Section 127 of the Indian Contract Act, 1872 - Consideration for Guarantee
Section 127 explains what amounts to sufficient consideration for a contract of guarantee. In simple terms, a benefit given or promised to the principal debtor can support the surety's promise to guarantee the debt or obligation.
Meaning of Section 127
A guarantee is defined by Section 126 of the Indian Contract Act, 1872. It involves a surety, a principal debtor and a creditor. Section 127 deals specifically with the consideration that supports the surety's promise.
The important rule is that consideration need not move directly to the surety. Something done, or a promise made, for the benefit of the principal debtor may constitute sufficient consideration for the surety's guarantee.
Text of Section 127 - Consideration for Guarantee
127. Consideration for guarantee. Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
Illustration (a): B asks A to sell and deliver goods to B on credit. A agrees if C guarantees payment. C's guarantee, given in consideration of A's promise to deliver the goods, has sufficient consideration.
Illustration (b): After A has sold and delivered goods to B, C asks A to refrain from suing B for the debt for one year and promises to pay if B defaults. A's agreement to forbear is sufficient consideration for C's promise.
Illustration (c): If, after A sells and delivers goods to B, C later promises without consideration to pay on B's default, that agreement is void.
Key Legal Principles
- Benefit to the principal debtor is sufficient: Section 127 expressly recognizes consideration connected with the benefit of the principal debtor.
- Direct benefit to the surety is unnecessary: the statutory rule focuses on what is done or promised for the principal debtor.
- Forbearance may be consideration: a creditor's promise to postpone legal action can support a guarantee when made as part of the guarantee arrangement.
- A bare later promise may fail: a guarantee made after the underlying transaction, without fresh consideration or a supporting promise such as forbearance, may be void, as shown by statutory illustration (c).
Example
Suppose a bank agrees to grant a loan to a borrower only if another person guarantees repayment. The bank's promise to advance the loan for the borrower's benefit can constitute consideration for the guarantor's promise. The guarantor need not personally receive the loan proceeds.
Related Provisions on Guarantee
Section 127 should be read with the surrounding provisions in Chapter VIII of the Act. Section 128 concerns the extent of the surety's liability, while Section 129 defines a continuing guarantee. Sections 130 onward address revocation and other consequences affecting guarantees and sureties.
Official Source
The authoritative statutory text of the Indian Contract Act, 1872 can be checked on the Government of India's India Code portal. View the Indian Contract Act, 1872 on India Code.