Contract of Guarantee

Introduction
• According to S. 2 (h) of the Indian Contract Act, 1872, a contract is an agreement
enforceable by law.
• A guarantee is a contractual promise to ensure that a third party fulfil its said
obligations.1
• Together, the contract of guarantee is a contract to perform the promise or discharge
the liability of a third person in case of his default.

Definition
• Section 126 of the Indian Contract Act, 1872, gives the definition of ‘Contract of
Guarantee’, ‘Creditor’, ‘Principal Debtor’ and ‘Surety’.
A “contract of guarantee” is a contract to perform the promise, or discharge
the liability, of a third person in case of his default. 2
• If A gives an undertaking stating that ‘if 200 is lent to C by B and C does not pay, A
will pay back the money’, it will be a contract of guarantee. 3
• Parties : here, we see that there are 3 parties, which is the same in every contract of
guarantee,
1. Where, C is the Principal Debtor or P.D. - The person in respect of
whose default the guarantee is given. 4 He himself makes a promise to
the creditor to perform a promise. 5
2. B who is the Creditor - The person to whom the guarantee is given. 6
3. And A who becomes the Surety or Guarantor for C, the P.D. - The
person who gives the guarantee. 7 He undertakes to be liable towards
the creditor if the principal debtor makes a default by not performing
the promise.8
➢ This creates three contracts in a contract of guarantee.

1 Law Column, https://www.lawcolumn.in/contract-of-guarantee-and-its-essential-elements/

2 Law of Contract Bare Act, Professional Book Publishers (2022).
3 K, Indian Contract Act, 1872 – Contract of Guarantee (Part 1 of 3), (Mar. 16, 2012),

https://kanwarn.wordpress.com/2012/03/16/indian-contract-act-1872-contract-of-guarantee-part-1-of-3/
4 Supra note 2.
5 Monad Edu., https://monad.edu.in/img/media/uploads/contract%20of%20guarantee.pdf
6 Supra note 2.
7 Ib.
8 Supra note 5.

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 a. Principal Contract :- this contract exists between the Principal
Debtor and the Creditor. This is the main and foundation
contract.9
b. Secondary Contract :- this contract exists between the Creditor
and the Surety because for the Principal Debtor to make a
promise, he has to provide a surety or guarantor and then only
there is a Principal Contract. And this contract comes into
effect when the Principal Debtor makes a default. 10
c. Implied Contract :- here, the contract exists between the Surety
and the Principal Debtor. It’s a contract of favour. 11

Essentials of Contract of Guarantee

1. Principal Debt12
• The whole purpose of guarantee being to secure the payment of a debt, the
existence of a recoverable debt is an absolute necessity.
• It is of the essence of guarantee that there should be someone liable as a principle
debtor and the surety undertakes that liability on his default.
• If there is no principle debt, there can be no valid guarantee and so there wouldn’t
be a contract.
• A contract of guarantee is a tripartite agreement which contemplates the principal
debtor, the creditors, and the surety.
• A Guarantee of a Minor’s debt13 :
The problem that arises when the debt of a minor has been guaranteed is that,
the debt being void, is the surety liable? In the case of Coutts and Co. v.
Browne Lecky14, the King’s bench decided that no liability should be incurred
by the surety.

In Kashiba Bin Narsapa Nikade v. Narshiv Sheipat15, Bom. HC observed:

“A surety to a bond passed by a minor for moneys borrowed for purposes of
litigation not found to be essential, is liable to be sued on it, whether the
contract of the minor is considered to be void or voidable.”
The court also observed “no reason why a person cannot contract to guarantee
the performance by the third person of the a duty of imperfect obligation. If
the debt is void, the contract of the surety is not collateral, but a principal
contract.”

9 Ma’am’s notes.
10 Ib.
11 Ib.
12 Priyanshu Yadav, Essential of Guarantee, https://www.legalserviceindia.com/legal/article-7276-essential-of-

guarantee.html
13 Supra note 16.
14 [1946] 2 All E.R. 207.
15 (1894) I.L.R. 19 Bom. 697.

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2. Sufficient Consideration
• According to S. 127 of ICA, 1872,
Anything done, or any promise made, for the benefit of the principal debtor, is
deemed sufficient consideration to the surety for giving the guarantee. 16
• It is sufficient inducement that the person for whom the surety has given
guarantee has received a benefit or the creditor has suffered an inconvenience. 17
• Illustrations18 :
a. B requests A to sell and deliver to him goods on credit. A agrees to do
so, provided C will guarantee the payment of the price of the goods. C
promises to guarantee the payment in consideration of A’s promise to
deliver the goods. This is a sufficient consideration for C’s promise.
b. A sells and delivers goods to B. C, afterwards, requests A to forbear
(restrain) to sue B for the debt for a year, and promises that, if he (A)
does so, C will pay for them in case of default of payment by B. A
agrees to forbear as requested. This is a sufficient consideration for C’s
promise.
• A guarantee without consideration is void. But there need be no direct
consideration between the surety and the creditor. 19
• Illustration :
A sells and delivers goods to B. C, afterwards, without consideration, agrees to
pay for them in default of B. The agreement is void. 20
• A Guarantee for Past debt :
The guarantee for a past debt should be invalid. S. 2 (d) of the ICA, 1872 says
that past consideration is good consideration, where as illustration (c) of S.
127 of the same act negates that point. 21
There have been conflicting judgments about whether past consideration is
good consideration or not. Oudh High Court in M. Gulam Husain Khan v. M.
Faiyaz Ali Khan22 held that the surety’s bond executed after the agreement
between the lessee and the landlord for the payment of lease in instalments
was considered not without consideration. 23

