“Contract of guarantee”, “surety”, “principal debtor” and “creditor”.— A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
What is Contract of Guarantee?
A contract of guarantee is an agreement where one person promises to take responsibility if another person fails to pay a debt or fulfill a promise. There are three important parties in a contract of guarantee:
- Surety – The person who gives the guarantee. This person promises to pay or fulfil the obligation if the borrower fails.
- Principal Debtor – The person who has to pay the debt or perform the duty is called the principal debtor. If this person does not pay or perform the promise, the surety becomes responsible.
- Creditor – The person who gives money or The person to whom the guarantee is given, is called the creditor.
In simple terms, the surety acts as a backup for the creditor if the principal debtor defaults.
Another important point is that a contract of guarantee can be made either orally or in writing. Unlike many other contracts, the law does not require it to be in written form.
Example of a Contract of Guarantee
Example 1 – Bank Loan Guarantee
A takes a loan of ₹5,00,000 from a bank. The bank asks for a guarantor before approving the loan. A’s friend B agrees to become the guarantor.
- A → Principal Debtor (the person who took the loan)
- B → Surety (the person who gives the guarantee)
- Bank → Creditor (the person who gives the loan)
If A fails to pay the loan, the bank can legally ask B (the surety) to pay the amount.
Example 2 – Guarantee for House Rent
A wants to rent a flat, but the landlord asks for a guarantor. Her brother agrees to guarantee the rent payments.
- A → Principal Debtor
- Brother → Surety
- Landlord → Creditor
If A fails to pay the rent, the landlord can recover the amount from her brother.