Contract of Guarantee - Sections: 126-147

A guarantee, simply speaking, is a promise to answer for the payment of some debt or the performance
of some duty, in case of the failure of another party, who is, in the first instance, liable to such payment
or performance.
Sec-126. “Contract of guarantee”, “Surety”, “Principal debtor” and “Creditor”: Contract of guarantee is a
contract to perform the promise, or discharge the liability, of a third person in case of his default.
Sec-126. “Contract of guarantee”, “Surety”, “Principal debtor” and “Creditor”:
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” .
The person to whom the guarantee is given is called the “Creditor”.
A Guarantee may be either oral or written.
Ex: A and B go to a shop. A says to the shopkeeper, let B have the goods and if he does not pay I will”.
This is a contract of guarantee.
The contract of guarantee is a Tripartite agreement, which contemplates the principal debtor, the
creditor and the surety in it.
It is a triangular relationship consisting of:
1) Creditor and Principal debtor
2) Surety and Creditor and
3) Principal debtor and Surety (Indemnity)
Firstly, the principal debtor himself makes a promise in favour of the creditor to perform a promise.
Secondly, the surety undertakes to be liable towards the creditor if the principal debtor makes a default.
Thirdly, an implied promise by the principal debtor in favour of the surety that in case the surety has to
discharge the liability of the default of the principal debtor, the principal debtor shall indemnify the
surety.
Legal Rules as to Contract of Guarantee
1) Consent or concurrence.
2) There should be a principal debt.
3) Liability must be legally enforceable.
4) Must have all the essential elements of a valid contract.
5) The contract may be either oral or in writing.
6) Benefit of the principal debtor is sufficient consideration to the surety (Sec:127)
7) Guarantee must not be obtained by misrepresentation or concealment (Sections-142 and 143)
1) Consent or concurrence: For a valid contract of guarantee there should be a consent of all the three
parties is required i.e., Principal Debtor, Creditor and the Surety.
2) There should be a principal debt: The purpose of a guarantee being to secure the payment of a
debt, the existence of a recoverable debt is necessary. It is of the essence of a guarantee that there

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 should be someone liable as a principal debtor and the surety undertakes to be liable on his default.
If there is no principal debt, there can be no valid guarantee.
3) Liability must be legally enforceable: The term “liability” in section 126 means a liability which is
enforceable by law. If that liability does not exist, there cannot be a contract of guarantee.
Where a person has become surety for the payment of a debt which was already barred by the law
of limitation the person will not be liable because when he became a surety there was no liability
“enforceable by law”. If the surety in such a case, pays the creditor, he cannot recover from the
principal debtor, the amount so paid (time barred debt), for it cannot be said that there was valid
guarantee in law.
Bittan Bibi V Kunti Lal AIR1952 ALL956
4) Must have all the essential elements of a valid contract: Though it is a special contract, it should
fulfil all the essential elements of a valid contract i.e free consent, consideration, lawful object etc.,
5) The contract may be either oral or in writing: Sec 126 of the Indian Contract Act, 1872, expressly
declares that a contract of guarantee may be either oral or in writing.
English law requires that for a valid contract of guarantee, it is necessary that it should be in writing
and signed by party to be charged therewith.
6) Benefit of the principal debtor is sufficient consideration to the surety (Sec:127): As a general rule,
a contract of guarantee to be enforceable should also be supported by some consideration.
However, it is not necessary that there should be some direct consideration, i.e., some benefit to the
surety himself. It would be sufficient if something is done or any promise is made for the benefit of
the principal debtor. It would be immaterial whether there is or is not any apparent benefit to the
surety.
7) Guarantee must not be obtained by misrepresentation or concealment (Sections-142 and 143): A
contract of guarantee is not a contract uberrimae fidei or one of absolute good faith. So there is no
need of disclosure of everything as is required in a contract of uberrimae fidei. As a result non-
disclosure would not enable the surety to avoid such a contract.
However, a surety ought to be acquainted with the whole contract entered into with his principal.
And it is the duty of a party taking a guarantee (the creditor)to put the surety in possession of all the
facts likely to affect the degree of his responsibility and if he omits to do so, it is at his peril.
It has been ruled that a creditor’s failure to disclose to a guarantee a material fact known to him will
vitiate the guarantee, if the non- disclosure amounts to a misrepresentation. The suppression of a
fact will amount to misrepresentation if the fact is inconsistent with the presumed basis of the
contract of guarantee.
Guarantee for past consideration:
A guarantee was executed subsequent to release of financial assistance to the borrower. The court held
that it could not be said that there was no consideration for the guarantee. In the view of the court, past
consideration is valid consideration.
SICOM Ltd V Padmashri Mahipatrai shah (2005)3 Mah MLJ125

