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Guarantees are usually taken to provide a second pocket to pay if the first should be empty

Poorna Agarwal |2015IPM074 | Section A


The guarantee agreement is a contract where one party approaches to pay some money or to perform an
obligation it is a promise to be responsible for another persons default. The guarantee provides for the
guarantor liability to pay or perform if the relevant 3rd party fails to pay or perform. The guarantors
liability only becomes effective upon the default of the parties by the principal debtor a party. The guarantee
normally sets out the principal obligations together with provisions relating to protection of the creditor, an
indemnity, avoidance or discharge of the guarantee provisions together with express rights of the guarantor.


A guarantee is a promise to answer for the payment of some debt, or the performance of some duty, in case
of the failure of another party, who is in the first instance, liable to such payment or performance. A
guarantee is an accessory contract by which the promisor undertakes to be answerable to the promisee for
the debt, default or miscarriage of another person, whose primary liability to the promise must exist or be
contemplated. Guarantee, is an undertaking to be collaterally responsible for the debt default or miscarriage
of another. In a banking context it is an undertaking given by the guarantor to the banker accepting
responsibility for the debt of the principal debtor if he defaults, the guarantor may or may not be a customer.
A contract of guarantee is thus a secondary contract, the principal contract being between the creditor and
the principal debtor themselves. If the promise or liability in the principal contract is not fulfilled or
discharged only then the liability of the surety arises. At least 5 cases on the topic



In this case the following were distinguished as contracts of indemnity and contracts of guarantee.

When A person says to a shopkeeper, give your goods to a certain person and I will pay you, it is a
contract of indemnity, and when a person goes with another to a shop and tell the shop keeper: If my friend
does not pay for the goods you are giving him I will pay for it, it becomes a contract of guarantee.


A contact of guarantee seeks to secure payment of a principal debt. Thus, it is necessary that a recoverable
principal debt must pre-exist. There cannot be a contract to guarantee a time barred debt. The House of
Lords, as early as 1836, in the Scottish case of Swan vs. Bank of Scotland held that if there is no principal
debt, there can be no valid guarantee. Further developments in the area if any.


On appeal in the High Court of Kerala, it was found that there was no prior oral contract between the surety
and the Bank. The contention of the Bank was that after having contracted to provide a loan of Rs. 20000/- ,
Sankaran brought the letter of guarantee and asked for a further loan of Rs. 5000/- which was refused by the
bank. Then Sankaran took back the letter of guarantee and then returned it after sometime making the
alterations mentioned above. These changes were not consented to by Anirudhan but the Bank however kept
the letter and sued Anirudhan on it. The High Court allowed the appeal by the Bank and made Anirudhan
liable to pay the amount of guarantee mentioned in the letter. Against this decision of the High Court,
Anirudhan appealed in the Supreme Court.

Thus by majority it was the court order was that the alteration had no discharged the appellant from his
obligations as a surety and he was still liable to the Bank to the tune of Rs. 20000/-


A three judge bench of Honble Supreme Court held as follows-

The guarantor in the present suit never took any plea to the effect that his liability is only contingent if
remedies against the principle debtor fail to satisfy the dues of the decree-holder. If such a plea had been
taken and the court trying the suit had considered the plea and gave any finding in favour of the guarantor,
then it would have been a different position. But in the present case, on the face of the decree, which has
become final, the court cannot construe it otherwise than its tenor. No executing court can go beyond the
decree. All such pleas as to the rights which the guarantor had, had to be taken during trial and not after the
decree while execution is being levied.


A three judge bench of Honble Supreme Court held as follows-

The expression "security" in s. 141 is not used in any technical sense; it includes all rights which the
creditor had against the property at the date of the contract. The surety is entitled on payment of the debt or
performance of all that he is liable for, to the benefit of the rights of the creditor against the principal debtor
which arise out of the transaction which gives rise to the right or liability: he is therefore on payment of the
amount due by the principal debtor entitled to be put in the same position in which the creditor stood in
relation to the principal debtor. If the creditor has lost or has parted with the security without the consent of
the surety, the latter is, by the express provision contained in s. 141, discharged to the extent of the value of
the security lost or parted with. The State had a charge over the goods sold as well as the right to remain in
possession till payment of the instalments. When the goods were removed by Jagatram that security was lost
and to the extent of the value of the security lost the surety stood discharged.


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, or the supplier or the employer that he (the
person in need) may be trusted and in case of any default, "I undertake the responsibility".

This type of collateral undertaking to be liable for the default of another is called a Contract of guarantee".
In English law a guarantee is defined as a promise to answer for the debt, default or miscarriage of another"
It is collateral engagement to be liable for the debt of another in case of his default. Guarantee are usually
taken to provide a second pocket to pay if the first should be empty.