ContraCt ofguarantee

Course: LLB IISubject : Company Act

Unit: I

Contracts of Guarantee

• Sec 126 deals with contract of guarantee. As per this section contract of guarantee is a contract to perform the promise, or discharge the liability of the third person in case of his default.

Parties to contract of guarantee

• The person who gives the guarantee is called the surety

• The person in respect of whose default the guarantee is given is called the Principal debtor

• The person to whom the guarantee is given is called the creditor.

Types of guarantees

• Specific Guarantee:- it covers only one transaction or objective ,is limited to a certain sum of money and is limited as to time

Types of guarantees

• Continuing Guarantee:- it covers a series of transactions subject to the limit as mutually agree upon irrespective of the payments towards the advance and irrespective of the fluctuations of the balance in the debtors account

Revocation of continuing Guarantee

• By the surety giving notice oral or in writing to the creditor as to future transitions

• In the absence of a contract to the contrary, by the death of the surety as to future transactions

Liability of surety

• According to sec 128 the liability of the surety is co extensive with that of the principle debtor, unless otherwise provided by the contract.

Discharge of surety

• By revocation1.notice2.death3.novation(new contract)

• By conduct of the creditor:- Any variance made without the surety’s consent in the terms of the contract between the principle debtor and the creditor, discharge the surety as to transactions subsequent to the variance

Discharge of surety

• By Invalidation of Contract:- Gurantee obtained by means of either misrepresentation or concealment of material fact which the creditor was aware of at the time of entering into the contract invalidates the guarantee and discharges the surety

• Where there is no consideration between the creditor and the principal debtor, the surety is discharged.

CONSIDERATION IN A CONTRACT OFGUARANTEE (Sec. 127)

• Anything done, or any promise made, for the benefit of principal debtor may be a sufficient consideration to the surety for giving the guarantee.

• Essentials of contract of guarantee• 1. There must be a debt existing, which should be

recoverable.• 2. Existence of three parties in a contract of guarantee, i.e.,

principal debtor, • creditor and surety.• 3. There must be a distinct promise, oral or written, by the

surety to pay the debt in case of default committed by the principal debtor.

CONSIDERATION IN A CONTRACT OFGUARANTEE (Sec. 127)

• 4. The principal debtor must be primarily liable. Surety’s liability is secondary, i.e., surety’s liability arises only in case of default of the principal debtor.

• 5. There should be some consideration.• 6. The liability must be legally enforceable.• 7. The contract of guarantee must have all the

essentials of a contract.

Distinction between a contract of indemnity and a contract of guarantee

• indemnity

• 1. parties- there are two parties indemnifier and indemnity holder

• 2.Liability:the liability of the indemnifier is ‘primary’

• 3.contigency:the liability of indemnifier arises only on the happening of the contingency .

• 4. contract: there is only one contract between the indemnifier and indemnity holder.

• 5. object: the indemnity contract is reimbursement of loss. It provides ‘ security’.

• 6.Right to sue: indemnifier can not sue a third party for the loss suffered

• Guarantee• 1.there are three parties-- creditor, principal

debtor and surety.

• 2. the liability of surety is secondary the surety is liable only if the principal debtor fails. The liability of principal debtor is primary.

• 3. there is an existing debt or duty, the performance of which is guaranteed by the surety.

• 4. there are three contract one contract between the creditor and principal debtor , second between surety and creditor, third between surety and principal debtor.

• 5.the contract of guarantee provides ’surety’ to the creditor.

• 6. surety can sue the principal debtor.

Contract of Insurance, Guarantee and Indemnity distinguished

• Contract of Insurance, Guarantee and Indemnity distinguished

• In a contract of insurance, pure and simple, insurer is not a surety.

• In a contract of guarantee, there must always be three parties in contemplation;

• a principal debtor a creditor and a third party who in consideration of the same act or promise on the part of the creditor,

• promises to discharge the debtor’s liability if the debtor failed to do so.

• In a contract of indemnity, however, the promisor makes himself primarily liable and undertakes to discharge the liability in any event.

CONTINUING GUARANTEE

• CONTINUING GUARANTEE (Sec. 129)• A guarantee which extends to a series of

transactions is called a “continuing guarantee.”

• A guarantee may cover a single or specific transaction or a series of transactions. Series of transactions implies series of separate and distinct future transactions.

Revocation

• Revocation of a continuing guarantee• A continuing guarantee can be revoked only as to

‘future transactions’ in any of the following ways:• 1. By Notice: (Sec. 130) A continuing guarantee may

at any time be revoked by the surety, as to future transactions, by notice to the creditor.

• 2. By death of the surety: (Sec. 131) In the absence of any contract to the contrary, death of surety operates as revocation of a continuing guarantee, so far as regards future transactions

Revocation• .• 3. By discharge of surety: Continuing guarantee is also revoked

when the surety is discharged in any of the following ways:• (i) By variance in the terms of contract: (Sec. 133)• (ii) By release or discharge of principal debtor: (Sec. 134)• (iii) By creditor compounding with the principal debtor• (iv) By creditor’s act or omission impairing surety’s eventual

remedy: (Sec. 139)• (v) By creditor losing security against the principal debtor:

(Sec.141)• (vi) By misrepresentation: (Sec. 142)• (vii) By concealment: (Sec. 143)• (viii) Failure of co-surety to join: (Sec. 144)

EXCEPTIONS

• WHEN SURETY IS NOT DISCHARGED?• EXCEPTIONS (Secs. 136-138)• In the following cases, the surety is not discharged:• (1) When agreement is made by creditor with third

person to give time to principal debtor: (Sec. 136)• (2) Creditor’s forbearance to sue the principal

debtor: (Sec. 137)• (3) Release of one co-surety: (Sec. 138)

INVALID GUARANTEES

• INVALID GUARANTEES• Under the following circumstances, the contract of

guarantee shall be invalid:• 1. Guarantee obtained by misrepresentation:• 2. Guarantee obtained by concealment: (Sec. 142)• 3. Guarantee or contract that co-surety shall join:

(Sec. 144)• 4. Essential elements absent:

RIGHTS OF SURETY

• 1. Right of Subrogation: (Sec. 140) — Right of a surety against principal debtor:

• 2. Right to benefit of creditor’s securities (Sec. 141) — Right of surety against the creditor:

• 3. Right to indemnity: (Sec. 145) — Right of surety against the principal debtor:

• 4. Right to be contributed equally in case where two or more persons are cosureties.

LAW AS TO CO-SURETIES

• Right of a surety against the co-surety (Sec. 146)• Co-sureties bound in different sums: Co-sureties

who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit ( Sec. 147).

• Surety’s liability: (Sec. 128)• The liability of the surety is co-extensive with that of

the principal debtor, unless it is otherwise provided by the contract.

ESSENTIAL FEATURES OF GUARANTEE

• Concurrence of three contracts• Primary liability is that of the principal debtor • In case the debtor is a minor , the surety’s liability

becomes primary• All the essentials of a valid contract• It may be in writing or oral • There need not be full disclosure of facts to the

surety before he gives the guarantee

References

• Avtar Singh : Contract Act, Eastern• Beatson : Anson's Law of Contract, Oxford

Thank You