Date: 10 November, 2020
by Anmol Kaur Sidhu, UILS, Panjab University
Section 126 of the Indian Contract Act,1872 states that the “Contract of guarantee” is 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”. A guarantee may be either oral or written.
For example, Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promises that in case Mr. Y fails to repay the loan, then he will repay the same. In this case of a contract of guarantee, Mr. X is a Creditor, Mr. Y is a principal debtor and Mr. Z is a surety.
KINDS OF GUARANTEES
Specific Guarantee: This kind of guarantee is for a specific transaction which comes to an end when the debt is paid.
Continuing guarantee: It is a kind of guarantee that applies to a series of transactions. It applies to all the transactions entered into by the principal debtor until it is revoked by the surety.
REVOCATION OF CONTINUING GUARANTEE
It can either be revoked by giving notice or by death of the surety.
By giving notice (Section130): The continuing guarantee can be revoked by giving a notice but for the future transactions. If there is by any chance notice period mentioned in the contract then the surety must comply with that.
By death (Section131): If the surety dies then the contract is revoked for the future transactions happening after such death. However his legal representative will be responsible for the transactions that took place before his death. Limitation period: the limitation period for a contract of guarantee is 3 years from the date when the contract was executed.
RIGHTS OF SURETY
When principal debtor’s liability is discharged the surety gets some rights which are usually against the principal debtor, creditors and co-sureties.
Right of subrogation: The surety has the right to recover the amount he has paid to the creditor as a guarantee for the principal debtor. The same way the principal debtor had to pay his loan to the creditor. Similarly the surety also has the right to recover principal amount, interest or cost.
Right to securities given by Principal debtor: When the principal debtor fails to pay the debt and the surety makes the payment on his behalf then it becomes his right to claim securities given by the principal debtor to the creditor.
Release of one co-surety doesn’t not discharge others: When there is default on the part of the principal debtor to pay the loan and the creditor compels one or two co-sureties to pay the entire amount then these co-sureties have the right to claim contribution from the rest of the co-sureties.
Co-sureties contribute equally: when there is more than one co-surety in a contract of guarantee then the co-sureties are required to contribute equally which is given under Section 146 of the Indian Contract Act,1872.
EXTENT OF SURETY’S LIABILITY
The liability of the surety is coextensive with that of the principal debtor i.e. he is also liable to the same extent as the principal debtor.