Section 143 Indian Contract Act 1872 - Guarantee Obtained by Concealment Invalid
Section 143 of the Indian Contract Act, 1872 protects a surety where the creditor obtains a guarantee while keeping silent about material circumstances. If material facts relevant to the surety's decision are concealed in this manner, the guarantee is invalid.
Updated and reviewed with reference to the current text of the Indian Contract Act, 1872.
What does Section 143 provide?
Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
The provision applies to a contract of guarantee. Under Section 126 of the Indian Contract Act, a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of that person's default. The person giving the guarantee is the surety, the person whose default is covered is the principal debtor, and the person to whom the guarantee is given is the creditor.
Meaning of concealment of material circumstances
For Section 143, the important issue is whether the creditor obtained the guarantee by remaining silent about a material circumstance. A material circumstance is a fact sufficiently connected with the proposed guarantee that disclosure could matter to the surety's decision to undertake the risk.
The section therefore addresses more than an express false statement. It deals specifically with material silence or concealment by the creditor. This should be read alongside Section 142, which deals with a guarantee obtained by misrepresentation concerning a material part of the transaction.
Statutory illustrations to Section 143
Illustration (a): Previous misconduct of employee concealed
A employs B as a clerk to collect money. B fails to account for some receipts, and A then requires B to provide security for proper accounting. C gives a guarantee for B. A does not tell C about B's previous conduct. B later defaults. The guarantee is invalid.
Effect: The earlier conduct was material to the risk C was being asked to guarantee. Keeping that circumstance from C invalidates the guarantee.
Illustration (b): Private arrangement affecting the transaction concealed
A guarantees to C payment for iron to be supplied by C to B up to 2,000 tons. B and C privately agree that B will pay five rupees per ton above the market price and that the excess will be applied towards an old debt. The arrangement is concealed from A. A is not liable as surety.
Effect: A concealed side arrangement that materially changes the transaction covered by the guarantee can prevent enforcement of the guarantee against the surety.
Essential points under Section 143
- There must be a guarantee involving a creditor, principal debtor and surety.
- The creditor must have kept silent about a circumstance connected with the guarantee.
- The concealed circumstance must be material, not merely trivial or irrelevant.
- The guarantee must have been obtained by means of that material silence or concealment.
- Where Section 143 applies, the statutory consequence is that the guarantee is invalid.
Section 142 and Section 143 - difference
Section 142 concerns a guarantee obtained through misrepresentation by the creditor, or with the creditor's knowledge and assent, about a material part of the transaction. Section 143 concerns a guarantee obtained by the creditor keeping silent about material circumstances. Both provisions protect the surety's consent, but they address different forms of improper procurement.
Relationship with the law of guarantee
Section 143 forms part of the statutory rules governing guarantees under the Indian Contract Act, 1872. Other relevant provisions include Section 128 on the surety's liability, Section 133 on variance in the terms of the contract, Section 139 on impairment of the surety's eventual remedy, and Section 141 on the surety's right to the benefit of the creditor's securities.
Practical significance
Before giving a personal, commercial, employment or financial guarantee, a proposed surety should understand the transaction and the circumstances that materially affect the risk. Conversely, a creditor relying on a guarantee should ensure that material circumstances relevant to the surety are not concealed. Whether a particular fact is material and whether the guarantee was obtained by keeping silence will depend on the facts and evidence of the particular case.
Official legal source
The current Central Act text can be checked on the Government of India's India Code portal. Section 143 appears in Chapter VIII of the Indian Contract Act, 1872, dealing with indemnity and guarantee.