Contract of Guarantee: Jaiib/DBF Paper 3 (Module D) Unit-3

Contract of Guarantee: Jaiib/DBF Paper 3 (Module D) Unit-3

Dear bankers,

As we all know that is Contracts Of Guarantee for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are Contracts Of Guarantee (Unit-3), Commercial Laws with Reference to Banking Operations (Module D), Legal & Regulatory Aspects of Banking -Paper 3.

♦Contracts Of Guarantee

A ‘Contract of Guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of latter’s default. A guarantee may be either oral or written. The question whether a particular contract is a contract of indemnity or guarantee has to be decided by examining the language of the documents entered into between the parties and the nature of transaction.

Parties To The Contract

  • The person who gives the guarantee is called the ‘surety’.
  • The person in respect of whose default the guarantee is given is called the ‘principal debtor’.
  • The person to whome the guarantee is given is called ‘creditor/beneficiary’.


  • Anything done, or any promise made, for the benefit of the principle debtor, is a sufficient consideration to the surety for giving the guarantee.

The Liability of the surety

  • The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. A surety is regarded as a favoured debtor.

Continuing Guarantee  

  • A guarantee which extends to a series of transactions, is called, a ‘Continuing Guarantee’. This type of guarantee is not limited to only transaction but to many transactions.

Death of surety

  • Normally, when the surety dies, the guarantee ends from that date. However, this is not true in all cases. It depends upon the terms of the contract and the intention of the parties as regards future transactions.
  • Generally all guarantee obtained by banks are continuing guarantee and in the case of death of a surety the guarantee would stand revoked for future transactions.

Variance in terms of the Contract

  • Any Variance (change/ modification) mode without the surety’s consent, in the ‘term of contract’ guaranteed by him, between the principal debtor and the creditor discharges the surety as to transactions subsequent to the variance.

Discharge of principal debtor

  • The surety is discharged if the principal debtor is released by the creditor.

Forbearance to Sue

  • Further, mere forbearance on the part of creditor to sue the principal debtor or to enforce any other remedy, against him, does not discharge the surety unless the parties has agreed for such discharge.


  • A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety- ship made, whether the surety knows of the existence of such security or not. It the creditor loses such security, then the surety is discharged to the extend of the value of the security.

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