Q. What do you understand by Contract of Guarantee?
Is there any Indemnity
between Principal debtor and Surety in a Contract of Guarantee?
INTRODUCTION: - The contract of guarantee may be an ordinary or some different type of
guarantee which is different from an ordinary guarantee. Guarantee may be either oral or
written. Basically it means that a contract to perform the promise or discharge the liability of
third person in case of his default and such type of contracts are formed mainly to facilitate
borrowing and lending money which based on the following facts :-
i) Surety is the person by the whom the guarantee is given.
ii) Principal debtor is the person from whom the assurance is given.
iii) Creditor is the person to whom the guarantee is given.
DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge the
liabilities of a third person in case of his default. The person who gives the guarantee is called
surety, the person in respect of whose default the guarantee is given is called Principal Debtor
and the person to whom the guarantee is given is called creditor. A guarantee may be either
oral or written.”
ILLUSTRATION: - A promises to a shopkeeper C that A will pay for the items being bought by B if
B does not pay this is a contract of guarantee. In case if B fails to pay C can sue A to recover the
balance the same was held in the case of Birkmyr v/s Darnell-1704, the court held that when
two persons come to shop one person buys and to give him credit the other person promises,
“ if he does not pay, I will”, this type of a collateral undertaking o be liable for the default of
another is called a contract of guarantee.
ESSENTIALS: - The following are the essential elements of Guarantee:-
1. Existence of Creditor, Surety, and Principal debtor: - The economic function of a guarantee
is to enable a credit-less person to get a loan or employment or something else. Thus there
must exist a principal debtor for a recoverable debt for which the surety is liable in case of the
default of the principal debtor. In the case of Swan v/s Bank of Scotland -1836, It was held that
a contract of guarantee is a triplicate agreement between the creditor, the principal debtor and
the surety.
2. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable
for the liability of the Principal debtor.
3. Liability must be legally enforceable: - Only if the liability of the principal debtor is legally
enforceable, the surety can be made liable. For example a surety cannot be made liable for a
debt barred by Statute of Limitation.
4. Consideration: - As with any valid contract the contract of guarantee also must have a
consideration. The consideration in such contract is nothing but anything done or the promise
to do something for the benefit of the principal debtor. The section 127 of the Act clarify as
under :-
“Anything done or any promise made for the benefit of principal debtor is sufficient
consideration to the surety for giving the guarantee.”
Illustrations: - 1. A agrees to sell to B certain goods if C guarantees for payment of the price of
the goods. C promises to guarantee the payment in consideration of A’s promise to deliver
goods to B. This is sufficient consideration for C’s promise.
2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for an year and
promise if A does so he will guarantee the payment if B not pay. A forbears to sue B for one
year. This is sufficient consideration for C’s guarantee.
5. It should be without misrepresentation or concealment: - Section 142 of the Act specifies
that a guarantee obtained by misrepresenting facts that are material to the agreement is
invalid, and section 143 specifies that a guarantee obtained by concealing a material fact is
invalid as well.
Illustration :- 1. A appoints B for collecting bills to account for some of the bills. A asks B to get a
guarantor for further employment. C guarantees B’s conduct but C is not made aware of B
previous mis-accounting by A. B afterwards defaults. C cannot be held liable.
Illustration: 2- A promise to sell Iron to B if C guarantees payment. C guarantees payment
however, C is not made aware of the fact that A and B had contracted that B will pay Rs.5/-
higher that the market price. B defaults. C cannot be held liable
A case of London General Omnibus V/s Holloway- 1912: A person was invited guarantee an
employee, who was previously dismissed for dishonesty by some employer. This fact was not
told to the surety. Later on the employee embezzled funds but the surety was not held liable.
CONCLUSION
It is noted from the above mentioned facts that the contract of guarantee is a triplicate
agreement between Creditor, Surety and the Principal debtor. A person who stands for surety
known as guarantor for a third person (principal debtor) who in case of his default to fulfil his
promise or to discharge the liabilities. The surety or guarantor has to make a distinct promise
for payment of the liabilities of the Principal debtor which must be legally enforced.
Section 145
In every contract of guarantee there is an implied contract of indemnity in between the surety
and principal debtor. Principal debtor has to indemnify the surety later with the rightfully sum.
The surety can sue the principal debtor for the guarantee amount as soon as his liability
becomes absolute. The surety may recover all damages, all costs and all sums in accordance
with section 125 of ICA.
