Contract of Guarantee /Indian Contract Act (II) 1872

What do you understand by Contract of Guarantee

Introduction

The Black Law Dictionary defines the term guarantee as the guarantee that a legal contract will be properly enforced. A guarantee contract is governed by the Indian Contract Act, 1872 and includes 3 parts in which one of the parties acts as a guarantee in case the defaulting party does not fulfill its obligations. Guarantee contracts are mainly required in cases where a party requires a loan, property or employment. The guarantor of such contracts guarantees the creditor that the person in need can be reliable and, in case of default, will assume the responsibility to pay. Therefore, we can say that the guarantee contract is an invisible security granted to the creditor and will be discussed further.  

Indian Contract Act (II), 1872

Contract of Guarantee/Warranty Contract

A Contract of Guarantee or a warranty contract is a contract to fulfill the promise or discharge the responsibility of a third party in the event of default. The person giving the guarantee is called the "Guarantee", the person in respect of whose breach the guarantee is granted is called the "principal debtor" and the person to whom the guarantee is granted is called the Creditor. A guarantee can be oral or written. (Sec. 126)

In each guarantee contract there are three parties, the creditor, the main debtor and the guarantee. There are three contracts in a warranty contract. First, the principal debtor himself makes a promise in favor of the creditor to fulfill a promise, etc. Second, the guarantee agrees to be responsible to the creditor if the main debtor does not comply. Thirdly, an implicit promise from the main debtor in favor of the guarantee that, in case the guarantee has to pay the responsibility in case of default of the main debtor, the main debtor must indemnify the guarantee for the same. [Nagpur N.S. Bank V. Union of India, AIR 1981 A.P. 153].