Contract of Guarantee

S.126 says that a "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. It may be either oral or written.

For Example - A says to B, "Lend money at interest to C, if C be unable to pay I shall pay". This is a contract of guarantee or suretyship. Thus, there are three parties is case of contract of guarantee i.e.-

‘Surety’- The person who gives the guarantee is called the 'surety'.

‘Principal debtor' - The person in respect of whose default the guarantee is' given is called the 'principal debtor'. can person to whom the guarantee is given is called

‘Creditor’-The person to whom the guarantee is given is called creditor.  

Essentials of a Contract of Guarantee:-

1.         Concurrence of three parties is necessary - The contract of suretyship requires the concurrence of three persons, the principal debtor, the creditor, and surety. The surety undertakes his obligation at the request of the principal debtor. Accordingly, if A enters into a contract with B, and C, without any communication with B, undertakes for a consideration moving from A to indemnify A against any damages that may arise from a breach of B's obligation, this will not make C a Surety for B or give him a right of action in his own name against B in the event of B's default.

2.    Surety's distinct promise to be answerable is necessary- Secondly, in order to constitute a guarantee there must be a distinct promise on the part of the surety to be answerble for the debt. If A goes with B to the West End Watch Co. and says to the proprietor, "Let B have this watch, and I see you paid," this is no guarantee; but if A says, "Let B have this watch, and if he does not pay you, I will," this is a guarantee.

3.         Liability must be legally enforceable- Lastly, the word "liability" used in S.126 means a liability which is enforceable at law, and if that liability does not exist, there cannot be a contract of guarantee. A surety, therefore, is not liable on a guarantee for the payment of a debt which is barred by the law of limitation.

Courtesy:- Legal Point Foundation