Meaning of Continuing Guarantee
A continuing guarantee is defined under Section 129 of the Indian Contract Act, 1872. It refers to a guarantee that extends to a series of transactions or a continuing supply of goods or credit by the creditor to the principal debtor. Unlike a simple guarantee, which applies to a single transaction, a continuing guarantee remains in force until it is revoked by the surety or discharged by the creditor. The purpose of a continuing guarantee is to provide flexibility in commercial transactions, particularly in cases where the debtor has recurring obligations or multiple credits with the creditor. This type of guarantee allows the creditor to recover dues from the surety for any default in any of the covered transactions, thereby providing a practical mechanism for ongoing business operations while protecting the interests of the creditor.
Scope and Legal Provisions
The legal provisions for a continuing guarantee are primarily contained in Sections 129 to 132 of the Indian Contract Act, 1872. Under Section 129, the guarantee continues until it is revoked by the surety for future transactions, though the surety remains liable for prior transactions. Section 130 stipulates that the surety can be discharged in certain circumstances, such as variation in the terms of the contract, alteration in the obligations, or release of the principal debtor without consent. Section 131 clarifies that the surety must be informed of revocation, and it is effective only for transactions occurring after notice. This legal framework ensures that the rights and liabilities of all parties—creditor, principal debtor, and surety—are clearly defined and protects the surety from unforeseen extensions of liability beyond his consent.
Legal Consequences
The main legal consequence of a continuing guarantee is that the surety remains liable for multiple transactions until the guarantee is revoked. If the principal debtor defaults in any transaction covered by the guarantee, the creditor may recover the outstanding dues from the surety. However, the surety’s liability is not unlimited; it is subject to the terms of the guarantee. Furthermore, under Section 132, a continuing guarantee cannot be enforced for obligations incurred after revocation, protecting the surety from indefinite risk. The creditor is required to provide notice of revocation, ensuring fairness. Continuing guarantees are commonly used in commercial credit, banking, and supply contracts, where the principal debtor has ongoing transactions. The doctrine ensures balance by protecting creditors while imposing clearly defined limits on the surety’s risk exposure.
Real-Time Example
Suppose Mr. X guarantees Mr. Y’s overdraft account with a bank for up to ₹10,00,000. The bank credits Mr. Y’s account multiple times over several months. Each withdrawal or advance made by the bank to Mr. Y is covered under the continuing guarantee provided by Mr. X. If Mr. Y defaults on repayment for any of these withdrawals, the bank can recover the outstanding amount from Mr. X, up to the limit of ₹10,00,000. Later, Mr. X decides to revoke the guarantee by providing written notice to the bank. Following the notice, any future credits or transactions are not covered, though he remains liable for all transactions prior to revocation. This example illustrates the practical use of a continuing guarantee in ongoing credit arrangements, protecting the bank while giving the surety a mechanism to limit future liability.
Easy Mnemonic
To remember Continuing Guarantee, use the mnemonic “C-R-L”:
- C – Continuous coverage for multiple transactions (Sec. 129).
- R – Revocable for future transactions by giving notice.
- L – Liability limited to transactions before revocation.
Think of it as: “Continuous, Revocable, Limited” – meaning the guarantee continues for recurring obligations, can be revoked for future transactions, and liability is restricted to past commitments. This simple mnemonic helps students recall the essentials of continuing guarantees under Sections 129–132 of the Indian Contract Act, 1872.
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