Guarantee Flashcards
What is guarantee?
Promise
To answer for payment of some debt or performance of some duty
In case of failure
Of another 3rd person (principal debtor)
Who is in the first instance liable for this payment or performance
Can be ORAL OR WRITTEN
What is the difference between contract of indemnity and contract of guarantee?
NUMBER OF CONTRACTS
Indemnity- one
Guarantee- three (creditor-p.d, p.d- surety, surety-creditor -> all 3 must be privy to the whole transaction, expressedly or impliedly)
NATURE OF LIABILITY
Indemnity- primary (indemnifier undertakes independent obligation not dependent on any other obligation)
Guarantee- secondary (obligation of surety depends on pds default)
QUANTITY OF LIABILITY
indemnity- covers loss entirely or with a capping
Guarantee- covers loss to the extent caused
PERSONS COVERED
Indemnity- covers for default in conduct of promisor or any other person
Guarantee- covers for default of pd only
Consideration in guarantee
CONTRACT WITHOUT CONSIDERATION IS VOID
Anything done or any promise made for benefit of principal debtor (past benefit counts when surety bond is made after original contract between pd and creditor)
-Sufficient Consideration for surety
Consideration can move from creditor or creditor and pd
Surety does not have to derive benefit
Surety’s liability
Co-extensive w principal debtor (unless limited by terms of contract)
Creditor does not have to give any notice of default of principal debtor or call upon pd to pay after default- can directly demand surety
Prior conditions to surety’s liability in contract must be fulfilled
Liable even if pd dies
Bank Guarantees
Bank stands as surety to pay for default by pd
Heightens business activity
Expands entrepreneurial activity
2 types: condition and unconditional
Unconditional- surety becomes liable without proof of breach, has to pay as soon as pd asks
Conditional- surety has to pay only upon proof of breach
Rights of Surety
Right of subrogation
Gets all rights of creditor against pd once he pays everything he is liable for (can sue pd in his own name, securities, same priority as creditor if pd is insolvent, lien which creditor held)
Guarantee obtained by misrepresentation or concealment of material facts= invalid
Right to Security (movable immovable properties) which the creditor has against pd at the time of contract of suretyship being entered- surety discharged to the extent of value of security
No right to security held by creditor before suretyship agreement
If creditor loses security (by some deliberate act or omission)- or cannot give it in exact same form- surety is discharged to the extent of value of security
Passive inactivity of creditor =/= discharge
VALUE OF DICHARGE- if security has less value, surety still had to pay the rest; if security has more value, surety is fully discharged
Right to sue creditor if he voluntarily gives up the security that surety has right to
Guarantee obtained by misrep or concealment by creditor invalid
Right to be indemnified by pd (can sue pd for guarantee amount as soon as his liability becomes absolute; damages costs sums)
Right of surety arises from discharge of his own liability, not from liability of debtor (eg rightfully paying guarantee amount -> he can sue pd for that amount, even if beyond time limitation)
Discharge of surety
Surety is discharged when:
- Underlying contract is discharged
- Variance (wo surety’s consent, for transactions subsequent to variance)
[unsubstantial alteration/ benefits the surety= not discharged - prima facie unsubstantial
not prima facie unsubstantial/ prejudicial- surety decides
definitely substantial/prejudicial- surety discharged]
- Release of principal debtor by any act or omission of creditor
[creditor refuses to perform, prevents pd from performing, one thing cannot be performed wo other thing be performed, failing to do smth within time, failing to provide reasonable facilities]
- Creditor makes composition with or promises to give time to or not to sue pd (unless surety consents)
[surety’s right against pd delayed- even if it doesn’t injure surety by principles of equity he is discharged]
- NOT DISCHARGED when contract to give time to pd is made w third person
- NOT DISCHARGED when mere forbearance on part of creditor to sue/enforce pd (forbearance for a short period or period of limitation)
- NOT DISCHARGED just bc another co surety is discharged
- If creditor does acts/ omits to do acts inconsistent w rights of surety AND eventual remedy of surety against pd is impaired
-> creditor owes duty of care to surety
Continuing Guarantee
Can be revoked by:
Notice to creditor
Death of surety
Future transactions revoked, earlier transactions still liable (for death- heirs will bear it)
(Simple guarantee cannot be revoked at all)
Bank of Bihar v Damodar Prasad
SURETY’S LIABILITY- IMMEDIATE
CREDITOR NOT BOUND TO EXHAUST REMEDIES AGAINST PD
FACTS
condition in contract- for enforcement of guarantee bond, only demand for payment by the bank was required
Court held- “plaintiff bank shall be at liberty to enforce its dues in question against surety only after having exhausted its remedies against pd”
ISSUE: was the court justified?
