Meaning & Essential Elements of Contract of Guarantee

Meaning & Essential Elements of Contract of Guarantee

1. Introduction:

There are different types of contracts that are enforced and accepted by law. Some of these include, the contract of indemnity, the contract of guarantee, etc. In this article, we are going to look into detailed analysis of the contract of guarantee. Section 126 of Indian Contract Act, 1972 defines the contract of guarantee as ,” A contract of guarantee may be a contract to perform the promise, or discharge the liability of the person just in case of his default. The one that gives the guarantee is named the surety; and therefore the person in respect of whose default the guarantee is given is named principal debtor, and therefore the person to whom the guarantee is given is named creditor.” A guarantee may either oral or written. The function of a contract of guarantee is to enable an individual to urge a loan, or goods on credit, or an employment.

2. Essential elements of the contract of guarantee:

i) Principle debt

  • Recoverable debt necessary : The purpose of a guarantee being to secure the payment of the debt, the existence of a recoverable debt is necessary. It is one among the essence of a guarantee that there should be someone liable as a principle debtor and therefore the surety undertakes to be liable on his default.
  • Guarantee for void debt is enforceable when: Sometimes a guarantee even for a void debt may be held enforceable.
  • In the case of Swan v Bank of Scotland, it was held that, “ The payment of the overdraft of a banker’s customer was guaranteed by the defendant. The overdrafts were contrary to a statue, which not only imposed penalty upon the parties to such drafts but also made them void. The customer having defaulted, the surety sued for the loss.”
  • Guarantee of a minor’s debt is a problem that arises in the contract of guarantee. The debt is void, but can we say that the surety is liable?
  • In India, it has been held that, where a minor’s debt has been knowingly guaranteed, the surety should be held liable as a principal as a principle debtor himself.
  • In Kashiba Bin Narsapa Nikade v Narshiv Shripat the Bombay High Court observed that, “ A surety to a bond passed by a minor for moneys borrowed for purposes of litigation not found to be necessary, is liable to be sued on it whether the contract of the minor is considered to be void or voidable. We see no reason why a person can not contract to guarantee the performance by a third person of a duty of imperfect obligation. If the debt is void, the contract of the so-called surety isn’t collateral, but a principal contract.”
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ii) Consideration

  • Like every contract, a contract of guarantee should be supported by some consideration. A guarantee without consideration is void. But there is no direct consideration between surety and the creditor.
  • Section 127 states that, “ Anything done, or any promise made, for the benefit of the principle debtor, may be sufficient consideration to the surety for giving the guarantee.
  • Illustration 1: B requests A to sell and deliver to him goods on credit. A agrees to try to to so, provided C will guarantee the payment of the worth of the products . C promise to ensure the payment in consideration of A’s promise to deliver the products . This is a sufficient consideration for C’s promise.
  • Illustration 2: A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and a promises that, if he does so, C can pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise.
  • Benefit of principal debtor is enough consideration : If the principle debtor gets a benefit, that suffices to sustain a guarantee. It will be of no consequence to say that the principal debtor had never requested for a guarantee or that it was given without his knowledge or consent.

iii) Misrepresentation and concealment

  • Sections 142 and 143 implement these principles and state that,” Any guarantee obtained by means by misrepresentation made by the creditor or with his knowledge and assent, concerning a material part of transaction, is invalid.” And section 143 states that,” Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.”
  • Illustration 1: A engages B as a clerk to collect money for him. B fails to account for a few of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. S gibes his guarantee for B’s duly accounting. A doesn’t acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
  • Illustration 2: A guarantees to C payment for iron to be supplied by him to B to the amount of 2000 tons. B and C have privately agreed that B should be pay five rupees per ton beyond the market value , such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.
  • Guarantees for the good conduct of a servant have invited more frequent applications of this principle. A very illustrative case is London General Omnibus Co v Holloway,
    “The defendant was invited to offer a guarantee for the fidelity of a servant. The employer had earlier dismissed him for dishonesty, but didn’t disclose this fact to the surety. The servant committed another embezzlement.” The surety was held not liable.
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iv) Writing not necessary

Section 126 expressly declares that a guarantee may be either oral or written. But in England under the provisions of the Statute of Frauds a guarantee isn’t enforceable unless it’s “ in writing and signed with party to be charged.”

Author: Vaishnavi Makne,
Symbiosis Law School, Nagpur

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