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

Ganesh gave a guarantee for a loan to Kiran on the express condition that the creditor, Bank X, would not act on it until Lata joined as co-surety. Lata never joined, but the bank advanced the loan to Kiran, who defaulted. Under the Indian Contract Act, 1872, what is the position of Ganesh's guarantee?

Ganesh's guarantee is not valid. Because he gave it on the condition that the creditor would not act on it until Lata joined as co-surety, and she never joined, the guarantee fails and he cannot be held liable.

  1. AIt is valid, as a guarantee may be oral or written
  2. BIt is valid only for half the amount
  3. CIt is not valid, because the other person did not join as co-suretyCorrect
  4. DIt is valid, but Lata becomes liable instead

Explanation

Where a guarantee is given on a contract that the creditor shall not act on it until another person joins as co-surety, the guarantee is not valid if that person does not join. Ganesh's condition was not met, so he is not liable. The oral or written form of a guarantee is irrelevant to this condition.

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