Contract of Gurantee – 1

Contract Of Guarantee- Section 126 of the Indian Contract Act defines the Contract of Guarantee as a Contract to perform the promise or discharge the liability of a third person in case of his default.

In English Law, a guarantee is defined as a promise to answer for the debt, default or miscarriage of another. It is a collateral explanation to be liable for debt of another in case of his default. ‘’Guarantees are usually taken to provide a second pocket to pay if the first pocket is empty.

1) Parties- Section 126 also defines the various parties in a contract of guarantee.

a) Surety- Surety is defined as a person gives the guarantee or undertakes to repay in case the principal debtor defaults.

b) Principal Debtor- Principal Debtor is a person in respect of whose default a guarantee is given.

c) Creditor –Creditor is a person to whom the guarantee is given. Often, a creditor is that person who lends money.

2) Independent Liability Different From Guarantee – A liability which is incurred independently of a default is not within the definition of guarantee.

ESSENTIAL FEATURES OF GUARANTEE

Following are the requisites of a guarantee-

1) Principal Debt- The purpose of a guarantee is to secure the payment of a debt, the existence of a recoverable debt. It is one of the essences of guarantee that there should be someone liable as a principal debtor and on his default the surety undertakes to be liable.

Hence if there is no principle debtor then there can be no valid guarantee. A contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditor and the surety.

Guarantee of minor’s debt?

The main question arises when the debt of a minor has been guaranteed. The debt being void, is the surety liable? The Court held that no liability should be incurred by the surety. But in India, it has been held that when a minor’s debt has been knowingly guaranteed then the surety should be held liable just as the principal debtor himself.

2) Consideration- Like in every other contract, a contract of guarantee is also supported by some consideration. Section 127 of Indian Contract Act defines consideration of guarantee as ‘’ Anything done or any promise made for the benefit of principal debtor maybe a sufficient consideration to the surety for giving the guarantee.

A guarantee without consideration is void. But there need not be any direct consideration between the surety and creditor.

ILLUSTRATION- A sells and delivers goods to B. C afterwards, without consideration agrees to pay for them in default of B. This agreement is void.

ILLUSTRATION- A sells and delivers goods to B. C afterwards, requests A to forebear to sue B for the debt for a year and promises that if he does so then C will pay for them in case there is default of payment by B. A agrees to forebear as requests by B. This is a sufficient consideration for C’s promise.

GUARANTEE FOR PAST DEBT

But a guarantee for a past debt should be invalid. This Section says that ‘’ anything done for the benefit of principal debtor is a good consideration. But the words ‘’anything done’’ include things done before the guarantee was given? The Court answers this question in the affirmative (agreeing to it). The Court held that an lessen agreed to pay the sum due under a lease by certain installments and after a few days a person executed a surety bond binding himself to pay a certain amount in default of the payment of installments. The Court held that a bond was not without consideration.

FUTURE DEBT

A guarantee for a past as well as future debt in enforceable provided some further debt is incurred after the guarantee. But debt is incurred after the guarantee. But there should be a clear undertaking liable for a past debt and as soon as some fresh obligation is incurred, the liability for all the obligations is coupled up.

MISREPRESENTATION AND CONCEALMENT (TO HIDE SOMETHING)

A contract of guarantee is not a contract of absolute good faith. It is duty of a party taking a guarantee to put the surety in position of all the facts or let him know all the facts or let him know all the circumstances that are likely to affect his responsibility. And even after this if he neglects to do so then it is on his own responsibility.

A surety must be acquainted with all the terms and conditions of the contract entered into with his principal.

Section 142 and 143 of the Indian Contract Act 1872 talks about guarantee that is obtained by misrepresentation and concealment respectively wherein such as guarantee becomes invalid.

Section 142 guarantee obtained by misrepresentation is invalid. It states that a guarantee obtained by means of representation made by the creditor or with his knowledge and accent regarding a material part of essential (most important).

Section 143 guarantee obtained by concealment is invalid. It states that any guarantee which the creditor has obtained by means of keeping silence regarding material facts of transaction is invalid.

ILLUSTRATION- (a) A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.

(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A.  A is not liable as surety.

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