Guarantee
A contract to perform the promise or discharge the liability of a third party in case of his default. [126] Contract Act 1872
There are three (3) parties in a Contract of Guarantee:
1. Person giving guarantee: Guarantor/Surety
2. Person for whom guarantee is given: Principle Debtor
3. Person to whom the guarantee is given: Creditor [126]
Guarantee can be:
o Oral
o Written [126]
Bankers prefer the contract of Guarantee to be in writing so as to make it enforceable in the court of law in case of customer’s default.
The contract of guarantee must be for some consideration. Anything done or any promise made for the benefit of principle debtor constitutes sufficient consideration. [127]
A contract of guarantee should have following elements:
o Names of the Parties e.g. Surety, Principle Debtor and the Bank.
o Essential terms of the contract.
o A mention of consideration for the contract.
Kinds of Guarantee
1. Specific Guarantee: When a guarantee refers to a specific transaction only, it is called a specific guarantee.
It becomes void upon the payment of entire amount of the finance.
2. Continuing Guarantee:
A Continuing guarantee may be revoked at any time by prior notice to the creditor. [130]
Upon the death of the surety, the guarantee stands revoked with regards to future transactions. [131]
Upon the change in terms of contract, without the notice to surety, the guarantee stands revoked with regards to future transactions subsequent to change. [133]Who can Give Guarantee
2. A major person3. A person of sound mind
4. A person who is not an insolvent
5. A person who is not de-barred by law from entering into the contact.
Company as a Guarantor
A company is NOT authorized to enter into a contract of guarantee in the normal course of business.
A company is prohibited to give guarantee for director’s borrowing.
A registered company can enter into contract of guarantee if it is allowed to do so by its Memorandum and Articles of Association.
A registered company shall give guarantee:
o Under its seal
o By the signature of directors or any other authorized person.
Before accepting company as a guarantor, a banker should satisfy himself that the company is permitted to enter into the contract of guarantee by its Articles and Memo of Association.
Firm as Guarantor
Generally, a partner can’t bind his co-partner by guarantee.
A partner can do so only if:
o Partner has an expressed authority from other co-partners to enter into such guarantees.
Guarantee given by firm should be signed by all the partners.
Every partner is jointly and severally liable for the guarantee so given.
Joint Guarantee
(By two or more persons)
Guarantee given should be signed by all the persons.
Every person is jointly and severally liable for the guarantee so given.
Co-sureties are liable to pay equal amount of money in case of default by P.D, unless there is a contract contrary to this. [146, 147]
Minor as a Guarantor
Minor CANNOT be a guarantor.
He can’t enter into a contract of guarantee even jointly with a major.
So, in any case guarantee of a minor is not acceptable.
Rights of Surety
1. Right to ask about the amount of his liability from creditor. (A banker shouldn’t provide a copy of his customer’s statement without the express consent of customer; only amount surety’s liability can be told).
2. On bankruptcy of principle debtor, right to prove on his state.
3. Upon payment on behalf of P.D, right to recover amount from P.D. In this case surety becomes the creditor and all the right of previous creditor stands transferred to him. [140]
4. Right to revoke guarantee after giving sufficient notice. 5. If surety pays the bank on behalf of P.D, he has the legal
claim on the securities held by the bank on behalf of P.D. [141]
1. Right to recover the amount from surety, if P.D defaults. 2. Right to sue surety, if advance becomes time barred. 3. Right to sue P.D after filing suit against surety.
4. Law of Limitation doesn’t apply to contract of Guarantee.
Concealment on Guarantee
Any guarantee obtained by creditor by keeping silence to material facts is Invalid. [143]
Misrepresentation in Guarantee
Any guarantee obtained by misrepresentation by the creditor or with his knowledge, to the material part of the contract, would be
Invalid. [142]
Demand for Payment
When P.D defaults, it’s not necessary that creditor must sue the P.D prior to demanding payment from surety.
The banker should send a formal written notice to surety demanding the payment of surety’s liability.
End/Determination/Discharge of Guarantee
1. Upon the payment, of amount due, by principle debtor. 2. Upon payment, of amount due, by surety.
3. In case of misrepresentation of material facts. 4. In case of concealment of material facts.
5. Upon the death of surety. (Upon the receipt of notice of death) [131]
6. Insolvency of surety. Bank can recover its amount from the proceeds of Liquidation.
7. In case of change in terms of contract without the notice to surety. [133]
10. If there is a contract between P.D and creditor through which creditor gives extra time to P.D or assures P.D not to sue him, without the consent of surety. [135] (In case contract is made with a 3rd person to give time to P.D, then surety is not released from his liability) [136]
11. Release of one co-surety by creditor doesn’t release other sureties, neither does the released co-surety is free from liability towards other co-sureties. [138]
