CONTRACT OF GUARANTEE
Section 126 of Indian Contract Act defines it as “a contract to perform the promise, or discharge the liability, of a third person in case of his default”. 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”, and the person to whom the guarantee is given is called the “creditor”.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety which means that if A does not pay the price of the goods, he will pay. Here, A is the principal debtor, B is the creditor and C is the surety or guarantee.