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Contract of Guarantee Meaning & Features (Indian Contract Act)
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Contract of Guarantee Meaning & Features (Indian Contract Act)
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Contract of Guarantee: Meaning & Features (IndianContract Act)
What is Contract of Guarantee?
Section 126 of the Indian Contract Act 1872 establishes that a Contract of Guarantee is a
type of contract where one party promises the other party to perform the promise or to
discharge the liability which is incurred by the third party due to his default. Contract of
Guarantee is governed under the Indian Contract Act 1872, where three parties come
together to create a contract of guarantee. A contract of guarantee is mostly seen in the
cases of loans, employment, etc. A surety is the person who shall undertake the
responsibility to perform the contract in case the principal debtor fails to undertake his
share of responsibility. It may be inferred that surety acts as a layer of security for the
creditor.
Contract of Guarantee can be either an oral contract or a written contract. There are three
parties in a contract of guarantee, namely the principal debtor, creditor, and surety. In a
contract of guarantee, there exists three contracts, viz primary contract between the
creditor and principal debtor, then a contract between surety and creditor comes into
existence when the principal debtor has made a default in fulfilling his part of the
responsibility. The third contract exists between the surety and the principal debtor, where
the surety has the right to recover the consideration paid to the creditor.
Geeky Takeaways:
● A contract of guarantee is a legal promise that is made by a third party to pay off
an obligation of another party in case the debtor fails to fulfill his part of the
obligation.
, ● The purpose of a contract of guarantee is to get assurance regarding the
performance of the contract to be executed.
● A guarantee is a secondary obligation that comes to light once the principal
debtor has failed to acknowledge his part of the performance.
● Contract of guarantee is a tripartite agreement, there are three parties in a
contract of guarantee, namely the surety, the principal debtor, and the creditor.
●
Example of Contract of Guarantee
Consider the following example under Contract of Guarantee:
● Ritesh obtains a loan from XYZ bank, and Sudhir promises the bank that if Ritesh
fails to repay the loan amount, he will pay off the amount to the bank. This is a
Contract of Guarantee.
● In any case, where Ritesh fails to pay off the loan amount, the bank can recover
the amount from Sudhir and Sudhir will be liable to pay off the dues.
● Also, Sudhir will have the right to claim the amount he has paid to the bank from
Ritesh.
● Here in this case, Ritesh is the Principal Debtor, and in his respect, Sudhir has
given a guarantee to the bank.
● XYZ bank is the Creditor, Sudhir has given XYZ bank the guarantee, and the
bank can recover the loan amount in case of default.
● Sudhir is the Surety, as he has given the guarantee to the bank in respect of
Ritesh.
Section 126: Indian Contract Act 1872
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