Contract of Guarantee and its Essential Elements

Table of Contents

THE CONTRACT OF GUARANTEE AND ITS ESSENTIAL ELEMENTS

INTRODUCTION

The word “ Contract” means “an agreement which is enforceable by law” . Whereas the word “GUARANTEE” MEANS “a contractual promise to ensure that a third party fullfill its said obligations”

This article gives a depth study on contract of guarantee and its various essentials.

CONTRACT OF GUARANTEE

According to “ section 126” of the Indian contract act 1872, which defines “contract of guarantee” as “A CONTRACT TO PERFORM THE PROMISE, OR DISCHARGE THE LIABILITY, OF A THIRD PERSON IN CASE IN CASE OF HIS DEFAULT” in lamest language we can say that a “contract of guarantee” means a contract to perform the promises made or discharge the liabilities by the third person in case the promisor or promisee fails to perform his promises or discharge the liabilities. The main objective of contract of guarantee is to provide security to the creditor ( the one to whom promises is made to perform certain obligations) , in case the principal debtor ( the one who promised ) fails to perform his promises or obligations.

In contract of guarantee there are three parties :-

the creditor
the principal debtor
surety

“ section 126” of Indian contract act 1872 defines contract of guarantee and further states about the three parties of contract of guarantee “ 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”

So from it we got to know that the “ surety” is the person who takes responsibility to pay amount if borrower fails to do so. The “ creditor” is the one who gets additional security in the form of guarantee. And the “ principal debtor” is the one who borrows the amount from the creditor or himself makes promise to creditor to perform promise.

For better understanding let’s have a look on example:-

Y has taken a loan from bank , and promise the bank to repay the loan , Z also make promise to the bank saying that if Y does not repay the loan “I will pay on the behalf of him”

In this example Y the one who taken the loan from bank and promise to repay is the “principal debtor” and Z who took the responsibility to repay the amount if there is a default from the part Y is the “surety”. And the bank to whom promise is made is the “ creditor”.

Basically “ contract of guarantee” consist of three contracts:-

Firstly , the “principal debtor” himself makes promise to the “ creditor” to perform the promise.

Secondly, “surety” gives guarantee to the “creditor” if the principal debtor makes a default or consent perform his promise.

Thirdly, the principal debtor in the favour of surety if in his default surety discharges the liability he will indemnify him for the same.

Now let’s have a brief look on features of “contract of guarantee”

Oral or in writing :-

The contract should be oral or in written it is clearly mention in the “section 126” of the Indian contract act 1872 that “A guarantee may be in either oral or written”

Principal debt :-

There should be a principal debt or an obligation by the principal debtor as contract of guarantee surmise the principal debt. And the “ surety” discharge liabilities only if the principal debtor fails to perform his liability.

Sufficient consideration:-

Like other contracts , contract of guarantee also needs consideration , here consideration does not mean that their should be consideration between creditor and surety , if creditor has done something for the benefit of the “principal debtor” its enough and is sufficient consideration. It is also clearly mention in “section 127” of the Indian contract act 1872 that “ Anything done, or any promise made for the benefit of the principal debtor may be sufficient consideration to the surety for giving the guarantee”.

Consent of the surety :-

ACCORDING TO “SECTION 142 AND 143” OF INIDAN CONTRACT ACT 1872 , states “Guarantee obtained by misrepresentation invalid”. “Guarantee obtained by concealment invalid”.

Therefore consent of surety should not be obtained by any misrepresentation or concealment.

ESSENTIALS OF CONTRACT OF GUARANTEE

There needs to be certain essentials (criterion) which needs to be fulfilled for every contract of Guarantee. These are as follows:

All parties must agree to make such a contract

There should be a concurrence of all the parties i.e. the principal debtor, the creditor, and the surety. If there is no concurrence then it will not be possible to form a contract of Guarantee.

There should not be any Misrepresentation

It should be taken care of that the Guarantee must not be taken by misrepresentation of the facts to the surety. Although contract of Guarantee is not a contract of absolute good faith (Uberrimae fidei) therefore it is not necessary for the Principal Debtor or the Creditor to disclose all the material facts to the surety before he/she enters into a contract of Guarantee. However it should be kept in mind that those facts which can have effect on Surety’s responsibility must be properly known to him/her.

Must fulfill all the essentials of a valid contract

It is necessary that the contract of Guarantee must fulfill all the essentials required for a valid contract. i.e. Offer and acceptance, intention to create a legal relationship, Free consent, Lawful object and Lawful consideration. If the essentials of a valid contract are not fulfilled then the contract of Guarantee cannot be formed.

There should be an Existence of a Debt

The contract of Guarantee is based on the existence of a liability and that should be enforceable by law. So, if there is no liability there can be no contract of guarantee. As, the principle of Contract of Guarantee is based on Liability.

Contract of Guarantee may or may not be in writing

It is not necessary that a Contract of Guarantee must be in Writing. It may either be in oral or written form. As well as it can also be formed through express or implied conduct of the parties to a contract.

As far as English law is concerned it is necessary that Contract of Guarantee must always be in writing.

Conclusion

Contract forms a very important part in our course curriculum as well as in Practical applicability. Contract of Guarantee is a very important branch arising from the same tree. This article gave a detailed overview of the entire topic.

Author: RISHIKA VERMA,
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