Consideration for guarantee.— Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.
What is Consideration for Guarantee?
A guarantee is valid if something is done, or a promise is made, for the benefit of the principal debtor.
If the lender (creditor) does something that helps the borrower (principal debtor), that benefit can be enough consideration for the surety (guarantor) to give the guarantee. The guarantor does not need to receive a direct benefit. Even a benefit given to the borrower is enough.
Illustration (a)
B asks A to sell goods to him on credit (pay later). A says, “I will sell only if C guarantees payment.” C agrees to guarantee payment because A is promising to give goods to B. This is valid because C’s promise is based on A giving goods to B.
Illustration (b)
A sells and delivers goods to B. Later, C asks A not to file a case against B for one year and promises that if B does not pay, C will pay the amount. A agrees to wait for one year before taking legal action. Here, A’s agreement to delay the legal action is the consideration for C’s promise. So, C’s guarantee is valid.
Illustration (c)
A sells and delivers goods to B. Later, C promises to pay the amount if B fails to pay, but A does not give anything in return for C’s promise. Since there is no consideration, C’s promise is void and not legally enforceable.
Illustration (d)
Your friend wants to take a loan from a bank. The bank asks your parent to guarantee repayment. The bank gives the loan to your friend (principal debtor). The benefit of getting the loan to your friend is enough consideration for your parent to act as guarantor.
Illustration (e)
A already sold goods to B. Later, C simply says, “If B doesn’t pay, I will pay,” without getting anything in return from A. This is not valid because C did not receive any reason or benefit for making the promise.