Guarantee is a contract to perform the promise or discharge the liability of a person to a third person in case of his default. The person who gives the guarantee is called a 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.
The essentials of a contract of guarantee are as under:
1. There should be three parties i e principal debtor, creditor, and surety;
2. Existence of recoverable debt;
3. Promise by surety to pay the debt in case of default by the principal debtor;
5. Liability of principal debtor should be primary and that of the surety be secondary;
6. All the essentials of a contract should also be present.
There are several types of guarantees;
• Personal Guarantee: this is a guarantee when an individual agrees to be responsible for completing the obligations of a principal debtor to the lender, in the event that the principal debtor fails to fulfill his obligation under the contract.
• Corporate Guarantee: this guarantee is given by a corporate that agrees to be responsible for completing obligations of a principal debtor to a lender, in the event that the principal debtor fails to fulfill his obligation under the contract.
• Continuing Guarantee: this guarantee which extends to a series of transactions is called a continuing guarantee. In this type of Guarantee, the guarantor assumes liability for future obligations by a principal debtor to the lender.
• Non continuing guarantee: in this type of guarantee, a guarantor assumes responsibility for the past and present obligation of the principal debtor. The obligations ceases once the liability has been satisfied.
• Limited Guarantee: in this type of guarantee, the guarantor is only responsible for or pre determined portion of the principal debtor’s liability to the lender.
Under the Indian Contract Act, the liability of a guarantor or surety is co extensive with that of principal debtor. A creditor can enforce his right against the surety even without exhausting his remedy against the principal debtor. A guarantor is not liable beyond the terms of guarantee and its enforceability depends on the terms of the contract.
A surety or guarantor can be discharged in the following cases:
a. By variance in terms of contract: any change made without the guarantor’s concern to the terms of contract between the debtor and the lender discharges the surety from his obligations.
b. By release or discharge of principal debtor: The surety is discharged when the principal debtor is discharged from his obligation to the lender.
c. When creditor compounds with, gives to, or agrees not to sue, principal debtor: A contract between the creditor and the principal debtor by which creditor makes a composition with or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the surety assents to such contract.
d. By creditor’s act or omission impairing surety’s eventual remedy: if the creditor does any act which is inconsistent with the rights of surety, or omits to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.
Bank Guarantee: a bank guarantee is a contract between the beneficiary and the bank. A bank guarantee is payable on demand made by the beneficiary. The bank is however, not compelled to pay if the guarantee is vitiated by fraud.
Performance guarantee: this type of guarantee is given for the benefit of the person who suffer a loss due to non performance of an obligation. A performance guarantee is given by a bank. It is paid in case of default on non performance of his obligation by the person, on whose behalf guarantee is given by the bank.
Stamp duty is payable on the guarantee under Article 5 (c) of Schedule 1 of the Indian Stamp Act. However, the stamp duty is different in different States.
No registration of any guarantee is required.