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CONTRACTS OF GUARANTEE

Loan guarantee Fidelity guarantee

Consideration for Guarantee


There need be no direct consideration bet the surety and

creditor. Sec 127 expressly provides to this effect and states that 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. A guarantee for past debt would be invalid as it lacks consideration.

Nature & Extent of Suretys liability


The liability of surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. 2. The liability of a surety is secondary or contingent i.e., the surety is liable only on default of the principal debtor. 3. The liability of the surety arises immediately on the default of the principal debtor, unless there is an express provision in the contract that the creditor must in the first instance proceed against the principal debtor or must give a notice of default to the surety.
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Nature & Extent of Suretys liability


4. Where a creditor holds security from the principal debtor for his debt, the creditor need not first resort to these securities before suing the surety, unless otherwise agreed. 5. The surety will not be liable where the creditor has obtained guarantee by misrepresenting (either innocently or knowingly) a material part of the transaction by keeping silence as to material circumstance e.g. obtaining guarantee for the conduct of an employee without disclosing to the surety his previous dishonesty.

Nature & Extent of Suretys liability


6. The law treats two contracts as separate. Law does not

treat the principal debtor and surety as one person. One may be liable other may not.