Q.1 – DEFINE A CONTRACT OF GUARENTEE , Explain its essentials?

Ans – 1 -Sec. 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”.
Example: A advances a loan of Rs.10,000 to B, and C promises A
that if B does not repay the loan, I will repay it. This is a contract of
guarantee.

It involves three parties namely,

1. Surety, who gives the guarantee or who make promise

2. Principal Debtor, in respect of whose default the
guarantee is given.
3. Creditor, to whom the guarantee is given.

A guarantee may be either “oral” or “written“. Just like any other

contract, it should also fulfill all the essentials of a valid contract.
ESSENTIALS OF A CONTRACT OF GUARANTEE
1. Concurrence of All the Parties
All the three parties namely, the principal debtor, the creditor and
the surety must agree to make such a contract.

2. Liability
In a contract of guarantee, liability of the surety is secondary i.e.,
the creditor must first proceed against the debtor and if the latter
does not perform his promise, then only he can proceed against the
surety.
3. Existence of a Debt
A contract of guarantee pre-supposes the existence of a liability,
which is enforceable at law. If no such liability exists, there can be
no contract of guarantee. Thus, where the debt, which is sought to
be guaranteed is already time barred or void, the surety is not liable.

4. Consideration
There must be consideration between the creditor and the surety so
as to make the contract enforceable.
5. Writing not Necessary
A contract of guarantee may either be oral or written. It may be
express or implied from the conduct of parties.

Note: A Contract of Guarantee must always be in writing

under English Law.
6. Essentials of a Valid Contract
It must have all the essentials of a valid contract
7. No Concealment of Facts
The creditor should disclose to the surety the facts that are likely to
affect the surety’s liability. The guarantee obtained by the
concealment of such facts is invalid. Thus, the guarantee is invalid if
the creditor obtains it by the concealment of material facts.
8. No Misrepresentation
The guarantee should not be obtained by misrepresenting the facts
to the surety.

Q.2 – What are the rights of the surety against against a

principle debtor and Creditor ?

Ans – 2 - Rights of Surety against the Creditor

1. Ask the creditor to sue the debtor: On the guaranteed debt having
fallen due for payment, the surety may ask the creditor to sue the debtor
to collect the due amount, but he cannot compel him to do so

2. Require the creditor to terminate the debtor’s services: In the

case of the fidelity guarantee, if the principal debtor’s dishonesty comes
to light, the surety can require the creditor to terminate the principal
debtor’s services so as to save him from further loss.

3. Claim to any set off: The surety on being called upon to pay, can
claim any set-off to which the principal debtor is entitled from the
creditor.

4. Access to the securities of the debtor with the creditor: The

surety can, after paying the guaranteed debt, compel the creditor to
assign to him all the securities taken by the creditor either before or at
the time of the contract of guarantee, whether the surety was aware of
them or not.

5. Right to Share Reduction: On debtor’s insolvency the surety is

entitled to claim the proportionate reduction of his liability by the amount
of dividend claimed by the creditor (from the Official Receiver of the
Principal debtor). Similarly, debtor’s debt obligation is scaled down by
subsequent legislation; the creditor is entitled to claim proportionate
reduction in his liability

Rights against the principal debtor

Rights of subrogation(Section 140):
                                                       When the principal debtor makes a default in
the performance of his duty, and on such a default, the surety makes the
necessary payment or makes performance of all what he is liable for he
becomes invested with all the creditor had against the principal debtor. In other
words, the surety steps in to the shoes of the creditor and by an action against
the principal debtor, he can recover from him all that, which could have been
recovered by the creditor. This is known as surety’s right of subrogation.
 Rights of indemnity against the principal debtor(sec.145):
                                                                                                  In a contract of
guarantee, when the principal debtor makes a default, the surety has to make
payment to the creditor. This payment is make by the payment to the creditor.
This payment is made by him on behalf of the principal debtor. After making
such payment, he can recover the same from the principal debtor. Such a claim
can be made by the surety only in respect of the sums he has rightfully paid
under the guarantee, but not the sums which he has paid wrongfully

Q.3 – Distinguish between contract of indemnity and contract

of guarantee ?
Ans – 3 -
 Contract of Indemnity Contract of Guarantee

It refers to a Contract by which one party

It refers to a Contract to perform the
promises to save the other from loss
promise or discharge the liability of a third
caused by conduct of the promisor or
person in case of his default.
another person.

In contract of guarantee, the primary

In contract of indemnity, the liability of
liability is of principal debtor and the
the promisor is primary.
liability of surety is secondary.

Contract between surety and principal

Contract between the indemnifier and the
debtor is implied and between creditor and
indemnity holder is express and specific.
principal debtor is express.

