LIABILITY UNDER CONTINUING GUARANTEE
INTRODUCTION
As per section 129 of Indian Contract Act, 1872- “A guarantee which extends to a series of transaction is called a continuing guarantee”[1]. The Indian Contract Act provides several examples of this:
• A pledge B that B will be accountable for prompt collection and payment of such c rents of 5,000 rupees in consideration for engaging B C to collect the rents of B's zamindari. That is a continuing guarantee.
• Guaranties for the payment to B by a tea merchant, from time to time for whatever tea he may supply to C. B gives tea C for £100, and B is reimbursed for it by C. After that, B purchases tea worth £200 from C. C cannot pay. C cannot pay. A was the guarantee and is thus responsible to B to the extent of £100. The promise has been continuously guaranteed.
The essential principle of a continuous guarantee is that it does not apply to a certain range of transactions, but to a number of transactions, and at the end of the guarantee it takes responsibility for the unpaid balance. The distinction is explained in Chorley and Tucker.
A Bank Guarantee is a form of unequivocal assurance made by a bank to pay the creditor, if the bank invokes the guarantee under an agreement with its customer. "A credit letter could look like and look like a guarantee contract." Similar to a letter of credit, a bank guarantee operates.
CONTINUING GUARANTEE
An ongoing guarantee covers a range of transactions and does not consist of a single credit or operation or is exhausted. At the time of insurance, certain activities may not be known. If the guarantee is continued, the obligation should exist until the credits or operations covered by the guarantee of the parties have been exhausted, or the guarantee has been revoked. Instead of the lifetime of those transactions, the continuous guarantee applies to continuing transactions. The guarantee shall be limited not to a certain duration but to a certain number of transactions. Only because the guarantee says so, is the guarantee not permanent.
In one of the examples, the difference between specific and continuous guarantee was discussed. According to Chorley & Tucker, "a specific guarantee secures a specific advance or advances up to a fixed sum, and ceases to be effective upon repayment thereof," while "a continuing guarantee covers a fluctuating account, such as an ordinary current account at a bank, and secures the balance owing at any time within the guarantee's limits —"
If a guarantor gives a continuing, limited amount guarantee to maintain a floating balance that can be due from the principal obligor to the creditor from time to time, that guarantee is to be interpreted prima facie at least for one part of the guarantee's obligation, as the case may be. For instance: a continuing guarantee was ruled to constitute a surety bond to produce the judgment-debtor in Court on each occasion when attendance is required, as well as a guarantee made by a member of a club ensuring payment of rent by the club for premises leased to it.
The Calcutta High Court ruled that a guarantee for the behavior of a servant hired to collect rentals is a continuing assurance[2]. However, a guarantee for a tenant's payment of rent owed under the lease, whether it is a periodic payment or a single lump amount, has been ruled to be a one-time guarantee and not a continuing guarantee.
8.1 LIABILITY OF SURETY UNDER CONTINUING GUARANTEE
In a continuing guarantee, the surety is still accountable for any further goods or loans granted to the principal debtor by the creditor. He is responsible for any amounts that may become payable as a result of interactions or transactions between the creditor and the debtor from time to time. When he revokes his assurance, however, he is released from liability. Whereas in a basic guarantee, the surety's duty is limited to one transaction and ends when the debtor pays his debt, in a continuing guarantee, the surety is liable until the parties' transactions or credits covered by the guarantee have been exhausted or the guarantee has been cancelled.
BANK GUARANTEE AND LIABILITY UNDER IT
A bank guarantee must be interpreted according to its own provisions. In the absence of contemporaneous documents, it is impossible to interpret a bank guarantee. It dissociates itself from the transaction's other documents and works independently of them.
9.1 LIABILITY UNDER A BANK GUARANTEE
A bank guarantee is a type of unconditional promise to pay the money once the guarantee-holder requests it. This had nothing to do with the state of the guarantee-relationship holder's with the individual for whom the guarantee was made. Ordinary guarantees are tied to and reliant on the underlying transaction, but a bank guarantee is unrelated to the underlying transaction. Professional guarantors, such as banks, insurance firms, or bond businesses that offer guarantees for a charge, provide a financial service by issuing guarantees or bonds.
