Description
A type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default.
Guarantee
1
Guarantee
2
Case: Credit and Agreement
A wants to buy goods from B on credit. He hopes to sell the goods and pay A in one month of getting the gods. B does not know A and cannot take this change. C, a person known to both, whom B can trust, comes forward and assures B that he could demand and take the money from him if A defaulted.
3
Guarantee
Three Parties
A: Buyer: Principal Debtor B: Seller: Creditor C: Surety or Guarantor
Two Contracts
Between Creditor and Principal Debtor Between Surety and Creditor
4
Contract Act
126. Contract of guarantee, surety, principal debtor and creditor.- A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written.
5
Contract Act
127. Consideration for guarantee.- Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
6
Summary
The contract between Surety and creditor is guided exclusively by its own terms. As Section 128 puts it: 128. Surety liability.- The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
7
Bank of Bihar Ltd. v. Dr. Damodar Prasad
8
Facts
Creditor: Bank of Bihar Principal Debtor: Damodar Prasad Surety: Paras Nath Sinha Guarantee: On default, surety would pay the liabilities of the principal debtor up to Rs. 12000 within two days of the demand.
9
Judgement
… the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
10
… Cond
Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright v. Simpson, … "But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of creditor."
11
M.S.E.B., Bombay v. Official Liquidator, H. C., Ernakulam
12
Facts
Maharashtra Electricity Board required earnest deposit for parties to participate in its tender. The earnest deposit could be paid case to case basis or as a bank guarantee. Cochin Malleables (P) Ltd. had arranged a bank guarantee from the canara bank.
13
Facts: Bank Guarantee Read:
The Canara Bank Ltd., hereby agrees unequivocally and unconditionally to pay within 48 (Forty-eight) hours on demand in writing from the Maharashtra State Electricity Board or any officer authorised by it in this behalf, of any amount up to and not exceeding Rs. 50,000/- (Rupees fifty thousand only) to the said Maharashtra State Electricity Board, Bombay on behalf of M/s Cochin Malleables (Private) Ltd., Trichur, who have tendered and/or contracted or may tender or contract hereafter for supply of materials, equipment or service to the Maharashtra State Electricity Board and have been exempted from payment of earnest money and/or security deposit against such tenders or contracts.
14
Dispute
The Company defaulted in a tender and the Electricity Board called upon the Bank to pay the guarantee amount of Rs. 50,000/-. The Bank did not respond. The Board send reminders to the Canara Bank to pay. In the mean time, the High Court of Kerala ordered liquidation of the Company. A dispute arose in the light of the liquidation whether the Electricity Board should claim it from the liquidation proceedings of the Company or the Bank.
15
Facts: Nature of Guarantee
The guarantee did not even require proof of default. This was because the bank had taken fixed deposits and other securities from the company.
16
Judgement: Supreme Court
But the transactions … (1) the bank guarantee executed by the Bank in favour of the Electricity Board, (2) the contracts of supply entered into between the Electricity Board and the Company … and (3) the document under which the Company … had given a fixed deposit receipt and certain quantity of zinc ingots as security to the Bank for executing the letter of guarantee in favour of the Electricity Board are independent of each other in so far as their legal incidents are concerned.
17
… Cond
…the Electricity Board … is not under any obligation to prove any default on the part of the Company … The Bank cannot raise the plea that it is liable only to the extent of any loss that may have been sustained by the Electricity Board … The liability is absolute and unconditional. The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. the guarantor. Under Section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.
18
Contract Act
134. Discharge of surety by release or discharge of principal debtor.- The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
19
Judgement: Supreme Court
…a discharge which the principal debtor may secure by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability. … As mentioned earlier the liability of the Bank to pay the amount as per the letter of guarantee did not depend upon prior proof of any default on the part of the Company in liquidation. Whether the whole of Rs. 50,000 should be demanded or any lesser sum should be demanded from the Bank was entirely within the choice of the Electricity Board. The Bank has, therefore, to pay the amount due under the letter of guarantee given by it to the Electricity Board.
20
doc_711233978.ppt
A type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default.
