THE CONCEPT OF GUARANTEE 

A guarantee means taking surety of something or someone. A contract of guarantee as per section 126 of the Indian Contract Act, 1872 is “a contract to perform the promise, or discharge the liability, of a third person in case of his default.” As per section 126 of the Indian Contract Act, there are three parties in the case of a contract of guarantee. 

• Creditor: Creditor is the person who has given a certain amount of money or any other thing to the Principal Debtor. A creditor is the one to whom the guarantee is given in the contract of guarantee.
• Principal Debtor: A Principal debtor is the one who has taken a certain amount of money or any other benefits from the creditor. Principal Debtor is the one for whom the guarantee is given.
• Surety: Surety is the person who gives a guarantee on behalf of the Principal debtor and promises to pay any loss or to fulfil any obligations that the third party fails to perform.

For example, A lends $10000 to B and B promises to return that amount within a month. C promises to A that in case B fails to return the amount after the said time, he will repay the same. In this case, A is a creditor, B is a principal debtor and C is a surety.

Surety’s Liability:

In the contract of guarantee surety’s liability is similar to that of a debtor. As per section 128 of the Indian Contract Act “The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.” 

A creditor can directly sue the surety before suing the principal debtor in case of any fault made by the principal debtor. Liability of surety arises as soon as the principal debtor makes the default.

However, the principal debtor is primarily responsible for the fulfilment of the duties or obligations stated in the contract and surety’s liability is secondary. If due to any defect in the agreement the principal debtor can’t be held liable, then the surety will also be free of such liabilities or duties.

Kinds of Guarantee: Guarantee is of two types- Specific Guarantee and Continuing Guarantee.

• Specific Guarantee: a specific guarantee is the one which is for only one debt or any specified transaction. This contract will end as soon as the transaction gets over or the party pays back the debt.
• Continuing Guarantee: Continuing guarantee is the one which is for the multiple or series of transaction.

In case of a continuing guarantee, Surety can any time revoke the contract of guarantee for the upcoming transactions by sending a letter of revocation to the creditor. However, a surety stays liable for the transactions occurred before his letter of revocation. 

Revocation of Guarantee:

1. A surety can revoke the contract of guarantee by sending the formal letter of revocation to the creditor or creditors.
2. By Surety’s death. A contract of continuing guarantee gets revoked after the death of the surety. But his legal heirs are bound to act as the surety for the transactions happened before his death.