Contract
of guarantee, surety, principal debtor and creditor
A “contract
of guarantee” is a contract of perform the promise or discharge the liability,
of a third person in case of his default. The person who gives a guarantee is
called the “surety”; the persons in respect of those default the guarantee is
given is called the “principal debtor”, and the person the whom the guarantee
is given is called the “creditor”. A guarantee may be either oral or written. Sec
126.
Contract
guarantee
There
can be no contract of guarantee without a liability enforceable a law. The
primary idea of surety ship is an undertaking to indemnify if some other person
does not fulfill his promise. Therefore person sought to be made liable as a
surety should undertake to perform the promise or discharge the liability of a
third party in case of his default. Where the husband deposits the fixed
deposit receipt of his wife in the Bank as security for his overdraft account,
the wife would be a surety within the meaning of S. 126.
A
mere recommendation by Ca that A should buy goods of B will not entail on C the
consequences that might flow his guarantee that A will not suffer any loss if
he takes up B’s offer of sale.
Form
of guarantee letter
The name
of the guarantor need not appear in the body of the letter of guarantee. If he
has signed it as guarantor he is liable under it. It is also not a requirement
of law that the signatures of the guarantor should be attested by a witness.
Personal
guarantee
In a
letter of guarantee world “director” below signature of guarantor does not mean
it to be executed on behalf of company or director. Guarantors were mentioned
as directors for the purposes of identification although intended to furnish personal
security.
Blank
guarantee
Where
a blank document was given to plaintiff Bank, unless otherwise proved,
presumption would be that guarantor had give implied authority to fill in the
blank in accordance with agreement and understanding between the parties.
Authority
of attorney to furnish bank guarantee.
Where
provisions of power of attorney specifically provided for furnishing a Bank
guarantee, in spite of absence of words “Bank guarantee” used therein, the
words execution of a contract bond, deed or undertaking to discharge the burden
of a third party on his default would amount to furnishing guarantee. Attorney
of Bank was thus, authorized to furnish Bank guarantee.
Discharge
of bank guarantee
Where
operative part of bank guarantee spoke of guaranteed money payable on demand,
such period could not be limited to a specified time, but would extend till
demand for its payment was made. Contract of guarantee being an independent document
which clearly stipulated payment of the guaranteed amount on demand would give
independent cause of action to creditor without recourse to agreement of load
between the creditor and the principal debtor. Agreement of loan having been
executed one day after the execution of contract of guarantee, it was not in
existence at the time of execution of document of guarantee. The document of
guarantee, therefore, could not be read and interpreted together with agreement
of load between the creditor and the principal debtor.
Performance
guarantee
Performance
guarantee is a guarantee for due performance of a contract by parties thereto. Ordinarily
a guarantee would be consent or through court of law. Performance guarantee is
a new type of guarantee introduced for large and international contracts.
Though such a guarantee is independent and autonomous in nature generally yet
import and scope, thereof could differ from case to case according to facts of
each case and according to working of performance guarantee furnished therein.
Where such guarantee had been furnished as per requirements in contract and
supplemental contract, under specific terms and conditions, same could be enchased
without reference to agreement including supplement agreement.
Three
parties are necessary for contract of guarantee
Contract
of guarantee means a contract to perform the promise or discharge the liability
of a third person in case of his default. Therefore, a contract of guarantee involves
three parties, the creditor, the surety and the principle debtor, and a
contract to which those parties are privy. The foundation is the contract
between the principal debtor and the creditor. Then there must be a contract
between the creditor and the surety, by one of indemnity. In order to
constitute a contract of guarantee, there must be a third contract, by which
the principal debtor expressly or impliedly requests the surety to act as
surety.
Guarantee
presupposes principal debtor
The
word “guarantee” has acquired a technical meaning. The essence of guarantee is
that a guarantor agrees to discharge his liability only when the principle
debtor fails in his duty. The presupposes the existence of a principal debtor.
If there never was another person who can be properly described as the “principal
debtor” there cannot be said to have been any “guarantee” either in its
technical or ordinary meaning.
Oral
or written guarantee
A
contract of guarantee need not necessarily be in writing. It may be expressed
by word of mouth or it may be tacit or implied and may be inferred from the
course of conduct of the parties. Chapter VIII is not exhaustive on the
subject. Where the terms of a contract of guarantee though oral, have been
mentioned with sufficient precision in the plaint, the contract cannot be held
uncertain or void within the meaning of section 29.
Guarantee
of honesty
A
guarantee of honesty stands on a different footing than a guarantee of debt. If
the employer of a servant whose fidelity has been guaranteed continues to
employ him even after a proved act of dishonesty, without notice to the
guarantor, the surety is discharged. But this happens only if the creditor or
employer has proof of the servant’s acts of dishonesty and not merely
suspicions or reports about them. It is a matter not of suspicion but of
satisfaction.
Proof
of contract of guarantee
A
contract of guarantee as also the consideration for it must be strictly proved
when they are relied upon. In such cases due weight must be given to the custom
of merchants in drawing presumptions.
Consideration
for guarantee
Anything
done, or any promise made, for the benefit of the principal debtor may be
sufficient consideration to the surety for giving the guarantee. Sec 127.
Consideration
for guarantee necessary
A
contract of guarantee cannot be enforced unless there is some consideration for
the guarantee.
Guarantee
given after breach of contract
Where
the supplier had already committed a breach of contract, an acceptance of
responsibility by the indent or cannot be construed in the context of anything
done or promise made for the benefit of the principal debtor qua the original
contract, to attract the provisions of section 127 of the contract act. Therefore
it is not a guarantee within the meaning of this section.
Forbearance
A
binding promise to forbear is good consideration for a guarantee, though there
be no contract by the plaintiff to forbear.
Release
of claim
A
mere promise to release a claim against another is not a consideration for a
guarantee of payment. But actual release of the claim is such consideration.
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