AN ANALYSIS OF THE CONTRACTS OF GUARANTEE

The author Mayank Raj Pranav is a 2nd Year student pursuing BBA.LLB from Gujarat National Law University. His areas of interest include criminal law, constitutional law, the law of contracts, and the law of torts.

INTRODUCTION

The Black Laws dictionary defines the term 'guarantee' with regards to the confirmation that a lawful agreement will be appropriately upheld. An agreement of guarantee is represented by the Indian Contract Act, 1872 and incorporates three parties namely principal debtor, guarantor, and creditor in which one of the parties goes about as the surety if the defaulting party neglects to satisfy his commitments. Contracts of guarantee are generally needed in situations when a party requires an advance, merchandise, or work. The guarantor in such agreements guarantees the creditor that the individual in need might be trusted and if there should arise an occurrence of any default, he will attempt the obligation to pay. Subsequently, we can say that the contract of guarantee is undetectable security given to the bank and will be examined further. This article deals with the analysis of contracts of guarantee discussed under the Indian Contract Act, 1872.

Definition

Section 126 of the Indian Contract Act, 1872, defines a contract of guarantee as a contract to perform the promise or discharge the liability of the defaulting party in case he fails to fulfill his promise. Thus, here we can infer that we have three parties in this contract namely:

1. Principal Debtor - The person who gets or is at risk to pay and on whose default the guarantee is given.
2. Creditor - The party who has given something of significant worth to get and stands to get the installment for something like this and to whom the guarantee is given.
3. Guarantor – The individual who gives the assurance to pay in the event of default of the key debt holder.

Likewise, we can comprehend that a contract of guarantee is an optional agreement that rises out of an essential contract between the creditor and the primary debtor. It might either be oral or written. It could be express or inferred from the conduct of parties. This can also be understood with the help of an illustration. Ankita progresses a credit of INR 70000 to Pallav. Srishti who is the supervisor of Pallav guarantees that if Pallav neglects to reimburse the credit, at that point she will reimburse the equivalent. For this situation of an agreement of guarantee, Ankita is the Creditor, Pallav the principal debtor, and Srishti is the Surety.

Essential features

• The agreement can be either oral or recorded as a hard copy. By the by, the guarantee contract must be recorded as a hard copy in English law.
• The guarantee contract assumes a principal liability or a discharge obligation concerning the principal debtor. Regardless of whether there is no such head risk, one party consents to pay another under such circumstances, and the authorization of this commitment isn't dependent upon any other person's default, it is an indemnity contract.
• Sufficient consideration is to help the principal debtor. It isn't important to have clear consideration between the creditor and the guarantee that it is suitable that the creditor has done anything to benefit the principal debtor.
• Assurance assent can't be gotten by misrepresentation/deception or by concealing any material data related to the transaction.

KINDS OF GUARANTEE CONTRACT

Contracts of guarantee may be classified into two types: Specific guarantee and continuing guarantee.

SIMPLE/SPECIFIC GUARANTEE CONTRACT

When a guarantee is given in respect of a single debt or specific transaction and is to come to an end when the guaranteed debt is paid or the promise is duly performed, it is called a specific or simple guarantee. An illustration to understand this contract is that S is a bookseller who supplies a set of books to P, under the contract that if P does not pay for the books, his friend K would make the payment. This is a contract of specific guarantee and K’s liability would come to an end, the moment the price of the books is paid to S.

CONTINUING GUARANTEE CONTRACT

A continuing guarantee is defined under section 129 of the Indian Contract Act,1872. A continuing guarantee is a type of guarantee which applies to a series of transactions. It applies to all the transactions entered into by the principal debtor until it is revoked by the surety. Therefore Bankers always prefer to have a continuing guarantee so that the guarantor’s liability is not limited to the original advances and would also extend to all subsequent debts. The most important feature of a continuing guarantee is that it applies to a series of separable, distinct transactions. Therefore, when a guarantee is given for an entire consideration, it cannot be termed as a continuing guarantee. An illustration to understand this contract is that on M’s recommendation S, a wealthy landlord employs P as his estate manager. It was the duty of P to collect rent every month from the tenants of S and remit the same to S before the 15th of each month. M, guarantee this arrangement and promises to make good any default made by P. This is a contract of continuing guarantee.

CASE LAWS

In P.J. Rajappan v Associated Industries, the guarantor, having not signed the contract of guarantee, wanted to wriggle out of the situation. He said that he did not stand as a surety for the performance of the contract. Evidence showed the involvement of the guarantor in the deal and had promised to sign the contract later. The Kerala High Court held that a contract of guarantee is a tripartite agreement, involving the principal debtor, surety, and the creditor. In a case where there is evidence of the involvement of the guarantor, the mere failure on his part in not signing the agreement is not sufficient to demolish otherwise acceptable evidence of his involvement in the transaction leading to the conclusion that he guaranteed the due performance of the contract by the principal debtor. When a court has to decide whether a person has guaranteed the due performance of the contract by the principal debtor all the circumstances concerning the transactions will have to be necessarily considered.

In State Bank of India v Premco Saw Mill, the State Bank gave notice to the debtor-defendant and also threatened legal action against her, but her husband agreed to become surety and undertook to pay the liability and also executed a promissory note in favor of the State Bank and the Bank refrained from threatened action. It was held that such patience and acceptance on the bank’s part constituted good consideration for the surety.

In State Bank Of India vs. Nagesh Hariyappa Nayak And Ors., against the advancement of a loan to a company, the guarantee deed was executed by its directors, and subsequently, a letter acknowledging the load was issued by the same directors on behalf of the company. It was held that the letter did not have the effect of extending the period of limitation. Recovery proceedings instituted after three years from the date of the deed of guarantee were liable to be quashed.

The main function of a contract of guarantee is to secure the payment of the debt taken by the principal debtor. If no such debt exists then there is nothing left for the surety to secure. Hence in cases when the debt is time-barred or void, no liability of the surety arises. The House of Lords in the Scottish case of Swan vs. Bank of Scotland held that if there is no principal debt, no valid guarantee can exist.

CONCLUSION

The contract of guarantee is a particular contract for which the Indian Contract Act has laid a few standards. As we have talked about, the essential capacity of an agreement of guarantee is to shield the leaser from misfortune and to give him the certainty that the agreement will be implemented with the guarantee of the guarantee. Each agreement of assurance has three gatherings and there exist two sorts of certifications i.e explicit assurance and proceeding with ensure. The kind of Guarantee utilized relies upon the circumstance and the details of the agreement. The guarantee has a few rights against different gatherings and the risk of the guarantee is viewed as co-broad with that of the chief indebted person except if it is generally given by the agreement. On the off chance that the agreements are gone into by deception made by the loan boss concerning material conditions or by the disguise of material realities by the bank, the agreement will be viewed as invalid.

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References:

1. S.A. No. 245 of 1983.
2. AIR 1984 Guj 93.
3. ILR 2003 KAR 1435.
4. (1836) 10 Bligh NS 627.