Guarantee under Indian Contract Act 1872 Section 126 to 147

TLDR;

Namaste doston! This video is about the contract of guarantee as defined in the Indian Contract Act, 1872, from sections 126 to 147. It explains the concept with examples, discusses the parties involved, features of the contract, surety's liability, discharge of surety, and the rights of a surety against the principal debtor and creditor.

• Contract of Guarantee involves three parties: Principal Debtor, Surety, and Creditor.
• The liability of the surety is co-extensive with that of the principal debtor unless otherwise provided in the contract.
• A surety can be discharged from liability under certain circumstances like revocation, variance in contract terms, or release of the principal debtor.

Introduction to Contract of Guarantee [0:00]

The video introduces the topic of Contract of Guarantee as defined under the Indian Contract Act, 1872, specifically sections 126 to 147. A contract of guarantee is essentially a promise to perform the duties or discharge the liabilities of a third person if they default. The video uses a simple example to illustrate this concept, involving three parties: the speaker (as the principal debtor), the viewer (as the surety), and a bank (as the creditor).

Parties Involved in a Contract of Guarantee [0:52]

The video explains the three parties involved in a contract of guarantee with an example. If the speaker needs a loan and approaches a bank (the creditor), the bank may ask for a surety. If the viewer agrees to be the surety, they promise the bank that if the speaker (principal debtor) fails to repay the loan, the viewer will cover the debt. The principal debtor has the primary responsibility to repay the loan, and the surety's responsibility arises only upon the debtor's default.

Key Aspects of Contract of Guarantee [2:32]

The video highlights that a contract of guarantee can be either oral or in writing. It also points out that there are actually three contracts involved: one between the principal debtor and the creditor (loan agreement), another between the surety and the creditor (guarantee agreement), and an implied contract where the surety, after paying the creditor, has the right to recover the amount from the principal debtor. The liability of the principal debtor and the surety is joint and several, meaning the creditor can pursue either or both for the debt.

Why Contract of Guarantee is Needed [4:08]

The video discusses why a creditor might require a contract of guarantee. It's because the creditor wants assurance that the debt will be repaid, even if the principal debtor defaults. The guarantee from the surety provides a second option for the creditor to recover the debt. The contract of guarantee is essentially a promise from the surety to the creditor that they will fulfill the principal debtor's obligation if the debtor fails to do so.

Features of a Contract of Guarantee [5:15]

The video outlines the features of a contract of guarantee. Firstly, it can be oral or in writing in India, but in England, it must be in writing. Secondly, there must be an existing liability or a promise of a future debt by the principal debtor. A mere assurance without an actual loan or debt is not a contract of guarantee. The benefit to the principal debtor acts as sufficient consideration for the surety's promise. The surety's consent must be free and valid, without any misrepresentation, fraud, or concealment of facts.

Liability of the Surety [7:17]

The video explains that the surety's liability is co-extensive with that of the principal debtor, meaning the creditor can recover the same amount from the surety as they could from the principal debtor, provided the principal debtor has defaulted. This is subject to any specific provisions in the contract that might alter the surety's liability. The creditor can pursue the surety without first exhausting all options against the principal debtor. The video references the Bank of Bihar vs. Damodar Prasad case (1969) to support this point.

Limits on Surety's Liability [10:43]

The video discusses the limits on a surety's liability. The surety can specify a limit to their liability when entering into the contract of guarantee. For example, a surety can guarantee a loan up to ₹30,000 even if the loan amount is ₹50,000. The video references the case of Adit Narayan Chaurasia vs. Bank of India, where the court upheld that the surety was only liable up to the amount they had specified, plus interest.

Co-Sureties [12:11]

The video explains the concept of co-sureties, where multiple parties act as sureties for the same debt. In such cases, the contract of guarantee may specify that there shall be co-sureties. A surety cannot be held liable unless the other co-sureties also join the agreement. The liability of co-sureties is joint and several, and one co-surety cannot insist that the creditor first pursue the other co-sureties or the principal debtor before coming after them.

