Contract of guarantee
Also called: Guarantee, Suretyship
Under Section 126 of the Contract Act, a contract to perform the promise, or discharge the liability, of a third person in case of his default. It may be oral or written.
Explained
Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person giving the guarantee is the surety, the person for whose default it is given is the principal debtor, and the person to whom it is given is the creditor. A guarantee may be either oral or written. There are three parties and, in substance, three relationships.
Consideration need not move to the surety. Under Section 127, anything done or any promise made for the benefit of the principal debtor is sufficient consideration for the guarantee, though a guarantee given without any consideration after the debt arose is void, as Illustration (c) shows. Under Section 128 the surety's liability is co-extensive with that of the principal debtor, unless the contract provides otherwise. A guarantee extending to a series of transactions is a continuing guarantee under Section 129.
The surety is protected in several ways. He is discharged by a variance in the terms of the principal contract made without his consent (Section 133), by release or discharge of the principal debtor (Section 134), by a composition, promise to give time or promise not to sue made with the principal debtor without his assent (Section 135), and by an act or omission of the creditor impairing his eventual remedy (Section 139). On payment he steps into the creditor's shoes under Section 140, and Section 145 implies a promise by the principal debtor to indemnify him for sums rightfully paid.
A guarantee differs from indemnity under Section 124: indemnity has two parties and the promisor's liability is primary, while a surety's liability is secondary and arises on default. Under Section 14(3)(b) of the Insolvency and Bankruptcy Code, the moratorium does not apply to a surety in a contract of guarantee to a corporate debtor, and Lalit Kumar Jain v. Union of India (2021) held that approval of a resolution plan does not by itself discharge a personal guarantor. Examiners test the definition, co-extensive liability and the grounds of discharge.
What the law says
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.
Defines contract of guarantee, surety, principal debtor and creditor
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.
Consideration for guarantee
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it.
Surety's liability is co-extensive
(a) A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.
(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for B’s duly accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B.
Discharge of surety by variance
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.
Illustrations
(a)B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt.
Implied promise to indemnify surety
(b) a surety in a contract of guarantee to a corporate debtor.]
[Explanation.––For the removal of doubts, it is hereby clarified that the provisions of sub-section (1) shall also apply where the surety seeks to initiate or continue any action or proceedings against the corporate debtor pursuant to a contract of guarantee.]
(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Moratorium does not apply to a surety of a corporate debtor
Example
Illustration (a) to Section 127: B requests A to sell and deliver goods to him on credit. A agrees, provided C guarantees payment of the price. C promises to guarantee payment in consideration of A's promise to deliver the goods. This is sufficient consideration for C's promise.
For the exam
- Section 126: three parties, surety, principal debtor and creditor; oral or written.
- Section 127: a benefit to the principal debtor is sufficient consideration.
- Section 128: surety's liability is co-extensive with the principal debtor's.
- Discharge: variance (133), release (134), time or composition (135), impairing remedy (139).
- IBC moratorium does not protect the surety (Section 14(3)(b) IBC).
272 questions in the Law Maker question bank use this term. Practise Contract Law questions
Judgments
Related terms
- Contract of indemnityUnder Section 124 of the Contract Act, a contract by which one party promises to save the other from loss caused by the conduct of the promisor or of any other person.
- ContractUnder Section 2(h) of the Contract Act, an agreement enforceable by law. Section 10 lists what makes an agreement a contract.
- ConsiderationAn act, abstinence or promise done or made at the desire of the promisor by the promisee or any other person, which is the price for the promise (Section 2(d) of the Contract Act).
- Corporate debtorUnder Section 3(8) of the Insolvency and Bankruptcy Code, 2016, a corporate person who owes a debt to any person.
- PledgeThe bailment of goods as security for payment of a debt or performance of a promise (Section 172 of the Contract Act). The bailor is called the pawnor and the bailee the pawnee.
Further reading
Checked 6 November 2026. Statutory text is quoted from the Bare Acts library, taken from India Code. See the full glossary.