What is Contract Of Guarantee :-

Introduction
Black laws dictionary defines the term guarantee as the assurance that a legal contract will be duly
enforced. A contract of guarantee is governed by the Indian Contract Act,1872 and includes 3 parties in which
one of the parties acts as the surety in case the defaulting party fails to fulfill his obligations.

Contracts of guarantee are mostly required in cases when a party requires a loan, goods or employment.
The guarantor in such contracts assures the creditor that the person in need may be trusted and in case of any
default, he shall undertake the responsibility to pay. Thus we can say contract of guarantee is invisible security
given to the creditor and shall be discussed further

What is a contract of guarantee?

Section 126 of the Indian contract act defines a contract of guarantee as a contract to perform the promise or
discharge the liability of the defaulting party in case he fails to fulfill his promise.

Thus here we can infer that there the 3 parties to the contract

Principal Debtor – The one who borrows or is liable to pay and on whose default the guarantee is given

Creditor – The party who has given something of value to borrow and stands to receive the payment for such a
thing and to whom the guarantee is given

Surety/Guarantor – The person who gives the guarantee to pay in case of default of the principal debtor

Also, we can understand that a contract of guarantee is a secondary contract that emerges from a primary
contract between the creditor and the principal debtor.

Illustration

Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav promises that in case Pallav
fails to repay the loan, then she will repay the same. In this case of a contract of guarantee, Ankita is the
Creditor, Pallav the principal debtor and Srishti is the Surety.

A contract of guarantee may either be oral or written. It may be express or implied from the conduct of parties.

In P.J. Rajappan v Associated Industries(1983) the guarantor, having not signed the contract of guarantee,
wanted to wriggle out of the situation. He said that he did not stand as a surety for the performance of the
contract. Evidence showed the involvement of the guarantor in the deal and had promised to sign the contract
later. The Kerala High Court held that a contract of guarantee is a tripartite agreement, involving the principal
debtor, surety and the creditor. In a case where there is evidence of the involvement of the guarantor, the mere
failure on his part in not signing the agreement is not sufficient to demolish otherwise acceptable evidence of his
involvement in the transaction leading to the conclusion that he guaranteed the due performance of the contract
by the principal debtor. When a court has to decide whether a person has actually guaranteed the due
performance of the contract by the principal debtor all the circumstances concerning the transactions will have
to be necessarily considered.

Essentials of a Contract of Guarantee

1) Must be made with the agreement of all three parties

All the three parties to the contract i.e the principal debtor, the creditor, and the surety must agree to
make such a contract with the agreement of each other. Here it is important to note that the surety takes his
responsibility to be liable for the debt of the principal debtor only on the request of the principal debtor. Hence
communication either express or implied by the principal debtor to the surety is necessary. The communication
of the surety with the creditor to enter into a contract of guarantee without the knowledge of the principal debtor
will not constitute a contract of guarantee.

Illustration
Sam lends money to Akash. Sam is the creditor and Akash is the principal debtor. Sam approaches Raghav to
act as the surety without any information to Akash. Raghav agrees. This is not valid.

2) Consideration

According to section 127 of the act, anything is done or any promise made for the benefit of the principal debtor
is sufficient consideration to the surety for giving the guarantee. The consideration must be a fresh consideration
given by the creditor and not a past consideration. It is not necessary that the guarantor must receive any
consideration and sometimes even tolerance on the part of the creditor in case of default is also enough
consideration.

In State Bank of India v Premco Saw Mill(1983), the State Bank gave notice to the debtor-defendant and also
threatened legal action against her, but her husband agreed to become surety and undertook to pay the liability
and also executed a promissory note in favor of the State Bank and the Bank refrained from threatened action. It
was held that such patience and acceptance on the bank’s part constituted good consideration for the surety.

3) Liability

In a contract of guarantee, the liability of a surety is secondary. This means that since the primary contract was
between the creditor and principal debtor, the liability to fulfill the terms of the contract lies primarily with the
principal debtor. It is only on the default of the principal debtor that the surety is liable to repay.

