Nature and characteristics of contract of guarantee and its various types

According to section 126, ‘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’ and 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’. A guarantee can be oral or written.

In a contract of guarantee it is essential that there are three parties, viz. the Surety, the principal debtor and the creditor. It is also necessary that there is a liability, existing or future, enforceable by law. The moment there is a default on the part of the principal debtor, the Surety immediately becomes liable as if he were the principal debtor. He has no right to ask the creditor to first proceed against the principal debtor nor can he demand a notice from the creditor that the principal debtor has defaulted, because it is the Surety’s duty to ensure that the principal debtor pays or performs his obligation. 

A contract of guarantee is like any other contract and therefore all the essential elements of valid contract, such as free consent, competence of parties etc. have to be present in the contract of guarantee also. However, so far as consideration is concerned, it is not separately needed for the Surety in the Contract of guarantee: Section 127 expressly provides that –‘anything done or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the Surety for giving the guarantee.’

Types of Guarantee:

A guarantee may be either (a)‘specific guarantee’ or (b) ‘continuing guarantee.’

(a) Specific Guarantee: It is given for single debt or obligation and comes to an end when the debt guaranteed has been paid or obligation guaranteed has been discharged. Thus, where A gives a loan to B for which C stands guarantee, it is a case of a specific guarantee. In this case, there is a specific debt and the guarantee shall come to an end the moment the loan is repaid. 

A specific guarantee cannot be revoked. Once the guarantee is given it cannot be withdrawn or revoked and even after the death of the Surety (guarantor), it continues to operate making his legal representatives liable for the same. 

(b) Continuing Guarantee: On the other hand, a continuing guarantee is one where the guarantee given is not for a single or specific debt or obligation, but for a series of debts.

 Nature and Meaning of Contract of Indemnity.

 Nature and characteristics of contract of guarantee and its various types

 Contracts of Indemnity and Contracts of Guarantee

 Essential features of a wagering agreement

 What are mistake of fact and mistake of law?

 What is Quasi Contracts?

 What are the rights and duties of an agent?

 How is an agency terminated?

 How is agency created and terminated?

 Rights of Surety Against the Principal Debtor

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