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Contract of Guarantee

This document discusses contracts of guarantee under business law. It defines a contract of guarantee as a contract where a third party (the surety) agrees to be liable for the debt or obligation of another (the principal debtor) in the event of default. The key parties in a contract of guarantee are identified as the surety, principal debtor, and creditor. The document also distinguishes between specific guarantees applicable to a single transaction, and continuing guarantees which apply to multiple transactions over time.

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Rishab Jain 2027203
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654 views15 pages

Contract of Guarantee

This document discusses contracts of guarantee under business law. It defines a contract of guarantee as a contract where a third party (the surety) agrees to be liable for the debt or obligation of another (the principal debtor) in the event of default. The key parties in a contract of guarantee are identified as the surety, principal debtor, and creditor. The document also distinguishes between specific guarantees applicable to a single transaction, and continuing guarantees which apply to multiple transactions over time.

Uploaded by

Rishab Jain 2027203
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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BBA 201 Business Law 6/18/2018 1

 Contract of guarantee (sec. 126)


 Essential features of guarantee
 Types of guarantee

BBA 201 Business Law 6/18/2018 2


 “A contract of guarantee is a contract to perform the
promise or discharge the liability of a third person in
case of his default.”

 e.g. - A advances a loan of Rs 5 lakh to B and C


promises to A that if B doesn‟t repay the loan, C will do
so. This is a contract of guarantee.

BBA 201 Business Law 6/18/2018 3


 The person who gives the guarantee is called the
„surety‟.

 The person in respect of whom the guarantee is given is


called „principal debtor‟.

 The person to whom the guarantee is given is called


„creditor’.

BBA 201 Business Law 6/18/2018 4


1. Tripartite Agreement
2. Consent of three parties
3. Existence of Liability
4. Essentials of Valid Contract
5. A Contract of Guarantee may be either Oral or
Written
6. Guarantee not be obtained by Misrepresentation [
Sec142]

BBA 201 Business Law 6/18/2018 5


Specific Guarantee:
It is applicable to a particular debt or single transaction
and guarantee end on its repayment.
A Specific guarantee once given is irrevocable.

e.g.
A guarantees the repayment of a loan of Rs. 10 lakh to
B by C (a banker). The guarantee in this case is a
specific guarantee.

BBA 201 Business Law 6/18/2018 6


Continuing Guarantee:
When a guarantee extends to a series of transactions, it is called
Continuing Guarantee

e.g. –
A guarantees payment to B , a tea- dealer, to amount of Rs.
10,000 for any tea he may from time to time supply to C. B
supplies C with tea of the value above Rs. 10,000 and C pays B
for it. Afterwards B supplies C with tea to the value of Rs.
15,000. C fails to pay. The guarantee given by A was a continuing
guarantee and he is accordingly liable to B to extent of Rs.
10,000.

BBA 201 Business Law 6/18/2018 7


 A). By Revocation (Sec 130)
 The surety may revoke his guarantee for future, i.e. , for the
transactions which have not yet been made, by a notice to the
creditor.
 e.g.-
 A had employed S as his employee. S took a house on rent
somewhere and A guaranteed to the house-owner that S will
pay rent regularly. After some time S left A‟s job. A informed
to the house owner and revoked his guarantee immediately.

BBA 201 Business Law 6/18/2018 8


 By Notice of Revocation

 By Novation

 By alteration in the terms of contract.

 Arrangement between Principal Debtor & Creditor.

BBA 201 Business Law 6/18/2018 9


 B). By death of surety (Sec 131)

 A surety‟s liability come to an end by the death.

BBA 201 Business Law 6/18/2018 10


 Surety’s liability is secondary not primary:
 In General circumstances, the liability of surety arises
only in case of default of Principal Debtor so his liability
is secondary.
 Liability of Surety is co-extensive with that of
Principal Debtor-if liability of Principal Debtor
reduces then surety’s liability also reduces
 When Creditor recovers a part of his loan from
property of principal debtor.
 When liability of Principal Debtor reduces by order of
court.

BBA 201 Business Law 6/18/2018 11


 If due to some reasons the Principal Debtor
cannot be held liable, still surety can be held
liable in following situations-

If Principal Debtor is declared insolvent.


If creditor delays in filing suit against the debtor.

 Surety will be liable only when the contract


with the creditors is valid
 If it is caused by a fraud or misrepresentation by the
creditors then it shall be voidable at surety‟s option

BBA 201 Business Law 6/18/2018 12


1. Number of Parties:
Indemnity Contract includes Two Parties namely,
Indemnifier and Indemnity Holder.
But Guarantee Contract includes Three Parties namely
Creditor, Principal Debtor and Surety.

2. Number of Contracts:
In case of Indemnity Contract, as there are only two
parties, there is possibility for existence of One Contract
only.
But a Contract of Guarantee includes Three Sub-
contracts.
BBA 201 Business Law 6/18/2018 13
3. Nature:
As indemnity contract includes Two Parties and One
Contract, it can be said that indemnity contract is
Simple in nature.

But Guarantee Contract includes Three Parties and


Three Sub-Contracts and hence be said that guarantee
contract is Complex in nature.

BBA 201 Business Law 6/18/2018 14


4. Liability:
Contract of Indemnity there is no classification and
sharing of liability where the Absolute Liability rests
with Indemnifier

But in Contract of Guarantee, there will be two types of


liabilities namely; Primary and Secondary Liabilities
which will be with Principal Debtor and Surety
respectively.

BBA 201 Business Law 6/18/2018 15

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