m




p A contract of guarantee is a contract to perform the promise or
discharge the liability of third person in case of his default.

p A contract of guarantee is entered into with object of enabling

a person to get a loan or goods on credit or an employment.

p The person who gives the guarantee is called the Ǯsuretyǯ.

p The person in respect of whose default the guarantee is given is

called the ǮPrincipal Debtorǯ, and

p The person to whom the guarantee is given is called the

ǮCreditorǯ

p A guarantee may be either oral or written. ----

p |


  


  
 
 
 

  
  

%etween the principal debtor and the creditor .

%etween the creditor and the surety .

%etween the surety and the principal debtor.

p ²   
  

A contract of guarantee like every other contract

must satisfy all the essential of valid contract i.e. free
concert, legality of object, competency of parties etc.
It should also be supported by some consideration.

In case of contract of guarantee consideration 

             and
the consideration received by the principal debtor is
sufficient for surety. ----

 




p ô. The liability of a surety is secondary or
contingent i.e. the surety is liable only an
default of the principal debtor.

p Thus is surety becomes insolvent before

default by principal debtor (i.e. before the
date on which the debt is due for repayment),
the creditor cannot prove against the suretyǯs
Ǯofficial receivesǯ in insolvency.
p . 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 first instance proceed
against the principal debtor or must give a
notice of default to the surety.

p 3. Where a creditor holds securities from the

principal debtor for his debt, the creditor need
not first resort to these securities before suing
the surety, unless otherwise agreed.
p ~. The surety will not be liable where the creditor has obtained
guarantee by misrepresentation (either innocently or
knowingly) a material past of the transaction or by keeping
silence as to material circumstances e.g.- obtaining guarantee
for the conduct of an employee without disclosing to the surety
his previous dishonesty. (Sec ô~-ô~3).

p 5. The law treats two separate contracts in a contract of

guarantee from creditors point of view Ȃ one between the
creditor and the principal debtor, and the other between the
creditor and surety. The law does not treat the principal debtor
and surety as one person, and there is no such thing that the
surety will be liable only if the principal debtor is liable. One
may be liable while the other may not be. ----
² m 


!
p A guarantee may be an ordinary guarantee or a
continuing guarantee:

When a guarantee is given for a single specific debt or

transaction, it is called an Ǯordinary or specific guarantee.ǯ it
comes to an end as soon as the liability under the transaction
ends.

When a guarantee extends to a series of distinct and separable

transaction it is called Ǯcontinuing guaranteeǯ. (Sec. ô ), The
guarantee given here is intended to cover a number of
transactions over a period of time.

p It is just like a standing offer which is accepted by the

creditor every time a subsequent transaction takes
place. %eing a standing offer it may be revoked at any
time by the surety as to future transactions. ----

"² m 

p A continuing guarantee may be revoked as

regards future transactions under the following
circumstances:

ô. %        (Sec. ô30) A

continuing guarantee may, at any time, be revoked
by the surety, as to future transactions, by notice to
the creditor. Thus the surety may terminate his
continuing guarantee as regards transactions entered
into after the notice.

e continues to be liable for transactions entered into

prior to the notice. ----
p . %     (Sec. ô3ô) The death of the surety
operates, in the absence of any contract to the contrary, as
revocation of a continuing guarantee so for as regards future
transactions.

p It is not necessary that the creditor must have notice of death.

p 3. |          



%y variance in terms of contract (Sec. ô33)

%y release or discharge of principal debtor (Sec. ô3~)
%y arrangement with principal debtor (Sec. ô35)
%y creditors act or omissions inspiring suretyǯs eventual remedy (Sec.
ô3 )
%y loss of security (Sec. ô~ô)

p Discussed under leading Dzdischarge of Surety from Liabilitydz

  #

p 6 6
  ²  

ô. M
          


d The surety is entitled to demand from the creditor, at the
time of payment, all the securities which the creditor has
against the principal debtor at the time when the contract
of surety ship is entered into. It is immaterial whether the
surety knows of the existence of such security or not.

d If by negligence the creditor loses or without the concert of

the surety parts with such security as acquired at the time
of contract, the surety is discharged to the extent of value
of security.
d owever, If the security is lost due to an act of God or
enemies of the state or unavoidable accident the surety will
not be discharged (Krishan Talvai vs industan Commercial
%ank, Air ô 57, Punjab)

d It is to be remembered that the surety is entitled to the

benefit of the securities only after paying the debt in full, e
can not claim the benefit of a part of the securities merely
because he has paid a part of the debt (Goverdhan Das vs
%ank of %engal, ô
ô, %ombay) ----

. M
       

d The surety is also entitled to the benefit of any setoff which

to principal debtor might possess against the creditor in
respect of same transaction, for instance when the liability of
principal debtor is scaled down under Debt relief Act, suretyǯs
liability is reduced. (Sec ô~0)
p %. 6
       

ô. M
   
 

d When the surety pays off the debt on default of the principal
debtor, he is invested with all the rights which the creditor
had against the principal debtor. The surety steps into the
shoes of the creditor and is entitled to all the remedies which
the creditor could have enforced against the principal debtor.
(Sec. ô~0)

 M
     

d In every contract of guarantee there is an implied promise by

the principal debtor to indemnify the surety, and the surety is
entitled to recover from the principal debtor whatever sum
he has Ǯrightfully paidǯ under the guarantee, but no sums
which he had paid Dzwrongfullydz.
d The expression Ǯrightfully paidǯ means a just and equitable
payment. It covers:

À The principal sum

À Interest
À Noting charges is case of %ill of Exchange and
À Cost of the suit if there are reasonable grounds to defend the
suit.

d It does not cover unjust payment like the payment made of a

debt which is time barred as against both the principal debtor
and surety.

d The surety can not claim more then what he has actually paid
to the creditor, thus if he discharge the debt by compromise
at less than it full amount, he can get from the principal
debtor only the amount actually paid. ----
p C.   
 
