Guarantee

Guarantee

1. Economic Functions

   • A promise to answer for the debt or default of another.
     • A second pocket to pay, should the first be empty.
   • Birkmyr v. Darnell
     • Two enter a shop, one to buy and the other to promise the keeper to pay in case of default.
       • This type of collateral undertaking to be liable for the default of another is a contract of guarantee.
   • It cannot be an independent liability.
     • It has to be a promise to pay on default of principal debtor
     • Cannot be a promise to be the debt instead of the principal debtor

2. Essential Features

   • Principal Debt
     • A Recoverable debt must exist.
       • As the purpose of a guarantee is to secure the payment of a debt, the existence of a recoverable debt is necessary.
       • Swan v. Bank of Scotland
         • A banker's customers overdraft was guaranteed by the defendant.
           • Such overdrafts were declared void by statute.
             • Not recoverable as there is nothing due.
     • Guarantee of a Minor's Debt.
       • Where a minor's debt has been knowingly guaranteed, the surety should be held liable as a principal debtor.
       • Kashiba v. Shripat
         • Surety Bond by minor for money borrowed for litigation that was not necessary.
         • A person can contract to guarantee the performance by a third person of a duty of imperfect obligation.
           • In such a case, the surety is not a collateral, but a principal contract.
     • Section 126
   • Consideration
     • Section 127
     • If loan is given, or goods are sold on credit on the basis of a guarantee, there is sufficient consideration.
       • If there is no consideration, there is no question of enforcing guarantee.
     • Guarantee for past debt.
       • Gulam Husain Khan v. Faiyaz Ali Khan
         • A lessee agrees to pay a sum through installments.
           • A person executes a surety bond to pay the amount in case of default.
             • Guarantee for past debt held to be sufficient consideration. Anything done for the benefit of the principal debtor.
       • SICOM v. Padmashri Mahipatrai Shah
         • Guarantee executed after release of financial assistance to the borrower.
           • Past Consideration is valid consideration.
     • Any benefit to the principal debtor is sufficient to constitute consideration.
       • Prasanjit Mahta v. United Commercial Bank
         • Sureties argued that they had provided guarantee without the request of the principal debtor, therefore they were not liable.
           • Relationship can be between creditor and surety, as opposed to one between all 3 parties, therefore request of the principal debtor is irrelevant.
   • No Misrepresentation or concealment.
     • Responsibility of the principal debtor to ensure that the surety is in possession of all relevant facts.
       • Section 142
         • Guarantee obtained through misrepresentation invalid.
       • Section 143
         • Guarantee obtained through concealment invalid.
   • Need not be written
     • Section 126
     • Guarantee can be written or oral.