Understanding the Concept of Guarantee
In commercial and business dealings, parties often need assurance that financial or contractual obligations will be fulfilled. This is where the contract of guarantee comes into play. Under the Indian Contract Act, 1872, a contract of guarantee is defined as a contract to perform the promise or discharge the liability of a third person in case of his default (Section 126).
In such a contract:
- The person giving the guarantee is called the surety,
- The person in respect of whose default the guarantee is given is the principal debtor, and
- The person to whom the guarantee is given is the creditor.
Among the various forms of guarantees recognized by law, the Continuing Guarantee plays a crucial role in ongoing business relationships. It applies not to a single transaction but to a series of transactions — ensuring continued confidence and credit flow between the parties.
Definition of Continuing Guarantee
A Continuing Guarantee is defined under Section 129 of the Indian Contract Act, 1872 as:
“A guarantee which extends to a series of transactions is called a continuing guarantee.”
In simpler terms, when a surety undertakes to be responsible for the debts or obligations arising from several future transactions between the principal debtor and creditor, it constitutes a continuing guarantee.
This means the surety’s liability continues until the guarantee is revoked or the total debt is repaid. It is not limited to a single transaction — instead, it applies to a course of business or credit arrangement that may involve multiple dealings over time.
Key Features:
- It applies to a series of transactions, not just one.
- The surety’s liability continues until revocation or fulfillment.
- It helps facilitate long-term business relations between creditor and debtor.
- It can be revoked in specific ways, which we will discuss later.
Illustration (Section 129, Example)
A, a bank manager, agrees to lend money to B from time to time up to ₹1,00,000, and C guarantees repayment of all such loans. This is a continuing guarantee, since it covers a series of future loans, not just a single one.
If the bank lends B ₹20,000 on five separate occasions, C remains liable for all five loans until he revokes the guarantee or until the total credit limit is exhausted.
Revocation of Continuing Guarantee
A continuing guarantee can be revoked in three primary ways under the Indian Contract Act, 1872 — by notice, by death of surety, and by novation or change in contract. Let’s examine these in detail.
1. Revocation by Notice – Section 130
Under Section 130, a continuing guarantee may be revoked at any time by the surety, by notice to the creditor, as regards future transactions.
However, the revocation does not affect past transactions that have already taken place before the notice was given. The surety remains liable for obligations already incurred but not for any future dealings after revocation.
Example:
C guarantees payment of goods supplied by A to B. Later, C gives notice to A revoking the guarantee. A is entitled to recover the payment for goods already delivered to B before the notice but not for goods supplied after revocation.
This ensures fairness to both sides — protecting the surety from indefinite liability while safeguarding the creditor for past transactions.
2. Revocation by Death of Surety – Section 131
Under Section 131, the death of the surety automatically revokes a continuing guarantee for future transactions, unless there is an express agreement to the contrary.
The estate of the deceased surety remains liable for obligations incurred before death, but not after. This rule protects the legal heirs of the surety from indefinite financial exposure.
Example:
If C guarantees repayment of future loans given by A to B, and C dies, the guarantee stands revoked for all loans advanced after C’s death, unless the contract states otherwise. However, C’s estate is still liable for loans given before his death.
3. Revocation by Novation or Change in Contract – Section 133
A continuing guarantee can also be revoked when the terms of the contract between creditor and debtor are varied without the surety’s consent. According to Section 133, any such material alteration discharges the surety from liability for future transactions.
This is because the surety agreed to guarantee only the original contract terms, not the altered ones.
Example:
If A lends money to B with C as surety, and later A increases the loan amount or changes repayment terms without informing C, then C is discharged from liability for future debts.
This principle ensures that a surety’s consent is respected in all variations affecting their potential liability.
Consequences of Revocation of Continuing Guarantee
The revocation of a continuing guarantee has clear legal and practical consequences under the Indian Contract Act:
- Liability for Past Transactions:
The surety remains liable for all transactions entered into before revocation, including those whose payment is due afterward. - No Liability for Future Transactions:
The surety is discharged from future liability after revocation (by notice or death). - Automatic Termination after Death:
If no express agreement continues the liability, the guarantee ends upon the surety’s death. - Protection of Estate:
The deceased surety’s estate is liable only for debts incurred during his lifetime. - Material Alteration:
Any change in the terms of the contract without the surety’s consent voids the guarantee for subsequent dealings.
Judicial Interpretation
The courts have often interpreted the rules surrounding continuing guarantees to protect both creditors and sureties.
In Offord v. Davies (1862), it was held that a continuing guarantee can be revoked before the credit is acted upon, and such revocation prevents liability for future transactions.
In Bradbury v. Morgan (1862), it was decided that the death of a surety revokes the guarantee for all future transactions, even if the creditor is unaware of the death at the time of the subsequent dealings.
Indian courts have followed these principles, emphasizing fairness and balance between both parties.
Real-Life Example
Consider the example of a bank overdraft facility.
Mr. A obtains an overdraft from a bank, and Mr. B acts as surety, guaranteeing repayment of all future withdrawals up to ₹5 lakhs. This is a continuing guarantee because it covers a series of transactions.
If Mr. B later issues a notice to the bank revoking the guarantee, the bank can hold him liable for the overdrafts already availed before the notice but not for any withdrawals made afterward.
If Mr. B dies, the guarantee stands revoked for future transactions, and his legal heirs are not responsible for new debts incurred by A after B’s death. This example highlights how the law balances security for the creditor and protection for the surety.
Mnemonic to Remember – “C.A.N.D.Y.”
Use the mnemonic C.A.N.D.Y. to recall everything about Continuing Guarantees easily:
- C – Continuing Guarantee (Section 129) – extends to a series of transactions
- A – Acts of Revocation (Sections 130–131) – by notice or death
- N – No future liability – only past transactions bind surety
- D – Death ends future liability (unless agreed otherwise)
- Y – You alter terms → discharge surety (Section 133)
Mnemonic Sentence:
“Continuing Agreements Never Die, Yet Alterations Discharge.”
This simple phrase helps you remember that a continuing guarantee continues until revoked by notice, death, or alteration, and remains binding only for transactions before revocation.
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