In brief, usually a guarantee is the binding commitment of one person to fulfil the financial obligations of another, if that other person fails to do so. In other cases, the word ‘guarantee’ is used loosely to mean an assurance.
Thus, when a contractor says that he guarantees your house renovations will be completed within six months or a dealer guarantees that the car battery you are buying will last one year, it is in essence an assurance or in law, merely a warranty because there is no undertaking of the obligations or a third party.
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Thus we continue our discussion of a guarantee as the world is used to mean agreeing to fulfil the obligations of a third party, usually in terms of financial obligation but not necessarily so. Fulfilling the obligation however is one thing but there are situations where even though there is a guarantee the person who has received the guarantee may not get its benefit.
This is because whilst on the one hand a guarantee need not necessarily be in writing it must nevertheless fulfill the prescribed conditions and criteria. If not then the guarantee will not be enforceable and the person to whom it is given will not receive any benefit.
Of Little Use?
What kinds of situations would result in this happening it may be asked? Quite apart from the technicalities that may defeat a contract of guarantee one single but wide area which could result in a guarantee being worthless is if the principle contract which encompasses the original obligation is void and therefore unenforceable.
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Under the Contracts Act an agreement is void if there is no consideration or one or more objects is unlawful. The word “unlawful” encompasses a wide area and in particular what is forbidden by law, if permitted would defeat the law, is fraudulent, and implies injury to person or property and finally anything that is regarded as immoral or opposed to public policy.
Similarly an agreement in restraint of marriage or whereby anybody is restrained from exercising a lawful profession trade or business of any kind is to that extent void. So too is an agreement that seeks to restrict any party from enforcing his rights by the usual legal proceedings is to that extent void.
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Finally in this category of agreements the meaning of which is not certain or capable of being made certain are void as are agreements made by wager which refers to a payment being made on the outcome of an uncertain event. There are of course other situations where an agreement is void but more of this later.
In most cases a Guarantee would not be subject to these problems because the primary obligations as contained in the principle agreement would be a valid and enforceable obligation and the rights against the Guarantor would follow as a matter of course. But then there are always exceptions in life.
An Alternative:
How does one then make sure that an assurance given by a third party can be enforced and such third party held on his word irrespective of the validity of the primary obligation and transaction?
One way out would be to ask for an Indemnity instead of a Guarantee. Section 77 of the Contracts Act provides that “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.”
In many cases where such an assurance is required such as bank loans and hire purchase transactions, it is common to make the third party sign a guarantee and indemnity as well.
If therefore you are in such situation and are called upon to sign a bundle of documents to ensure performance of obligations by a third party make sure you know and find out what exactly you are signing and what you are committing yourself to otherwise.
On a different note it would also be useful to know that a Guarantee may be created verbally and a written document is not an absolute pre-requisite. However, there could be numerous disputes as to what was agreed to but that really is a matter of evidence.
But if whatever is agreed to even verbally can be proved by cogent and reliable evidence and there no disputes as to facts as a matter of finding of fact by the Court, the obligations created even though verbal, can be enforced.
On the other hand the mere fact that the Guarantee is written contained in a beautifully printed document, duly attested and stamped does not make it an ironclad assurance if there important elements missing.
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From time to time it happens that the persons who have signed a guarantee may be able to avoid liability to pay because of some defects and inadequacies. On other occasions persons may feel unfairly called upon to make payment when not sufficient efforts have been made to obtain payment from the Principal Debtor.
Depending on the situation, a person may find these principles as fair or not. But these are the provisions that the law makes whether the individual stands to gain or to lose. It all depends on the provisions of the law that are utilised, though one may not always be acting with a full measure of voluntariness.