Contract of Guarantee

CONTRACT OF GUARANTEE SECTION 126

Contract of guarantee  

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FUNCTIONS Repayment of debt

PARTIES INVOLVED  Creditor

Payment of goods sold on credit Good conduct or honesty of a person or Fidelity Guarantee

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Principal debtor Surety

Example 

S and P go into a shop. S says to the shopkeeper “ Let P have the goods and if P fails to pay the amount , I will”.This is the contract of guarantee. BIRKMYR vs. DARNELL

FEATURES     

Concurrence or triangular relationship Primary liability in some person Essentials of a valid contract Writing not necessary Not a contract of UBERRIMAE FIDEI

KINDS OF GUARANTEE 

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Retrospective guarantee (For existing debt) Prospective guarantee (For future debt) Specific guarantee Continuing guarantee

Example : S in consideration that C will employ P in collecting rents of C’s zamindari, promises C to be responsible to the amount of Rs.5000 for due collection and payment by P of these.

RIGHTS OF SURETY 

Rights against creditor - Before the payment of guarantee debt - Right of set-off  - Right of subrogation - On the payment of guaranteed debt

RIGHTS OF SURETY Rights against principal debtor - Right to be relieved of liability - Right to be indemnity Example: P is the principal debtor of C and S the surety of  

the debt .C demands the payment of debt and on his refusal , sues him. S is compelled to pay the amount of  debt with costs. He can recover the amount from P ,the amount paid as well as the costs.

RIGHTS OF SURETY 

Rights against co-sureties - Co-sureties liable to contribute equally

e.g. S1,S2 & S3 are sureties to C for a sum of  Rs.3000.P makes a default .S1,S2&S3 will be liable to what amount???

- Liability of co-sureties bound in different sums

Example: S1,S2 and S3 as sureties for P ,enter into three separate bonds each in different penalty .S1 in the penalty of Rs.10000 ,S2 in the penalty of Rs.20000 and S3 for Rs.30000.P makes the default a) Rs. 30000 b) Rs. 40000 c) Rs. 60000 S1,S2&S3 are liable for what amount in each of  three cases???

DISCHARGE OF SURETY 1.

BY REVOCATION

REVOCATION BY SURETY DEATH OF SURETY NOVATION

2. BY THE CONDUCT OF CREDITOR

Discharge of principal debtor  Variance in terms of contract

Compounding by creditor with principal debtor 

Loss of security

Creditor’s act

3. By invalidation of contract

Misrepresentation Concealment Failure of consideration Creditor shall not act on it until a co-surety joins

TRUE OR FALSE???  

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A contract of guarantee must be in writing Consideration Consideration received by principal debtor is sufficient and it need not result in some benefit to the surety himself  In a contract of guarantee two parties are necessary The death of principal debtor releases the surety from his liability In a contract of guarantee there is no implied promise by the principal debtor to indemnify the surety

CONTINUED… 

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A contract of guarantee is a contract of uberrimae fidei The liability of surety is primary If the creditor does some act which by implication releases the principal debtor from his liability , the surety is not discharged A specific guarantee cannot be revoked