When the Guarantee is Invalid and void.
A warranty contract can be invalidated in a particular set of situations as provided by the Indian Contract Law, 1872. The purpose behind providing the invalidity of a warranty contract is clear. The Indian Contract Act, 1872 considers guarantee contracts made for intentional misrepresentation and concealment to be invalid. Here, it should be noted that the presence of the free consent of the contracting parties is a fundamental requirement for deciding the validity of a contract. Misrepresentation and concealment challenge the very element of consent on the guarantee side. Therefore, it is justified to declare such guarantee contracts invalid. It also serves to protect the warranty from any form of exploitation to which it may be subject by willful misrepresentation and concealment.
1.1. An invalid warranty contract due to misrepresentation
Section 142 of the Indian Contract Law invalidates any collateral contract that has been concluded "... by means of false statements made by the creditor, or with his consent, regarding a significant part of the transaction" 1 A combined reading of Section 142, Section 17 and Section 18 of the Indian Contract Law, 1872, will hint at the presence of innocent and fraudulent misrepresentations. As regards the invalidity ratio in a guarantee contract, you should focus on that, the relevant section in this regard, takes into account both the creditor's false statements and those made with your consent. The presence of assent immediately brings the factor of intent in the field of disqualification of a guarantee contract due to misrepresentation. A look at the timeline of cases will further clarify the nature of the misrepresentation accepted by law. In the case of Stone v. Compton, it was held that, "if with the knowledge and consent of the creditor, any material part of the transaction between the creditor and its debtor is misrepresented in the guarantee, the misrepresentation is such that only for If the same had happened, no longer the guarantee would have been held or subscribed, the scope of the liability for the guarantee could therefore be increased, the security thus given is null for reasons of fraud. "2 On the other hand, in a last case, the London General Omnibus Co. Ltd. V. Holloway, it was clearly decided that "innocent misrepresentation is sufficient and, although the doctrine by which uberrima is required in insurance cases is not applicable to the same extent in surety cases, the surety is still entitled to reparation for not disclosing the matters that should have been communicated to him, whether or not the non-communication was innocent. ”3 Therefore, it is valid. Please note that a warranty contract initiated by misrepresentation of any kind, with respect to the material facts of the case, is void in the eyes of the law.
The law also takes into account situations in which the creditor has the responsibility of keeping the guarantor informed about material facts. “A creditor must disclose to the guarantor each fact that, under the circumstances, the guarantor would expect did not exist; the failure to mention that such a fact exists is an implicit misrepresentation. ”4 However, the disclosure of material facts must not include clarifying facts that can be understood by the guarantee on the basis of ordinary diligence. There is a fine line of distinction between the creditor's responsibility to disclose information to the guarantee and the exercise of silence by the creditor in the event of ordinary diligence of the guarantee. But, once, the courts decide on the scope of the creditor's duty according to the peculiar facts of the case, it is clear that the misrepresentation, whether innocent or intentional, will invalidate the guarantee contract.
1.2. An invalid warranty contract for concealment
The concealment of the material circumstances related to the agreement between the creditor and the main debtor must refer to any form of active concealment. "The expression 'keep silent' clearly implies intentional concealment rather than mere non-disclosure." 5 Dutt. This rules out the possibility of passively concealing material circumstances as a vitiating factor for a warranty contract. Essentially it implies that, if the creditor does not provide information on material facts and circumstances related to the transaction, it is not covered under the scope of concealment, unless the guarantee explicitly seeks information from the creditor, that is, the creditor does not come under the scope of concealment unless you actively conceal some facts and situations relevant to the transaction between the creditor and the main debtor.
Importance must be re-established in the distinction between non-disclosure of material facts (a kind of passive concealment) and the area where active concealment begins. The situation is similar to that of misrepresentation, in that it is not the creditor's responsibility to disclose such information that may be discovered by the surety as a reasonable prudent man. This, once again, suggests the question about the role and extent of silence in a warranty contract.
2. Misrepresentation And Concealment Must Be Regarding Material Facts And Circumstances
The point that is concurrent in both Section 142 and Section 143 of the Indian Contract Act, 1872 is- for a contract of guarantee to be rendered invalid on grounds of misrepresentation and concealment, such vitiating factors must pertain to the material facts and situations involved in the transaction between the creditor and the principal debtor, likely to affect the surety. This is important because, else, it will make mandatory for the creditor to disburse any information, irrespective of their importance to the surety, pertaining to the obligation existing between the creditor and the principal debtor. It also ensures that the surety consents to the surety ship only after obtaining adequate material knowledge of the consequences of such a contractual relationship. For instance, “… where a surety to a fidelity bond was not told of the particular dishonesty of the employee the surety was not liable for a subsequent act of dishonesty of the employee.” 6 It must be noted here, that, considering the nature of the contract was that of fidelity, information as to the past moral behavior of the debtor is a situation material for the surety to be aware of. It is hence clear that, there is no singular definition as to what is a material fact. The nature of the case determines as to which fact situation must be considered as one of substance and material. For instance, “… non disclosure of the fact that a previous surety is withdrawing from the surety ship agreement” 7 is not a fact material to the surety.
Hence, from the above discussion it is clear that, material facts and situations are only such situations that are likely to have a strong impact on the surety’s decision to enter into the surety ship agreement. Unless misrepresentation and concealment tamper with the revelation of the material facts and circumstances, the guarantee contracts cannot be considered invalid on this ground.
In
a contract of guarantee, is there any implied promises to indemnify the Surety?
In every collateral contract there
is an implicit promise from the principal debtor to indemnify the collateral;
and the guarantor has the right to recover from the principal debtor any sum
that he has legitimately paid in guarantee, but no sum that he has erroneously
said. (Sec. 145)
Illustration
B is indebted to C and A is a
guarantee for the department. C demands payments from A, and for his refusal he
demands it for the amount. A defends the lawsuit with reasonable reasons to do
so, but is forced to pay the amount of the debt with the costs. You can recover
from B the amount paid by him for the cost, as well as the main debt.
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