Contract of Guarantee (Section 126 -127)

INTRODUCTION 

  • Contract of Guarantee, Surety, Principal debtor and Creditor (Section—126)

Contract of Guarantee is a contract which is made to perform the promise or to free the liability in any case of default. Contract of guarantee is defined from section 126 till 147 Under Indian Contract Act. Contract of guarantee is performed to fulfil the Promises made between the parties.

There are three parties which are involved in contract of guarantee which are as follows: 

  1. Surety

The surety is the one who’s gives the assurance and takes the guarantee of the principal debtor that if in any case the principal debtor is not able to repay the money, he will pay in behalf of it. It is the promise made by surety to the creditor in case of any default by the principal debtor. A secondary contract happens with the surety in contract of guarantee. 

  1. Principal debtor 

Principal debtor is the one who’s the defaulter and on who’s behalf the guarantee is given by the surety. Principal debtor is the one who’s the borrower and liable to pay the creditor on the behalf of whom the guarantee was given. 

  1. Creditor 

The creditor is one who’s payable and is the one who is being protected from loss. The creditor is the one to whom the guarantee is given. Either principal debtor or the surety, are liable to pay to the creditor. It is party which has given something to borrow which is valuable and should be payable for that. 

For example: A told B that if C doesn’t repay the loan, A will pay to C on B’s behalf. In this case A is the one who’s taking the guarantee of C, and C is the one who’s the main debtor of the B, who’s the creditor. If C fails to repay the loan to B then A has to pay for it as A is the surety.

Here, there by A becomes the surety, who’s taking the guarantee 

The second part is C, who will be called as a principal debtor,

And the third party is B, is the whom the guarantee was given, the creditor. 

Case : P. J. Rajappan vs. Associated Industries

Citation : 

Facts —   In this case, The guarantor says as he  had not signed the contract of guarantee thus he won’t called as the surety of contract. But later all the evidence shows that that there has been a guarantor there in the deal which he promised that he will later signed the contract. The guarantor want to move away from this situation and said that without signing the contract he couldn’t be surety of the contract. 

Held –  The High Court of Kerala held that the contract of guarantee consist of three parties which are surety, principal debtor and creditor and all the evidence provide the fact that there was a guarantor there involved at the time of contract. The contract of guarantee is an agreement where parties are obligated and responsible for their actions thus guarantor not signing the contract doesn’t prove or is sufficient to prove what he’s stating. The court concluded the guarantor has guaranteed the due action of the principal debtor.

  • Consideration for Guarantee (Section —127)

Consideration come under section 127 of the act. When any promises is been made by the surety for the benefit of the principal debtor, there is may be consideration given in the surety.  Consideration are promises which are been made for the benefit of principle debtor. 

For example : Ram buys good from Raj. Later, Rahul agrees to pay for Ram because of any default from Ram, without consideration.  The agreement between them is void. 

Case : State Bank of India vs.  Premco Saw mill 1983

Citation :

Facts — A notice was issued by the State Bank of India against the defendant, who was the debtor. She was also threatened for legal actions by the State Bank but then her husband came forward and becomes the surety of the contract between her wife, the debtor and the State Bank and took the responsibilities to pay the liabilities. The husband also executed the promissory note in favour of the State bank and refrained the threatening action from the bank. 

Held –  The court held that acceptable and patience constituted good consideration for the surety on the banks part. 

Some of the Essential of contracts are as follows: 

  • All the three parties must be there for the agreement. It is to be assured that the principal debtor, creditor and the surety, all these parties should be there to form a contract of guarantee. In absence of any of these parties the contract of guarantee cannot be formed as per the section. All the parties to the contract must agree to the contract and the consent of each other must be there for a contract to be formed. The communication between the parties should either be expressed or implied.
  • All the essential’s of a valid contract are also being required to form a contract of guarantee. The contract should be lawfully enforceable. All the essentials which are applied in a valid contract will apply the same the in the contract of guarantee as well. Some of the essential of valid contract are Legal intention, valid consent, free consideration, acceptance etc. It is important that the liability should be legally valid.
  • The liability of surety in a contract of guarantee is secondary. The primary Liability  is of the principal debtor to the creditor because since they are one who had official entered to the primary contract. So, the primary duty is of the principal debtor to pay the liabilities and then in case when the principal debtor defaults in the payment or couldn’t able to pay the creditor then only the surety will be held liable to the creditor. 
  • There should be no misrepresentation to the there while this contract of guarantee. The facts should be stated clear to the surety while making the contract as the surety has the right to know. It should be truly represented to the surety which  will be likely to effect the responsibilities of the surety. The surety decision shouldn’t be influenced by giving the wrong facts or by representation of the facts. 
  • There should be no hiding or concealment of any facts which would likely to influence or effect the decision of the surety’s liability. Such contract will be held invalid if any guarantee is been obtained by such concealment of facts. Guarantee which are obtained by such concealment of facts and liabilities are held invalid. 
  • It is important that a debt or a liability to b there for a surety to pay. If principal debtor has already paid the liabilities there is nothing been left between the surety and the creditor to pay. The contract of guarantee secure such payment of debts of creditor which the principal debtor has to pay.  https://thelegallock.com/contract-of-indemnity-section-124-125

Conclusion

In this article contract of guarantee is been discussed where Contract of guarantee is defined from section 126 till 147 Under Indian Contract Act but in this paper we have major discussed on section 126 and 127 of Indian contract Act. Section 126 deals with Contract of Guarantee which is  been defined as a contract which is made to perform the promise or to free the liability in any case of default whereas under Section 127 consideration is been defined which means when a promises is been made by the surety for the benefit of the principal debtor, there is may be consideration given in the surety.  Consideration are promises which are been made for the benefit of principle debtor. The three parties are also been discussed which are surety, principal debtor and creditor. At the last the article concluded with essential of the contract and  how the contract of guarantee is an agreement where parties are obligated and responsible for their actions.

References —

www.blog-ipleaders-in 

www.ikouniv.ac.in 

www.legalserviceindia.com 

Author/Editor

Author: Poojitha Polichetty

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