Introduction

This paper attempts to answer the question, “is past consideration a valid consideration for a
guarantee contract.” Before embarking on trying to answer this question, we must understand what
this question truly means. The confusion is whether past consideration, unsupported by any fresh
consideration at the time of entering into a guarantee contract, is sufficient consideration. There is
no controversy on whether a guarantee contract has to be formed contemporaneous with the debt
contract. It is well settled that even if the guarantee contract is formed after the debt contract is
formed, if there is some new consideration, the contract is valid. Examples for this new
consideration include forbearance to sue1 the principal debtor or extending credit to the principal
debtor2. Thus, the question is essentially ‘does the creditor have the right to enforce a guarantee
contract which he has neither given any fresh consideration for; nor had he any reason to suppose
that his debt would be supported by this guarantee when the debt was in fact given.’ The confusion
refuses to be resolved due to two main reasons. The first reason is that it is difficult to import the
logic used in English cases because the English jurisprudence does not accept the validity of past
consideration at all. Subsequently, we find that the only reasoning given by English court if a
situation of past consideration in guarantee pops up is that past consideration is invalid. Therefore,
the guarantee is without consideration and void3. The second reason is that there has been no
Supreme Court decision in India deciding this issue and the various High Courts which have dealt
with the issue were unable to agree on a common way to approach this. The way to resolve this
confusion is by using conventional rules of interpretation to find what the true meaning of S.127
is and by analysing conceptually what it would mean to accept the validity of past consideration
in guarantee contracts.

1
State Bank of India v Premco Saw Mills AIR 1984 Guj 93.
2
See Guild v Conrad [1984] 2 QB 885.
3
Astley Industrial Trust ltd v Grimston Electric Tools (1965) 109 S.J. 149.
Intrinsic Sources of Statutory Interpretation

Section 127 of the Indian Contract Act reads as:

Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.

Illustration(c) of the same section is as follows:

A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in
default of B. The agreement is void.

The true meaning of the word ‘done’ as used in the Section has been widely discussed by various
High Courts all over India. In the case, Union Bank of India v Avinash P Bhonsle4, while dealing
with this same issue the court said that illustrations should not be used to restrain the section in a
manner as to take away rights that the plain words of the Section confer. While accepting this
contention, the court in that case never addressed how the words used in the section have no
ambiguity attached to it. While reading the section, we find that after the words ‘anything done’,
are followed by the words ‘or any promise made’ Reading these two together, the prima facie
interpretation is that the words, ‘anything done’ was used to differentiate executed consideration
from executory consideration, the latter being referred to by the words, ‘any promise made’. It is
a very basic rule of statutory interpretation that the words of a statute should not be read in
isolation. Even if one does not immediately accept that this is the correct interpretation of the
statute, it is irrefutable that this preposition creates a valid ambiguity as to how the words can be
interpreted. This paves way to reading the illustration to find out the true meaning. Illustration (c)
in no uncertain terms tell us that when after the formation of the debt contract, with no
consideration for the proposed guarantee contract, an agreement of guarantee is reached, that
agreement is void.

4
1991 (3) BomCR 735.
Extrinsic Sources of Statutory Interpretation

The above interpretation that we arrived at was based purely on intrinsic sources of statutory
interpretation5. Next, let us look at the chief extrinsic source of statutory interpretation, namely
case laws. While dealing with any statute, how previous judgments have interpreted that statute
gives one a fair idea on plausible statutory interpretations. In this section, various High Court
judgments that dealt with this case will be analysed so as to see whether there is any judgment that
has given a valid rebuttal to the previous argument advanced in this paper citing the intrinsic
sources of legislative interpretation.

While discussing case laws related to past consideration in guarantee, M Ghulam Husain Khan v
M Faiyaz Ali Khan6 is a good starting point. In this case, the Oudh High Court relied on the words,
‘anything done’ to say that this covered past consideration. However, this argument fails to take
into consideration the illustration (c) of S.127. The second argument by the court was one from
existing case law. It referred to the case, Kali Charan v Abdul Rahman7 to say that the Privy
Council judgment upheld the validity of past consideration in guarantee contracts. However, in the
latter case, the fact scenario was that the creditor while entering into the debt contract had agreed
with the debtor that there would be guarantee for the debt. In the Ghulam Husain case as well as
for the controversy this paper seeks to address, the creditor has no contemplation of having a surety
at the time of entering into the debt contract.

Ram Narain v Lt. Col. Hari Singh And Anr8 disagreed with view expressed in the Ghulam Hussain
case. Here, the Rajasthan High Court held that illustration (c) of S.127 cannot be ignored while
understanding the section and a combined reading of the section requires that past consideration

5
William N Eskridge, Jr., Philip P Frickey and Elizabeth Garrett, Legislation and Statutory Interpretation
(Foundation Press 2000)
6
AIR 1940 Oudh 346.
7
AIR 1918 PC 226.
8
AIR 1964 Raj 176.
should not be treated as valid consideration. The court said that “anything done or any promise
made should be contemporaneous to the surety's contract of guarantee in order to constitute
consideration therefore.” This judgment thus followed the same rationale that this paper seeks to
advocate. The next major case that dealt with this issue is Union Bank of India v Avinash P
Bhonsle9 . Here the Bombay High Court said that an illustration cannot be used to curtail the
original ambit of the Section and therefore illustration (c) cannot negate the validity of past
consideration. This argument has already been tackled in the previous section.

