A continuing guarantee refers to a contractual assurance where a surety undertakes to be responsible for a series of transactions between a principal debtor and a creditor, rather than a single, isolated obligation. This type of guarantee is particularly relevant in ongoing commercial relationships, such as credit facilities, supply contracts or bank overdrafts, where multiple transactions occur over time. The continuing guarantee remains in effect until explicitly revoked by the surety or terminated under specific circumstances, such as the surety’s death. Understanding its nature, the extent of the surety’s liability, the methods of revocation and its distinction from a specific guarantee is crucial for legal practitioners, businesses, and individuals engaging in such agreements. This article provides a detailed analysis of continuing guarantee under Indian Contract Act, supported by statutory provisions and case law.
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What is a Continuing Guarantee?
Continuing guarantee under Indian Contract Act is defined in Section 129 as a continuing guarantee is a guarantee (Section 126) that extends to a series of transactions between the principal debtor and the creditor. Unlike a specific guarantee, which is limited to a single debt or obligation, a continuing guarantee covers multiple, ongoing transactions until it is revoked by the surety.
For example, if a surety guarantees payments for goods supplied on credit to a debtor over a period then each supply constitutes a separate transaction under the guarantee.
This mechanism is widely used in banking and commercial contexts where creditors seek assurance for recurring financial obligations. For example, a bank may require a continuing guarantee to secure the overdraft facility of a debtor, which ensures the liability of surety for all advances until revocation.
Nature of Continuing Guarantee under Indian Contract Act
The characteristic of a continuing guarantee is its applicability to a series of distinct and separable transactions, rather than a single, indivisible obligation. It does not cover an entire consideration as a whole but applies to each transaction individually within the series.
For example, a surety guarantees the payment for tea supplied by a creditor to a debtor over time, each delivery of tea represents a separate transaction under the continuing guarantee. This distinguishes it from a guarantee for an entire contract, such as a lease for a fixed term, which may not qualify as a continuing guarantee if it constitutes a single consideration.
Banks and financial institutions favor continuing guarantees because they provide ongoing security for revolving credit facilities, ensuring that the liability of a surety extends to all subsequent debts which are incurred by the principal debtor.
Liability of Surety in Continuing Guarantee
The liability of the surety in a continuing guarantee is co-extensive with that of the principal debtor, as per Section 128 of the Indian Contract Act, 1872. This means the surety is responsible for the same amount and in the same manner as the debtor for all transactions covered by the guarantee, unless the contract specifies a limit. The surety’s obligation persists until the guarantee is revoked, either by notice, the surety’s death or other legal grounds. For example, if a surety guarantees a debtor’s credit purchases up to a certain limit, they are liable for all purchases within that limit until revocation. The case of State Bank of India vs Gemini Industries (2001) clarified that in a cash-credit facility, the guarantee remains continuing, and the surety is not discharged even if the hypothecated goods change, highlighting the broad scope of liability in such arrangements.
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Modes of Revocation in Continuing Guarantee under Indian Contract Act
A continuing guarantee can be revoked through several mechanisms involving notice, death of surety, variation in the terms of the contract, novation and creditor's omission. Let's look into the provisional details of these mechanisms
By Notice (Section 130): The surety may revoke the guarantee for future transactions by providing clear notice to the creditor. However, the surety remains liable for all transactions that occurred before the notice was given.For example, if a surety guarantees a debtor’s purchases up to ₹10,000 and revokes the guarantee after ₹6,000 worth of goods are supplied then they remain liable for the ₹6,000 but not for future supplies.
By Death of Surety (Section 131): Unless the contract specifies otherwise, the death of the surety automatically revokes the continuing guarantee for future transactions. The estate of the deceased surety remains liable for transactions that took place before the death. The case of R.K. Devan vs State of Uttar Pradesh (AIR 1956 Mad 211) established that the liability of a deceased surety’s heirs is limited to the inherited property for prior transactions.
By Variation in Contract Terms: If the creditor and principal debtor alter the contract terms without the surety’s consent, the surety is discharged from liability for future transactions. This protects the surety from unforeseen changes that could increase their risk.
By Novation (Section 133): If a new contract replaces the original agreement between the creditor and the principal debtor, the surety is discharged unless they agree to guarantee the new contract.
By Creditor’s Omission: If the creditor’s actions, such as releasing security or extending undue forbearance, impair the surety’s remedy against the principal debtor, the surety may be discharged from their obligations.
Difference between Specific Guarantee and Continuing Guarantee under Indian Contract Act
The difference between a specific guarantee and a continuing guarantee lies in their scope and duration. For example, a specific guarantee ends when the single obligation it covers is fulfilled such as payment for a particular debt whereas, a continuing guarantee remains in force for multiple transactions, providing ongoing security. Let's find out more such differences between the two
Aspect | Specific Guarantee | Continuing Guarantee |
Scope | Covers a single transaction or specific debt. | Covers a series of transactions over time. |
Duration | Terminates once the transaction is fulfilled. | Persists until revoked by notice or surety’s death. |
Example | Guaranteeing payment for one consignment of goods. | Guaranteeing all credit purchases over a year. |
Revocation | Not applicable after fulfillment. | Can be revoked for future transactions. |
Liability | Limited to the specific obligation. | Extends to all transactions until revocation. |
Summary
A continuing guarantee under Indian Contract Act is defined in Section 129 as a contractual arrangement that extends to a series of transactions between a principal debtor and a creditor. It remains effective until revoked by the surety through notice (Section 130), upon the surety’s death (Section 131) or due to variations in contract terms, novation (Section 133), or the creditor’s actions that impair the surety’s remedies. The surety’s liability is co-extensive with the principal debtor’s, covering all transactions within the guarantee’s scope. This distinguishes it from a specific guarantee, which is limited to a single transaction. The continuing guarantee’s flexibility makes it a vital tool in ongoing commercial relationships, but its broad liability and revocation conditions require careful consideration by all parties involved.
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Continuing Guarantee under Indian Contract Act: FAQs
Q1. What is continuing guarantee in Indian Contract Act, 1872?
A continuing guarantee covers a series of transactions over time, remaining effective until revoked or fulfilled.
Q2. What is Section 129 continuing guarantee?
Section 129 of the Indian Contract Act, 1872 defines a continuing guarantee as one that extends to multiple transactions, not limited to a single debt.
Q3. What are the continuing guarantees?
Continuing guarantees are assurances for ongoing or future transactions, like a guarantor covering a retailer’s repeated purchases from a supplier.
Q4. What is Section 131 of the Contract Act?
Section 131 states that a continuing guarantee is revoked by the guarantor’s death, unless otherwise agreed, discharging liability for future transactions.
Q5. What are the three types of guarantees?
The three types are personal guarantees (individual liability), bank guarantees (bank-backed), and performance guarantees (ensuring contract obligations).
