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1. INTRODUCTION

Nobody can really guarantee the future. The best we can do is size up the chances, calculate the
risks involved, estimate our ability to deal with them and make our plans with confidence.

A guarantee can be many a things. It can be assurance of a particular outcome or that something
will be performed in a specified manner. A guarantee is a way of assuming responsibility for
paying another‟s debts or fulfilling another‟s responsibilities. It can be a promise for the
execution, completion, or existence of something. A guarantee can also be a promise or an
assurance attesting to the quality or durability of a product or service.

The English law defines a „guarantee‟ as a „promise to answer for the debt, default or
miscarriage of another‟.

Section 126 of the Indian Contract Act, 18721 says that a „Contract of guarantee‟, „surety‟,
„principal debtor‟ and „creditor‟—A „contract of guarantee‟ is a contract to perform the promise,
or discharge the liability, of a third person in case of his default. 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‟, and the person to whom the guarantee is given is called the
„creditor‟. A guarantee may be either oral or written. —A „contract of guarantee‟ is a contract to
perform the promise, or discharge the liability, of a third person in case of his default. 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‟, and the person to whom the guarantee is given
is called the „creditor‟. A guarantee may be either oral or written."

► Illustration: If A gives an undertaking stating that if ` 200 are lent to C by B and C does not
pay, A will pay back the money, it will be a contract of guarantee. Here, A is the surety, B is the
principal debtor and C is the creditor.

Surety is the person gives the guarantee, the Principal Debtor is one for whom the guarantee is
given and the creditor is the person to whom the guarantee is given. Contract Act uses the word
„surety‟ which is same as „guarantor‟ Prima facie, the surety is not undertaking to perform should
1
Indian Contract Act 1872, Section 126.
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the principal debtor fail; the surety is undertaking to see that the principal debtor does perform
his part of the bargain. A contract of guarantee pre-supposes a principal debt or an obligation that
the principal debtor has to discharge in favour of the creditor.

Anything done, or any promise made, for the benefit of the principal debtor, is deemed sufficient
consideration to the surety for giving the guarantee. It is sufficient inducement that the person for
whom the surety has given guarantee has received a benefit or the creditor has suffered an
inconvenience. While Section 2 (d) of the ICA, 18722 says that past consideration is good
consideration, illustration (c) of Section 127 of the ICA, 1872 seems to negate this point. Those
who favour the validity of past consideration state that law is not supposed to be guided by
illustrations. But there have been conflicting judgments about whether past consideration is good
consideration.

► Illustration: B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises to guarantee the
payment in consideration of A‟s promise to deliver the goods. This deemed sufficient
consideration for C‟s promise.3

► Illustration: A sells and delivers goods to B. C afterwards requests A to forbear to sue B for
the debt for a year, and promises that, if he does so, C will pay for them in default of payment by
B. A agrees to forbear as requested. This is a sufficient consideration for C‟s promise.4

► Illustration: A sells and delivers goods to B. C afterwards, without consideration, agrees to

pay for them in default of B. The agreement is void.

The most basic function of a contract of guarantee is to enable a person to get a job, a loan or
some goods as the case may be. In case, a person is desirous of buying a car on a hire- purchase
agreement by making monthly payments over a period of time but the car dealer asks for
guarantee. Then someone would have to assure him that he will make the monthly payments in
case of default by the person who is buying the care. Such an undertaking results in a contract of

2
Indian contract act, 1872, Section 2(d).
3
See illustration of section 127 of Indian contract act, 1872
4
id
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surety ship or guarantee. Guarantee is security in form of a right of action against a third party
called the surety or the guarantor.
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AIMS AND OBJECTIVES:

The researcher intends to present a detailed study of various requisites of a valid guarantee. It
includes guarantee for past as well as future debt.

HYPOTHESIS:

The researcher presumes that a guarantee for past debt is valid after certain obligations are
fulfilled.

RESEARCH METHODOLOGY:

The researcher has relied upon Doctrinal mode of research.

SOURCES OF DATA:

The researcher has relied upon both primary as well as secondary sources to complete the
project.

1. Primary Sources: Acts and Statutes.

2. Secondary Sources: Books and Websites.

LIMITATIONS:

The researcher had monetary, territorial and time limitations.

MODE OF CITATIONS:

The researcher has followed the Bluebook Mode of Citation (19th Ed.).
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2. NATURE OF CONTRACT OF GUARANTEE

The contract of guarantee has to be clear. A letter clearly stating the intention to guarantee a
transaction will go on smoothly or one will behave appropriately conduct himself at work place
will suffice. But a promise to pay extra attention or to take care of it does not constitute a
guarantee.

