Business Laws and Ethics · Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Contract of Guarantee: Surety, Principal Debtor and Creditor

Updated 10 October 2026 · Fact-checked

A contract of guarantee, under Section 126, is a contract to perform the promise or discharge the liability of a third person if he defaults. Three parties exist: surety (gives the guarantee), principal debtor (whose default is guaranteed) and creditor (receives it). To solve questions, identify the parties, check validity, then classify the guarantee.

Understand Contract of Guarantee: Surety, Principal Debtor, Creditor

Think of a bank lending ₹5,00,000 to Ramesh. The bank is unsure he will repay, so it asks his friend Suresh to stand behind him. If Ramesh defaults, Suresh will pay. That arrangement 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. The law gives each party a name. The person who gives the guarantee is the surety (Suresh). The person in respect of whose default the guarantee is given is the principal debtor (Ramesh). The person to whom the guarantee is given is the creditor (the bank). Section 126 also says a guarantee may be oral or written. Writing is not compulsory.

A guarantee is really a set of linked promises. The principal debtor owes the creditor under the main contract. The surety promises the creditor to answer for the debtor's default. Usually the surety gives the guarantee at the debtor's request, and this request is what ties the three parties together. The surety's liability is secondary: it arises only when the debtor defaults. For this reason, a guarantee is different from a contract of indemnity, where the indemnifier's liability is primary and there are two parties.

Because a guarantee is a contract, the general essentials of a valid contract apply: free consent, lawful object, capacity and consideration. Consent must be free of the defects covered in the contract chapters. Guarantee also needs an existing or promised liability of the principal debtor, which is the liability the surety backs. Do not make up extra rules beyond these. In the exam, tie each point back to the Section 126 wording.

Guarantees are classified by their reach. A specific guarantee covers a single transaction and ends when that transaction is complete. A continuing guarantee under Section 129 extends to a series of transactions. It can be ended for future transactions by the surety's notice to the creditor (Section 130) or by the surety's death, unless the contract says otherwise (Section 131).

Key rules to remember

Definition of guarantee (Section 126): Guarantee = contract to perform the promise, or discharge the liability, of a third person in case of his default; Can be oral or written. Quote the key words 'third person' and 'in case of his default'.
Three parties (Section 126): Surety = gives the guarantee; Principal debtor = person whose default is guaranteed; Creditor = person to whom the guarantee is given; Name the parties in every answer using the facts given.
Continuing guarantee (Section 129): Continuing guarantee = guarantee which extends to a series of transactions; Illustrations: guarantee for tea supplied from time to time is continuing; guarantee for five sacks of flour in one delivery is not.
Revocation by notice (Section 130): Surety may revoke a continuing guarantee at any time, as to future transactions, by notice to the creditor; Liability for transactions already made stays. Past transactions are not wiped out.
Revocation by death (Section 131): Death of surety = revocation of continuing guarantee as to future transactions, in the absence of any contract to the contrary; Applies only to continuing guarantees and only for future transactions.

How to solve Contract of Guarantee: Surety, Principal Debtor, Creditor questions

Use this method for any fact-based question on guarantee. It keeps your answer in the format examiners reward: rule, application, conclusion.

1Read the facts and mark who promises what to whom. Find the third-person liability being backed.
2Label the parties: surety, principal debtor and creditor. Write the labels in your answer.
3Confirm it is a guarantee under Section 126: a promise to answer for a third person's default. If the promisor is liable on his own account, think of indemnity instead.
4Check validity: free consent, lawful object, capacity and consideration, as for any contract. Remember oral guarantees are valid.
5Classify it: single transaction (specific) or series of transactions (continuing, Section 129).
6If a continuing guarantee is revoked by notice or death, apply Sections 130 and 131: future transactions only, past ones remain.
7State the conclusion in one line, with the exact amount of liability in rupees if given.

Quickest way: Three-label test

When to use it: Use it for MCQs and short fact-pattern questions where time is under two minutes.

Ask: is someone promising to pay if a third person fails? If yes, it is a guarantee.
Put S, P and C next to the three persons on the question paper.
Ask: one deal or a series? A series means continuing.
If revocation or death appears, apply: future transactions end, past ones stay.
Tick the option that matches, after eliminating options that mention writing as compulsory.

