This document discusses contracts of guarantee under Indian law. It defines key parties in a contract of guarantee as the surety, principal debtor, and creditor. It outlines types of guarantees as specific or continuing. It explains rules around revocation of continuing guarantees, liability of the surety, discharge of the surety, consideration, and distinction between contracts of guarantee, indemnity and insurance. Key points covered are types of guarantees, rights and liabilities of parties, essential elements, and discharge or revocation of a guarantee.

1. ContraCt of
guarantee
Course: LLB II
Subject : Company Act
Unit: I

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.

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.

4. 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

5. Types of guarantees
• 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

6. Revocation of continuing Guarantee
• By the surety giving notice oral or in writing to
the creditor as to future transitions
• In the absence of a contract to the contrary,
by the death of the surety as to future
transactions

7. 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.

8. Discharge of surety
• By revocation
1.notice
2.death
3.novation(new contract)
• By conduct of the creditor:- Any variance made without
the surety’s consent in the terms of the contract between
the principle debtor and the creditor, discharge the surety
as to transactions subsequent to the variance

9. Discharge of surety
• By Invalidation of Contract:-
Gurantee obtained by means of either
misrepresentation or concealment of material fact which
the creditor was aware of at the time of entering into the
contract invalidates the guarantee and discharges the
surety
• Where there is no consideration between the creditor and
the principal debtor, the surety is discharged.

10. CONSIDERATION IN A CONTRACT OF
GUARANTEE (Sec. 127)
• Anything done, or any promise made, for the benefit of
principal debtor may be a sufficient consideration to the
surety for giving the guarantee.
• Essentials of contract of guarantee
• 1. There must be a debt existing, which should be
recoverable.
• 2. Existence of three parties in a contract of guarantee, i.e.,
principal debtor,
• creditor and surety.
• 3. There must be a distinct promise, oral or written, by the
surety to pay the debt in case of default committed by the
principal debtor.

11. CONSIDERATION IN A CONTRACT OF
GUARANTEE (Sec. 127)
• 4. The principal debtor must be primarily
liable. Surety’s liability is secondary, i.e.,
surety’s liability arises only in case of default
of the principal debtor.
• 5. There should be some consideration.
• 6. The liability must be legally enforceable.
• 7. The contract of guarantee must have all the
essentials of a contract.

12. Distinction between a contract of indemnity and a contract of guarantee
•
indemnity
• 1. parties- there are two parties
indemnifier and indemnity holder
• 2.Liability:the liability of the indemnifier is
‘primary’
• 3.contigency:the liability of indemnifier
arises only on the happening of the
contingency .
• 4. contract: there is only one contract
between the indemnifier and indemnity
holder.
• 5. object: the indemnity contract is
reimbursement of loss. It provides ‘
security’.
• 6.Right to sue: indemnifier can not sue a
third party for the loss suffered
• Guarantee
• 1.there are three parties-- creditor, principal
debtor and surety.
• 2. the liability of surety is secondary the surety
is liable only if the principal debtor fails. The
liability of principal debtor is primary.
• 3. there is an existing debt or duty, the
performance of which is guaranteed by the
surety.
• 4. there are three contract one contract
between the creditor and principal debtor ,
second between surety and creditor, third
between surety and principal debtor.
• 5.the contract of guarantee provides ’surety’ to
the creditor.
• 6. surety can sue the principal debtor.

13. Contract of Insurance, Guarantee and
Indemnity distinguished
• Contract of Insurance, Guarantee and Indemnity
distinguished
• In a contract of insurance, pure and simple, insurer is not a
surety.
• In a contract of guarantee, there must always be three parties
in contemplation;
• a principal debtor a creditor and a third party who in
consideration of the same act or promise on the part of the
creditor,
• promises to discharge the debtor’s liability if the debtor failed
to do so.
• In a contract of indemnity, however, the promisor makes
himself primarily liable and undertakes to discharge the
liability in any event.

14. CONTINUING GUARANTEE
• CONTINUING GUARANTEE (Sec. 129)
• A guarantee which extends to a series of
transactions is called a “continuing
guarantee.”
• A guarantee may cover a single or specific
transaction or a series of transactions. Series
of transactions implies series of separate and
distinct future transactions.

15. Revocation
• Revocation of a continuing guarantee
• A continuing guarantee can be revoked only as to
‘future transactions’ in any of the following ways:
• 1. By Notice: (Sec. 130) A continuing guarantee may
at any time be revoked by the surety, as to future
transactions, by notice to the creditor.
• 2. By death of the surety: (Sec. 131) In the absence
of any contract to the contrary, death of surety
operates as revocation of a continuing guarantee, so
far as regards future transactions

16. Revocation
• .
• 3. By discharge of surety: Continuing guarantee is also revoked
when the surety is discharged in any of the following ways:
• (i) By variance in the terms of contract: (Sec. 133)
• (ii) By release or discharge of principal debtor: (Sec. 134)
• (iii) By creditor compounding with the principal debtor
• (iv) By creditor’s act or omission impairing surety’s eventual
remedy: (Sec. 139)
• (v) By creditor losing security against the principal debtor:
(Sec.141)
• (vi) By misrepresentation: (Sec. 142)
• (vii) By concealment: (Sec. 143)
• (viii) Failure of co-surety to join: (Sec. 144)

17. EXCEPTIONS
• WHEN SURETY IS NOT DISCHARGED?
• EXCEPTIONS (Secs. 136-138)
• In the following cases, the surety is not discharged:
• (1) When agreement is made by creditor with third
person to give time to principal debtor: (Sec. 136)
• (2) Creditor’s forbearance to sue the principal
debtor: (Sec. 137)
• (3) Release of one co-surety: (Sec. 138)

18. INVALID GUARANTEES
• INVALID GUARANTEES
• Under the following circumstances, the contract of
guarantee shall be invalid:
• 1. Guarantee obtained by misrepresentation:
• 2. Guarantee obtained by concealment: (Sec. 142)
• 3. Guarantee or contract that co-surety shall join:
(Sec. 144)
• 4. Essential elements absent:

19. RIGHTS OF SURETY
• 1. Right of Subrogation: (Sec. 140) — Right of
a surety against principal debtor:
• 2. Right to benefit of creditor’s securities (Sec.
141) — Right of surety against the creditor:
• 3. Right to indemnity: (Sec. 145) — Right of
surety against the principal debtor:
• 4. Right to be contributed equally in case
where two or more persons are cosureties.

20. LAW AS TO CO-SURETIES
• Right of a surety against the co-surety (Sec. 146)
• Co-sureties bound in different sums: Co-sureties
who are bound in different sums are liable to pay
equally as far as the limits of their respective
obligations permit ( Sec. 147).
• Surety’s liability: (Sec. 128)
• The liability of the surety is co-extensive with that of
the principal debtor, unless it is otherwise provided
by the contract.

21. ESSENTIAL FEATURES OF
GUARANTEE
• Concurrence of three contracts
• Primary liability is that of the principal debtor
• In case the debtor is a minor , the surety’s liability
becomes primary
• All the essentials of a valid contract
• It may be in writing or oral
• There need not be full disclosure of facts to the
surety before he gives the guarantee

22. References
• Avtar Singh : Contract Act, Eastern
• Beatson : Anson's Law of Contract, Oxford

23. Thank You