Contract of Guarantee | Indian Contract Act 1872 | CA Foundation
Channel: Learning With Nirmal
Date: 2023-03-06

This video talks about the following topics
CONTRACT OF GUARANTEE
According to sec 126, "A contract of guarantee is a contract to perform the promise or discharge 
the liability of third person in case of his default". A guarantee may be either oral or written
Parties to a contract of guarantee
Creditor: The person to whom the guarantee is given is called the creditor.
Surety: The person who gives the guarantee is called the surety.
Principal debtor: The person for whom the guarantee is given is called the principal debtor
 In a contract of guarantee there are three separate agreements.
• One between the principal debtor and creditor
• The second between the creditor and the surety
• The third between the surety and the principal debtor
ESSENTIALS OF A CONTRACT OF GUARANTEE
following are the essential features of a valid contract of guarantee.
 1. Tripartite agreement:
 contract of guarantee is a tripartite agreement between the principal debtor, creditor and 
surety
 2. Consent of three parties:
 There must be consent of all three parties
 3. It may be oral or in writing:
 A contract of guarantee may be either oral or in writing. Whereas, as per English law, the 
guarantee must be in writing and signed by the party who offers guarantee.
 4.Existence of Liability:
 There must be an existing liability or a promise whose performance is guaranteed and such 
liability must be enforceable by law. The exception to this rule is a guarantee given for minor's 
debt. Though minor's debt is not enforceable by law, yet the guarantee given for minor's debt is 
valid.
 5. Essentials of a valid contract:
 All the essential of a valid contract must be present in a contract of guarantee. However the 
following points are worth noting in this regard.
 A) The principal debtor need not be competent to contract and the surety would regarded as 
the principal debtor and would be personally liable to pay.
 B) Surety need not be benefited. Anything done or any promise made, for the benefit of the 
principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
6. Guarantee not to be obtained by misrepresentation:
 Any guarantee which has been obtained by means of misrepresentation made by or with 
his knowledge and assent, concerning a material part of the transaction is invalid.
7. The contract of guarantee must be supported by consideration
 We have discussed above that n contract of guarantee must have all the essential, valid 
contract. It will be interesting to know that it is not necessary that there be direct consideration 
between the surety and creditor. The law presumes that consideration received by the principal 
debtor is the sufficient consideration for the surety.
8. The promise to pay must be conditional
 It is another important essential element of a contract of guarantee. There must be a 
conditional promise to be liable on the default of the principal debtor.
9. There should be no concealment of fact
 The creditor should disclose to the surety the facts which are likely to affect the surety's 
liability. The guarantee obtained by the concealment of such facts is invalid.


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