BATCH 2019-20

“FINAL PROJECT”

TITLE: - Contract of Guarantee

Topic: - Payment Guarantee Agreement

SUBJECT: - Law of Contract

SUBJECT CODE:

Submitted to: Submitted by:

DR. Rahul Nikam
Associate Professor Name: - Rounak Sinha
Faculty of Law, Marwadi University Roll No. 91901140001
B.A.L.L.B Hons. (SEM 2)
 DECLARATION
I ROUNAK SINHA certify that the work embodied in this project work, entitled
“Payment Guarantee Agreement”, is my own bona-fide work carried out by
me under the supervision of Dr. Rahul Nikam of Faculty of Law, Marwadi
University. The matter embodied in this Project has not been submitted for the
award of any other degree/diploma.
I declare that I have faithfully acknowledged, given credit to and referred to the
authors/ research workers wherever their works have been cited in the text and
the body of the project. I further certify that I have not willfully lifted up some
other's work, para, text, data, results, figures etc. reported in the journals, books,
magazines, reports, dissertations, theses, etc., or available at web-sites and
included them in this project work and cited as my own work.

Signature of the Student

Date:
Place:
 SUPERVISOR’S CERTIFICATE

This is to certify that the work embodied in the accompanying project entitled
“Payment Guarantee Agreement” has been carried out entirely by ROUNAK
SINHA under my direct supervision and guidance and that the candidate has
fulfilled the requirements of the regulations laid down for the partial fulfillment
of B. A. LL. B Hons. Degree examination in the course of Law of Contract
(Semester I), Faculty of Law, Marwadi University.

DR. RAHUL NIKAM

Associate Professor (Law)
Faculty of Law, Marwadi University.
 ACKNOWLEDGEMENT
I would like to express my thanks to all the people who have helped me most
throughout my project, be it directly or indirectly. I am most grateful to my
teacher Dr. Rahul Nikam who actually inspired me to do this project by
providing this opportunity.

A special thanks goes to my classmate JAINAM SHAH who helped me out in

completing the project, where they all exchanged their own interesting ideas, and
made me realize both the perspectives to the issue and thus made it possible to
complete my project with all accurate information. I wish to thank my parents for
their personal support or attention who inspired me to go my own way.

Last but not the least, I would also extend my appreciation to those who could
not be mentioned here but well played their role to inspire the curtain.
 Table of Contents
Chapter 1 INTRODUCTION…………………………………………………6
1.1 STATEMENT OF PROBLEM……………………………………………………………8
1.2 OBJECTIVES……………………………………………………………………………..8
1.3 HYPOTHESIS……………………………………………………………………………8
1.4 RESEARCH METHDOLOGY…………………………………………………………..8

Chapter 2. ESSENTIALS OF CONTRACT OF GUARANTEE……………9

Chapter 3. DATA INTERPERATION……………………………………...11
Chapter 4. DRAFT MODEL OF CONTRACT…………………………….19
Chapter 5. Annexure…………………………………………………………20
 CHAPTER 1
INTRODUCTION

Definition and Meaning

A contract of guarantee is in essence a contract by which one person (the guarantor) agrees to
answer for some liability of another (the principle debater) to a third person (the creditor).
These types of contract may be constituted by a personal engagement on the part of the
guarantor or by a charge on property without any personal liability or by both.
Prima Facie a guarantor, does not merely undertake to perform if the principle debater fails to
do so; he undertakes to see that the principle debtor will perform. Important results flow from
the prima facie – is rule of construction.
It was held in Moschi v. Lep Air Services Ltd1 that , the guarantor is normally liable to the
same extent as the principle debtor for damages for breach of later’s obligations even though
he has not in terms guaranteed the payment of damages.
In English law, Guarantee has been defined as “a promise to answer for the debt, default or
miscarriage of another”. Thus a contract of guarantee is a collateral engagement to be liable for
the debt of another in the case of his default.
Section 126 of Indian Contract Act defines “Contract of Guarantees”; a contract of guarantee
is a contract to perform the promise, or discharge the liability, of a third person in case of his
default. The person who gives the guarantee is called the ‘Surety’, and the person in respect
of whose default the guarantee is given called the ‘Principle debtor’, and the person to whom
the guarantee is given is called the ‘Creditor’.
As per the section 126 of the Act, guarantee may be either oral or written.

1
Moschi v. Lep Air Services Ltd(1973) AC 331
What is Payment Guarantee Agreement?

A payment guarantee provides the beneficiary with financial security should the applicant fail
to make payment for the goods or services supplied.
Payment guarantees mitigate Credit or country risk when selling on an open account basis.
They are often used to cover the non-payment of debts arising under a transaction or over a
period of time. A payment guarantee sometimes offers a type of collateral in exchange for the
promise of payment at a future time, effectively minimizing the risk for the company
conducting the sale. It usually takes the form of an agreement and different types are often
seen. Such guarantees generally run up to the final scheduled date of payment, and also include
a grace period to allow the beneficiary to make demands in the event of non-payment.

