contract of guarantee - legal environment of business
DESCRIPTION
According to Section 126, “a contract of Guarantee is a contract to perform the promise or to discharge the liability of a third person in case of his default.”TRANSCRIPT
Contract of GuaranteeLegal Environment of Business
Prepared By
Manu Melwin Joy
Assistant ProfessorIlahia School of Management Studies
Kerala, India.
Phone – 9744551114Mail – [email protected]
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Definition
• According to Section 126,“a contract of Guaranteeis a contract to performthe promise or todischarge the liability of athird person in case of hisdefault.”
Example
• A lends Rs 500 to B on C’s promise to pay thesame if B fails to pay within a year. This iscontract of Guarantee.
Definition
• A contract of Guaranteeinvolves three parties, thecreditor, the surety and theprincipal debtor. The personwho gives the guarantee iscalled the surety, theperson in respect of whosedefault the guarantee isgiven is called the principaldebtor and the person towhom the guarantee is giveis called the ‘creditor’.
Essential features of a Contact of Guarantee
• A contract of Guaranteeinvolves three parties, thecreditor, the surety and theprincipal debtor. The personwho gives the guarantee iscalled the surety, theperson in respect of whosedefault the guarantee isgiven is called the principaldebtor and the person towhom the guarantee is giveis called the ‘creditor’.
Essential features of a Contact of Guarantee
• Three parties.
• Indemnity of mind.
• Liability of existence.
• Primary and secondaryliability.
• Writing or Oral.
• No misrepresentation orconcealment.
Essential features of a Contact of Guarantee
Three parties – There must bethree parties in a contract ofguarantee namely, theprincipal debtor, the creditorand the surety. In a Contract ofGuarantee, there are threecontracts (1) Contract betweenprincipal debtor and creditor(2) Contract between principaldebtor and surety and (3)Contract between creditor andsurety.
Essential features of a Contact of Guarantee
Indemnity of mind – TheContract of Guaranteerequires the identify ofmind (Concurrence) of allthe said three persons inrespect of the subjectmatter of the contract.
Essential features of a Contact of Guarantee
• Liability of existence – Theremust be a primary liability insome person other than thesurety.
• Primary and secondary liability– The primary liability lies withthe principal debtor. Theliability of the surety is onlysecondary in the sense that hisliability arises only when theprincipal debtor fails to pay hisdebt.
Essential features of a Contact of Guarantee
• Writing or Oral – Contract ofGuarantee may be oral or inwriting. But under the Englishlaw, a contract of guaranteemust always be in writing.
• Essential elements of acontract – A Contract ofGuarantee must have all theessential elements of a validcontract.
Essential features of a Contact of Guarantee
No misrepresentation orconcealment – Anyguarantee which has beenobtained by means ofmisrepresentation madeby the creditor or with hisknowledge and assentconcerning a materialpart of the transaction isinvalid.
Kinds of Guarantee
• Absolute or conditional.
• Retrospective or prospective
• General or specific
• Limited or unlimited
Kinds of Guarantee
Absolute or conditional – Anabsolute guarantee is one bywhich the guaranteeunconditionally promisespayment or performance ofthe contract on default of theprincipal debtor. A conditionalguarantee is one which is notenforceable immediately onthe default of the principaldebtor but some othercontingency.
Kinds of Guarantee
• Retrospective orprospective – When aguarantee is given for anexisting debt, it is calledretrospective guarantee.When a guarantee isgiven for a future debt, itis called prospectiveguarantee.
Kinds of Guarantee
• General or specific – Ageneral guarantee is onefor acceptance by thepublic generally. It is ageneral promise to anyone accepting it to beanswerable for a debt incase of the failure ofanother person.
Example
• A gives guarantee to B for the payment ofthe price of five sacks of flour to bedelivered by B to C and to be paid in amonth. B delivers 5 sacks to C. C in returnpays for them. Afterwards, B delivers flourto C to which C does not Pay. In thisexample, the guarantee given by A was aspecific guarantee so C is not liable for thesacks delivered subsequently.
Kinds of Guarantee
• Limited or unlimited – Alimited guarantee is one,restricted to a singletransaction. An unlimitedguarantee is one which isunlimited either as totime or amount.
• Contract of Guarantee.