CONTRACT OF GUARANTEE
Contract of Guarantee-Section 126
A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default.
Example (a): A requests B to lend Rs.1,000 to C and guarantees that if C does not pay the amount, he will pay. This is a contract of guarantee.
There are three parties in a contract of guarantee:
Surety The person who gives the guarantee.
Creditor The person to whom guarantee is given.
Principal Debtor The person in respect of whose default the guarantee is given.
Contract of guarantee comprises three agreement
In a contract of guarantee there are three collateral contracts as follows:
(a) First, between creditor and principal debtor, there is a contract out of which the guaranteed debt arises.
b. Second, between surety and creditor, there is a contract by which surety guarantees to pay to creditor, principal debtor’s debt in case of default.
c. Third, between surety and principal debtor, there is a contract that principal debtor shall indemnify surety in case surety pays in the event of default by principal debtor.
Essentials of contract of guarantee
1. Concurrence of three parties necessary: A contract of guarantee (or suretyship) require the concurrence of three persons, viz principal debtor, the creditor and surety. In the absence of consent of any of them no contract is made.
Example: A, enters into a contract with B. C without any communication with B, undertakes for a consideration moving from A to indemnify A against any damage that may arise from a breach of B’s obligations. This will not make C a surety for B because a person cannot become a surety without the consent of principal debtor.
2. Liability must be legally enforceable: Section 126 contemplates a liability which is enforceable at law. If that liability does not exist, there cannot be a contract of guarantee. Thus, a surety is not liable on a guarantee for the payment of a debt which is barred by the law of limitation.
Example: A owes a debt to B. C gives a guarantee to B for the payment of a debt after it is barred by the law of limitation. C pays the amount to B. He cannot recover the amount from A as there is no enforceable liability against A.
3. Essentials of valid contract of guarantee
A contract of guarantee must have all the essentials of a valid contract. But the following two points should be noted:
(a) Principal debtor may suffer incapacity in which case the surety is regarded as the principal debtor and is liable personally.
(b) Consideration must be received by the principal debtor which need not be of any benefit to the surety himself. It is sufficient if something is done or promised for the benefit of principal debtor. Section 127 lays down this rule as under:
“Anything done, or promise made for the benefit of principal debtor may be a sufficient consideration to the surety for giving the guarantee.”
Example: A requests B to sell and deliver to him goods on credit. B agrees to do so, if C guarantee’s the payment of the price of the goods C promises to guarantee the payment in consideration of B’s promise to deliver the goods. This is sufficient consideration for C’s promise.
4. Writing not necessary-Section 126: Section 126 provides that a contract of guarantee may either be oral or written. Again it may be express or implied. Besides, implied guarantee may be inferred from the course of conduct of the parties concerned.
Guarantee not a contract of uberrimae fidie
A contract of guarantee is not a contract of uberrirnae fidie requiring full disclosure of ail material facts by the principal debtor or creditor to the surety before the contract is made. The surety is entitled to know so much as will tell him what is the transaction for which he is making himself liable. A creditor must disclose the facts which under the circumstances should not exist. If the creditor is in possession of unusual important facts must bring them <o the notice of surety at the time of contract. Concludingly, the contract of guarantee may not be a contract of uberrirnae fidei i.e. of utmost good faith. But the suretyship relation is still one of trust and confidence and its validity depends on good faith on the part of the creditor.