Q. Write down various features of Contract of Guarantee.


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In contract act, Section 126 deals with the definition of guarantee. It provides as:

a contract of guarantee as a contract to perform the promise or discharge the liability of the defaulting party in case he fails to fulfill his promise.


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Important Features of contract of guarantee

1.     Tri-party agreement:

It’s a tri-party agreement:

A.      Principal debtor,

B.      Creditor,

C.      Surety.


2.     The contract may be either oral or in writing:

Unlike the English law, In India, it is not necessary to have a written contract only, for the purpose of its enforcement, section 126 specifically mentioned about the same.


3.     Presupposes the existence of a Debt:

The main function of a contract of guarantee is to secure the payment of the debt taken by the principal debtor. If no such debt exists then there is nothing left for the surety to secure. Hence in cases when the debt is time-barred or void, no liability of the surety arises.


4.     Consideration: Section 127

The consideration has always been prerequisites for the contract. According to section 127 of the act, anything is done or any promise made for the benefit of the principal debtor is sufficient consideration to the surety for giving the guarantee.


5.     Liability:

In a contract of guarantee, the liability of a surety is secondary. It is only on the default of the principal debtor that the surety is liable to repay.


6.     Must contain all the essentials of a valid contract:

Since a contract of guarantee is a type of contract, all the essentials of a valid contract needs to be fulfilled, such as: offer, acceptance, free consent, valid consideration and other qualifications.


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