Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Guarantee under Section 126 and Its Parties

Updated 10 October 2026 · Fact-checked

A contract of guarantee, under Section 126 of the Indian Contract Act, 1872, is a contract to perform the promise or discharge the liability of a third person if that person defaults. It has three parties: surety, principal debtor and creditor. To solve questions, identify the three parties and check the essentials.

Understand Contract of Guarantee and Parties

Think of a bank lending ₹5,00,000 to Ravi's shop. The bank is not sure Ravi will repay. So Ravi's uncle Mohan tells the bank, "If Ravi does not pay, I will." That promise by Mohan is a contract of guarantee.

Section 126 defines it as a contract to perform the promise, or discharge the liability, of a third person in case of his default. So a guarantee always involves a third person whose debt or duty is being backed.

There are three parties. The surety is the person who gives the guarantee (Mohan). The principal debtor is the person whose default the guarantee covers (Ravi). The creditor is the person to whom the guarantee is given (the bank). The contract of guarantee may be oral or written.

In fact, a guarantee sits on top of two other relationships. Between creditor and principal debtor, there is the main loan or contract. Between creditor and surety, there is the guarantee. The surety's liability is secondary: it arises only when the principal debtor defaults. The surety also usually has an implied request from the principal debtor to give the guarantee.

A guarantee is a contract, so it needs all the essentials of a valid contract, plus a few features of its own. Most exam questions test whether you can name the parties, spot the essentials, or tell guarantee apart from indemnity.

Key formulas to remember

Definition of guarantee (Section 126): Guarantee = contract to perform the promise or discharge the liability of a third person on his default; The word 'third person' is the key. Without a principal debtor, there is no guarantee.
Surety: Surety = person who gives the guarantee; His liability is secondary and arises on the default of the principal debtor.
Principal debtor: Principal debtor = person in respect of whose default the guarantee is given; He owes the primary liability to the creditor.
Creditor: Creditor = person to whom the guarantee is given; He can be the lender, seller or employer, depending on the facts.
Form of guarantee: Guarantee may be either oral or written; Writing is not compulsory under the Act.
Number of contracts: Three parties and three relationships: creditor-debtor, creditor-surety, surety-debtor; There is usually a contract between each pair, though the debtor-surety one is often implied.
Extent of surety's liability: Surety's liability is co-extensive with that of the principal debtor, unless the contract provides otherwise; This is the rule in Section 128. If the debtor owes ₹2,00,000, the surety is ordinarily liable for that amount, up to any limit agreed.
Consideration in guarantee: Anything done or promised for the principal debtor is sufficient consideration for the surety; The surety need not receive any benefit himself. This is the rule in Section 127.

How to solve Contract of Guarantee and Parties questions

Use this method for any question on contract of guarantee, whether it is a definition, an essentials question or a case-based MCQ.

1Read the facts and find the promise: who promises to answer for whose debt or duty?
2Check for a third person. If someone promises to answer for another's default, it points to guarantee.
3Label the three parties: surety (gives the promise), principal debtor (whose default is covered), creditor (receives the promise).
4Check the essentials: valid contract, three parties, existing or promised liability, consent of all, no misrepresentation or concealment of material facts.
5Check consideration: benefit to the principal debtor is enough for the surety's promise.
6Check form: oral guarantee is valid. Do not reject an option just because it is not written.
7If the option mentions indemnity, compare: indemnity has two parties and primary liability; guarantee has three parties and secondary liability.
8Choose the option that matches the exact wording of Section 126.

Quickest way: Three-party test

When to use it: Use when a short MCQ asks you to name a party, define guarantee or tell it from indemnity.

Ask: is a third person's debt or duty being backed? If yes, it is guarantee.
Ask: who gave the promise? That is the surety.
Ask: whose default is covered? That is the principal debtor.
Ask: who holds the promise? That is the creditor.
If only two parties and a promise to cover loss, think indemnity.

