Guarantee—a contract of surity under the Indian Contract Act 1872 where a third party promises liability for another's debt or default.
## Definition & Nature
Section 126, Indian Contract Act 1872: A guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
Key participants: - Creditor: person to whom guarantee is made - Principal debtor: person whose liability is guaranteed - Guarantor (surety): person who gives the guarantee
Essential features: - Three distinct parties (unlike indemnity which is bilateral) - Guarantor's liability is *secondary*—contingent on principal debtor's default - Must be in writing (Section 30) - Based on consideration flowing to principal debtor, not guarantor directly - Guarantor can be sued only *after* creditor pursues principal debtor
## Types of Guarantee
| Type | Nature | |------|--------| | Specific guarantee | Limited to one transaction or one creditor | | Continuous guarantee | Covers multiple transactions between creditor and debtor within a fixed period (Section 131) | | Guarantee for a series of advances | Applied in banking (revolving credit) |
Discharge of continuous guarantee (Section 133): - Death of guarantor automatically discharges future liability - Notice of revocation by guarantor applies to future transactions only
## Key Rules under Sections 128–145
Who cannot give guarantee: - Minor (lacks contractual capacity) - Person of unsound mind - Disqualified persons (e.g., undischarged bankrupt in some contexts)
Effect of guarantor's discharge (Section 137): - Any act of creditor that materially alters principal debtor's position without guarantor's consent discharges guarantor - Example: composition with creditor, acceptance of security without guarantor's knowledge, release of co-guarantor
Creditor's duty to guarantor: - Must not release principal debtor without consent - Must not delay legal proceedings unreasonably - Must communicate material facts (e.g., evidence of insolvency)
## Common Exam Applications
- Bank guarantee cases: Continuous guarantees for overdraft facilities
- Personal loans: Spouse/parent as guarantor
- Tender guarantees: Bid security by contractors
- Partnership guarantee: Partners guaranteeing firm's debts
Distinction from indemnity (Section 124): - Indemnity: Two parties; indemnifier promises to reimburse indemnitee's loss - Guarantee: Three parties; guarantor guarantees another's liability
Distinction from bailment (Section 148): - Guarantee: contract of surity; liability-based - Bailment: transfer of goods for specific purpose; possession-based
## Worked Example
Scenario: Bank lends ₹5 lakhs to Ravi (principal debtor). Priya gives continuous guarantee. Six months later, bank agrees to extend repayment period without Priya's knowledge.
Analysis: - Bank's act (extension of period) materially altered Ravi's liability position - Under Section 137, Priya is discharged from further liability on the guarantee - Bank cannot recover from Priya for losses on principal debt (though recovered amount from Ravi may still hold)
## Common Mistakes
- Confusing guarantor's secondary liability with indemnifier's primary liability
- Assuming consideration to guarantor is required (it flows to principal debtor only)
- Thinking oral guarantee is valid (must be in writing per Section 30)
- Treating co-guarantors' liability as joint and several (each independently liable for full amount)
- Forgetting that death of guarantor discharges *future* liability only under continuous guarantee