Types of Guarantee in Contract Law
Since a warranty contract is a warranty contract, there are also rules of interpretation developed by the courts that grant special protection to guarantors. For example, courts invariably hold that while certain legal or equitable rights normally enjoyed by a guarantor should be excluded from the warranty contract, very clear words should be used (Trafalgar House Construction v General Surety & Guarantee [1996] AC 199). In case of ambiguous wording, the “contra proferentem” rule can be used for interpretation in favour of the guarantor and vis-à-vis the bank. The permanent guarantee is one of those guarantees given for a number of transactions. It refers to present and future transactions. Therefore, this type of guarantee is not limited to a single transaction, but covers a range of current to future transactions. Holme v Brunskill (1878) 3 QBD 495 is at the origin of the rule that variations in the creditor/debtor agreement relieve the guarantor; A change in the agreement may result in a change in risk, whereby the guarantor has never agreed to guarantee the new risk. The cotton LJ judgment explains this reasoning: “If there is an agreement between the contracting entities with regard to the secured contract, the guarantor should be consulted, and only if he has not accepted the amendment. he will be released. In North Shore v. Anstead Holdings (see above), it was concluded that the amendments to the underlying cartel are objective facts; The court ruled that an amendment had been made even though both parties to the agreement had proved otherwise. The main function of a guarantee contract is to ensure the settlement of the debt assumed by the principal debtor. If such debts do not exist, there is nothing left to guarantee for the guarantor.
In cases where the debt is time-barred or void, there is therefore no liability on the part of the guarantor. The House of Lords in the Scottish case of Swan vs. Bank of Scotland (1836) ruled that if there is no principal debt, there can be no valid guarantee. A guarantor is not bound by his contract if it has been caused by a misrepresentation by the creditor (bank) of a fact that he knows and is essential to the guarantor, whether or not the misrepresentation is fraudulent (London General Omnibus Co v. Holloway [1912] 2 KB 720). K gave his house to S in a ten-year lease with a fixed rent. P guaranteed that S would fulfil its obligations. After seven years, S stopped paying the lease rent.
“K sued him for paying the rent. P then terminated its warranty for the remaining three years. P would not be able to withdraw the guarantee, since the ten-year lease represents an entire indivisible consideration and cannot be described as a series of transactions and therefore does not constitute a permanent guarantee. Suppose Mr. Shah makes a promise to Mr. Joshi that if he executes Mr. Rao 5 lakh rupees for a period of 2 years at an interest rate of 5% and Mr. Rao is in default, Mr.
Shah will repay the debt. This creates a guarantee agreement between Mr. Shah (guarantor) and Mr. Joshi (the creditor). Here, Mr. Rao is the main debtor. The whole process consists of two different contracts: the first between the main debtor and the creditor and the second between the same creditor and the guarantor. Contracts are independent of each other and liability must be clearly defined, with any subsequent extension or reduction based on this original definition. In fact, the courts have even been flexible in interpreting the 1677 Act. Golden Ocean Group v Salgaocar Mining Industries PVT [2012] EWCA Civ 265 confirmed that a number of documents, in this case a chain of emails, can be interpreted together as a valid guarantee. A guarantees B an amount of Rs.
10,000 that C will have to pay for all goods purchased by him over the next three months. B sells goods worth Rs. 6,000 C. A announces the revocation, C is responsible for Rs. 6,000. If the goods are sold to C after the cancellation policy, A is not responsible for this. (i) Creditor – The person to whom the security is granted in the contract of guarantee. (ii) Principal Debtor – The person for whose delay the security is given. iii) Warranty – The person giving the guarantee is a guarantor. In addition, the contract remains valid regardless of the incapacity of the principal debtor. But there will be no contract if the guarantor is incompetent. No particular phraseology is required to provide a guarantee.
What distinguishes a guarantee from insurance is not the difference between the words “insurance” and “guarantee”, but the content of the contract concluded by the parties. [11] If a contract of guarantee has been substantially modified by an agreement between the creditor and the principal debtor, the guarantor is released from liability. Indeed, a guarantor is only responsible for what he has done in the guarantee, and any modification made without the consent of the guarantor will relieve the guarantor in terms of transactions after the change. The contract of guarantee was defined in accordance with section 126 of the Indian Contracts Act, 1872, that is: “A contract of guarantee is a contract for the performance of the promise or for the performance of the liability of a third party in the event of its default. The person giving the security is called the “guarantor”, the person for whom the security is granted is called the “principal debtor”, and the person to whom the security is granted is called the “creditor”. .