The Indian Contract Act 1971

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Contracts of Guarantee

Sec 126 deals with contract of guarantee. As per this section contract of guarantee is a

contract to perform the promise, or discharge the liability of the third person in case of his default.

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Parties to Contract of Guarantee

The person who gives the guarantee is called the Surety;

The person in respect of whose default the guarantee is given is called the Principal Debtor;

The person to whom the guarantee is given is called the Creditor.

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Essentials of Contract of Guarantee

Tripartite AgreementConsent of Three Parties Existence of Liability Essentials of Valid ContactGuarantee not to be Obtained by

Misrepresentation Guarantee not to be Obtained by

Concealment (any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid)

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Types of Guarantees

Specific Guarantee: It covers only one transaction or objective, is limited to a certain sum of money and is limited as to time.

Continuing Guarantee: It covers a series of transactions subject to the limit as mutually agree upon irrespective of the payments towards the advance and irrespective of the fluctuations of the balance in the debtors account.

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Liability of Surety

According to sec 128 the liability of the surety is co extensive with that of the principle debtor, unless otherwise provided by the contract.

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Discharge of Surety

By notice of revocationBy death of suretyBy novation (new contract)By variance in terms of contractBy release or discharge of Principal DebtorBy agreementLoss of Security

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Contract of Indemnity vs. Contract of Guarantee

Basis Contract of Indemnity Contract of GuaranteeNo. of Parties

Two Three

No. of Contracts

One Three

Undertaking Indemnifier undertakes to save the indemnity holder from any loss.

The Surety undertakes for the payment of debts of principal debtor.

Nature of Liability

The liability of indemnifier is primary and unconditional.

The liability of Surety is secondary and conditional.

Nature of Event

In case of contingency Only on the non performance of an existing promise 05/02/23

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