Guarantee 124

# Taylor v. Lee

A landlord and his tenant went to the plaintiff store and landlord said sell him anything I will see
it paid. It was held to be an original promise and not one of guarantee.

Essentials-

1. There must exist a principal debt because a contract of guarantee is a tripartite agreement
which contemplates the principle debtor, the creditor and the surety. The purpose of
guarantee being to secure the payment of a debt the existing of a recoverable debt is

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necessary if the debt is illegal and non-recoverable no guarantee then subsistence.

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2. A guarantee without consideration is void but there need not be any direct consideration

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between the guarantee and the creditor. As explained under section 127 where a loan is

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given or goods are sold on credit, it is sufficient consideration for surety who guarantees
the payment by the principal debtor.

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3. Guarantee arises on default only; the guarantee where promise to pay is at the first

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instance or as an alternative, is not a guarantee because a guarantee means a payment
made if the principal debtor defaults.

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# Union Bank of India v. Avinash P. Bhonsle
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It is well settled that just as illustration should not be read as extending the meaning of a section,

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they should also not be read as restricting its approach, especially so when the effect would be to
curtail a right which the plain words of the section would confer. When the language of section
127 is clear and unambiguous the scope of text cannot be curtailed by using illustration C. To
impose limitation on the expression anything done or any promise made that it should be done at
the time of giving the guarantee is erroneous. The language is wide enough to include anything
that was done and any promise that was made before giving of guarantee.

Continuing: In cases of continuing guarantee, the surety may revoke his guarantee at any point of
time and will 1S6M9Udischarged
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remain intact as far as the transaction before revocation are concerned. The creditor on
revocation in such cases will have the right to put a hold on future transaction until a new
security joins or may choose to continue with the contract.

Discharge of principal debtor discharge the surety –

The liability of the surety is who extensive with that of a principal debtor. This means that the
surety is liable only for the amount by which the principal debtor is liable. As and when the
principal debtor makes payment, the liability 0F5K also decreases. If the principal debtor
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is released or discharge, the surety automatically is discharged. However, the liability of surety
and principal debtor is of joint and several natures. In order to file a suit, the creditor can sue
either the principal debtor or surety or both together but if the principal debtor is discharged, no
suit shall lie against the surety either.

Death of the surety discharges the surety regarding future transaction –

Just like notice of revocation, the death of the surety or insanity of surety discharges the surety
regarding all transaction occurring after the death. For the transaction that occurred before the
death, the legal representatives, heirs would still be liable.

Discharge of surety by variation in terms of contract (Sec 133 and 135) – (Similar to section 62

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and 63).

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# Central Bank of India v. Ali Mohammad

The provision of Section 133,134, 135,139,141 cannot be nullified in advance and authority

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given by the surety enabling the creditor and principal debtor to make any alteration in the terms
and conditions of the contract would be contrary to the provision of natural justice and of section

# Bonar v. MacDonald

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133 and therefore will be of no effect.

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The defendant guarantees
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conduct of a manager of a bank. The bank afterwards raised his
salary on the condition that he would be liable for 1/4th of the losses on discounts allowed by

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him. No communication of this new arrangement was made to the surety. The manager allowed a
costumer to over draw his accounts and loss good some of money. It was held that surety could
not be called on to make good loss as the fresh agreement was a substitution of a new agreement
for the former which discharge the surety.

# Syndicate Bank v. AP Manjunathan

In case of the death of the principal debtor, a suit against him will not stand however the surety is
not discharged 1S6M9U0S5Ta legal representative of a principal debtor could be impeded by virtue
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of order 1 rule 10 of CPC.

CONDITION ATTACHED BY SURETY -

A surety can attach any reasonable condition to his liability where the letter guarantee made it a
condition precedent to sureties’ liability that on default of the part of borrower, demand should
be made upon the surety/ guarantor. It was held that an independent demand was necessary and
mere service on guarantor of the carbon copies of the demand meant for the borrower was
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Difference between Forbearance to sue and Promise not to sue -

A promise not to sue is an engagement which ties the hands of the creditor. It is not negatively
reframing, not exacting the money at the time, but it is the creditor depriving himself of power of
suing. Mere forbearance to sue does not discharge surety. A failure to sue the principal debtor
until recovery is barred by the statute of limitation does not discharge the surety. It is well
settled that the statute of limitation only bars the remedy and does not extinguish the debt.

Impairing sureties remedy -

# In re Darwin v. Pears

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The principal debtor was a share-holder in a company and his share were partly paid and the

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payment of unpaid balance was guaranteed by the surety the shareholder defaulted in the
payment of all and the company forfeited his shares by reason of the forfeiture, the shares

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became the property of a company. If they had not been forfeited they would have belonged to
the surety on the payment of the outstanding fall. Thus, the forfeiture deprived the surety of his

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right to the share and was accordingly discharged.

Section 140 of ICA

Subrogation - It means stepping

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rights that the creditor was vested with. This includes right to securities and right to sue.

# Amritlal Govind Lalan v. State Bank of Travancore

The surety will be entitled to every remedy which the creditor had against the principal debtor to
enforce every security and all means of payment, to stand in the place of creditor, to have the
securities transferred to him, even if there is no stipulation for it, and to avail himself of all those
securities against the debtor. This principle stands on natural justice.

Indemnity
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In a contract of guarantee, the principal debtor impliedly promises to indemnify the surety for the
lawfully paid amount.

B takes a loan from C to which A is the surety C demands payment from A and on his refusal
sues him for the amount, A defends the suit having reasonable grounds but it is compelled to pay
the entire amount along with the cost of the suit. The amount of principal debt can be recovered
(Subrogation), and the amount paid as cost of defending the suit can also be recovered
(indemnity). Such promise of indemnity is mostly implied and there is no need of an express
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Right on securities

The section 141 recognizes the general rule of equity that the security is entitled to all the rights
and remedies available to the creditor against the principal debtor including the enforcement of
securities. This right exist whether or not the security is aware of such securities. It is the duty of
creditor to keep the securities in tact or lose them.

Setoff

If the creditor files a suit against sureties and the security defends the suits he has all the defenses
of the principal debtor if the creditor owes him something or the creditor has in his hands

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something belonging to the debtor for which the creditor could have counter claim, the security

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can also put up the same counterclaim.

Share Reduction

# Hobsan v. Base

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“A gave a guarantee to B in the following words” I hereby guarantee to you the payment of all
goods you may supply to EH but so as my liability to you under this or any other guarantee shall

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not at any time exceed the sum of 250 pounds. E gave a similar guarantee B supplied goods to

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EH for the amount of 657 pounds. EH became bankrupt B prove the whole sum in the insolvency
of EH and then call on who paid him 250 pounds each. Subsequently B received from the
receiver a sum of 2 shillings

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the guarantors was entitled to a part of the dividend bearing to the whole the same proportion as

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250 pounds to 657.

If the creditor sell, losses, destroys or uses the securities to get the amount realize the securities
share in liabilities will also reduce proportionately.

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