This document can be used in the following contexts:
a.In lease arrangements. As condition for a Residential or Commercial Lease Agreements, a guarantor may be required to guarantee the payment of the tenant's debts in the event of default. This means that if a tenant fails to pay their rent or violates the provision of a lease agreement, the guarantor will assume responsibility for the payment of the tenant's debts.
b.In employment agreements. As a condition for employment, some employers may require their employees to provide guarantors. The guarantor guarantees the payment of any debt owed by the employee, or the guarantor may pay the cost for any damage done by the employee at the workplace.
c.In loan or security transactions. In loan contracts or mortgage transactions, the loan guarantor guarantees the payment of loan advanced to the borrower, interests, or other payment in the event of the borrower's default.
Sec. 126 of the Indian ContractAct 1872, which deals with the contract of guarantee, has defined it as “A contract to perform the promise, or discharge the liability of a third person in case of his defaults”.
It involves three parties namely,
1.Surety, who gives the guarantee.
2.Principal Debtor, in respect of whose default the guarantee is given.
3.Creditor, to whom the guarantee is given.
Example: A supplies goods to B on C’s guaranteeing payment by B to A. This means that if B does not pay, C would be liable to pay. This is a “Contract of Guarantee”.
Features of Guarantee Agreement:
1.The contract may be either oral or written: According to Section 126, a guarantee may be either oral or written. In this regard, the position in India is different from that in England. According to English Law, for a valid contract of guarantee, it is necessary that it should be in written form and signed by the parties.
2.There should be a principal debt: A contract of guarantee presumes a principal debt or an obligation to be discharge by the principal debtor. The surety undertakes to be liable only if the principal debtor fails to discharge his obligation. If no such liability exists, there can be no contract of guarantee. Thus, where the debt, which is sought to be guaranteed, is already time-barred or void, the surety is not liable.
3.Benefit to the principal debtor is sufficient consideration: A contract guarantee like other contracts must be supported by some consideration. It is not necessary that there must be a direct consideration between the surety and the creditor. The consideration by the principal debtor is sufficient for the surety.
4.Consent of the surety should not have been obtained by misrepresentation or concealment: A guarantee obtained by means of misrepresentation or concealment of material facts concerning the transaction is void. The position is explained by Section 142 and Section 143.