Contracts of Guarantee & Bank Guarantee | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS
Contracts of Guarantee & Bank Guarantee - Notes and MCQs Contracts of Guarantee & Bank Guarantee 1. Parties to the Contract A Contract of Guarantee involves three parties: Creditor – The party to whom the guarantee is given. Principal Debtor – The party on whose behalf the guarantee is given. Surety – The party who gives the guarantee. 2. Basic Principles of Contract A contract of guarantee must satisfy basic principles of a valid contract: offer, acceptance, consideration, capacity, free consent, lawful object. 3. Consideration There must be a lawful consideration between the parties, even if the surety does not directly receive a benefit. Example: If A lends Rs.10,000 to B and C guarantees repayment, the loan itself serves as consideration. 4. Liability of the Surety The surety’s liability is co-extensive with the principal debtor, unless otherwise provided by the contract. If B owes Rs.50,000 to A and C is the sur...