Continuing Guarantee under Sections 129 to 131 of the Indian Contract Act, 1872: Revocation by Notice, Revocation by the Death of the Surety, Liability for Prior Transactions, and Specific Guarantee Compared

A guarantee may cover a single transaction or a running series of them. The distinction decides three practical questions: whether the surety's liability ends when the first advance is repaid, whether he can get out of the arrangement while it is still running, and what happens on his death. Sections 129 to 131 answer all three. A continuing guarantee is revocable as to future transactions by notice, and it is revoked as to future transactions by the surety's death, but in neither case does the surety escape liability for what has already been done on the faith of it.

1. The Definition

Sections 129, 130 and 131, Indian Contract Act, 1872

129. Continuing guarantee. A guarantee which extends to a series of transactions is called a continuing guarantee.

Illustrations. (a) A, in consideration that B will employ C in collecting the rents of B's zamindari, promises B to be responsible, to the amount of five thousand rupees, for the due collection and payment by C of those rents. This is a continuing guarantee. (b) A guarantees payment to B, a tea-dealer, to the amount of one hundred rupees, for any tea he may from time to time supply to C. B supplies C with tea to above the value of one hundred rupees, and C pays B for it. Afterwards B supplies C with tea to the value of two hundred rupees. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of one hundred rupees. (c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.

130. 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.

131. Revocation of continuing guarantee by surety's death. The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

1.1 Reading the Illustrations

Illustrations (b) and (c) are a matched pair and they turn on a single difference. In (b) the guarantee is for tea supplied from time to time, so it covers a series and the payment for the first lot does not exhaust it. In (c) the guarantee is for the price of five sacks of flour, a defined quantity in a single transaction, so once those sacks are paid for the guarantee is spent and the four later sacks are outside it. The test is therefore the scope of the guarantee as the parties framed it, and not the number of dealings that in fact took place.

The scope as framed decides the kind, and death or notice ends the future

2. Specific and Continuing Guarantee Compared

Point of difference	Specific guarantee	Continuing guarantee
Scope	A single transaction or a defined obligation	A series of transactions, present and future
When it is exhausted	On performance or payment of the transaction guaranteed	Not by payment of any one transaction; it continues until revoked or exhausted by its own terms
Revocation by notice	Not possible once the transaction has been entered into on the faith of it	Possible at any time as to future transactions, under Section 130
Effect of the surety's death	No effect; the liability already incurred binds the estate	Revoked as to future transactions under Section 131, in the absence of a contrary contract
Limit on amount	Generally the amount of the single transaction	Usually capped by the guarantee at a stated maximum, as in Illustrations (a) and (b)
Typical instance	A guarantee for a particular loan or a particular consignment	A guarantee for an overdraft or cash credit account, or for goods supplied from time to time

3. Revocation by Notice: Section 130

Section 130 gives the surety a way out that a specific guarantee does not. He may, at any time, revoke the guarantee as to future transactions, by notice to the creditor. Four points govern its operation.

Notice must be given to the creditor. A decision to withdraw, or notice to the principal debtor, is not enough; the creditor must be told, because it is he who must stop giving credit on the faith of the guarantee.
The revocation operates only prospectively. Liability for transactions already entered into on the faith of the guarantee is unaffected, and the surety remains bound for the balance then outstanding.
It is subject to any contract to the contrary. Where the guarantee is expressed to be irrevocable for a period, or where consideration has been given for keeping it open, the section yields to the agreement.
Where consideration for the guarantee is entire and has been received, revocation may not be possible at all, the surety having already been paid for the whole of what he undertook.

📖 Offord v. Davies, (1862) 12 CB NS 748

Facts: The defendants guaranteed the due payment of bills of exchange which the plaintiff might discount for a third party, up to a stated amount, over a period of twelve months. Some bills were discounted and duly paid. Before the twelve months expired the defendants gave notice revoking the guarantee. The plaintiff nonetheless discounted further bills, which were not paid, and sued on the guarantee.

Held: The defendants were not liable for the bills discounted after the revocation. A guarantee of this kind is in the nature of a continuing offer, which is converted into a binding promise, transaction by transaction, as the creditor acts on it. Until the creditor acts, the surety may withdraw. The revocation therefore ended the guarantee as to future discounts, though the defendants remained liable for those already made.

Ratio: A continuing guarantee operates as a standing offer accepted by each transaction the creditor enters into on the faith of it. The surety may revoke as to future transactions, and remains liable for those already concluded.

4. Revocation by Death: Section 131

Section 131 provides that the death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee so far as regards future transactions. Three features of the drafting repay attention.

