NATIONAL UNIVERSITY OF ADVANCED LEGAL STUDIES

LAW OF SPECIAL CONTRACTS

PROJECT

SUBMITTED BY
ELIZABETH JAMES_1492
4TH SEM
NUALS.
CONTRACT OF GUARANTEE –
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 TRIPARTITE NATURE
Contract of guarantee is categorized as a specific performance contract under the Indian
Contract Act. Just as the name indicates, in contracts of guarantee, a person guarantees on behalf
of another person to perform a specific obligation only when the other person fails to do the
same. The unique nature of guarantee contracts is that it is a tripartite agreement. There are three
essential parties in every contract of guarantee, namely, the creditor, the principal debtor and the
surety. The person who gives the guarantee on behalf of the principal debtor for the default
payment is called the “surety”. A contract of guarantee is generally applied in situations where a
person wants to get a loan or goods on credit. The surety comes forward and secures the creditor
by promising to pay the amount in case of default by the principal debtor. A contract of
guarantee can be either oral or written; however, the English courts demand that the same should
be written. There are three agreements involved in guarantee contracts. The first contract is
explicitly between the principal debtor and the creditor, which is also the primary contract and,
there is a consideration that runs between them as in the form of money. The second agreement
is between the creditor and the surety and, the promise of repayment given to the creditor by the
surety acts as the consideration in this case. The third agreement can be drawn between the
principal debtor and the surety wherein the debtor is obliged to repay the amount that the surety
has guaranteed on his behalf.
Contracts of guarantee is utterly different from contracts of indemnity. Contracts of
indemnity are security against loss wherein the indemnifier promise to compensate the other
party for the loss suffered by him. There are only two parties in an indemnity contract, while a
contract of guarantee is between 3 parties. In a contract of indemnity, the indemnifier has the
primary liability, while a surety in a guarantee only has secondary liability. The indemnifier is
liable to repay the loss even when such a loss arose as a result of the performance of the
promisor or any other person. However, in a guaranteed contract, the surety will only be held
liable once the principal debtor fails to perform his obligation. In the case of Punjab National
Bank Ltd v. Bikram Cotton Mill and Anr. 1, the Court has laid down a clear distinction between a
contract of indemnity and a contract of guarantee.
The liability of a surety is clearly that of secondary liability as to the principal debtor, i.e., the
primary liability is always with the principal debtor. Only when the creditor has exhausted all
his remedies available against the principal debtor he can move against the surety. On an

1
1970 AIR 1973

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important note, the liability of the surety and the principal debtor is co-extensive. The expression
“co-extensive” clearly indicates the maximum liability of the surety. However, the surety can
limit his liability to a fixed amount that has to be expressly stated in the contract of guarantee.
Sec. 133 – Sec. 139 of the Contract Act states the ways and situations through wherein a
contract of guarantee can be revoked. A contract of guarantee can be of two types mainly: A
Specific guarantee and a Continuing guarantee. A Specific guarantee is where a surety gives the
guarantee in respect of a single specific transaction. In contrast, a continuing guarantee extends
to a series of transactions for a certain period. A continuing guarantee can only be revoked
through a notice of revocation or the death of the surety. There are certain vital features or
necessities to contracts of guarantee. This includes:
a. PRINCIPAL DEBT: The primary subject matter of a guarantee is to secure the debt of the
principal debtor. Hence, the existence of a recoverable debt is the essence of guarantee
contracts. If there is no principal debt, to begin with, there is no valid guarantee. In this
context, it is important to confer about the liability of a minor’s debt. The Indian Courts have
taken the position that, in case of the principal debtor being a minor, the entire liability will
shift to the surety2. The surety will take the primary liability in such cases and not a
collateral liability. However, the English position, on the contrary, explains that since the
debt of a minor is void ab initio, the surety will be discharged from all his liabilities 3. If we
observe both the positions, we can conclude that the Indian position is adopted to provide a
just and equitable remedy towards the creditor.
b. CONSIDERATION: As per Sec. 10 of the Act, consideration is a very significant element of a
contract. A guarantee without consideration will be considered void. S.127 of the Act clearly
explains that any action done or any promised for the benefit of the principal debtor will be
considered as sufficient consideration. It was observed in the case of SBI v. Kusum
Vallabhdas Thakkar4 that even the forbearance to sue the principal debtor by the creditor
would be considered as sufficient consideration. If the consideration failed, then there is no
contract of guarantee. In the case of Ujjal Transport Agency v. Coal India Ltd 5, the contract
was for cutting timber, and the payment for the same was secured by a bank guarantee.
However, the consideration failed as the forest officials refused to cut and remove the timber
and hence the guarantee cannot be invoked.

2
Kashiba v. Shripat Narshiv, (1895) ILR 19 Bom. 697
3
Coutts & Co. v. Browne Lecky, 1947 KB 10
4
SBI v. Kusum Vallabhdas Thakkar, (1994) 1 GLH 62
5
AIR 2011 Jha 34

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c. MISREPRESENTATION AND CONCEALMENT: It is the duty of the principal debtor
seeking security to acquaint the surety of all the necessary and relevant facts that are likely
to affect the responsibility of the surety. If the principal debtor actively conceals any material
fact about the contract to the surety, then it will be at the cost of the principal debtor himself.
Sec. 142 and 143 of the Indian Contract facilitates the same.

A critical case to be discussed on account of the tripartite nature of the guarantee contract is P J
Rajappan v. Associated Industries Pvt Ltd6 . In the instant case, the guarantor promised to stand
as a surety for the debt of the principal debtor towards the creditor.; But failed to sign the
contract due to an emergency promising that he will sign it later on. However, when the surety
was asked to fulfil his liability, he tried to wriggle out of his obligation by saying that he cannot
be held liable as he never signed the documents. The Kerala HC ruled that the contract of
guarantee is a tripartite contract, and in a case where there is evidence of the active involvement
of the guarantor, the mere failure on his part in signing the contract does not dissolve his liability
as a guarantor. Consequently, the guarantor, in this case, was directed to fulfil his extent of
liability. Henceforth, a contract of guarantee has a tripartite nature wherein the parties, the
principal debtor, the creditor and the surety, are bound by certain liabilities and rights. It must be
noted that the surety also enjoys some equitable rights against the creditor as in the form of the
right of securities or the right to share reduction. The surety can also avail the right of indemnity
and the right of subrogation against the principal debtor, thus securing the position of the surety.
To summarize, a contract of guarantee function to protect the creditor from any loss and these
types of contracts are very necessary to facilitate an individual to avail loans or goods on credit
or for employment.

6
1990 (1) KLJ 77

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 RESOURCES
1. (Singh, 2017)
2. (J. Beatson, 2010)