Page 85 - DCOM103_COMMERCIAL_LAW

Commercial Law

Notes 8.1.2 Purpose of Guarantee (S. 126)

The contract of guarantee are among the most common business contracts and are used for a
number of purposes. These are:
1. The guarantee is generally made use of to secure loans. Thus, a contract of guarantee is for
the security of the creditor.
2. The contract of guarantee are sometimes called performance bonds.

Example: In the case of a construction project, the builder may have to fi nd a
surety to stand behind his promise to perform the construction contract.
Also employers often demand a type of performance bond known as a fi delity bond
from employees who handle cash, etc., for the good conduct of the latter. If an employee
misappropriates then the surety will have to reimburse the employer.
3. Bail bonds, used in criminal law, are a form of contract of guarantee. A bail bond is a device
which ensures, that a criminal defendant will appear for trial. In this way a prisoner is
released on bail pending his trial. If the prisoner does not appear in the court as desired
then the bond is forfeited.

8.2 Kinds of Guarantee

There are various kinds of guarantee such as oral, written, specifi c, continuing and whole debt
or a part of debt.

8.2.1 Oral or Written Guarantee

A contract of guarantee may either be oral or in writing (s.126), though a creditor should always
prefer to put it in writing to avoid any dispute regarding the terms, etc. In case of an oral
agreement, the existence of the agreement itself is very difficult to prove.

8.2.2 Specific and Continuing Guarantee

From the point of view of the scope of guarantee a contract of guarantee may either by specifi c or
continuing. A guarantee is a “specific guarantee”, if it is intended to be applicable to a particular

debt and thus comes to end on its repayment. A specific guarantee once given is irrevocable.
Example: A guarantees the repayment of a loan of ` 10,000 to B by C (a banker). The
guarantee in this case is a specifi c guarantee.

A guarantee which extends to a series of transactions is called a “continuing guarantee” (s.129)

Example: A guarantees payment to B, a tea-dealer, to the amount of ` 10,000 for any tea
he may from time to time supply to C. B supplies C with tea of the value above ` 10,000 and
C pays B for it. Afterwards B supplies C with tea to the value of ` 15,000. C fails to pay. The
guarantee given by A was a continuing guarantee and he is accordingly liable to B to the extent
of ` 10,000.
A guarantee regarding the conduct of another person is a continuing guarantee. Unlike a

specific guarantee which is irrevocable, a continuing guarantee can be revoked regarding further
transactions (s.130). However, continuing guarantee cannot be revoked regarding transactions
that have ready taken place.

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