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.”
A contract of guarantee is made with the object of enabling a person to get a loan or goods on credit or an employment etc. It may be either oral or written. It is a promise to pay a debt owing by a third person in case the later does not pay.
Parties:
There are three parties to a contract of guarantee:
1. Surety
2. Creditor
3. Principal Debtor
1. Surety:
The person who gives the guarantee is called the surety or guarantor;
2. Creditor:
The person to whom the guarantee is given is called he creditor.
3. Principal Debtor:
The person for whom the guarantee is given is called the principal debtor.
Example:
A) A requests B to lend Rs.5 lack to C and guarantees that if C fails to pay, he will himself pay to B, there is a contract of guarantee.
B) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.
Writing not Necessary:
According to section 126, it is not necessary that contract of guarantee must be in writing. It may be either oral or written. It may be express or implied from the conduct of parties.
Example:
A sells and delivers goods to B on the verbal guarantee of C. It is valid guarantee.
Nature and Extent of Surety's Liability:
Extent of Surety's Liability:
Section 128 of the contract Act 1872 provides that the liability of the surety is co-extensive with that of the principle debtor, unless it is otherwise provided by the contract. The phrase co-extensive with that of principle debtor’ shows the quantum of the surety’s liability. The quantum of obligation of surety is the general it will be neither more nor less; the surety’s liability can be made less than that of the principle debtor but never greater with special contract.
Example:
A guarantee to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bill.
1. Specific Guarantee:
The guarantee which is given for a single debt or transaction is called specific or ordinary guarantee. It comes to an end as soon as the liability under the transaction ends.
Example:
G guarantees K for the payment of 5 bags of wheat purchased C.C makes payment. Later on C again purchases 5 bags of wheat. C did not pay for that. K used g. Held, G’s guarantee is specific guarantee and G is not liable.
2. Continuing Guarantee:
According to section 129, a guarantee, which extends to a series of transaction, is called continuing guarantee. In other words a guarantee which covers a number of transactions over a period of time is called continuing guarantee. It is just like a standing offer, which is accepted by the creditor every time a subsequent transaction take lace. Being a sanding offer it may be revoked at any time by the surety as to further transactions.
Example:
1) A guarantee to C for B’s credit purchases with a running balance of account not exceeding Rs.5,000. this is a continuing guarantee.
2) A guarantees to C for B’s purchases from C for six months to the extent of Rs.5,000. this is a continuing guarantee.