The Indian Contracts Act defines Guarantee as a contract in which one promises to discharge the liability of the other upon the default of the latter. Creditor, debtor and the surety are the three parties to the contract of guarantee. This contract is formed by the consent of the all the three parties to the contract. Guarantee contract may be oral or written. The contract of guarantee is of different types depending on the contract’s contents and the nature of the same. Here under are the different types of guarantee contracts.
Unilateral Contract of Commercial Credit
This is a type of contract of guarantee usually seen in trade transactions. It commonly arises between the wholesale trader and a retail trader. Also, it arises between a retail trader and the customer. In this type of guarantee contract, the goods are delivered against no payment but with an agreement. The agreement between parties is either written or oral. The agreement may or may not have any securities against discharge of the payment on a later date.
This type of guarantee contract is common in the contracts of the Government. Also, it is common in tender for contracts. This type of guarantee contract is a commercial document. The bank guarantee is autonomous and is independent of the contract that is underlying. It is a guarantee from a bank against liabilities.
Letter of Credit
A letter of credit is an instrument which is written by one person to the other about giving of credit. The one who writes the letter, requests the other to give credit to the bearer of the letter or in whose favor the letter is drawn. In the international trade this practice is commonly seen. This can be general letter of credit which is drawn against merchants in general or special letter of credit which is drawn against a specific person with all the information enclosed.
Absolute Performance Bonds
Absolute means perfect and it also means complete. In this type of guarantee contract, the surety pays the amount written in the contract upon the failure to discharge the contract by the person against whom the guarantee is given.
When the guarantee is given for an existing obligation or debt, it is called retrospective guarantee.
When the guarantee is given for a future obligation or debt it is called prospective guarantee.
This type of guarantee is for a single transaction. It is extended only to a single debt. It is also called as simple guarantee.
This type of guarantee extends to more number of transactions. It continues until the guarantee is revoked.