4) Presupposes the existence of a Debt

The main function of a contract of guarantee is to secure the payment of the debt taken by the principal debtor.
If no such debt exists then there is nothing left for the surety to secure. Hence in cases when the debt is time-
barred or void, no liability of the surety arises. The House of Lords in the Scottish case of Swan vs. Bank of
Scotland (1836) held that if there is no principal debt, no valid guarantee can exist.
5) Must contain all the essentials of a valid contract

Since a contract of guarantee is a type of contract, all the essentials of a valid contract will apply in contracts of
guarantee as well. Thus, all the essential requirements of a valid contract such as free consent, valid
consideration offer, and acceptance, intention to create a legal relationship etc are required to be fulfilled.

To know more about the essentials of a valid contract, please read this

6) No Concealment of Facts

The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee
obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by
the concealment of material facts.

7) No Misrepresentation

The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract of
guarantee is not a contract of Uberrima fides i.e., of absolute good faith, and thus, does not require complete
disclosure of all the material facts by the principal debtor or creditor to the surety before he enters into a
contract. But the facts, that are likely to affect the extent of surety’s responsibility, must be truly represented

Kinds of guarantee
Contracts of guarantees may be classified into two types: Specific guarantee and continuing guarantee.
When a guarantee is given in respect of a single debt or specific transaction and is to come to an end when the
guaranteed debt is paid or the promise is duly performed, it is called a specific or simple guarantee. However, a
guarantee which extends to a series of transactions is called a continuing guarantee (Section129). The surety’s
liability, in this case, would continue till all the transactions are completed or till the guarantor revokes the
guarantee as to the future transactions.

Illustrations

a) S is a bookseller who supplies a set of books to P, under the contract that if P does not pay for the books, his
friend K would make the payment. This is a contract of specific guarantee and K’s liability would come to an
end, the moment the price of the books is paid to S.

b) On M’s recommendation S, a wealthy landlord employs P as his estate manager. It was the duty of P to
collect rent every month from the tenants of S and remit the same to S before the 15th of each month. M,
guarantee this arrangement and promises to make good any default made by P. This is a contract of continuing
guarantee.

Continuing guarantee
A continuing guarantee is defined under section 129 of the Indian Contract Act,1872. A continuing guarantee is
a type of guarantee which applies to a series of transactions. It applies to all the transactions entered into by the
principal debtor until it is revoked by the surety. Therefore Bankers always prefer to have a continuing
guarantee so that the guarantor’s liability is not limited to the original advances and would also extend to all
subsequent debts.

The most important feature of a continuing guarantee is that it applies to a series of separable, distinct
transactions. Therefore, when a guarantee is given for an entire consideration, it cannot be termed as a
continuing guarantee.

Illustration

K gave his house to S on a lease for ten years on a specified lease rent. P guaranteed that S, would fulfill his
obligations. After seven years S stopped paying the lease rent. ‘K sued him for the payment of rent. P then gave
a notice revoking his guarantee for the remaining three years. P would not be able to revoke the guarantee
because the lease for ten years is an entire indivisible consideration and cannot be classified as a series of
transactions and hence is not a continuing guarantee.

Revocation of Continuing Guarantee

So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an offer is accepted it
becomes final. However, a continuing guarantee can be revoked for future transactions. In that case, the surety
shall be liable for those transactions which have already taken place.

A contract of guarantee can be revoked in the following two ways-

1) By giving a notice (Section 130)

Continuing guarantees can be revoked by giving notice to the Creditor but this applies only to future
transactions. Just by giving a notice the surety cannot waive off his responsibility and still remains liable for all
the transactions that have been placed before the notice was given by him. If the contract of guarantee includes a
clause that a notice of a certain period of time is required before the contract can be revoked, then the surety
must comply with the same as said in Offord v Davies (1862).

