Introduction
In contract law, a guarantee is a commitment to fulfil the obligations of another party if that party fails to do so. Understanding the different types of guarantees can help individuals and businesses navigate their legal and financial responsibilities more effectively. Here, we explore two primary types of guarantees: specific guarantees and continuing guarantees.
Specific Guarantee
A specific guarantee, also known as a simple guarantee, relates to a single debt or transaction. This type of guarantee is limited to one particular obligation and terminates once that obligation is fulfilled. Specific guarantees are common in transactions where a guarantor agrees to back a single loan or a one-time purchase.
Key Characteristics of Specific Guarantees:
Single Transaction
The guarantee applies to one specific transaction or debt.
Termination
The guarantor’s obligation ends once the specific debt is repaid or the transaction is completed.
Example: If a guarantor ensures payment for a single loan a borrower takes, their responsibility ends once the borrower repays that loan.
Continuing Guarantee
A continuing guarantee covers multiple transactions over time and remains in force until it is explicitly revoked. This type of guarantee is often used in ongoing business relationships where a guarantor backs a series of transactions or a line of credit.
Key Characteristics of Continuing Guarantees:
Multiple Transactions
The guarantee extends to a series of transactions or a continuous relationship.
Ongoing Liability
The guarantor remains liable for obligations arising from all transactions covered by the guarantee until it is revoked.
Revocation
The guarantor can revoke the guarantee for future transactions by providing notice, but remains liable for transactions already undertaken.
Example: In a business relationship where a guarantor ensures payment for all purchases made by a business from a supplier, the guarantor remains responsible until they revoke the guarantee.
Legal Provisions and Case Law
The Indian Contract Act, of 1872, under Sections 126-147, provides a comprehensive framework for guarantees. The roles and commitments of guarantors, creditors, and debtors are clearly defined within these sections.
Case Law:
State Bank of India v Premco Saw Mill (1983)
The bank refrained from legal action based on the surety’s promise, which was deemed good consideration.
Offord vs. Davies
A surety was discharged after giving notice of revocation despite continued transactions.
Conclusion
Understanding the differences between specific and continuing guarantees is crucial for both guarantors and creditors. Specific guarantees offer limited, short-term protection, whereas continuing guarantees provide broader, long-term security. Familiarity with relevant legal provisions and case law can further ensure that parties to a guarantee understand their rights and obligations.
FAQs Types of Guarantees in Contract Law
What is the difference between a specific guarantee and a continuing guarantee?
A specific guarantee covers a single debt or transaction, while a continuing guarantee extends to multiple transactions over time.
Can a guarantor revoke a continuing guarantee?
Yes, a guarantor can revoke a continuing guarantee for future transactions by providing notice, but remains liable for past transactions.
What happens if the primary debtor fails to fulfill their obligation under a guarantee?
The guarantor is required to fulfill the obligation as per the terms of the guarantee agreement.
Also Read: Contract of Guarantee
