CAIIB BRBL Module D Unit 3 : Contracts Of Guarantee

CAIIB Paper 4 BRBL Module D Unit 3 : Contracts Of Guarantee (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Contracts Of Guarantee”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module D (COMMERCIAL & OTHER LAWS WITH REFERENCE TO BANKING OPERATIONS) Unit 3 : Contracts Of Guarantee, Aspirants must go through this article to better understand the topic, Contracts Of Guarantee and practice using our Online Mock Test Series to strengthen their knowledge of Contracts Of Guarantee. Unit 3 : Contracts Of Guarantee

Contract Of Guarantee

  • A ‘Contract of Guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of latter’s default.
  • A guarantee may be either oral or written.
  • The question whether a particular contract is a contract of indemnity or guarantee has to be decided by examining the language of the documents entered into between the parties and the nature of transaction.
  • 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’. The person to whom the guarantee is given is called the ‘creditor/beneficiary’.


Anything done, or any promise made, for the benefit of the principal debtor, is a sufficient consideration to the surety for giving the guarantee (Sec. 127).

Example 1: B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will give guarantee for the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s promise.

Example 2: A sells and delivers goods to B. C afterwards, out of nothing and without any request or promise to him by any party, agrees to pay for the goods in default of B. This is a void (invalid) contract as there is no consideration for C’s promise.

The Liability Of The Surety

  • The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract (Sec. 128).
  • A surety is regarded as a favoured debtor. This means that only if the principal debtor is unable to pay the debt, the surety takes the place of the principal debtor. Again, once the surety has paid the debt, he then occupies the place of the original creditor. He can then claim from the principal debtor, the entire sum he has paid to the original creditor.
  • The surety has no right to restrain an action against him by the creditor on the ground that the principal debtor is insolvent and that the creditor may have relief against the principal debtor in some other proceedings.
  • Similarly, if the creditor has obtained any decree against the surety and the principal debtor, the surety has no right to restrain execution against him just because the creditor has not exhausted his remedies against the principal. discharged.
  • Even the death of the principal debtor does not release the surety from his obligation during his lifetime and against his legal heirs to the extent of estate (immovable and movable properties) inherited by them from the deceased surety.

Continuing Guarantee

A guarantee which extends to a series of transactions, is called, a ‘continuing guarantee’. This type of guarantee is not limited to only one transaction but to many transactions.

Illustration Mr. A contracts with Mr. B, a shopkeeper to allow Mrs. A to take whatever goods she may need from his shop, up to the amount of Rs. 20,000. Mr. A will be liable for the debts incurred by Mrs. A up to the given amount.  A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor (Sec. 130).

Death of Surety

  • Normally, when the surety dies, the guarantee ends from that date. However, this is not true in all cases. It depends upon the terms of the contract and the intention of the parties as regards future transactions.
  • 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 future transactions are concerned. Generally all guarantees obtained by banks are continuing guarantees and in the case of death of a surety, the guarantee would stand revoked for future transactions. This is the precise reason when the information of a guarantor’s death is received, banks prefer to break the running accounts of a borrower.

Variance In Terms Of The Contract

Any variance (change/modification) made, without the surety’s consent, in the ‘terms of contract’, between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance (Sec. 133).

Example: the surety that Mr. A had given strict instructions to the shopkeeper  not to allow his wife to buy any cosmetics on credit. If the shopkeeper allows Mrs. A to buy these items, the terms of the guarantee are changed and therefore, Mr. A would not be liable to pay to the shopkeeper for any future transactions from that point onwards

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 (Sec. 134).
  • Example: A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B and afterwards B contracts with his creditors (including C) to assign/sell them certain properties of his, in consideration of all the creditors, releasing B from all their demands. Here B is now, after the settlement, not a debtor to C. A is therefore discharged from his surety-ship to C.

Forbearance To Sue

Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him, does not discharge the surety unless the parties had agreed for such discharge.

Illustration:  B owes to C a debt guaranteed by A. The debt becomes payable. However, C does not sue B for a year after the debt has become payable. Despite this forbearance Ai s not discharged from his surety-ship.

Release Of One Co-surety Does Not Discharge Others

Where there are co-sureties, a release by the creditor of one of them does not discharge the others. Also, the surety released does not become free from his responsibility to the other sureties.

Surety Can Claim His Dues From The Principal Debtor

Once the surety makes the payment or performs the act which the principal debtor has failed to pay/ perform, the surety steps into the shoes of the creditor and he can claim his dues from the principal debtor.

Subrogation is the right of the surety to recover his money from the principal debtor (PD) on settlement of the liabilities of PD with the creditor. Subrogation is the legal doctrine whereby one person takes over the rights or remedies of a creditor against his/her debtor.


A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety-ship is made, whether the surety knows of the existence of such security or not.

If the creditor loses such security, then the surety is discharged to the extent of the value of the security.

Misrepresentation Made By The Creditor

Any guarantee obtained by means of misrepresentation made by the creditor is invalid. Any guarantee which the creditor has obtained by keeping silent as to the material circumstance, is also invalid.

Implied Promise By The Principal Debtor To Indemnify The Surety

 In every Contract of Guarantee there is an implied promise by the principal debtor to indemnify the surety. The surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee (but no sums which he has paid wrongfully) (Sec. 145).

Co-sureties For The Same Debt

Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor (Sec. 146).

Illustration: A, B and C are sureties to D for the sum of Rs. 30,000 lent to E. E makes a default in payment. All of A, B and C are liable between themselves to pay Rs. 10,000 each.

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CAIIB Paper 4 (BRBL) Module D Unit 3-Contracts Of Guarantee ( Ambitious_Baba )

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