Illustration

A guarantees to B to the extent of Rs. 10,000, that C shall pay for all the goods bought by him during the next
three months. B sells goods worth Rs. 6,000 to C. A gives notice of revocation, C is liable for Rs. 6,000. If any
goods are sold to C after the notice of revocation, A shall not be, liable for that.

2) By Death of Surety(Section 131)

Unless there is a contract to the contrary, the death of surety operates as a revocation of the continuing guarantee
in respect to the transactions taking place after the death of surety due to the absence of a contract. However, his
legal representatives will continue to be liable for transactions entered into before his death. The estate of
deceased surety is, however, liable for those transactions which had already taken place during the lifetime of
the deceased. Surety’s estate will not be liable for the transactions taking after the death of surety’even if the
creditor had no knowledge of surety’s death.
Period of Limitation
The period of limitation of enforcing a guarantee is 3 years from the date on which the letter of guarantee was
executed. In State Bank Of India vs Nagesh Hariyappa Nayak And Ors, against the advancement of a loan to a
company, the guarantee deed was executed by its directors and subsequently a letter acknowledging the load
was issued by same directors on behalf of the company. It was held that the letter did not have the effect of
extending the period of limitation. Recovery proceedings instituted after three years from the date of the deed of
guarantee were liable to be quashed.

Rights of a Surety
After making a payment and discharging the liability of the principal debtor, the surety gets various rights.
These rights can be studied under three heads:

(i) rights against the, principal debtors.

(ii) rights against the creditor, and
(iii) rights against the co-sureties.

(i) Rights against the Principal Debtor

1) The right of surety on payment of debt or the Right of subrogation(Section 140)

The right of subrogation means that since the surety had given a guarantee to the creditor and the creditor after
getting the payment is out of the scene, the surety will now deal with the debtor as if he is a creditor. Hence the
surety has the right to recover the amount which he has paid to the creditor which may include the principal
amount, costs and the interest.

2) The right of Indemnity(Section 145)

In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety, and
the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the
guarantee. This is because the surety has suffered a loss due to the non-fullfillment of promise by the principal
debtor and therefore the surety has a right to be compensated by the debtor

Illustration
Luthra and co has taken a loan from Khaitan and co where Amarchand acts as security on behalf of Luthra.
Khaitan demands payment from Amarchand and on his refusal sues him for the amount, Amarchand defends the
suit having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs. He
can recover from Luthra the amount paid by him for costs, as well as the principal debt.

(ii) Rights against the Creditor

1) Right to securities given by the principal debtor(section 141)

On the default of payment by the principal debtor, when the surety pays off the debt of the principal debtor he
becomes entitled to claim all the securities which were given by the principal debtor to the creditor. The Surety
has the right to all securities whether received before or after the creation of the guarantee and it is also
immaterial whether the surety has knowledge of those securities or not.

Illustration
On the guarantee of Priya, Anita lent rs 100000 to Sita. This debt is also secured by security for the debt which
is the lease of Sita’s house. Sita defaults in paying the debt and Priya has to pay the debt. On paying off Sita’s
liabilities Priya is entitled to receive the lease deed in her favor.

2) Right to set off

When the creditor sues the surety for the payment of principal debtor’s liabilities, the surety can claim set off, or
counterclaim if any, which the principal debtor had against the creditor.

(iii) Rights against the Co-sureties

1) Release of one co-surety does not discharge others (Section 138)

When the repayment of debt of the principal debtor is guaranteed by more than one person they are called Co-
sureties and they are liable to contribute as agreed towards the payment of guaranteed debt. The release by the
creditor of one of the co-sureties does not discharge the others, nor does it free the released surety from his
responsibility to the other sureties. Thus when the payment of a debt or performance of duty is guaranteed by
co-sureties and the principal debtor has defaulted in fulfilling his obligation and thus the creditor compels only
one or more of the co-sureties to perform the whole contract, the co-surety sureties performing the contract are
entitled to claim contribution from the remaining co-sureties.

