Co-extensive liability of a Gurantor under the Contract Act
Gopal Krishna Behera
(Querist) 06 June 2009
This query is : Resolved
What is the co-extensive liability of a gurantor under the Contract Act?
A V Vishal
(Expert) 06 June 2009
Dear Behera:
SECTION 126 OF INDIAN CONTRACT ACT 1872 DEFINES A CONTRACT OF GUARANTEE AS FOLLOWS :
"A CONTRACT OF GUARANTEE IS A CONTRACT TO PERFORM THE PROMISE, OR TO DISCHARGE THE LIABILITIES OF A THIRD PERSON IN CASE OF HIS DEFAULT. THE PERSON WHO GIVES THE GUARANTEE IS CALLED SURETY, THE PERSON IN RESPECT OF WHOSE DEFAULT THE GUARANTEE IS GIVEN IS CALLED PRINCIPAL DEBTOR, AND THE PERSON TO WHOM THE GUARANTEE IS GIVEN IS CALLED CREDITOR. A GUARANTEE MAY BE EITHER ORAL OR WRITTEN."
FOR EXAMPLE, WHEN A PROMISES TO A SHOPKEEPER C THAT A WILL PAY FOR THE ITEMS BEING BOUGHT BY B IF B DOES NOT PAY, THIS IS A CONTRACT OF GUARANTEE. IN THIS CASE, IF B FAILS TO PAY, C CAN SUE A TO RECOVER THE BALANCE. THE SAME WAS HELD IN THE CASE OF BIRKMYR VS DARNELL 1704, WHERE THE COURT HELD THAT WHEN TWO PERSONS COME TO A SHOP, ONE PERSON BUYS, AND TO GIVE HIM CREDIT, THE OTHER PERSON PROMISES, "IF HE DOES NOT PAY, I WILL", THIS TYPE OF A COLLATERAL UNDERTAKING TO BE LIABLE FOR THE DEFAULT OF ANOTHER IS CALLED A CONTRACT OF GUARANTEE.
A CONTRACT OF GUARANTEE HAS THE FOLLOWING ESSENTIAL ELEMENTS -
1. PRINCIPAL DEBTOR - THE ECONOMIC FUNCTION OF A GUARANTEE IS TO ENABLE A CREDIT-LESS PERSON TO GET A LOAN OR EMPLOYMENT OR SOMETHING ELSE. THUS, THERE MUST EXIST A PRINCIPAL DEBTOR FOR A RECOVERABLE DEBT FOR WHICH THE SURETY IS LIABLE IN CASE OF THE DEFAULT OF THE PRINCIPAL DEBTOR.
IN THE CASE OF SWAN VS BANK OF SCOTLAND 1836, IT WAS HELD THAT A CONTRACT OF GUARANTEE IS A TRIPARTITE AGREEMENT BETWEEN THE CREDITOR, THE PRINCIPAL DEBTOR, AND THE SURETY.
2. CONSIDERATION - AS WITH ANY VALID CONTRACT, THE CONTRACT OF GUARANTEE ALSO MUST HAVE A CONSIDERATION. THE CONSIDERATION IN SUCH CONTRACT IS NOTHING BUT ANY THING DONE OR THE
PROMISE TO DO SOMETHING FOR THE BENEFIT OF THE PRINCIPAL DEBOR. SECTION 127 CLARIFIES THIS AS FOLLOWS :
"ANY THING DONE OR ANY PROMISE MADE FOR THE BENEFIT OF THE PRINCIPAL DEBTOR MAY BE SUFFICIENT CONSIDERATION TO THE SURETY FOR GIVING THE GUARANTEE."
ILLUSTRATIONS:
1. A AGREES TO SELL TO B CERTAIN GOODS IF C GUARANTEES THE PAYMENT OF THE PRICE OF THE GOODS. C PROMISES TO GUARANTEE THE PAYMENT IN CONSIDERATION OF A PROMISE TO DELIVER GOODS
TO B. THIS IS A SUFFICIENT CONSIDERATION FOR C'S PROMISE.
2. A SELLS AND DELIVERS GOODS TO B. C, AFTERWARDS, REQUESTS A TO FORBEAR TO SUE B FOR AN YEAR AND PROMISES THAT IF A DOES SO, HE WILL GUARANTEE THE PAYMENT IF B DOES NOT PAY. A
FORBEARS TO SUE B FOR ONE YEAR. THIS IS SUFFICIENT CONSIDERATION FOR C'S GUARANTEE.
3. A SELLS AND DELIVERS GOODS TO B. LATER ON, C, WITHOUT ANY CONSIDERATION, PROMISES TO PAY A IF B FAILS TO PAY. THE AGREEMENT IS VOID FOR LACK OF CONSIDERATION.
HOWEVER, THERE IS NO UNIFORMITY ON THE ISSUE OF PAST CONSIDERATION. IN THE CASE OF ALLAHABAD BANK VS S M ENGINEERING INDUSTRIES 1992 CAL HC, THE BANK WAS NOT ALLOWED TO SUE THE SURETY IN ABSENCE OF ANY ADVANCE PAYMENT MADE AFTER THE DATE OF GUARANTEE. BUT IN THE CASE OF UNION BANK OF INDIA VS A P BHONSLE 1991 MAH HC, PAST DEBTS WERE ALSO HELD TO BE RECOVERABLE UNDER THE WIDE LANGUAGE OF THIS SECTION.
IN GENERAL, IF THE PRINCIPAL DEBTOR IS BENEFITTED AS A RESULT OF THE GUARANTEE, IT IS SUFFICIENT CONSIDERATION FOR THE SUSTENANCE OF THE GUARANTEE.
3. IT SHOULD BE WITHOUT MISPRESENTATION OR CONCEALMENT - SECTION 142 SPECIFIES THAT A GUARANTEE OBTAINED BY MISREPRESENTING FACTS THAT ARE MATERIAL TO THE AGREEMENT IS INVALID, AND SECTION 143 SPECIFIES THAT A GUARANTEE OBTAINED BY CONCEALING A MATERIAL FACT IS INVALID AS WELL.
ILLUSTRATIONS -
1. A APPOINTS B FOR COLLECTING BILLS. B FAILS TO ACCOUNT FOR SOME THE BILLS. A ASKS B TO GET A GUARANTOR FOR FURTHER EMPLOYMENT. C GUARANTEES B'S CONDUCT BUT C IS NOT MADE AWARE OF B PREVIOUS MIS-ACCOUNTING BY A. B, AFTERWARDS, DEFAULTS. C CANNOT BE HELD LIABLE.
2. A PROMISES TO SELL IRON TO B IF C GUARANTEES PAYMENT. C GUARANTEES PAYMENT HOWEVER, C IS NOT MADE AWARE OF THE FACT THAT A AND B HAD CONTRACTED THAT B WILL PAY 5 RS HIGHER THAT THE MARKET PRICES. B DEFAULTS. C
Uma parameswaran
(Expert) 06 June 2009
U/s 128 the liability of the surety (guarantor) is described as co-extensive with that of the principal debtor i .e the surety becomes liable to pay the default amount made by the principal debtor. His liability is immediate.
adv. rajeev ( rajoo )
(Expert) 06 June 2009
Dear Member,
I agree with Uma and also want to inform you that if the properties of the gurantor(surety) is joint family properties then such property cannot be attached to recover the amount from the surety.
B.B.R.Goud.
(Expert) 06 June 2009
i do agree with learned friends Ms Uma and Mr Vishal.
A. A. JOSE
(Expert) 06 June 2009
Mr.Vishal and Ms.Uma have dealt with the issue well and I agree with the same.
