contract of guarantee is a legal agreement in which one party, known as the "surety" or "guarantor," agrees to take on the financial responsibility for the debts or obligations of another party, known as the "principal debtor," in case the principal debtor fails to fulfill their obligations. This concept is primarily governed by the Indian Contract Act, 1872, which defines and regulates contracts of guarantee.

1. CONTRACTS OF
GUARANTEE

2. 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 his fault.”
⚫ The person who gives the guarantee is called the ‘surety’
⚫ The person for whom the guarantee is taken is called the ‘
principal debtor.
⚫ The person to whom the guarantee is given is called
‘creditor’.

3. Essential elements of a Contract of
guarantee
⚫ It can only be between at least three parties – surety ,
principal debtors, creditor
⚫ Free consent of all parties is essential for a contract to be
valid.
⚫ Surety’s obligation arises only when the principal debtor
makes a default.
⚫ It can be oral or written.

4. Purpose of contract of guarantee
1. For the security of a loan given to a party.
2. For the assurance of good conduct and honesty of an
employee in service contracts.
3. For the indemnity of a third party loss resulting from the
non-payment of a debt.

5. Difference b/w contracts of
Indemnity and Guarantee
Basis of Difference Contract of Indemnity Contract of Guarantee
1. Function Indemnifier promises to protect the
indemnified against the
consequences of indemnity- holder.
Surety promises to perform the
obligation or promise of a third
party.
2. Parties to the contract Two parties : indemnifier &
indemnity - holder
Three parties: The surety, principal
debtor, creditor.
3. Object Safety from an uncertain future
event
To assure the other party of
performance of an obligation.
4. Liability Indemnifier is primary Surety is secondary
5. Number of contracts One contract b/w indemnifier and
indemnity holder
Three contracts :
b/w the principal debtor &
creditor,
b/w creditor & surety,
an implied contract b/w principal
debtor & surety.

6. Basis of Difference Contract of Indemnity Contract of Guarantee
7. Nature Security against loss An assurance to the creditor
8. Consideration Indemnifier receives a
consideration from the
indemnity- holder at the
beginning of contract
Surety doesn’t receive any
consideration. Only
consideration for surety is
the expected gain of
principal debtor.
9. Right to sue Indemnifier can not sue a
third party for loss in his
own name. He can only sue
on behalf of indemnified
Surety , on discharging a
debt due by the principal
debtor, can sue the
principal debtor in his own
right.

7. Types of Guarantee
⚫ 1. Retrospective Guarantee
⚫ 2. Prospective guarantee : a. Specific Guarantee
b. Continuing Guarantee
1. Retrospective Guarantee: A guarantee which is with respect
to an existing or an old debt of a party.
2. Prospective Guarantee: A guarantee for a future debt or
obligation is a prospective guarantee.
a. Specific: extends to a single transaction or debt
b.Continuing ; Sec. 129 , “when a guarantee is extends to a
series of transactions.”

8. Revocation or Termination of
continuing guarantee
⚫ 1. By Notice (Sec. 130)
⚫ 2. By Surety’s death (Sec. 131)
⚫ 3. Invalid Guarantee
a. Guarantee obtained by Misrepresentation (A appoints B as
manager but tells C he is auditor)
b. Guarantee obtained by Concealment(some important
aspect is invalid , for eg A appoints B clerk for collection of
debts)
c. Guarantee on the condition of Joining Co- sureties: when a
person stand guarantee wrt to a contract on a condition that
the creditor will not deem it to be operative until another
person joins him as co surety

9. Liability of Surety
1. The liability of the surety is co- extensive with that of the
principal debtors (Sec. 128)
2. Liability of surety commences with the default of the
principal debtors
3. Liability of co- sureties (Sec. 132)

10. Right of Surety
⚫ 1. Rights against principal debtor (Sec. 140)
⚫ 2. Right against the creditor ( Sec. 141)
⚫ 3. Right against co- sureties (Sec. 138 – one co- surety,
Sec . 146 – more than two )