It operates automatically. Unlike revocation under Section 130, no notice is required, and the guarantee is revoked as to future transactions from the moment of death.
It is prospective only. The estate remains liable for transactions already entered into on the faith of the guarantee before the death.
It yields to a contract to the contrary. Most bank guarantees expressly provide that the guarantee shall continue notwithstanding the surety's death until the executors give notice, and such a clause is effective.

📖 Lloyd's v. Harper, (1880) 16 Ch D 290 (CA)

Facts: A father gave a guarantee to Lloyd's in respect of the engagements of his son as an underwriting member, undertaking to be responsible for all his engagements in that capacity. The father died, and the son continued to underwrite. The question was whether the father's estate remained liable in respect of engagements entered into after his death.

Held: The estate remained liable. The guarantee, on its true construction, was intended to continue so long as the son remained a member, and the death of the surety does not of itself determine a continuing guarantee where the terms show that the parties intended otherwise or where the creditor has no notice. The obligation was one the estate had to answer for.

Ratio: Whether a continuing guarantee survives the surety's death is a question of the construction of the instrument. Where its terms show that the parties intended it to continue, it binds the estate, which is the contract to the contrary that Section 131 preserves.

⚠ Section 131 and Section 130 differ on notice

The two modes of revocation are easily confused and behave differently. Section 130 requires the surety to give notice to the creditor, and until he does the guarantee stands. Section 131 operates on the death of the surety without any notice, so a creditor who continues to give credit in ignorance of the death does so at his own risk unless the guarantee contains a contract to the contrary. That is precisely why standard bank guarantee forms provide that the guarantee shall remain in force notwithstanding the death of the surety until his legal representatives give written notice, a clause the section expressly permits.

5. Liability for Transactions Prior to Revocation

Transactions already entered into bind the surety, whether the revocation was by notice under Section 130 or by death under Section 131.
The relevant date is when the creditor acted on the guarantee, not when the debt fell due. An advance made before revocation is covered even though repayment falls due afterwards.
A running account raises the question of appropriation. Where payments in and out continue after revocation, the rule in Clayton's Case applies unless the account is broken, so subsequent credits may reduce the guaranteed balance. A prudent creditor therefore closes the existing account and opens a new one on receiving notice of revocation or of the surety's death, so that later payments are not applied to reduce the sum for which the surety remains liable.
The surety's rights survive. He remains entitled to subrogation under Section 140 and to indemnity from the principal debtor under Section 145 in respect of what he pays on the transactions that bind him.

6. Other Ways a Continuing Guarantee Comes to an End

Exhaustion by its own terms, where the guarantee is limited to an amount or a period and that limit is reached.
Discharge of the surety under Sections 133 to 139, by variance, release of the principal debtor, composition, giving time, impairment of the surety's remedy or loss of security.
Invalidity under Sections 142 to 144, where the guarantee was obtained by misrepresentation or concealment, or was given on the condition that a co-surety should join and he did not.
Novation or rescission of the underlying arrangement under Section 62.
A change in the constitution of the firm to which or for which the guarantee was given, which under the general law discharges the surety as to future transactions unless the guarantee provides otherwise.

7. The Position Stated Shortly

Section 129 defines a continuing guarantee as one extending to a series of transactions.
Illustrations (b) and (c) show that the test is the scope of the guarantee as framed, not the number of dealings that occurred.
A specific guarantee is exhausted when the transaction guaranteed is performed; a continuing guarantee is not exhausted by payment of any one transaction.
Section 130 permits revocation at any time as to future transactions, by notice to the creditor.
Offord v. Davies: a continuing guarantee is a standing offer accepted transaction by transaction, and may be withdrawn as to those not yet made.
Section 131 revokes a continuing guarantee as to future transactions on the surety's death, automatically and without notice, in the absence of a contract to the contrary.
Lloyd's v. Harper: whether the guarantee survives death is a question of construction, and a clause continuing it is effective.
In both cases the surety or his estate remains liable for transactions already entered into on the faith of the guarantee.
In a running account a creditor should break the account on revocation, or Clayton's Case will apply subsequent credits to reduce the guaranteed balance.

8. Related Topics and Provisions

Topic or provision	Connection
Contract of Guarantee under Section 126	The definition, the parties and the essentials
Discharge of the Surety	Sections 133 to 139 and 142 to 144
Rights of the Surety under Sections 140 to 147	Subrogation, securities and contribution
Appropriation of Payments under Sections 59 to 61	Clayton's Case and the running account problem
Sections 129 to 131, Indian Contract Act	Continuing guarantee and its revocation
Section 128, Indian Contract Act	Co-extensive liability of the surety
Section 140, Indian Contract Act	Subrogation on payment
Section 145, Indian Contract Act	Implied promise by the principal debtor to indemnify