A contract of Guarantee is governed mainly by the provisions of the Indian Contract Act, 1872 (“Contract Act”). Section 126 of the Contract Act defines a it as 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”. The Contract Act uses the word ‘surety’ which is same as a ‘guarantor’.
Essentials of a valid contract of guarantee
- Essentials of a valid contract: Since a contract of guarantee is a species of contracts, the general principles governing contracts are applicable here. Thus, all the essential requirements of a valid contract (such as free consent, valid consideration, etc.) are required to be fulfilled.
- A principal debt must pre-exist: A contact of guarantee seeks to secure payment of a principal debt. Thus, it is necessary that a recoverable principal debt must pre-exist. There cannot be a contract to guarantee a time barred debt. The House of Lords, as early as 1836, in the Scottish case of Swan vs. Bank of Scotland [(1836) 10 Bligh NS 627] held that if there is no principal debt, there can be no valid guarantee.
- Consideration: Consideration received by the principal debtor is sufficient for the surety. Anything done, or any promise made for the benefit of the principal debtor can be taken as sufficient consideration to the surety for giving guarantee.
Generally, a guarantee accommodates an obligation far-reaching with that of the principal. At the end of the day, the guarantor can’t be at risk for much more than the client. The document will be understood as a guarantee if, on its actual development, the commitments of the surety are to “remained behind” the principal and just go to the fore once a commitment has been broken as between the principal and the lender. The commitment is an auxiliary one, reflexive in character.
By – Shradha Arora
(Editor @ Legal Bites)