Guarantee
1
Guarantee
2
Case: Credit and Agreement
A wants to buy goods from B on credit. He hopes to sell the goods and pay A in one month of getting the gods. B does not know A and cannot take this change. C, a person known to both, whom B can trust, comes forward and assures B that he could demand and take the money from him if A defaulted.
3
Guarantee
Three Parties
A: Buyer: Principal Debtor B: Seller: Creditor C: Surety or Guarantor
Two Contracts
Between Creditor and Principal Debtor Between Surety and Creditor
4
Contract Act
126. Contract of guarantee, surety, principal debtor and creditor.- A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written.
5
Contract Act
127. Consideration for guarantee.- Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
6
Summary
The contract between Surety and creditor is guided exclusively by its own terms. As Section 128 puts it: 128. Surety liability.- The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
7
Bank of Bihar Ltd. v. Dr. Damodar Prasad
8
Facts
Creditor: Bank of Bihar Principal Debtor: Damodar Prasad Surety: Paras Nath Sinha Guarantee: On default, surety would pay the liabilities of the principal debtor up to Rs. 12000 within two days of the demand.
9
Judgement
… the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.
10
… Cond
Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright v. Simpson, … "But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of creditor."
11
M.S.E.B., Bombay v. Official Liquidator, H. C., Ernakulam
12
Facts
Maharashtra Electricity Board required earnest deposit for parties to participate in its tender. The earnest deposit could be paid case to case basis or as a bank guarantee. Cochin Malleables (P) Ltd. had arranged a bank guarantee from the canara bank.
13
Facts: Bank Guarantee Read:
The Canara Bank Ltd., hereby agrees unequivocally and unconditionally to pay within 48 (Forty-eight) hours on demand in writing from the Maharashtra State Electricity Board or any officer authorised by it in this behalf, of any amount up to and not exceeding Rs. 50,000/- (Rupees fifty thousand only) to the said Maharashtra State Electricity Board, Bombay on behalf of M/s Cochin Malleables (Private) Ltd., Trichur, who have tendered and/or contracted or may tender or contract hereafter for supply of materials, equipment or service to the Maharashtra State Electricity Board and have been exempted from payment of earnest money and/or security deposit against such tenders or contracts.
14
Dispute
The Company defaulted in a tender and the Electricity Board called upon the Bank to pay the guarantee amount of Rs. 50,000/-. The Bank did not respond. The Board send reminders to the Canara Bank to pay. In the mean time, the High Court of Kerala ordered liquidation of the Company. A dispute arose in the light of the liquidation whether the Electricity Board should claim it from the liquidation proceedings of the Company or the Bank.
15
Facts: Nature of Guarantee
The guarantee did not even require proof of default. This was because the bank had taken fixed deposits and other securities from the company.
16
Judgement: Supreme Court
But the transactions … (1) the bank guarantee executed by the Bank in favour of the Electricity Board, (2) the contracts of supply entered into between the Electricity Board and the Company … and (3) the document under which the Company … had given a fixed deposit receipt and certain quantity of zinc ingots as security to the Bank for executing the letter of guarantee in favour of the Electricity Board are independent of each other in so far as their legal incidents are concerned.
17
… Cond
…the Electricity Board … is not under any obligation to prove any default on the part of the Company … The Bank cannot raise the plea that it is liable only to the extent of any loss that may have been sustained by the Electricity Board … The liability is absolute and unconditional. The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. the guarantor. Under Section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.
18
Contract Act
134. Discharge of surety by release or discharge of principal debtor.- The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
19
Judgement: Supreme Court
…a discharge which the principal debtor may secure by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability. … As mentioned earlier the liability of the Bank to pay the amount as per the letter of guarantee did not depend upon prior proof of any default on the part of the Company in liquidation. Whether the whole of Rs. 50,000 should be demanded or any lesser sum should be demanded from the Bank was entirely within the choice of the Electricity Board. The Bank has, therefore, to pay the amount due under the letter of guarantee given by it to the Electricity Board.
20
doc_711233978.ppt