Guarantee Agreement (Drafting)

A Guaranty Agreement is a contract by which a guarantor agrees to settle the debts of another person where the person is unable to pay their debts. In other words, the guarantor assumes liability for the debts owed by the debtor in the event the debtor fails to pay. The guarantor is a party that undertakes to satisfy a debtor's debts in the case of default. The guarantor may, depending on the nature of the contract deposit a tangible asset (such as, land, building vehicle, etc) as collateral, which will be sold and used for the satisfaction of the debts in the event that the guarantor does not pay the entire debts he has guaranteed.

A guarantee may be either “oral” or “written“. Just like any other contract, it should also fulfill all the essentials of valid contract. As stated already, three parties are involved in a contract of guarantee. As condition for a Residential or Commercial Lease Agreements, a guarantor may be required to guarantee the payment of the tenant's debts in the event of default. This means that if a tenant fails to pay their rent or violates the provision of a lease agreement, the guarantor will assume responsibility for the payment of the tenant's debts.. In other words, the guarantor assumes liability for the debts owed by the debtor in the event the debtor fails to pay.

 

This document can be used in the following contexts:

 

a.In lease arrangements. As condition for a Residential or Commercial Lease Agreements, a guarantor may be required to guarantee the payment of the tenant's debts in the event of default. This means that if a tenant fails to pay their rent or violates the provision of a lease agreement, the guarantor will assume responsibility for the payment of the tenant's debts.

b.In employment agreements. As a condition for employment, some employers may require their employees to provide guarantors. The guarantor guarantees the payment of any debt owed by the employee, or the guarantor may pay the cost for any damage done by the employee at the workplace.

c.In loan or security transactions. In loan contracts or mortgage transactions, the loan guarantor guarantees the payment of loan advanced to the borrower, interests, or other payment in the event of the borrower's default.

Sec. 126 of the Indian ContractAct 1872, which deals with the contract of guarantee, has defined it as “A contract to perform the promise, or discharge the liability of a third person in case of his defaults”.

It involves three parties namely,

1.Surety, who gives the guarantee.

2.Principal Debtor, in respect of whose default the guarantee is given.

3.Creditor, to whom the guarantee is given.

Example: A supplies goods to B on C’s guaranteeing payment by B to A. This means that if B does not pay, C would be liable to pay. This is a “Contract of Guarantee”.

 

Features of Guarantee Agreement:

 

1.The contract may be either oral or written: According to Section 126, a guarantee may be either oral or written. In this regard, the position in India is different from that in England. According to English Law, for a valid contract of guarantee, it is necessary that it should be in written form and signed by the parties.

 

2.There should be a principal debt: A contract of guarantee presumes a principal debt or an obligation to be discharge by the principal debtor. The surety undertakes to be liable only if the principal debtor fails to discharge his obligation. If no such liability exists, there can be no contract of guarantee. Thus, where the debt, which is sought to be guaranteed, is already time-barred or void, the surety is not liable.


 

3.Benefit to the principal debtor is sufficient consideration: A contract guarantee like other contracts must be supported by some consideration. It is not necessary that there must be a direct consideration between the surety and the creditor. The consideration by the principal debtor is sufficient for the surety.

 

4.Consent of the surety should not have been obtained by misrepresentation or concealment: A guarantee obtained by means of misrepresentation or concealment of material facts concerning the transaction is void. The position is explained by Section 142 and Section 143.

Documents


Passport Photo

Passport photo of all parties.


PAN Card

PAN card of all parties.


Aadhar Card

Aadhar card of all parties.


Utility Bill

Utility bill of Electricity or Telephone.


Address Proof

Valid Address Proof of all the parties.


Licence

Valid Driving Licence of all the parties.


Terms and Conditions

Terms and Conditions between the parties.


Other Documents

Other documents will be intimated through e-mail.

FAQ

A Guaranty Agreement is a contract by which a guarantor agrees to settle the debts of some another person when the person is unable to pay their debts. Basically, the guarantor assumes liability for the debts owed by the debtor in case the debtor fails to pay.

A guarantor guarantees to pay a borrower's debt in the event that the borrower defaults on a loan obligation. The guarantor guarantees a loan by pledging his or her assets as collateral. A guarantor alternatively describes someone who verifies the identity of an individual attempting to land a job or secure a passport.

It must have all the essentials of a valid contract such as offer and acceptance, intention to create a legal relationship, capacity to contract, genuine and free consent, lawful object, lawful consideration, certainty and possibility of performance and legal formalities.

In the event that your guarantor is able to technically pay, but decides not to when they have been called upon to do so, then they are breaking the contract that they signed to with the lender and borrower.

An offer to guarantee must be accepted, either by express or implied acceptance. If a surety consent to a guarantee has been procured by fraud by the person to whom it is given then there is no binding contract.

The main purpose of a contract of guarantee involves enabling a person to get a loan and goods on credit or on employment. Repayment of loan, price of goods sold on credit and the good conduct or honesty of a person employed in a particular office are the purposes for which a guarantee can be given.

The simplest way to get out of being someone's guarantor is for the main borrower to pay off their loan and essentially, terminate the agreement.