Ppt about contract of guarantee

1. BUSINESS LAWS
CONTRACT OF GUARANTEE
BY
CHERUKULA SUDHARSHAN.
REG.NO. 1982263060
(2021-2023)
UNDER THE SUPERVISION OF
DR. B. SUDHESHNA
DEPARTMENT OF MANAGEMENT STUDIES
SRI VENKATESWARA UNIVERSITY
TIRUPATI.

3. CONTENTS
 MEANING
 PARTIES TO CONTRACT OF GUARANTEE
 ESSENTIAL ELEMENTS OF A CONTRACT OF GUARANTEE
 TYPES OF GUARANTEE
 DISCHARGE OF A SURETY FROM LIABILITY
 RIGHTS OF A SURETY

4. MEANING
According to Section 126 of the Indian Contract Act 1872,
Contract of Guarantee is a contract to perform the promise, or discharge the
liability, of a third person in case of his default
EXAMPLE:
A requests B to give Rs. 50,000 to C, and guarantees that C will repay the
amount within a year. If C does not, A himself will pay the amount to B.
This contract would be a contract of Guarantee.

5. PARTIES TO CONTRACT OF GUARANTEE
There are three parties to the contract of Guarantee
1) Surety
2) Principal Debtor
3) Creditor
• The person who gives the guarantee is called the Surety.
• The person in respect of whose default, the guarantee is given is called the
principal Debtor.
• The person to whom the guarantee is given is called the Creditor.

7. ESSENTIAL ELEMENTS OF A CONTRACT OF GUARANTEE
1)Concurrence of All the Parties:
All the three parties namely, the principal debtor, the creditor and the surety
must agree to make such a contract.
2)Liability:
In a contract of guarantee, liability of the surety is secondary i.e., the
creditor must first proceed against the debtor and if the latter does not
perform his promise, then only he can proceed against the surety.
3)Existence of a Debt:
A contract of guarantee pre-supposes the existence of a liability, which is
enforceable at law. If no such liability exists, there can be no contract of
guarantee. Thus, where the debt, which is sought to be guaranteed is already
time barred or void, the surety is not liable.

8. 4)Consideration:
There must be consideration between the creditor and the surety so as to
make the contract enforceable. The consideration must also be lawful. In a
contract of guarantee, the consideration received by the principal debtor is
taken to be the sufficient consideration for the surety.
Anything done, or any promise made, for the benefit of the principal debtor
may be sufficient consideration to the surety for giving the guarantee
– Sec. 127 of Indian Contract Act, 1872..
5)Writing not Necessary:
A contract of guarantee may either be oral or written. It may be express or
implied from the conduct of parties.

9. 6)Essentials of a Valid Contract:
It must have all the essentials of a valid contract such as offer and
acceptance, intention to create a legal relationship, capacity to contract,
genuine and free consent, lawful object, lawful consideration, certainty and
possibility of performance and legal formalities.
7)No Concealment of Facts:
The creditor should disclose to the surety the facts that are likely to affect
the surety’s liability. The guarantee obtained by the concealment of such
facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by
the concealment of material facts.

10. 8) No Misrepresentation:
The guarantee should not be obtained by misrepresenting the facts to the
surety. Though the contract of guarantee is not a contract of uberrimae fidei
i.e., of absolute good faith, and thus, does not require complete disclosure of
all the material facts by the principal debtor or creditor to the surety before
he enters into a contract. But the facts, that are likely to affect the extent of
surety’s responsibility, must be truly represented.
9)Co-sureties:
Guarantee given by the surety on the condition that another party must enter
as a co-surety, and no one joins as a co-surety, in that case also, contract
stands invalid.

11. 10)Tripartite Contract:
There are three types of Contract:
 Contract of Indemnity: It exists amidst Surety and Principal Debtor,
which is an Implied Contract.
 Loan Agreement: It exists amidst Principal Debtor and Creditor which is a
Principal Contract.
 Contract of Guarantee: It exists amidst Surety and Creditor which is a
Secondary Contract.

12. TYPES OF GUARANTEE:

13. Based on Transaction:
 Specific Guarantee:
The form of guarantee that sticks to a single debt or a particular
transaction is called a specific guarantee. In such a guarantee, as and when
the debt is repaid or the promise is fulfilled, the liability is discharged.
Example:
A requests B to give Rs. 50,000 to C, and guarantees that C will repay the
amount within a year. If C does not, A himself will pay the amount to B.
This is a specific Guarantee.

14. Continuing Guarantee:
A type of guarantee that stretches to a number of transactions is continuing
guarantee. In such a guarantee, the liability of the surety continues till it is
revoked.
Example:
On A’s recommendation B, a wealthy landlord employs C as his estate
manager. It was the duty of C to collect rent on 1st of every month from the
tenant of B and remit the same to B before 5th of every month. A, guarantee
this arrangement and promises to make good any defaults made by C. This
is a contract of Continuing guarantee.