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Liability of Surety – Sec 128
Sec-128 Surety’s liability
The liability of surety is co- extensive with that of the principal debtor, unless it is otherwise provided by
the contract.
Ex: ‟A‟ guarantees to „B‟ the payment of a bill of exchange by „C‟ , the acceptor. The bill is dishonoured
by „C‟. „A‟ is liable, not only for the amount of the bill, but also for any interest and charges which may
have become due on it.
1) The surety is liable for what the principal debtor is liable: The liability of surety is neither be more
nor less than that of the principal debtor. But by special contract it may be made less than that of the
Principal debtor but never greater.
The liability of the guarantor cannot go beyond the terms of the guarantee. A bank was not allowed
to recover from the guarantor liability due under pre-existing debts when there was no mention of
such liability in the guarantee which had been framed by the bank itself.
Central Bank of India V Virudhnagar steel Rolling Mills Ltd, (2016)3 SCC664
A guarantee was given to a bank for the borrower‟s loan. The guarantor gave a notice to the bank
withdrawing his guarantee. The guarantee carried a provision to the effect that it would cease to
exist after the expiry of three months from the date of notice. The court said that the guarantor
could not be held liable after such expiry of time.
Amal Krishna Ray V Bank of Baroda, AIR2014(NOC)179(Ori)
Minor as a principal debtor
 All the parties must be capable of entering into a valid contract. Surety is regarded as principal
debtor if principal debtor is incapable of entering into a contract and is liable to pay personally even
though the principal debtor (Minor) is not liable to pay.
Kashibha V Shripat(1895)19 ILR Bom
 If the principal debtor happens to be a minor and the agreement made by him is void, the surety
too cannot be made liable in respect of the same because the liability of the surety is co- extensive
with that of the principal debtor.
Edvan kavingal Kelappan Nambiar V Moolakal Kunhi Raman and another.AIR1957, Madras164.
Collateral security
It has been held by the Supreme court that when there is a decree against the principal debtor, the
guarantor and also against the mortgaged property. The decree holder bank should first proceed
against the mortgaged property and then against the guarantee.
Union Bank of India V Manka Narayana AIR1987 SC1078
2) Condition precedent
Where there is a condition precedent to the surety‟s liability, he will not be liable unless that
condition is first fulfilled. A partial recognition of this principle is to be found in Section- 144.