2) Co-sureties to contribute equally (Section 146)

According to Section 146, in the absence of any contract to the contrary, the co-sureties are liable to contribute
equally. This principle will apply even when the liability of co-sureties is joint or several, and whether under the
same or different contracts, and whether with or without the knowledge of each other.

Illustration
A, B, C, and D are co-sureties for a debt of Rs. 2,0000 lent by Z to R. R defaults in repaying the loan. A, B, C,
and D are liable to contribute Rs. 5000 each.

3) Liability of co-sureties bound in different sums(Section 147)

When the co-sureties have agreed to guarantee different sums, they have to contribute equally subject to the
maximum of the amount guaranteed by each one.

Illustration
A, B and C, sureties for D, enter into three separate bonds, each in a different penalty, A for Rs. 10,000, B for
Rs. 20,000 and C for Rs. 40,000. D makes default to the extent of Rs. 30,000. A B and C are liable to pay Rs.
10,000 each. Suppose this default was to the extent of Rs. 40,000. Then A would be liable for Rs. 10,000 and B
and C Rs. 15,000 each.
Discharge of Surety from Liability
Under any of the following circumstances a surety is discharged from his liability:
i) by the revocation of the contract of guarantee,
ii) by the conduct of the creditor, or
iii) by the invalidation of the contract of guarantee

We have already discussed above the first circumstance in which how a surety can be discharged i.e by
Revocation of the Contract of Guarantee. This includes by giving notice or death or the surety.

(ii) Conduct of the Creditor

1) Variance in terms of the contract(Section 133)

When a contract of guarantee has been materially altered through an agreement between the creditor and
principal debtor, the surety is discharged from his liability. This is because a surety is liable only for what he has
undertaken in the guarantee and any alteration made without the surety’s consent will discharge the surety as to
transactions subsequent to the variation.

Illustration

A becomes surety to C for B’s conduct as a manager in C’s bank. Afterward, B and C contract, without A’ s
consent, that B’ s salary shall be raised, and that he shall become liable for one-fourth of the losses on
overdrafts. B allows a customer to over-draw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent and is not liable to make good this loss.

2) Release or discharge of the principal debtor(Section 134)

A surety is discharged if the creditor makes a contract with the principal debtor by which the principal debtor is
released, or by any act or omission of the creditor, which results in the discharge of the principal debtor.

Illustration
A supplies goods to B on the guarantee of C. Afterwards B becomes unable to pay and contracts with A to
assign some property to A in consideration of his releasing him from his demands on the goods supplied. Here,
B is released from his debt, and C is also discharged
from his suretyship. But, where the principal debtor is discharged of his debt by operation of law,
say, on insolvency, this will not operate as a discharge of the surety.

3) Arrangement between principal debtor and creditor

According to section 135 when the creditor, without the consent of the surety, makes an arrangement with the
principal debtor for composition, or promise to give him time to, or not to sue him, the surety will be
discharged.
However, when the contract to allow more time to the principal debtor is made between the creditor and a third
party, and not with the principal debtor, the
surety is not discharged (Section 136).
Illustration
C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to
give time to B, A is not discharged.

4) Loss of security(Section 141)

If the creditor parts with or loses any security given to him at the time of the guarantee, without the consent of
the surety, the surety is discharged from liability to the extent of the value of the security.

Illustration
A, as surety for B, makes a bond jointly with 3 to C to secure a loan from C to B. Later on, C obtains from B
further security for the same debt. Subsequently, C gives up further security. A is not discharged.

(iii) By Invalidation of the Contract

A contract of guarantee, like any other contract, may be avoided if it becomes void or voidable at the option of
the surety. A surety may be discharged from liability in the following cases:

1) Guarantee obtained by misrepresentation(Section 142)

When a misrepresentation is made by the creditor or with his knowledge or consent, relating to a material fact in
the contract of guarantee, the contract is invalid

2) Guarantee obtained by concealment(Section 143)

When a guarantee is obtained by the creditor by means of keeping silence regarding some material part of
circumstances relating to the contracts, the contract is invalid

3) Failure of co-surety to join a surety(Section 144)

When a contract of guarantee provides that a creditor shall not act on it until another person has joined in it as a
co-surety, the guarantee is not valid if that other person does not join.E

Extent of a surety’s liability

In the absence of a contract to the contrary, the liability of a surety is co-extensive with that of the liability of the
principal debtor. It means that the surety is liable to the same extent to which the principal debtor is liable.

Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. On the due date, the bill is dishonored
by C. A is liable, not only for the amount of the bill but also for any interest and charges which may have
become due on it.

Conclusion
The contract of guarantee is a specific contract for which the Indian Contract Acy has laid some rules. As we
have discussed, the basic function of a contract of guarantee is to protect the creditor from loss and to give him
confidence that the contract will be enforced with the promise of the surety. Every contract of guarantee has
three parties and there exist two types of guarantees i.e specific guarantee and continuing guarantee. The type of
Guarantee used depends on the situation and the terms of the contract. The surety has some rights against the
other parties and liability of the surety is considered to be co-extensive with that of the principal debtor unless it
is otherwise provided by the contract. In case the contracts are entered into by misrepresentation made by the
creditor regarding material circumstances or by concealment of material facts by the creditor, the contract will
be considered invalid.

Rights Of Surety :-

Introduction

An agreement which is enforceable by law is called a contract. A contract is an

agreement where certain terms and conditions are agreed by the parties in exchange of
consideration and a guarantee means an assurance which is being given by a party to
someone in respect to an act. Hence, the contract of guarantee is a contract between
three parties in respect to any default done by a person then another party assures to
recover that loss.

In this article you will further read about the contract of guarantee between the specific
parties of the contract of guarantee. How the contract of guarantee is different from
other forms of contract and provisions under which they are enforced with judicial
interpretations.

What is a contract of guarantee

Section 126 of the Indian Contract Act, 1872 has defined the contract of guarantee. The
word contract of guarantee in simplified form means a contract which is an agreement
forcible in the eye of law and guarantee which means the assurance.

The Contract of Guarantee is a contract where there are 3 people involved. In a sense, a
person lends money who is said to be a creditor to another person who is in need of
money, called the principal debtor along with a person who gives the guarantee that the
money will be repaid to the creditor either by the principal debtor or if he makes a
default in paying then the guarantor or surety will make the payment.

Essentials of a contract of guarantee

Parties to be involved in a contract

In a contract of guarantee there must be a contract between three parties. The three
parties include the creditor, the principal debtor and the surety. In respect to a loan
which is taken by the principal debtor from a creditor having a surety.

Role of surety

The surety is bought in the contract just as a person who gives a guarantee that the
principal debtor will pay the amount but if in any circumstances the principal debtor fails
to pay the amount the creditor may ask the surety to pay the debt amount. The
important point to be noted here is that only if the principal debtor does not pay the debt
then only the creditor can ask the surety to clear his debt.

Consideration involved

It is the established principle of contract law that a contract is valid only when the
contract involves any kind of consideration in it. Section 127 of the Indian Contract Act,
1872 clarified in respect to the consideration as part of surety it says that if any benefit
is being received by the principal debtor the same can be regarded to be for the surety
to give the guarantee.

Essentials for making a contract valid

There are certain points to be kept in mind while making a contract valid. There must be
an offer, with a lawful consideration between the parties to enter into a contract and the
age must be of at least 18 years, giving free consent to enter into a contract.

All the facts must be communicated

All the facts to the surety should be communicated in respect to the contract which is
being executed. The creditor or the principal debtor cannot conceal any facts in relation
to the contract of guarantee.

There must be a debt

It is important that there must be any kind of debt in the contract. If the debt is not
there then there cannot be a contract of guarantee. A promise for the repayment of the
dues must be there on part of the principal debtor or the surety.

