Contract of guarantee has been defined under section 126 of the Indian contract act, 1872. i.e.,

• A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default.
• The person who gives the guarantee is called Surety.
• The person in respect of whose default the guarantee is given is called a principal debtor.
• The person to whom the guarantee is given is called the creditor.

Section 127 of the Indian contract act, 1872 defines consideration for guarantee. i.e., "Anything done, or any promise made, for the benefits of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee."

The basic elements of a contract of the guarantee are as follows:

• The contract of guarantee is said to be a specific contract.
• A promise to perform promises and discharge the liability of a third person.
• The performance will arise in cases of default on behalf of the third party.
• A guarantee can be oral as well as written.

The parties involved in a guaranteed contract are 'surety,' 'principal debtor,' 'creditor.'

Nature of contract of guarantee

1. A contract can be divided into two classes, i.e., one in which a promise becomes effective if the debtor fails to perform his obligations and the second in which there is a promise that the debtor will perform his obligations.
2. An agreement is said to be a guarantee only when there is an existence or contemplation of some other principle, some other principal obligator's obligation for which the guarantee will be subsidiary or ancillary.
3. In the absence of a principal debtor, there cannot be any suretyship, and a man cannot guarantee the debt of somebody else unless there is a debt of another person which can be guaranteed. A guarantee can be used as an indemnification if a person doesn't fulfill his promise.
4. The liability under a contract of guarantee is not a " promise to pay" as it is conditional, and a person becomes liable only on the default of the principal debtor.

Kinds of Guarantee:

There are two types of guarantee which are given below:

Specific Guarantee:

A guarantee is given for only one transaction or debt; the guarantee is known as a specific guarantee. A specific guarantee is said to be discharged when the debt is repaid or the promise is performed.
Illustrations

A guarantees B for payment of 5 bags of wheat purchased C. C makes payment. Later on, C again purchases 5 bags of wheat. C did not pay for that. B uses A . held A's guarantee is specific, and A is not liable.

Continuing Guarantee:

"Section 129 of Indian Contract Act, 1872 defines A guarantee that extends to a series of transactions and is called a continuing guarantee". In the case of a continuing guarantee, the guarantee liability is for all the transactions, and it is not discharged until revoked.
Illustrations

Guaranteed payment to B, a tea-dealer, to amount of 100$, for any tea he may from time to time supply to C. B supplies C with tea above the value of 100$, and C pays B for it. Afterward, B supplies C with tea above the value of 200$. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of 100$.

Also Read:

• Contract of Indemnity and Guarantee