Guarantee obtained by misrepresentation invalid.— Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.
Guarantee obtained by misrepresentation invalid
If someone gives a guarantee because they were told something wrong or misleading by the lender (creditor), and that information was important, then the guarantee is not valid.
If the lender (creditor) lies or hides important facts, and because of that someone agrees to be a guarantor, then the guarantee will not be accepted in law.
Example 1:
R takes a loan from a bank. The bank tells S that R is financially strong and has no other loans, which is not true. Trusting this, S agrees to be R’s guarantor. Later, it is found that R already had many unpaid loans. In this case, since the bank gave wrong information, S’s guarantee is invalid.
Example 2:
A bank manager tells P that a new shop owner, A, has a very good business and will repay the loan on time. P agrees to be A’s guarantor based on this information. Later, it turns out A’s business is failing. P’s guarantee is invalid because the bank gave false information.
Example 3:
A creditor tells R that S’s house is free from all debts and is a safe security for a loan. Believing this, R gives a guarantee. Later, it is discovered that S’s house was already mortgaged. The guarantee by R is not valid because he was misled about an important fact.