16 Law of Contract Bare Act, Professional Book Publishers (2022).

17 K, Indian Contract Act, 1872 – Contract of Guarantee (Part 1 of 3), (Mar. 16, 2012),
https://kanwarn.wordpress.com/2012/03/16/indian-contract-act-1872-contract-of-guarantee-part-1-of-3/
18 Supra note 13.
19 Priyanshu Yadav, Essential of Guarantee, https://www.legalserviceindia.com/legal/article-7276-essential-of-

guarantee.html
20 Law of Contract Bare Act, Professional Book Publishers (2022).
21 All India Legal Forum, Contract of Guarantee (Aug. 17, 2020).

https://allindialegalforum.com/2020/08/17/contract-of-guarantee/
22 AIR 1940 Oudh 346.
23 Supra note 16.

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 • In Prasanjit Mahtha v. United Commercial Bank24, the Court held that if the
Principal Debtor gets a benefit, that suffices to sustain the guarantee. It will be of
no consequences to say that the Principal Debtor had never requested for a
guarantee or that it was given without his knowledge or consent. 25
3. Free Consent
• The creditor should not obtain guarantee by misrepresentation or concealment of
any material facts concerning the transaction, and on failure to do so, the
guarantee is invalid.26
• S. 142 and S. 143 of the ICA, 1872, respectively state that 27
Guarantee obtained by misrepresentation invalid.—Any guarantee which has
been obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
Guarantee obtained by concealment invalid.—Any guarantee which the
creditor has obtained by means of keeping silence as to material
circumstances, is invalid.
• Illustrations28 :
a. A engages B as clerk to collect money for him. B fails to account for
some of A’s 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 a surety.
• Although the contract of guarantee is not a contract uberrimae fidei or one of
absolute good faith, it should be kept in mind that facts which can have an effect
on the Surety’s responsibility must be properly known to him/her. 29
• In, London General Omnibus Co. Ltd. v. Holloway30, the court held that
guarantee could not be enforced as non-disclosure of facts.
• However, in National Provincial Bank v. Glasnuck31, the court upheld the same
by saying that there was no duty of the creditor to disclose the circumstances
seriously affecting the Surety. It said that ‘non-disclosure is not withholding’.

24 AIR 1979 Pat 151.

25 Supra note 16.
26 Monad Edu., https://monad.edu.in/img/media/uploads/contract%20of%20guarantee.pdf
27 Supra note 17.
28 Law of Contract Bare Act, Professional Book Publishers (2022).
29 Law Column, https://www.lawcolumn.in/contract-of-guarantee-and-its-essential-elements/
30 1912 2 KB 72.
31 1913.

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 • Lord Chelmsford observed with regard to a guarantee other than a guarantee of
fidelity that ‘a creditor is under no obligation to inform an intended surety of
matters affecting the credit of the debtor, or of any circumstances connected with
the transaction in which he is about to engage which will render the position
hazardous.’32
4. Oral or Written
• Under English law, the contract of guarantee being in writing is an essential
requirement for the contract to come into existence.

• According to S. 126 of the ICA, 1872,

‘A guarantee maybe either oral or written.’

• It is not necessary that a contract of guarantee must be in writing. It can either be

in oral or written form. It can also be formed through express or implied conduct
of the parties to the contract.

Other Essentials

1. All parties must agree to make the contract. A contract of guarantee being a tripartite
agreement, all the three parties, i.e., the Principal Debtor, the Creditor and the Surety
or Guarantor must willingly agree to enter into the contract. No concurrence means no
contract of guarantee.

2. All the essentials of a valid contract must be fulfilled. Which we all know, are: offer,
acceptance, intention to create a legal relationship, free consent (which we already
talked about), lawful object and lawful consideration (which we again spoke about).
Exception applies when:

a. A consideration being received by the Principal Debtor is consideration

enough for the surety to give guarantee, and,

b. If Principal Debtor is incompetent to the contract, the guarantee is still valid

due to the presence of the Surety to complete the promise. But if the the Surety
is incompetent to contract, the guarantee becomes void.

32 Avtar Singh, Indian Contract & Special Relief, pg. 607.

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Conclusion

The contract of guarantee is a specific contract for which the Indian Contract Act, 1872 has
laid down some rules. From the presentation we understand that the main objective or basic
function of a contract of guarantee is to protect the Creditor from loss and to give him
confidence that the contract will be enforced with the promise of the Surety.33

Without the mentioned essentials, a contract of guarantee cannot be formed.

33All India Legal Forum, Contract of Guarantee (Aug. 17, 2020).

https://allindialegalforum.com/2020/08/17/contract-of-guarantee/