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 Section:144- Guarantee on contract that creditor shall not act on it until co-surety joins.
The defendant signed a guarantee which on the face of it was intended to be a joint and several
guarantee of three other persons with him. One of them did not sign. There being no agreement
between the bank and co-sureties to dispense with his signature, the defendant was held not liable.
National Provincial Bank of England V Brakenbury (1906)22
3) Prior action against principal debtor not necessary
It was held that the guarantor cannot insist that creditor must first proceed against the principal
debtor and not the guarantor. In other words; it is open for the creditor to proceed for recovery
against the guarantors without first proceeding against the principal borrower.
State Bank of India V Index port Registered AIR1992 SC1740
Kinds of Guarantee and Discharge of Guarantee
Guarantees may be:
 Specific guarantee: A guarantee for a single specific transaction, such a guarantee comes to an
end as soon as the liability under that transaction ends.
 Continuing guarantee – Sec 129: A guarantee which extend to a series of transactions is called a
continuing guarantee.
 Conditional guarantee: A guarantee subjected to the existence of the security is known as a
Conditional guarantee. In order to establish such a condition, the surety must show that offering
some other security was a part of the contract of guarantee and that the lender (the creditor)
accepted the condition.
A guarantee is usually given for:
1. The repayment of debt.
2. The repayment of price of goods sold on credit.
3. Good conduct or honesty of a person employed with a particular person.
Discharge of surety
By revocation:
1. By the surety, by notice to the creditor, Sec:130 (Continuing guarantee)
2. By surety’s death, Sec: 131
3. By Novation, Sec: 62
By the conduct of the creditor
1. Variance in terms of contract, Sec:133
2. Release or discharge of principal debtor, Sec:134
3. Compounding by creditor with principal debtor, Sec:135
4. Creditor‟s Act or omission impairing surety’s eventual remedy, Sec:139
5. Loss of security, Sec:141

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By invalidation of contract
1. Guarantee obtained by misrepresentation, Sec:142
2. Guarantee obtained by concealment, Sec: 143
3. Failure of co-surety to join a surety, Sec: 144 (condition precedent)
By revocation
A surety is said to be discharged from liability when his liability comes to an end. Ordinarily a guarantee
is not revocable when once it is acted upon. But section 130 provides for revocation of continuing
guarantees.
1. By the surety, by notice to the creditor Sec:130 (Continuing guarantee)
 Revocation becomes effective for the future transactions while the surety remains liable for
transactions already entered into.
Haragopal Agarwal V SBI, AIR 1956, Mad 211
Where the directors of a company guaranteed the payment of the company‟s overdrafts and
subsequently resigned their office and the bank was informed, it was held that the liability of the
directors would be confined to the amount due up to the date of their resignation.
2. By surety’s death, Sec: 131 (automatic revocation of the continuing guarantee as to future
transactions)
 A continuing guarantee is also determined by the death of surety unless there is a contract to
the contrary.
 The termination becomes effective only for the future transactions.
 The surety’s heirs can be sued for liability already incurred. SBI V Jayanthi, AIR 2011, Mad 179
Liability of legal heirs of deceased surety: Only to the extent of the property inherited by them or
recovery from the estate of the deceased surety.
3. By Novation, Sec: 62
When an old contract is replaced by a new contract then the parties under the old contract
discharge from their liability.
By the conduct of the creditor
1. Variance in terms of contract, Sec:133
The surety is discharged as soon as the original contract is altered without his consent.
The Act does not draw any distinction between the variances beneficial or prejudicial to the surety
in material particulars as compared to the original one.
But the courts interpreted that, if the variance (alteration) is not prejudicial to the surety, then the
surety can be held liable.
M.S. Anirudhan V Thomco’s Bank Ltd. AIR 1963 SC 746
The defendant guaranteed the repayment of a loan of Rs. 20,000 given by the plaintiff bank to the
principal debtor. The guarantee paper showed the loan to be Rs.25,000. The bank refused to
accept. The principal debtor then reduced the amount to Rs.20,000 and without intimation to the

