CONTRACT OF GUARANTEE

GUARANTEE DEFINED

“An undertaking to answer for the payment or performance of

another person's debt or obligation in the event of a default by the
person primarily responsible for it.”
-- Oxford English Dictionary
 DEFINITION AS PER ICA

Section 126 in The Indian Contract Act, 1872:

“Contract of guarantee”, “Surety”, “Principal Debtor” and “Creditor” --

• 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’; the person in respect
of whose default the guarantee is given is called the ‘principal debtor’, and the
person to whom the guarantee is given is called the ‘creditor’.

• A guarantee may be either oral or written.

 ILLUSTRATION

• Two friends P and S go to an electronic goods shop. S says to the

shop-owner C “let P purchase a washing machine on credit. I will
pay you if P is unable to do so”. On this assurance, the sale is
confirmed. This is a Contract of Guarantee.
Three Contracts exist among the
parties:
1. Between Principal Debtor &
Creditor: The Principal
Contract to perform the
contractual obligations.
2. Between Surety & Creditor:
A Secondary Contract to
discharge the liabilities of the
Principal Debtor if he fails to
do so himself.
3. Between Principal Debtor &
Surety: An Implied Contract
that the Principal Debtor will
reimburse the Surety.
 ESSENTIALS OF A CONTRACT
OF GUARANTEE

Section 127 in The Indian Contract Act, 1872:

Consideration for Guarantee --

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

That is to say, a guarantee without consideration is void but there need

not be direct consideration between surety and creditor.
 SALIENT FEATURES OF A CONTRACT
OF GUARANTEE AS PER ICA

Section 127 in The Indian Contract Act, 1872:

Consideration for Guarantee --

Anything done, or any promise made, for the benefit of the principal
debtor, may be a sufficient consideration to the surety for giving the
guarantee.
 SALIENT FEATURES OF A CONTRACT
OF GUARANTEE AS PER ICA

Section 128 in The Indian Contract Act, 1872:

Surety's liability --
The liability of the surety is co-extensive with that of the principal
debtor, unless it is otherwise provided by the contract.
 SALIENT FEATURES OF A CONTRACT
OF GUARANTEE AS PER ICA

Sections 129, 130 & 131 in The Indian Contract Act, 1872:
Continuing Guarantee --
A guarantee which extends to a series of transactions, is called, a "continuing
guarantee".
Revocation of continuing guarantee --
A continuing guarantee may at any time be revoked by the surety, as to future
transactions, by notice to the creditor.
Revocation of continuing guarantee by surety’s death --
The death of the surety operates, in the absence of any contract to the contrary, as a
revocation of the continuing guarantee, so far as regards to future transactions.
 DISTINCTION BETWEEN
A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEE.

SL. CONTRACT OF GUARANTEE

CONTRACT OF INDEMNITY (SECTION 124)
NO. (SECTION 126)
1. Two Parties: It is a bipartite agreement between Three Parties: It is a tripartite agreement between the
the Indemnifier and Indemnity-holder. Creditor, Principal Debtor, and Surety.

2. Liability of the indemnifier is contingent upon Liability of the surety is not contingent upon any loss.
the loss. It exists from the moment of entering into the contract
but crystallizes on the Principal Debtor’s default.

3. Liability of the indemnifier is primary to the Liability of the surety is co-extensive with that of the
contract. principal debtor although it remains in suspended
animation until the principal debtor defaults. Thus, it is
secondary to the contract and consequently if the
principal debtor is not liable, the surety will also not be
liable.
 DISTINCTION BETWEEN
A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEE

SL. CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

NO. (SECTION 124) (SECTION 126)

4. The undertaking in indemnity is original. The undertaking in a guarantee is collateral to the

original contract between the creditor and the
principal debtor.

5. There is only one contract in a contract of There are three contracts in a contract of guarantee -
indemnity - between the indemnifier and the an original contract between Creditor and Principal
indemnity holder. Debtor, a contract of guarantee between creditor and
surety, and an implied contract of indemnity
between the surety and the principal debtor.

6. The reason for a contract of indemnity is to The reason for a contract of guarantee is to enable
make good on a loss if there is any. a third person get credit.