Key Words: mutual mistake in guarantee, estoppel, rectification


Defendant Company (S), in consideration of Plaintiff Company’s (C) giving credit to principle debtor (D), guaranteed the payment of debt, which was stated in deed to be secured by ‘validly issued shares in Company’. Though both S and C believed this fact to be true but later on when D failed to clear the debt, it was found that the shares were never issued. On suing S by C for paying off the guaranteed amount, S alleged that he wasn’t bound by the contract.


The Court observed that since S never undertook (or consented to, according to S.13 of ICA) the liability to guarantee the payment of an unsecured debt, such that both S as well as C were at the mutual mistake of fact essential to the formation of a contract (that the shares were validly issued when no such shares were issued) hence the contract of guarantee was void ab intio on account of S.20 of ICA.

As to the contention of the plaintiff that the defendant was estopped from denying the debt to be secured, the Court observed –“when a recital is intended to be a statement which all the parties to the deed have mutually agreed to admit as true, it is an estoppel upon all. But, when it is intended to be the statement of one party only, the estoppel is confined to that party, and the intention is to be gathered from construing the instrument.”  Holding the recital, in preset case, to be a statement as to matters which would normally be within the knowledge of plaintiff and not within the knowledge of defendant, namely, that plaintiff had made a loan to debtor and had obtained from him the stated security; estoppel didn’t bind the defendant.

Furthermore, the Court observed that in Equity, where there are proper grounds for rectifying a deed, e.g., because it is based upon a common mistake of fact, then to the extent of the rectification there can plainly be no estoppel based on the original form of the instrument”. Since in the present case, the deed, having been tainted with mutual mistake as to existence of the fact essential to the formation of contract, could have been rectified at a later stage by deletion of section dealing with security, there can simply be no estoppel as to the fact of existence of security.

Therefore, the defendant was held to be not bound by the guarantee.

Author: Vishrut Kansal

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