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Guarantee Agreement: How Far Surety Is Protected

A guarantee contract is regulated by the Indian Contract Act, 1872, and consists of three parties (principal debtor, creditor, surety) one of whom serves as the surety in the event that the defaulting party fails to fulfil his obligations. A contract of guarantee is needed when there is a need of loan, goods or employment.

The guarantor guarantees the creditor that the individual in need can be assured, however if the borrower defaults, he will bear responsibility for repayment. As a result, we should conclude that a contract of guarantee is an unseen protection granted to a borrower.

According to the law, if a contract cannot be decided or profit sharing is insufficient, one party can file an appeal to force the latter party to comply with the contract's terms. Since the relief is not the damages given by the judge, the contract of assurance is called Specific Results. Rather than just paying money for failure to meet contractual obligations, the party must meet its contractual obligations, which include performing a particular action that he agreed to do.

In the case that the individual for whom he has insured defaults, the guarantor agrees to pay. The relief is unique in that the guarantor is required to perform the basic duty that he agreed to under the agreement, namely, pay the promised. 

The Section 126 of the Indian Contract Act talks about contract of guarantee.

Contract of guarantee, surety, principal debtor and creditor:

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; 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 may be either oral or written.

In a contract of guarantee there are three parties to a contract. They are:
  • Principal debtor:
    Principal debtor is a person or a party who borrows money and he is liable to pay.
     
  • Creditor:
    Creditor is a person who has given something of value to borrow and will be paid for it, as well as the person to whom the guarantee is given.
     
  • Surety:
    A surety is a person who gives a guarantee to pay on behalf of the default of the principal debtor.
Explanation:
Rohan needs money for his business. He borrowed an amount of Rs.1 lakh from Mohan. Sohna promises that in case of default on part of Rohan, he will pay the amount to Mohan. In this case, Rohan will be principal debtor, Mohan will be creditor and Sohna will be surety.

Contract of Guarantee essentials:

  1. An agreement between all the parties must be there:
    The principal debtor, the creditor, and the surety, all three parties to the contract, must enter into a contract with the consent of each other. It's worth noting that the surety only agrees to be responsible for the principal debtor's debt if the principal debtor specifically requests it. The guarantee's contact with the loan specialist to go into an agreement of assurance without the chief indebted person's information doesn't comprise an agreement of assurance.
     
  2. Consideration:
    According to section 127 of the ICA, anything is done or any promise made for the benefit of the principal debtor is sufficient consideration to the surety for giving the guarantee. One thing to note here is that the consideration given by the creditor must be new.

    In State Bank of India v Premco Saw Mill (1983) case, the State Bank pulled out to the borrower litigant and furthermore compromised legitimate activity against her, yet her significant other consented to become guarantee and attempted to pay the responsibility and furthermore executed a promissory note for the State Bank and the Bank avoided undermined activity.
     
  3. Liability:
    A surety's responsibility is secondary in a contract of guarantee. This assumes that, since the primary contract was between the creditor and the principal debtor, the principal debtor bears the primary responsibility for fulfilling the contract's terms. The surety is only responsible for repayment if the principal debtor defaults.

Types of guarantee:

  • Specific Guarantee:
    A specific guarantee is one that is granted in respect of a particular debt or specific transaction and is set to expire until the assured debt is paid or the commitment is fulfilled.
     
  • Continuing Guarantee:
    A continuing guarantee is a series of continuous transaction. Section 129 of the Indian Contract Act, 1872, defines a continuing guarantee. A proceeding with ensure is a type of assurance that covers a few exchanges. Until the guarantee denies it, it stretches out to all exchanges went into by the key indebted person.

Rights of a Surety:

The guarantee gets various advantages in the wake of setting aside an installment and releasing the chief borrower's risk.
  • Right against the principal debtor:
    Under Section 140: The right of surety on payment of debt or the right of subrogation. This expresses that on the grounds that the guarantee gave a guarantee to the borrower, and the bank has now left the scene subsequent to accepting installment, the guarantee will presently regard the account holder as though he were a leaser. So now, the guarantee has an option to recuperate the sum (which he paid) from the essential borrower. A guarantee is qualified for any of the leaser's cures against the borrower, including all of the debtor's assets, according to a general principle.
     
  • Right against the Creditor
    Under section 141: Right to securities given by the principal debtor. This expresses that when the guarantee takes care of the chief account holder's obligation after the key indebted person defaults, he gets responsible to the every one of the protections that the vital borrower provided for the loan boss. The Surety does have the right to any securities received before or after the guarantee was created, and therefore, it does not make a difference whether the surety is aware of those securities or not.
    The case of Craythorne v Swinburne:
    The general rule of equity that the surety is entitled to every remedy which the creditor has against the principal debtor.
     
