantee is not exhausted by the first advance, credit, or supply up to the pecuniary limit.

• In regard to future transactions, revocation can be made by notifying the creditor.

• In terms of future transactions, the surety's death terminates the continuing guarantee.

Revocation of the Continuing Guarantee

The following are the circumstances under which the continuing guarantee may be revoked −

• By Notice − According to Section 130, the surety may revoke the continuing guarantee as to future transactions at any time by giving due notice to the creditor.

• By Death − The death of the surety leads to the revocation of the continuing guarantee with regard to future transactions, unless the contract provides otherwise [sec. 131].

• By Contract Variation − The contract of guarantee is revoked if any variation is made in the terms of the contract of guarantee between the creditor and the principal debtor without the knowledge of the surety.

• By Novation − When the parties agree to substitute a new contract for the old contract or rescind or alter the old contract, the contract of guarantee is revoked [sec. 133].

• By Creditors' Act of Omission − Any omission by the creditor that repairs the surety's eventual remedy against the debtor leads to revocation of the guarantee contract.

Case Laws

Major case laws are −

State Bank of India vs. Gemini Industries

A guarantee for a cash-credit account has been held to be a continuing guarantee in this case. The sureties could not claim that they were released from liability because the goods in the hypothecated store had been changed.

R.K. Devan v. State of Uttar Pradesh

In the case, the Court ruled that the dead surety's liability might be imposed on his legal heirs, but only to the extent of the property inherited by them.

Conclusion

The Indian Contract Act of 1972 defines a contract of continuous guarantee. The primary function here is to guard the creditor from any substantial loss arising from the principal debtor's breach of contract. Every guarantee contract, whether particular or continuous, involves three parties: the main debtor, the creditor, and the surety. The principal debtor's liability burden.

It is essential for the surety to take extra care when entering into such a contract. The contract of continuous guarantee is also very essential in English law. As a result, the presence of a guarantee contract becomes vital to the interests of the creditor.

Frequently Asked Questions (FAQ)

Q1. What is continuing guarantee Indian Contract Act?

Ans. According to Section 129 of the Indian Contract Act, 1972, a "continuing guarantee" in a contract is one that extends to a series and multitudes of transactions. These guarantees have a time limit and a time frame, or they are for a specified period of time, such as one month, one year, etc.

Q2. What happens to a continuing guarantee?

Ans. A continuing guarantee covers all transactions entered into by the principal debtor until the surety revokes it. A continuing guarantee can be revoked by the surety at any time for future transactions by notifying the creditors.

Q3. What are the characteristics of a continuing guarantee?

Ans. A continuing guarantee is unique in that it applies to a series of separable, distinct transactions. As a result, a guarantee given for full consideration cannot be called a continuing guarantee.

Q4. What is the purpose of the continuing guarantee?

Ans. A continuing guarantee is a guarantee given by one party in a contract to another party for goods or services. A continuing guarantee may also be used by a guarantor company. The contract states that if one party fails to fulfill their end of the agreement, the other will compensate them.