Parties to a contract of guarantee

In the contract of guarantee there are three parties involved. The parties in contract of
guarantee are the following :

1. Creditor – The creditor is the person who lends money to the principal debtor
and is entitled to receive the loan back as the specified time period expires.
 2. Principal debtor – The principal debtor is the person who receives the loan
from the creditor and it is the primary liability of the principal debtor to return
the money back.
3. Surety – The surety is a person who takes the guarantee that the principal
debtor will return the money back. The surety is also called a guarantor. If the
principal debtor fails to pay the loan amount then the creditor can ask the
surety to repay the loan.

Rights of a surety

Rights against the creditor

i) Right to securities with the creditor

Section 141 of the Indian Contract Act,1872 has mentioned the right of surety to get a
share in the security which has been kept while entering into the contract of guarantee.
The place of surety is the same as the place of the creditor in terms of security. It is a
compulsion on a creditor to share the security with the surety; it is irrelevant whether
the surety was aware of the security or not. If the principal debtor defaults in the
payment and the surety has cleared the dues, it makes the surety entitled for a share.

ii) Loss of securities without creditor’s negligence

Under this circumstance the creditor takes the security of the principal debtor in case of
default of payment. The surety has the right to set-off the claim in respect to the value
of security from the debt of the principal debtor.

Illustration– A being the creditor gave a loan to B of Rs 2,00,000 on the surety of C.

While B has kept his house on security in respect to the loan borrowed from A. B was in
default to pay the loan of A. If A files a case against C for the repayment of the due
amount, then C can claim discharge of the amount from the security which was
recovered.

Rights against the principal debtor

i) Rights of subrogation

Section 140 of the Indian Contract Act, 1872 has stated the right of subrogation. The
right of subrogation means forming a new contract to recover the debt from the parties.
As the surety has paid the amount due in respect to default made by the principal
debtor. Now the surety takes the place of the creditor and the principal debtor is entitled
to pay the repaid loan amount which was paid on behalf of him to the creditor in the
original contract of guarantee.
ii) Rights of indemnity against the principal debtor

Under Section 145 of the Indian Contract Act, 1872 it is mentioned to indemnify the
surety. ‘To indemnify’ means that a party will pay the damages which are caused to the
party in respect of fulfilment of the act of the promisor. Under the Contract of Guarantee
the principal debtor is obliged to indemnify the surety in respect to the default of
payment at the time of discharging the loan amount. It is not compulsory that the
indemnity clauses should be mentioned in the contract; it is an implied duty of the
principal debtor in respect to default of payment.

iii) Securities received by the creditor after the contract of guarantee

Section 141 of the Indian Contract Act, 1872 has mentioned the right of surety in the
security which is mentioned in the contract of guarantee. If the principal debtor makes a
default in payment of the loan amount and the payment is made by surety then in this
case the surety can avail the benefit of security. If the amount is being deducted from
security then in this case the surety can be discharged.

Surety’s rights against the co-sureties

i) Co-sureties right to get release from the contract

Section 138 of the Indian Contract Act, 1872 has stated that if one surety is discharged
from his liability it will not mean that all the sureties are also discharged from his
obligation. Co-sureties here means that when more than one surety gives the guarantee
or takes the obligation to pay the debt of the principal debtor. As per Section 138 when
the principal debtor fails to pay the debt and if the creditor asks only one surety to fulfil
his duty. In this case that surety can ask the other co-sureties to fulfil their
responsibility.

2.Co-sureties are entitled to contribute equally

Section 146 of the Indian Contract Act, 1872 has mentioned that the liabilities of co-
securities are joint. If the contract does not mention the liability of co-securities as joint,
it must be implied that all the co-securities will share equally the debt not paid by the
principal debtor.

3.Co-sureties entitled to pay the amount as promised

As per Section 147 if the co-securities have promised a particular amount to pay in the
sum of debt then they are obligated to pay that sum if the principal debtor causes
default in payment of the loan.

