Page 42 - DMGT407Corporate and Business Laws

Unit 2: Consent, Indemnity and Guarantee Acts

From the above discussion, it is clear that in a contract of guarantee there must, in effect, be two Notes
contracts, a principal contract between the principal debtor and creditor, and a secondary contract
between the creditor and the surety. In a contract of guarantee there are three parties, viz., the
creditor, the principal debtor and the surety. Therefore, there is an implied contract also between
the principal debtor and the surety.

Example: When A requests B to lend ` 10,000 to C and guarantees that C will repay the
amount within the agreed time and that on C failing to do so, he will himself pay to B, there is
a contract of guarantee.

The contract of surety is not a contract collateral to the contract of the principal debtor, but is an
independent contract. There must be a distinct promise on the party of the surety to be assumable
for the debt. It is not necessary that the principal contract, between the debtor and the creditor,
must exist at the time the contract of guarantee is made; the original contract between the debtor
and creditor may be about to come into existence. Similarly, under certain circumstances, a
surety may be called upon to pay though principal debtor is not liable at all.
Also, where a person gives a guarantee upon a contract that the creditor shall not act upon it
until another person has joined in it as co-surety, the guarantee is not valid if that other person
does not join (s.144).
2.7.3 Fiduciary Relationship

A contract of guarantee is not a contract “uberrimae fidei” (requiring utmost good faith).
Nevertheless, the suretyship relation is one of trust and confidence and the validity of the
contract depends upon good faith on the part of the creditor. A creditor must disclose all those
facts which, under the circumstances, the surety would expect not to exist. So where guarantee is
given for good conduct of an employee, the employer’s failure to inform the surety of any
breach on the part of employee, will discharge the surety. Similarly, where X guarantees the
existing and future liabilities of A to B up to a certain amount which limit has already been
exceeded, the contract of guarantee can be avoided on the ground of concealment of a materiel
fact. However, it should be noted that it is no part of the creditor’s duty to inform the surety
about all his previous dealings with the debtor.

2.7.4 Kinds of Guarantees

1. Oral or Written Guarantee: A contract of guarantee may either be oral or in writing
(s.126), though a creditor should always prefer to put it in writing to avoid any dispute
regarding the terms, etc. In case of an oral agreement the existence of the agreement itself
is very difficult to prove.
2. Specific and Continuing Guarantee: From the point of view of the scope of guarantee a
contract of guarantee may either by specific or continuing. A guarantee is a “specific
guarantee”, if it is intended to be applicable to a particular debt and thus comes to end on
its repayment. A specific guarantee once given is irrevocable.

Examples:
(a) A guarantees the repayment of a loan of ` 10,000 to B by C (a banker). The guarantee
in this case is a specific guarantee.
A guarantee which extends to a series of transactions is called a “continuing guarantee”
(s.129).

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