Test: Contract of Guarantee - CLAT PG MCQ

In a contract of guarantee, the parties involved are the Principal Debtor, the Creditor, and the Surety. The term "Guarantor" is often used interchangeably with "Surety," but in the context of this question, it is not a distinct role in the structure of the contract.

Independent liability differs from a guarantee in that it does not rely on the default of the principal debtor. In a guarantee, the surety’s obligation is conditional upon the debtor’s failure, whereas independent liability stands on its own regardless of the debtor’s actions.

A guarantee for a void debt can be enforceable when it involves company directors guaranteeing a loan for the company that is void due to being ultra vires (beyond the powers of the company). This indicates that the directors can still be held liable despite the contract's void nature.

Upon the death of the surety, the continuing guarantee is revoked for any future transactions. However, the estate of the deceased surety remains liable for transactions that occurred prior to their death, ensuring that creditors can still recover debts that existed at that time.

A surety is discharged from their obligations if the creditor enters into a contract that releases the principal debtor from liability. This means that the surety’s commitment is nullified if the creditor makes a deal that absolves the principal debtor of their debt.

According to Section 127, anything done or promised for the benefit of the principal debtor can be deemed sufficient consideration for the surety's commitment. This highlights that the surety’s obligation is tied to the principal debtor's benefits, which validates the guarantee.

The primary difference is that indemnity involves two parties (the indemnifier and the indemnity holder) and pertains to compensating for specific losses, while a guarantee involves three parties (the principal debtor, the surety, and the creditor) and is intended to secure the creditor’s interests against default by the principal debtor.

A continuing guarantee is a type of guarantee that remains in effect for a series of transactions. The surety's liability continues until the guarantee is explicitly revoked. This means that the surety can be responsible for multiple instances of default by the principal debtor, ensuring ongoing protection for the creditor.

A continuing guarantee can be revoked by the surety simply by notifying the creditor. This revocation applies only to future transactions, meaning the surety remains liable for any transactions that occurred before the notice of revocation.

A surety has the right to claim set-off or counterclaim against the creditor if the principal debtor has any claims against the creditor. This right allows the surety to use any claims the principal debtor has as a defense in case of liability.

The primary function of a contract of guarantee is to facilitate individuals in obtaining loans, goods on credit, or securing employment. When someone provides a guarantee, they assure the creditor that they will be responsible if the principal debtor fails to meet their obligations, thereby providing a safety net for the transaction.

A Specific Guarantee covers a single debt or specific transaction. The surety's liability ends once the guaranteed debt is discharged or the promise is fulfilled. This contrasts with other types of guarantees, such as Continuing Guarantees, which cover multiple transactions.

A surety is discharged from their obligations if the creditor changes the terms of the contract without the surety’s consent. This action can affect the surety’s rights, and any substantial alteration can relieve the surety from liability concerning future transactions.

A contract of guarantee does not fall under the category of contracts of uberrimae fidei, which require absolute good faith. Thus, it is not mandatory for either the principal debtor or the creditor to disclose all material facts to the surety.

Co-sureties are generally liable to contribute equally towards the debt they are guaranteeing unless there is an agreement specifying different shares. This means that if multiple co-sureties guarantee the same debt, they share the financial responsibility equally among themselves.

When a surety guarantees a minor's debt, they assume the role of a principal debtor. This means that the surety becomes liable for the debt as if they were the original borrower, which illustrates the legal complexities surrounding contracts involving minors.

While it is necessary for the other parties to have a clear intention and the terms to be specific, the surety does not need to have a personal benefit from the guarantee. The consideration for the surety can be based on benefits received by the principal debtor instead.

A counter guarantee serves to protect the original guarantor. When the original guarantor has to fulfill their obligation, the counter guarantee allows them to seek reimbursement from another party, effectively providing a safety net for the surety.

If the creditor loses or disposes of security without the surety's consent, the surety is released from liability to the extent of the security's value. This protects the surety from being liable for more than what was secured originally, ensuring fairness in the agreement.

After a surety pays off the debt of the principal debtor, they acquire the right to subrogation, meaning they can step into the shoes of the creditor and exercise all the rights that the creditor had against the principal debtor. This allows the surety to recover the amount paid from the principal debtor.