3. Contracts of guarantee
• Acc. To sec. 126 of Indian Contract Act-
A contract of guarantee is a contract to
perform the promise or discharge the liability
of a third person in case of default.
7. CONTRACT OF GUARANTEE cont---
Essentials
1. All the essentials of a valid contract
2. There must be a Consideration-no need for separate
consideration
3. Contractual capacity of parties- competent to contract
4. There must be some one primarily liable-
Existence of principal debt—enforceability by law
Secondary liability of surety
8. CONTRACT OF GUARANTEE cont---
Essentials
5. Promise to pay must be conditional
6. No Misrepresentation-
7.No concealment of facts
8. Writing not necessary
– The contract of guarantee can be oral or written
12. 1 Right to set off
A borrowed Rs 5000 from B , and C gave the guarantee for the
repayment of this loan. A also had a claim of Rs 1000 against B on
some earlier transaction. On due date , A failed to repay the amount of
loan and B filed a suit against the surety C, for the recovery of the loan
.In this case also C is entitled to deduct of Rs 1000 which B owed to A.
And thus C’s liability is only for Rs 4000.
13.
14. Example : A borrowed Rs 20,000 from B and mortgaged his
house with B as security for the repayment of loan . This
loan was also guaranteed by C . On due date , A failed to
repay the amount , and B recovered the full amount from
the surety C . In this case C is entitled to claim the security
(i.e. house) from B and can enforce it against A to realize
the amount paid by him
15. 3. Right to Share Reduction: Sometimes after the
recovery of the guaranteed amount from the surety , the
debtor is declared insolvent . And on debtor’s insolvency
,the creditor also received some dividend out of the assets
of insolvent .In such cases , the surety is entitled to claim
the proportionate reduction of his liability by amount of
dividend claimed
.
16. For Instance: A agreed to supply certain goods to B on
credit . And A’s friend C gave a guarantee for the
payment of price of the goods up to Rs 2000. A supplied
goods to B to the amount of Rs 10,000 But B failed to
pay the price And A recovered the guaranteed amount
of Rs 2000 from C Subsequently B became insolvent
and a proved the whole debt of 10,000 in insolvency of
B .And A rec. only 25 % of Rs 10,000 as dividend in he
insolvency .In this case C can claim a refund of 25% of
Rs 2000 i.e 500 from A which he has already paid
17. Rights against principal debtor
1. Right of subrogation
2. Right to indemnity
3. Right to be relieved from Liability
18.
19. A borrowed money from B and mortgaged his house as security . C was
surety (guarantor) for loan . A failed to repay the loan and B recovered the
amount from C . In this case ,C steps into the shoes if B ( creditor) and can
enforce the mortgage against A
2. Right of Indemnity
20. 3. Right to be Relieved Earlier
A surety can, even before making any payment,
compel the debtor to relieve him from liability by
paying off the debt. But, before doing so, the debt
should be ascertained.
A borrowed Rs 10,000 from B and C gave a guarantee to B for the
repayment of the loan . On due date , A refused to repay the loan . B
demanded the payment from C who also refused to repay the
money. B filed a suit for recovery against C who defended the suit
having reasonable ground for doing so . However C was compelled
to pay the amount of debt with the costs . In this case C can recover
from B the amount of principal debt along with the cost paid by him.
21. Rights against Co- sureties
1. Right to claim contribution
2. Right to share benefits of securities
23. DISCHARGE OF SURETY
“A surety is said to be discharged when his
liability comes to an end”
BY
REVOCATION
BY THE
CONDUCT OF
THE
CREDITORS
BY
INVALIDATION
OF CONTRACT
25. BY REVOCATION
1. BY NOTICE(SEC.130)
A specific guarantee cannot be revoked by the
surety if the liability has already accrued.
A continuing guarantee may at any time be revoked
by the surety as to future transaction by the notice
to the creditor.
But the surety remains liable for transaction already
entered into.
26. BY REVOCATION
BY DEATH(SEC.131)
The deceased surety’s estate will not be liable for any
transaction entered into between the creditor and the
principal debtor after the death of surety, even if the
creditor has no notice of death. The surety’s legal heirs
will remain liable for the transactions already entered
into before the death of surety…
27. For Instance:
At A’s request ,B employed C for collecting the rent
of B’s house .A gave a guarantee to B to the extent
of Rs 5000 for the due collections of rent by C . A
collection of Rs 1000 was made by C and thereafter
A died . On A ‘s death the guarantee gets revoked in
respect of collections made after A;s death . However
A’s legal representatives are liable up to Rs 1000 if C
fails to give this amount to B
28. BY REVOCATION
BY NOVATION(SEC.62)
Novation means
substitution of a new contract of guarantee for an old one either
between the same parties or
between one of the old parties and a new party,
the consideration for the new contract being the mutual discharge of
the old contract.
