A guarantee contract is regulated by the Indian Contract Act, 1872, and consists
of three parties (principal debtor, creditor, surety) one of whom serves as the
surety in the event that the defaulting party fails to fulfil his obligations.
A contract of guarantee is needed when there is a need of loan, goods or
The guarantor guarantees the creditor that the individual in need
can be assured, however if the borrower defaults, he will bear responsibility
for repayment. As a result, we should conclude that a contract of guarantee is
an unseen protection granted to a borrower.
According to the law, if a contract cannot be decided or profit sharing is
insufficient, one party can file an appeal to force the latter party to comply
with the contract's terms. Since the relief is not the damages given by the
judge, the contract of assurance is called Specific Results. Rather than just
paying money for failure to meet contractual obligations, the party must meet
its contractual obligations, which include performing a particular action that
he agreed to do.
In the case that the individual for whom he has insured
defaults, the guarantor agrees to pay. The relief is unique in that the
guarantor is required to perform the basic duty that he agreed to under the
agreement, namely, pay the promised.
The Section 126 of the Indian Contract Act talks about contract of guarantee.
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
In a contract of guarantee there are three parties to a contract. They are:
- Principal debtor:
Principal debtor is a person or a party who borrows money and he is liable
Creditor is a person who has given something of value to borrow and will be
paid for it, as well as the person to whom the guarantee is given.
A surety is a person who gives a guarantee to pay on behalf of the default
of the principal debtor.
Rohan needs money for his business. He borrowed an amount of Rs.1 lakh from
Mohan. Sohna promises that in case of default on part of Rohan, he will pay the
amount to Mohan. In this case, Rohan will be principal debtor
, Mohan will
and Sohna will be surety
Contract of Guarantee essentials:
- An agreement between all the parties must be there:
The principal debtor, the creditor, and the surety, all three parties to
the contract, must enter into a contract with the consent of each other. It's
worth noting that the surety only agrees to be responsible for the principal
debtor's debt if the principal debtor specifically requests it. The guarantee's
contact with the loan specialist to go into an agreement of assurance without
the chief indebted person's information doesn't comprise an agreement of
According to section 127 of the ICA, anything is done or any promise made for
the benefit of the principal debtor is sufficient consideration to the surety
for giving the guarantee. One thing to note here is that the consideration
given by the creditor must be new.
In State Bank of India v Premco Saw Mill (1983) case, the State Bank
pulled out to the borrower litigant and furthermore compromised legitimate
activity against her, yet her significant other consented to become
guarantee and attempted to pay the responsibility and furthermore executed a
promissory note for the State Bank and the Bank avoided undermined activity.
A surety's responsibility is secondary in a contract of guarantee. This assumes
that, since the primary contract was between the creditor and the principal
debtor, the principal debtor bears the primary responsibility for fulfilling the
contract's terms. The surety is only responsible for repayment if the principal
Types of guarantee:
- Specific Guarantee:
A specific guarantee is one that is granted in respect of a particular debt or
specific transaction and is set to expire until the assured debt is paid or the
commitment is fulfilled.
- Continuing Guarantee:
A continuing guarantee is a series of continuous transaction. Section 129 of
the Indian Contract Act, 1872, defines a continuing guarantee. A proceeding
with ensure is a type of assurance that covers a few exchanges. Until the
guarantee denies it, it stretches out to all exchanges went into by the key
Rights of a Surety:
The guarantee gets various advantages in the wake of setting aside an
installment and releasing the chief borrower's risk.
- Right against the principal debtor:
Under Section 140: The right of surety on payment of debt or the right of
subrogation. This expresses that on the grounds that the guarantee gave a
guarantee to the borrower, and the bank has now left the scene subsequent to
accepting installment, the guarantee will presently regard the account holder as
though he were a leaser. So now, the guarantee has an option to recuperate the
sum (which he paid) from the essential borrower. A guarantee is qualified for
any of the leaser's cures against the borrower, including all of the debtor's
assets, according to a general principle.
- Right against the Creditor
Under section 141: Right to securities given by the principal debtor. This
expresses that when the guarantee takes care of the chief account holder's
obligation after the key indebted person defaults, he gets responsible to the
every one of the protections that the vital borrower provided for the loan boss.
The Surety does have the right to any securities received before or after the
guarantee was created, and therefore, it does not make a difference whether the
surety is aware of those securities or not.
The case of Craythorne v Swinburne:
The general rule of equity that the surety is entitled to every remedy which
the creditor has against the principal debtor.
