CONTRACTS OF GUARANTEE Definition : “A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default" (Sec.126). The person who gives the guarantee is called the ‘surety’ or ‘guarantor’, the person in respect of whose default the guarantee is given ig called the ‘principal debtor’ and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be oral or written. It may also be express or implied and may be,inferred from the course of the conduct of the Parties concerned. Saba contract of guarantee is entered into with the object of ei 9 a person to yet a loan or goods on credit or an ‘ployment. :Business Law joan of RS 10,000 t0 B and c¢ 7, © will repay the same. This is pancwpa! dedtor, A is the creditor samples > (a) A advances # 7 fais to repay * ‘2 contract of guarantee, Here. Bis the guarantor or surety. and Cis he Cashier in bis firm and G promises A ther it good the loss. This is @ contract of guarantee. Parties to a Contract of Guarantee There are three parties in 2 contract of guarantee - the principal debtor, the creditor and the surety. There is therefore a triangular relationship between them involving three — separate contracts- One, between the principal debtor an@ the creditor, The second, between the creditor and the surety, and The third, between the surety and the principal debtor, in which the principal debtor requests the surety to act as surety and impliedly promises to indemnify the surety in case the surety incurs any liability. Further, it is to be noted that a contract of guarantee requires the concurrence of all the three parties-the principal debtor should request the surety to act as surety, the surety should ee to do so and the creditor should accept the surety as uch. Example : A sells goods to B on credit. C, without the knowledge 8, promises to pay for them in case B fails to pay. This agreement 's and € is not regarded as surety for A. Because @ person cannot 1 @ surety without the consent of or c eee ‘omm / debtor. nication with the 7 ° contract of guarantee, like any other contract must the essential elements of a valid contract e.g. free ality of the object, ty of the object, etc. However the following two pect of guarantee, though all the parties must Cea @ Contract, the principal debtor may nd is ra Bo ee: the surety is regarded 0 pay perso: ot liable to pay. nally even though : antee should be supported by consi deration. i onsideration between the surety andcomracts of Indemnity and Guarantee . 13.5 the creditor ut consideration received by the arded as sufficient for the surety, Sec 127 Gram Pitts ything done or any promise made for the page eae debtor may be a sufficient consideration to the ae fe y for thet "an principal giving the guarantee”. Examples : i) B requests A to sell goods on ci 1 agrees 10 00 50, provided C wil guarantee Pigs aoe him of the goods. C promises to guarantee the payment in considerst Baio ot) promise to delver to 8. This is 2 sufficient consideration for cs promise. - iy A sols and delivers goods to B. C sfterwards requests A to forbear to sue B for the debt for a year and promises that if he dows so them in case B fails to pay. A agrees to forbear. This Me ¢ will pay for a sufficient consideration for C’s promise. Essential Features of a Contract of Guarantee : 1, Three Parties : There are three parties in a contract of guarantee the principal debtor, the creditor and the surety. 2. Concurrence : It requires the concurrence of all the above mentioned three parties. 3. Primary Liability of the Principal Debtor : The liability of ondary while the liability of the the surety is collateral or sec principal debtor is primary. The liability of the surety arises only when the principal debtor fails to pay. The principal debtor may be 2 4. Competent to Contract : minot, But the surety and the creditor must be capable of entering into a contract. The surety is liable to pay even though the minor fot competent to contract and the contract with a minor 's The contract will be enforced as between the surety and the itor. 5. Consideration : The creditor need not furnish fresh con- tion to the surety for his promise because the consideration supplied to the principal debtor 1s sufficient to the surety 9 the guarantee. jot a Contract of Uberrimae Fidei : A contract of is not a contract of ‘uberrimae fide’. The creditor need to the surety any material facts affecting the credit , of making the surety’s position more onerous: But ee is in the nature of insurance, as in ® fidelity material facts myst be disclosed. ornerwise the J to avoid the contractiii. 