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(b) The indemnity holder did not contravene the orders of the indemnifier; and the indemnity holder
acted as it would have been prudent for him to act in the absence of any contract of indemnity.
Contract of guarantee
3. MEANING OF CERAIN TERMS (Sec. 126)
Meaning of contract of guarantee
A contract of guarantee is a contract to
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Perform the promise; or
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Discharge the liability, of a third person in case of his default.
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Meaning of surety
The person who gives the guarantee is called as surety
Meaning of creditor
The person to whom the guarantee is given is called as creditor.
GUARANTEE
Specific/Simple Guarantee
Continuing
Retrospective
Prospective
Guarantee
Guarantee
Guarantee
Guarantee is for a single Guarantee is for a Guarantee is for Guarantee is for a
transaction. It ends when debt series
of an existing debt future debt or
is discharged or promise is transactions.
or obligation.
obligation.
performed.
Liability extends
till the revocation
of guarantee.
Fidelity
Guarantee
Guarantee is on
the good conduct
or honesty of a
person employed
in a particular
organizations
Form of contract
6. CONTINUING GUARANTEE
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Meaning
A guarantee which extends to a series of transactions is called as continuing guarantee.
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Revocation (Sec.130)
Continuing guarantee may be revoked, at anytime, by the surety by giving a notice to the creditor.
However, revocations shall be effective only in respect of future transactions (i.e. the liability of the
surety with regard to previous transactions remains unaffected)
On payment of a debt, the surety shall be entitled to all the rights which the creditor could claim
against the principal debtor.
II. Rights against the creditor
Right of subrogation
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The surety can claim all the securities which the creditor had at the time of giving of guarantee
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It is immaterial as to whether the surety had knowledge of such securities or not.
2
If the securities are returned by the creditor to the principal debtor the surety is discharged to the
extent of value of the securities so returned.
Right of set off
0
Any amount recoverable by the principal debtor may be claimed as deduction.
1
Any amount recoverable by the surety may be claimed as deduction
III. Rights against co-sureties
Rights to contribution
General Rule
All the co-sureties shall contribute equally
Exceptions
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Under the contract of guarantee, the co-sureties may fix limits on their respective liabilities. Even in
such a case, the co-sureties shall contribute equally, subject to maximum limit fixed by the co-sureties.
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The contract of guarantee may provide that the co-sureties shall contribute in some other proportion.
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Death of surety
In case of death of surety, a continuing guarantee is automatically revoked in respect of future
transactions.
Variance in terms
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2
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If
Any variation is made subsequent to formation of contact of guarantee; and
Such variation is made without the consent of surety;
Then
The surety shall be released for such transactions as take place after such variation.