Common mistakes in Contract of Guarantee: Surety, Principal Debtor, Creditor

Saying a guarantee must be in writing.
Students mix it with rules for contracts that need writing, or assume banks always take written guarantees.
Fix: Quote Section 126: a guarantee may be either oral or written.
Mixing up the surety and the principal debtor.
Both are connected with the debt, and the question may introduce them in a confusing order.
Fix: Surety gives the guarantee. Principal debtor is the one whose default is guaranteed. Label each name before writing.
Treating the surety's death as cancelling all liability.
Students forget that Section 131 speaks only of future transactions.
Fix: Write: continuing guarantee stands revoked for future transactions; liability for transactions already made remains.
Applying Section 131 to a guarantee for a single transaction.
Students memorise 'death revokes guarantee' without the word continuing.
Fix: Section 131 deals with continuing guarantees. Also note the exception: unless there is a contract to the contrary.
Calling every guarantee for repeated supplies continuing.
The word 'repeated' is assumed, but the guarantee may cover only one delivery.
Fix: Check what the guarantee covers. In the Section 129 illustration, a guarantee for five sacks of flour to be paid within a month is not continuing.

Worked examples

Example 1

Mehta Traders supplies cloth on credit to Kiran Garments. At Kiran's request, Anil guarantees to Mehta Traders payment for the cloth. Name the parties and state whether this is a contract of guarantee. Can the guarantee be oral?

Show the solution

Anil promises Mehta Traders to pay if Kiran Garments fails to pay. He answers for the liability of a third person on default.
So the contract fits Section 126: a contract to discharge the liability of a third person in case of his default.
Anil gives the guarantee, so he is the surety. Kiran Garments is the principal debtor, whose default is guaranteed. Mehta Traders is the creditor, to whom the guarantee is given.
Section 126 says a guarantee may be oral or written, so writing is not compulsory.

Answer: Yes, it is a contract of guarantee. Surety: Anil. Principal debtor: Kiran Garments. Creditor: Mehta Traders. It may be oral or written.

Example 2

Priya guarantees to Bharat Bank, up to ₹1,00,000, repayment of all advances the bank may make to Dev from time to time. The bank advances ₹40,000 to Dev. Priya then dies. After her death, the bank advances a further ₹30,000 to Dev. Dev fails to repay anything. Discuss Priya's estate's liability. There is no contract to the contrary.

Show the solution

The guarantee covers a series of advances, so it is a continuing guarantee under Section 129.
Section 131: death of the surety operates as revocation of a continuing guarantee as to future transactions, absent a contract to the contrary.
The ₹40,000 advance was made before death. It is a past transaction and remains covered.
The ₹30,000 advance was made after death. It is a future transaction, so the guarantee does not cover it.
Past liability of ₹40,000 is within the limit of ₹1,00,000.

Answer: Priya's estate is liable for ₹40,000 but not for the ₹30,000 advanced after her death.

Exam tips

Start every answer with the Section 126 definition in your own words, then apply it. This gets the definition marks even if the facts are tricky.
In fact-based problems, write the labels surety, principal debtor and creditor against the actual names. Examiners look for this.
For continuing guarantee questions, always separate past and future transactions in two lines.
In the MCQ section, watch for options saying 'must be in writing' or 'death discharges all liability'. Both are wrong on the Act's text.
Use the Act's own illustrations, such as the tea-dealer guarantee for continuing and the flour sacks guarantee for not continuing, to support your answer.

Practice questions from Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Contract of Guarantee: Surety, Principal Debtor, Creditor 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: Surety, Principal Debtor, Creditor: 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 in case of his default. The person giving the guarantee is the surety, the person whose default is guaranteed is the principal debtor, and the person to whom it is given is the creditor.

Does a guarantee have to be in writing?

No. Section 126 states that a guarantee may be either oral or written. Writing is useful as proof, but the law does not require it.

What is a continuing guarantee?

Under Section 129, it is a guarantee that extends to a series of transactions. For example, a guarantee for tea supplied from time to time to a buyer is continuing. A guarantee for one fixed delivery is not.

How is a continuing guarantee revoked?

The surety may revoke it at any time, as to future transactions, by notice to the creditor (Section 130). Under Section 131, the surety's death also revokes it for future transactions unless there is a contract to the contrary.

How is guarantee different from indemnity?

A guarantee involves three parties and the surety's liability arises on the principal debtor's default, which is secondary. Indemnity is a separate contract with its own rules, and it is studied in its own topic. Compare them on number of parties and nature of liability.