Contract of Guarantee

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HomeBrud.gifContract LawBrud.gifContract of Guarantee

A Contract to perform the promise, or discharge the liability, of a third person in case of his default is called Contract of Guarantee. A guarantee may be either oral or written.

  • The person who gives the guarantee is called the Surety
  • The person on whose default the guarantee is given is called the Principal Debtor
  • The person to whom the guarantee is given is called the Creditor

Contents

Points to Note

  • There are three parties in every Contract of Guarantee
  • The liability arises right from the beginning. The surety becomes liable when the principle debtor commits default in meeting the liability.
  • Surety has the right to sue the third party (Principle Debtor) directly. The Law puts him in the position of Creditor. Where as in Contracts of Indemnity, the Indemnifier cannot sue the third party in his name. He has to sue in the name of the Indemnity-holder or after obtaining the rights from him.
  • 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. The guarantor need not personally derive any benefit from the guarantee.
  • The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
  • The creditor can straightway proceed against the guarantor without first proceeding against the principal debtor.
  • The liability of the surety can never be greater than that of the principal debtor. The surety can however may restrict his liability to part of the Principal debtor's liability by contract.
  • Surety's liability is distinct and separate

Continuing Guarantee

A Guarantee which extends to a series of transactions is called a continuing guarantee.

  • A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
  • 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.

Rights of a surety

As against the Creditor

According to the Indian Contract Act, 1872,

  • Sec. 133 - The creditor shall not vary terms of the contract between the creditor and the principal debtor without the surety's consent. Any such variance discharges the surety as to transactions subsequent to the variance. However if the variance is for the benefit of the surety or does not prejudice him or is of an insignificant character, it may not have the effect of discharging the surety.
  • Sec. 134 - The creditor should not release the principal debtor from his liability under the contract. The effect of the discharge of the principal debtor is to discharge the surety as well. Any act or omission on the part of the creditor which in law has the effect of discharging the principal debtor puts an end to the liability of the surety.
  • Sec. 135 - If an agreement is made between the Creditor and Principal debtor for compounding the later's liability or promising him extension of time for carrying out the obligations or promising not to sure, discharges the surety unless he assents to such a contract.
  • Sec. 139 - The surety is discharged if the creditor impairs the surety's eventual remedy against the principal debtor.

As against the Principal Debtor

  • Right of subrogation - The surety on payment of the debt acquires a right of subrogation.
  • Sec 140 - The surety cannot claim the right of subrogation to the creditor's securities if he has signed up as a security for a part of the agreement and security has been held by the creditor for the whole debt.

Notes

  • Sec 142 - Guarantee obtained by misrepresentation invalid
  • Sec 143 - Guarantee obtained by concealment invalid
  • Sec 145 - Co-sureties liable to contribute equally
  • Malaysia: Section 79 of Malaysian Contracts Act, 1950: “Contract of guarantee”, “surety”, “principal debtor”, and “creditor”

Related Topics

  • Indemnity Contract Vs Guarantee Contract
  • Bank Guarantee
  • Consideration for Guarantee
  • Surety's Liability under Contract of Guarantee

Related Topics

Related Acts


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