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Unit 7: Contracts of Guarantee and Indemnity

7.2.2 Specific and Continuing Guarantee Notes

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.

Examples: (i) X guarantees repayment of advances made to A within 6 months subject
to a maximum of ` 20,000. If `10,000 has been advanced by the end of 2 months, guarantee is
irrevocable insofar as this advance of ` 10,000 is concerned.
(ii) A guarantees to B to the extent of ` 10,000 that C shall pay all the bills that B shall draw upon
him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at
maturity. A is liable upon his guarantee.
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. (s.131).

7.2.3 A Guarantee may either be for the Whole Debt or a Part of the Debt

Difficult questions arise in case of guarantee for a limited amount because there is an important
distinction between a guarantee for only a part of the whole debt and a guarantee for the whole debt
subject to a limit. For instance, where X owes Y ` 50,000 and A has stood as surety for ` 30,000, the
question may arise whether A has guaranteed ` 30,000 out of ` 50,000 or whether he has guaranteed
the full amount of ` 50,000 subject to a limit of ` 30,000. This matter becomes important if X is
adjudged insolvent and Y wants to prove in X’s insolvency and also enforce his remedy against A.
If A stood surety only for a part of the debt and if X’s estate can pay only 25 paisa dividend in the
rupee, then Y can get ` 30,000 the full amount of guarantee from A and ` 5,000 from X’s estate, being
¼ of the balance, i.e., ` 50,000 – ` 30,000 = ` 20,000 which was not guaranteed. Since after paying
` 30,000 to Y, A can claim from X’s estate, he will get ` 7,500 being ¼ of ` 30,000 paid by A to Y. If
on the other hand, A had stood surety for the whole debt of ` 50,000 subject to a limit of ` 30,000
then Y can recover from A ` 30,000 and from X’s estate ` 12,500, i.e., ¼ of ` 50,000. A will not get
any dividend unless Y has been fully paid. This can happen only if X’s estate declares a higher
dividend.

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