CONTRACT OF GUARANTEE

SECTION 126
Contract of guarantee
FUNCTIONS PARTIES INVOLVED
 Repayment of debt  Creditor

 Payment of goods  Principal debtor

sold on credit  Surety

 Good conduct or
honesty of a
person or Fidelity
Guarantee
Example
 S and P go into a shop. S says to the
shopkeeper “ Let P have the goods and
if P fails to pay the amount , I
will”.This is the contract of guarantee.
BIRKMYR vs. DARNELL
FEATURES
 Concurrence or triangular relationship
 Primary liability in some person
 Essentials of a valid contract
 Writing not necessary
 Not a contract of UBERRIMAE FIDEI
KINDS OF GUARANTEE
 Retrospective guarantee (For existing
debt)
 Prospective guarantee (For future debt)
 Specific guarantee
 Continuing guarantee
Example: S in consideration that C will employ P in
collecting rents of C’s zamindari, promises C to be
responsible to the amount of Rs.5000 for due collection
and payment by P of these.
RIGHTS OF SURETY
 Rights against creditor
- Before the payment of guarantee debt
- Right of set-off
- Right of subrogation
- On the payment of guaranteed debt
RIGHTS OF SURETY
 Rights against principal debtor
- Right to be relieved of liability
- Right to be indemnity
Example: P is the principal debtor of C and S the surety of
the debt .C demands the payment of debt and on his
refusal , sues him. S is compelled to pay the amount of
debt with costs. He can recover the amount from P ,the
amount paid as well as the costs.
RIGHTS OF SURETY
 Rights against co-sureties
- Co-sureties liable to contribute
equally
e.g. S1,S2 & S3 are sureties to C for a sum of
Rs.3000.P makes a default .S1,S2&S3 will
be liable to what amount???
- Liability of co-sureties bound in
different sums
Example: S1,S2 and S3 as sureties for P ,enter
into three separate bonds each in different
penalty .S1 in the penalty of Rs.10000 ,S2 in
the penalty of Rs.20000 and S3 for
Rs.30000.P makes the default
a) Rs. 30000
b) Rs. 40000
c) Rs. 60000
S1,S2&S3 are liable for what amount in each of
three cases???
DISCHARGE OF SURETY
1. BY REVOCATION

REVOCATION BY SURETY

DEATH OF SURETY

NOVATION
 2. BY THE CONDUCT OF CREDITOR

Discharge of principal debtor

Variance in terms of contract

Compounding by creditor with principal debtor

Loss of security Creditor’s act

3. By invalidation of contract

Misrepresentation

Concealment

Failure of consideration

Creditor shall not act on it until a co-surety joins

TRUE OR FALSE???
 A contract of guarantee must be in writing
 Consideration received by principal debtor is
sufficient and it need not result in some benefit
to the surety himself
 In a contract of guarantee two parties are
necessary
 The death of principal debtor releases the
surety from his liability
 In a contract of guarantee there is no implied
promise by the principal debtor to indemnify
the surety
CONTINUED…
 A contract of guarantee is a contract
of uberrimae fidei
 The liability of surety is primary
 If the creditor does some act which
by implication releases the principal
debtor from his liability , the surety is
not discharged
 A specific guarantee cannot be
revoked