1.2.1 Concept
A contract of guarantee is a promise to answer for the debt, default or miscarriage of another person. Three parties: the principal debtor (whose obligation is secured), the creditor, and the surety/guarantor (the collateral promisor). Three contracts coexist: principal debtor–creditor; creditor–surety; surety–principal debtor (an implied indemnity: the debtor must reimburse the surety who pays). The Indian Act's section 126 definition (a "promise to perform the promise, or discharge the liability, of a third person in case of his default") is the classical statement — cite by name. Bank guarantees are the commercial species (see 1.2.8).
Indemnity vs. guarantee (the exam table): | Point | Indemnity | Guarantee | |---|---|---| | Parties | Two (third party only the occasion of loss) | Three (all contracting through the tri-partite structure) | | Liability | Primary (the indemnifier's own promise) | Secondary/collateral (arises only on the debtor's default) | | Number of contracts | One | Three | | Purpose | Reimburse/hold harmless from loss | Provide security for another's obligation | | Subrogation | Arises by the doctrine's own force | The surety's express right after payment | | Enforceability | On loss occurring | On the principal debtor's default (or demand, if a demand guarantee) |
1.2.2 Basic Features
1. Tri-partite consent (express or implied from conduct).
2. Secondary, accessory liability: the surety's obligation is co-extensive with the principal debtor's unless confined by the deed (the Indian Act's section 128 formula — name only); the Nepali Full Bench has confined it by the deed's stated sum (Lumbini Bank, below).
3. A principal debt or obligation must exist (or be contemplated); a guarantee of a void debt falls with it.
4. Consideration: anything done or promised for the principal debtor is sufficient consideration for the surety (the Indian Act's section 127 rule — name only); the surety need not benefit directly.
5. Presumption: the guarantee is presumed to secure the principal debtor's honest performance — the creditor need not first exhaust remedies against the debtor unless the deed says so.
1.2.3 Types of Guarantee Contracts
• Specific vs. continuing (a single transaction vs. a series — 1.2.4).
• Conditional vs. unconditional (demand) guarantee: payable on default (judicially assessed) vs. payable on the beneficiary's mere demand — the bank-guarantee norm.
• Financial vs. performance guarantee: payment of money vs. performance of obligations (construction completion, supply contracts).
• Personal vs. corporate: individual sureties vs. company-given guarantees (the corporate- benefit questions — Company Law and Governance, LAW5404, this semester).
• Counter-guarantee: a back-to-back structure — a foreign bank counter-guarantees the local bank's guarantee; the two instruments are autonomous (Bipin Hada, below).
1.2.4 Continuing Guarantee
A continuing guarantee extends to a series of transactions (a running account: bank credit lines, dealer advances) rather than one debt. Revocation: the surety may revoke it as to future transactions by notice (Nepali commentary reads the Code's scheme with a prior-notice discipline — a three-month notice is commonly spoken of for future-transaction revocation); the creditor's notice to the surety of the revocation also fixes the cut-off. Death of the surety operates as revocation as to future transactions (unless the contract shows a contrary intent). The surety remains liable for transactions already entered before the revocation's effective date.
1.2.5 Rights, Duties, and Liability of the Guarantor/Surety
Liability: to answer on the principal debtor's default per the deed's terms — the Full Bench rule that liability is limited to the sum stated in the guarantee deed, with the collateral released once that sum is paid (Lumbini Bank v. Sangita Tripathi, NKP 2073, Vol. 8, D.No. 9646, Full Bench — the deed is the measure). The surety's three-right map (memorise): | Against whom | Right | Content | |---|---|---| | Creditor | Subrogation | On payment, steps into the creditor's rights and securities | | Creditor | Benefit of securities | The creditor must not release or impair securities without the surety's consent, else the surety is discharged to that extent | | Principal debtor | Exoneration / implied indemnity | Before payment: exoneration (compel performance); after payment: reimbursement of everything paid with costs | | Co-sureties | Contribution | Co-sureties bear the default in equal shares unless otherwise agreed (the contribution doctrine) | Duties: to pay according to the deed on default; not to impede the creditor's realisation; to disclose his own known facts bearing on the risk where the creditor asks.
1.2.6 Termination of Contract of Guarantee
1. Revocation by the surety (continuing guarantees — future transactions; notice).
2. Revocation/renunciation by the creditor (release of the surety expressly or by conduct).
3. Payment or performance by the principal debtor (discharge).
4. Variance of the principal contract without the surety's consent — the classic discharge (the surety is only liable for the risk he undertook).
5. Creditor's omission or act impairing securities (discharge to the extent of the loss).
6. Expiry of the guarantee's stated period; time-bar of the principal debt.
7. Death/insolvency/incapacity of the surety (future-transaction effect).
8. Invalidation of the principal obligation (the accessory falls with the principal).
1.2.7 Grounds of Invalidation of Contract of Guarantee
• Misrepresentation or concealment of material facts by the creditor to obtain the guarantee (the guarantee is voidable — the creditor's duty of candour).
