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Section 126 of The Indian Contract Act, 1872 A Contract To Perform The Promise or Discharge The Liability of The Third Person in Case of His Default

A contract of guarantee is an agreement where a surety promises the creditor to perform or discharge the liability of the principal debtor in case of default. The essential elements of a valid contract of guarantee are: 1) it must satisfy all requirements of a valid contract, 2) it can be oral or written, 3) there must be a principal debtor whose default triggers the surety's liability, 4) it requires consideration, 5) all three parties (creditor, principal debtor, surety) must consent, and 6) there can be no misrepresentation or concealment of material facts.

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Section 126 of The Indian Contract Act, 1872 A Contract To Perform The Promise or Discharge The Liability of The Third Person in Case of His Default

A contract of guarantee is an agreement where a surety promises the creditor to perform or discharge the liability of the principal debtor in case of default. The essential elements of a valid contract of guarantee are: 1) it must satisfy all requirements of a valid contract, 2) it can be oral or written, 3) there must be a principal debtor whose default triggers the surety's liability, 4) it requires consideration, 5) all three parties (creditor, principal debtor, surety) must consent, and 6) there can be no misrepresentation or concealment of material facts.

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yasir
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Essentials of contract of Guarantee?

Section 126 of the Indian Contract Act, 1872 provides for contract of Guarantee as “A Contract to
perform the promise or discharge the liability of the third person in case of his default.

Section further provides that:

“The person who gives the guarantee is called the Surety”

“The person in respect of whose default the guarantee is gives is called Principal debtor” and

“The person to whom the guarantee is given is called the Creditor”.

The following are the requisites of a valid Guarantee:

1 All the conditions of a valid contract

All the essentials of a valid contract must be present in the Contract of Guarantee.

2 Oral or Written format

Sec 126 of the act expressly declares that a guarantee may be either oral or written different from that
of England where it is necessary that for a valid contract of guarantee, it should be in writing.

3 Principal debt

There should be someone liable as a Principal debt and the surety should undertake to be liable on his
default. If there is no principal debt, there can be no valid guarantee.

Swan vs. bank of Scotland, 1836

In this case it was laid down that , “a contract of guarantee is a tripartite agreement which contemplates
the principal debtor, the creditor and the surety”.

4 Sufficient Consideration

A contract of guarantee should be supported by some consideration.


Section 127 of Indian contract act,1872provides for the consideration for guarantee.

Ghulam Husain khan vs. Faiyaz Ali khan AIR 1940

In this case it was held that since no consideration in capacity of principal debtor had passed from
creditor at the time of execution of the document, nor was anything done for his benefit on that day,
the contract of guarantee was without consideration.

5 Consent

It is necessary that all the three parties’ i.e., the creditor, Principal debtor and the surety should agree to
the contract.

In the case of Swan vs. Bank of Scotland 1836, it was held that a contract of guarantee is a tripartite
agreement between the creditor, the principal debtor, and the surety.

6 There should be no misrepresentation of concealment of facts

A contract of guarantee is not a contract uberrimae fides or one of absolute good faith.

Section 142 provides for “Any Guarantee which is obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.”

Section 143 provides for “Any guarantee which the creditor has obtained by means of keeping silence as
to material circumstance, is invalid”

In the case of London General Omnibus vs. Holloway 1912, a person was invited to guarantee an
employee, who was previously dismissed for dishonesty by the same employer. This fact was not told to
the surety. Later on, the employee embezzled funds but the surety was not held liable.

Conclusion:

A contract of guarantee requires important essentials for a valid guarantee. Without these essentials a
contract of guarantee cannot be formed.

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