ASSIGNMENT NO: 1 on Contract of guarantee

TOPIC: CONTRACT OF GUARANTEE

Submitted By
Bhavitha. Birdala
Third year B.ALL.B

Submitted to
Prof. NUPUR KHANNA
Assistant professor of law
DECLARATION:

I hereby declare that the research assignment no 1 titled CONTRACT OF GURANTEE

carried out

Under the guidance of M.S NUPUR KHANNA is a record of bona-fide research work

Undertaken by me in partial fulfilment for award 5 year B.ALL.B offered by Christ academy

Institute of law, Bengaluru. The said work is an authentic research and not submitted before

Any other university academic programs for the award of any degrees.

Bhavitha .Birdala

Reg No: 45419231015

B.ALL.B 5TH SEM

DATE: 13.01.2022

PLACE: BANGLORE
ACKNOWLEDGEMENT 

First and foremost, praise and thanks in the God, the almighty, for his shower of

             Blessings throughout my assignment to complete it successfully.

             

I would like to express my deep and sincere gratitude to my experience 

MS NUPUR KHANNA, assistant prof., Christ Academy Institute of law Bangalore for

Giving me the opportunity to work on this assignment. 

                    I am very grateful for his help throughout the assignment.

          Although, this report has been prepared with utmost care and deep routed   

                      Interest.  Even then I accept respondent and imperfection.

                                                                                          BHAVITHA.BIRDALA 

                                                                                               B.ALL.B (B) 5thSEM 

                                                        
 CERTIFICATE

          This is to certify that the forgoing study by Ms. Bhavitha. Birdala student of

          Christ Academy institute of Law, Bangalore, in hereby approved as creditable

            Work on the topic “CONTRACT OF GURANTEE”.

Place:  Bangalore        

Date:  13-01-2022                                                         

                                                                                  

                     MS. NUPUR KHANNA

ASSISTANT PROFESSOR OF LAW

TABLE OF CONTENTS:

 DECLARATION

 ACKNOWLEDGEMENT

 CERTIFICATE

 TABLE OF CONTENTS

 AIM OF STUDY

 RESEARCH METHGODOLOGY

 RESEARCH QUESTIONS

 NATURE & SCOPE

 DEFINATION

 PARTIES INVOLVED

 ESSENTIALS OF CONTRACT OF GUARANTEE

 MAIN FEATURES

 LIABILITY OF SURETY

 DIFFERENCE BETWEEN INDEMNITY & GUARANTEE

 CONCLUSION

 FOOT NOTES

 BIBLOGRAPHY
Aims and Objectives:

The aim of the project is to present a detailed study consent as defence in CONTRACT OF
GURANTEE” through general principles, statutes, amendments, suggestions and different
writings and articles.

Scope and Limitations:

Though this is an immense project and pages can be written over the topic but because of
certain restrictions and limitations I was not able to deal with the topic in great detail. Sources
of Data: The following secondary sources of data have been used in the project

1. Articles

2. Books

3. Websites

RESEARCH QUESTIONS:

1. Whether essentials need to fulfil contract of guarantee?

2. Whether liabilities of surety & co surety mentioned under contract act 1872?

3. Whether contract of guarantee becomes invalid?

Nature:

The Contract of Guarantee is defined under section 126 of Indian Contract Act, 1872.

Section 126 states:

A contract of guarantee is a contract to perform the promise or discharge the liability, of a

third person in case of his default.
It further states that, 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.

And, the last part of the section states that guarantee may be either oral or written.

Let’s explain this with an examples,

if suppose A takes a loan of Rs. 1,00,000 from a Union bank of India. Here B, promises to
bank that if A some How fails to return the amount, then I will make payment on his behalf.

Here, A is principal debtor, Union bank of India is creditor and lastly B will act as surety.

A supplies goods to B on C’s guaranteeing payment by B to A. This means that if B does not
pay, C would be liable to pay. This is a “Contract of Guarantee”.

Here B is the principal debtor, C is the surety and A is the creditor.

A guarantee may be either “oral” or “written“. Just like any other contract, it should also
fulfill all the essentials of a valid contract. As stated already, three parties are involved in a
contract of guarantee. At the same time, there are three collateral contracts also namely,

1. As between A and B [A supplies goods to B on credit who promises that he would pay].

2. As between A and C [C gives guarantee the price of goods, I will pay].

3. As between C and B [B indemnifies C in case of B’s default in paying the amount to A).

Definition:

Contract of Guarantee refers to a contractual arrangement in which one party gives a

guarantee for another regarding the Fulfillment of a promise or repayment of the debt when
the latter fails to discharge the liability or perform the undertaking.
 That is to say, guarantee means to stand for another person and in a contract of guarantee, the
surety assures repayment of the loan on behalf of the one, who has taken the loan but failed to
repay. Therefore, it aims at protecting the other party from suffering loss.

