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Contract Of Guarantee

The Contract of Guarantee is defined under section 126 of Indian Contract Act, 1872.

Section 126 states:
A contract of guarantee is a contract to perform the promise or discharge the liability, of a third person in case of his default.

It further states that, the person who gives the guarantee is called surety , the person in respect of whose default the guarantee is given is called principal debtor, and the person to whom the guarantee is given is called creditor.

And, the last part of the section states that guarantee may be either oral or written.

Letís explain this with an example, if suppose A takes a loan of Rs. 1,00,000 from a Union bank of India. Here B, promises to bank that if A some how fails to return the amount,then I will make payment on his behalf.
Here, A is principal debtor, Union bank of India is creditor and lastly B will act as surety.

In this research paper, we are going to discuss about the contract of guarantee in more depth.

Main Feature Of Contract Of Guarantee

  1. The contract may be either oral or in writing:

    We have already discuss about this point in the introduction part of the paper. This is provided under section 124 of Indian contract Act, 1872. This point has been point of discussion because this part doesnít coincide with the English law. English law says that the contract of guarantee must be in written format with the consenting signature of the parties
  2. There should be a principal debt:

    This point discuss about most important part of the contract of guarantee, this act as subject of the contract of guarantee. Firstly, we have to understand that what is principal debt? Principal debt is amount or thing which is borrowed by the principal debtor by creditor, for which the surety as given the guarantee, if any default happen from principal debtor. So, if any principal debt will not exist then, automatically contract of guarantee will not exist as well. Letís understand this with an example. Suppose, A borrow a sum of Rs. 500 from a landlord B, for which the person C has given his surety. In this case if A will not borrow money from B, then contract of guarantee will not exist.
  3. Benefit to the principal debtor is sufficient consideration:

    As we have seen earlier as well that the consideration has always been prerequisites for the contract. Here as well, we have consideration as a essential element for the contract. But here we donít need to pay or perform anything extra for the consideration. In this case, any profit or benefit, which principal debtor will receive from the creditor will act as consideration for surety and for the contract of guarantee. Letís suppose, if A request for certain goods from B. And, for which C is acting as a surety, then the delivering of goods to A will consider as consideration for C, because A is benefited from this delivery of goods. This is mention under section 127 of Indian Contract Act, 1872. It states 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.
  4. Consent of the surety should not have been obtained by misrepresentation or concealment:

    The consent of the surety should not be obtained by any unfair means i.e, by misrepresentation or concealment of any material or fact of the contract. If any thing found further, this will subject to discontinuing of contract and contract can be further termed as a invalid contract. This is discuss under section 142 ans 143 of Indian Contract Act, 1872. Section 142 states, Any guarantee which has been obtained by means of misrepresentation or concealment of any material facts concerning the transaction, is invalid. Section 143 says, Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.

Difference between Contract of Guarantee and Contract of Indemnity
  1. There are two party in Contract of Indemnity, one is indemnity holder or indemnified and second is Indemnifier. While in Contract of Guarantee, there are three parties i.e, Principal Debtor, Creditor and Surety.
  2. Contract of indemnity consist of only one contract i.e, between indemnity holder and indemnifier under which indemnifier promises to indemnified the indemnity holder for any loss. Where as Contract of guarantee consist of three contract, one is between principal debtor and creditor, to perform there task against each other, second is between surety undertakes the performance of principal debtor, if any default happen by the principal debtor. And third one is the implied contract between principal debtor and the surety, in which principal debtor has to pay back to the surety which he has perform on his behalf under the guarantee.
  3. The object of contract of guarantee is the security of creditor, it means principal debtor is primarily liable for certain debt or obligation. A contract of indemnity is to protect the indemnity holder from any loss
  4. In the Contract of guarantee, surety liability is termed as secondary liability, which means if principal debtor makes default then, only surety is liable to pay the sum. Where as in the contract of indemnity, indemnifier is liable to protect the indemnity holder for any loss, and it is his primary liability.
  5. In contract of guarantee, once the surety has paid or completed the default part of principal debtor. He is vested with all the right which creditor has against the principal debtor. After which he can received the same amount of sum or the job which surety has done on his behalf as return. But in Contract of Indemnity, the indemnity holder is not required to pay back to indemnifier.
  6. In England, Contract of guarantee should be in the written format and Contract of indemnity may be either oral or written. But in India, Contract of Indemnity and Contract of guarantee, both may be in oral or writing. There is no such restriction.

