622 Chapter 12 Guarantee [S.
129]
Changes in surety company
The defendant company and its promoters borrowed a sum of money
from the Industrial Development Corporation. Promoters could make any
changes in their company only with the approval of the corporation. But
without taking any such approval, they transferred their interest in the com
pany to new company and changed the management of the company. The
promoters were not allowed to claim discharge from their personal liability
under the guarantee.^"^
Limitation.—^Where a statutory provision or contract clause requires that
first recovery should be effected from,the assets of the principal debtor, the
Supreme Court held that recovery should be effected against the guaran
tor only after it becomes ascertained as to how much could be recovered
from the principal debtor. The period of limitation for suing the guarantor
will start then and not from the date of issue of notice for recalling the
amount.^"®
Liability under continuing guarantee
S. 129. "Continuing guarantee".—A guarantee which extends to a series
of transactions, is called a "continuing guarantee".
Illustrations
(a) A, in considerationthat 6 will employ Cin collecting the rent of B's zamindari, promises
Bto be responsible, to the amount of 5000 rupees, for the due collection and payment
by Cof those rents. This is a continuing guarantee.
(b) Aguarantees paymentto fi, a tea-dealer, to the amount of£1GO, foranytea he mayfrom
time to time supplyto C Bsupplies Cwith tea to the above value of £ 100, and CpaysB
for it.Afterwards S suppliesCwithtea to the valueof £200.Cfails to pay.The guarantee
given by/A was a continuing guarantee, and he isaccordinglyliableto Bto the extent of
£100.
(c) Aguarantees payment to Bof the price of five sacksof flour to be delivered by fi to C
and to be paid for in a month. 6 delivers five sacks to C. C pays for them. Afterwards B
delivers four sacks to C, which Cdoes not pay for. The guarantee given by Awas not a
continuing guarantee, and accordingly he is not liable for the four sacks.
A guarantee of this kind is intended to cover a number of transactions
over a period of time. The surety undertakes to be answerable to the cred
itor for his dealings with the debtor for a certain time. A guarantee for a
single specific transaction comes to an end as soon as the liability under that
transaction ends. Take, for instance, the old case of Kay v Groves,on
whichthe third illustration given in the section is based. The guaranteewas
in these terms:
105. HPSIDCv Manson India (P) Ltd, AIR 2009 NOC 490 (HP).
106. Deepak Bhandari v H.P. State Industrial Development Corpn Ltd, (2015) 5 SCC 518:
(2015) 3 SCC (Civ) 123. It seemsthat all guarantors should be wise enough to put in such a
clause.
107. (1829) 6 Bing 276; 130 ER 1287.
[S. 129] Extent of surety's liability 623
"I hereby agree to be answerable to K for the amount of five sacks of
flour to be delivered to T, payable in one month." Five sacks were actually
supplied and T paid for them. Further supplies were made during the
same month, for which T failed to pay.
The surety was then sued. The court held that it was not a continuing
guarantee and, therefore, there was no liability for parcels delivered for var
ious subsequent periods.
Following is an illustration of a continuing guarantee:^"®
I do hereby guarantee the payment of goods to be delivered in umbrel
las and parasols to / in the sum of £200.
Another instance of a continuing guarantee is:
Messrs Sea 6c Co, Sirs, the bearer, Mr Thomas Horan, wishes to deal
with you for produce, and he asked me to speak for him. I can highly
recommend him, and in fact, I will stand good for him to the amount of
£50}°'
The essence of a continuing guarantee is that it applies not to a specific
number of transactions, but to any number of them and makes the surety
liable for the unpaid balance at the end of the guarantee."" In Chorley &c
Tucker the distinction is thus explained:"^ "A specific guarantee provides for
securing of a specific advance or for advances up to a fixed sum, and ceases
to be effective on the repayment thereof, while a continuing guarantee cov
ers a fluctuating account such as an ordinary current account at a bank, and
secures the balance owing at any time within the limits of the guarantee —"
A guarantee for a cash-credit account has been held to be a continuing
guarantee. The sureties could not claim to be discharged from their lia
bility by reason of the fact that the goods in the hypothecated store were
changed."^
108. Hargreave v Smee, (1829) 6 Bing 244: 8 LJCP 46: 31 RR 407.
109. See v Farey, (1889) 13 LR NSW 72.
110. The liability of the guarantor to pay remains alive as long as the principal debtor does not
clear the account. Union Bank of India v T.J. Stephen, AIR 1990 Ker 180. Following the
Supreme Court decision in Margaret Lalita Samuel v Indo Commercial Bank Ltd, (1979)
2 see 396: AIR 1979 SO 102, the court held that the period of Hmitation commences from
the time when the payment is demanded and refused or otherwise denied by the surety. In
Bradford Old Bank Ltd v Sutecliffe, (1918) 2 KB 833 (CA) it was pointed out that the con
tract of the surety is collateral and, therefore, a demand on him is necessary to complete the
cause of action and set the statute running. The decision of the Supreme Court in R. Lilavati
VBank ofBaroda, AIR 1987 Kant 2: ILR 1987 Kant 964 at p. 969 is authority for the prop
osition that in the case of a continuing guarantee, the question of limitation does not crop
up at all. Punjab National Bank v Surinder Singh Mandyal, AIR 1996 HP 1, guarantee for
loan for purchase of bus, debtor became irregular with his repayments,guarantor proposed
to pay back if the bank would transfer the bus to him, no responsefrom bank, guarantor not
discharged by that reason alone.