Illustrations: Ram, Shyam and Mohan are co-securities to Ramesh. Ramesh took a loan
of Rs 9,000. If three of them have decided to pay Rs 3,000 each in case of default of
payment of the loan by Ramesh. Then they are entitled to pay Rs 3,000 only
Conditions under which the surety can be discharged from his liability

There are majorly three circumstances when a surety can be discharged from his
liability. The circumstances are :-

1. Revocation of contract of guarantee;

2. Conduct of the creditor; and
3. Invalidating contract of guarantee.

i) Revocation of contract of guarantee

By way of notice

According to Section 130 of the Indian Contract Act, 1872 the surety can revoke the
contract of guarantee by way of notice to the creditor in advance. The surety is
exempted from any responsibility after the surety gives notice to the creditor. It means
that prior to the notice all contracts will be valid.

Death of surety

According to Section 131 of the Indian Contract Act, 1872 the death of the surety will
cause a revocation of the contract of guarantee. But the legal heirs of surety will be
obliged to perform the contract on behalf of surety.

ii) Conduct of the creditor

Terms of contract being changed

According to Section 133 of the Indian Contract Act, 1872 if the creditor makes any
changes in the terms of contract with the consent of the principal debtor without the
knowledge of the surety. The surety will be discharged from the contract of guarantee.
The reason being the surety will be liable for the conduct only which he would have
promised to do and not further.

Performance of contract of guarantee

According to Section 134 of the Indian Contract Act, 1872 the surety will be discharged
from his promise if the principal debtor fulfils his promise or pays the loan and the
contract of guarantee is executed.

Mere compromise
According to Section 135 of Indian Contract Act, 1872 the creditor gives extra time to
the principal debtor for the payment of the loan amount and promises that he may not
sue the debtor for this; in this case the surety is discharged from the contract.

iii) Invalidating the contract of guarantee

Contracts executed through misrepresentation

According to Section 142 of the Indian Contract Act,1872 if the contract is made by a
creditor by concealing material facts from the parties or he has misrepresented the
terms of the contract, then the contract is not valid. It will not be enforced under law.

Contract entered through concealing facts

According to Section 143 of the Indian Contract Act,1872 if the contract was entered
through concealing a material fact from the parties then the contract will not be valid.

Unless co-sureties consent to a contract

According to Section 144 of the Indian Contract Act,1872 the contract will not be
forceable unless the other co-sureties enter into a contract of guarantee.

Surety’s liability

Section 128 of the Indian Contract Act, 1872 has stated the liability of surety. The
liability of surety will be co-extensive which means that the extent to which the principal
debtor is liable is the same as the surety is liable. The surety cannot be made liable to
the extent in which the principal debtor is not. The contract of guarantee is primarily
with the principal debtor and then with the surety.

Case laws with respect to contract of guarantee

State of Madhya Pradesh v. Kaluram 1967 SCR (1) 266 (1966)

Facts of the case

The auction was held by the forest officer in Madhya Pradesh for the sale of felled trees.
The auction was in favour of Jagatram. The contract was executed between Jagtram and
Government of Madhya Pradesh where the payments were decided to be made in
instalments where Nathuram and Kaluram were made the surety if Jagatram made any
default in payment of the dues. After the payment of the first instalment, Jagatram failed
to pay the due amount from the second instalment and cleared all the trees. In respect
to the non-payment of the due amount, the surety was asked to fulfil the promise.

Issue involved in the case

Whether the co-sureties are liable to pay the debt ?

Judgement of the Court

The Hon’ble Supreme Court relied his judgement on Section 141 of Indian Contract Act
the department should not have allowed the Jagatram to clear the forest without the due
payment of loan and it can be seen that the fault was on part of creditor hence, the
surety cannot be made liable to pay the loan amount as this act made him discharge
from his liability.

Rajappan v. Associated Industries Private Ltd. (1990)

Facts of the case

The agreement of guarantee was drafted by the plaintiff on the account of surety given
by the second defendant in respect to a loan of Rs 10,000 to the first defendant. In this
case the plaintiff was the creditor, the principal debtor was the first defendant and the
surety was the second defendant.

