Short notes on Revocation of Guarantee

So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an offer is accepted it becomes final.

However, a guarantee for a future debt or continuing guarantee can be revoked for future transactions.

In that case, the surety shall be liable for those transactions which have already taken place.

How is Continuing Guarantee Revoked

A continuing guarantee can be revoked in any of the following ways:

1. By notice:

A continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditor (Sec. 130).

Examples:

(1) A gives a loan of Rs. 1,000 to B on the guarantee of C. C cannot revoke his guarantee.

(2) A stands surety for any credit purchases upto Rs. 1,000 to be made by B from a shop­keeper. After the shop-keeper has supplied goods worth Rs. 500, A gives a notice to the shop-keeper not to sell goods to B in future. A is liable for the purchases already made. However, he will not be liable for any purchases made after the notice of revocation.

2. By death:

The death of a surety operates in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions (Sec. 131).

However it should be noted that the notice of death is not necessary.

Rights of Surety

A contract of guarantee confers the following rights on the surety:

1. Rights against the creditor :

(a) “Rights “before making payment:

In case of continuing grantee or fidelity guarantee, a surety can ask the creditor not to sell goods on credit or to give credit in future. Similarly, in case of fidelity guarantee the surety can ask the creditor (employer) to dismiss the employee, where the surety discovers that the employee had misconducted himself in that post or had been dishonest. A surety can also file a suit for declaration that only the principal debtor shall be liable to pay the amount.

(b) Rights at the time of making payment: At the time of making payment, a surety can compel the creditors to release those securities first, which are in the creditor’s possession.

(c) Rights after making payment:

(i) Rights to securities (Sec. 141):

A surety is entitled to the benefit of every security which the creditor has against the principal-debtor at the time, when the contract of surety-ship is entered into, whether the surety knows of the existence of such security or not. If the creditor loses or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

Example:

C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent, and C sues on his guarantee. A is discharged from his liability to the extent of the value of the furniture.

(ii) Right Vo claim set-off: A surety can ask the creditor to set-off or adjust any claim which the debtor has against the creditor.

2. Rights against principal-debtor :

(i) Rights of subrogation (Sec. 140):

Where a guaranteed debt has become due, 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. In simple words, a surety steps into the shoes of the creditor on making the payment of the debt.

(ii) Rights of indemnity (Sec. 145):

In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety. The surety is entitled to recover from the principal debtor all payment properly made, i.e., amount paid with interest and any damage or cost incurred.

Example:

B is indebted to C, and A is surety for the debt. C demands payment from A and on his refusal, sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for the costs including the principal debt.

If, in the above example, A defends himself without reasonable ground, then he can recover the principal debt but not the costs.

3. Rights against Co-sureties:

When a debt is guaranteed by two or more sureties, each of them is called a co-surety.

1. Co-sureties liable to contribute equally (Sec. 146):

Where two or more persons are co­sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and even with or without the knowledge of each other, the co- sureties, in the absence of any contract to the contrary, are liable as between themselves to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.

Examples:

(1) A, B and C jointly guarantee a sum of Rs. 3,000 lent by D to E. E makes a default in payment. A, B and C are liable to contribute 1,000 rupees each.

(2) If A, B and C agree to share the guarantee in the ratio of 3 : 2 : 1, then their liability is 1,500, 1000 and 500 rupees respectively.

2. Liability of co-sureties bound in different sums (Sec. 147):

Co-sureties who are bound in different sums are liable to pay equally as far as limits of their respective obligations permit.

Example:

In the above case, if E makes a default of Rs. 1,500, then each of them is liable to 500 rupees. Supposing E makes a default of Rs. 2,000, then C will be liable to pay 500 rupees and A and B to the extent of Rs. 750 each.