111. Leading Cases on Mercantile Law {4th Edn by Lord Chorley & Giles, 1962) 332.
112. SBI V Gemini Industries, (2001) 3 CCD 1885; SICOM Ltd v Harjindersingh, AIR 2004
Bom 337, in the case of continuing guarantee, the bar of limitation does not arise as long as
guarantee is running.
624 Chapter 12 Guarantee [S. 129]
A guarantee for the conduct of a servant appointed to collect rents has
been held by the Calcutta High Court to be a continuing guarantee.^" But a
guarantee for the conduct of a tenant in paying rent due under the tenancy,
whether it be a repeated payment or a single lump sum, has been held to be
a guarantee for one transaction and not of continuing nature.^" It is not per
missible to construe a bank guarantee in the light of contemporaneous doc
uments. A bank guarantee has to be construed on its own terms. It delinks
itself with other documents of the transaction and operates independently
of them. As compared with it, a contract has to be construed, when it is
contained in more than one documents, by considering all the documents
together."^ The employment of a person is one transaction and the guaran
tee for his good conduct is not a continuing guarantee."®
Liability under bank guarantee
A bank guarantee is a sort of an absolute undertaking to pay the amount
whenever demanded by the guarantee-holder. It has nothing to do with the
state of relations between the guarantee-holder and the person on whose
behalf the guarantee was given. While ordinary guarantees are linked
to and dependent on the underlying transaction, a bank guarantee is an
arrangement where the guarantee is independent of the underlying transac
tion. There are professional guarantors for whom the issue of guarantees or
bonds is a financial service, namely, banks, insurance companies or bond
companies who issue guarantees at a certain fee."^
113. Durga Priya Chowdhury v Durga Pada Roy, AIR 1928 Cal 204; ILR (1928) 55 Cal 154.
Liability under a continuing guarantee can be enforced only after ascertaining the final
amount due. See Punjab National Bank v Sri Vikram Cotton Mills, (1970) 1 SCC 60: AIR
1970 SC 1973 and United Commercial Bank Ltd v Okara Grain BuyersSyndicate Ltd, AIR
1968 SC 1115: (1968) 3 SCR 396, bank held liable in respect of its branches in Pakistan for
amounts not forfeited by that Government.
114. Hasan Ali v Waliullah, AIR 1930 All 730.
115. SBIV Mula Sahakari Sakkar Karkhana Ltd, (2006) 6 SCC 293: AIR 2007 SC 2361.
116. Sen VBank of Bengal, (1919-20) 47 lA 164. A guarantee for a sum certain though payable
in instalments is not continuing guarantee. Bhagvandas Rangildas Vaniv Secyof State, AIR
1926 Bom 465.
117. State Trading Corpn of India Ltd v Golodetz Ltd, (1989) 2 Lloyd's Rep 277 (CA). K.L.
Steels Ltd v Maharashtra SEB, (1998) 2 Bom CR 31, independent nature of the transaction
emphasised and no stay granted because there was no plea of irretrievable loss or fraud by
the beneficiary. Alsoto the sameeffect, DwarikeshSugarIndustries Ltd v PremHeavyEngg
Works (P) Ltd, (1997) 6 SCC 450: AIR 1997 SC 2477; Orissa Construction Corpn Ltd v
B. Engineers & Builders (P) Ltd, (1996) 81 Cal LT 126, the sub-contractor executed 42 per
cent of the total work, the total bank guarantee of Rs 50 lakhs could not be encashed. The
court permitted encashment only up to Rs35.40 lakhs. The court followed U.P. State Sugar
Corpn v Sumac International Ltd, (1997) 1 SCC 568: AIR 1997 SC 1644; NTPC Ltd v
Flowmore (P) Ltd, (1995) 4 SCC 515. The bank is not a party to the underlying contract.
State of Maharashtra v National Construction Co, (1996) 1 SCC 735: AIR 1996 SC 2367
KrishnaElectricalIndustries (P) Ltd v SBI, AIR 1996 MP 188, amount recoverable quanti
fied, requisite notice,opportunity to show causenot required, encashment not stayed.Food
Corporation of India v Arosan Enterprises Ltd, AIR 1996 Del 126, bank guarantee encash
ment by buyernot stayed on the allegation that the seller had delivered the goods. Syndicate
Bank V Wilfred D'Souza, AIR 2003 Kant 337, no term in the guarantee that encashment
