Legal and Regulatory Continuing guarantee

Environment of
Business
A guarantee that extends to a series of transactions is called a continuing guarantee [Section 129].
Under this kind of guarantee, the surety undertakes responsibility for a series of separable and
Notes distinct transactions over a period of time. For instance, a fidelity guarantee, in which the insurer
provides cover for a business against theft by an employee, is a continuing guarantee, as it remains
in force for a period of time.

Revocation of continuing guarantee

A continuing guarantee may be revoked in respect of future transaction in any of the following ways.
By notice of revocation  The surety, as to future transactions, may at any time revoke a continuing
guarantee by serving a notice to the creditor [Section 130].
For instance, A guarantees to B, to the extent of ` 10,000, that C shall pay all the bills that B shall
draw upon him (C). B draws upon C, who accepts the bill. Later on, A serves a notice of revocation.
C dishonours the bill on maturity. A is liable upon his guarantee.
By death of surety  The death of the surety, in the absence of any contract to the contrary, oper-
ates as a revocation of a continuing guarantee, as regards future transactions [Section 131].
The termination of a continuing guarantee by death of the surety, however, becomes effec-
tive only for the future transactions.
In the same manner as the surety is discharged  A continuing guarantee is also annulled
(i.e., no longer legally valid) under all the circumstances under which a surety is discharged from
the liability. In other words, a continuing guarantee stands as along as the surety is not discharged
and the same rules that apply for the discharge of a surety are applicable to a continuing guarantee,
such as
1. Novation [Section 62]
2. Variance in terms of contract [Section 133]
3. Release or discharge of principal debtor [Section 134]
4. Arrangement with the principal debtor [Section 135]
5. Creditor’s act or omission impairing surety’s eventual remedy [Section 139]
6. Loss of security [Section 141]
We shall study these points in detail later in this chapter under the heading ‘Discharge of
Surety’.

Rights of Surety
The rights of a surety can be studied under the following three heads:
1. Rights against the principal debtor
2. Rights against the creditor
· 3. Rights against the co-sureties.

Rights against the principal debtor

The surety has the following two rights against the principal debtor.
Right of subrogation  After discharging the debt, the surety steps into the shoes of the
creditor, i.e., subrogated to all the rights of the creditor against the principal debtor. Section 140
provides, ‘Where a guaranteed debt has become due, or default of the principal debtor to perform
guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for
is invested with all the rights which the creditor had against the principal debtor’.
Right of indemnity  A surety is entitled to be indemnified by the principal debtor for whatever
sum he has rightfully paid under the guarantee. Section 145 provides that ‘In every contract of
guarantee there is an implied promise by the principal debtor to indemnify the surety, and the
surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under
the guarantee, but no sums, which he has paid wrongfully’.

Rights against the creditor

Self-Learning The surety enjoys the following two rights against the creditor.
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