Guarantee Contract: A contract to perform the obligation or to discharge the liability of a third party in case of its default is called contract of guarantee, (Section 126) Indian Contract Act, 1876. A Contract to perform the promise, or discharge the liability, of a third person in case of his default is called Contract of Guarantee.
Guarantee contract includes three parties namely; Creditor, Principal Debtor, and Surety. The person who is granting the loan, the person who is utilizing the amount of loan is a principal debtor and the person who is giving a guarantee is called surety or guarantor or favored debtor. In case of guarantee contract, there will be two types of liabilities namely; Primary liability and secondary liability. Primary liability will be with the principal debtor and Secondary liability goes to the surety.
Example: Y is in need of Rs. 10000/-. Upon guarantee by Z, Y has got the amount from X. Here X, Y, and Z are the creditor, principal debtor, and surety respectively. 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”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
A Guarantee could be an assurance of many things, for example –
- A Guarantee of fulfilling a third party’s responsibilities, financial or otherwise,
- A Guarantee of executing and completion of something,
- A Guarantee of something to be done with a particular result in a particular manner.