Parties Involved in a Contract of Guarantee

The three parties that take part in a contract of guarantee are:

 Principal Debtor: He/she is the one who defaults in the payment of debt and therefore,
guarantee is given by another party.

 Creditor: One who extends credit to the Principal Debtor and to whom the guarantee is
given.

 Surety: The one who gives assurance to the creditor that he/she will pay the debt in case the
principal debtor defaults.

Let’s understand the parties involved in contract of guarantee with an example:

Suppose Mr. Shah gives a promise to Mr. Joshi, that if he extends 5 lakh rupees to Mr. Rao,
for a period of 2 years at an interest of 5% and Mr. Rao defaults in payment, Mr. Shah will
repay the debt. This creates a contract of guarantee between Mr. Shah (surety) and Mr. Joshi
(the creditor). Here, Mr. Rao is the (principal debtor).

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.

1. 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.

2. 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.

3. 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.

4. 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.
Main Feature of Contract of Guarantee

The contract may be either oral or in writing:

We have already discuss about this point in the introduction part of the paper. This is
provided under section 124 of Indian contract Act, 1872. This point has been point of
discussion because this part doesn’t coincide with the English law. English law says that the
contract of guarantee must be in written format with the consenting signature of the parties

 There should be a principal debt:

This point discuss about most important part of the contract of guarantee, this act as subject
of the contract of guarantee. Firstly, we have to understand that what is principal debt?
Principal debt is amount or thing which is borrowed by the principal debtor by creditor, for
which the surety as given the guarantee, if any default happen from principal debtor. So, if
any principal debt will not exist then, automatically contract of guarantee will not exist as
well. Let’s understand this with an example. Suppose, A borrow a sum of Rs. 500 from a
landlord B, for which the person C has given his surety. In this case if A will not borrow
money from B, then contract of guarantee will not exist.

 Benefit to the principal debtor is sufficient consideration:

As we have seen earlier as well that the consideration has always been prerequisites for the
contract. Here as well, we have consideration as a essential element for the contract. But here
we don’t need to pay or perform anything extra for the consideration. In this case, any profit
or benefit, which principal debtor will receive from the creditor will act as consideration for
surety and for the contract of guarantee. Let’s suppose, if A request for certain goods from B.
And, for which C is acting as a surety, then the delivering of goods to A will consider as
consideration for C, because A is benefited from this delivery of goods. This is mention
under section 127 of Indian Contract Act, 1872. It states anything done or any promise made,
for the benefit of the principal debtor, may be a sufficient consideration to the surety for
giving the guarantee.
 Consent of the surety should not have been obtained by misrepresentation or
concealment:

The consent of the surety should not be obtained by any unfair means i.e, by
misrepresentation or concealment of any material or fact of the contract. If anything found
further, this will subject to discontinuing of contract and contract can be further termed as a
invalid contract. This is discuss under section 142 and 143 of Indian Contract Act, 1872.
Section 142 states, Any guarantee which has been obtained by means of misrepresentation or
concealment of any material facts concerning the transaction, is invalid. Section 143 says,
Any guarantee which the creditor has obtained by means of keeping silence as to material
circumstances is invalid.

Liability of Surety

Liability of surety is mentioned in the section 128 of Indian Contract Act, 1872. It says The
liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
provided by the contract.

The above section explains us that, at what extent the surety is liable. It says that surety is
liable co-extensively with the principal debtor, in short we can say that the principal debtor’s
liability is equals to surety’s liability. If it is not provided in the contract additionally.

Let’s suppose if principal debtor have to pay any sum to any person with some additional
amount of interest, then surety will also have to pay the sum with some additional amount of
interest. Also, if somehow principal debtor is exempted due to any reason, then surety will
also be exempted in this scenario.

Co-Surety: Nature, Extent and Liability

Section 144 of Indian Contract Act, 1872 introduce the term Co-surety in the act. It states
where a person gives a guarantee upon a contract that the creditor shall not act upon it until
another person has joined in it as co-surety, the guarantee is not valid if that person does not
join.

The liability of sureties is co-extensive with that of principal debtor. As we have seen in
section 128 of Indian Contract Act, 1872 that the liability of surety is co-extensive with
principal debtor, the same is applicable with the co-surety as well.

Continuing Guarantee

A guarantee which is extend to series of the transactions is called a continuing guarantee.

This guarantee is applicable for the limited period of time and amount.

