Other
Contract of Guarantee Meaning & Features (Indian Contract Act)
- Course
- Institution
Contract of Guarantee Meaning & Features (Indian Contract Act)
[Show more]
Content preview
Contract of Guarantee: Meaning & Features (IndianContract Act)
What is Contract of Guarantee?
Section 126 of the Indian Contract Act 1872 establishes that a Contract of Guarantee is a
type of contract where one party promises the other party to perform the promise or to
discharge the liability which is incurred by the third party due to his default. Contract of
Guarantee is governed under the Indian Contract Act 1872, where three parties come
together to create a contract of guarantee. A contract of guarantee is mostly seen in the
cases of loans, employment, etc. A surety is the person who shall undertake the
responsibility to perform the contract in case the principal debtor fails to undertake his
share of responsibility. It may be inferred that surety acts as a layer of security for the
creditor.
Contract of Guarantee can be either an oral contract or a written contract. There are three
parties in a contract of guarantee, namely the principal debtor, creditor, and surety. In a
contract of guarantee, there exists three contracts, viz primary contract between the
creditor and principal debtor, then a contract between surety and creditor comes into
existence when the principal debtor has made a default in fulfilling his part of the
responsibility. The third contract exists between the surety and the principal debtor, where
the surety has the right to recover the consideration paid to the creditor.
Geeky Takeaways:
● A contract of guarantee is a legal promise that is made by a third party to pay off
an obligation of another party in case the debtor fails to fulfill his part of the
obligation.
, ● The purpose of a contract of guarantee is to get assurance regarding the
performance of the contract to be executed.
● A guarantee is a secondary obligation that comes to light once the principal
debtor has failed to acknowledge his part of the performance.
● Contract of guarantee is a tripartite agreement, there are three parties in a
contract of guarantee, namely the surety, the principal debtor, and the creditor.
●
Example of Contract of Guarantee
Consider the following example under Contract of Guarantee:
● Ritesh obtains a loan from XYZ bank, and Sudhir promises the bank that if Ritesh
fails to repay the loan amount, he will pay off the amount to the bank. This is a
Contract of Guarantee.
● In any case, where Ritesh fails to pay off the loan amount, the bank can recover
the amount from Sudhir and Sudhir will be liable to pay off the dues.
● Also, Sudhir will have the right to claim the amount he has paid to the bank from
Ritesh.
● Here in this case, Ritesh is the Principal Debtor, and in his respect, Sudhir has
given a guarantee to the bank.
● XYZ bank is the Creditor, Sudhir has given XYZ bank the guarantee, and the
bank can recover the loan amount in case of default.
● Sudhir is the Surety, as he has given the guarantee to the bank in respect of
Ritesh.
Section 126: Indian Contract Act 1872
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller AnswersCOM. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.99. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
72964 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now