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What is Contract Of Guarantee
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What is Contract Of GuaranteeIntroduction
Black laws dictionary defines the term guarantee as the assurance that a legal contract will be duly
enforced. A contract of guarantee is governed by the Indian Contract Act,1872 and includes 3
parties in which one of the parties acts as the surety in case the defaulting party fails to fulfill his
obligations. Contracts of guarantee are mostly required in cases when a party requires a loan,
goods or employment. The guarantor in such contracts assures the creditor that the person in
need may be trusted and in case of any default, he shall undertake the responsibility to pay. Thus
we can say contract of guarantee is invisible security given to the creditor and shall be discussed
further
,What is a contract of guarantee?
Section 126 of the Indian contract act defines a contract of guarantee as a contract to perform the
promise or discharge the liability of the defaulting party in case he fails to fulfill his promise.
Thus here we can infer that there the 3 parties to the contract
Principal Debtor – The one who borrows or is liable to pay and on whose default the guarantee is
given
Creditor – The party who has given something of value to borrow and stands to receive the
payment for such a thing and to whom the guarantee is given
Surety/Guarantor – The person who gives the guarantee to pay in case of default of the
principal debtor
Also, we can understand that a contract of guarantee is a secondary contract that emerges from a
primary contract between the creditor and the principal debtor.
Illustration
Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav promises that in
case Pallav fails to repay the loan, then she will repay the same. In this case of a contract of
guarantee, Ankita is the Creditor, Pallav the principal debtor and Srishti is the Surety.
A contract of guarantee may either be oral or written. It may be express or implied from the
conduct of parties.
, In P.J. Rajappan v Associated Industries(1983) the guarantor, having not signed the contract of
guarantee, wanted to wriggle out of the situation. He said that he did not stand as a surety for the
performance of the contract. Evidence showed the involvement of the guarantor in the deal and
had promised to sign the contract later. The Kerala High Court held that a contract of guarantee is
a tripartite agreement, involving the principal debtor, surety and the creditor. In a case where
there is evidence of the involvement of the guarantor, the mere failure on his part in not signing
the agreement is not sufficient to demolish otherwise acceptable evidence of his involvement in
the transaction leading to the conclusion that he guaranteed the due performance of the contract
by the principal debtor. When a court has to decide whether a person has actually guaranteed the
due performance of the contract by the principal debtor all the circumstances concerning the
transactions will have to be necessarily considered.
Essentials of a Contract of Guarantee
1) Must be made with the agreement of all three parties
All the three parties to the contract i.e the principal debtor, the creditor, and the surety must agree
to make such a contract with the agreement of each other. Here it is important to note that the
surety takes his responsibility to be liable for the debt of the principal debtor only on the request
of the principal debtor. Hence communication either express or implied by the principal debtor to
the surety is necessary. The communication of the surety with the creditor to enter into a contract
of guarantee without the knowledge of the principal debtor will not constitute a contract of
guarantee.
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