The Contract of Guarantee is defined under section 126 of Indian Contract Act,
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
And, the last part of the section states that guarantee may be either oral or
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
Difference between Contract of Guarantee and Contract of Indemnity
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
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.
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.
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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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 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.
A guarantee which is extend to series of the transactions is called a
. 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
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
Rights Of Surety
A surety has certain right against the principal debtor, creditor and co-surety.
Rights Against Principal Debtor
- 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.
- 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
- 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
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
Rights Against Co-Sureties
- 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.
- 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.
- 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
Authentication No: MA114317233661-23-0521