A ‘contract of Guarantee’ is a contract to perform the promise, or discharge the liability of a third person in case of his default.
The person who gives the guarantee is called the ‘surely’, the person in respect of whose default the guarantee is given is called the ‘principal debtor’ and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be either oral or written (Sec 126). It may be express or implied. To invoke contract of guarantee, default must be committed by the third person on whose behalf a person stands surety.
In English law, a guarantee is defined as ‘a promise to answer for the debt, default or miscarriage of another’.
The contract of guarantee is also known as a contract of ‘suretyship’.
A lends money to B and C promises A that in case B fails to pay the money he will pay the money. This is a contract of guarantee.
Every contract of guarantee has three parties viz., (1) Principal Debtor; (2) Creditor; and (3) Surety. In the above illustration, B is the ‘Principal Debtor’, A is the ‘Creditor’ and C is the ‘Surety’ or ‘Guarantor’.
Tripartite agreement: Every contract of guarantee has three agreements:
1. An agreement between the creditor and the principal debtor.
2. An agreement between the surety and the creditor.
3. An agreement between the surety and the principal debtor.
Contract between the surety and the principal debtor is that of indemnity. Principal debtor indemnifies the surety that if he pays the amount in case of default committed by him, he will indemnify him in case of loss. This contract, if it is not express, is always implied.
It is no doubt true that for a contract of suretyship there should be the concurrence of the principal debtor, the creditor and the surety but this does not mean that there must be evidence showing that the surety undertook his obligation at the express request of the principal debtor; an implied request will also be sufficient. There need not be a tripartite contract between the three parties, namely, the surety, creditor and the principal debtor simultaneously. The very nature of the contract of guarantee does not stipulate for the surety to receive or, for that matter retain the money or advantage himself as the actual beneficiary is the principal debtor.
Consideration in a Contract of Guarantee:
Anything done, or any promise made, for the benefit of principal debtor may be a sufficient consideration to the surety for giving the guarantee. In other words, something done or any promise made for the benefit of the principal debtor is presumed by law to be sufficient consideration in the contract of guarantee. It is not necessary that there should be some benefit to the surety himself. It is immaterial whether there is or not any apparent benefit to the surety. The consideration received by the principal debtor is taken to be sufficient consideration for the surety. A contract of guarantee without consideration is void. Past consideration is a sufficient consideration for a contract of guarantee. For example, where after a lease is executed and a person becomes surety for the payment of the rent due to the lessee, the contract of suretyship is for consideration. Anything done for the benefit of the principal debtor before the guarantee was given is a good consideration.
1. B requests A to sell and deliver to him goods on credit. A agrees to do so provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.
2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to for bear as requested. This is a sufficient consideration for C’s promise.
3. A sells and delivers goods to B, C afterwards without consideration, agrees to pay for them in default of B. The agreement is avoid.