CONTRACT: -A Contract is an agreement which is enforceable by law.
CONTRACT OF GUARANTEE: -A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
Person who takes the loan is known as “principal debtor”.
Person who gives the loan is known as “creditor”.
Person who promises to pay the debt if, in the case the “debtor” is unable to pay his/her debt is known as “surety/guarantor”.
A contract of guarantee may be oral or written.
For example: -A takes a loan from a bank. A promise to the bank to repay the loan. B also makes a promise to the bank saying that,“ if A does not repay the loan,“ then B will pay on A’s behalf”. In this case, A is the principal debtor ,who undertakes the loan, B is the surety, whose liability is secondary because he promises to perform the same duty in case there is default on the part of A. The one who gives the loan is “Creditor”
ESSENTIAL FEATURES OF GUARANTEE
1. PRINCIPAL DEBT (Recoverable debt): - The purpose of guarantee is to secure the payment of debt, so recoverable debt is necessary.
2. CONSENT OF THE SURETY SHOULD NOT HAVE BEEN OBTAINED BY MISREPRESENTATION OR CONCEALMENT: - The creditor should not obtain guarantee either by any misrepresentation or concealment of any material facts concerning the transaction.
CONTINUING GUARANTEE: - A guarantee which extends to a series of transactions is called a “continuing guarantee”. For ex: -A guarantees payment to B, a cotton/dealer to the amount of $50 that he will deliver it time to time to C. B supplies C with cotton to the extent agreed value i.e. $50 and C pay for it. Afterward B delivered cotton at the rate of $100. C fails to pay. The guarantee given by A is a continuing guarantee and he is liable for the extend of $50.
REVOCATION OF GUARANTEE
There are certain ways to revoke the continuing guarantee like: -
1.By giving notice to creditor: - The surety can revoke his continuing guarantee by giving notice to the creditor.
2. Death of surety person: - If the surety person die, then his guarantee is automatically revoked unless contract to the contrary, as revocation of a continuing guarantee, so far as regards future transactions.
3.By variance in the terms of the contract: - If there is any change in the contract without the consent of the surety, the contract is revoked.
4.By release or discharge of principle debtor: - when creditor release or discharge principal debtor, then the surety is also discharge from his liability and the contract is revoked.
RIGHTS OF SURETY
There are certain rights of surety against the principal debtor, creditor and co-sureties that are: -
RIGHT AGAINST PRINCIPAL DEBTOR
1.Right to subrogation: -where a guarantee debt has become due or default of the debtor to perform a guarantee. The surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor has against the principal debtor.
2.Right to indemnity: - In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The rights enable the surety to recover from the principal debtor whatever amount he has rightfully paid under the guarantee, but not the amount which he has wrongfully paid.
RIGHT AGAINST CREDITOR
1.Right of securities: -A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows or the existence of such security or not.
2.Right of set off: -if the creditor sues the surety, the surety may have the benefit of the set-off, if any, that the principal debtor has against the creditor:- A, takes loan from bank of rupees 100000 and B is the surety of A ,A supplies stationery items to bank of rupees 50000 on credit, if bank sues to B for payment ,then B have to give only rupees 50000 and the rest amount will be set off.
RIGHTS AGAINST CO-SURETIES
1.Release of one co-surety does not discharge others: - Where there are co-sureties, a release by the creditor of one of them does not discharge others; neither does it free the surety.so, released from his responsibility to the other sureties.
2.Right to contribution: - Co-sureties liable to contribute equally unless contract to the contrary. e.g.: - A, B, C as sureties to D, for the sum of 3000 rupees lent to E.E makes default in payment and C are liable, as between themselves, to pay 1000 rupees each.