Definition of Guarantee: A contract of guarantee means a contract to perform the promise or discharge liability of the third person in case of his default. A guarantee which extends to series of transactions is called continuing guarantee.
The meaning of Surety (Guarantor), principal debtor, and creditor: The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal-debtor,’ and the person to whom the guarantee is given is called the ‘creditor.’
Following are the circumstances under which a contract of guarantee could be declared void and the guarantor is discharged from all his liabilities.
When the liability of principal debtor is extinguished:
Section 134 of contract act provides that the liability of the surety gets automatically terminated when the liability of principal debtor is extinguished. It means that the surety is discharged from all liabilities when any contract between the creditor and the principal debtor resulted into the release of principal debtor or due to any such act or omission of the creditor, the legal effect of which extinguishes liability of the principal debtor.
- Variance/alteration made in terms of the contract:
According to section 133 of contract act, any material alterations/ variations made to the terms and conditions of the original contract between the principal debtor and the creditor without the consent of the surety, the surety are discharged from liabilities as to transactions subsequent to such variance/material alteration.
- Guarantor’s death:
In a continuing guarantee, when a guarantor dies, the deceased guarantor’s liability to the creditor is limited only to the extent of transactions taken place during the guarantor’s lifetime. The legal heirs/representatives are liable to assume the promise executed by the deceased under the guarantee, but they are not liable for future liabilities of the principal debtor after his death unless such liability on legal heirs is expressly mentioned in the guarantee contract. Nevertheless, in terms of Section 130 of the Indian Contract Act, 1872, a continuing guarantee may, at any time, be revoked by the surety (including legal representatives of the deceased) as to future transactions by notice to the creditor.
- Loss of security:
When the security offered to the creditor by the principal debtor is released in full or part without the consent of the surety, the surety is discharged to the extent of the value of the security released, irrespective of whether the surety was having knowledge of such security being offered to the creditor.
- Opening the fresh account in lieu of the old:
When the lender closes the existing account by transferring the outstanding to a new account with fresh documents from the borrower, the liability of a guarantor also comes to an end under the old guarantee contract. Therefore, it is necessary for the creditor to get a fresh guarantee contract executed by the guarantor along with the fresh documents from the principal debtor for the continuation of guarantee to the new account.
- Certain conducts of the creditor:
When a creditor commits any act or fails to perform any act which impairs the surety’s right to have recourses against the principal debtor; or his guarantee is obtained by the means of misrepresentation or concealment concerning material part of the transaction; the surety in those cases is discharged from all liabilities as such guarantee is invalid.
- Time barred documents:
A document is called time-barred document when the document (including guarantee contract) held by the creditor cannot be enforced through the court of law due to the lapse of defined length of time under limitation act. The breach in cases of guarantees occurs if the payment is not made or refused ‘on demand’. It means a claim may be time-barred against the principal debtor, but still enforceable against the guarantor on breach of contract. Thus, the time limit of three years would be reckoned from the date of demand from the guarantor for the purpose of computing time as per article 55 of the limitation act. However, some decided cases in the courts reveal the divergence of opinions for the words ‘on demand’ depending purely upon the terms of the contract.
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This article should not be construed as a professional advice under any circumstance. It is clarified to the readers that the contents provided in this write-up are intended for general information only and cannot be relied upon for real-time professional facts. Readers are advised to refer relevant provisions of law and also to take the qualified professionals’ advice before applying or accepting any of the points mentioned above. The author or the website accepts no responsibility whatsoever caused by the use of any information provided in this article and shall not be liable for any losses, claims or damages which may arise because of the contents of this post.