Essential features of 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. For example, A is the creditor and B is the debtor and C is the guarantor to the loan that B is taking
Parties to the contract :
The person who gives the guarantee is called as surety, the person in respect of whose default the guarantee is given is called as principal debtor. The person to whom the guarantee is given is called a creditor
Essential features:
There should be debt and the person should be primarily liable to pay the amount. It should be a recoverable debt. The main objective of a contract of guarantee is for assurance or providing security. The recoverable debt which is out of limitation period it cannot be claimed. Under a contract of guarantee, one person should be primarily liable known as principal debtor and another person undertakes the liability in case of his default. When there is no recoverable debt its not a valid guarantee.
Swan vs bank of Scotland
In this case, there was an agreement between the customer(swan) and the bank for the payment of overdraft. but in Scotland overdraft facility is void. Under the law every overdraft facility is taken by any customer, he or she shall be liable to pay. The Customer failed to pay to the bank .bank filed case against the customer but he was not liable to pay. later the bank filed the case against surety holder .the surety holder is also not liable as there is no recoverable debt as it is declared void from the law itself.
Contract with minor
In Indian law, the contract with minor is void .surety holder will be made liable in entering into a contract with minor .the surety holder will be primarily made liable.
Section 127 of the Indian contract act states that any contract without consideration is void except in the cases of love and affection, voluntary service, time-barred debt. Consideration need not be adequate to the value of the goods but there should be some value. Consideration for the principal debtor is a loan, for creditor the consideration is loan + interest. And for the surety holder also there shall be a consideration and sec 127 states the consideration for surety holder “ anything done or any promise made for the benefit of the principal debtor is sufficient consideration to the surety holder”.
Sec 142 defines misrepresentation which means believing something to be true and giving that information to another person. “Uberrimae fides: utmost good faith”.A person shall have good faith while entering into a contract. Creditor should convey all the information to the surety holder he should not hide any fact or shouldn't misrepresent any fact.
Sec142 Guarantee obtained by Misrepresentation
Any guarantee obtained utilizing misrepresentation made by the creditor or misrepresentation made by the debtor with the consent of the creditor.
Sec143 Guarantee obtained by concealment
Any guarantee which the creditor has obtained utilizing keeping silence as to the material invalid fact or circumstances is invalid.
In Indian law, Sec 126 which says the guarantee may be either oral or written. An oral agreement is Very difficult to prove. England law, Contract of guarantee must be in writing no oral agreement is permitted. Only enforceable if its in writing.
