Question: Contract of guarantee is a tripartite agreement. How? What are the rights and duties of surety?
Answer:
A contract of guarantee is a legal arrangement where one person (the surety) promises to take responsibility for another person’s debt or obligation if they fail to fulfill it. It is called a tripartite agreement because it involves three parties:
- Creditor – The person or entity that provides the loan, goods, or services on credit.
- Principal Debtor – The person who borrows money or takes credit and is primarily responsible for repayment.
- Surety (Guarantor) – The person who guarantees that the debtor will repay. If the debtor fails, the surety will pay the creditor.
This contract builds trust between the creditor and debtor because the creditor feels secure knowing that if the debtor cannot pay, the surety will cover the debt.
Why Is It a Tripartite Agreement?
The guarantee contract connects three people in a single legal arrangement:
Between Creditor and Debtor – The creditor provides the loan or goods on credit, and the debtor agrees to repay.
Between Creditor and Surety – The surety assures the creditor that they will pay if the debtor fails.
Between Debtor and Surety – The surety expects the debtor to fulfill their obligation, and if they pay on behalf of the debtor, they have the right to recover the amount.
Thus, a guarantee contract ensures that the creditor has an additional source of repayment if the debtor defaults.
Rights and Duties of Surety Under Nepalese Contract Law
Since the surety takes on a financial responsibility, Nepal’s Contract Act, 2056 (1999) provides specific rights and duties for them.
Rights of Surety (Guarantor)
Right to Indemnity – If the surety pays on behalf of the debtor, they can recover the full amount from the debtor, including any extra costs incurred.
Right to Security – If the creditor holds any security (such as collateral) from the debtor, the surety has the right to claim it after settling the debt.
Right to Discharge – A surety can be freed from their obligation under certain conditions:
- If the creditor changes the loan terms without the surety’s consent.
- If the creditor releases the debtor from liability.
- If the creditor acts carelessly and increases the risk for the surety.
Right to Contribution – If there are multiple sureties, each surety is responsible only for their agreed share of the debt. If one pays more, they can demand compensation from the other sureties.
Right to Subrogation – If the surety pays the creditor, they take over all the creditor’s rights against the debtor. This means the surety can demand repayment from the debtor as if they were the creditor.
Duties of Surety (Guarantor)
Liability for the Debt – If the debtor fails to pay, the surety must fulfill the financial obligation.
Obligation to Act in Good Faith – The surety must not misrepresent facts or give a false guarantee.
Responsibility Continues Even After Death – In some cases, the legal heirs of a deceased surety may still be responsible for the guarantee.
Cannot Escape from Liability – Once a surety gives a guarantee, they cannot simply back out unless discharged by the creditor or law.
No Need for First Default – The creditor can directly ask the surety for payment without waiting for the debtor to default multiple times.
A contract of guarantee is a three-party deal where the surety acts as a backup for the debtor. The surety has rights like reimbursement and subrogation but must also fulfill duties like paying the creditor if the debtor fails. Under Nepalese law (Contract Act, 2056), the rights and obligations of the surety are clearly defined to ensure fairness among all parties.
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