Earlier it is known as Specific Guarantee, but later it is termed as Continuing Guarantee.

Eg. A guarantees payment for the transaction amount of Rs. 15,000, which B will give C in
terms of good. Every time C pay the sum on time, but this time he found to be default. Now,
If C fails to do the payment, then A will pay behalf on him.

Rights of Surety

A surety has certain right against the principal debtor, creditor and co-surety.

Rights against Principal Debtor

Rights of Subrogation:

When the principal debtor fails to pay or perform to creditor, than surety steps in and perform
on behalf of principal debtor. After which surety is equipped with all the rights which creditor
has against the principal debtor. And, hereby surety can recover the amount or performance
which he has done on the behalf of principal debtor, it is Know as Right of Subrogation. This
is mention under section 140 of Indian Contract Act, 1872.
Right of Indemnity against the principal debtor:

This part discuss about section 145 of Indian Contract Act, 1872. When the principal debtor
makes any default, then the surety fulfil all the needs of creditor, which has to be completed
by the principal debtor according to the contract. Now, there is implied promise involved in
this contract that if the surety is performing on the behalf of principal debtor, then principal
debtor is liable to pay back all the amount which surety had pay on his behalf to creditor
lawfully. He is vested with all those rights which creditor had against the principal debtor.

Rights against Creditor

Securities received by the creditor at the time of contract guarantee: This point brings out
Section 141 of Indian Contract Act, 1872 in the discussion, which says, Surety’s right to
benefit of creditor’s securities.

A surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of surety ship is entered into, whether the surety knows
of the existence of such security or not; and if the creditor loses, or without the consent of the
surety, parts with such security, the surety is discharged to the extent of the value of the
security.

Rights against Co-Sureties

Right of Contribution against the Co-sureties in equal sums: Section 146 of Indian Contract
Act, 1872 discuss about the provision regarding distribution of liabilities of debt. Section 146
says, Where two or more persons are co-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contracts, and whether with or without the
knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are
liable, as between themselves, to pay each an equal share of the whole debt, or of that part of
it which remains unpaid by the principal debtor. This section speak up about the equal
contribution by surety. It is irrelevant that whether the sureties have undertaken the contract
individual or in a group. Whether they are aware about the other sureties or not, they have to
divide the amount of debt equally. This is all about this section.
Right of Contribution against the Co-sureties in equal sums

In section 147, it says, Co-sureties who are bound in different sums are liable to pay equally
as far as the limits of their respective obligations permit." In many conditions, the co-sureties
are free to make a contract in between themselves, about the different proportional of the
liability. The principal debtor and the creditor can’t interfere in between them. There will be a
different maximum limit for different sureties. There must be consent of all the other surety
members, if any one member is not ready with the contract, then contract will be quashed.

Right of Contribution:

If due to any reason, one of the surety has pay all the debts to the creditor, then he is liable to
Get back the rest of the money from other sureties, which he was not entitled to pay. In this
there is no need to take the consent of the other sureties.

CIRCUMSTANCES WHEN CONTRACT OF GURANTEE BECOMES INVALID

1. The guarantee is obtained by misrepresentation of facts

2. When the creditor obtains guarantee without disclosure of materials facts or with the
intention of committing fraud.

3. When the contract is made on a condition that creditor shall not act upon until there enters
a co-surety to a contract of guarantee and the other party fails to join.

DIFFERENCE BETWEEN INDEMNITY AND GURANTEE

INDEMNITY:

1. Two parties (Indemnifier & indemnity holder)

2. One contract

3. Objective to protect from any loss or damage to indemnity holder

4. Defined under section 124

5. Liability of indemnifier is primary

GUARANTEE:

1. Three parties (principle debtor, creditor, surety)

2. Three contracts (Basic contract, contract of indemnity & contract of guarantee)

3. Objective is to provide additional security to the creditor.

4. Defined under section 126

5. Liability of indemnity holder is secondary or colletral.

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 indemnity and guarantee is considers
as a special contract under Indian contract act, 1872. The legislation is well drafted one. The
extent of liability under a contract of indemnity depends on the nature and terms of the
contract and both this indemnity thus plays a crucial role in fixing the liabilities.

FOOT NOTES:

1. Contract of guarantee and its essential elements

https://www.lawcolumn.in/contract-of-guarantee-and-its-essential-elements/

2. Contract of indemnity & guarantee

https://www.studocu.com/in/document/karnataka-state-law-university/contract/contract-of-
indemnity-and-guaranett/8081348
3. Contract of guarantee rights of surety & co surety

http://www.jiwaji.edu/pdf/ecourse/law/8%20-%20Rights%20of%20Surety%20against
%20Creditor.pdf