In this Project, The Researcher is preparing a model draft of a Payment Guarantee Agreement
between Landlord and Tenant. The research was conducted using Survey Method. A structured
questionnaire was developed and distributed among 05 respondents for collecting the data.
Respondents were selected based on accessibility to the researcher. A detail description
required for the Guarantee Contract has been covered.
 STATEMENT OF PROBLEM

The payment guarantee needs a clear statement of the guarantor’s obligations – i.e. an
unconditional promise to make any payment that the buyer under the contract fails to make.
Timing is important as well as the way that a notice requiring payment will be given to the
guarantor.
How long the guarantor will have this liability also needs to be spelt out. It will usually
continue for as long as the buyer under the contract has a liability to the supplier.

OBJECTIVES
1. To understand the Contract of Guarantee.
2. To study the Payment Guarantee Agreement.
3. To analyse the contractual agreements between the guarantor and the lender.
4. To draft the agreement of Payment Guarantee.

RESEARCH DESIGN
A research design is considered as the framework or plan for a study that guides as well as
helps the data collection and analysis of data. Empirical method will be use in this study. The
primary source of data is respondents will be concerned and collected by using a predefined
questionnaire. The Source of Secondary data in this study will be from books, magazines,
journals and websites. Data will be analysed by simple percentage analysis, tabular and pie
chart presentation.
Sample Technique: - The Research will conduct using survey method. A structured
questionnaire was distributed among 05 respondents for collecting the data. The analysis of
data collection will be completed and presented symmetrically with the use of MS-Excel and
MS-Word.
 CHAPTER 2
ESSENTIALS OF CONTRACT OF GUARANTEE

1. Concurrence of All the Parties

All the three parties namely, the principal debtor, the creditor and the surety must agree to make
such a contract.
2. Liability
In a contract of guarantee, liability of surety is secondary i.e., the creditor must first proceed
against the debtor and if the latter does not perform his promise, then only he can proceed
against the surety.
3. Existence of a Debt
A contract of guarantee pre-supposes the existence of a liability, which is enforceable at law.
If no such liability exists, there can be no contract of guarantee. Thus, where the debt, which is
sought to be guaranteed is already time barred or void, the surety is not liable.
4. Consideration
There must be consideration between the creditor and the surety so as to make the contract
enforceable. The consideration must also be lawful. In a contract of guarantee, the
consideration received by the principal debtor is taken to be the sufficient consideration for the
surety.
Thus, any benefit received by the debtor is adequate consideration to bind the surety. But past
consideration is no consideration for a contract of guarantee. There must be a fresh
consideration moving from the creditor.
5. Writing not Necessary
A contract of guarantee may either be oral or written. It may be express or implied from the
conduct of parties.
6. Essentials of a Valid Contract
It must have all the essentials of a valid contract such as offer and acceptance, intention to
create a legal relationship, capacity to contract, genuine and free consent, lawful object, lawful
consideration, certainty and possibility of performance and legal formalities as per section 10
of the Indian Contract Act.
7. No Concealment of Facts
The creditor should disclose to the surety the facts that are likely to affect the surety’s liability.
The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is
invalid if the creditor obtains it by the concealment of material facts.
8. No Misrepresentation
The guarantee should not be obtained by misrepresenting the facts to the surety. Though the
contract of guarantee is not a contract of uberrimae fidei i.e., of absolute good faith, and thus,
does not require complete disclosure of all the material facts by the principal debtor or creditor
to the surety before he enters into a contract. But the facts, that are likely to affect the extent of
surety’s responsibility, must be truly represented.
 CHAPTER- 3
DATA INTERPRETATION
The data analysis and interpretation for this research is based on primary data collected from
the respondents.
Period of Study: - The study was conducted during the period of 5-10 Feb.
Sample Technique: - The Research was conducted using survey method. A structured
questionnaire was distributed among 05 respondents for collecting the data. General discussion
are also made at the time of filing up of questionnaire. The analysis of data collection is
completed and presented symmetrically with the use of MS-Excel and MS-Word.

Part 1

Distribution of age on the basis of Age

 Distribution of Respondents on the basis of Gender

It is evident from the pie chart that Majority of Respondents (80%) belong to male group.

Distribution of Respondents on the basis of Educational Background

It is clear from the above pie chart that all the respondents are graduated.
 Distribution of Respondents on the basis of Occupation

As per the Analysis, It was found that majority of respondents (60%) are students.

