Guarantee

Guarantee

Economic Functions
1. A promise to answer for the debt or default of another.
  1. A second pocket to pay, should the first be empty.
2. Birkmyr v. Darnell
  1. Two enter a shop, one to buy and the other to promise the keeper to pay in case of default.
    1. This type of collateral undertaking to be liable for the default of another is a contract of guarantee.
3. It cannot be an independent liability.
  1. It has to be a promise to pay on default of principal debtor
  2. Cannot be a promise to be the debt instead of the principal debtor
Essential Features
1. Principal Debt
  1. A Recoverable debt must exist.
    1. As the purpose of a guarantee is to secure the payment of a debt, the existence of a recoverable debt is necessary.
    2. Swan v. Bank of Scotland
      1. A banker's customers overdraft was guaranteed by the defendant.
        Such overdrafts were declared void by statute.
        Not recoverable as there is nothing due.
  2. Guarantee of a Minor's Debt.
    1. Where a minor's debt has been knowingly guaranteed, the surety should be held liable as a principal debtor.
    2. Kashiba v. Shripat
      1. Surety Bond by minor for money borrowed for litigation that was not necessary.
      2. A person can contract to guarantee the performance by a third person of a duty of imperfect obligation.
        In such a case, the surety is not a collateral, but a principal contract.
  3. Section 126
2. Consideration
  1. Section 127
  2. If loan is given, or goods are sold on credit on the basis of a guarantee, there is sufficient consideration.
    1. If there is no consideration, there is no question of enforcing guarantee.
  3. Guarantee for past debt.
    1. Gulam Husain Khan v. Faiyaz Ali Khan
      1. A lessee agrees to pay a sum through installments.
        A person executes a surety bond to pay the amount in case of default.
        Guarantee for past debt held to be sufficient consideration. Anything done for the benefit of the principal debtor.
    2. SICOM v. Padmashri Mahipatrai Shah
      1. Guarantee executed after release of financial assistance to the borrower.
        Past Consideration is valid consideration.
  4. Any benefit to the principal debtor is sufficient to constitute consideration.
    1. Prasanjit Mahta v. United Commercial Bank
      1. Sureties argued that they had provided guarantee without the request of the principal debtor, therefore they were not liable.
        Relationship can be between creditor and surety, as opposed to one between all 3 parties, therefore request of the principal debtor is irrelevant.
3. No Misrepresentation or concealment.
  1. Responsibility of the principal debtor to ensure that the surety is in possession of all relevant facts.
    1. Section 142
      1. Guarantee obtained through misrepresentation invalid.
    2. Section 143
      1. Guarantee obtained through concealment invalid.
4. Need not be written
  1. Section 126
  2. Guarantee can be written or oral.

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