CONTRACT OF GUARANTEE
Define the term contract of guarantee and discuss the circumstances under which a surety is said to be discharged of his liability. (2013-S)
Highlight the essentials of the contract of guarantee. Discuss the circumstances under which the surety is discharged of his liability. (2013-A)
What is the contract of Guarantee? Also discuss when is surety discharged from his liability. (2010-S)
What are salient features of a contract of guarantee? How a surety discharge from his liability. (2010-S BZU)
Define the term contract of Guarantee and discuss the circumstances under which a contract of guarantee is said to be discharged. (2008-S)
SYNOPSIS
PARTIES TO A CONTRACT OF GUARANTEE 3
THREE AGREEMENTS IN A CONTRACT OF GUARANTEE 4
1. Between Creditor and Principal Debtor 4
2. Between Surety and Creditor 4
3. Between Surety and Principal Debtor 4
ESSENTIALS OF CONTRACT OF GUARANTEE 4
1. Concurrence of Three Parties 4
3. All Essentials of a Valid Contract 5
4. Guarantee Must Be Express or Implied 5
5. Guarantee May Be Oral or Written 5
RIGHTS OF SURETY AGAINST THE CREDITOR (CIRCUMSTANCES UNDER WHICH SURETY IS DISCHARGED) 5
RIGHTS AGAINST THE PRINCIPAL DEBTOR 6
INTRODUCTION
An individual intending to get loan or take on any obligation might be obligated to offer collateral. However, the lender might be open to providing a loan without collateral if any individual is willing to take on personal responsibility as a guarantee for the repayment of the loan or the fulfillment of promise. In such a scenario, the lender extends a loan to the borrower based on the collective financial reputation of both the borrower and another individual, referred to as the surety.
RELEVANT PROVISION
Sections 126 and 146 of the Contract Act, 1872.
DEFINITION OF CONTRACT OF GUARANTEE
According to Section 126 of the Contract Act, 1872;
“A contract to perform the promise, or discharge the liability of a person in case of his default is a contract of guarantee"
EXAMPLE
Imagine if Akbar asks his friend Bilal to lend Rs. 2,000 to Faisal. Akbar guarantees that if Faisal doesn't repay the money within, let's say, one month, Akbar will step in and pay the amount to Bilal. This arrangement between Akbar, Bilal, and Faisal forms a contract of guarantee. It's like Akbar vouching for Faisal and promising to cover the debt if Faisal can't repay.
PARTIES TO A CONTRACT OF GUARANTEE
(i) Surety
Surety is the one who promises to take responsibility if the principal debtor can't pay back the money they borrowed.
(ii) Creditor
Creditor is the person who lends money or extends credit. Creditor receives the promise from the surety that borrowed money will be paid back.
(iii) Principal Debtor
Principal debtor is the person who borrows money. If the principal debtor can't repay, then surety fulfill the promise.
THREE AGREEMENTS IN A CONTRACT OF GUARANTEE
1. Between Creditor and Principal Debtor
- This is like the main agreement. The borrower (principal debtor) and the one lending money (creditor) have a direct contract. The debt that needs to be guaranteed comes from this agreement.
2. Between Surety and Creditor
- Now, think of the friend (surety) stepping in. The surety promises the one lending money (creditor) that if the borrower (principal debtor) can't pay, the friend will cover the debt. So, it's an extra promise to the lender.
3. Between Surety and Principal Debtor
- Lastly, there's a promise between the borrower (principal debtor) and the friend (surety). This promise is that if the friend has to pay because the borrower can't, then the borrower will compensate the friend. It's like an agreement to make sure the friend doesn't end up losing anything.
ESSENTIALS OF CONTRACT OF GUARANTEE
1. Concurrence of Three Parties
A contract of guarantee or suretyship involves the participation of three parties that are the principal debtor, the creditor, and the surety. For the valid contract to be formed, the consent of all three parties is mandatory. Without the agreement of any of these parties, the contract of guarantee cannot be held.
2. Liability
A basic requirement for a contract of guarantee is the existence of a legally enforceable liability. If there is no such liability, the guarantee contract becomes untenable. The guarantee is importantly a commitment to answer for the debt or obligation of another, and this underlying liability is essential for the contract to be valid.
3. All Essentials of a Valid Contract
In addition to the specific requirements related to guarantee, the contract must possess all the essentials of the valid contract. This includes elements such as offer and acceptance, consideration, legal capacity of the parties, and a lawful object. These general principles ensure the overall validity of the contract of guarantee.
4. Guarantee Must Be Express or Implied
A contract of guarantee can be express or implied. In an express guarantee, the terms are explicitly stated, whereas an implied guarantee may be inferred from the circumstances and conduct of the parties involved. Both types are valid, and the nature of the guarantee is determined based on the explicit or implicit agreement between parties.
5. Guarantee May Be Oral or Written
In Pakistan, a guarantee may be established through either oral communication or a written document. It is important to note, however, that English law mandates written evidence for guarantees. Despite this difference, in Pakistan, the legality of a guarantee is recognized whether it is presented in oral or written form. The mode of expression does not invalidate the guarantee, as long as the essential elements are present and agreed upon by the parties involved.
RIGHTS OF SURETY AGAINST THE CREDITOR (CIRCUMSTANCES UNDER WHICH SURETY IS DISCHARGED)
Right of Exoneration
Before the surety pays, they can ask the creditor to first go after the person who owes the money (principal debtor). This way, the surety doesn't have to pay if the debtor can.
Right to Set-Off
If the surety gets sued by the creditor, they can use any valid reasons the debtor had for not paying as a defense. They also get the benefit of any counter-claims the debtor had against the creditor.
Right of Subrogation
After the surety pays off the debt, they can step into the creditor's shoes and get back any security or collateral given to the creditor by the debtor.
Right to Securities
When the surety pays, they have the right to take all the collateral or security that the creditor had against the debtor, whether the surety knew about it or not.
Right to Equities
The surety, after paying off the debt, gets all the benefits or advantages the creditor had against the debtor. This includes any special legal rights.
RIGHTS AGAINST THE PRINCIPAL DEBTOR
Right of Subrogation
Once the surety pays the debt because the debtor couldn't, the surety gets the same rights against the debtor that the creditor had.
Right to Indemnity
The debtor promises to cover the surety for any amount paid under the guarantee. But if the surety pays for something the debtor isn't supposed to, the surety can't ask for compensation.
RIGHTS AGAINST CO-SURETIES
When more than one person guarantees the same debt, they might have to share the responsibility. If one surety pays more than their share, they can ask the others to contribute, according to Section 146.
CONCLUSION
In simple terms, a contract of guarantee is a promise to take on someone else's responsibility if they can't fulfill it. The surety has specific rights, whether dealing with the creditor, the debtor, or other co-sureties.
Ikyan Shah (Advocate High Court) WhatsApp: https://whatsapp.com/channel/0029VaCJ8BT8fewjugv9FS1x Mentoga: https://mentoga.com/ikyanshah LinkedIn: https://www.linkedin.com/in/ikyanshah/ Facebook: https//www.facebook.com/ikyanshah TikTok: https://www.tiktok.com/@ikyanshah Instagram: https://www.instagram.com/ikyanshah