By- Shrasti Singh
The contract of guarantee is one of the important topics under the Indian contract Act, 1872. It is also known as a contract of surety. It can be defined as a specific contract entered into for the purpose of performing the promise or discharging the liability of the third person whenever he/she is at fault.
The object of contract of guarantee is to enable a person to obtain an employment, a loan or goods on credit. Section 126 of the Indian Contract Act provides the meaning of contract of guarantee as a contract to perform the promise, or discharge the liability of a third person in case of his default.
There are three parties in a contract of guarantee-
- The person who gives the guarantee is known as ‘surety’.
- The person in respect of whose default the guarantee is given is known as ‘the principle debtor’.
- The person to whom the guarantee is given is called ‘the creditor’.
A contract is formed when all the three parties agree. A guarantee may either be in written or oral.
A and B enter in a stationary shop. A orders to deliver the books to B on credit. The shopkeeper said that he can give book on credit provided A gives the guarantee for the payment of books. A promise to guarantee the payment. In this illustration- A is the surety, B is the principle debtor and the shopkeeper is the creditor and this is a contract of guarantee.
It is important that all the essentials of a valid contract must be present in the contract of guarantee. For eg: The contracting parties should be competent to contract. In above illustration if B is a minor i.e., incompetent to contract. A would be regarded as the principle debtor and he will become personally liable to pay. It does not affect the Validity of a contract of guarantee. The only requirement for valid contract is that creditor and the surety must be competent to contract.
As we see the three parties in a contract of guarantee there is also three contracts as well.
- One contract is between creditor and the principle debtor, from which guarantee debt is arises.
- Second contract is between the surety and the principle debtor which implies that the principle debtor shall indemnify the surety, if he fails to pay and the surety is asked to pay.
- The third contract is between the surety and the creditor by which surety undertakes (guarantees) to pay the principal debtor’s liabilities (debt) if the principal debtor fails to pay.
There is no need of direct consideration between the surety and the creditor. It is sufficient (for the purposes of consideration) that something is being done or some promise is made for the benefit of principal debtor. It is believed that the consideration received by principal debtor is the sufficient consideration for the surety. The provision of Section 127, provides that anything done, or any promise made for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
Thus, the essential features of a contract of guarantee as follows:
- There should be existence of a debt for which some person other than the surety should be primarily liable.
- There should be consideration but it is not necessary that the surety should be benefited.
- All the essentials of a valid contract should be fulfilled.
- Creditor and surety should be competent to contact. i.e., principal debtor need not be Competent to contract.
- Surety is liable to pay only when the principal debtor’s default.
- Guarantee must not be obtained by misrepresentation under Section 142 of the Act.
- Guarantee must not be obtained by concealment of material facts under Section 143 of the Act.
KINDS OF GUARANTEE
Contracts of guarantees may be classified into two types:
- Specific guarantee – When a guarantee is given for a single debt or for specific transaction is called single or specific guarantee. It come to an end when the guaranteed debt is repaid or the promise is performed.
For example – A is a sari seller who supplies a 12 saries to B, under the contract that if B does not pay for the saries, his friend C would make the payment. This is a contract of specific guarantee. And C’s liability would come to an end, the moment the price of the saries is paid to A.
- Continuing guarantee- A guarantee which gives for a series of transactions, is called a continuing guarantee (Section 129). The surety’s liability in this case would be discharged when all the transactions are completed or till the guarantor revoked the guarantee as to the future transactions. For example – On M’s recommendation S, a wealthy landlord, employs Raju as his estate manager. It was the duty of Raju to collect rent every month from the tenants of S and remit the same to S before the 15th of each month. M, guarantee this arrangement and promises to make good any default made by Raju. This is a contract of continuing guarantee.
EXTENT OF SURETY’S LIABILBTY
In the contract of guarantee, the liability of surety is co-extensive with that of the principal debtor. It means that surety is liable to the same extent to which the principle debtor is liable. But it does not mean that if due to some reason the principal debtor cannot be held liable then the surety will also not be liable. Because the contract between the surety and the creditor is an independent contract and not a collateral one. For example, when the principal debtor is a minor, the surety is liable.
In a contract, if there is a condition precedent for the surety’s liability, the surety would only be liable when that condition is fulfilled first given under section 144 of the Act. For example, your friend A requires a loan of Rs. 10,000 from the bank. I and my two other friends C and D, agree to guarantee the repayment of loan. C does not sign the necessary. Documents. I and my friend D are also not liable on this guarantee because it is a condition precedent to your guarantee that the repayment of loan shall be guaranteed by all the three.
In case of a continuing guarantee the surety shall be liable for all such transactions which have taken place up to the time of termination of guarantee.
RIGHTS OF A SURETY
After making a payment and discharging the liability of the principal debtor, the surety gets various rights. These rights can be studied under three heads: (i) Rights against the principal debtors. (ii) Rights against the creditor, and (iii) Rights against the co-sureties.
RIGHT AGAINST THE PRINCIPLE DEBTOR-
- Right of Subrogation under section 140 of the Act
- Right of Indemnity under section 145 of the Act.
RIGHT AGAINST THE CREDITOR-
- Right to Securities under section 141 of the Act.
- Right to Set off
RIGHT AGAINST THE CO-SURETIES-
- Right to Contribution under section 146 of the act.