1BE Business Lay ?. Sweety and Principal Debtor Distinct - The surety and the gomopal debtor are destinct persons. Therefore. @ decree, obtained aparsi the prncipal debtor, cannot be executed |gainst the Surety Distmction between 2 Contract of indemnity and a Contract of ‘Guaramee 4. im 2 convact of indemnity, there are only two parties-the indemmifier and the indemnified. But in 2 contract of guarantee there ave three partes- the principal debtor, the creditor and the surety 2. The lability of the indemnifier, in 2 contract of indemnity, @ primary and independent. But im a contract of guarantee, the Sibiiny of the surety is secondary and the liability of the principal Seto ss pmery-. 3. im 3 contract of indemnity. the indemnifier acts indepen. Gently without any request of the indemnified or the third person. Sut m 2 contact of guarantee, the surety acts always at the fequesi of the debtor. 4. The fiability of the indemnifier arises only on the happen- img of 2 contingency. But in a contract of guarantee, there is exasting debt or duty, the performance of which is guaranteed by the surety. 5. im 2 contract of indemnity, the indemnifier cannot sue a third party for loss in his own name, because there is no privity of comtract. He can do so only if there is an assignment in his fevour. But im 2 contract of guarantee, the surety after discharg- ing the debt due by the principal debtor, can proceed against the principal debtor in his own night. 6. A contract of indemnity is for the re-imbursement of loss. Gut 2 contract of guarantee is for the security of a debt or good conduct of an employee. 7. in indemnity, there is only one contract i.e. between the fier and the indemnified. But in a guarantee, there are contracts - one between the principal debtor and the cred- second between the creditor and the surety and the third. the principal debtor and the surety. ‘TURE AND EXTENT OF SURETY'S LIABILITY Surety's Liability : it is co-extensive. 328 deals with the nature and extent of surety’s es that “the liability of the surety is co-extensivegomracts of indemnity and Guarantee 137 that of the principal debtor, unless it i . the contract”. Thus the quantum of opinion ee Provided same os that of the principal debtor uniess there yep a to the contrary. Generally it is neither more nor less —o. contract, it may be made less than that of the poled feotor but never greater than it, cipal Example : A guarantees to B the payment of a by 6. the acceptor, The bill is dishonored by C. A is potas fee me amount of the bill but also the interest thereon and noting charges which are viable to be paid by the principal debtor himself. 2. Limitation of Surety’s Liability Though the surety's liability is cofktensive with that of the principal debtor, he may limit his liability. (i) It may be a guarantee for a part of the entire debt; or (ii) It may be a guarantee for the entire debt subject to a limit. Examples : (i) A borrows Rs. 10,000 from B and C stands as a surety for Rs. 6,000 only. It is @ guarantee for a part of the entire debt WA becomes bankrupt, B will recover Rs, 6,000 from C, and not Rs. 10,000. f 50 paise in a rupee is available from the property of A, then B will recover Rs. 2,000 from A's estate and C will recover Rs. 3,000 trom A's estate, =~ ti) In the above example, if C guarantees to 8 for any amount of loan given by B to A subject to a maximum of Rs. 6,000 then it A fails fo repay the loan, then B will recover Rs. 6,000 trom C. If 50 paise in # rupee is available trom the estate of A, then B will recover Rs. 6,000 from C and Rs.2,000 trom A's estate. C will not get any dividend trom A's estate till the entire amount of debt ie. Rs. 10,000 is paid to C. 3. Liability under continuing guarantee tt is explained under ‘Types of Guarantee’. Rules relating to the Nature and Extent of Surety’s Liability « a. 1. The tiability of a surety is secondary or contingent. He ion be liable only on default of the principal debtor. Thus, 'f the ‘ety becomes insolvent before the default of the principal pt, the creditor ‘@. before the date of payment of the de! Prove against the official receiver of the surety in insolven ie ™ Habiity of the surety arises wnmedately OF 7 Poleg i Principal debtor. The creditor 1s No! bound to give A the Of default to the surety or to exhaust all meas Principal debtor before suing the sufely13.8 Business Law 3. The creditor is free to realise the debt when it becomes due either from the principal debtor or from the Surety. It is not necessary for him to proceed against the debtor first. He may sue the surety without suing the principal debtor. 4, The surety will not be liable, if the creditor has obtained guarantee by misrepresenting @ material part of the transaction ‘or by remaining silent as to material circumstances. 