CONTRACT OF GUARANTEE

SECTION 126

Contract of guarantee

FUNCTIONS Repayment of debt Payment of goods

sold on credit Good conduct or

honesty of a person or Fidelity Guarantee

PARTIES INVOLVED Creditor Principal debtor Surety

Example S and P go into a shop. S says to the

shopkeeper “ Let P have the goods and if P fails to pay the amount , I will”.This is the contract of guarantee.

BIRKMYR vs. DARNELL

FEATURES

Concurrence or triangular relationship Primary liability in some person Essentials of a valid contract Writing not necessary Not a contract of UBERRIMAE FIDEI

KINDS OF GUARANTEE Retrospective guarantee (For existing

debt) Prospective guarantee (For future

debt) Specific guarantee Continuing guaranteeExample: S in consideration that C will employ P in

collecting rents of C’s zamindari, promises C to be responsible to the amount of Rs.5000 for due collection and payment by P of these.

RIGHTS OF SURETY

Rights against creditor - Before the payment of guarantee

debt - Right of set-off - Right of subrogation - On the payment of guaranteed

debt

RIGHTS OF SURETY Rights against principal debtor - Right to be relieved of liability - Right to be indemnityExample: P is the principal debtor of C and S the

surety of the debt .C demands the payment of debt and on his refusal , sues him. S is compelled to pay the amount of debt with costs. He can recover the amount from P ,the amount paid as well as the costs.

RIGHTS OF SURETY

Rights against co-sureties - Co-sureties liable to contribute

equallye.g. S1,S2 & S3 are sureties to C for a sum of

Rs.3000.P makes a default .S1,S2&S3 will be liable to what amount???

- Liability of co-sureties bound in different sums

Example: S1,S2 and S3 as sureties for P ,enter into three separate bonds each in different penalty .S1 in the penalty of Rs.10000 ,S2 in the penalty of Rs.20000 and S3 for Rs.30000.P makes the default

a) Rs. 30000b) Rs. 40000c) Rs. 60000S1,S2&S3 are liable for what amount in each

of three cases???

DISCHARGE OF SURETY

1. BY REVOCATION

REVOCATION BY SURETY

DEATH OF SURETY

NOVATION

2. BY THE CONDUCT OF CREDITOR

Discharge of principal debtor

Compounding by creditor with principal debtor

Creditor’s act

Variance in terms of contract

Loss of security

3. By invalidation of contract

Misrepresentation

Concealment

Failure of consideration

Creditor shall not act on it until a co-surety joins

TRUE OR FALSE??? A contract of guarantee must be in writing Consideration received by principal debtor is

sufficient and it need not result in some benefit to the surety himself

In a contract of guarantee two parties are necessary

The death of principal debtor releases the surety from his liability

In a contract of guarantee there is no implied promise by the principal debtor to indemnify the surety

CONTINUED… A contract of guarantee is a contract

of uberrimae fidei The liability of surety is primary If the creditor does some act which by

implication releases the principal debtor from his liability , the surety is not discharged

A specific guarantee cannot be revoked