A "Guarantee" means a contract of a promise to be responsible for something, to perform the promise or to discharge the liability of a third person, in case of his default. In other words, guarantee means a promise to answer debt, default or miscarriage of another. Such a contract involves three parties.
- Creditor: The person, to whom the guarantee is given, is called the creditor.
- Surety: The person, who gives the guarantee, is called the surety.
- Principal Debtor: The person, in respect of whose default is given the guarantee, is called the principal debtor.
A contract relating to guarantee shall be deemed to have been concluded if it provides that, if any person defaults in the repayment of the loan obtained by him or fulfillment of the obligation accepted by him, It will be repaid of fulfilled by a third person. [Sec. 15(1) of NCA 2056]
A contract of guarantee is a contract to perform the promise to discharge the liability of a third person in case of his default. [Sec. 126 of ICA 1872]
On the basis of definitions given above, it can be said that a contract of a guarantee is that contract by which one party promises to discharge the liability or to repay the loan on behalf of the third party if the third party is unable to repay the loan or to discharge the liability promised by him. Example, If 'A' advances a loan of Rs. 5,000/- to 'B' and 'C' promises to 'A' that if 'B' does not repay the loan, 'C' will pay. Here, this is a contract of guarantee.
In Mahabir Shumsher vs. Loyds Bank, the court held that 'A contract of guarantee is a tripartite Agreement which contemplates the principal debtor, the creditor and the surety.