Common mistakes in Contract of Guarantee and Parties

Treating the creditor as the person who gives the guarantee.
Students link 'credit' with 'giving help'.
Fix: The creditor receives the guarantee. The surety gives it. Remember: surety = secure the loan.
Saying a guarantee must be in writing.
Students confuse it with documents that need writing, like a promissory note.
Fix: Under the Indian Contract Act, a guarantee may be oral or written.
Saying the surety must get some benefit to give valid consideration.
Students apply the general rule that each party must gain.
Fix: Anything done or promised for the principal debtor is enough consideration for the surety.
Mixing up guarantee and indemnity.
Both protect a person against loss, so they sound alike.
Fix: Guarantee: three parties, secondary liability, debtor's default. Indemnity: two parties, primary liability, loss from any cause.
Thinking the surety is liable even when there is no principal debtor liability.
Students forget the surety's liability is secondary.
Fix: The surety is liable only when the principal debtor defaults on a liability that exists or is promised.
Calling the principal debtor the creditor, or the surety the debtor, in case questions.
Students read names, not roles.
Fix: Underline the promise first. Then assign roles by function: who promises, who defaults, who is owed.

Worked examples

Example 1

Anita borrows ₹3,00,000 from Canara Bank. Her brother Vikas tells the bank, "If Anita does not repay, I will pay." Identify the creditor, principal debtor and surety, and state whether this is a valid guarantee if Vikas gave the promise orally.

Show the solution

Find the promise: Vikas promises to pay if Anita defaults.
Anita's liability is backed by Vikas, a third person, so this is a contract of guarantee under Section 126.
Vikas gives the guarantee, so he is the surety.
Anita's default is covered, so she is the principal debtor.
The bank receives the promise, so it is the creditor.
A guarantee may be oral or written, so the oral promise does not make it invalid.

Answer: Creditor: Canara Bank. Principal debtor: Anita. Surety: Vikas. The oral guarantee is valid.

Example 2

Which of the following is a feature of a contract of guarantee? (A) It has only two parties (B) The surety's liability is primary (C) It is a contract to discharge the liability of a third person on his default (D) It must always be in writing

Show the solution

Check A: guarantee has three parties, so A is wrong.
Check B: the surety's liability is secondary, arising on default, so B is wrong.
Check C: this matches the definition in Section 126, so C is right.
Check D: guarantee may be oral or written, so D is wrong.

Answer: (C) It is a contract to discharge the liability of a third person on his default.

Exam tips

Learn the Section 126 definition word for word: 'perform the promise or discharge the liability of a third person in case of his default'.
Expect role-identification MCQs. Assign roles by function, not by name or relationship.
Remember the three-party versus two-party contrast with indemnity, as it is a favourite comparison question.
Watch for traps saying guarantee must be written or that the surety needs a personal benefit. Both are false.
There is no negative marking, so always attempt every question. Eliminate options that say 'primary liability' or 'two parties' for guarantee.

Practice questions from Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Guarantee and Parties in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contract of Guarantee and Parties: frequently asked questions

What is a contract of guarantee under Section 126?

It is a contract to perform the promise, or discharge the liability, of a third person if he defaults. The person who gives the guarantee is the surety. The person whose default is covered is the principal debtor. The person who receives the guarantee is the creditor.

What are the essentials of a contract of guarantee?

It must satisfy the essentials of a valid contract. It also needs three parties, an existing or promised liability of a principal debtor, and a promise by the surety to answer for his default. Consent must be free, and the creditor must not obtain it by misrepresentation or by concealing material facts.

What is the difference between indemnity and guarantee?

Indemnity usually has two parties, the indemnifier and the indemnified, and the indemnifier's liability is primary. Guarantee has three parties, and the surety's liability is secondary, arising on the principal debtor's default. Guarantee covers a third person's debt or duty, while indemnity covers loss.

Does a guarantee have to be in writing?

No. The Indian Contract Act allows a guarantee to be oral or written. In practice, banks take written guarantees for proof.