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Essential of Guarantee

It is a contract to perform the promise or discharge the liability of a third person in case of his default. The guarantee is given by the surety to the creditor in respect of the principal debtor.

S becomes a surety to A (seller) in respect of goods given on credit to B. B fails to pay, S becomes liable.

As per Sec 126 of Indian Contract Act 1872 guarantee is defined as A contract of guarantee is a contract to perform the promise or discharge the liability of the third person in case of his default. The person who gives the guarantee id called surety ; the person in respect of whose default the guarantee is given is called the principle debtor , and the person to whom the guarantee is given is called as the creditor. A guarantee may be either oral or written.1

Essential features of Guarantee

  1. Must have all the essentials of the valid contract

    All the essential of a valid contract must be present in the contract of guarantee.

    Exception:
    1. A Consideration received by the principal debtor is a sufficient consideration to the surety for giving guarantee.
    2. Even if principal debtor is incompetent to contract, the guarantee is valid. But, if surety is incompetent to contact, the guarantee is void.
       
  2. Principal Debt

    The purpose of guarantee being to secure the payment of a debt, the existence of a recoverable debt is necessary2. It is of the essence of guarantee that there should be someone liable as a principle debtor and the surety undertakes to be liable on his default. If there is no principle debt, there can be no valid gutarantee.3A contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditors, and the surety. This was held by the House of Lord in a Scottish case of Swan vs Bank of Scotland 1836.

    The payment of the overdraft of a banker's customer was guaranteed by the defendant. The overdrafts were the country to a statute, which is not only imposed penalty upon the parties to such draft but also made them void. The customer having defaulted, the surety was sued for the loss caused to the party by the conduct of the defendant.

    In the case of Lima Leitao and Co. Vs Union of India AIR 1968 the court held that:
    If there is nothing due, no balance, the obligation to make that nothing good amount itself to nothing. If dept is due, if the banker is forbidden from having any claim against his customer, there is no liability incurred by the co-obligers. 4

    Guarantee For Void Debt, When Enforceable
    But sometimes a guarantee even for the void debt may be held enforceable. For example, the owner of the company guaranteed their company's loan which was as being ultra vires, the owner was nevertheless held liable5.

    The reason:
    May be that the voidability of the contract to a guarantee the debt of a company acting ultra vires in different in its consequences form the voidability brought about by the express and emphatic language of a statute.6

    Guarantee of minor's debt
    A similar problem comes when the debt of a minor has been guaranteed. The debt being void, is the surety is liable. This was decided in the case of Coutts and Co. Vs Browne Lecky7 which was decided by the King's bench and it was held that no liability should be incurred by the surety.

    In the Case of Kashiba Bin Narsapa Nikade Vs Narshiv Sheipat 81895 the High Court of Bombay observed:
    A surety to a bond passed by a minor for moneys borrowed for purposes of litigation not found to be essential, is liable to be sued on its whether the contract of the minor is considered to be void or voidable. The court observed no reason why a person can-not contract to guarantee the performance by the third person of the a duty of imperfect obligation. If the debt is void, the contract of the surety is not collateral, but a principal contract.
     
  3. Consideration

    Like every other contact, a contact of guarantee should also be supported by a valid consideration. A guarantee without consideration is void. But there need be no direct consideration between the surety and the creditor.

    Sec 127 of Indian Contract Act 1872 talks about the consideration for guarantee as Anything done, or any promise made for the benefit of the principle debtor, may be a sufficient consideration to the surety for giving the guarantee. 9

    Thus, where loan is given or goods sold on credit on the basis of guarantee that is sufficient consideration. Similarly, where a credit has already been given and the payment having become due, the creditor refrains from suing the principal debtor, that would be a sufficient consideration from giving a guarantee.

    Guarantee for the past debt.
    The guarantee for the past debt is invalid. The section says that anything done for the benefit of the principal debtor is a good consideration. But the word anything was explained in the case of M.Gulam Husain Khan Vs M. Faiyaz Ali Khan.10 the court held that the bond was not without consideration. The decision has been criticised in pollock and Mulla. The learned editor observed This seems to attribute and unnatural meaning to the word, which, it is submitted and as the rest of the section shows refers to an executed as distinguished from the executory consideration.

    Benefit Of Principle Debtor, Enough Consideration
    If the principal debtor gets a benefit, that suffices to sustain the guarantee. It will be of no consequences to say that the principal debtor had never requested for a guarantee or that it was given without his knowledge or consent. A contention of this kind was refuted by the Patna High Court in a case 10.

    Where the direction of a company who guarantee. The court relied upon the following statement of Lord Lore burn there are three possible variation in the parties to contract of suretyship. The first and the simplest case in that in which all the three parties concerned are parties to the contract of suretyship.

    The first and the simplest case is that in which all the three parties concerned are parties to the contract in sense the both the principal debtor and creditor agree that the surety's liability is a secondary liability only.
     
  4. Misrepresentation and Concealment

    A contract of guarantee is not a contract uberrimae fide or one of absolute good faith11. Thus, where a banker received a guarantee with knowledge of circumstances seriously affecting the credit of the customer, it was held that there was no duty to disclose this fact to the surety12.

    Yet it is the duty of the party taking a guarantee to put the surety in possession of all the that fact likely to affect the degree of his responsibility; and if he neglects to do so, it is at his peril. A surety ought to be acquainted with the whole contact entered with his principal. Where a person purchased land without disclosing that he was doing so on behalf of society for already embroiled in litigation, the court held that it could be said that the consent of the surety was taken by suppressing that it could be said that the consent of the surety was taken by suppressing the vital fact from him and therefore of the surety was taken by suppressing the vital fact from him and therefore he was not bound by the guarantee.

