Contract of Guarantee
Introduction
A contract of guarantee is an important special contract under the Indian Contract Act, 1872. It provides security to creditors in transactions involving credit, loans, or employment.
It ensures that if one person fails to perform, another person will take responsibility for the obligation.
Meaning / Definition
Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as:
“A contract to perform the promise, or discharge the liability, of a third person in case of his default (failure).”
It is a conditional contract where liability arises only when the principal debtor fails to perform.
Parties to a Contract of Guarantee
-
Principal Debtor
The person whose default is guaranteed. -
Creditor
The person to whom the guarantee is given. -
Surety
The person who gives the guarantee and promises to discharge the liability.
Modes or Types
Specific Guarantee
A guarantee given for a single transaction or specific debt. It ends once the obligation is fulfilled.
Continuing Guarantee
A guarantee which extends to a series of transactions over a period of time.
Distinction / Comparison
Guarantee vs Independent Liability
| Basis | Contract of Guarantee | Independent Liability |
|---|---|---|
| Nature | Conditional liability | Absolute (direct) liability |
| Parties | Three parties involved | Usually two parties |
| Liability | Arises on default of debtor | Arises immediately |
| Purpose | To secure another’s obligation | To create primary obligation |
Practical Example
X tells Z to supply goods to Y and promises that if Y does not pay, he will pay. If Y fails to pay, X becomes liable. This is a contract of guarantee.
Summary
- Defined under Section 126 of the Indian Contract Act, 1872
- Involves three parties: principal debtor, creditor, and surety
- Surety’s liability is conditional on default of principal debtor
- Used to secure loans, credit, and employment
- Can be specific or continuing
- Provides additional security to the creditor