“MEANINGS AND KINDS OF GUARANTEE

AND DIFFERENCE BETWEEN CONTRACT OF

GUARANTEE AND INDEMNITY”
A project submitted to

Army Institute of Law, Mohali

By
(AYUSHI JARYAL Roll No. – 1827)

Under the guidance of Mrs. Deepinder Gill

LAW OF CONTRACTS
In partial fulfillment of the requirements for the award of
Degree BA.LLB
Punjabi University, Patiala (Punjab)
Jan – May 2019
 DECLARATION

It is certified that the project work presented in this report entitled

‘MEANINGS AND KINDS OF GUARANTEE AND DIFFERENCE

BETWEEN CONTRACT OF GUARANTEE AND INDEMNITY’

embodies the results of original research work carried out by me. All the

ideas and references have been duly acknowledged.

DATE: 1st Feb 2019 NAME: AYUSHI JARYAL

PLACE: ARMY INSTITUTE OF LAW MOHALI ROLL NO:1827

 ACKNOWLEDGEMENTS

This project consumed huge amount of work, research and dedication. I

would like to express my deepest appreciation to all those who provided me

the possibility to complete this project work. A sincere gratitude to our

professor Mrs Deepinder Kaur Gill, whose superior knowledge and

contribution in stimulating suggestions helped me to coordinate my full

effort in achieving the project. Furthermore, I would also like to

acknowledge with much appreciation the crucial role of management of

Army Institute of Law, who gave me the permission to use all necessary

material to complete this task of research.

 CONTRACT OF GUARANTEE

Section 126 of the Indian Contract Act 1872, which deals with the
contract of guarantee, has defined it as “A contract to perform the
promise, or discharge the liability of a third person in case of his
defaults”.
The Section further provides that:
“The person who gives the guarantee is called ‘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.
A supplies goods to B on C’s guaranteeing payment by B to A. This
means that if B does not pay, C would be liable to pay. This is a
“Contract of Guarantee”.
The object of a contract of guarantee is to provide additional security
to the creditor in the form of a promise by the surety to fulfil a certain
obligation, in case the principal debtor fails to do that.
The contract of guarantee is no doubt tripartite in nature but it is not
necessary or essential that the principal debtor must expressly be a
party to that document. In a contract of guarantee, the principal debtor
may be a party to the contract by implication. Thus, there is a possibility
that a person may become a surety without the knowledge and consent
of the principal debtor.
MAIN FEATURES OF CONTRACT OF GUARANTEE

1. THE CONTRACT MAY BE EITHER ORAL OR

WRITTEN:
According to Section 126, a guarantee may be either “oral” or
“written“. Just like any other contract, it should also fulfil all
the essentials of a valid contract. On this point, the position in
India is different from that in England. According to English law,
for a valid contract of guarantee, it is necessary that it should be
in written and signed by the party to be charged therewith.

2. THERE SHOULD BE A PRINCIPAL DEBT:

A contract of guarantee pre-supposes a principal debt or
obligation to be discharged by the principal debtor. The surety
undertakes to be liable only if the principal debtor fails to
discharge his obligation. If there is no such distinction, but there
is a promise by one party in favour of another for compensation
in a certain situations, and the performance of this promise is not
dependent upon the default of somebody else, it is a contract of
indemnity.

3. BENEFITS TO THE PRINCIPAL DEBTOR IS

SUFFICIENT CONSIDERATION:
As is any other contract, the consideration is also needed a
contract of guarantee. For the surety’s promise, it is not necessary
that there should be direct consideration between the creditor and
the surety, it is enough that the creditor had done something for
the benefit of the principal debtor. This is clear from Section 127,
which reads as under:
“Anything done, or any promise made for the benefit of the
principal debtor may be a sufficient consideration to the surety
giving the guarantee.”
4. CONSENT OF THE SURETY SHOULD NOT HAVE BEEN
OBTAINED BY MISREPRESENTATION OR
CONCEALMENT:
The creditor should not obtain guarantee either by any
misrepresentation of concealment of any material facts
concerning the transaction. If the guarantee has obtained that way,
the guarantee is invalid. The position is explained by Section 142
and 143, which are as under:
“142. Guarantee obtained by misrepresentation invalid.-any
guarantee which has been obtained by the means of
misrepresentation made by the creditor, or with his knowledge
and assent, concerning a material part of the transaction, is
invalid.”
“143. Guarantee obtained by concealment invalid.-Any
guarantee which the creditor has obtained by means of keeping
silence as to material circumstance is invalid.”
 TYPES OF GUARANTEES

A guarantee may be given in two way, on the basis of these ways, there
can be two types of guarantees: specific and continuing.