The Supreme Court put forth the laws relating to bank guarantees in Hindustan Steelworks Construction Ltd v Tarapore[3] & in the following propositions:
· A bank guarantee is a separate and independent contract between the bank and the beneficiary that is unaffected by the underlying transaction or the primary contract between the person on whose behalf the bank guarantee is issued and the beneficiary.
· The nature of the bank's commitment in the case of an unconditional bank guarantee is total and unaffected by any dispute or lawsuit between the party at whose request the bank guarantee is granted and the beneficiary.
· Bank commitments must be honored without interference from the courts, and the court will only intervene in extreme instances, such as cases of fraud or circumstances where irreversible damage will be done if a bank guarantee is permitted to be encashed.
The fact that there can be abusive or unjust callings, which is largely attributable to the independent nature of both documentary credits and unconditional on demand guarantees, has resulted in some lawsuit in connection with bank or demand guarantees. The beneficiary has an absolute or nearly absolute entitlement to payment. When a bank guarantee is conditional, the beneficiary does not have an unrestricted right to use it, and the court can issue an injunction prohibiting it based on the facts of the case. Although the provisions of the guarantee required such conditions to be met, the plaintiff was granted injunction relief since there was no reference in the invocation letter to any breach of contract or loss or damage.
An autonomous juristic entity provided a bank guarantee. Even though it was a sister company of the abovementioned juristic body, it was held that it could not be used to recover unpaid dues of a different juristic corporation. A contract's performance guarantee has been deemed equivalent to a bank guarantee.
9.2 VARIATION IN CONTRACT TERMS
The High Court of Delhi has ruled that a condition in a bank guarantee that allows the parties to change the terms of the contract without impacting the bank's obligations is legal. The only need is that the guarantor's ultimate remedy against the principal debtor be unaffected[4].
UNDER ENGLISH AND OTHER LAWS
It is a question of the parties' intention, “as expressed by the language they have employed, understood fairly in the sense in which it is used; and this intention is best ascertained by looking to the relative positions of the parties at the time the instrument is written[5]” to determine whether a guarantee is continuing in a particular case. The surrounding circumstances must be examined "to determine what was the subject matter in the parties' minds at the time the assurance was provided.” Given the extrinsic circumstances of the case, a guarantee “for liabilities incurred by A to B. to the sum of £ 50” was ruled to extend to GBP 41 due from the principal-debtor at the time of the guarantee and subsequent payments. The principal-obligation debtor's at the time of the guarantee was held to extend to GBP 41, with additional advances up to GBP 9. The Court has the authority to “fill in the instrument where it is silent, and to apply it to subject matter to which the parties intended it to be applied,” rather than to “alter the language.” The parties' entire utterances, not just the operative words, must be considered when interpreting their language. A declaration that the guarantor is to be liable for the ultimate balance may sometimes imply that the guarantee is a continuing one.
REFRENCES
1. Indian Contract Act 1872
2. Avtar Singh, Text book on Law of Contract and Special Relief Act (Eastern Book Company).
3. Dr. Avtar Singh, Contract Law (e-book)
4. Divya Rai, A Guide to Contract of Guarantee, ipreaders, September 19, 2019, https://blog.ipleaders.in/a-guide-to-contract-of-guarantee/
6. Pollock & Mulla, Indian Contract Act, 2021.
WRITTEN BY: VRANDA RELLAN
(SYMBIOSIS LAW SCHOOL, HYDERABAD)
[1] Indian Contract Act 1872 [2] Durga Priya Chowdhury v. Durga Pada Roy, AIR 1928, Cal 204: ILR(1928) Cal 154. [3] Hindustan Steelworks Construction Ltd v Tarapore, (1996) SCC 34: AIR 1996 SC 2268. [4] Lloyds Steel Industries Ltd. v. Indian Oil Corpn. Ltd, AIR 1999 Del 248. [5] Coles v Pack, (1869) LR 5 CP 65, at 70 per Bovill CJ.