Definition
A contract of guarantee is a legal agreement in which one party, known as the guarantor, agrees to fulfill the obligations of another party, known as the principal debtor, if the debtor fails to do so.
In simple terms, the guarantor agrees to provide a form of security or assurance that the principal debtor will fulfill their contractual obligations.
Scope
The scope of a contract of guarantee is typically defined by the terms of the agreement. The parties will outline the specific obligations for which the guarantee is being provided, the duration of the guarantee, and any other relevant details.
Example: A bank might sign a contract of guarantee with a borrower, agreeing to pay back the loan if the borrower defaults.
Features of Contract of Guarantee
- Secondary liability: The guarantor’s liability is secondary to that of the principal debtor. The guarantor is only obligated to fulfill the debtor’s obligations if the debtor fails to do so.
- Unilateral agreement: A contract of guarantee is a unilateral agreement in which the guarantor makes a promise to the creditor. The debtor is not a party to the agreement.
- Consideration: Like any other contract, a contract of guarantee requires consideration. The guarantor may receive compensation or some other benefit in exchange for providing the guarantee.
- Written agreement: A contract of guarantee must be in writing and signed by the guarantor. This is necessary to ensure that there is clear evidence of the agreement in case of disputes.
- Revocability: A contract of guarantee may be revoked by the guarantor at any time before the debtor defaults. Once the debtor has defaulted, the guarantor’s obligation to fulfill the debtor’s obligations becomes binding.