  • Right against the Co-sureties:
    • Under section 138:
      Release of one co-surety does not discharge others. This expresses that when more than one party ensures the reimbursement of the chief borrower's obligation, they are known as C0-guarantees, and they are committed to contribute as consented to the installment of the guaranteed obligation. The lender's arrival of one of the co-guarantees doesn't relieve different guarantees of their commitments, nor does it soothe the delivered guarantee of his commitments to different guarantees.
       
    • Co-sureties to contribute equally, under section 146. Without an agreement to the next, the co-guarantees are responsible to pay similarly, as indicated by segment 146. This law would apply if co-sureties' liability is joint or multiple, whether under the same or separate arrangements, and whether they are aware of each other or not.

      Example:
      Ram, Mohan, Soham and Rohan are co-sureties for a debt of amount 1 lakh lent by Golu to Goli. Goli defaults in repaying the loan. Then in that scenario Ram, Mohan, Soham and Rohan are liable to pay 25,000 each.
       
    • Under section 147:
      Liability of co-sureties bound in different sums. Right when co-ensures agree to guarantee different entireties, they ought to submit comparatively up to the best aggregate guaranteed by all of them.

Discharge of Surety from Liability

The surety is discharged from the liability by:
  • The revocation of the contract of guarantee
  • The conduct of the creditor
  • The invalidation of the contract

  1. The conduct of the creditor
    • By Variance-Under section 133 which states that any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

      If the contract is altered by the creditor and debtor without surety's knowledge then, the is released from the liability. This happens because a surety is responsible what he promises in the guarantee, and any change made without the surety's permission releases the surety from liability for amount that occur after the alteration.
       
    • Discharge of surety by release or discharge of principal debtor. Under section 134.
      A surety is released if the creditor enters into a contract with the principal debtor that releases the principal debtor, or if the creditor acts or fails to act in a way that releases the principal debtor.
       
    • Arrangement between principal debtor and creditor section 135 when the creditor, without the consent of the surety, makes an arrangement with the principal debtor for composition, or promise to give him time to, or not to sue him, the surety will be discharged.
       
  2. Loss of security:
    The guarantee is released under section 135, if the leaser settles on a concurrence with the foremost account holder for piece, or vows to permit him an opportunity to, or not to sue him, without the guarantee's assent.
     
  3. The invalidation of the contract of guarantee
    A guarantee contract, like any other contract, can be avoided if the surety chooses to make it void or voidable.
    A surety may be discharged from the liability when:
    • Guarantee obtained by misrepresentation Under section 142.
      When the creditor, with his knowledge or consent, makes a material truth misrepresentation in the contract of guarantee, the contract is void.
    • Guarantee obtained by concealment Under section 143.
      When a creditor obtains a promise by staying silent about a material part of the contract's circumstances, the contract is void.
    • Failure of co-surety to join a surety Under section 144.
      When a creditor agrees not to act on a promise unless another party joins as a co-surety, the guarantee is void if the other person does not join.

Notice of revocation

  • By notifying future transactions of the termination under section 130
    • Up to Rs. 4000, Hera is a surety on all credit payments made by Sona to a shopkeeper. Hera gives the shopkeeper a note instructing him not to sell any more products to Sona until the shopkeeper has supplied goods worth Rs. 2000. Hera is the one who is in control of all the previous transactions. He will not be held liable for any transactions that occur after the revocation notice has been sent.
    • By the death of surety under section 131
       
  • The guarantee is cancelled on all potential transaction if the surety dies.
    • By change in terms and conditions.
       
  • According to section 133, when the borrower and the principal debtor change the terms and conditions of the contract without the agreement of the surety. After such a transition of terms and conditions, the surety will be released from all transactions.
Example:
  • Amar rents Bunty his car for a fee, and Munna agrees to be the surety for the loan Bunty owes Amar. Without consulting Munna, Amar and Bunty agree to a higher rent. After the contract is amended, Munna will be released as a surety in this case.
     
Conclusion
It is easy to conclude from a clear reading of the Contract Act that the surety in a contract of guarantee is provided with several protections. The law is not unfair, and it protects the surety's rights and ensures that the surety is not placed in an unfavorable position. The Indian Contract Act of 1872 defined rights, sought to limit the surety's liability, and included clauses defining when the surety would be released without performing. As a result, it's fair to assume that the surety is a favored instead of an unprotected debtor.

References:
  • Indiankanoon.org. 2021. Indian Kanoon - Search engine for Indian Law. [online] Available at:  Singh, A., n.d. Law of contract (a study of the Contract Act, 1872) and specific relief.

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