Supreme Court in the case namely Sita Ram Gupta vs. Punjab National Bank and Ors. (Civil Appeal No. 1878 of 2008, decided on 10.03.2008 and reported as MANU/SC/7385/2008: AIR 2008 SC 2416) had before it the issue of guarantor’s liability in loan recovery related issue. In the instant matter, the core issue was that in view of the statutory provision under Section 130 of the Indian Contract Act, 1872, whether High Court had rightly held that guarantor of the loan was liable to pay the decretal amount when the guarantor had revoked the guarantee before such loan was actually paid to borrowers and long before the suit was filed by the bank against them for recovery of such loan.
It was an admitted position that the guarantee issued by the guarantor to the Bank was subsequently cancelled vide letter sent to the Bank Manager. It was accordingly the case of guarantor that since his guarantee had stood revoked before the loan was in fact taken by the borrowers from the bank, in view of Section 130 of the Act, he was not liable to pay the loan taken by them in respect of which he was a guarantor.
It was argued on behalf of the guarantor that Section 130 clearly provides for revocation of a continuing guarantee as to future transactions by notice to the creditor, the guarantee was revoked long before the loan was given and the suit was filed and accordingly he was not liable to pay the decretal amount to the Bank.
Section 130 of the Contract Act provides that a continuing guarantee may at any time be revoked by the surety, as to future 'transactions, by notice to the creditor.
Supreme Court affirmed the view taken by High Court that the guarantor was liable to pay the decretal amount to the Bank in view of the clause contained in the agreement of guarantee itself. The agreement clearly provided that the guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time, the said accounts may show no liability against the borrower or may even show a credit in his favour but shall continue to be a guarantee and remain in operation in respect of all subsequent transactions. This was an agreement entered into by the guarantor with the Bank, which is binding on him. It was further held that the agreement cannot be said to be unlawful and it was also not alleged by the parties either before the Trial Court or the High Court.
Supreme Court concluded that the guarantor cannot claim benefit under Section 130 of the Act because he had waived the benefit by entering into the agreement of guarantee with the Bank. If a party has given up the advantage he could take of a position of law, it is not open to him to change and say that he could avail of that ground.
It was not in dispute that the guarantor had clearly agreed that the guarantee he had entered into with the Bank was a continuing one, which was to continue and remain in operation for all subsequent transactions. It then was not open to guarantor to turn around and say that in view of Section 130 of the Act, since the guarantee was revoked before the loan was advanced to borrowers, he was not liable to pay the decretal amount as a guarantor to the Bank as his guarantee had already stood revoked.