What is a continuing guarantee? When can it be revoked?

Question: What is a continuing guarantee? When can it be revoked? [MPJS 2007]

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Answer

A guarantee which extends to a series of transactions is called a continuing guarantee. To constitute a continuing guarantee, the guarantee must cover more than one transaction; it will not be a continuing guarantee merely because it extends over a period of time.

For example, where ‘A’ guarantees ‘B’ payment to ‘B’ up to a certain amount for the supply, from time to time, of tea to ‘C’ and ‘B’ supplies tea of that value and is paid for it and he supplies tea further, ‘A’ is liable as a surety for the amount guaranteed as it is a continuing guarantee.

A continuing guarantee may be revoked by the surety at any time as to future transactions, by giving notice to the creditor. A contract may provide that the notice of revocation of guarantee must be in writing. A mere request to be relieved from a guarantee is not a notice of revocation. A denial of liability in an earlier suit is not a revocation of a continuing guarantee

Section 130 of the Contract act talks about Revocation of continuing guarantee.—A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

For instance, If ‘A’, in consideration of ‘B’s discounting bills of exchange for ‘C’, guarantees payment of the bills for twelve months up to Rs 5,000/- and ‘B’ discounts bills to the extent of Rs 2,000/- and at the end of three months ‘A’ revokes the guarantee, the revocation discharges ‘A’ of any future liability but ‘A’ is liable for Rs 2,000/- if ‘C’ defaults.

Also, when ‘A’ guarantees to ‘B’ that ‘C’ will pay all the bills that ‘B’ draws upon him and ‘B’ draws on him, and ‘C’ accepts the bill, if ‘A’ gives notice of revocation and ‘C’ dishonors the bill, ‘A’ is still liable as a surety.

In the case of Indian Overseas Bank v. Goh Teng Hoon [(1989) 1 CLJ 554.], it was held, “Revocation becomes effective for the future transactions while the surety remains liable for transactions already entered into.”

In the case of Bhikabhai v. Bai Bhuri [(1904) ILR 27 Bom 272], the court clarified regarding the “Notice to the Creditor” that only those notices will be deemed valid which is clear in its meaning with the intention to terminate the liability under the guarantee. “A denial of liability in a previous suit was held to be not serving as a notice.”

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X