Contract Of Guarantee Case Study

928 Words2 Pages

A contract of guarantee is a contract in which one party promises to perform the promise or to discharge the liability incurred by the third party in case of his default. There are three parties in a contract of guarantee. The person who gives the guarantee is known as ‘surety’. The person in default of whose the guarantee is given is known as the ‘principal debtor’. The person to whom the guarantee is given is known as ‘creditor’. In a contract of guarantee, there are two contracts; the principal contract between the principal debtor and the creditor as well as a secondary contract between the creditor and the surety. The liability of the principal debtor is primary, whereas, the liability of the surety is secondary. The contract between principal …show more content…

A specific guarantee is intended to be applicable to a particular debt and thus it ceases with the repayment of debt. On the other hand, a continuing guarantee extends to a series of transactions.
So, here in this case, the principal debtor is Rakesh, creditor is Lena Bank and the surety is Mohan. The type of contract Mohan will have to execute with the bank is the contract of surety which will be independent of the contract between Rakesh and the Bank.
The features of this type of contract are as follows:
• There are three parties in every Contract of Guarantee
• The liability arises right from the beginning. The surety becomes liable when the principle debtor commits default in meeting the liability.
• Surety has the right to sue the third party (Principle Debtor) directly. The Law puts him in the position of Creditor.
• Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. The guarantor need not personally derive any benefit from the …show more content…

In case the principal debtor makes a default or refuses to make the payment, the liability of the surety arises. The surety must act at the request of principal debtor. So in case of default by Rakesh, the liability of Mohan; the surety, arises. Mohan is required to discharge the liability incurred by Rakesh. In the above situation the creditor, that is, the Bank has some rights against the surety. These rights are listed below:
• The creditor is entitled to demand the payment from the surety as soon as the principal debtor refuses to pay or makes default in payment.
• The liability of the surety cannot be postponed till all other remedies against the principal debtor have been exhausted. In other words, the creditor cannot be asked to exhaust all other remedies against the principal debtor before proceeding against surety.
• The creditor also has a right of general lien on the securities of the surety in his possession. This right, however, arises only when the principal debtor has made default and not before that.
• In case of insolvency of surety, the creditor is entitled to proceed in the surety’s insolvency and claim the pro rata

Open Document