• Misdescription of the transaction guaranteed.
• The surety's own incapacity, coercion, undue influence or fraud (the general vitiators — Law of Contract-I, Unit 5).
• Illegal or void principal obligation (no guarantee of a gambling debt or a criminal liability).
• Fiduciary overreach: guarantees extracted from dependents without independent advice (the protection-of-vulnerable-surety theme; English equity's restraint by name only).
1.2.8 Provisions of Nepalese Contract Law + the Prescribed Case Cluster
Statutory frame: the Muluki Civil Code 2074, Part 5, Chapter 7 (contracts of guarantee — the indemnity-and-guarantee chapter); the Banking and Financial Institutions Act 2073 authorises banks and financial institutions to issue guarantees on behalf of their customers, execute the necessary bonds and take counter-security (the BAFIA powers, stated by the Act's own functions list); NRB directives discipline guarantee limits and cash margins; recovery of the guaranteed debt proceeds through the bank's contractual channels, the Debt Recovery Tribunal under the banking legislation, and the ordinary courts (Procedural Law-II, LAW5403, this semester).
The autonomy principle (the bank-guarantee doctrine): a bank guarantee is an independent, unconditional contract — the issuing bank must honour it on the beneficiary's compliant demand regardless of disputes in the underlying contract ("pay now, sue later"); the narrow exceptions are the beneficiary's outright fraud and (in some systems) irretrievable injustice or imminent insolvency (Indian authority by name only). Nepal's Supreme Court has held exactly this independence — Bipin Hada, below.
Prescribed cases (the cluster — cite with the syllabus's own citations):
1. Pushpa Rawal Rayamajhi v. Nepal Bank Ltd., Central Office et al., NKP 2069 B.S., Vol. 7, D.No. 8861 (Surety) — a suretyship decision in the bank-loan recovery line; the citation is invoked in the Court's loan-recovery jurisprudence on pursuing guarantors. Read the full report for the precise holding.
2. Kamala Amatya v. Himalayan Bank Ltd. et al., NKP 2070 B.S., Vol. 4, D.No. 8997 (Guarantee) — the personal-guarantee landmark (Division Bench, decision date 2070/01/03): where a person gives a personal guarantee for a company's loan, and the mortgaged security does not cover the debt, the creditor may recover from the guarantor; the promoter- surety cannot hide behind the company's limited liability, and property that had passed to the guarantor's wife (the petitioner, who had received it in partition) could not defeat the bank's pursuit of the guarantee. The writ was quashed — a pure guarantee matter unfit for the writ jurisdiction.
3. Lumbini Bank Ltd. v. Sangita Tripathi, 2073 B.S., Vol. 8, D.No. 9646, Full Bench (Guarantee) — the surety's liability is limited to the sum stated in the guarantee deed, and the collateral must be released once that sum is paid; applied in the later guarantor decisions (Sushil Chaudhary v. Nepal Bank; Punya Prabha Devi Bisht v. Gorkha Development Bank — names only).
4. Rastriya Banijya Bank v. Purnakala Aryal, NKP 2066 B.S., No. 10, P. 1705 — a banker- and-surety dispute of the pre-Code era (the old Contract Act 2056's guarantee chapter governed); prescribed here for the classical banker-surety relationship. Read the report at the cited place before attributing any specific holding.
5. Satish Kumar Bohra v. Ministry of Industry, Commerce and Supplies et al., NKP 2076 B.S., Vol. 3, D.No. 10227 (Bank Guarantee) — a recent bank-guarantee decision with a government beneficiary; prescribed with Bipin Hada for the modern guarantee doctrine. Read the full report at the cited place; cite it as the recent authority in the bank-guarantee line.
6. Bipin Hada v. Nepal Rastra Bank et al., N.K.P. 2076 B.S., Vol. 12, D.No. 10398 (Counter Guarantee) — the autonomy landmark: Himalayan Bank (petition moved through its Company Secretary, Bipin Hada) had issued a guarantee for the Melamchi project's contractor, backed by a Chinese bank's counter-guarantee; when a Chinese court stopped the counter-guarantee's payment, the bank resisted the beneficiary's demand and NRB's debit. The Supreme Court dismissed the writ: a bank guarantee is an independent and unconditional contract which must be honoured according to its terms — the issuing bank cannot refuse the beneficiary merely because the counter-guarantor abroad has not paid or a foreign court has interfered with the underlying/counter arrangements. (The remaining prescribed cases — Swamilal Shrestha, Madan Bahadur Thapa, Keshav Kisi, Gauri Parbati — are treated in Units 7, 2, 6 and 8 respectively.)