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law of guarantee and its kinds with case law, it explains the definition meaning and kinds with examples
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The term ‘guarantee’ may be defined as an undertaking by one person to pay the amount due from another preson. And a contract to pay the amount due from another preson, in case the latter fails to pay, is known as contract of guarantee. The term ‘contract of guarantee’ is defined in Section 126 of the Indian Contract Act, which reads as under:- “A contract of guarantee is a contract to performs the promise, or discharge the liability of a third person in case of his default." The analysis of this section shows that, a contract of guarantee is a contract in which a person promises to discharge the liability of a third person in case the third person fails to discharge his own liability. It may be noted that the following three parties are involved in a contract of guarantee :
204 Law of Contracts Example 18.14: A sold and delivered goods to B. Afterwards, C without any consideration, agreed to pay the price in default of B. The agreement is void as it is without any consideration. Simultaneous tripartite contract between surety, creditor and principal delator is not necessary. When once a contract between principal debtor and creditor is formed, a contract by which the surety guarantees the debt, can also take place. And the consideration may move either from the creditor or the principal debtor. Thus a guarantee can be given after the loan has been advanced. Moreover, the word ‘done’ in Section 127 shows that the past benefit to the principal debtor may be a good consideration for a bond of guarantee. In Parsanjit Mahlha v. U.C. Bank, AIR 1979 Pat. 151, the Patna High Court has held that a guarantee given after the execution of the loan document is valid. In another case, past debts were also held to be covered under the wide language of Section 127. | Union Bank of India v. A.P. Bhonslc (1991) Mah LJ 1004]. However, in M.N.A. Khan v. Commercial & Industrial Bank. AIR 1969 AP 294, the A.P. High Court has support the view that past consideration is not a good consideration. It is submitted that the position stated above appears to be correct. 7>. The contract of guarantee must be made by the parties competent to contract: We know that the competency of the parties is an important requirement of a valid contract. As such, the parties to a contract of guarantee, must also be competent to contract. However, the incapacity of the principal debtor docs not affect the validity of a contract of guaranatcc. Thus, the requirement is that the creditor and the surety must be competent to eater into a valid contract. A principal debtor may be a minor. In such cases, the surely is regarded as principal debtor and is personally liable to pay the debt, though the principal debtor is not liable. In such cases, the contract between the creditor and surety is treated as a primary and independent, and not a collateral. The surety is also liable if the guarantee is given knowing the minority of the debtor. ■ Kashi ha v. Shripat (1.895) J9 IL.R Bom. 697 )^4 Example 18.15: A requested 3 to lend Rs. 1000 to C, a minar. And A promised that if C failed to repay ilien lie i-.l p.iv .he amount In this cave, though the principal debtor (te.. O >x a minor, hut the contract •. 1..1 ft i< enforceable And ft can recover the amount Irom A
- m.u; be someone primarily liable: It is an essential requirement of a contract of _. "'ere must he someone primarily liable (/ e. liable as principal riehior) other than "e matter of fact, a contract of gitatmucc presupposes the existence of a liability ci-.tcrcc.v ■ .o'. If there is no such primary liability, there can be no vatic! coi iiaci of guuriiaiee. Howe'er. •. -rated above, the guarantee given for minor’s debt is enforceable Example lJt.U>: A owed Rs 10.000 to ft After the debts became time-barred by the l aw of Limiution. C a guarantee to ft for the repayment of the amount. This is not a valid contract of guarantee as ;:.e ?:.tr.ary lability between A and ft is not enforceable by law due to the expiry of limitation period. Example 18.17: A was enjoying overdraft facilities from a Bank, ft guaranteed the repayment of the i. mount of overdraft. However, the overdrafts were contrary to the law and therefore void. A defaulted in repayment of the overdraft. The bank filed a suit against ft (the surety) for the recovery of the amount. It was held that ft was not liable to pay. The court observed, “if there is nothing due. no balance, the obligation to make that nothing good amounts itself to 4
206 Law of Contracts 18.10, KINDS OF GUARANTEE Though there are many kinds of guarantee, yet the following two kinds are important from the subject point of view :
debtor. A conditional guarantee mean a guarantee where the surety promises to pay in case some event, in additon to. the default of (he principal debtor, happens. 18.11. REVOCATION OF CONTINUING GUARANTEE The revocation of a guarantee means the cancellation of the guarantee. On the revocation of a continuing guarantee, the liability of the surety comes to an end for the future transactions. However, the surety continues to be liable for the previous transactions. A continuing guarantee may be revoked in any of the following ways :
creditor to first recover the amount out of the mortgaged property, and the balance from him. Here, the court allowed the surety to proceed as he liked. In case of default by the principal debtor, the creditor can immediately demand the amount from the surety. He is not required tc give a notice of default to the surety. It may, however, be noted that where the contract of guarantee provides that the surety will not be liable unless some condition is fulfilled, then the surety is not liable until such condition is actually fulfilled. e.g., where it is provided in the guarantee that the surety shall be liable only after a notice of demand is served on him, then surety’s liability will arise only after the notice of demand is served on him.
210 Law of Contracts 18.13. RIGHTS OF THE SURETY The rights of the surety may be discussed under the following three heads :