Gaurantee under ICA,1872


As defined in section 126 of the contract Act -A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the ‘Surety’ or ‘guarantor’ & the person in respect of whose default the guarantee is given is called the principal debtor or he is the party on whose behalf. Guarantee is given and the person to whom the guarantee is given is called the ‘Creditor’.

Guarantee is constituted with the concurrence of the principle debtor, the creditor and the surety, but that does not mean that there must be evidence showing that the principle-debtor undertook his obligation at the express request of the principle-debtor as implied request will be quiet sufficient to satisfy this requirement. The function of a contract of guarantee is to enable a person to get a loan on goods on credit, or an employment. A contract of guarantee is rendered void without valid consideration

Essential features of a Guarantee Contract

  • Tripartite Agreement: A contract of guarantee entails three parties, principal creditor, creditor and surety. In a successful contract of guarantee, there must be three separate contracts between the three parties and each and every contract must be consenting.
  • Liability: Here the main liability lies with the principal debtor. Secondary liability lies with the surety which can only be invoked once the principal debtor defaults on its payment.
  • Essentials of a Valid Contract: Like any other general contract, it maintains free consent, consideration, lawful object and competency of contracting parties as the essentials of a valid contract.
  • Medium of Contract: The Indian Contract Act, 1872, does not strictly mention the need for any written form of contract of guarantee. Both oral and written form will suffice.

Kinds of Guarantee

Specific or Simple Guarantee: When a guarantee is given in respect to a single debt or specific transaction is to come to an end when the guarantee debt is paid or the promise is duly performed. It is called a specific or simple guarantee.

Continuing guarantee: Section 129, of the contract Act defines a guarantee which towards to a series of transaction is called a continuing guarantee; thus, a continuing guarantee is not confined to a single transaction but keeps on moving to several transactions continuously.

Rights of a surety

As against the Creditor:

  • Sec. 133 — The creditor ought not fluctuate terms of the agreement between the creditor and the principal debtor without the surety’s assent. Any such fluctuation releases the surety as to transactions ensuing to the difference. However in the event that the change is for the profit of the surety or does not prefer him or is of an irrelevant character, it might not have the impact of releasing the surety.
  • Sec. 134 — The creditor ought not discharge the principal debtor from his liability under the agreement. The impact of the release of the principal debtor is to release the surety too. Any enactment or exclusion from the creditor which in law has the impact of releasing the principal debtor puts a close to the liability of the surety.
  • Sec. 135 -In the event that an agreement is made between the Creditor and Principal debtor for intensifying the last’s liability or making a guarantee to him growth of time for doing the commitments or swearing up and down to not to beyond any doubt, releases the surety unless he consents to such an agreement.
  • Sec. 139 — the surety is released if the creditor debilitates the surety’s possible remedy against the principal debtor.

As Against the Principal Debtor

  • Rightof subrogation — The surety on making good of the debt obtains a right of subrogation.
  • Sec. 140 — the surety can’t assert the right of subrogation to the creditor’s securities in the event that he has agreed as a security for a part of the contract and security has been procured by the creditor for the complete debt.

Case Laws

In P.J Rajappan v. Associate Industries (P) Ltd It was held by the Kerala High Court that an oral guarantee is also valid, a person who otherwise appeared to be a guarantor was held liable though his signature did not appeared on the guarantee papers.

In Punjab National Bank Limited v. Bikram Cotton Mills & Anr it was held that though, the bond, it is true, did not expressly recite that the company was the principal debtor;it is also true and the Company did not execute the bond but a contract of guarantee may be wholly written, may be wholly oral, or may be partly written and partly coral.