Contract of Guarantee*

Section 126[i] of the Indian contract act defines a contract of guarantee as a contract to perform the promise or discharge the liability of the defaulting party just in case he fails to meet his promise. To represent a contract of guarantee, there should be a concurrence of the principle-debtor, the creditor and therefore the surety, however that doesn’t mean that there must be proof showing that the principal-debtor undertook his obligation at the categorical request of the principal-debtor as the inexplicit request are quite enough to satisfy this requirement. The operation of a contract of guarantee is to alter an individual to urge a loan on merchandise on credit or employment. Some person comes forward and tells the lender, on the provides on the leader that he could be trusty and just in case of any default and that I undertake to be a responsible-For example

In, PJ Rajappan vs Associated Industries[ii]– The guarantor having not signed the contract of guarantee, needed to wriggle out of the situation. He same that he failed to stand as a surety for the performance of the contract. The proof showed the involvement of the guarantor within the deal and had secured to sign the contract later. The Kerala high court stated that a contract of guarantee could be a three-party agreement, involving the principal debtor, surety, and therefore the creditor. During a case wherever there’s evidence of the involvement of the guarantor, the mere failure on his half in not signing the language of the agreement isn’t comfortable to demolish otherwise acceptable proof of his involvement within the dealings resulting in the conclusion that he warranted the due performance of the contract by the principal individual. once a court should decide whether or not an individual has guaranteed the due performance of the contract by the principal debtor all the circumstances regarding the transactions can have to be compelled to be essentially considered.

  1. Parties to Contract

 so here we will infer that there are three parties to the contract

  • Principal debtor – The one who borrows or is susceptible to pay and on whose default the guarantee is given.
  • Creditor – The party who has given one thing useful to borrow and stands to receive the payment for such a thing and to whom the guarantee is given
  • Surety/Guarantor – The one that offers the guarantee to pay just in case of default of the principal debtor.

 Also, we will perceive that a contract of guarantee may be a second contract that emerges from a primary contract between the mortal and also the principal debtor.

  1. Essentials of a Contract of Guarantee

1) Must be made with the agreement of all three parties.

The three contracting parties, i.e. the principal debtor, the creditor, and the guarantor, must agree to conclude the contract by mutual agreement. It should be noted here that the guarantor is only responsible for the debt of the main debtor at the request of the main debtor. Therefore, the express or tacit notification of the principal debtor to the guarantee is required. The notification of the guarantee to the creditor for the conclusion of a guarantee contract without the knowledge of the principal the debtor does not constitute a guaranteed contract.

2) Liability.

In a guaranteed contract, liability for a surety is secondary. Since the main contract was thus concluded between the creditor and the principal debtor, the responsibility for the performance of the contract lies primarily with the principal debtor. The deposit is only obligated to be paid if the main debtor defaults in payment.

3) It must contain all the essential elements of a valid contract.

 Since a guaranteed contract is a type of contract, all the essential elements of a valid contract also apply to guarantee contracts. Therefore, all essential requirements of an effective contract must be met, such as free consent, a valid offer of consideration and acceptance, intention to establish a legal relationship, etc.

4) No concealment of facts.

The creditor must disclose to the guarantor facts likely to affect the guarantor’s liability. The guarantee obtained by concealing such facts is void. The guarantee is therefore void if the creditor obtains it by concealing essential facts.

5) Consideration.

According to section 127[iii] of the act, anything done or promised in favor of the principal debtor is sufficient consideration for the surety to perform the guarantee. The consideration must be new consideration by the creditor and not previous consideration. The guarantor does not have to receive anything in return, sometimes even a deferral by the creditor in the event of late payment is sufficient.

In, State Bank of India v. Premco Saw Mill (1983)[iv], the debtor and defendant was notified by the State Bank and also threatened to take legal action against her, but her husband agreed to become a guarantor and promised to pay them to settle liabilities also executed a promissory note in favor of the state bank and the bank has refrained from a threat. This patience and acceptance by the bank were seen as a good return for the guarantee.

  1. Conclusion

The Guarantee Contract is a specific contract for which the Indian Contract Act has established some rules. As we have discussed, the basic the function of a security agreement is to protect the creditor from loss and to provide confidence that the contract will honor the promise of security. Each guarantee contract consists of three parts.The guarantor has some rights against the other parties and the guarantor’s responsibility is considered to be the same as that of the principal debtor unless the contract provides otherwise. If the contracts come into being due to false statements by the obligee about essential circumstances or due to the ignorance of essential facts by the obligee, the contract is deemed null and void.

  • References

* Harshita Malviya, final year law student, Banasthali University.

[i] https://indiankanoon.org/doc/53550/#:~:text=126.,in%20case%20of%20his%20default.

[ii] https://www.casemine.com/judgement/in/56b49660607dba348f018a73

[iii] https://indiankanoon.org/doc/777650/

[iv] https://indiankanoon.org/doc/1407889/

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