The original contract of guarantee in such
a case comes to an end
29. BY THE
CONDUCT
OF THE
CREDITORS
VARIANCE IN THE TERMS OF
CONTRACT(SEC.133)
DISCHARGE OF PRINCIPLE
DEBTORS(SEC.134)
COMPOSITION WITH PRINCIPAL
DEBTORS(SEC.135)
IMPAIRING SURETY’s
REMEDY(SEC.139)
LOSS OF SECURITY(SEC.141)
30. By the conduct of the creditor
BY VARIANCE IN TERMS OF CONTRACT(SEC133)
A surety is liable for what he has undertaken in
the contract.
When the terms of the contract between the
principal debtor and the creditor are varied
without the surety’s consent , the surety is
discharged as to the transactions subsequent to
the variance.
31. Example
C contracts to lend P Rs.5000 on 1st March.
S guarantees repayment . C pays the
amount to P on1st January. S is discharged
from his liability, as the terms of the contract
have been varied.
32. By the conduct of the creditor
BY RELEASE OR DISCHARGE OF
PRINCIPAL DEBTOR(SEC.134)
The surety is discharged by any contract
between the creditor and the principal debtor,
by which the principal debtor is released,
or by any act or omission of the creditor, the
legal consequences of which is discharged of
the principal debtor.
33. Example
A contract with B for a fixed price to build a
house for B within a stipulated time, B
supplying the necessary timber. C
guarantees A’s performance of the contract .
B omits to supply the timber. C is discharged
from his surety ship.
34. By the conduct of the creditor
BY CREDITOR COMPOUNDING WITH THE
PRINCIPAL DEBTOR/ BY GIVING MORE
TIME TO DEBTOR (SEC135)
•Without the consent of surety creditor
gives more time to the principal debtor of
repayment = Surety is discharged
automatically if no consent has been given
from his side
•Nonetheless if surety gives his consent
then he is not discharged from his liability
35. Example
P purchased a motor car from C under hire-
purchase agreement on guarantee of S for
the due performance of the agreement . C
for the valuable consideration gives P further
time for payment of one of the instalments.
Held the giving of time to P discharged S
from any further liability under the guarantee
36. By the conduct of the creditor
BY CREDITOR’S ACT OR OMISSION
IMPAIRING SURETY’S EVENTUAL
REMEDY(SEC139)
If the creditor does any act
which is inconsistent with the rights of the surety,
or omits to do any act which his duty to the surety requires him
to do,
and the eventual remedy of the surety himself against the
principal debtor is thereby impaired,
the surety is discharged.
37. Example
A puts M as apprentice to B and gives a
guarantee to B for M’s fidelity. B promises
on his part that he will, at least once a month
see M make up the cash. B omits to see this
done, as promised, and M embezzles. A is
not liable to B on his guarantee.
38. By the conduct of the creditor
BY CREDITOR LOSING SECURITY
AGAINST THE PRINCIPAL
DEBTOR(SEC141)
If the creditor
loses or,
without the consent of the surety, parts with the
security
he has against the principal debtor at the time when the
contract of suretyship is entered into,
Surety is discharged to the extent of the value of the
security.
40. By Invalidation of Contract
BY MISREPRESENTATION(SEC.142)
• Where a creditor misrepresents to the surety
regarding the material facts,
The guarantee is invalid if the creditor obtained it by
misrepresentation of material facts or with the
knowledge of creditor any material part of
transaction between creditor and debtor is
misrepresented to surety
E.g. Goods taken on credit
41. By Invalidation of Contract
BY CONCEALMENT(SEC.143)
When a creditor obtains guarantee
by concealing or
keeping silent over the materials facts,
The surety is discharged as the guarantee is invalid.
42. Example
C engage P as a clerk to collect money for
him. P fails to account for some of his
receipts and C, in consequences, calls upon
him to furnish security for his duly
accounting. S gives his guarantee for P’s
duly accounting. C does not inform S with
P’s previous contract . P afterwards makes
default. The guarantee is invalid
43. By Invalidation of Contract
BY FAILURE OF CO-SURETY TO
JOIN(SEC.144)
• Where a person gives a guarantee upon a contract
that a creditor shall not act upon it until another
person has joined in it s co-surety
• The guarantee is not valid if that person does not
join.
44. • S2 signed a guarantee given to a bank
which on the face of it was intended to be
joint guarantee of S1,S2,S3 and S4. S4
did not sign and afterwards died. The bank
did not agree with S1,S2 and S3 to
dispense with S4’s signatures. Held S2
was not liable.
46. MCQ
A contract in which a person promises to
discharge liability of another person in
case of default by such person, is known
as:
a) Contract of indemnity
b) Contract of guarantee
c) Quasi contract
d) None of these
47. MCQ
In contract of guarantee, a person who
promises to discharge another’s liability, is
known as:
a) Principal debtor
b) Surety
c) Indemnified
d) creditor
49. MCQ
The liability of surety is:
a) More than that of principal debtor
b) Less than that of principal debtor
c) Same as that of principal debtor
d) Dependent on court’s discretion
50. MCQ
The liability of surety arises, when the
a) Principal debtor commits default in
payment
b) Creditor fails to recover any thing from
principal debtor
c) Surety is reimbursed by principal debtor
d) Court directs him to pay