HELD
no- liability of surety is immediate
Creditor not bound to exhaust his remedies against pd
Object of guarantee defeated if creditor is asked to postpone his remedies against surety
Hindustan Steel Works v Tarapore & Co.
BANK GUARANTEES
FACTS
Hindustan steel and contractor made agreement- not completed within stipulated time or extended time
Bank guarantees given by Bank of India to Hindustan Steel
[contract between bank and Hindustan steel:
Hindustan steel shall be the sole judge on the question of whether contractor has committed breach of contract
And sole judge of extent of loss
Decision of Hindustan steel will be final and binding on bank
Bank will pay without demur a protest whether or not there is any difference between Hindustan steel and contractor]
HC HELD:
unless there is fraud or special circumstance- beneficiary cannot be restrained from encashing bank guarantees even if there are disputes between the beneficiary and pd
In this case- there ARE SPECIAL CIRCUMSTANCES
The term in contract (bw Hindustan steel and contractor) that one of the parties (HS) shall be the sole judge to quantify damages - has to be invalid
It was actually duty of arbitrators to decide if there is breach in contract- liability to pay arises only then
Restrained Hindustan steel from encashing guarantee
ISSUE: do special circumstances exist in this case to warrant an injunction against encashing bank guarantees
HELD:
In favour of Hindustan steel
Court can intervene only in cases of fraud
HC wrong in holding that one party cannot be the sole judge in holding breach of contract
A bank guarantee is an independent contract between bank and beneficiary (underlying transaction between beneficiary and pd doesn’t matter)
In case of unconditional bank guarantee- nature of obligation of bank is ABSOLUTE (not dependent on any dispute)
Commitment of bank to be honoured except in exceptional cases of fraud (fraud not pleaded here)
The argument for injunction in grounds of special circumstances bc of dispute as to who has committed breach- not sufficient
Amrit Lal v. State Bank of Travancore
VARIATION
TIME
LOST SECURITY
FACTS
Partnership firm entered into agreement with bank- cash credit acc (1L rs)
Bank could sell pledged goods in case firm failed to repay
[pledged goods conditions:
Borrowers were responsible for quantity, quality of goods and correctness of market value of goods and balance due to the bank
At the time of pledging- borrowers declared they had not weighed or valued the goods and bank could do so any time- borrowers would make up for any shortfall]
Appellant acted as surety
Partnership firm failed to pay in time/ goods were sold w notice to firm, proceeds applied to line of credit
Balance to bank still had to be paid
Bank sued surety and borrowers
Surety’s arguments:
Stands discharged bc
1. Variance (s133)
[change in credit acc limit for 1L to 50k to 1L again- evidence in bank entries w title “limit”]
- Time (s135)
[Bank had given time to partnership firm to make up for shortage of goods] - Bank lost security (s141)
[when asked how shortfall happened, agent of the bank said he did not know how it occurred and there was a possibility of defendant taking away goods]
HELD:
- No variance
(Based on evidence- did not change credit limit, it was a private instruction) - No time given based on s135
(“What really constitutes giving of time is the extension of the period at which pd was originally obliged to pay creditor by substituting a new and valid contract between creditor and pd to which surety does not consent”
- not extending time to make up for shortfall of goods) - Bank did lose security
(Agent could not answer- there probably was negligence)
Anirudhan v. Thomco’s Bank
VARIANCE- IMMATERIAL AND NOT DETRIMENTAL
FACTS
Surety hands over guarantee directly to pd for Rs 25,000
pd alters the amount to Rs 20,000
Pd defaulted on dues- surety argues that there was change in amount- should be discharged
ISSUE:
Whether or not surety stands discharged where he himself handed over possession of the letter of guarantee to the sole custody of pd and some immaterial change is made to the same, without taking surety on board
HELD
Surety will not be discharged
Surety handed over letter of guarantee solely to pd- relationship of agency
Variation was not detrimental to surety- reduced sum was already included in amount of guarantee already furnished
-> implied consent for reduction in amount already consented to
By the act of surety himself, letter of guarantee is entrusted to pd and not creditor- he is liable and not bound by immaterial alteration
Subramania Chettiar v. MPN Gounder 1951
SURETY’S LIABILITY CO EXTENSIVE W PRINCIPAL DEBTOR
FACTS
Pd’s debt was scaled down by Madras Agriculturists Relief Act
ISSUE
Will liability of surety be equally scaled down
HELD
yes
S 128
Surety’s engagement is accessory to principal obligation (latter extinct-> surety relieved)
If this did not happen then pd’s release would be illusory bc surety would turn on pd after being compelled to pay