In contract of indemnity there are two In contract of guarantee there are three
parties indemnifier and the indemnity parties i.e. creditor, the principal debtor
holder. and surety.

In contract of guarantee there are three

In Contract of indemnity there is only one agreements i.e. agreement between the
agreement i.e. the agreement between creditor and principal debtor, the creditor
indemnifier and indemnity holder. and surety and surety and principal
debtor.

Contract of indemnity protects the Contract of guarantee is for the surety of

promise from loss. the creditor.

In contract of guarantee, the surety does

In Contract if indemnity, the promisor
not require any relinquishment for filing of
cannot file the suit against third person
suit. The surety gets the right to file suit
until and unless the promisee relinquishes
against the principal debtor as and when
his right in favour of the promisor.
the surety pays the debt

Q.4– Outline the terms for termination of bailment?

Ans – 3. As
per the section 148 of the Indian Contract Act, 1872, a
bailment is a contract where one person delivers goods to another
person for some purpose. The person delivering the goods is the
Bailor and the person receiving the goods is the Bailee. After the
accomplishment of the purpose, the Bailee needs to return these
goods to the Bailor or dispose of them according to the directions of
the Bailor.

Terms for Termination of Bailment -

1. When the period or purpose is over:

In case the bailment is for a specific period or purpose, it is
terminated on the expiry of that period or on the
completion of the purpose.

2. When the bailee makes unauthorized use of the

goods:
In case the bailee makes unauthorized use of the goods
bailed, the bailment is voidable at the option of the bailor.

3. When the subject-matter is destroyed or becomes

illegal:
In case the subject-matter is destroyed or becomes illegal,
the bailment is terminated.

4. At the will of the bailor:

Where the bailment is gratuitous, it can be terminated
merely at the sweet will of the bailor. However, the
termination should not cause loss to the bailee in excess of
the benefit derived by him. In case the loss exceeds the
benefit derived by the bailee, the bailor must compensate
the bailee for such a loss (Sec. 159).

5. When the bailor or bailee dies:

A gratuitous bailment is terminated by the death of the
bailor or bailee.

Q.5 – Define Pledge outline its essentials and distinguish

between bailment and pledge ?

Ans – 5 –

Meaning:  Pledge is a special kind

of bailment. If the goods are bailed
as a security for payment of a debt
or performance of a promise, it is
called Pledge.

Definition: The Bailment of goods

as security for payment of a debt or
performance of a promise is called
pledge. (Section.178, I.C.A)

Meaning: Pledge is a special kind of bailment. If the goods

are bailed as a security for payment of a debt or
performance of a promise, it is called Pledge.

Definition: The Bailment of goods as security for payment

of a debt or performance of a promise is called pledge.
(Section.178, I.C.A)
Essential elements of the Pledge :

         To constitute Pledge, the following conditions are to be satisfied.

(i) Delivery of possession

            There must be a bailment of goods as defined in section 148 of the Contract Act that is delivery
of goods. The delivery of possession may be actual or constructive. If the Pledger has goods in his
physical possession he could effect the pledge by actual delivery.
(ii) Security for payment of debt : 

         The bailment must be by way of security. The goods are delivered as security for the payment of a
debt or performance of a promise.

(iii) Security must be for payment of a debt or performance of a promise.

(iv) Movable Property : 

        To constitute Pledge the subject matter of property must be a movable property. It can be valuable
documents, goods, chattels etc.

Sr.
No Bailment Pledge

1 Sections 148 to 171 of the Indian Sections 172 to 181 of the Indian
Contract Act 1872 deals with Contract Act deals with Pledge.
bailment

Meaning:  The term bailment is Meaning:  Pledge is a special kind

2 derived from the French word of bailment. If the goods are bailed
‘Bailor’, which means ‘to deliver. It as a security for payment of a debt
means possession voluntarily from or performance of a promise, it is
one person to another. called Pledge.

Definition:  Delivery of goods by Definition: The Bailment of goods

3 Bailor to Bailee for a definite as security for payment of a debt or
purpose on condition of their performance of a promise is called
return or disposal, when purpose pledge. (Section.178, I.C.A)
is accepted. (Section.148, I.C.A)

Example:   Sam delivers a cloth to Example: If a Farmer delivers to

4 John, a tailor making a shirt . The bank 50 bags of wheat as security
contract between Sam and John is for obtaining a loan, it is called
bailment pledge.

5
It is made for any purpose It is made for specific purpose

6
The Bailee can use the goods Pledgee cannot use the goods 

7 The Bailee has no right to sell the The Pledgee / Pawnee has a right to
goods bailed sell the goods pledged if the pledger
could not redeem them within the
stipulated period.

8 Bailee can exercise lien on goods Pledgee can exercise lien even for
only for labour and service nonpayment of interest