Cheat Sheet: Contract of Guarantee

1. Basic Concepts and Definitions

1.1 Definition of Contract of Guarantee

1.2 Essential Elements

• All essentials of a valid contract under Section 10 must be present
• Three parties: creditor, principal debtor, and surety
• Existence of a principal debt or obligation
• Surety's liability must be secondary and collateral
• Writing not required unless under special statutes
• Consideration to principal debtor is sufficient consideration to surety (Section 127)

1.3 Nature of Surety's Liability

2. Types of Guarantee

2.1 Specific vs Continuing Guarantee

2.2 Revocation of Continuing Guarantee

• Surety may revoke as to future transactions by notice to creditor (Section 130)
• Revocation does not affect past transactions already entered into
• Death of surety operates as revocation for future transactions (Section 131)
• Death does not affect completed transactions before notice of death

3. Rights of Surety

3.1 Rights Against Creditor

3.2 Rights Against Principal Debtor

3.3 Rights Against Co-Sureties

3.3.1 Contribution (Section 146)

• Co-sureties bound to contribute equally to payment of debt unless contract provides otherwise
• Contribution limited to co-surety's actual liability under guarantee
• If one co-surety is unable to pay, balance shared equally by remaining co-sureties

3.3.2 Release of Co-Sureties (Section 138)

• Release of one co-surety does not discharge others unless contract provides otherwise
• Remaining co-sureties continue to be liable for their shares

4. Discharge of Surety

4.1 Discharge by Conduct of Creditor

4.2 Key Discharge Provisions - Details

4.2.1 Variance in Contract (Section 133)

• Any variance made without surety's consent in terms of contract between principal debtor and creditor discharges surety
• Variance must be material
• Applies to variations that may be prejudicial to surety

4.2.2 Release of Principal Debtor (Section 134)

• Contract between creditor and principal debtor to release or not sue principal debtor discharges surety
• Mere forbearance on part of creditor does not discharge surety
• Discharge must be by contract, not mere indulgence

4.2.3 Giving Time to Principal Debtor (Section 135)

• Contract between creditor and principal debtor to give time discharges surety
• Mere forbearance without contract does not discharge (proviso to Section 135)
• Agreement must be binding contract to extend time

4.2.4 Loss of Securities (Section 141)

• If creditor loses or parts with securities without surety's consent, surety discharged to extent of value of securities lost
• Applies where surety was entitled to benefit of securities

4.3 Other Modes of Discharge

• Payment or performance by principal debtor
• Payment by surety discharges guarantee but gives surety right of subrogation
• Revocation of continuing guarantee for future transactions (Section 130)
• Death of surety for continuing guarantee as to future transactions (Section 131)
• Material concealment by creditor (Section 142)
• Misrepresentation by creditor (Section 142)
• Creditor's compounding with or giving release to co-surety (Section 138 - discharge to extent of co-surety's share)

5. Liability and Rights of Co-Sureties

5.1 Liability Inter Se

5.2 Release of One Co-Surety (Section 138)

• Release of one co-surety by contract does not discharge others
• But others discharged to extent of that co-surety's share in debt
• Remaining co-sureties liable only for their reduced proportionate shares

6. Guarantee vs Indemnity

7. Special Provisions

7.1 Liability When Principal Debtor Incompetent

• Guarantee valid even if principal debtor's liability is void due to incompetency (Section 128 explanation)
• Surety liable even when principal debtor is minor, lunatic, or otherwise incompetent
• In such cases, surety's liability becomes primary obligation

7.2 Guarantee Obtained by Misrepresentation (Section 142)

• Guarantee obtained by misrepresentation is invalid
• Guarantee obtained by creditor's silence as to material facts is invalid
• Concealment of material circumstances by creditor invalidates guarantee
• Applies only to facts within creditor's knowledge

7.3 Guarantee Obtained by Creditor's Default (Section 143)

• Guarantee obtained by keeping silence about principal debtor's default is invalid
• Creditor must disclose any existing default by principal debtor

7.4 Guarantee on Contract Modified Without Surety's Consent (Section 144)

• Where creditor agrees with surety that creditor will do certain act, and creditor fails to do it, surety discharged
• Applies where doing of act was condition of guarantee

7.5 Implied Promise by Principal Debtor (Section 145)

• Implied promise by principal debtor to indemnify surety
• Surety entitled to recover all sums rightfully paid under guarantee
• Includes principal, interest, and costs

8. Important Case Law Principles

• Surety's consent must be free and not obtained by coercion, undue influence, fraud, or misrepresentation
• Material alteration in guarantee contract without surety's consent discharges surety
• Creditor under no duty to disclose facts equally known to surety and creditor
• Surety cannot be called upon to pay unless principal debtor has made default
• Notice of revocation of continuing guarantee must reach creditor to be effective
• Surety discharged if creditor does any act inconsistent with surety's rights
• Benefit of all securities must pass to surety on payment of debt
• Co-sureties bound in same transaction are liable to contribute equally irrespective of when guarantees were given

9. Key Section References Summary