CONTINUING GUARANTEE:
A continuing guarantee is that which extends to a series of
transactions (Sec. 129). It is not confined to a single transaction. Surety
can fix up a limit on this liability as to time or amount of guarantee,
when the guarantee is a continuing one. The fact that the guarantee is
continuing can also be ascertained from the intentions of the parties and
the surrounding circumstances.
Example: (i) A, in consideration that B will employ C in collecting the
rents of B’s zamindari, promises B to be responsible, to the amount of
5,000 rupees, for the due collection any payment by C of those rents.
This is continuing guarantee.
(ii) A guarantees payment to B, a tea/dealer to the amount of £ 100, for
tea he may from time to time supply to C.B supplies C with tea to the
extent of the agreed value i.e., £ 100 and C pays B for it. Afterwards B
supplies C with tea to the value of £ 200. C fails to pay. The guarantee
given by A was a continuing guarantee, and he is accordingly liable to
B to the extent of £ 100.

SPECIFIC GAURANTEE:
Specific guarantee means a guarantee given for one specific
transaction. In this case the liability of the surely extends only to a
single transaction.
Example: A guarantee payment to B of the price of 5 sacks of flour to
be delivered by B to C and to be paid in a month. B delivers sacks to
C. C pays for them. Afterwards B delivers four sacks to C, which C
does not pay. The guarantee given by A was only a specific guarantee
and accordingly he is not liable for the price of the four sacks.
REVOCATION OF CONTINUING GUARANTEE:
The revocation of guarantee means the cancellation of guarantee. On
revocation the liability of the surety comes to an end. A continuing
guarantee may be revoked as regards on future transactions under the
following circumstances:-
1. By notice of revocation by the surety- A surety may revoke the
continuing guarantee by giving a notice of revocation to the
creditor. However, surety remains liable for transactions
already entered into before the revocation (section130).
Example:
2. By death- Death of the surety operates as revocation of the
continuing guarantee with reference to the future transactions
unless the contract otherwise provide (sec. 131).

3. By variation in contract- If any variation is done in the terms

of contract of guarantee between the creditor and the
principal debtor without the knowledge of the surety, the
contract of guarantee is revoked.

4. By Novation- The contract of guarantee will be revoked when

the parties agree to substitute a new ‘contract for the old
contract or rescind or alter the old contract (sec. 133).

5. By creditors act of omission- Any omission by the creditor

which repairs the eventual remedy of the surety against the
debtor amounts to revocation of the contract of guarantee.
DISTINCTION BETWEEN CONTRACT OF
GUARANTEE AND CONTRACT OF INDEMNITY

1. There are two parties in a contract of indemnity, the

indemnifier and the indemnity-holder, or indemnified. There are
three parties in a contract of guarantee, the creditor, the
principal debtor and the surety.

2. Contract of indemnity consists of only one contract under

which the indemnifier promises to indemnify the indemnified in
the event of certain loss. There are three contracts in a contract
of guarantee. One contract is between the principal debtor and
the creditor in respect of a certain promise or obligation
undertaken to be performed by the principal debtor. By a second
contract, the surety undertakes to perform the same obligation
which the principal debtor has undertaken, in case the principal
debtor makes a default. The third contract, which is an implied
one, is between the principal debtor and the surety. By this
contract, the principal debtor is bound to indemnify the surety
for whatever sum the surety has rightfully paid under the
guarantee. It means that after the surety discharges his
obligation, he is invested with all the rights which the creditor
had against the principal debtor.

3. The object of a contract of guarantee is the security of the

creditor. It presupposes a principal debtor and a certain debt or
an obligation for which the principal debtor is primarily liable.
A contract of indemnity is made to protect the promise against
some likely loss.

4. In a contract of guarantee, the liability of the surety is only a

secondary one. Surety’s liability arises only when the principal
debtor makes a default. The liability of the indemnifier in a
 contract of indemnity is a private one. He undertakes to be
liable when the contemplated situation is there.

5. In a contract of guarantee, after the surety has discharged his

liability and paid to the creditor, he steps into the shoes of the
creditor and he can realize the payments made by him, from the
principal debtor. In a contract of indemnity, the loss falls on the
indemnifier, and therefore, after the indemnifier had
indemnified the indemnity-holder, he cannot recover the amount
from anybody.

6. In England, a contract of guarantee should be in writing,

whereas a contract of indemnity may be either oral or in writing.
There is no such distinction in India. In India, whether it is a
contract of indemnity or guarantee, the same may be either oral
or in writing.
BIBLIOGRAPHY

1) Contracts-2 by R.K. Bangia

2) Wikipedia