Kinds of Guarantee
Under the Indian Contract Act, 1872, particularly Sections 126–147, a contract of guarantee is an agreement to perform the promise or discharge the liability of a third person in case of their default. Guarantees can broadly be divided into different types depending on their scope and purpose. The most common types include: (1) Specific Guarantee, which is for a single debt or transaction, and once the obligation is discharged, the guarantee ends; (2) Continuing Guarantee, which extends to a series of transactions until it is revoked; and (3) Fidelity Guarantee, which ensures the honesty of a person, such as an employee towards the employer. Each of these guarantees has distinct legal implications and is vital in commercial and employment relationships.
Real-Time Example
A classic example is seen in banking transactions. Suppose a person takes a loan of ₹5,00,000 from a bank. The bank may ask for a guarantor. If the borrower defaults, the guarantor must repay the loan. This is a Specific Guarantee, as it is tied to one loan. On the other hand, if a business has an arrangement with a supplier where the guarantor assures payment for all goods supplied over a year, that is a Continuing Guarantee. A Fidelity Guarantee could be seen in an office setting, where an employer takes a guarantee bond from a security company to cover possible misconduct or fraud by its employee. These practical examples show how guarantees protect creditors and employers from potential losses.
Legal Significance
These guarantees are essential for risk management in contracts and commerce. A Specific Guarantee is simple and ends once the agreed transaction is completed, reducing uncertainty. A Continuing Guarantee is more complex, covering multiple or ongoing transactions, which makes it crucial for long-term business relations. Fidelity Guarantees are especially important in employment or agency situations where trust and honesty are critical. The Indian Contract Act ensures that all parties in a guarantee—principal debtor, creditor, and surety—understand their obligations, thereby maintaining fairness and balance. Guarantees thus strengthen commercial trust and make financial dealings smoother, more reliable, and legally secure.
Mnemonic to Remember (3 Main Kinds of Guarantee)
“SCF” = Specific, Continuing, Fidelity
- S → Specific Guarantee
- C → Continuing Guarantee
- F → Fidelity Guarantee
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