Contract of guarantee

Since a guarantee is, for the purposes of the Contract Act, 1872 a contract under the law, the parties to the guarantee are deemed to be regulated by the terms of the guarantee which they have mutually agreed upon keeping in view the legal principle of consensus ad idem (meeting of the minds) when it comes to construction of contracts

Once a guarantee is executed between the parties (i.e. between a guarantor/surety and a creditor), they would be bound by the terms and conditions of the guarantee irrespective of any independent obligation of the principal debtor towards the creditor

Once a bank issues a guarantee, it is duty-bound to pay the beneficiary of a guarantee in terms of the guarantee itself.

Bank or insurance guarantee that contained a categorical undertaking and imposed absolute obligation on the guarantor, i.e., the Bank or the insurance company, to pay the guaranteed amount, irrespective of any dispute which may arise between the parties regarding breach of the contract, for which performance one of the parties furnished the guarantee to the other, was an independent contract; therefore, the guarantor must discharge its obligations under the contract of guarantee as per the terms thereof, independent of the dispute as to performance of the primary contract between the parties.

Bank or insurance guarantee that contained a categorical undertaking and imposed absolute obligation on the guarantor, i.e., the Bank or the insurance company, to pay the guaranteed amount, irrespective of any dispute which may arise between the parties regarding breach of the contract, for which performance one of the parties furnished the guarantee to the other, was an independent contract; therefore, the guarantor must discharge its obligations under the contract of guarantee as per the terms thereof, independent of the dispute as to performance of the primary contract between the parties.

Factum of death of surety shall only be relevant in absence of any contract to the contrary or in case of continuing guarantee for transactions after death of guarantor

When transaction was made during lifetime of a guarantor and rested on security furnished and did not relate to any future transaction, then liability of either guarantor or his/her legal heirs could not be avoided as it created a charge against assets of a deceased

Only such transaction which took place subsequent to death of guarantor could be exempted.

Contention of plaintiff was that the guarantee being a performance guarantee its encashment, whether conditional or unconditional, was in the nature of a penalty, hence, unlawful

Plea of defendant was that it was a simple guarantee which entitled the defendant to its encashment on plaintiff's default in payment of liabilities

Validity

Guarantee made it obligatory on the Bank, as guarantor, to unconditionally and irrevocably pay certain amount on written demand irrespective of any dispute under the contract or between the parties to the contract

Guarantee was undoubtedly irrevocable and unconditional

Encashment of Bank guarantee could not be restrained by an injunctive order

Plaintiff had failed to make out the prima facie case for the grant of injunction in its favour

Balance of convenience also did not lie in favour of the plaintiff and it was not the plaintiff who was likely to suffer in case the injunction was granted

Defendant, on the other hand, would suffer in case an injunction was granted

Application for grant of interim injunction was dismissed.

Criteria prescribed under S. 133 of the Contract Act, 1872 for discharge of surety was that there should be a variance in terms of the contract between principal debtor and creditor; and that such variance should have been without surety's consent and it was only then that surety was discharged from transactions subsequent to such variance

Variation of a contract within contemplation of S. 133 of the Contract Act, 1872 meant material variation or alteration in original contract that may prejudicially or adversely affect surety

Defence conferred on surety under S. 133 of the Contract Act, 1872 could be waived by surety through specific agreement in the deed of guarantee provided that such waiver did not defeat any provision of law and such waiver would amount to "surety's consent" within meaning of S. 133 of the Contract Act, 1872 with the result that the surety would not be discharged.

Liability of guarantor was co-extensive with that of a principal debtor unless in the letter of guarantee, it was provided otherwise

Any promise made, thing done for the benefit of the principal debtor, under law, was sufficient consideration as far as surety was concerned for giving guarantee

Contract for guarantee was a contract to perform a promise and/or to discharge a liability of a third person in case of occurrence of default by principal debtor.

Guarantors are jointly and severally liable to pay outstanding amount to creditor unless contents of contract provide otherwise

Liability of surety immediately arises after failure on the part of principal debtor to payout legally due liability against him

Creditor in such regard is legally entitled to proceed in case of default of principal debtor against surety/guarantor, as per terms of contract

While determining liability of guarantors/sureties technicalities, unless insurmountable, were not to be taken into consideration.

Sponsors, undertaking was an integral part of agreement and the same had to be read in conjunction with agreement entered between principal borrower company and Bank

Sponsors could not absolve themselves from the liability accruing and arising on principal borrower company to be its liability only

Sponsors were co-extensively liable to payout liability of principal borrower company

Terms of sponsors' agreement duly signed had to be read in conjunction with main agreement entered between principal borrower company and Bank

High Court declined to interfere in judgment and decree passed by Banking Court, as there was no legal infirmity found

Appeal was dismissed in circumstances.

