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Section 126 defines the contract of guarantee1

Guarantee is a contract, which should have the essential of a valid contract, like any other
general contract, to perform the promise or liberate the liability of a third person in case of his

A guarantee can be either oral or in written.

Contract of guarantee is a tripartite agreement the person who provides the guarantee is called
the surety. The person on whose default the guarantee is provided is known as the principal
debtor. The person to whom the guarantee is provided is known as the creditor.

When the principal debtor commits any default then the surety becomes liable.

Illustration:- if a gives an undertaking that if 500/- are lent to C by B then on Cs default A will
pay back the money. Here, A is the surety, B is the principal debtor and C is the creditor.

When do we provide consideration to the surety then we can do any promise for the principal
debtor benefit, but only distinction is that the one who provide guarantee should not personally
derive any benefit.

Suretys liability is coincident with that of the principal debtor. if it is not provided by the law of

The creditor without first of all proceeding against the creditor he can directly proceed against
the person who provides the guarantee.

The liability of the surety is always less than that of the principal debtor to part of principal
debtor liability he can however restrict his liability by contract.

The suretys liability is however specific and independent.

1 Bhadbhade N, Mulla D and Pollock F, The Indian Contract And Specific Relief Acts (Lexis Nexis 2013)

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Bank guarantee

Bank guarantee is a free and unmistakable contract between the bank and the recipient and is not
qualified by the hidden exchange and the legitimacy of the essential contract between the
individual at whose example the bank assurance was given and the recipient. Unless
misrepresentation or exceptional value show the recipient can't be controlled from encasing the
bank regardless of the possibility that question emerges in execution of the agreement.

National Highways Authority of India v. Ganga Enterprises AIR 2003 SC 38232

Fact of the case Appealing party (N) issued a delicate notification for gathering of toll on a part
of an expressway. For this reason two sorts of securities were to be outfitted, bank certification
and execution security by method for a bank ensure. One [1] of the provisos gave that the offer
security could be relinquished if the bidder pulled back his offer amid the time of offer
legitimacy; or if the effective bidder fizzled inside the predetermined period to outfit the required
execution security and consent to the Arrangement. Another clause[2] gave that that the offer
would stay substantial for 120 days after the last date of offer accommodation. The respondent
firm (G) gave its offer and outfitted an 'on-interest bank ensure'. G later pulled back its offer and
did not outfit execution ensure, taking after which N encashed the bank ensure, effectively
outfitted. G documented a request in HC for discount of the sum.

Continuing Guarantee

Those Guarantees which prolong to a chain of transactions is called a continuing guarantee.

The surety may at any time revoke the continuing guarantee, by giving notice to the creditor.

If any variance is made in contract without informing surety in terms of the contract between
creditor and the principal debtor it discharges surety liability as to the variance

Illustration:- Mr.gupta contracts with Mr.shyam, a shopkeeper, to allow Mrs. Gupta to take
whatever goods she may need from his shop up to the amount of Rs. 10,000/-. Mr. gupta will be
liable for the debts incurred by Mrs. Gupta up to the given amount
2 'Supreme Court Of India' (, 2016) <> accessed 24 August 2016.

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Rights of a surety:

As against the Creditor:

Sec. 133 The leaser should not differ terms of the understanding between the bank and the
main borrower without the surety's consent. Any such differentiation discharges the surety as to
exchanges following to the distinction. However if the change is for the benefit of the surety or
does not incline toward him or is of an immaterial character, it won't not have the effect of
discharging the surety3

Sec. 134 The creditor should not release principal debtor from his risk under the understanding.
if we discharge the liability of principal debtor then the surety will also become free. Any
authorization or avoidance from which in law has the effect of discharging the indebted person
puts a near the obligation of the surety4

Sec. 135 If there is an agreement between the creditor and the principal debtor for decreasing
the laters liability or promising him for the increase of time or carrying out the duty or
promising not to sure if surety doesnt provide his assent it discharges him from liability 5

Sec. 139 the surety is discharged if principal debtor incapacitates the surety's imaginable cure
against the important account holder6

As against the Principal Debtor

3 Nilima Bhadbhade, Dinshah Fardunji Mulla and Frederick Pollock, The Indian Contract And Specific Relief Acts
(Lexis Nexis 2013)

4 id.

5 <> accessed 23 August 2016

6 < >accessed 23 August 2016

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Right of subrogation on payment of the debt the surety acquires the right of subrogation. when
he pays his part of debt on default of the principal debtor.

Sec 140 - The surety cannot claim the right of subrogation For the part of the agreement if the
creditor has not rectified it as a security for a part of the agreement and security has been held by
the creditor for the whole debt.7

Invalid guarantee

Sec. 142- Invalid guarantee- guarantee which are obtained by misrepresentation is invalid if
the creditor makes any misrepresentation in obtaining the guarantee or with his assent or
knowledge concerning a part of the transaction is known as invalid guarantee.

Definition of Gurantee under English law

Guarantee is a type of contract in English law it is used for the answer for the
paying of the debt or any duty which is informed by the third person who is first of
all liable for the payment or performance this is a collateral contract. Which does
not diminish the original obligation for payment if the original promise fails then it is
referred as zero one who provides guarantee has the responsibility to depend upon
those of the principal debtorand when the principal obligation cease the guarantor
do too8except in certain cases where the discharge of the principal debtor is by the operation of
the law9for eg if some person or some one wrongly interpreted that some one is liable to them
and on erroneous basisguarantee is given by virtue of the law of contract the guarantee is invalid
because its foundation is failed.

7 R. K Bangia, The Indian Contract Act (Allahabad Law Agency 1990).

8 (2016) <http://1. Lyde v. Barnard, 1 M. & W. 104> accessed 24 August 2016.

9 (2016) <http://1. Lyde v. Barnard, 1 M. & W. 104> accessed 24 August 2016.

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no phrase is necessary to form the guarantee the statute condition of a guarantee are provided in
England by (1) statute of fraud : that no action can be taken to charge the defendant for
answering any promise of the debt for default or miscarriages of another person.

Unless the agreement upon which such action shall be bought or some memorandum will be in
written and signed by the party or some person who is lawfully authorized.(2)lord tenterdans
actwhich says that no action shall be taken to change any person by reason of any representation
or assurance made relating to the character, conduct , credit ability dealing or trade of some other
person with the intention that some other may obtain money or credit ofany other person unless
such representation or assurance be made in writing signed by the party to be charged therewith10

10 (2016) <http://1. Lyde v. Barnard, 1 M. & W. 104> accessed 24 August 2016.

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