A guarantor’s liability is based on an undertaking or promise to perform the thing or the act in the event of non-performance by the principal obligor. A guaranty itself is an undertaking by one person that if another person fails to perform or fulfil an obligation the guarantor would perform it. It is in the nature of a warranty that the thing guaranteed to be done shall be done despite the non-performance of it by another for whom the guarantee is made. It involves a liability to account to the person who first acted on the strength of the guarantee.
When can we say that a person is bound “in a fiduciary capacity” to account? The term fiduciary isderived from Roman Law. It means “as a noun, a person holding the character of a trustee or a character analogous to that of a trustee. As an adjective it means “of the nature of a trust; having the characteristics of a trust; analogous to a trust; relating to or founded upon a trust or confidence”. (Vide Black’s Law Dictionary. Fifth Edition). A person having duty, created by his undertaking to act primarily for another’s benefit in matters connected with such undertaking has fiduciary obligation. The expression fiduciary capacity is not restricted to technical or express trusts, but includes also such offices or relations involving the imparting of a confidence on the strength of which one person has acted. When a guarantor gives an undertaking to another for advancing money to a third person, the guarantor knows that the other person would not advance money without such a guarantee. In other words, the money is advanced on the strength of the confidence reposed in the guarantor of the performance promised or undertaken. In that view, the position of a guarantor is very much near to that of a trustee, albeit some features of d issimilarities between the two.
In K. P. Ambady v. Balan AIR 1959 Ker 273, the liability of a guarantor and a surety was considered vis-a-vis Clause (c) of the proviso to Section 51 of the Code of Civil Procedure. Varadaraja Iyyenger, J. considered the nature of the liability of a surety, who guaranteed the safe return of certain articles which were under attachment and which were taken by the principal debtor. It was held that the surety who guaranteed the return of the articles has the obligation in a fiduciary capacity and hence he is liable to be proceeded against under Clause (c) of the proviso to Section 51 of the Code of Civil Procedure. The learned counsel has made the following observation in the above context.
“Indeed it is unnecessary for the purpose of Clause (c) that there should be an express trust. It is enough there is a quasi-trust or a fiduciary position involving a liability to account in relation to another party.”
KERALA HIGH COURT -V. VELAYUDHAN Vs. STATE BANK OF INDIA -(1989) AIR(Kerala) 38