Guarantors having signed and executed letters of guarantees in their personal capacity for duly discharging obligations of the debtor company were "customers" in terms of S. 2(c) of the Financial Institutions (Recovery of Finances) Ordinance, 2001 and were liable to pay outstanding amounts of finance facility and per S.126 of the Contract Act, 1872, contract of guarantee was a contract to perform the promise or discharge the liability of a third person in case of his default and the person who gave such guarantee was the "surety", the person in respect of whose default the guarantee was given was the "principal debtor" and the person to whom the guarantee was given was called the "creditor"

Guarantee may be oral or written and anything done or any promise made by the guarantors by giving the guarantee for the benefit of the principal debtor was sufficient consideration for the surety under S. 127 of the Contract Act, 1872

In terms of S. 128 of the Contract Act, 1872 the liability of the guarantor was co-extensive with that of the principal debtor unless it was otherwise provided by the letter of guarantee itself.

Held, that defendants to the suit, who were guarantors, were also jointly and severally liable and the liability of guarantors was co-extensive with that of the principal debtor, unless it was otherwise provided by the contract of guarantee itself

Anything done or promise made for the benefit of the principal debtor was sufficient consideration as far as the surety was concerned

Manifestly the contract of guarantee was a contract to perform the promise or discharge the liability of a third person in case of default

Under S. 2(c) of the Financial Institutions (Recovery of Finances) Ordinance, 2001, guarantors fell within the meaning of "customers"; as such they were also liable to pay the dues of the principal debtor on whose behalf they stood as guarantors

Among other things, performance of an undertaking or fulfilment of a promise relating to repayment of finance or payment of any other amounts regarding finance was also an "obligation" within meaning of S. 2(c) of the Financial Institutions (Recovery of Finances) Ordinance, 2001

Suit was decreed.

Plea raised by plaintiff bank was that defendant company had executed 'contract of guarantee' and 'letter of comfort', therefore, was a real beneficiary of the finance

Validity

In view of definitions of 'contract of guarantee' and 'letter of comfort', in juxtaposition of he contents thereof, defendant company was not liable to make any payment to plaintiff bank

defendant company was not beneficiary of financial facilities granted to and availed by borrower company, therefore, it could not be held liable for outstanding dues of plaintiff bank

plaintiff bank did not obtain any guarantees from Directors of borrower company which omission nonetheless called for wisdom of plaintiff bank

Figures of amount claimed by plaintiff bank was subsequently substituted with other figures on the basis of application filed by plaintiff bank, therefore, such substituted figures were liability of borrower company

defendant company was not liable to pay any amount to plaintiff bank

Suit was decreed accordingly.

In cases of construction or service contracts, advance paid to the contractor was known as the "mobilization advance"; and normally as a pre-condition for release of the advance to the contractor, the latter was required to furnish a guarantee, either from a bank or an insurance company

Two separate and distinct agreements/contracts existed in such cases, which were firstly, the underlying agreement and secondly, the bank or insurance guarantee

On completion of the agreed work, the guarantee was to be released, or it may be enforced/encashed if a default was committed

Depending upon the intention of the parties, a bank or insurance guarantee may be either conditional or unconditional

Conditional guarantee could only be invoked on fulfilment of the condition(s) stipulated therein; for example proof of breach or default

In case of unconditional guarantee, the guarantor, that was either the bank or an insurance company, was under an obligation to honour its commitment by making payment on demand; regardless of any dispute between the parties arising out of or connected with underlying agreement/contract

"Mobilization guarantee" was an independent contact, and terms and conditions stipulated therein determined its nature and consequent effect

Like any other contract, a guarantee came into existence as a legally binding agreement between two or more willing parties, and therefore, the same had to be read and interpreted independent of any other agreement or the underlying agreement pursuant to which it had been furnished.

In cases of construction or service contracts, advance paid to the contractor was known as the "mobilization advance"; and normally as a pre-condition for release of the advance to the contractor, the latter was required to furnish a guarantee, either from a bank or an insurance company

Two separate and distinct agreements/contracts existed in such cases, which were firstly, the underlying agreement and secondly, the bank or insurance guarantee

On completion of the agreed work, the guarantee was to be released, or it may be enforced/encashed if a default was committed

Depending upon the intention of the parties, a bank or insurance guarantee may be either conditional or unconditional

Conditional guarantee could only be invoked on fulfilment of the condition(s) stipulated therein; for example proof of breach or default

In case of unconditional guarantee, the guarantor, that was either the bank or an insurance company, was under an obligation to honour its commitment by making payment on demand; regardless of any dispute between the parties arising out of or connected with underlying agreement/contract

"Mobilization guarantee" was an independent contact, and terms and conditions stipulated therein determined its nature and consequent effect

Like any other contract, a guarantee came into existence as a legally binding agreement between two or more willing parties, and therefore, the same had to be read and interpreted independent of any other agreement or the underlying agreement pursuant to which it had been furnished.