This document provides an overview of the law of contracts as it relates to guarantees. It defines a guarantee as a tripartite agreement involving a principal debtor, creditor, and surety where the surety assumes secondary liability for the debt if the principal debtor defaults. The document outlines the essential elements of a valid guarantee contract and distinguishes guarantees from indemnity agreements. It also discusses different types of guarantees like continuing guarantees and how continuing guarantees can be revoked. Overall, the document provides a high-level introduction to key concepts regarding guarantees under contract law in 3 sentences or less.

1. B.B.A.LL.B(HONS.)
LAW OF CONTRACTS - II
(SEMESTER-II B)
Mrs. Amrita Singh
Asst. Prof. (Law)

3. UNIT -I
 Guarantee
The
Definition of guarantee: as distinguished from
indemnity
Basic essentials for a valid guarantee contract
Difference between Indemnity & Guarantee
Kinds of Guarantee
Continuing Guarantee
Revocation of continuing guarantee

4. Contract of Guarantee (Sec.126)
 A Contract of Guarantee is a contract to perform the
promise, or discharge the liability of a third person in
case of his default. The person who gives the guarantee
is known as the ‘Surety’, the person in respect of whom
the guarantee is given is known as the ‘Principal
Debtor’, and the person to whom the guarantee is
given is called the ‘Creditor’.
E.g. – A advances a loan of Rs. 6000 to B and C promises
to A that if B doesn't repay the loan, C will do so. This
is a contract of guarantee.

5.  Consideration for Guarantee (Sec.127)
“Anything done, or any promise made, for
the benefit of the principal debtor, may be a
sufficient consideration to the surety for
giving the guarantee.”

6. Illustration
a) B requests A to sell and deliver to him
goods on credit. A agrees to do so, provided
C will guarantee the payment of the price of
the goods. C promises to guarantee the
payment in consideration of A’s promise to
deliver the goods. This is a sufficient
consideration for C’s promise.

7. Scope
 In Ghulam Hussain Khan v. M Faiyaz Ali Khan
[AIR 1940 Oudh 346], it was held that where,
after a lease has been executed, a person
became surety for the payment of rent due by
the lessee, a contract of a surety was for
consideration, on the ground that the word
‘done’ in Section 127 showed that past benefit
to the principal debtor could be good
consideration for a bond of guarantee.

8.  In the Privy Council Case [Kali Charan v. Abdul
Rahman , (AIR 1918 PC 226)], on which the
court relied are not clearly set out in the
judgment of their Lordships, but apparently
the surety bond, though executed at a date
subsequent to the principal agreement (a
compromise approved by the court) was
executed in the pursuance of one of the terms
of that agreement.

9. Essential Features of Guarantee
1. Tripartite Agreement:
Concurrence of three Contracts: The Contracts connecting each-other as
a contract between:
The Principal Debtor & Creditor
The Creditor & Surety The Surety & Principal Debtor

10. 2. Liability: Under such contract the primary liability
is of the principal debtor and only secondary
liability is of the surety. The liability of surety arises
only in case of default by principal debtor.
3. The contract may be either oral or in writing.
4. A contract of guarantee is invalid where
guarantee has been obtained by means of
misrepresentation made by creditor. (Sec.142 &
143)

11. Contd…5. Section 10- essentials should be satisfied.
Agreement
Valid
Lawful Consideration
Free consent
Lawful Object
Competency

12. Contd…

13. Contd….
6. In a Contract of Guarantee is that there must be a
debt existing and it should be recoverable.
7. The liability undertaken by surety must be legally
enforceable.
8. The contract undertaken by surety must be legally
enforceable.
9. In contract of guarantee there should be some
consideration. However, there need not be any
direct consideration between a surety and a creditor.
The consideration received by the principal debtor is
sufficient. A contract of guarantee without
consideration is void. (Sec.127)

14. Case-Laws
Where the only contracts are between the principal-
debtor and the creditor and the surety, but no
contract between the principal debtor and the surety,
the case is one of indemnity.
- Ramchandra B Loyalka v. Shapurji N Bhownagree,
AIR 1940 BOM 315

15. Difference between Indemnity &
Guarantee
Indemnity Guarantee
1. Sec. 124 defines a contract of
Indemnity.
2. In indemnity, there are two parties
i.e. Indemnifier and indemnity
holder.
3. There is only one contract between
indemnifier and indemnity holder.
4. The liability of indemnifier is
primary.
5. The liability of indemnifier arises
only on the happening of
contingency.
1. Sec. 126 defines a Contract of
Guarantee.
2. In guarantee there are three parties i.e.
creditor, principal debtor & surety.
3. There are three contracts, one between
principal debtor and creditor, second
between creditor & surety and third
between surety & principal debtor.
4. The liability of surety is secondary and
arises only if the principal debtor fails
to perform his obligations.
5. There is existing legal debt, the
performance of which is guaranteed by
the surety.

16. Continued…
Indemnity Guarantee
6. The indemnifier act independently
without any request of the debtor or
third party.
7. The indemnifier can’t sue the third
party for loss in his own name.
8. Indemnity is for reimbursement of
loss.
9. An Indemnifier has no right to file a
suit against the third party for any loss.
An Indemnifier can do so only when
there is an assignment in his favour.
6. Under guarantee, it is necessary that
surety should give guarantee at the
request of debtor.
7. Surety after discharging the debt can
sue the principal debtor.
8. The contract of guarantee is for surety
of debt.
9. When a surety pays off the debt due to
the principal debtor under a contract of
guarantee, the surety gets the right to
bring a suit against the principal debtor
in order top recover the amount he has
paid to the creditor. Even the surety gets
certain rights against the creditor and co-

17. Contd…
Indemnity Guarantee
10. In a contract of Indemnity,
it is not necessary for the
indemnifier to act at the
request of the indemnity-
holder.
11. Indemnity is promised
generally as a compensation
for a loss.
10. In a contract of guarantee,
the surety should give
guarantee only at the request
of the Principal Debtor.
11. Guarantee is given to
secure a loan or acquire a job.

18. Kinds of Guarantee
 1) Absolute guarantee – unconditional guarantee by
surety
 2) Conditional guarantee – enforceable when
contingency along with default happens
 3) Retrospective guarantee – given for existing debt
 4) Prospective guarantee – given for future debt
 5) Limited guarantee – for a single transaction

19. 6. Unlimited guarantee – unlimited as to time or
amount
7. General guarantee – for acceptance by public
generally
8. Special Guarantee – for acceptance by the
particular person
9. Continuing Guarantee – extends to the series of
transaction

21. Continuing Guarantee (Sec.129) – A guarantee
which extends to a series of transaction, is called
a “continuing guarantee”.
Illustration
A A, in consideration that B will employ C in
collecting the rent of B’s zamindari promises B to
be responsible, to the amount of 5,000 rupees,
for due collection and payment by C of those
rents. This is a continuing Guarantee.

22. Revocation of Continuing Guarantee
 By notice of revocation by the surety
(Sec.130)
 By the death of the surety (Sec.131)
 By variation in the contract (Sec.133)
 Creditor’s act of omission (Sec.139)

23.  Novation
 Creditor discharges principal debtor (Sec.134)
 Creditor losses security under the contract
(Sec.141)
When creditor compounds with, gives time to,
or agrees not to sue, the principal debtor
(Sec.135)

24. Thank You