Saturday, November 03, 2007

Contract Act_Practical Problems_57

A bank sanctions an overdraft limit against the security of a continuing guarantee. The surety dies. Can the bank proceed against the heirs of the surety under the guarantee and, if so, to what extent ?

The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee as regards future transactions. It may, however, be noted that the estate of the surety shall be liable for all transactions entered into between the creditor and the principle debtor prior to the death of the surety, unless there was a contract to the contrary. However, his estate shall not be liable for the transactions entered into after his death, even if the creditor has no notice of the death.

Thus, in the given problem, since there is nothing against attachment of surety's properties after his death, the heirs of the surety shall be liable for the debit balance in the overdraft account but this liability shall be limited to the higher of the following two:

1. The amount of debit balance in the overdraft account as on the date of surety's death;
and

2. The value of the surety's estate acquired by the heirs.

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