  ² 

Where a debt is guarantee by more than one sureties

they are called co-sureties.

In such a case all the co-sureties are liable to

contribute towards the payment of the guaranteed
debt as per agreement among them.

%ut in the absence of any agreement, if one of the co-

sureties is compelled to pay the entire debt, he has a
right of contribution from the other co-surety or co-
sureties.
p M ²  

ô. Where they are sureties for the same debt for

similar amount:

d The co-sureties are liable to contribute equally and are

entitled to share the benefit of securities, if any, held by
any one of the co-sureties, equally. ----

. Where they are sureties for the same debt for

different sums:

d The rule is that Dzsubject to the limit fixed by his

guarantee, each surety is to contribute equally, (and not
proportionately to the liability undertaken)dz. ----
 „ ²

m$% &%$'

(  &
A surety is freed from his obligation under a contract of
guarantee under any one of the following
circumstances:

p ô. ë  M 

An Ǯordinary guaranteeǯ for a single specific debt or transaction

can not be revoked once it is acted upon.

%ut, a Ǯcontinuing guaranteeǯ, may at any time, be revoked by

the surety as to future transactions, by giving notice to the
creditor. (Sec. ô30).

The surety shall however, continue to remain liable for

transactions entered into prior to the notice.
p .    

In case of Ǯcontinuing guaranteeǯ the death of a surety

also discharges him from liability as regards
transactions after his death, unless there is a contract
to the contrary.

The deceased suretyǯs estate will not be liable for any

transaction entered into after the death, even if the
creditor has no notice of the death.
p 3.        ²  

A surety is discharged from liability when, without his

concert, the creditor makes any changes in the terms
of the contract with the principal debtor (no matter
whether the variation is beneficial to the surety or is
made innocently., or does not materially affect the
position of surety) because the surety is liable only for
what he has undertaken the contract. ----
p ~. M  
       

this section provides for following two ways of

discharge of surety from liability:

d The surety is discharged by any contract between the

creditor and the principal debtor, by which the principal
debtor is released. Any release of the principal debtor is
a release of surety also.

d The surety is also discharged by any act or omission of

the creditor, the legal consequence of which is the
discharge of principal debtor.
d ----
p 5. 6 
            
   


p Where the creditor, without the concert of surety, makes an

arrangement with the principal debtor for composition, or promises to
give him time, or not to sue him, the surety will be discharged.

p owever, in the following cases, the surety is not discharged Ȃ

Where a contract to give time to the principal debtor is made by the creditor
with a third person, and not with principal debtor, the surety is not discharged
(Sec. ô36)

Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him, does not discharge the surety, unless
otherwise agreed. (Sec. ô37) ----

Where there are co-sureties, a release by the creditor to one of them does not
discharge the others, neither does it free the surety so released from his
responsibility to the other sureties (Sec. ô3
)
p 6. ²        
 
   


It is the duty of the creditor to do every act necessary for

the protection of the rights of the surety and if he
(Creditor) fails in his duty, the surety is discharged ,

For instance Ȃ In case where the integrity of the cashier is

guaranteed, it is the duty of the employer to give
information to the suretyǯs any dishonest act is done by
the employee. If the employer continues to employ him
after an act of dishonest (which is proved), the surety is
discharged, if he is not informed within a reasonable time,
because then the suretyǯs right (eventual remedy) to
inform police for necessary recovery action is lost or
damaged i.e. may not be so fruitful as it would have been,
had a report been lodged earlier. ----
p 7. Æ    



If the creditor loses or without the concent of the

surety parts with any security given to him, at the
time of the contract of guarantee, the surety is
discharged from liability to the extent of value of
security.
p
. |       
  

A surety is also discharged from liability when the

contract of guarantee (between the creditor & surety) is
invalid. A contract of guarantee is invalid in following case.

d Where the guarantee has been obtained by means of

misrepresentation or fraud or keeping silence to material
part of the transaction by the creditor. ----

d Where a person gives a guarantee upon a contract that the

creditor shall not act upon it until another person has joined
in it as co-surety, the guarantee is not valid if that other
person does not join (Sec. ô~~)

d Where it lacks one or more essential elements of a valid

contract, et surety is incompetent to contract or the object is
illegal.
p Self:
Difference between contract of Indemnity and
contract of Guarantee

Contract of Indemnity Ȃ meaning , rights of

indemnity holder when sued, time of
commencement of Indemnifierǯs liability.