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Contract of Guarantee

 CONTRACT OF GUARANTEE

Generally to get a loan, to buy on debit, to get employment, etc. one needs guarantee from a third person. The person who gives guarantee is called Guarantor/Surety. To whom the guarantee is given is called Creditor. For whom the guarantee is given is called Principal Debtor. So, the Contract of Guarantee must have a minimum of three parties.

There are three types of contract of guarantee:

  1. Contract between creditor and principal debtor.

  2. Contract between surety and creditor.

  3. Contract between surety and principal debtor.

The third type of contract comes into existence only when the surety pays on behalf of the principal debtor.

These contracts may be either oral or written. This is explained in the Section 126 of the Indian Contract Act, 1872. Sections 126-147 deal with the issues related to the Contract of Guarantee.

A Contract of Guarantee is invalid with the same conditions of a void contract, since contract of guarantee is also a contract itself. Some of which includes incompetence, impossibility of performance, presence of an unlawful element, lack of consent of either of the parties, etc.

There must be a proper agreement between the three parties. The Principal Debtor must ask the surety to give guarantee on his/her behalf and promise to repay his debt as soon as possible to the creditor or in case if the surety repays the debt, then the Principal Debtor must promise the surety that he/she will refund the amount paid to the creditor.

The surety must give the guarantee only after the Principal Debtor asks the surety to be his/her guarantor/surety. The surety should repay the debts on behalf of the Principal Debtor only after he/she promises the surety to refund the same.

After giving the guarantee, the creditor must also do any action that is favorable to the principal debtor, for example, extending the time for repaying the debt and not to file a case against the principal debtor until the extended time. Otherwise, it cannot be called as a contract of guarantee.

The guarantee given by the surety can be of two types:

  1. Specific Guarantee

  2. Continuing Guarantee

Specific Guarantee is given for a specific time period and this cannot be revoked. Even the death of the surety cannot revoke the Specific Guarantee and it will pass on to his/her legal heirs. Even if the Principal Debtor dies, the surety will not be discharged of his legal obligations. No legal procedure can revoke the same.

Continuing Guarantee is given for a series of transactions. In Continuing Guarantee, the surety can invoke the guarantee for the future transactions, but not for the past or present transactions.

The surety can be discharged if there are any material changes made to the guarantee which affects the rights and obligations of the parties, unless and until, such changes are informed to the surety and the surety gives fresh consent to the same.

The guarantee must be interpreted strictly, so that the surety is only bound to the obligations and has rights only in accordance with the terms of the contract of guarantee. The process of discharge of rights of the surety may not necessarily be mentioned in the Indian Contract Act, 1872, to insert them in the Contract of Guarantee.

If the guarantee is ambiguous and had been drafted by the surety, then the ‘contra proferentem’ rule applies which says that if any clause is ambiguous in natures, then it has to be interpreted against the interests of the person who inserted it or who suggested it.
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