Contract of guarantee under contract act

Contract of guarantee, surety, principal debtor and creditor

A “contract of guarantee” is a contract of perform the promise or discharge the liability, of a third person in case of his default. The person who gives a guarantee is called the “surety”; the persons in respect of those default the guarantee is given is called the “principal debtor”, and the person the whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. Sec 126.

Contract guarantee

There can be no contract of guarantee without a liability enforceable a law. The primary idea of surety ship is an undertaking to indemnify if some other person does not fulfill his promise. Therefore person sought to be made liable as a surety should undertake to perform the promise or discharge the liability of a third party in case of his default. Where the husband deposits the fixed deposit receipt of his wife in the Bank as security for his overdraft account, the wife would be a surety within the meaning of S. 126.

A mere recommendation by Ca that A should buy goods of B will not entail on C the consequences that might flow his guarantee that A will not suffer any loss if he takes up B’s offer of sale.

Form of guarantee letter

The name of the guarantor need not appear in the body of the letter of guarantee. If he has signed it as guarantor he is liable under it. It is also not a requirement of law that the signatures of the guarantor should be attested by a witness.

Personal guarantee

In a letter of guarantee world “director” below signature of guarantor does not mean it to be executed on behalf of company or director. Guarantors were mentioned as directors for the purposes of identification although intended to furnish personal security.

Blank guarantee

Where a blank document was given to plaintiff Bank, unless otherwise proved, presumption would be that guarantor had give implied authority to fill in the blank in accordance with agreement and understanding between the parties.

Authority of attorney to furnish bank guarantee.

Where provisions of power of attorney specifically provided for furnishing a Bank guarantee, in spite of absence of words “Bank guarantee” used therein, the words execution of a contract bond, deed or undertaking to discharge the burden of a third party on his default would amount to furnishing guarantee. Attorney of Bank was thus, authorized to furnish Bank guarantee.

Discharge of bank guarantee

Where operative part of bank guarantee spoke of guaranteed money payable on demand, such period could not be limited to a specified time, but would extend till demand for its payment was made. Contract of guarantee being an independent document which clearly stipulated payment of the guaranteed amount on demand would give independent cause of action to creditor without recourse to agreement of load between the creditor and the principal debtor. Agreement of loan having been executed one day after the execution of contract of guarantee, it was not in existence at the time of execution of document of guarantee. The document of guarantee, therefore, could not be read and interpreted together with agreement of load between the creditor and the principal debtor.  

Performance guarantee

Performance guarantee is a guarantee for due performance of a contract by parties thereto. Ordinarily a guarantee would be consent or through court of law. Performance guarantee is a new type of guarantee introduced for large and international contracts. Though such a guarantee is independent and autonomous in nature generally yet import and scope, thereof could differ from case to case according to facts of each case and according to working of performance guarantee furnished therein. Where such guarantee had been furnished as per requirements in contract and supplemental contract, under specific terms and conditions, same could be enchased without reference to agreement including supplement agreement.

Three parties are necessary for contract of guarantee

Contract of guarantee means a contract to perform the promise or discharge the liability of a third person in case of his default. Therefore, a contract of guarantee involves three parties, the creditor, the surety and the principle debtor, and a contract to which those parties are privy. The foundation is the contract between the principal debtor and the creditor. Then there must be a contract between the creditor and the surety, by one of indemnity. In order to constitute a contract of guarantee, there must be a third contract, by which the principal debtor expressly or impliedly requests the surety to act as surety.

Guarantee presupposes principal debtor

The word “guarantee” has acquired a technical meaning. The essence of guarantee is that a guarantor agrees to discharge his liability only when the principle debtor fails in his duty. The presupposes the existence of a principal debtor. If there never was another person who can be properly described as the “principal debtor” there cannot be said to have been any “guarantee” either in its technical or ordinary meaning.

Oral or written guarantee

A contract of guarantee need not necessarily be in writing. It may be expressed by word of mouth or it may be tacit or implied and may be inferred from the course of conduct of the parties. Chapter VIII is not exhaustive on the subject. Where the terms of a contract of guarantee though oral, have been mentioned with sufficient precision in the plaint, the contract cannot be held uncertain or void within the meaning of section 29.

Guarantee of honesty

A guarantee of honesty stands on a different footing than a guarantee of debt. If the employer of a servant whose fidelity has been guaranteed continues to employ him even after a proved act of dishonesty, without notice to the guarantor, the surety is discharged. But this happens only if the creditor or employer has proof of the servant’s acts of dishonesty and not merely suspicions or reports about them. It is a matter not of suspicion but of satisfaction.

Proof of contract of guarantee

A contract of guarantee as also the consideration for it must be strictly proved when they are relied upon. In such cases due weight must be given to the custom of merchants in drawing presumptions.

Consideration for guarantee

Anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration to the surety for giving the guarantee. Sec 127.

Consideration for guarantee necessary

A contract of guarantee cannot be enforced unless there is some consideration for the guarantee.

Guarantee given after breach of contract

Where the supplier had already committed a breach of contract, an acceptance of responsibility by the indent or cannot be construed in the context of anything done or promise made for the benefit of the principal debtor qua the original contract, to attract the provisions of section 127 of the contract act. Therefore it is not a guarantee within the meaning of this section.

Forbearance

A binding promise to forbear is good consideration for a guarantee, though there be no contract by the plaintiff to forbear.

Release of claim

A mere promise to release a claim against another is not a consideration for a guarantee of payment. But actual release of the claim is such consideration.

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