Contracts

DR. RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW

2016-17
FINAL DRAFT
ON
ESSENTIAL FEATURES OF CONTRACT OF GUARANTEE

SUBMITTED BY:

SUBMITTED TO:

RISHI SAGAR

MAHENDRA SINGH PASWAN

ROLL NO: 114

Assistant Professor

SECTION B

(Contract law)

B.A. LLB (Hons.), SEMESTER III

SIGNATURE OF STUDENT

SIGNATURE OF PROFESSOR

Contracts

ACKNOWLEDGEMENT

I am obliged to assistant professor Mr. Mahendra Singh Paswan, who has given me golden
chance for this research project. I would also like to thank the almighty and my parents for
their moral support and my friends who are always there to extend the helping hand
whenever and wherever required.
I further extend my thanks to library staff of DR. RAM MANOHAR LOHIYA
NATIONAL LAW UNIVERSITY who helped me in getting all the materials necessary for
the project.

RISHI SAGAR
ROLL NO.-114

DECLARATION

Contracts
I hereby declare that this project titled Article 368 submitted to the Department of the
Law, Dr. Ram Manohar Lohiya National Law University, Lucknow is a record of original
work done by me under the guidance of Mr. Mahendra Singh Paswan.
The information and data given in this project is authentic and best to my knowledge.
This project is not submitted to any other institution or university or published any
time before.
I also declare that, as required by these rules and conduct, I have fully cited and
referenced all material and results that are not original to this work.

RISHI SAGAR
Semester III
Roll No.- 114

TABLE OF CONTENT

Contracts
ACKNOWLEDFGEMENT
DECLARATION
INTRODUCTION
ESSENTIAL FEATURES OF GUARANTEE
THERE SHOULD BE AN AGREEMENT
TRIPARTITE CONTRACT
THERE MUST BE COLLATERAL AGREEMENT
PRINCIPAL DEBT
RECOVERABLE DEBT
MINORS DEBT
CONSIDERATION
PAST AS WELL AS FUTURE DEBT
GUARANTEE MUST BE WITHOUT MISREPRESENTATION
GUARANTEE MUST BE WITHOUT CONCEALMENT
BIBLIOGRAPHY
WEBLIOGRAPHY

INTRODUCTION
Section 126 of Indian Contract Act 1872 defines a contract of guarantee as follows:
"A contract of guarantee is a contract to perform the promise, or to discharge the liabilities of
a employment. Some person comes forward and tells the lender, or the supplier, or the
employer amy be trusted and in case of third person in case of his default. The person who
gives the guarantee is called Surety, the person in respect of whose default the guarantee is

Contracts
given is called Principal Debtor, and the person to whom the guarantee is given is called
Creditor. A Guarantee may be either oral or written."

The person who gives the guarantee is called the Surety

The person on whose default the guarantee is given is called the Principal Debtor
The person to whom the guarantee is given is called the Creditor
Read more: http://www.lawnotes.in/Contract_of_Guarantee#ixzz4LIAroesR

The function of a contract of guarantee is to enable a person to get a loan, or goods on credit,
or an any default, I undertake the responsibility
In case of Birkmyr v. Darnell1
If two come to a shop and one buys, and the other to give him credit, promises the seller , if
he does not pay I will pay you.
This type of collateral undertakings 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 agreement to be liable for the debt of another in case of
his default.. Guarantees are usually taken to provide a second pocket to pay if the first
Should be empty.
The court further said that if the companion had said: Let him have the goods, I will be your
pay master or I will see you paid. This would have been an undertaking for himself but not
a contract of guarantee. This principle was applied in Taylor v Lee2 decided in the United
States of America:
A landlord and his tenant went to the plaintiffs store. The landlord said to the plaintiff: Mr.
Parker will be on our land this year, and you will sell him anything he wants, and I will see it
paid.

1 91 ER 27: 1 Salk 27

2 Supreme Court of North California, (1924) 121 SE 659

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This was to be an original promise, and not a collateral promise to be liable for the default of
another

and,

therefore,

not

guarantee.

For example, when A promises to a shopkeeper C that A will pay for the items being bought
by B if B does not pay, this is a contract of guarantee. In this case, if B fails to pay, C can sue
A to recover the balance. The same was held in the case of Birkmyr vs Darnell 1704, where
the court held that when two persons come to a shop, one person buys, and to give him credit,
the other person promises, "If he does not pay, I will", this type of a collateral undertaking to
be liable for the default of another is called a contract of guarantee.

