Contract of Guarantee

Presented by- Divyansh

 According to Section 126 of the
Act, “A contract of guarantee is
a contract to perform the
What is promise, or discharge the
liability, of a third person in case
contract of of his default”. The object of
guarantee? contract of guarantee is to
enable a person to get a loan or
goods on credit or to get an
employment.
Parties involved in
Contract of
Guarantee
A contract of guarantee has three
parties, viz., the surety, the principal-
debtor and the creditor.
• 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.
Relationship among Parties

• One, between the creditor and the principal-debtor creating the debt, etc.
• Second, between the surety and the creditor guaranteeing the
performance
• Third, between the principal-debtor and the surety by which the principal-
debtor requests the surety to act as such and impliedly promises to
indemnify the surety in case surety is called upon by the creditor to pay off
the debt due by the principal- debtor.
 These must be someone liable as principal-debtor.

There must be consideration.

Essential
Features of a There should not be misrepresentation or
Contract of concealment of material facts.

Guarantee
All the parties must consent.

Writing is not necessary.

 Contract of Indemnity
A contract of indemnity is a contract by
which one party promises to save
another harmless from loss caused as
a result of transaction entered at the
instance of the promisor.

Contract of Indemnity vs.

Contract of Guarantee
Contract of Guarantee
A contract of guarantee is a contract to
perform the promise, or
discharge the liability, of a third person
in case of his default.
Nature and Extent of Surety’s Liability

The liability of the surety is only secondary.

In case of default by the principal debtor it is open to the creditor not to sue the principal-debtor first; he
may straightway proceed against the surety, unless the contract provides that the creditor has to sue the
principal-debtor first, and then only the surety.

Where a creditor hold securities from the principal-debtor, he (the creditor) need not resort to these
securities before suing the surety, unless there is a contract to the contrary.

Once the liability of the surety arises, it is co-extensive with that of the principal-debtor.
Any guarantee which has been obtained by the creditor misrepresenting a material part of the transaction or by keeping
silence as to material circumstances is not valid and therefore the surety will not be liable in such cases (Sections 142 and
143).

It is not necessary that surety is liable only if the principal-debtor is liable.

Where a person gives a guarantee upon a contract that a creditor shall not act upon it until another person has joined in it as
co-surety, the guarantee is not valid if the other person does not join.

The contract of guarantee may provide for conditions precedent to the surety’s liability.

A continuous guarantee is not exhausted by the first advance or credit upto the specified limit.
Thank You!