A contract of guarantee is a type of contract in which one party, known as the surety or guarantor, promises to be responsible for the debts, obligations, or liabilities of another party, known as the principal debtor, if the principal debtor fails to fulfill their contractual or legal obligations.
Characteristics of contract guarantee
- It consists of three parties namely the guarantor, creditor and the principal debtor.
- The guarantor’s liability is secondary or collateral
- The guarantor has no interest in the transaction between the parties.
- The contact must be evidenced by some note or memorandum.
Major differences between indemnity and guarantee:
- In the contract of indemnity, one party makes a promise to the other that he will compensate for any loss occurred to the other party because of the act of the promisor or any other person. In the contract of guarantee, one party makes a promise to the other party that he will perform the obligation or pay for the liability, in the case of default by a third party.
- In indemnity, there are two parties, indemnifier and indemnified but in the contract of guarantee, there are three parties i.e. debtor, creditor, and surety.
- The liability of the indemnifier in the contract of indemnity is primary whereas if we talk about guarantee the liability of the surety is secondary because the primary liability is of the debtor.
- The purpose of the contract of indemnity is to save the other party from suffering loss. However, in the case of a contract of guarantee, the aim is to assure the creditor that either the contract will be performed, or liability will be discharged.
- In the contract of indemnity, the liability arises when the contingency occurs while in the contract of guarantee, the liability already exists.
Extent of nature and surety
In a contract of guarantee, the surety (guarantor) provides a secondary or contingent guarantee for the performance or payment of the principal debtor. The surety’s liability is limited to the extent specified in the contract.
A surety is an individual or entity that provides the guarantee in a contract of guarantee. The surety’s role is to ensure the fulfillment of the principal debtor’s obligations and may be called upon if the principal debtor defaults.