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Characteristics Of Guarantee

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Apr 14th, 2011
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The main characteristics of guarantee are as under:-

(a) Three Parties.
There are three parties in a guarantee (1) Principal creditor (2) Principal debtor and (3) Guarantor.

(b) Primary Liability of Principal Debtor. The primary liability to pay the debt falls on the original debtor. The guarantor will pay only when the principal debtor fails to pay whole or part of the agreed debt.

(c) Guarantor has no interest in the Contract Entered. The guarantor is answerable for the loan if the debtor defaults He has no interest in the contract between the principal creditor and the principal debtor.

Capacity to Contract. The persons or firms who are able to make contracts may stand as surety for loans.

The readers may here note that:
(a) Minors and persons of unsound mind are not eligible to enter into contacts of guarantee;

(b) Married women have capacity to contract only against their separate estates. The bankers, however, should avoid accepting guarantees of married women as they are not considered a free agent after marriage;

(c) Registered Companies. The bankers should avoid accepting guarantees of registered companies as they have implied power to borrow but not normally implied power to stand as surety. The trading firm can enter into a contract of guarantee provided it is expressly authorized by its memorandum and articles of association to do so (which is very rare).

Partnership Firms. A partner has no implied power to enter into a guarantee and thus bind his co-partners unless he has a (i) definite authority of his co-partners to give guarantee or (ii) all the partners sign the guarantee deed or (iii) standing of surety is a part of the ordinary business of the firm.

A contract of guarantee is different from a contract of indemnity. In case of indemnity contract the indemnifier promises the other party to save it from loss caused to him by the conduct of the promise. The main difference between the two is that in case of indemnity there are two contracts whereas in a Contract of guarantee there is only one contract of liability. Secondly, contract of indemnity does not require written evidence.

Disclosure of Material Fact.
The banker is not under any legal duty to provide to the intended guarantor any information regarding the debtors dealing with him. But if the guarantor questions the principal creditor about the financial position of the debtor or the matters connected with the transaction, the creditor must give a straightforward reply without concealment of material facts. If the debtor with the active connivance of the creditor misrepresent the facts to the guarantor the guarantee will be considered as invalid. Even the guarantee which the creditor has obtained by means of keeping silent as to material circumstances is also invalid. The creditor should however be very cautious in providing the customer’s financial position to the guarantor He should follow the motto, ‘’Least said, soonest mended’’.

Joint and Several Guarantees
If more than one person co-operate in giving of a guarantee, the guarantors will be answerable for the debt depending on the agreement: (1) Jointly; (2) separately; (3) jointly and separately both.

(a) Joint Guarantors. In case of a joint guarantee each guarantor is personally liable for the payment of the whole amount but the principal creditor is to sue all the guarantors together If the action is taken against one guarantor the other guarantors w be discharged from all liability as the creditor exhausts his one cause of action In case of a death or bankruptcy of a joint guarantor his estate is discharged from all obligations.

(b) Separate or Several Guarantors. If the guarantee is separate o several, the creditor can sue each of the guarantor for the whole liability separate In case of death or bankruptcy of a several guarantor, his estate is not released from liability for claims arising before the death or bankruptcy.

(c) Joint and Several Guarantors. When the guarantee is joint and several the creditors can sue the guarantors either jointly or separately until the debt s fully recovered. The guarantor who dies or is declared bankrupt remains liable for the advances as in (b) above.

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