In India, a contract of guarantee may be oral or written.5 But in England contract of gurantee
must be in writing.6 It may even be inferred from the course of conduct of the parties concerned.
Under English Law, a guarantee is defined as a promise made by one person to another to be
collaterally answerable for the debt, default or miscarriage of the third persons and has to be in
writing.

There are three parties in a contract of guarantee; the creditor, the principal debtor and the surety.
In a contract of guarantee, there are two contracts; the Principal Contract between the principal
debtor and the creditor as well as the Secondary Contract between the creditor and the surety.
The contract of the surety is not contract collateral to the contract of the principal debtor but is an
independent contract. Liability of surety is secondary and arises when principal debtor fails to
fulfil his commitments. Even an acknowledgement of debt by the principal debtor will bind the
surety.7

It is not essential that the Principal Contract must be in place/existence at the time of the
Contract of Guarantee being made. The original contract between the debtor and the creditor
may be about to come into existence. Similarly, in certain situations, a surety may be called upon
to pay though the principal debtor is not liable at all. For example, in cases where the principal
debtor is a minor, the surety will be liable though the minor will not be personally liable.

A contract of guarantee is to be enforced according to the terms of the contract.

A guarantee is a contract of strictissima juris that means liability of surety is limited by law; a
surety is offered protection by law and is treated as a favored debtor in the eyes of the law. A
contract of guarantee is not a contract „uberrimae fidei‟ (requiring utmost good faith). Still the
5
See section 126 of Indian Contract Act, 1872
6
Dr. R.K. Bangia, Contract-I, ( Allahabad ; Allahabad law agency, sixth ed., 2009), 11
7
https://kanwarn.wordpress.com/2012/03/16/indian-contract-act-1872-contract-of-guarantee-part-1-of-3/; (visited
on 12 Oct, 2016)
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suretyship relationship is one of trust and confidence and the validity of the contract depends
upon the good faith of the creditor. However, it is not a part of the creditor‟s duty to inform the
surety about all his previous dealings with the principal debtor.

In WYTHES vs. LABON CHARE 1858, Lord Chelmsford held that the creditor is not bound to
inform the matters affecting the credit of the debtor or any circumstances unconnected with the
transaction in which he is about to engage which will render his position more hazardous.

Since it is based on good faith, a contract of guarantee becomes invalid if the guarantee is
obtained from the surety by misrepresentation or concealment as given in Sections 142 and
143 of the ICA8, 1872.

► Illustration: If a clerk in an office occasionally fails to account for some of the receipts for
money collected, he may be asked for surety. In case the person who steps up to be a surety for
the clerk in the office is not informed of the occasional lapses on part of the clerk which lead to
the requirement of a surety, any guarantee given by him is invalid as something of importance
and directly affecting his decision to act as a surety was concealed from him.

► Illustration: 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 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.

But where the surety ship is with regard to an advance to be made by a bank, the bank need not
disclose past indebtedness to the surety unless it relates to the particular transaction.

8
Section 143 and 144 of Indian contract, 1872
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3. GUARANTEE FOR PAST DEBT

Like every other contract, a contract of guarantee should also be supported by some
consideration. A guarantee without consideration is void. But, there need be no direct
consideration between the surety and the creditor

Section 127 clearly says that.

127. Consideration for guarantee: 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 where a loan is given or goods sold on credit on the basis of a guarantee that is sufficient
consideration. Similarly, where a credit has already 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.9

Where the consideration failed, the court said that there was no question of recovering anything
from the principal debtor or of enforcing his bank guarantee. In this case, the contract was for
cutting and removing timber from a forest. Payment for the same was guaranteed by a bank
guarantee. The forest authorities did not permit the cutting. Consideration failed. Neither the
bank guarantee could be invoked nor could the contractor‟s earnest money be forfeited.10

GUARANTEE FOR PAST DEBT

But, should the guarantee for past debt be invalid, is the question. The section says that anything
done for the benefit of principal debtor is good consideration.

But, will the words “anything done” include things done before the guarantee was given? The
Oudh High Court in M. Gulam Husain Khan v. M. Faiyaz Ali Khan11, answered the question in
affirmative.

9
Madan Lal Sobe v. Rajasthan State Industrial Development & Investment Corpn. Ltd (2006) 135 DLT 554.
10
Ujjal Transport Agency v. Coal India Ltd, AIR 2011 Jha 34.
11
AIR 1940 Oudh 346.
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A lessee agreed to pay the sum due under a lease by certain installments and after a few days a
person executed a surety bond binding him to pay a certain amount in default of the payment of
installments.