5. The contract between the creditor and the surety is an independent contract and not a collateral one. There is therefore no such thing that the surety will be liable only if the principal debtor is liable. One maybe liable while the other may not be. For example. a) If some variation in the contract is made lateron by the creditor and the principal debtor without the surety’s consent, the surety is not liable but the principal debtor is liable. b) An acknowledgment or admission by the principal debtor against the surety is not binding on the surety. Similarly a judgment obtained against the principal debtor is not enforceable against the surety. This is so because the law does not treat the principal debtor and the surety as one and the same person. c) A debt may become time barred as against the principal debtor but the surety may continue to be liable, if he stood surety at a later date, or if he has kept his liability alive by bonafide payment of interest or part of the principal amount within the period of limitation. However, the surety can recover this amount from the principal debtor. d) The surety is liable even if the contract between the principal debtor and the creditor is found for any reason to be void or voidable. (The surety, after paying the creditor, can however claim. the payment from the principal debtor.) ce) A discharge of the principal debtor by operation of law insolvency does not discharge the surety. The surety remains to the creditor, even though the principal debtor has become KINDS OF GUARANTEE ity Guarantee : A contract of guarantee is entered object of enabling a person to get (i) a loan or (ii) or (iii) an employment. Thus, guarantee may be ayment of the loan, or (ii) the payment of theq contracts of Indemnity and Guarantee 13.9 ice of the goods sold on credit, or (ili) the good conduct or pomesty of 2 Person employed. This type of guarantee is called ogdelity (b) Retros} tee May in. In tht antee’. pective and Prospective Guarantee : Further, a be given for an existing or a future debt or e former case, it is called ‘retrospective guarant e latter case, it is called ‘prospective guarantee’. Continuing Guarantee : When a guarantee is given for 2 cific debt or transaction, it is called ordinary ‘specific guarantee’. It comes to an end when the guaranteed dept is duly discharged or the promise made is duly performed. When a guarantee extends to a series of distinct and le transactions, itis called a continuing guarantee (Sec. 129). such a guarantee is given to cover a number of transactions over a certain period of time. The surety can fix up a limit on his liability as to time or amount of guarantee in such a case. It can be revoked by him at any time as to future transactions. in consideration that B employs C to collect the jarani obligatio’ and in th (c) Specific and single spe Examples : 2) A, rents of his property, promises B that he (A) wil be responsible to the runt of Rs. 5,000 for the due collection and payment by C of these {> is @ continuing guarantee. b) A guarantees B for C's purchases from B on credit upto Rs. 10,000 for a period of one year. The is a continuing guarantee. Whether a guarantee is a continuing guarantee or not depends upon the terms of the contract, intention of the parties and the surrounding circumstances. Example : A guarantees payment 0 B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards, B delivers three sacks (0 ©. which C does not pay for. It was held that the guarantee given byA for the price was not a continuing guarantee and hence A was not liable of three: sacks. The following are not regarded as continuing guarantees : rr 58 A guarantee of the fidelity of a person appointed to a place +4, ee @.g. as a cashier in a bank is not a continuing guarantee Tee so long as that person is in that employment, tee cannot be revoked. i li) A guarantee for the payment of a certain S| ‘nstalme ni tee, 18 within a certain time is also not a continuing guaran rents. 7 the um byBusiness Lay 1410 Guarantee ¢ flevocation of Continuing be revoked 4% f6gaIde the A continuing guarantee may circumetanices actions under the following Gir future trans ¢ revocation by the surety © A continuing 1, By netier ay time, be revoked by the surety, a6 ty may, a . 2 ne ranenetions. py notice to the eraditor” (Sec,130), By death of surety ¢ The death of the surety operates, in ok of any contract to the Contrary, 66 & fevocation of aun guarantee, so far as regards future transactions” (Sec.131). 3, In the same manner as the surety is discharged: A continuing guarantee is also revoked under the same circumstances ufder which the surety is discharged from his liability @.g. (a) By variance in terms of contract (Sec,133), (b) By release or discharge of the principal debtor (Sec.134). (c) By arrangement with the principal debtor (Sec,135), (d) By creditor's act or omission impairing the surety’s even- tual remedy (Sec,139), (e) By loss of security (Sec.141),