The Indian Contract Act 1971

1. The Indian Contract Act 1971
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Dr Siddharth Shimpi

2. Contracts of Guarantee
Sec 126 deals with contract of guarantee.
As per this section contract of guarantee is a contract
to perform the promise, or discharge the liability of
the third person in case of his default.
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Dr Siddharth Shimpi

3. Parties to
Contract of Guarantee
The person who gives the guarantee is called the
Surety;
The person in respect of whose default the guarantee
is given is called the Principal Debtor;
The person to whom the guarantee is given is called
the Creditor.
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Dr Siddharth Shimpi

4. Essentials of
Contract of Guarantee
Tripartite Agreement
Consent of Three Parties
Existence of Liability
Essentials of Valid Contact
Guarantee not to be Obtained by Misrepresentation
Guarantee not to be Obtained by Concealment (any
guarantee which the creditor has obtained by means of keeping silence
as to material circumstances is invalid)
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Dr Siddharth Shimpi

5. Types of Guarantees
Specific Guarantee: It covers only one transaction
or objective, is limited to a certain sum of money
and is limited as to time.
Continuing Guarantee: It covers a series of
transactions subject to the limit as mutually agree
upon irrespective of the payments towards the
advance and irrespective of the fluctuations of the
balance in the debtors account.
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Dr Siddharth Shimpi

6. Liability of Surety
According to sec 128 the liability of the surety is co
extensive with that of the principle debtor, unless
otherwise provided by the contract.
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Dr Siddharth Shimpi

7. Discharge of Surety
By notice of revocation
By death of surety
By novation (new contract)
By variance in terms of contract
By release or discharge of Principal Debtor
By agreement
Loss of Security
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Dr Siddharth Shimpi

8. Contract of Indemnity vs.
Contract of Guarantee
Basis Contract of Indemnity Contract of Guarantee
No. of Parties Two Three
No. of
Contracts
One Three
Undertaking Indemnifier undertakes to
save the indemnity holder
from any loss.
The Surety undertakes for
the payment of debts of
principal debtor.
Nature of
Liability
The liability of indemnifier
is primary and
unconditional.
The liability of Surety is
secondary and conditional.
Nature of
Event
In case of contingency Only on the non
performance of an existing
promise
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Dr Siddharth Shimpi