A contract of guarantee is a tripartite agreement in which one party agrees to be responsible for the debt

or obligation of another party if they default. It is governed by the Indian Contract Act, 1872, under
Section 126. This essay examines the essential elements required for a contract of guarantee to be valid.

1. Definition of Contract of Guarantee

Under Section 126 of the Indian Contract Act, a contract of guarantee is defined as "a contract to perform
the promise or discharge the liability of a third person in case of his default." It involves three parties:

 Creditor (the party to whom the promise is made),

 Principal debtor (the party whose default triggers the guarantee),
 Surety (the party who undertakes to pay or perform the promise of the principal debtor in case of
default).

Thus, it serves as a safeguard for the creditor by assuring that if the principal debtor defaults, the surety
will step in to fulfill the obligation.

2. Offer and Acceptance

Like all contracts, a contract of guarantee requires a clear offer and acceptance. The offer in a guarantee is
made by the principal debtor or by a third party who requests the surety to guarantee the performance of
the debtor's obligations. The surety must explicitly accept the terms of the guarantee, either orally or in
writing. This forms the foundation of the contract.

3. Capacity to Contract

For a contract of guarantee to be valid, all parties must have the requisite legal capacity to contract. This
includes:

 Surety: Must be competent to contract under the Indian Contract Act, i.e., the surety must be of
sound mind and must not be a minor.
 Principal Debtor: Must be legally capable of entering into the contract whose performance is
being guaranteed.
 Creditor: Like the other parties, the creditor must also have legal capacity.

If any party lacks capacity, the guarantee agreement may be rendered void or unenforceable.

4. Free Consent

1|Page
A valid contract of guarantee requires the free consent of the parties. Consent must be given without
coercion, undue influence, fraud, or misrepresentation. If the consent of the surety is obtained through
undue influence or misrepresentation, the contract will be voidable at the option of the surety.

5. Consideration

For a contract to be valid, consideration must exist. In a contract of guarantee:

 The consideration for the surety's promise may be the request made by the principal debtor to the
surety, or it may be the assurance provided to the creditor.
 The principal debtor’s promise is usually supported by consideration, but the surety may not
always have direct consideration from the creditor.
 This can create confusion, but it does not necessarily invalidate the contract as long as there is
some form of consideration, usually implied through the relationship between the debtor and the
creditor.

6. The Liability of the Surety

In a contract of guarantee, the surety's liability is secondary, meaning it arises only if the principal debtor
defaults. The surety's liability is co-extensive with that of the principal debtor unless otherwise agreed
upon. This means the surety is liable to pay the entire debt or perform the obligation of the principal
debtor if the debtor defaults.

 Co-extensive liability: The surety is liable for the full extent of the principal debtor's obligations,
unless the guarantee specifically limits the surety's liability to a certain amount or time.

7. The Presence of a Written Agreement (Optional)

Although not mandatory, a contract of guarantee is often evidenced by a written document. A written
agreement helps to clarify the terms of the guarantee, including the amount guaranteed, the time limit for
performance, and the specific duties of each party.

 Section 126 does not require the guarantee to be in writing; however, written contracts provide
more certainty and serve as legal evidence in case of a dispute.

8. Discharge of the Surety

A contract of guarantee may be discharged under several circumstances:

 Performance of the Principal Debtor's Obligation: If the principal debtor fulfills their
obligations, the guarantee contract is discharged.

2|Page
  Novation: If the principal debtor and creditor agree to a new contract, the surety may be released
from the guarantee.
 Release by Creditor: The creditor may release the surety from their obligations through an
agreement, without the need for the principal debtor's consent.
 Impossibility of Performance: If it becomes impossible for the principal debtor to perform, the
surety may be discharged.

Conclusion

In conclusion, a valid contract of guarantee must meet specific legal requirements under Indian Contract
Law. These include an offer and acceptance, legal capacity of the parties, free consent, valid
consideration, and a clear agreement regarding the surety's secondary liability. Understanding these
elements is crucial for ensuring that a guarantee contract holds up in court. Additionally, the discharge
provisions provide a mechanism for ending the liability of the surety once the obligations of the principal
debtor are fulfilled or other conditions are met.

Case Illustration of Contract of Guarantee

To illustrate the essentials of a valid contract of guarantee, let's consider a well-known case under Indian
Contract Law:

Case: Bank of Bihar v. Damodar Prasad (1969)

Facts of the Case: In this case, the Bank of Bihar had extended a loan to a company, and the loan was
guaranteed by Damodar Prasad (the surety). The company defaulted on its repayment, and the bank
sought to recover the amount from the surety, Damodar Prasad. The surety contested his liability,
claiming that the guarantee was not valid.

Issue: The main issue in this case was whether the contract of guarantee between the bank and Damodar
Prasad (the surety) was enforceable.

Judgment: The Supreme Court held that the contract of guarantee was valid and enforceable. The Court
stated that the guarantee was a contract where Damodar Prasad had undertaken to fulfill the debt in case
of default by the company (the principal debtor).

