Characteristics of a Contract of Guarantee:
1. The contract can be oral or written: -
According to section 126, a guarantor can be oral or written. At this point, the position in India is different from that of England. According to English law, for a valid warranty contract it must be in writing and signed by the party to whom it will be attributed.
2. There must be a principal debt: -
A guarantee contract involves a principal debt or an obligation to be paid by the principal debtor. The guarantee undertakes to be responsible only if the main debtor does not fulfill his obligation. If that main debt does not exist, but one party promises in favor of another to compensate in a given situation and the fulfillment of this promise does not depend on the default of another person, it is an indemnity contract.
3.The benefit for the main debtor is a sufficient consideration: -
As in any other contract, the consideration is also necessary for a guarantee contract. For the promise of collateral, there needs to be a direct consideration between the creditor and the collateral, it is sufficient that the creditor has done something for the benefit of the principal debtor. The benefit to the principal debtor constitutes sufficient consideration of the collateral to grant the collateral.
4. The consent of the guarantee should not have been obtained by misrepresentation or concealment: -
The creditor must not obtain the guarantee or by misrepresentation or concealment of any material fact related to the transaction. If the warranty has been obtained in this way, the warranty is invalid. The position is explained in sections 142 and 143 which are executed as follows:
"142. Guarantee obtained by invalid misrepresentation.- Any guarantee obtained by misrepresentation made by the creditor, or with his knowledge and consent, with respect to a material part of the transaction, is invalid.
143. Guarantee obtained for invalid concealment - Any guarantee that the creditor has obtained by remaining silent regarding material circumstances is invalid.
Section 142 of the Indian Contract Law defines a "Compensation Contract". A contract by which one of the parties promises to save the other from the loss caused by the conduct of the promisor himself, or by the conduct of any other person, is called an Indemnity Contract ”. Section 126 defines a "Warranty Agreement". A promises to be primarily and independently responsible for the conduct of another person which may amount to an indemnity contract. A guarantee contract requires the attendance of three people: the main debtor, the guarantor and the creditor --- the guarantor assumes an obligation at the request, express or implied, of the main debtor. The obligation of the guarantee depends substantially on the default of the main debtor under an indemnity contract, the responsibility arises from the loss caused to the promise by the conduct of the promisor himself or by the conduct of another person. [Punjab National Bank Ltd V. Cotton Mills Shri Vikram et al., (1970)]
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