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.
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