    Section 142:
    Guarantee obtained by misrepresentation, invalid- Any guarantee obtained by means of misrepresentation made by the creditor or with his knowledge and assent, concerning a material part of the transaction, is invalid 13.

    Section 143:
    Guarantee obtained by concealment, invalid- Any guarantee which the creditor has obtained by means of keeping silences as to material silences as to material circumstances in valid. Guarantees for the good conduct of a servant have invited more frequent application of this principle 14

    A very illustrative case is London General Omnibus Co Vs Holloway 1912 KB15
    The defendant was invited to give guarantee for fidelity of a servant. The employer had earlier dismissed him for dishonesty but did not disclose this fact to the surety. The servant committed another embezzlement. \

    The surety was held not liable. The surety believed that he was making himself answerable for a presumably honest man, not for a known thief. Even surety undertakes the risk of default, which is more in some cases and less in other depending upon circumstances. If the creditor is aware of circumstances affecting the risk. He should make the surety equally aware. Similarly, in a case before the Lahore High Court, fresh guarantees were obtained for the fidelity of a manager of a bank without disclosing his previous defalcations the sureties were held not liable for further defalcation.

    Lord Chelemsford observed with regard to a guarantee other than a guarantee of fidelity that a creditor is under no obligation to inform an intended surety of matters affecting the credit of the debtor, or of any circumstances connected with the transaction in which he is about to engage which will render the position hazardous.16 To the same effect is an observation in a Scottish case.

    There is nothing in authorities for holding that the fact that suspicious circumstances arises to the knowledge of a creditor, and are not communicates arises to the knowledge of a creditor and are not communicated at once to the cautioner is a ground for holding a cautioner freed from his obligation referring to the position of a bank, it was observed in the same. There is no authority for the view that it is the duty of a bank , whenever it become aware of any circumstances seriously affecting the credit of a customer, to communicate at once with any of that customer's friend whom may have cash credits on his behalf or guarantees for his pecuniary obligation17.
     
  5. Writing not necessary

    Sec 126 expressly declares that a guarantee may be either oral or written. But in England under the provision of the Statute of Frauds a guarantee is not enforceable unless it is written and signed by the party to be change. 18
     
  6. There must be someone primarily liable

    it is an essential requirement of a contract of guarantee that there must be someone primarily liable (i.e., liable as principal debtor) other than the surety. As a matter of fact, a contract of guarantee presupposes the existence of a liability enforceable by law. If there is no such primary liability, there can be no valid contract of guarantee. However, as slated above, the guarantee given for minor's debt is enforceable.
Case laws:
  • Kashiba v Shreepath
    One Lakshmi Bai entered into a bond to secure payment to the plaintiff of Rs. 1000 and interest. At the time of the execution of the bond, she was a minor and her father joined in the bond. The material terms of the contract by the father were: Should she (i.e., Lakshmi Bai) fail to pay, I will pay the above-mentioned amount personally without pleading her excuse and take back this bond. If it is not so paid, you should get it paid off from my income. The question was whether the father was liable on this guarantee in view of Lakshmi Bai herself not being liable because of her minority. In that case, the contract of the so-called surety is not a collateral, but a principal, contract. It is a conditional promise founded upon valuable consideration. It is like the case of a person, who to-appease the anger of a child, requests another to lend a guinea to the child to play with, and promises if the child loses or does not give back the coin, to make it good to the lender. The promise in such, circumstances is clearly that of a principal, and not of surety, and the situation is not altered by its being called a guarantee. On this reasoning, the learned Judge held that the surety and those claiming under him were liable to the promisee of the bond.
     
  • In P.J Rajappan v Associate Industries (P) Ltd, it was held by the Kerala High Court that since an oral guarantee is also valid, a person who otherwise appeared to be a guarantor was held liable though his signature did not appeared on the guarantee papers.
     
  • In Punjab National Bank Limited vs Bikram Cotton Mills & Anr it was held that though, the bond, it is true, did not expressly recite that the Company was the principal debtor; it is also true and the Company did not execute the bond. But a contract of guarantee may be wholly written, may be wholly oral, or may be partly written and partly oral.

Conclusion
These are the important requirement of a valid guarantee. Without these essential a guarantee cannot be formed a guarantee must contain all the provision of a valid contract and all the essentials which are mentioned above.

Reference:
  1. Sec 126 Indian Contract Act 1872
  2. Mountstephen Vs Lakeman
  3. Manju Mahadev Vs Shivappa Manju
  4. AIR 1968 GOA 29
  5. Yorkshire Railway Wagon Co Vs Maclure
  6. Coutt & Co Vs Browne Lecky 1947 KB
  7. Coutt & Co Vs Browne Lecky 1947 KB
  8. ILR 1895 Bombay HC
  9. Sec 137 Indian Contract Act
  10. AIR 1940 Oudh 346
  11. See Davies Vs London & Provincial Marine Insurance Co.
  12. National Provincial Bank Vs Glanusk 1913
  13. Sec 142 of Indian Contract Act
  14. Sec 143 of Indian Contract Act
  15. Avtar Sing Indian Contract & Special Relief pg- 607
  16. Avtar Sing Indian Contract & Special Relief pg- 607
  17. Avtar Sing Indian Contract & Special Relief pg- 608
  18. Avtar Sing Indian Contract & Special Relief pg- 608

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