Contract of Guarantee under Indian Contract Act
A Contract of Guarantee under the Indian Contract Act, 1872, is a legal agreement wherein a third party (called the surety) assures the performance or obligation of a principal debtor to a creditor. If the principal debtor fails to fulfill their obligation, the surety is bound to perform it or compensate the creditor.
📜 Definition (Section 126 of the Indian Contract Act, 1872):
“A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.”
🧑⚖️ Parties Involved:
Principal Debtor – The person who has the primary liability.
Creditor – The person to whom the guarantee is given.
Surety – The person who gives the guarantee (the guarantor).
✅ Essentials of a Valid Contract of Guarantee:
Agreement between three parties (creditor, principal debtor, and surety).
Consideration – No direct benefit to the surety is necessary; benefit to the principal debtor is sufficient.
Competency of parties – Surety must be competent to contract.
Existence of liability – There must be a default or potential liability of the principal debtor.
No misrepresentation or concealment – Guarantee must be free from fraud.
Written or Oral – Under Indian law, a guarantee may be either oral or written (unlike English law, which generally requires writing).
🔁 Types of Guarantees:
Specific Guarantee – Applies to a single transaction.
Continuing Guarantee – Extends to a series of transactions (Section 129).
⚖️ Rights of the Surety:
Right of Subrogation (Section 140) – After paying the creditor, the surety steps into the shoes of the creditor.
Right to Indemnity (Section 145) – Surety can recover from the principal debtor all sums rightfully paid.
Right to securities (Section 141) – Surety is entitled to benefit from all securities the creditor holds.
❌ Discharge of Surety (Sections 133–139):
The surety may be discharged in several ways, including:
Variance in terms of contract without surety’s consent.
Release or discharge of principal debtor.
Act or omission of creditor impairing surety's remedy.
🧠 Example:
If A lends ₹50,000 to B, and C guarantees that if B fails to repay, C will. If B defaults, C is bound to pay A.
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