Distribution of Respondents on the basis of Monthly Income

It was found that majority of Respondents had monthly income more than 20,000.
 CHAPTER 4

DRAFT MODEL OF CONTRACT

PAYMENT GUARANTEE AGREEMENT

THIS AGREEMENT OF GUARANTEE dated the day of 10 Feb 2019 BETWEEN: Rounak
Sinha (hereinafter called the “Guarantor”), and Jainam Shah (hereinafter called “Creditor")

WHEREAS Atul Sinha (the “Principle Debtor”) has agreed to borrow from the creditor in the
sum of 50 thousand rupees pursuant to a commitment letter dated the 25 Feb 2020, between
the Creditor and the Principle Debtor.
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
premises the Guarantor covenants and agrees with the Creditor as follows:

SECTION 1. PAYMENT GUARANTEE AGREEMENT

1.1 For good and valuable consideration, the Guarantor:
(a) unconditionally guarantees and covenants with the Creditor that the Guarantor will duly
and punctually pay the all debts and liabilities, present or future, direct or indirect, absolute or
contingent, matured or not at any time owing by the principle debtor to the Creditor upon
demand wherever incurred and whether incurred by the Principle Debtor alone or with another
or others, including, without limitation, all of the principal of, interest on and all other moneys
owing as and when the same become due and payable; and
(b) agrees to indemnify and save the Creditor harmless from and against all losses, damages,
costs and expenses which the Creditor may sustain, incur or be or become liable for in respect
of all debts and liabilities secured by a mortgage granted by the Principle Debtor to the Creditor,
including:
(i) The failure, for any reason for the Principal Debtor to pay the debts and liabilities or to do
any other act, matter or thing pursuant to the provisions of the mortgage or any other of the
loan documents; and
(ii) any act, action or proceeding of or by the Creditor for, or in connection with, the recovery
of the debts and liabilities or any part thereof or obtaining performance by the Principle Debtor
or person of any other act, matter or thing, pursuant to the provision of the mortgage or other
loan documents.
(The “Principle Debtor Liabilities”)
SECTION 2. DEFAULT AND ENFORCEMENT
2.1 If the Guarantor shall fail on demand to make payment pursuant of the Principle Debtor
Liabilities. The Creditor may in its discretion proceed with the enforcement of its rights
hereunder and may proceed to enforce such rights or from time to time any thereof prior to,
contemporaneously with or after any action taken under any security or other documents
delivered by the Principle Debtor or others to the Creditor. The Guarantor shall pay on demand
all costs and expenses (including legal fees on a solicitor and own client indemnity basis)
incurred by the Creditor in enforcing or attempting to enforce its rights hereunder and all
proceedings taken in relation hereto with interest thereon at the rate of interest provided for in
the security or loan documents.
2.2 All sums paid to or recovered by the Creditor pursuant to the provisions hereof shall be
applied by it against all amounts owing in such order as the Creditor in its sole discretion may
determine.
2.3 The Creditor may waive any default of the Guarantor hereunder upon such terms and
conditions as it may determine provided that no such waiver shall extend to or be taken in any
manner whatsoever to affect any subsequent default or the rights resulting therefrom.
2.4 Any moneys paid by or recovered from the Guarantor hereunder shall be held to have been
paid in discharge of the liability of the Guarantor hereunder, but not in discharge of the liability
of the Principle Debtor, and in the event of any such payment by or recovery from the
Guarantor, the Guarantor hereby assigns any rights with respect to or arising from such
payment or recovery (including without limitation any right of subrogation) to the Creditor
unless or until the Creditor has received in the aggregate payment in full of all moneys.
2.5 The liability of the Guarantor under this Guarantee is absolute and unconditional. It will
not be limited or reduced, nor will the Creditor be responsible or owe any duty (as a fiduciary
or otherwise) to the Guarantor, nor will the Creditor's rights under this Guarantee be prejudiced.
2.6 The Guarantor, if more than one, agrees to be jointly and severally liable under this
Guarantee with all other Guarantors.
2.7 This Agreement shall be construed in accordance with and governed by the laws of the
Province of Alberta and shall extend to and be binding upon the heirs, executors, administrators
and personal representatives of the Guarantor.
IN WITNESS WHEREOF the Guarantor has executed this Guarantee.
Creditor: - Jainam Shah Witness:-
Visnagar, Gujrat (362358) 1. Tushar Jain
Mob No. 93231529850 2. Ram Malani

Principle Debtor: - Atul Sinha Witness:-

Patna, Bihar (800010) 1.Arvind Kumar Sinha
Mob no. 9999215889 2. Sefali Sinha

Guarantor: - Rounak Sinha Witness:-

Rajkot, Gujarat 1.Yashi Jain
Mob No. 9113342838 2. Medha Joshi
ANNEXURE:-
QUESTIONNAIRE:-
1. Name of the Guarantor:-
2. Name of the Borrower:-
3. Name of the Lender:-
4. How many numbers of Guarantors?
5. Do you agree to be jointly and severally liable?
6. Do you unconditionally guarantees and covenants to pay all the debts and liabilities, when
the owing became due or not paid by the borrower?
7. Do you agree to indemnify and save the lender harmless from and against all loses,
damages, costs and expenses which the lender may sustain?
8. Do you agree to pay all the demanded costs and expenses incurred by the lender in
enforcing or attempting to enforce its rights i.e. legal fees?
9. What is liability of the guarantor? Is it absolute and unconditional or it will be reduced?
10. Which law will govern the Contract?