A contract of Guarantee is to discharge liability of a third person in case of his default. The person who gives guarantee is the “surety”. The liability of surety arises only when there is a default of the principal debtor. So, liability of the surety is Secondary.
Primary liability lies with the principal debtor, the person in respect of whose default the guarantee is given is called “Principal debtors and person to whom the guarantee is given is called “Principal creditor”. In order to invoke guarantee there must be default, by the third person on whose behalf a person stands surety.
If X lends money to Y and Z promises X that if Y fails to pay the money he will pay the money. This is a contract of guarantee. A contract of guarantee may be either oral or written.
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A contract of guarantee has three parties creditor, principal debtor and the surety.
(1) An agreement between creditor and principal debtor.
(2) Agreement between surety and creditor.
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(3) Agreement between surety and principal debtor. In contract of guarantee actual beneficiary is the principal debtor.
Contract Act also discusses the issue of Bailment. The person delivering the goods is the Bailor. The person whom it is delivered is called Bailee. The transaction is Bailment.