CONTRACT OF GUARANTEE

SECTION 126:

“A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of default his default.”

i.e. undertaking by one person to pay the amount due from another person.

PARTIES INVOLVED IN CONTRACT OF GUARANTEE

1.Principal Debtor: the party on whose behalf

the guarantee is given.

2.Surety: the party who gives the guarantee .

3. Creditor: the party to whom the guarantee is

given.

(a contract of guarantee is the tripartite agreement)

ESSENTIALS AND LEGAL RULES FOR A VALID CONTRACT OF GUARANTEE-

1. It must be supported by Consideration. (Sec.127)

2. It must satisfy the requirements of a valid contract.

3. It must be made by the parties competent to contract.

4. There must be someone primary liable.

5. The promise to pay must be conditional.

6. There should be no misrepresentation. (Sec. 142)

7. There should be no concealment of facts. (Sec.143)

8. It must be oral or in writing. (Sec.126)

KINDS OF GUARANTEE:

1. Specific or Simple-

. Extends to a single transaction or debt.

2. Continuing Guarantee-

. Extends to series of transactions or debts.

Example: At A’s request B employed C for collecting rent of B’s zamindari. A Promised B to be responsible up to 50,000 for collection and payment by C of those rents. This is a continuing guarantee.

REVOCTION OF CONTINUING GUARANTEE

1.By the Notice of Revocation by the Surety (Sec.130) :

Example: A,a shopkeeper, agreed to supply some goods to B on Credit, at the request of C. And C gave a guarantee to A for the payment of the price up to Rs. 10,000. After three months, C revoked the guarantee by giving notice to A. But within these three months, A had already supplied goods to B worth Rs. 2,500.

REVOCATION CONT…….

2. By the Death of the Surety (Sec.131) :

Example: At A’s request B employed C for collecting guarantee to B to the extent of Rs.5,000 for the due collections of rent by C . A collection of Rs. 1,000 was made by C and thereafter A died. On A’s death, the guarantee gets revoked in respect of the collections made after A’s death. However, A’s legal representatives are liable up to Rs. 1,000 if C fails to give this amount to B.

NATURE AND EXTENT OF SURETY’S LIABILITY.

1. Surety’s liability is coextensive -

Example: A gave a guarantee to B for the repayment

of the loan due from C. On due date, C failed to repay

loan. In this case, A is liable not only for the amount of

the loan but also for any interest and other charges which

may have become due.

2.Surety's liability may also be limited.

3.Surety's liability arises immediately on default of the principal debtor.

4. Surety’s liability where the original contract between creditor and principal debtor is void or voidable.

5.Surety’s liability under continuing guarantee.

RIGHTS OF THE SURETY.

1. Rights against the principal debtor:

a. Right of subrogation.

The substitution of one person for another.

b. Right of indemnify.

As a matter of fact, in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety

But amount Wrongfully paid cannot be recovered.

2. RIGHT AGAINST THE CREDITOR:

a. Right to claim securities.

Example: A obtained a loan of Rs. 2,500 from B, A gave some jewelry as security. And A’s friend C also gave a guarantee for the repayment of the loan. After this contract of guarantee, due to fall in the price of jewelry B obtained some goods from A as a further security for the same debt. In this case, C is entitled to claim only the Jewelry from B. And he is not entitled to claim the goods from B as these obtained by the creditor (i.e. B) after the guarantee was given.

b. Right of set off.

c. Right to share reduction.

3. RIGHT AGAINST THE CO-SURETIES:

a. Right to contribution.

Example : A borrowed Rs. 10,000 from B. C,D,E

gave a joint guarantee for the repayment of the loan.

C, D and E have agreed among themselves that C will

be liable for 25 percent of the amount of loan, D also

for 25 percent , and E have for 50 percent . On the due

Date, A made default in the repayment of the loan. In

this case C is liable to pay Rs.2,5000, D Rs.2,500 and

E Rs. 5,000.

DISCHARGE OF SURETY FROM LIABILITY :

1. By the notice of revocation by the surety.

2. By death of the surety.

3. By variance in terms of the contract.

4. By release or discharge of the principal debtor.

5. By composition with the principal debtor.

6. By giving more time to the principal debtor.

7. By promise not to sue the principal debtor.

8. By impairing surety’s remedy.

9. By losing the security by the creditor.

10. By invalidation of the contract of guarantee.