ESSENTIAL FEATURES
There should be an agreement or contract
Tripartite contract
Consideration
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Contracts
Guarantee msut be without misrepresentation
Guarantee must be without concealment
Writing not necessary

1. There should be an agreement or contract:The first essential feature and condition for the contract of guarantee is that there must exists
an agreement between the parties whether between creditor and principle debtor or between
principle debtor and surety or between surety and creditor. An agreement, according to Indian
law(Section 126 of Indian Contract Act,1872) can be in writing or oral
There is a difference exist between English law and Indian law. In English law an agreement
must be in writing while in the case of Indian law an agreement can be either in writing or
can be in oral.

2. Tripartite contract
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It is an agreement between the principal debtor, creator and surety. The tree separates
contracts exist between them. If the promise principal debtor is not fulfilled, the liability for
the surety arises.
In a contract of guarantee the principal debtor is liable and the surety will be liable on
principal debtors default. The principal contract exists between the principal debtor and the
creditor and the contract between the surety is a secondary contract.
In the case of Swan vs Bank of Scotland3 1836, it was held that a contract of guarantee is a
tripartite agreement between the creditor, the principal debtor, and the surety.

3. Consideration
Acontract guarantee like other contracts must fulfill essentials of a valid contract. It must be
supported by some consideration. It is not necessary that there must be direct consideration
between the surely and the creditor. The consideration by the principal debtor is sufficient for
the surety. Section 127 clarifies this as follows :
"Any thing done or any promise made for the benefit of the principal debtor may be
sufficient consideration to the surety for giving the guarantee."

Illustrations:
1. A agrees to sell to B certain goods if C guarantees the payment of the price of the goods.
C promises to guarantee the payment in consideration of A's promise to deliver goods to B.
This is a sufficient consideration for C's promise.
2. A sells and delivers goods to B. C, afterwards, requests A to forbear to sue B for an year
and promises that if A does so, he will guarantee the payment if B does not pay. A forbears to
sue B for one year. This is sufficient consideration for C's guarantee.
3. A sells and delivers goods to B. Later on, C, without any consideration, promises to pay
A if B fails to pay. The agreement is void for lack of consideration.

For a contract of guarantee, like any other contract, consideration is necessary. But Sec. 127
provides 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. Thus, there is no need for

3 (1836) 10 Bligh NS 627.

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a separate consideration between the Principal debtor and the surety consideration received
by the Principal debtor is sufficient for the surety.
If the principal debtor gets a benefit, that suffices to sustain the guarantee. It will be of no
consequence to s ay that the principal debtor had never requested for a guarantee or that it
was

given

without

his

knowledge

or

consent.

In case of SBI v Kusum Vallabhdas Thakkar4,

Gujrat

High

Court

held

that

:-

Forbearance on the part of the creditor in filing a suit against one of the debtors was held to
be a good consideration for the guarantee.
Same was held in the case of Madan Lal Sobe v Rajasthan State Industrial development
and Investment Corporation Ltd5,: where a credit has been given and the payment having
become due, the creditor refrains from suing the principal Debtor, that would be a sufficient
consideration for giving a guarantee.

Past as well as future debt

A guarantee for a past as well as a future debt is enforceable provided some further debt is
incurred after the guarantee. But there should be a clear undertaking to be liable for the past
debt and as soon as some fresh obligation is incurred, the liability for all the obligation is
coupled up.

Will the words anything done include things done before the guarantee was given? Oudh
High Court in the case of M. Gulam Hussain Khan v M. Faiyaz Ali Khan answered in the
affirmative.
However, there is no uniformity on the issue of past consideration. In the case of Allahabad
Bank vs S M Engineering Industries6, the bank was not allowed to sue the surety in
absence of any advance payment made after the date of guarantee. But in the case of Union
4 (1994) 1 GLH 62: (1994) 1 Guj LR 655
5 (2006) 135 DLT 554, guarantee for securing forbearance.
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Bank of India vs A P Bhonsle 7, past debts were also held to be recoverable under the wide
language of this section. In general, if the principal debtor is benefitted as a result of the
guarantee, it is sufficient consideration for the sustenance of the guarantee.
Like any other contract, a guarantee is not enforceable against a guarantor if no consideration
is provided by a creditor for the guarantee. Consideration for a guarantee must move from a
creditor to a guarantor if the agreement is to be binding. The consideration for
a guarantee may emanate from a creditor in a number of ways.
The most common route through which consideration may be manifested is through a
principal debtor since a guarantor normally assumes the liability solely for the benefit of the
principal debtor. In practice, the consideration for a guarantee comes in the form of a benefit
provided by a creditor to a principal debtor, and this is normally done at the request of the
guarantor. Equally, consideration may be provided by a creditor if he suffers a detriment in
responding to a guarantor's request.
At common law, past consideration does not constitute good consideration for a contract.
Generally, a debt incurred by a principal debtor before a guarantee is provided constitutes
past consideration. A guarantee is not binding unless a creditor provides fresh consideration
to a guarantor. This is usually done when a creditor provides new advances to a principal
debtor. The past liability of a principal debtor may, however, constitute good consideration
for a guarantee if the creditor undertakes, at the request of a guarantor, to refrain from suing
the principal debtor for his past liability.
A guarantee may also expressly cover the past, present as well as the future liabilities of a
principal debtor. If no reference is made in a guarantee to the past and present liabilities of a
principal debtor, the guarantee is construed to cover only the future liabilities of the principal
debtor. Consideration for such a guarantee comes from the future advances to be made by the
creditor. However, if a guarantee is expressly made to cover the past, present and future
liabilities of a principal debtor, consideration for the past liability of the principal debtor
comes from the creditor's forbearance to sue the principal debtor for his past debts.