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 surety gave it to the bank which was then accepted. The question was whether the alteration had
discharged him. The court held that the surety was not discharged. Because such alteration did not
cause any loss or detriment to the interest of the surety.
2. Release or discharge of principal debtor, Sec:134
Release of the principal debtor from liability is a release of the surety also.
Any act or omission, the legal consequence of which is the discharge of the principal debtor, the
surety would also be discharged for his liability.
Ex: There is a contract for the construction of a building the performance of which is guaranteed by
a surety. Under the contract, the creditor has to supply the building material. An omission on his
part to do so would discharge the contractor and so would the surety be discharged.
Subramania Chettiar V M.P.Narayana swami Gounder. AIR1951 Mad145
Where the liability of the prprincipal debtor is reduced under the provisions of a statute. Effect:
Madras High court held that “the surety is liable for the reduced amount”
3. Compounding by creditor with principal debtor. Sec:135
Section provides 3 modes, they are:
a) Composition: Ex: A settlement was entered in to between the principal borrower and the
bank for one time settlement without reference to the guarantor, then the liability of
guarantor ceased to exist.
b) Promise to give time: Creditor gave the principal debtor more time for payment
c) Promise not to sue the principal debtor: The surety has a right to sue that soon after the
payment becomes due, the cr. will take action against the principal debtor to recover the
same.
4. Creditor’s Act or omission impairing surety’s eventual remedy, Sec:139
It is the plain duty to the creditor not to do anything inconsistent with the rights of the surety. A
surety is entitled, after paying of the creditor, to his indemnity from the principal debtor. If the
creditor’s act or omission deprives the surety of the benefit of this remedy the surety is discharged.
Ex: A puts M as apprentice to B and gives a guarantee to B for M‟s fidelity. B promises on his part
that he will, at least once a month, see M make up the cash. B omits to see this done as promised,
and M embezzles. A is not liable to B on his guarantee
Union Bank of India V S.B.Mehatha, AIR1997, Guj482
The property hypothecated to the bank was sold by the principal debtor. The surety immediately
furnished particulars of the sale to the bank, but the bank took no steps either to trace or seize the
property and failed to take any action against the principal debtor, by lodging a complaint with the
police or filing a case in a criminal court for tracing and attachment of property and recovering the
dues. It was held that the surety was discharged due to inaction of the bank.
5. Loss of security, Sec:141
On paying off the creditor the surety steps into his shoes and gets the right to have the securities, if
any, which the creditor has against the principal debtor. It is the duty of the creditor to keep the
securities intact, not to give them up or to burden with further advances.

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 State Bank of Saurashtra V Chitranjan Ranganath Raja (1980)4,SCC516
A Bank granted a loan on the security of the stock in godown. The loan was also guaranteed by a
surety. The goods were lost from the godown on account of the negligence of bank officials. The
surety was discharged to the extent of the value of the stock so lost.
By invalidation of contract
1. Guarantee obtained by misrepresentation, Sec:142
Any guarantee which has been obtained by means of misrepresentation made by the creditor, or
with his knowledge and assent, concerning a material part of the transaction is invalid.
2. Guarantee obtained by concealment, Sec: 143
Concealment as to the material circumstances pertaining to the agreement between the creditor
and the principal debtor, must refer to any form of active concealment. Material facts and
situations are only such situations that are likely to have a strong impact on the surety‟s decision to
enter into the suretyship agreement.
3. Failure of co-surety to join a surety, Sec:144 (condition precedent)
When two or more persons promise to be liable for the same debt or duty, they are known as co-
sureties.
Where a person gives a guarantee upon a contract that creditor shall not act upon it until another
person has joined in it as co-surety, the guarantee is not valid if that other person does not join.
National Provincial Bank of England V Brackenbury (1906) 22
The defendant signed a guarantee, which on the face of it, was intended to be a joint and several
guarantee of three other persons with him. One of them did not sign. The defendant was held NOT
liable.
When Surety is not Discharged
1. Surety not discharged when agreement made with third person to give time to Principal Debtor,
Sec 136:
Where a contract to give time to the principal Debtor is made by the creditor with a third person,
and not with the principal debtor, the surety is not discharged.
2. Creditor’s forbearance to sue does not discharge surety, Sec: 137:
Ex: P owes C a debt guaranteed by S. The debt becomes payable. C does not sue P for a year after
the debt has become payable. S is not discharged from his suretyship. Forbearance to sue until the
end of the period of limitation.
3. Release of one co-surety does not discharge others, Sec: 138:
The creditor may at his will release any of the co-sureties from his liability. But that will not operate
as a discharge of his co-sureties. However, the released co-surety will remain liable to the others for
contribution in the event of default.
Rajamma V C.Puttachari AIR 2005, Karn
Rights of surety
1. Rights against the principal debtor

