2. DEFINITION
According to Section 126, a ‘contract of guarantee’ 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’, the person in respect of whose default the guarantee is
given is called the ‘principal debtor’, and the person to whom the
guarantee is given is called the ‘creditor’. A guarantee may be
either oral or written.
3.
4. PURPOSE OF CONTRACT OF
GUARANTEE
It enables a person to get a loan, or goods on credit or employment. Some person comes
forward and ensures the lender or the supplier or the employer that he may be trusted and in
case of any untoward incident, “I undertake to be responsible”.
In the case of Birkmyr v Darnell (1704), the court said: Where a collateral guarantee arises
when two persons come to shop, one of them to buy, the other to give credit, thereby
promising the seller stating if he doesn’t pay I will’’. This is a collateral guarantee.
In English law, a guarantee is defined as ‘’a promise to pay for the debt, default or failure of
another’’. “Guarantees are a backup when the principal fails the guarantee act as second
pockets’’.
5. PARTIES
The person who gives the guarantee is called the
Surety, the person in respect of whose default the
guarantee is given is called the Principal Debtor and
the person to whom the guarantee is given is called
the Creditor.
6. INDEPENDENT LIABILITY DIFFERENT FROM
GUARANTEE
There must be a conditional promise to be liable on the default of the principal debtor. A
liability which is incurred independently of a default is not within the definition of
guarantee.
This principle was applied in Taylor v Lee where a landlord and his tenant went to the
plaintiff’s store. The landlord said to the plaintiff: Mr. Parker will be on our land this year,
and you will sell him anything he wants, and I will see it paid.
This was held to be an original promise and not a collateral promise to be liable for the
default of another and, therefore, not a guarantee.
7. EXCEPTIONS OF ESSENTIAL FEATURES OF
GUARANTEE
A Consideration received by the principal debtor is a sufficient
consideration to the surety for giving guarantee.
Even if principal debtor is incompetent to contract, the guarantee
is valid. But, if surety is incompetent to contact, the guarantee is
void.
8. ESSENTIAL FEATURES OF
GUARANTEE
Principal debt: “A contract of guarantee is a tripartite agreement which contemplates the
principal debtor, the creditor and the surety’’. There should exist an independent debt. It is
critical that there should be a principal debtor who has taken debt from the creditor. There can’t
be a surety without a principal debtor, held in Scottish case of Swan v. Scotland, 1836.
Guarantee For Void Debt, When Enforceable
But sometimes a guarantee even for the void debt may be held enforceable. For example, the owner
of the company guaranteed their company's loan which was as being ultra vires, the owner was
nevertheless held liable
Guarantee Of Minor’s Debt
When the debt of a minor has been guaranteed, no liability should be incurred by the surety. This
was held in the case of Coutts and Co. v. Browne Lecky.
In case of Kashiba v. Shripat, 1895, Bombay High Court held that in case of guarantee for void
debt when enforceable (minor’s), if the debt is void, the contract of the surety is not collateral, but a
principal contract.
9. Consideration: A contract of guarantee should also be supported by a valid consideration. A
guarantee without consideration is void.
Sec 127 of Indian Contract Act 1872 talks about the consideration for guarantee as Anything done,
or any promise made for the benefit of the principle debtor, may be a sufficient consideration to the
surety for giving the guarantee.
Guarantee For The Past Debt
The guarantee for the past debt is invalid. The section says that anything done for the benefit of the
principal debtor is a good consideration. But the word anything was explained in the case
of M.Gulam Husain Khan Vs M. Faiyaz Ali Khan.10 the court held that the bond was not
without consideration. The decision has been criticized in pollock and Mulla. The learned editor
observed This seems to attribute and unnatural meaning to the word, which, it is submitted and as
the rest of the section shows refers to an executed as distinguished from the executory
consideration.
10. Benefit Of Principle Debtor, Enough Consideration
If the principal debtor gets a benefit, that suffices to sustain the guarantee. It will be of no
consequences to say that the principal debtor had never requested for a guarantee or that it
was given without his knowledge or consent.
There are three possible variation in the parties to contract of suretyship. The first and the
simplest case in that in which all the three parties concerned are parties to the contract of
suretyship.
The second and third case is that in which all the three parties concerned are parties to the
contract in sense the both the principal debtor and creditor agree that the surety's liability is a
secondary liability only.
11. Misrepresentation and Concealment : According to Section 142, guarantee obtained
by misrepresentation, invalid- Any guarantee obtained by means of misrepresentation
made by the creditor or with his knowledge and assent, concerning a material part of the
transaction, is invalid.
According to Section 143, guarantee obtained by concealment, invalid- Any guarantee which
the creditor has obtained by means of keeping silences as to material silences as to material
circumstances in valid.
A contract of guarantee is not a contract uberrimae fides or one of complete good faith..
Where a customer had a precarious credit position. The surety wasn’t aware of this and acted
as a guarantor of the customer. In case of London General Omnibus Co v. Holloway,
1912, it was held that the bank is under no obligation to disclose this fact to the surety.
However, it is the duty of a party taking guarantee to provide the surety with important facts
so that he can make an informed decision. Facts which will affect his responsibility under
the contract of guarantee.
12. Writing not necessary: Section 126 says that a guarantee may be either oral or written. In
England, guarantee is not enforceable unless it is “In writing and signed by the party to be
charged”.