A very interesting interpretation to illustration(c) was given in the case, State Bank of India v
Srimathi Kusum Vallabhdas Thakkar10. The fact scenario of this case was of a wife agreeing to
guarantee a past debt of her husband. Here, the court said that illustration(c) refers only to strangers
who have nothing to do with the principal debtor agreeing to guarantee the debt without any
consideration. Such an interpretation would go against the very principle of S.127. S.127 says that
consideration passing from the creditor to the principal debtor is enough to satisfy as consideration
being given to the surety. In this context, there is no differentiation if the surety is a stranger to the
principal debtor or a first blood relative. If the rule is to be that past consideration given to the
debtor is valid in itself, then the same rule will apply irrespective of the relation between the surety
and the creditor.

Another argument regarding accepting past consideration as valid consideration was raised in the
case, Y Venkatachalapathy Reddy v Bank of India11. Here the court held that there is no confusion
regarding past consideration in guarantee as the consideration as defined in S.2(d) of the Indian
Contract Act includes past consideration. The problem with line of reasoning is that what Section
127 does is it defines what valid consideration is for a guarantee contract. It is a common principle
of statutory interpretation that when there is a general rule and a specific rule on the same topic,
the specific rule holds priority over the general rule 12 . In the specific rule that deals with

9
Supra 4.
10
(1994) 1 GLR 655.
11
2002 (4) ALD 173.
12
Supra 5.
consideration for guarantee contracts, namely S.127, an overall reading of the Section as explained
in the previous sections of this paper shows us that past consideration is not valid consideration.

Analysis based on concepts

After having applied both the intrinsic and extrinsic sources of statutory interpretation to S.127,
what is left now is to analyse whether the conclusion we have arrived at makes conceptual sense.
What is it that happens during the most ordinary guarantee contract where there is no controversy
at all? The creditor agrees to give a certain amount of money to the debtor provided that the surety
guarantees the payment of this debt. At this juncture, the surety could be involved or the surety
could be fixed later as was done in Kali Charan v Abdul Rahman13 The consideration in both these
cases is flowing from the creditor to the debtor. Consideration is the price paid in exchange of the
promise14. In the scenario being discussed, at the time of giving the consideration the parties know
exactly what this consideration is buying. This consideration is buying a guaranteed debt. S.127
of the Indian Contract Act gives this consideration the legal backing as enough to satisfy both the
debtor and the surety.

In the next case, we come to a guarantee contract which was formed after the debt contract was
formed but with a fresh consideration. Here, when the debt contract was formed, there were only
two parties, the understanding was that the consideration given by the creditor is buying a debt
which is not secured by a guarantor. Subsequently circumstances change and there is something
more that the debtor wants from the creditor; this could be anything from more time to repay the
debt to more line of credit. Now, a new contract is being formed. Here, the creditor is paying a
new consideration and the understanding now is that this new consideration is buying a guarantee
to the old debt. Since there is a consideration, this scenario will come under illustration (b) of S.127
and the contract is still valid.

13
Supra 7.
14
Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1.
In the last case, the guarantee contract is again formed after the debt contract but this time there is
no additional consideration paid by the creditor. Here, similar to the last scenario, the initial
position was that the consideration paid by the creditor will buy him a debt which is not secured
by a guarantor. Subsequently, the creditor meets the proposed surety and they agree to make the
loan guaranteed. Here undoubtedly, the creditor is getting something but with what is he buying
it. Consideration is a detriment suffered by the promisee15. Here, what is the detriment suffered by
the creditor? As for the money given earlier, that was already agreed to be consideration for him
getting an unguaranteed debt. Thus, there is nothing that is happening which is beneficial to either
the debtor or the surety. The only one benefitting is the creditor16.

15
Ibid.
16
Nanak Ram v Mehin Lal (1875) ILR 1 All 487.
Conclusion

An application of both the intrinsic and extrinsic sources of statutory interpretation on S.127 has
resulted in the following conclusion.

Unless, there is some fresh consideration flowing from the creditor, a creditor who did not know
he would have the benefit of a surety when he gave the debt cannot at a later stage acquire a
surety. In this case, the past consideration of having given the debt will not qualify as valid
consideration.

This conclusion was also analysed on a conceptual level and it was found that what was interpreted
from the statute stands under that analysis. Proving that past consideration is not valid for guarantee
contracts has in effect made the Indian position similar to the English position of law on this.
Bibliography

Cases:
 Astley Industrial Trust ltd v Grimston Electric Tools (1965) 109 S.J. 149.
 Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1.
 Guild v Conrad [1984] 2 QB 885.
 Kali Charan v Abdul Rahman AIR 1918 PC 226.
 M Ghulam Husain Khan v M Faiyaz Ali Khan AIR 1940 Oudh 346.
 Nanak Ram v Mehin Lal (1875) ILR 1 All 487.
 Ram Narain v Lt. Col. Hari Singh And Anr AIR 1964 Raj 176.
 State Bank of India v Premco Saw Mills AIR 1984 Guj 93.
 State Bank of India v Srimathi Kusum Vallabhdas Thakkar (1994) 1 GLR 655.
 Union Bank of India v Avinash P Bhonsle 1991 (3) BomCR 735.
 Y Venkatachalapathy Reddy v Bank of India 2002 (4) ALD 173.

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