Liability of Surety
Liability of surety is mentioned in the section 128 of Indian Contract Act, 1872. It saysí The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

The above section explains us that, at what extent the surety is liable. It says that surety is liable co-extensively with the principal debtor, in short we can say that the principal debtorís liability is equals to suretyís liability. If it is not provided in the contract additionally.
Letís suppose if principal debtor have to pay any sum to any person with some additional amount of interest, then surety will also have to pay the sum with some additional amount of interest. Also, if somehow principal debtor is exempted due to any reason, then surety will also be exempted in this scenario.

Co-Surety: Nature, Extent And Liability

Section 144 of Indian Contract Act, 1872 introduce the term Co-surety in the act. It states where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that person does not join.

The liability of sureties is co-extensive with that of principal debtor. As we have seen in section 128 of Indian Contract Act, 1872 that the liability of surety is co-extensive with principal debtor, the same is applicable with the co-surety as well.

Continuing Guarantee

A guarantee which is extend to series of the transactions is called a continuing guarantee. This guarantee is applicable for the limited period of time and amount.
Earlier it is known as Specific Guarantee, but later it is termed as Continuing Guarantee.

Eg. A guarantees payment for the transaction amount of Rs. 15,000, which B will give C in terms of good. Every time C pay the sum on time, but this time he found to be default. Now, If C fails to do the payment, then A will pay behalf on him.

Rights Of Surety

A surety has certain right against the principal debtor, creditor and co-surety.

Rights Against Principal Debtor

  1. Rights of Subrogation:
    When the principal debtor fails to pay or perform to creditor, than surety steps in and perform on behalf of principal debtor. After which surety is equipped with all the rights which creditor has against the principal debtor. And, hereby surety can recover the amount or performance which he has done on the behalf of principal debtor, it is know as Right of Subrogation. This is mention under section 140 of Indian Contract Act, 1872.
  2. Right of Indemnity against the principal debtor:
    This part discuss about section 145 of Indian Contract Act, 1872. When the principal debtor makes any default, then the surety fulfil all the needs of creditor, which has to be completed by the principal debtor according to the contract. Now, there is implied promise involved in this contract that if the surety is performing on the behalf of principal debtor, then principal debtor is liable to pay back all the amount which surety had pay on his behalf to creditor lawfully. He is vested with all those rights which creditor had against the principal debtor.

Rights Against Creditor

  1. Securities received by the creditor at the time of contract guarantee: This point brings out section 141 of Indian Contract Act, 1872 in the discussion, which says, Suretyís right to benefit of creditorís securities.

    A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

Rights Against Co-Sureties

  1. Right of Contribution against the Co-sureties in equal sums: Section 146 of Indian Contract Act, 1872 discuss about the provision regarding distribution of liabilities of debt. Section 146 says, Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor. This section speak up about the equal contribution by surety. It is irrelevant that whether the sureties have undertaken the contract individual or in a group. Whether they are aware about the other sureties or not, they have to divide the amount of debt equally. This is all about this section.
  2. Right of Contribution against the Co-sureties in equal sums : In section 147, it says, Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit." In many conditions, the co-sureties are free to make a contract in between themselves, about the different proportional of the liability. The principal debtor and the creditor canít interfere in between them. There will be a different maximum limit for different sureties. There must be consent of all the other surety members, if any one member is not ready with the contract, then contract will be quashed.
  3. Right of Contribution: If due to any reason, one of the surety has pay all the debts to the creditor, then he is liable to get back the rest of the money from other sureties, which he was not entitled to pay. In this there is no need to take the consent of the other sureties.

    Award Winning Article Is Written By: Mr.Ashish Kushwaha
    Awarded certificate of Excellence
    Authentication No: MA114317233661-23-0521

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