The terms were already reciated to both the parties and both of them agreed to the
terms. After relying on the terms the draft was made for the agreement but at the time
of execution of signature, the second defendant contended to the Plaintiff that he was in
hurry and would sign the agreement later due to some urgent work and left the place.
Now when the time came to fulfil the promise of being a guarantor he refused the said
terms and said that he had never signed the agreement, hence he is not entitled to pay
the due amount.

Issue involved in the case

Whether the second defendant is entitled to pay the amount because he promised to be
a guarantor?

Judgement of the Court

The Hon’ble Kerala High Court mentioned there was certain evidence in favour of the
second defendant which was produced by the plaintiff in respect to performance of the
agreement. The Hon’ble Court established that, as the second defendant on just the
basis of not signing the agreement cannot be discharged from his duties. Hence, the
contract of guarantee is an agreement where three parties are involved: the creditor,
principal debtor and the surety. It should not be necessary that only the signature will be
considered as entering into an agreement but implied acts can also be deemed as a
consent.

Radha Kanta Pal v. United Bank of India Ltd. (1954)

Facts of the case

The case was in respect to the agreement. Rajanikant Pal (Deceased) came under a
bond dated 8 August 1944 with Comilia Banking Corporation Limited (at the time of
executing the bond) now known as United Bank of India after amalgamation in respect
to appointing Nishikanta Pal as a cashier in the bank. The consideration of the bond was
Rs 10,000.

When Nishikanta Pal was appointed as a cashier in the bank, the misrepresentation in
cash of the bank was found twice. The bank instead of taking any disciplinary action
against Nishikanata deducted the amount from Rajanikant promissory note without any
prior consent or information given to the parties in view of adjusting their claims.

Judgement of the Court

The Court stated that the creditor was in the employer’s position. He must have checked
in regard to the work being done and he could have taken any action against the
employee. The Hon’ble Court stated that Section 139 of the Indian Contract cannot be
brought in this case.

Ansal Engineering Projects Limited v. Tehri Hydro Development Corporation Limited and Another (1966)

Facts of the case

The petitioner entered into a contract with the respondent dated 30 March, 1991 in
respect to the construction of a residential quarter in Tehri. The residential quarters were
not completed within the time period. The respondent terminated the contract on his
part and went to United Commercial Bank Ltd. (UCO) to collect the amount. As part of
the conflict the plaintiff appointed an arbitrator for the resolution of the said dispute.

Judgement of the Court

The Hon’ble Court stated that the respondent was not entitled to receive the amount
from the bank guarantee. This will be regarded as revocation of contract through illegal
means and will be termed as fraud on the part of the respondent.
Difference between contract of indemnity and contract of guarantee

Basis Contract of Indemnity Contract of Guarantee

Provision under Section 124 of Indian Contract Act Section 126 of Indian Contract Act defines Contract of
Indian Contract Act defines Contract of Indemnity Guarantee

It is a contract of promise to save the

It is a contract of a guarantee that the principal debtor will
Definition person from loss which is caused by
not make a default in payment of due by the surety.
another person.

Parties to a There are two parties involved There are three parties involved in a contract, creditor,
Contract indemnifier and indemnity holder principal debtor and surety

Liability of third In this contract the promisor has In this contract the primary liability will be on the principal
party primary liability in case of default debtor if he is at default then it is the surety.

Number of There is only one contract. That is There are three contracts.Firstly, between Creditor and
agreement between the indemnifier and the Principal Debtor. Secondly with the Principal Debtor and
between parties indemnity holder. Surety. Thirdly, between Creditor and Surety.

Conclusion

The contract of guarantee is different from the other forms of contract. In the contract of
guarantee there are three parties involved instead of two parties and more specifically
this contract is executed to protect the creditor from the default of the principal debtor,
unusual to other contracts. In common forms of contract there must be a consideration
in exchange for fulfilment of the act but here there is no major consideration involved; it
is a promise to recover the loss caused to the creditor by the default of the principal
debtor.