by Guarantee is a contract whereby one person (the guarantor) agrees to be responsible for the debt or obligation of another person (the principal debtor) in the event that the debtor fails to fulfill their obligation to a third party (the creditor).
It is important to note that the legal provisions related to guarantees in Indian contract law can be complex and may vary based on the specific circumstances of each case. It is recommended to seek the advice of a qualified attorney who is familiar with the laws of India before entering into any contract of guarantee.
Legal provisions related to guarantees in Indian contract law:
- Writing and Registration: A guarantee contract must be in writing and signed by the guarantor or their authorized representative. If the guarantee is for a sum exceeding Rs. 100, it must be registered with the appropriate authority.
- Consideration: A guarantee must be supported by consideration, which can be any value or benefit that is exchanged between the parties involved.
- Primary Liability: In India, the liability of the guarantor is primary, meaning that the creditor can seek payment directly from the guarantor without first seeking payment from the principal debtor.
- Co-Suretyship: If there are multiple guarantors, each guarantor is only responsible for their portion of the debt. If one guarantor pays more than their share, they may have the right to seek contribution from the other guarantors.
- Discharge of the Guarantee: A guarantee can be discharged in several ways, such as through the fulfillment of the underlying obligation, a release from the creditor, or the expiration of the guarantee period.
- Limitations on Liability: The contract of guarantee may include limitations on the liability of the guarantor, such as a cap on the amount for which the guarantor is liable.
- Indemnification: The guarantor may be entitled to seek indemnification from the principal debtor for any payments made to the creditor on behalf of the debtor.
- Right of Set-Off: In India, if the principal debtor owes money to the guarantor, the creditor may have the right to set off that debt against any amounts owed by the guarantor to the creditor.
- Liability of the Guarantor: The guarantor is liable only to the extent of the amount guaranteed. If the guarantee is for a continuing transaction, the liability of the guarantor is limited to transactions entered into while the guarantee is in force.
- Revocation of Guarantee: A guarantee may be revoked at any time by the guarantor, but the revocation does not take effect until it is communicated to the creditor.
Kinds of Guarantee
There are different kinds of guarantees under Indian contract law. Some of the commonly recognized types of guarantees are:
- Specific Guarantee: A specific guarantee is one where the guarantor agrees to be responsible for a specific debt or obligation of the principal debtor. For example, a bank may require a guarantor to provide a specific guarantee for a loan.
- Continuing Guarantee: A continuing guarantee is one where the guarantor agrees to be responsible for all debts or obligations of the principal debtor that may arise in the future. For example, a guarantor may provide a continuing guarantee to a supplier to ensure payment for goods purchased on credit by the principal debtor.
- Performance Guarantee: A performance guarantee is one where the guarantor agrees to ensure that the principal debtor performs a certain obligation, such as completing a construction project on time or delivering goods as per the agreed specifications.
- Financial Guarantee: A financial guarantee is one where the guarantor agrees to ensure that the principal debtor fulfills their financial obligations, such as making timely payments on a loan.
- Bank Guarantee: A bank guarantee is a type of financial guarantee issued by a bank on behalf of a customer to ensure payment to a third party in case the customer defaults on their obligation. For example, a bank may issue a guarantee to a supplier on behalf of a customer to ensure payment for goods purchased on credit.
- Corporate Guarantee: A corporate guarantee is one where a company provides a guarantee for the debt or obligation of another company. This type of guarantee is often used in joint ventures or partnerships.