Continuous Guarantee [13:17]

The video defines a continuous guarantee as one that extends to a series of transactions. For example, if the speaker takes a loan of ₹5,000 and the viewer provides a guarantee specifically for that amount, it's a specific guarantee. However, if the speaker needs ongoing financial support for a business over a year, and the viewer guarantees all transactions within that period, it becomes a continuous guarantee. This is similar to a standing offer, where the guarantee covers multiple future transactions.

Discharge of Surety [14:40]

The video discusses the circumstances under which a surety can be discharged from their liability. These include:

1. Revocation by Surety: The surety can revoke a continuous guarantee for future transactions by giving notice to the creditor (Section 130).
2. Death of Surety: The death of the surety generally terminates the guarantee unless the contract specifies that the surety's legal representative will continue the guarantee.
3. Variance in Terms of Contract: Any alteration in the terms of the contract between the principal debtor and creditor without the surety's consent discharges the surety (Section 133).
4. Release or Discharge of Principal Debtor: If the creditor releases or discharges the principal debtor, the surety is also discharged (Section 134).
5. Creditor's Actions or Forbearance: If the creditor acts in a way that impairs the surety's rights or agrees to give the principal debtor more time, the surety may be discharged (Section 135).
6. Loss of Security: If the creditor loses or impairs any security held against the principal debtor, the surety is discharged to the extent of the value of the security (Sections 139, 140).

Illustrative Example of Surety Discharge [20:15]

The video provides an example where the government sells trees and a purchaser is given time to remove them. A surety guarantees the payment. If the purchaser fails to pay the second installment, and the government doesn't demand it or stop the purchaser from removing the trees, the surety is discharged. The court held that the government's inaction impaired the surety's right, as they should have either demanded the payment or prevented the purchaser from continuing the work.

Surety's Right to Security [21:41]

The video explains that if a seller provides goods to a buyer without demanding payment, and a surety has guaranteed the buyer's payment, the seller's action of not seeking payment can burden the surety. The surety is secured because they expect to recover from the principal debtor, but if the seller waives the payment, it impacts the surety's ability to recover.

Rights of a Surety [22:44]

The video discusses the rights of a surety. These include:

1. Right of Subrogation: After paying the creditor, the surety steps into the shoes of the creditor and has all the rights that the creditor had against the principal debtor.
2. Right of Indemnity: The surety has the right to recover from the principal debtor whatever sum they have rightfully paid to the creditor (Section 145).
3. Rights Against the Creditor: The surety is entitled to the benefit of every security that the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not (Section 141).

Surety's Rights Regarding Securities [24:33]

The video further explains the surety's rights regarding securities. The surety is entitled to all securities the creditor holds against the principal debtor at the time of the contract. However, the surety has no right to securities that come into the creditor's possession after the contract is made. Also, the surety has no claim on goods that are hypothecated.

Surety's Right When Guaranteeing Part of a Debt [25:48]

The video addresses the situation where a surety guarantees only part of a debt. If the surety pays that part to the creditor, but the creditor's total debt is not fully recovered, there are differing views on whether the surety can claim that amount from the principal debtor.

Rights Against Co-Sureties [26:39]

The video discusses the rights of a surety against co-sureties (Sections 146 and 147). Co-sureties are equally liable to contribute towards the debt. For example, if A, B, and C are co-sureties for a debt of ₹3,000, each is liable to pay ₹1,000 if the principal debtor defaults. This liability is equal unless the contract specifies otherwise.

Liability of Co-Sureties with Different Limits [28:09]

The video explains how liability is distributed among co-sureties when they have different limits on their guarantees. For instance, if A guarantees up to ₹10,000, B up to ₹20,000, and C up to ₹40,000, and the principal debtor defaults on ₹30,000, each surety is liable for ₹10,000. However, if the default is ₹40,000, A is liable for ₹10,000 (their limit), while B and C are liable for ₹15,000 each. The distribution ensures that no surety exceeds their specified limit. The total liability is capped at ₹70,000, which is the sum of all individual limits (₹10,000 + ₹20,000 + ₹40,000).