Contract of Guarantee

A Contract to perform the promise, or

discharge the liability, of a third person
in case of his default is called Contract
of Guarantee.
 Example:
Taking loan
A from Bank

Keeping
as surety

3 contracts involved between each other

The person who gives the guarantee is
called the “SURETY”

The person who is taking loan is called

as “PRINCIPAL DEBTOR”

The one who gives loan is called as

“CREDITOR”.
Is it necessary to have only one person
as surety?
Discharge of surety from liability
REVOCATION BY THE SURETY, SEC-130.

BY SURETY’S DEATH, SEC-131.

BY VARIANCE IN THE TERMS OF THE

CONTRACT, SEC-133.

BY RELEASE OR DISCHARGE OF THE

CONTRACT, SEC-134.
Types of Guarantee

 1. On The Basis Of Transection

 Specific Guarantee
 Continuing Guarantee

 2. On The Basis Of Time

 Retrospective Guarantee
 Prospective Guarantee
Rights Of Surety
 1. Rights Against The Creditor
 Right to securities(SEC 141)

 2. Rights Against The Principal Debtor

 Right of subrogation(SEC 140)
 Right of indemnity(SEC 145)

 3. Rights Against Co-surety

 Right to contribution (SEC 146-147)
Rights Against the Creditor

 RIGHT TO 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
suretyship is entered into.
Example

 A goes to B and ask for the loan of 2000$ for which C is the Surety.
But B says only Guarantee is not enough what will I do if A does not
repay.
 A gives the Gold as security and B gives the loan.
 When A failed to pay the amount, B recovered the amount from C
who is the surety.
 After C has paid the amount he can take the gold from B.
 This is know as the RIGHT TO SECURITIES
Rights Against The Principal Debtor
 RIGHT OF SUBROGATION
 Example
 When the debt has become due or when default is made by the
principal debtor and surety has paid the amount.
 The surety steps into the shoes of the creditor.- that means surety will
get all the rights which the creditor had against the principal debtor.
 RIGHT TO INDEMNITY
 In every contract of guarantee there is an IMPLIED PROMISE by the
principal debtor to indemnify the surety.
 According to section 145
 The surety is entitled to recover from the principal debtor whatever
sum he has rightfully paid under the guarantee.
Rights against Co-surety

 RIGHT TO CONTRIBUTION
 CO-SURETIES LIABLE TO CONTRIBUTE – SECTION 146
 LIABILITY OF CO-SURETIES BOUND IN DIFFERENT SUMS- SECTION 147
 CO-SURETIES LIABLE TO CONTRIBUTE EQUALLY
 When 2 or more persons are co-sureties
 Whether under the same or different contracts. and
 Whether with or without the knowledge of each other.
 THEY ARE LIABLE AS TOWARDS EACH OTHER, TO PAY AN EQUAL SHARE
OF THE WHOLE DEBT.
 EXAMPLE
 A, B and C are co-sureties for a loan of 3000 $ given by D to E and
when E fails to pay the A B and C are liable to pay 1000 $ each.
 LIABILITY OF CO-SURETIES BOUND IN DIFFERENT SUMS- SECTION 147
 Co-sureties who are bound in different sums are liable to pay
equally as far as the limits of their respective obligations permit.
 EXAMPLE
 A, B and C are co-sureties for a loan given to D.
 A has guaranteed up to 10000 $
 B has guaranteed up to 20000 $
 C has guaranteed up to 40000 $
 When D makes a default of 30000 $ . A,B and C liable to pay 10000 $
each.
 In this same example if suppose D makes a default of 40000 than A
will be liable for 10000 $ but B and C will be liable for 15000 $ and
15000$ each.