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Issues: Whether, on the terms of a continuing guarantee requiring payment "on demand", the suit against the guarantors was barred by limitation, or whether limitation began only when a valid demand was made and refused.
Analysis: The guarantees were not ordinary guarantees; they expressly required the guarantors to pay the bank on demand and provided for interest only from the date of demand. In such a contract, the guarantor's liability arises when the creditor makes a lawful demand for payment and the guarantor fails to comply or refuses to pay. The Court distinguished a line of authority dealing with continuing guarantees that did not contain an on-demand stipulation, and held that those decisions did not govern a guarantee where demand was a contractual condition precedent. The cessation of operations in the borrower's accounts did not amount to a demand by the bank or a refusal by the guarantors. For limitation purposes, the material event was the demand dated 12.10.1987 and the subsequent refusal, not the dormancy of the accounts in 1986. On that basis, the suit filed within three years was within time. The Court also noted that the claim would be in time even if the residuary article of limitation were applied.
Conclusion: The suit was not barred by limitation and the finding of the courts below was incorrect; the issue was decided in favour of the appellant bank.
Final Conclusion: The decree of the courts below was set aside and the suit was decreed as claimed, with costs.
Ratio Decidendi: Where a continuing guarantee stipulates payment on demand, limitation against the guarantor commences only when a valid demand is made and is not complied with, and mere dormancy of the borrower's account does not start limitation.
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