- Right against the Co-sureties:
- Under section 138:
Release of one co-surety does not discharge others.
This expresses that when more than one party ensures the reimbursement of the
chief borrower's obligation, they are known as C0-guarantees, and they are
committed to contribute as consented to the installment of the guaranteed
obligation. The lender's arrival of one of the co-guarantees doesn't relieve
different guarantees of their commitments, nor does it soothe the delivered
guarantee of his commitments to different guarantees.
- Co-sureties to contribute equally, under section 146. Without an
agreement to the next, the co-guarantees are responsible to pay similarly,
as indicated by segment 146. This law would apply if co-sureties'
liability is joint or multiple, whether under the same or separate
arrangements, and whether they are aware of each other or not.
Ram, Mohan, Soham and Rohan are co-sureties for a debt of amount 1 lakh lent by
Golu to Goli. Goli defaults in repaying the loan. Then in that scenario Ram,
Mohan, Soham and Rohan are liable to pay 25,000 each.
- Under section 147:
Liability of co-sureties bound in different sums. Right when co-ensures
agree to guarantee different entireties, they ought to submit comparatively
up to the best aggregate guaranteed by all of them.
Discharge of Surety from Liability
The surety is discharged from the liability by:
- The revocation of the contract of guarantee
- The conduct of the creditor
- The invalidation of the contract
- The conduct of the creditor
- By Variance-Under section 133 which states that any variance, made
without the surety's consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to transactions
subsequent to the variance.
If the contract is altered by the creditor and debtor without surety's knowledge
then, the is released from the liability. This happens because a surety is
responsible what he promises in the guarantee, and any change made without the
surety's permission releases the surety from liability for amount that occur
after the alteration.
- Discharge of surety by release or discharge of principal debtor. – Under
A surety is released if the creditor enters into a contract with the principal
debtor that releases the principal debtor, or if the creditor acts or fails to
act in a way that releases the principal debtor.
- Arrangement between principal debtor and creditor – section 135 when the
creditor, without the consent of the surety, makes an arrangement with the
principal debtor for composition, or promise to give him time to, or not to
sue him, the surety will be discharged.
- Loss of security:
The guarantee is released under section 135, if the leaser settles on a
concurrence with the foremost account holder for piece, or vows to permit
him an opportunity to, or not to sue him, without the guarantee's assent.
- The invalidation of the contract of guarantee
A guarantee contract, like any other contract, can be avoided if the surety
chooses to make it void or voidable.
A surety may be discharged from the liability when:
- Guarantee obtained by misrepresentation – Under section 142.
When the creditor, with his knowledge or consent, makes a material truth
misrepresentation in the contract of guarantee, the contract is void.
- Guarantee obtained by concealment – Under section 143.
When a creditor obtains a promise by staying silent about a material part of
the contract's circumstances, the contract is void.
- Failure of co-surety to join a surety – Under section 144.
When a creditor agrees not to act on a promise unless another party joins as
a co-surety, the guarantee is void if the other person does not join.
Notice of revocation
- By notifying future transactions of the termination – under section 130
- Up to Rs. 4000, Hera is a surety on all credit payments made
by Sona to a shopkeeper. Hera gives the shopkeeper a note instructing him not to
sell any more products to Sona until the shopkeeper has supplied goods worth Rs.
2000. Hera is the one who is in control of all the previous transactions. He
will not be held liable for any transactions that occur after the revocation
notice has been sent.
- By the death of surety – under section 131
- The guarantee is cancelled on all potential transaction if the surety
- By change in terms and conditions.
- According to section 133, when the borrower and the principal debtor
change the terms and conditions of the contract without the agreement of the
surety. After such a transition of terms and conditions, the surety will be
released from all transactions.
- Amar rents Bunty his car for a fee, and Munna agrees to be the surety
for the loan Bunty owes Amar. Without consulting Munna, Amar and Bunty agree to
a higher rent. After the contract is amended, Munna will be released as a surety
in this case.
It is easy to conclude from a clear reading of the Contract Act that the surety
in a contract of guarantee is provided with several protections. The law is not
unfair, and it protects the surety's rights and ensures that the surety is not
placed in an unfavorable position. The Indian Contract Act of 1872 defined
rights, sought to limit the surety's liability, and included clauses defining
when the surety would be released without performing. As a result, it's fair to
assume that the surety is a favored instead of an unprotected debtor.
- Indiankanoon.org. 2021. Indian Kanoon - Search engine for Indian
Law. [online] Available at: Singh, A., n.d. Law of contract (a study of the Contract Act, 1872)
and specific relief.