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 a) Right of subrogation, Sec: 140
b) Right of Indemnity, Sec: 145
2. Rights against the creditor
a) Right to securities, Sec: 141
b) Right to share reduction
c) Right of set-off
3. Rights against co- sureties
a) Right to contribution, Sec: 146 and 147
1. Rights against principal debtor: (after payment)
a) Right of subrogation, Sec: 140
“Subrogation” means “substitution”. When the surety has paid all that he is liable for, he is
invested all the rights, which the creditor had against the principal debtor. The surety steps into
the shoes of the creditor. The creditor had the right to sue the principal debtor, therefore surety
has the right to sue the principal debtor after making payment to the creditor.
The surety will be entitled to every remedy which the creditor had against the Principal Debtor,
to enforce every security and all means of payment, to stand in the place of the creditor, to have
the securities transferred to him, though there was no stipulation for that, and to avail himself of
all those securities against the debtor. This right of a surety stands not merely upon contract, but
also upon natural justice.
Amrithlal Govardhan Lalan V State Bank of Travancore AIR1968, SC1432
b) Right of Indemnity, Sec: 145
 In every contract of guarantee there is an implied promise by the principal debtor to
indemnify the surety. The right enables the surety to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but not the sums which he paid
wrongfully.
 There need not be any express promise by the principal debtor to indemnify the surety.
 Injunction order against the principal debtor to prevent him to dispose off his personal
properties.
 In a case where the surety found, that the amount having become due, the principal debtor
was disposing of his personal properties one after the other, in case, the surety, after paying,
may seize them and sought a temporary injunction to prevent the Principal Debtor from
doing so. The court can grant the injunction.
2. Rights against the Creditor
a) Right to securities, Sec: 141
 On paying off the creditor the surety steps into his shoes and gets the right to have the
securities, if any, which the creditor has against the Principal Debtor. The right exists
irrespective of the fact whether the surety knows of the existence of such security or not. It
is the duty if the creditor to keep the securities intact, not to give them up or to burden with
further advances.

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 Forbes V Jackson, (1882) LR19
b) Right to share reduction
 Reduction here refers to insolvency of the Principal Debtor.
Ex: A gives loan to B, C is the guarantor. B became bankrupt. C repaid loan amount to A. In an
insolvency proceeding against B, A received some amount from the official receiver
appointed by the court. That amount has to be repaid to C by A.
c) Right of set-off
 Meaning: A claim by the defendant against the plaintiff or a plea in defence available to the
defendant. It is cross claim between the parties to the suit regarding their recovery of
money.
Ex: Where the plaintiff files a suit of recovery of money from the defendant, but at the same
time defendant also has some debt on the plaintiff, in this case the defendant may claim for
the set off the amount against the plaintiff recoverable by him.
3. Rights against co-sureties
a) Right to contribution, Sec: 146 and 147
Where there are several sureties for the same debt and the principal debtor has committed
default, each surety is liable to contribute equally to the extent of the default. If one of them was
compelled to pay more than his share, he can recover contribution from his co-sureties so as to
equalise the loss as between all of them.
If there are three sureties and default of Rs.3000 has taken place, each surety must contribute
Rs1000. (If there is an absence of contract to the contrary).
It may be stated that, the liability of co-sureties, in case of default of the Principal Debtor, is joint
as well as several. It follows that the creditor may sue the co-sureties jointly or severally. He is
not bound to sue all the co-sureties. A release by the creditor of one of the co-sureties, does not
discharge the others, nor does it free the surety so released from his responsibility to the other
sureties.