Guarantee obtained by concealment invalid.— Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances, is invalid.
Illustrations
(a) A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.
Guarantee obtained by hiding facts is not valid
If a creditor hides important facts (material circumstances) while taking a guarantee, the guarantee becomes invalid.
In simple words, a surety must know all important facts before agreeing to give a guarantee. If the creditor keeps silent about something important, the surety is not bound by the guarantee.
Examples:
(a) A hires B as a clerk to collect money. B does not give a full account of the money he collected. A asks B to provide security for properly accounting. C agrees to give a guarantee for B. But A does not tell C about B’s past misbehavior. Later, B fails to account properly. In this case, C’s guarantee is not valid, because A hid important facts.
(b) A guarantees to C that he will pay for 2,000 tons of iron supplied to B. But B and C secretly agree that B will pay extra ₹5 per ton above the market price, to pay off an old debt. This secret is not told to A. Later, when payment is expected, A is not responsible, because he was kept unaware of the hidden agreement.
(c) A wants C to guarantee that B will do a job honestly. C asks about B’s past work. A does not tell C that B was fired earlier for stealing. Later, B steals again. C’s guarantee is not valid because A hid important information.
(d) A guarantees C that B will buy 100 bags of rice. B and C secretly agree that only 50 bags need to be delivered, and the rest is “off the books.” A does not know this. Later, B fails to deliver 100 bags. A’s guarantee is invalid, as the secret agreement was hidden.