Question

1       John and his father go to the office of Tom, a corporate lending officer with ABC Bank in order for John to secure a loan for his new software business.  Tom is skeptical since John has no track record in business, but finally relents to giving John the loan when his father tells Tom: “Don’t worry. If John doesn’t pay the loan back, I will.” The father then leaves the meeting and John signs the loan documentation. When can the ABC Bank look to John’s father to repay the loan?

Answer 1

Contract of Guarantee :- A Contract to perform the promise, or discharge the liability, of a third person in case of his defaultis called Contract of Guarantee. A guarantee may either be oral or written.

The essentials of a Contract of Guarantee are as follows :- 1.There must be lfree consent, a legal objective to contract. 2. A principal debt must pre-exist. 3. Consideration received by the prinicipla debtor is sufficient for the surety.

Generally, the surety can be held liable only on default of the prinicipal debtor.

The surety's liability is indicated by the terms of the contract. Unless otherwise provided, a surety assumes the obligation of the principal. A surety, however, can limit his liability to a certain amount since the obligations of the principal and surety do not have to be coextensive. When a surety agrees to be accountable for a certain amount, she cannot be held responsible for a sum greater than that for which she contracted. The surety becomes liable when the principal breaches a contract with the creditor. In the absence of a contractual limitation, a surety's liability is measured by the loss or damage resulting from the default by the principal. The liability of the surety terminates when the principal's obligation is fulfilled.

In the above case, ABC Bank can look upto John's father to repay the loan on default by John.