A Contract to perform the promise, or discharge the liability, of a third person in case of his default is

called Contract of Guarantee. A guarantee may be either oral or written.

 The person who gives the guarantee is called the Surety

 The person on whose default the guarantee is given is called the Principal Debtor
 The person to whom the guarantee is given is called the Creditor

 There are three parties in every Contract of Guarantee

 The liability arises right from the beginning. The surety becomes liable when the principle debtor
commits default in meeting the liability.
 Surety has the right to sue the third party (Principle Debtor) directly. The Law puts him in the
position of Creditor. Where as in Contracts of Indemnity, the Indemnifier cannot sue the third
party in his name. He has to sue in the name of the Indemnity-holder or after obtaining the rights
from him.
 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. The guarantor need not personally derive
any benefit from the guarantee.
 The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
provided by the contract.
 The creditor can straightway proceed against the guarantor without first proceeding against the
principal debtor.
 The liability of the surety can never be greater than that of the principal debtor. The surety can
however may restrict his liability to part of the Principal debtor's liability by contract.
 Surety's liability is distinct and separate

Continuing guarantee:L
A Guarantee which extends to a series of transactions is called a continuing guarantee.

 A continuing guarantee may at any time be revoked by the surety, as to future transactions, by
notice to the creditor.
 Any variance, made without the surety's consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to transactions subsequent to the
variance.

Rights of suerty

As against the Creditor

According to the Indian Contract Act, 1872,

 Sec. 133 - The creditor shall not vary terms of the contract between the creditor and the principal
debtor without the surety's consent. Any such variance discharges the surety as to transactions
subsequent to the variance. However if the variance is for the benefit of the surety or does not
 prejudice him or is of an insignificant character, it may not have the effect of discharging the
surety.
 Sec. 134 - The creditor should not release the principal debtor from his liability under the
contract. The effect of the discharge of the principal debtor is to discharge the surety as well.
Any act or omission on the part of the creditor which in law has the effect of discharging the
principal debtor puts an end to the liability of the surety.
 Sec. 135 - If an agreement is made between the Creditor and Principal debtor for compounding
the later's liability or promising him extension of time for carrying out the obligations or promising
not to sure, discharges the surety unless he assents to such a contract.
 Sec. 139 - The surety is discharged if the creditor impairs the surety's eventual remedy against
the principal debtor.
As against the Principal Debtor
 Right of subrogation - The surety on payment of the debt acquires a right of subrogation.
 Sec 140 - The surety cannot claim the right of subrogation to the creditor's securities if he has
signed up as a security for a part of the agreement and security has been held by the creditor for
the whole debt.

 Sec 142 - Guarantee obtained by misrepresentation invalid

 Sec 143 - Guarantee obtained by concealment invalid
 Sec 145 - Co-sureties liable to contribute equally

Section 126 in The Indian Contract Act, 1872

126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’—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."
What is a ‘suretyship’?
A suretyship involves three parties being the creditor, the principal debtor and yourself, as the surety. It is
a contract between the creditor and the surety, in his personal capacity, in terms of which the surety
undertakes to fulfil the obligations due to the creditor by the principal debtor, in the event that the principal
debtor fails in whole or in part to fulfil the obligations himself. In essence, the surety agrees to step into
the principal debtor’s shoes, if that debtor can no longer fill those shoes financially, so to speak, vis-à-vis
his creditor.
At what point does a debtor’s debt become enforceable as against the surety?
 A suretyship agreement cannot exist without a principal obligation. Thus the creditor can only claim
the performance of the obligation from the surety if the principal debtor fails to perform in terms of the
principal obligation.
 The intention of the parties must be to conclude a suretyship agreement.
 The General Law Amendment Act 50 of 1956 provides that a valid suretyship agreement must be
embodied in a written document.
 The parties must agree on the extent to which the surety accepts liability and the period for which the
surety can be held liable.
In practice most suretyship agreements make provision for the surety to bind himself as surety and co-
principal debtor. In such instances, the surety’s obligations are equivalent to those of the principal debtor
and he is jointly and severally liable to the creditor. A consequence of signing as both surety and co-
principal debtor results in the renunciation of the benefits of excussion. This means that the creditor need
not seek to recover the debt from the principal debtor first before enforcing the agreement against the
surety, a particularly onerous arrangement for the surety / co-principal debtor.
What happens when you sign a suretyship agreement without the intention of binding yourself as a
surety?
Although the formulated intention to enter into a suretyship agreement is a requirement of a valid
suretyship agreement, general contract law principles dictate that it is presumed that anyone who signs a
document has the intention of entering into the agreement contained within that document (the caveat
subscriptor principle). Therefore the court in the case of Langeveldt v Union Finance Holdings (Pty)
Ltd 2007 (4) SA 572 (W), discussed that a surety seeking to be released from liability in terms of a
suretyship agreement will have to bear the onus of convincing the court that he had no intention of
entering the suretyship agreement in issue.
In a similar vein, the Supreme Court of Appeal held in the recent judgment of Slip Knot Investments 777
(Pty) Ltd v Du Toit 2011 (4) SA 72 (SCA), that a person who was induced to sign a suretyship agreement
by fraud or by the misrepresentation of a third party, and who is unaware of the nature of the document
he is signing, will nevertheless be bound to the agreement if the lender is innocent and unaware of the
surety’s mistake. The lender would in such a case be entitled to rely on the appearance of liability created
by the surety’s signature, and the surety would not be entitled to rely on his unilateral mistake to escape
liability under the agreement.
In terms of this SCA judgment, therefore, where a surety has signed a suretyship agreement with a
creditor based on the fraud or misrepresentation of a third party, which is unbeknown to the creditor, the
creditor has a valid and enforceable suretyship agreement.
What happens when a suretyship clause is included in an agreement that is yet to be signed?
Should you not wish to bind yourself as a surety and co-principal debtor, such intention needs to be
clearly stated and communicated to the other parties, ahead of signature. When signing a contract on
behalf of a juristic person, which contains a suretyship clause, it is not sufficient to merely draw a line
through the clause and then sign the contract. To reinforce your intention of not binding yourself as surety
you should initial next to your amendment of the contract and ensure that the creditor acknowledges this
by way similarly initialling that change. This is particularly important where contracts include a “whole
agreement” clause that requires any edits to be reduced to writing and acknowledged by all parties.
Whilst it is important that the minds of the parties to an agreement meet, a court will place emphasis on
the fact that you may have lead the other party to believe that you were intending to bind yourself as
surety and co-principal debtor, if you have not explicitly indicated otherwise in the agreement.
Should you ever find yourself in a situation in which you are called upon to stand as surety for another
party, make sure you satisfy yourself as to the identity of the parties concerned, the nature and extent of
the debt and the period for which you can be held liable. In this regard, it is worth noting that “continuing
covering suretyship” clauses are often included in credit agreements, in relation to the surety. These can
potentially bind the surety in perpetuity for the debts of the principal debtor, so binding the surety for debts
that may become due any time in the future, even if that surety is no longer involved in any way with the
debtor. A practical example is where an MD of a company binds himself as surety in perpetuity for that
company’s debts in relation to a particular supplier or service provider in the face of a suretyship in
perpetuity. In such an instance, that surety can successfully be held to a suretyship agreement, even after
he leaves the employ of the said company – a most unpleasant surprise that potentially lies in waiting for
the unsuspecting surety, long after signature of the initial suretyship agreement.