The Court also emphasized the essential elements of a contract of guarantee:

1. Offer and Acceptance: The surety had agreed to guarantee the repayment of the loan, which was
communicated and accepted by the bank.
2. Capacity to Contract: The surety, Damodar Prasad, was of legal age and sound mind, and thus
competent to enter into the contract.
3. Free Consent: There was no coercion, undue influence, or misrepresentation involved in
obtaining the consent of the surety.
4. Consideration: There was adequate consideration for the guarantee, which was provided by the
bank's lending to the company, making the surety liable to pay if the company defaulted.
5. Secondary Liability: The surety’s liability was secondary to that of the principal debtor (the
company). The liability of the surety was not primary; it arose only after the company defaulted.

3|Page
The Court concluded that the guarantee was enforceable and that the bank could recover the amount from
Damodar Prasad in case of default by the principal debtor, as the essential requirements of a valid
contract of guarantee were satisfied.

Key Takeaways from the Case:

1. Offer and Acceptance: There must be an agreement between the parties—the principal debtor,
the creditor, and the surety.
2. Liability of the Surety: The surety’s liability is secondary, which only arises if the principal
debtor defaults.
3. Consideration: The consideration for the guarantee can be implied, and it need not always be
direct from the creditor to the surety.
4. Discharge of the Surety: The surety’s liability can be discharged once the principal debtor has
fulfilled their obligation or if any conditions are fulfilled.

This case serves as a reminder of the fundamental requirements and enforceability of a contract of
guarantee in India under the provisions of the Indian Contract Act, 1872.

2. Under Indian Contract Law, the rights of a finder of goods are addressed within the framework of the
Indian Contract Act, 1872, specifically in relation to the principles of bailment and the finder of goods.
The rights of a finder of goods are discussed under Section 71 of the Indian Contract Act.

Rights of a Finder of Goods

1. Right to Possession of the Goods:

o The finder of goods has a right to take possession of the goods found. However, this right
is not absolute and is based on the condition that the goods are lost, not abandoned, and
the true owner is not identifiable at the time of finding. The finder of goods becomes a
bailee under the law, assuming a duty to take care of the goods found, and must treat the
goods with reasonable care and caution.
2. Right to Earn a Reward (if promised):
o If the owner of the goods has publicly announced a reward for the return of the goods, the
finder is entitled to the reward if the goods are found and returned in accordance with the
conditions specified by the owner. The finder does not need to be a "volunteer" to be
entitled to a reward; the promise of a reward binds the owner of the goods.
3. Right to Retain Goods Until Expenses Are Repaid:
o If the finder of goods has incurred expenses while taking care of the goods (for example,
for storing or preserving the goods), the finder has the right to retain the goods until those
expenses are reimbursed. This right stems from the finder’s duty as a bailee and the right
of lien under Section 171 of the Indian Contract Act. The finder is entitled to claim any
reasonable expenses incurred for preserving the goods.
4. Right to Sell the Goods (in Certain Circumstances):
o Under Section 169 of the Indian Contract Act, the finder of goods has the right to sell the
goods if the goods are perishable or if the owner cannot be found after a reasonable
period. If the goods are not perishable, the finder must first try to locate the true owner
and give reasonable notice to return the goods. However, if the goods are perishable and
the finder cannot locate the owner in time, the finder can sell the goods to avoid loss.
5. Right to Sue for Compensation for Loss of Goods:
o If the goods are lost while in the finder’s possession, and the finder has taken reasonable
care, they may sue for compensation for the loss or damage. However, the finder is not

4|Page
 liable for any loss or damage to the goods as long as they have acted with reasonable
care.
6. Right to Act as a Bailee:
o The finder of goods has the rights and duties of a bailee. As a bailee, the finder must
ensure that they do not use the goods for their own benefit or in a way that would harm
the goods or the owner. They are also obligated to take reasonable care to protect the
goods until the rightful owner claims them. If the finder violates the terms of the bailment
or misuses the goods, they may be liable for damages.
7. Obligation to Return the Goods:
o The finder of goods has an obligation to return the goods to the true owner as soon as the
owner is found. If the finder does not return the goods, they may be liable for conversion
(an act of dealing with the goods in a manner inconsistent with the ownership of the true
owner).

Case Law Example:

 Case: Armory v. Delamirie (1722)

o In this case, a young boy found a jewel and took it to a goldsmith to inquire about its
value. The goldsmith, after examining the jewel, removed the precious stones from it and
returned only the setting. The court held that the finder of the goods (the boy) had the
right to possess the jewel and that the goldsmith was liable for conversion because the
boy’s rights to the jewel were greater than the goldsmith's claim. This case exemplifies
the rights of a finder of goods to retain possession and seek remedies against unlawful
interference.

Conclusion:

In conclusion, the finder of goods has certain rights under Indian Contract Law, such as the right to
possession, the right to a reward if promised, the right to retain the goods until reimbursement for
expenses, the right to sell perishable goods, and the right to sue for compensation for loss or damage.
However, these rights are balanced with the responsibility to care for the goods and to return them to the
rightful owner. The finder acts as a bailee and is under a duty to return the goods or notify the owner.

5|Page