6 1992 Cal HC
7 1991 Mah HC
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A guarantee stipulated as a continuing guarantee is wide enough to cover the past, present
and future liability of a principal debtor. Consideration for a continuing guarantee comes
from a creditor's promise to provide future credit to a principal debtor and from the creditor's
forbearance to sue the principal debtor for his past and present debts.

4. Guarantee should be without misrepresentation and concealment of fact

Section 142 of the Indian Contract Act, 1872 talk about invalidity of guarantee obtained by
the misrepresentation which says that:
A guarantee obtained by means of misrepresentation made by the creator or with his
knowledge ad assent, concerning a material part of the transaction is invalid.
If the consent of surety will be obtained by misrepresentation, the surety is discharged from
his liability.

Section 143 of the Indian Contract Act, 1872 talk about invalidity of guarantee obtained by
the concealment which says that:
A guarantee which the creditor obtains by means of keeping silence to material
circumstances is invalid. The expression keeping silence means intentional concealment of
the facts.
(a) A engages B as clerk to collect money for him. B fails to account for some of his
receipts, and A in consequence calls upon him to furnish security for his duly
accounting. C gives his guarantee for Bs duly accounting. A does not acquaint C with

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Bs previous conduct. B afterwards makes default. The guarantee is invalid. (a) A
engages B as clerk to collect money for him. B fails to account for some of his
receipts, and A in consequence calls upon him to furnish security for his duly
accounting. C gives his guarantee for Bs duly accounting. A does not acquaint C with
Bs previous conduct. B afterwards makes default. The guarantee is invalid."
(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000
tons. B and C have privately agreed that B should pay five rupees per ton beyond the
market price, such excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety. (b) A guarantees to C payment for iron to
be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed
that B should pay five rupees per ton beyond the market price, such excess to be
applied in liquidation of an old debt. This agreement is concealed from A. A is not
liable as a surety."

The creditor should disclose to surety the facts which are likely to affect the suretys liability
Guarantees for the good conduct of a servant have invited more frequent applications of this
principle. A very illustrative case is London General Omnibus Co v Holloway.8
the defendant was invited to give a guarantee for the fidelity of a servant. The employer had
earlier dismissed him for dishonesty, but did not disclose this fact to the surety. The servant
committed another embezzlement.
The surety was held not liable. The surety believed that he was making himself answerable
for a presumably honest man, not for a known thief.
If the creditor is aware of circumstances affecting the risk, he should make the surety equally
aware. Similarly, in a case before the Lahore High Court, fresh guarantees were obtained for
the fidelity of a manager of a bank without disclosing his previous defalcations, the sureties
were held not liable for further defalcations.9

8 (1912) 2 KB 72 (CA)
9 Coop Commission Shop Ltd v Udham Singh, AIR 1944 Lah 424.
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5. Writing not necessary

Section 126 expressly declares that a guarantee may be either oral or written. But in England
under the provisions of the Statue of Frauds a guarantee is not enforceable unless it is in
writing and signed by the party to be charged.

BIBLIOGRAPHY
(i)
(ii)
(iii)
(iv)
(v)

Law of contract by Hugh Collins

Law of contract and specific relief by A.C. Moitra
Contract and specific relief by Avtar Singh
Law of contract by R.K. Bangia
Indian contract and specific Relief Acts by Stealvad and Gooderson

WEBLIOGRAPHY
(vi)
(vii)
(viii)

www.scconline.com
www.manupatra.com
www.indiakanoon.org

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