A Contract of Guarantee serves to secure loans, commercial credit, or performance of obligations by adding a third-party backup promisor.
1. Statutory Definition: Section 126
Under Section 126, 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 is a tripartite contract involving three parties:
- Principal Debtor: The person in respect of whose default the guarantee is given.
- Creditor: The person to whom the guarantee is given.
- Surety: The person who gives the guarantee (the guarantor).
2. Essential Requisites of a Valid Guarantee
- Tripartite Nature: Three separate agreements co-exist: (1) Principal debtor owes debt to creditor; (2) Surety guarantees debtor's liability to creditor; (3) Principal debtor has an implied duty to indemnify the surety.
- Consideration (Section 127): 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.
- Enforceable Primary Debt: The primary liability of the principal debtor must exist. If the main debt is void, the guarantee generally becomes void.
3. Difference: Indemnity vs. Guarantee
| Contract of Indemnity | Contract of Guarantee |
|---|---|
| Two parties: Indemnifier and Indemnity Holder. | Three parties: Principal Debtor, Creditor, and Surety. |
| Single contract between the two parties. | Tripartite structure with three separate agreements. |
| Primary and independent liability of the indemnifier. | Secondary liability of the surety (arises only if the debtor defaults). |
4. Kinds of Guarantees
- Specific Guarantee: Given for a single specific transaction or debt (terminates when that specific debt is paid).
- Continuing Guarantee (Section 129): Extends to a series of transactions.
- Revocation (Section 130): A continuing guarantee can be revoked by the surety at any time as to future transactions by giving notice to the creditor.
- Revocation by Death (Section 131): The death of the surety operates as a revocation of a continuing guarantee so far as regards future transactions, unless agreed otherwise.