The court held that the bond was not without consideration. The decision has been criticized in
Pollock and Mulla. The learned editors observe: “This seems to attribute an unnatural meaning to
the word, which, it is submitted and as the rest of the section shows, refers to an executed as
distinguished from an executor consideration.

In a case before the Bombay High Court12 , a guarantee was executed subsequent to release of
financial assistance to the borrower. The court held that it could not be said that there was no
consideration for the guarantee. In the view of the court, “past consideration is valid
consideration”.

PAST AS WELL AS FUTURE DEBT:

A guarantee for a past as well as a future debt is enforceable provided some future debt is
incurred after the guarantee. But, there should be a clear undertaking to be liable for a past debt
and as soon as some fresh obligation is incurred, the liability for all the obligations is coupled
up.13

BENEFIT OF PRINCIPAL DEBTOR, ENOUGH CONSIDERATION:

If the principal debtor gets a benefit, that suffices to sustain the guarantee. It will be of no
consequence to say that the principal debtor had never requested for a guarantee or that it was
given without his knowledge or consent. A contention of this kind was refuted by the Patna
High Court in a case14, where the directors of a company who guaranteed the company‟s loans
argued that the company had never asked for the guarantee. The court relied upon the following
statements of Lord Loreburn: “There are three possible variations in the parties to contract of

12
SICOM Ltd. V Padmashri Mahipatrai Shah, (2005) 3 Mah LJ 125.
13
Morrell v Cowan, (1877) 7 Ch D 151.
14
Prasanjit Mahtha v United Commercial Bank Ltd, AIR 1979 Pat.151.
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suretyship. The first and the simplest case is that in which all the three parties concerned are
parties to the contract in the sense that both the principal debtor and creditor agree that the
surety‟s liability is a secondary liability only, and that the principal debtor is primarily liable for
the obligations guaranteed. But it is also possible that the contract of suretyship may be
recognized only as between the principal debtor and the surety, or as between the creditor and
the surety, in which event the rights and duties arising out of the contract of suretyship only
affect those parties.”
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4. DISCHARGE OF SURETY FROM LIABILITY

When the liability of surety, which he had undertaken under a contract of guarantee, is
extinguished or comes to end, he said to be discharge from liability. The modes of discharge of a
surety, as recognise by the Indian contract act, are as under:

(i) By notice of revocation (Section 130)

(ii) By death of surety (Section 131)

(iii) By novation (Section 62)

(iv) By variance in terms of contract (Section 133)

(v) By release or discharge of principal debtor (Section 134)

(vi) By arrangement between principal debtor and creditor (Section 136)

(vii) By Creditor‟s act or omission impairing sureties eventual remedy (Section 139)

(viii) By the loss of security (Section 141)

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5. CONCLUSION

The hypothesis of the researcher has been proved correct. The guarantee for past debt is
enforceable provided there should be a clear undertaking to be liable for a past debt and as soon
as some fresh obligation is incurred, the liability for all obligations is coupled up.

Like in the case of SICOM Ltd v Padmashri Mahipatrai Shah, it was held by the court that where
a guarantee was given in consideration of an amount lent and advanced; it was not required in
the law that there should be an independent consideration for each of the clauses.

Apart from that it in the case of Carlesbery Brewery Malaysia v Soon Heng A.W. & Sons it was
held by the court that it was within the contemplation of the parties that the guarantors were to be
saddled with liabilities not only after but also before the signing of the guarantee.

As stated earlier guarantee for future debt is also enforceable provided some future debt is
incurred after the guarantee. Apart from that the contract of guarantee has explained in a very
lucid manner in the Contracts Act of 1872 which makes the problem simple. The Indian Law is a
bit different from the English Law. Under English Law a contract of guarantee must be in
writing. Whereas under Indian law it can be both oral and written. Hence, there is much more
flexibility under the Indian law.
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BIBLIOGRAPHY

BOOKS

(I) Dr. Bangia R.K, Contract-I, Allahabad ; Allahabad law agency, sixth ed., 2009

(II) Singh Avatar, contract and Specific Relief act; Eastern book company, eleventh
edition, 2013

WEBSITES

(i)http://www.shareyouressays.com/92169/eight-important-circumstances-under-which-a-surety-
is-discharged-from-his-liability

(ii) http://www.preservearticles.com/2012012621542/short-essay-on-discharge-of-surety.html

(iii)http://accountlearning.com/discharge-of-surety-circumstances-when-liability-of-surety-
comes-to-end/

(iv)http://www.preservearticles.com/2012012621539/short-essay-on-the-special-features-of-a-
contract-of-guarantee.html

BARE ACT

Indian Contract Act, 1872