15. Based on Time:
 Retrospective Guarantee:
A guarantee given by the surety for an existing debt or promise, is a
retrospective guarantee.
 Prospective Guarantee:
Any guarantee given by the surety for the ensuing debt or promise is a
prospective guarantee.

16. DISCHARGE OF A SURETY FROM LIABILITY:
Under a contract of guarantee, a surety may be discharged from his liability
in the following circumstances:
1) By notice of revocation in case of a continuing guarantee:
A continuing guarantee is revoked and the surety is discharged from liability
when a notice of revocation is given by the surety (Section 130 of the Indian
Contract Act, 1872). Such notice operates to revoke the surety’s liability with
regard to future transactions. However, he continues to be accountable for
transactions that are entered into before the issue of notice.
2) By the death of the surety in case of a continuing guarantee:
In the absence of a contract to the contrary, the death of the surety acts as a
ground for revoking a continuing guarantee as far as future transactions are
concerned (Section 131 of the Contract Act). However, the surety’s estate
will be held accountable for all transactions done prior to his death

17. 3) Discharge of surety by Variation in the terms of the contract:
The surety is discharged from his liability if any variation is made in the
terms of the contract between the creditor and principal debtor without the
surety’s consent (Section 133 of the Contract Act). In such a case, the surety
is discharged with regard to all transactions taking place after the variation.
4) When the creditor releases the principal debtor:
A surety will be released if the creditor releases the principal debtor, or if the
creditor acts or fails to act in a way that causes the principal debtor to be
released (Section 134 of the Indian Contract Act). However, the surety is not
discharged if the creditor fails to sue the principal debtor within the
limitation period.

18. 5) Composition without the consent of the surety:
The surety will be released from liability if the creditor reaches a
composition agreement with the principal debtor without the surety’s
assent, or if the creditor pledges to give time or not to sue the principal
debtor without the surety’s consent (Section 135 of the Indian Contract Act).
6) Violation of rights of the surety:
If the creditor performs an act that violates the surety’s rights or fails to
perform an act that his obligation to the surety requires him to perform, and
the eventual remedy of the surety against the principal debtor is affected as
a result, the surety is discharged (Section 139 of the Indian Contract Act).

19. 7) Loss of security by the creditor:
Where the creditor loses or parts with any security that the principal debtor
had given in favour of the creditor at the time of the contract, the surety is
discharged to the extent of the value of the security, unless the surety
consented to the release of such security by the creditor in favour of the
debtor. It makes no difference whether the surety was or was not aware of
the security (Section 141 of the Indian Contract Act).
8) Discharge of surety when Guarantee is obtained by misrepresentation:
When a misrepresentation relating to a significant fact in the contract of
guarantee is made by the creditor or with his knowledge or consent, the
contract is void (Section 142). Hence, the contract may be avoided by the
surety to discharge himself from liability.

20. 9) Discharge of surety when Guarantee is obtained by concealment:
Similar to the previous point, if a guarantee is obtained by the creditor by
being silent about some important aspect of circumstances relating to the
contract, the contract is null and void (Section 143). Thus, the surety will be
discharged.
10) Failure of co-surety to join a surety:
When a contract of guarantee states that a creditor may not act on it until
the time another person joins as a co-surety, the guarantee is void if that
other person does not join (Section 144).

22. 1)Rights against the creditor.
Sec 141. Surety's right to benefit of creditors securities:
A surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is
entered into, whether the surety knows of the existence of such security or
not; and, if the creditor loses, or, without the consent of the surety, parts,
with such security, the surety is discharged to the extent of the value of the
security

23. 2) Rights against Principal Debtor:
i. Right of subrogation:
A surety enjoys two types of rights against the Principal Debtor and they
are covered under the sections 140&145. Firstly, section 140 mentions right
to subrogation. It reads as follows:
Sec 140. Rights of surety on payment or performance:
Where a guaranteed debt has become due, or default of the principal debtor
to perform a guaranteed duty has taken place, the surety upon payment or
performance of all that he is liable for, is invested with all the rights which
the creditor had against the principal debtor."

24. ii. Right to indemnity:
Section 145 of the Indian Contracts Act talks about the right to
indemnity. It reads as follows:
Sec 145. Implied promise to indemnify surety:
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 rightfully paid under the
guarantee, but no sums which he has paid wrongfully.

25. 3) Rights against co- sureties:
Right to contribution
This right empowers a surety to enforce payment for the owed liability by
the specific co-surety. This right is given under sections 146-147 which reads
as follows:
Sec 146. Co-sureties liable to contribute equally.
Where two or more persons are co-sureties for the same debt or duty, either
jointly or severally, and whether under the same or different contracts, and
whether with or without the knowledge of each other, the co-sureties, in the
absence of any contract to the contrary, are liable, as between themselves, to
pay each an equal share of the whole debt, or of that part of it which
remains unpaid by the principal debtor.

26. Sec 147. Liability of co-sureties bound in different sums.
Co-sureties who are bound in different sums are liable to pay equally as
far as the limits of their respective obligations permit.