Contract of guarantees, meaning,Examples,types,,parties involved.

Contract of guarantees

Meaning

According to sec.126 of Indian contract act 1872"A contract of guarantee is a contract to perform the promise made to discharge liability, of a third person in case of default

For example: when A requested B to lend RS.10000 to C and guarantees that C will repay the amount within the agreed time and that on C failing to do so, he himself pay to B, there is a contract of guarantee.

Kind of guarantees 

1. A contract of guarantee may be either be oral or in writing (section 126), though a creditor should always prefer to put it in writing to avoid any disputes regarding the term, etc. In case of an oral agreement the existence of the agreement itself is very difficult to prove. 

2. From the point of view of the scope of guarantee a contract of guarantee may either specific or continuing.

Specific guarantee:

A guarantee is specific if it is intended to be applicable to a particular debt and thus come to an end on it's repayment.

A specific  guarantee once given is irrecoverable. Even the death of the surety does not result in revocation of guarantee . Legal  successor continue to remain liable . However, their liability shall be limited to the value of the assets inherited.

Example A,  guarantees the repayment of a loan of RS. 10000 to B, by C, (a banker) The guarantee in this case is specific guarantee 

Continuing  guarantee:-

Section 129 states that "A guarantee which extends to series of transaction is called a continuing  guarantee .

Examples A, in consideration that B, will employee C, in collecting the rent of B, zamindari,  promises B, to be responsible, to amount of RS.5000 for due collection and the payment of those rents . This is continuing guarantee. 

There are three parties in contract of guarantee 

1. Principal debtor:-

The one who borrows or liable to pay and one whose default on which  guarantee is given.

2. Creditor:-

The party who has given some thing of value to borrow and stand to receive the payment

Of such thing and to whom the guarantee is given .

3. Surety/guarantee:-

The person who give the guarantee to pay in case of default of the principal debtor

Rights and obligations of the creditor.

Rights

1. The creditor has a right to demand payment from the surety as soon as the principal debtor refuses to pay or make default in payment. The liability of the surety can not be posponed till all other remedies against the principal debtor have been exhausted.

2. Where surety is insolvent the creditor is entitled to proceed in the surety insolvency and claim the pro data dividend.

Obligations

The Indian contract act 1872 imposed the following obligations on a creditor in a contract of guarantee:

1. Not to change any terms of original contract.: The creditor cannot change any terms of the original contract without seeking the consent of the surety. Section 133 provide ,'' Any variance made, without the surety's consent in the terms of the contract between the principal debtor and the creditor discharge the surety as to the transaction subsequent to the variance"

Example: A banker contract to lend X RS.5000 on March 4 .  A guarantee repayment. The banker pays X RS. 5000 on January 1. Ain this case is discharge from from his liability as the contract sue A as the guarantee is from March 4 .

2. Not release the amount of principal debtor: The creditor is under an obligation not to release or discharge the principal debtor . Section 134 states " The surety is discharge by a contract between the creditor and the principal debtor, by which the principal debtor is released  or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor"

For example
A gives a guarantee to banker C for repayment of debt granted to B. B later contracts with his creditors ( including C the banker) to assign to them his property in consideration of their releasing him from their demands . Here B is released from his dent by the contract with C and A is discharge from his surertyship.

3. Not to compound, or give time to or agree not to sue the principal debtor : section 135 states that " A contract between the creditor and the principal debtor, by which the creditor makes a composition with or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the surety assents to such contract"

If the time for repayment is extended, the debtor may die or become insane, or insolvent or his financial position may become weaker in the meanwhile, with  the effect that the surety's remedy to recover the money in case the principal debtor defaults, may be impaired.
However there are certain exception . They are :
(A). Section 136 states that if the creditor makes an agreement with the third party, but not with the principal debtor, to give extension of time to the principal debtor, surety is not discharge even if consent has not been sought.
(B). Mere tolerance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him, does not, in the absence of a provision to the contrary, discharge the surety (section137).

(C). If the creditor release one of the co-sureties ,the other co-surety ( or co-sureties ) thereby not discharge . The co-surety released by the creditor is also not released from him liability to the other sureties (section138)

Right of surety

Right of surety may be classified under three heads:

1. Rights against creditor:-

In case of fedelity guarantee, the surety can direct creditor to dismiss the employee whose honesty he has guarantee, in the event of proved dishonesty of the employee. The creditor's failiur to do so will exonerate the surety from his liability .

2. Rights against the principal debtor:-

(A) Right of subrogation: section 140 states that where a surety has paid the guarantee debt on it's becoming due or had performed the guaranteed duty on the default of the principal debtor, he is invested with all right which the creditor has the against the  debtor.  

(B).Right to be Indemnified:   

The surety has the right to recover from the principal debtor, the amount which he has to rightfully paid under the contract of guarantee .

3. Rights against co-sureties :-
(A). Rights to contribution. Where a debt has been guaranteed by more than one person, they are called as co-sureties . Section 146 provides for a right of contribution between them . When a surety has paid more than his share, he has a right of contribution from the other sureties who are equally bound to pay with him.

 For example. A,B,C, are the sureties to D for sum of RS. 3000 lent to E. E defaults in making the payment . A,B,C are liable as between themselves to pay RS.1000 each and if any one of them has to pay more than his share i.e., RS. 1000, he can claim contribution from the other, for the amount paid in excess of Rs. 1000.

(B). Where, the co-sureties have guaranteed different sums they are bound under section 147 to contribution equally, subject to the limits fixed by guarantee, and not proportionately to the liability undertaken. 

Discharge of sureties

1. By death of surety (section131). 

The death of surety operates, in the absence of any contrast to the contrary, as a revocation of a continuing  guarantee, so far as regard future transactions.

2. By variance in term of contract :

(Section 133) states that any variance made without the sureties consent , in term of the contract between the principal debtor and the creditor, discharge the surety as to transaction subsequent to the variance.
For example.
A becomes surety to C for B’s conduct as a manager in C’s bank. Afterward, B and C contract, without A’ s consent, that B’ s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to over-draw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent and is not liable to make good this loss.

3. By release or discharge of principal debtor 

(Section 134) states that the surety is discharge by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the crediter, the legal consequence of which is discharge of the  principal debtor.

For example A contract with B for a fixed price to build a house for A within a stipulated time, B supplying the necessary timber . C guarantees A's performance of contract . B omits to supply the timber . C is discharge from his surertyship. 

4. By compounding with, or giving time to, or agreeing not sue, principal debtor

(Section135) states that the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety. The surety shall, however, be not discharged if 

(A). He assents to such contract, 

(B). The contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor. 

For example. C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B. A is not discharged.

5. By creditor's act or omission impairing surety 's eventually remedy

(Section 139) states that if the creditor does any act which is inconsistent with the right of surety, or omits to do any act which his duty to surety requires to do, and the eventually remedy of surety himself against the principal debtor is thereby impaired, the surety is discharged .

Examples B contracts to build a ship for C for a given sum to paid by installment as the work reach's stages. A, become  surety of B,s due performance of the contract. C, without the knowledge of A, repays to B, the last two installment A, is discharged

6. Loss of security.

If the creditor loses or parts with any security given to him by the principal debtor at the time the contract of guarantee was made, the surety is discharged to the extent of the value of the security, unless the surety consent to the release of such security (Section141) .

Example

C, advances to B, his tenant 2000 rupees on the agreement of A, . C, has also a further security for the 2000 rupees by a mortgrage of B,s furniture. C, cancels the mortgages   . B, become insolvent and C, Sue'son his gaurantee A, is discharged from liability to the amount of value of the furniture.

 

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