CONTRACT OF GUARANTEE

There are many types of contracts. Indian Contract Act, 1872 (denoted as ‘The Act’ further) discusses almost all its types. One such is a contract of guarantee. For this, at least three persons are required; surety, principle debtor and creditor. Contract of Guarantee denoted as ‘The Contract’ further, are discussed under chapter VIII of the act, under Section 125 to section 147, along with the contract of indemnity, which can be discussed later.

Section 126 defines the contract and its parties as, “A ‘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’.” According to law, the surety is also known as ‘guarantor; principle debtor is simply be called ‘obligor’ and the creditor can also be called ‘obligee’.

The contract of guarantee can be of many kinds, based on the basis of differentiation.

1. On the basis of time

On time basis, differentiation takes place on the basis of existence of debt with respect to guarantee. It can be of two types:

1. Prospective Guarantee – When guarantee is provided for a debt that will exist in near future, it is prospective guarantee.
2. Retrospective Guarantee – When guarantee is provided for a pre existing debt, it is a retrospective guarantee.
3. Number of transactions

When guarantee is distinguished, on the basis of number of transactions guaranteed by the surety, on behalf of the principle debtor, it can be distinguished into two:- 

1. Continuing Guarantee – When surety agrees to guarantee many transactions between the creditor and principle debtor, it is known as continuing guarantee.
2. Specific Guarantee – When the surety provides guarantee only for a single transaction between the creditor and principle debtor, it is a specific guarantee.
3. Guarantee for honesty or good conduct

When the guarantor does not ensure the obligor in respect of money, but on the basis of the conduct of the concerned person and his skills, then that type of guarantee can be divided into two types:-

1. Fidelity guarantee – When surety assures the obligee (say employer) of the obligor’s (employee) loyalty and good conduct as a part of his character, it is fidelity guarantee.
2. Warranty - Warranty is a promise made by seller to the buyer, of goods produced by his manufacturer, for an uninterrupted service by the goods concerned up to a specific period of time and to make good any damage on the goods incurred within that period of time.

A contract of guarantee provides surety with many rights that can be exercised in case the others, i.e. creditor, principle debtor or the co-surety, tries to do something which deprives him of what he is legally entitled to. Some of the rights given to the surety are as:

1. Rights on the security – At the time of making the payment to the creditor, the surety becomes entitled to the security, if any, kept by the principle with the creditor.
2. Right of subrogation – After the surety sets off the debt with the creditor, he himself attains all the rights that the creditor had against the principle debtor.

• Right to get indemnified – An implied contract of indemnity comes hand in hand with the contract of guarantee