‘Consideration in a Contract of Guarantee'

Introduction:

To understand the Consideration in a ‘Contract of Guarantee’, we must first understand the importance and definition of ‘Consideration’ and ‘Guarantee’ under the Indian Law.?

Consideration:

It is defined under Section 2(d) of the Indian Contract Act, 1872:

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”

When the promisee at the request to the promisor has done or abstained from doing something, does or abstains from doing something, promises to do or abstain from something then such act or abstinence is called consideration. In other words, only promises that are supported by thinking are upholdable since promises made in the absence of any responsibility are typically made hastily and without any form of thought. Making consideration a requirement in a contract imposes some form of obligation on the parties to uphold the terms of the agreement.?

Contract of Guarantee:

It is defined under Section 126 of the Indian Contract Act, 1872:

“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. —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."

A Contract of Guarantee is a contract to perform the promise, discharge the liability of a third person in case of his default. The person who gives 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 the ‘Creditor’. A Guarantee may be either oral or written. It may be expressed or implied. However, to invoke a contract of guarantee, the default must be committed by the third person on whose behalf a person stands as a surety. A contract of guarantee is always a Tripartite Agreement or has an interest of three parties, that is to say, an agreement between the Creditor and the Principal Debtor, an agreement between Creditor and the Surety, and an agreement between Principal Debtor and Surety. The Agreement by and between Creditor and the Principal Debtor and by and between the Creditor and Surety is expressed however, the agreement between Principal Debtor and Surety, if it is not expressed, is always implied. The Contract between the Surety and the Principal Debtor is that of indemnity. Principal Debtor indemnifies the Surety that if he pays the amount in case of default committed by him, he will indemnify him in case of loss.

Consideration in a Contract of Guarantee:

Generally, a contract without consideration is considered to be void and legally unenforceable. However, Section 25 of the Indian Contract Act, 1872 lays down a few exceptions where the contract without consideration is not void. Such exceptions are provided under Section 25 of the Indian Contract Act, 1872 as below:

“Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law.—An agreement made without consideration is void, unless— —An agreement made without consideration is void, unless—"

(i) it is expressed in writing and registered under the law for the time being in force for the registration of 1[documents], and is made on account of natural love and affection between parties standing in a near relation to each other; or unless

(ii) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless.

(iii) It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract. Explanation 1.—Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made. Explanation 2.—An Agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.”

In short, according to aforementioned section, an agreement made without consideration is void unless it is made either in writing and registered or for compensating someone for his voluntary services toward the promisor in the past or is made for a promise made in writing to pay a whole or a part of a debt that is barred by the law of limitation.

For the present purpose and issue, Section 25 (ii) provides that consideration is not required if it is made either in writing and registered or for compensating someone for his voluntary services toward the promisor in the past.

In view of the above, 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. In other words, something done or any promise made for the benefit of the Principal Debtor is presumed by law to be sufficient consideration in the contract of guarantee. It is not necessary that there should be some benefit to the surety himself. It is immaterial whether there is any apparent benefit to the Surety. The consideration received by the Principal Debtor is taken to be sufficient consideration for the Surety.

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