The expression 'Guarantee' literally means "assurance given by one person to another at the default of some other". In other words, it is a secondary agreement in which a person is liable for the debt or default of another, who is the party primarily liable for the debt. Contract of guarantee also called as the Contract of Suretyship

1) Definition : 

       Section 126 of the Indian Contract Defines the contract of Guarantee as, "A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default.

               Surety: The person who gives the guarantee is called the “surety”.Surety also known as Guarantor.

               Principal Debtor: The person in respect of whose default the guarantee is given is called the “principal debtor”,

               Creditor: The person to whom the guarantee is given is called the “creditor”.

   The function of a contract of guarantee is to enable a person to get a loan or goods on credit. or an employment. Some person comes forward and tells the lender, on the supplies, on the employee that he may be trusted and in case of any default I undertake to be responsible. A guarantee may be either oral or written.


Example : 

'X' takes loan from a bank. 'X' promise to the bank to repay the loan. 'Y' also makes a promise to the bank saying that if 'X' does not repay the loan "then I will pay".

       Here, in the above example, X is Principal debtor , Y is surety , whose liability is secondary. and the Bank is creditor.  


2) Essentials of Contract of Guarantee:


(i) Principal Debt: There can be no Contract of Guarantee unless there is a principal debtor.

(ii) Consideration for Guarantee: According to Section 127 of the Indian Contract Act, 1872  Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

Illustrations 

        (a) 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 a sufficient consideration for C’s promise.

        (b) 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 forbear as requested. This is a sufficient consideration for C’s promise.

        (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.


3) Distinction between Contract of Guarantee and Contract of Indemnity

    See in detail >>>>>  Distinction between Contract of Indemnity and Guarantee



See also 

1) Contract of Indemnity 

2) Revocation of Proposal (Offer)

3) Difference between Sub-Agent and Substituted-Agent

4) Distinction between Offer and Invitation to Offer

5) Kinds of Agents

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