Zaib Sofi & Soumyadip Chakraborty, Jindal Global Law School
ABSTRACT
A contract of guarantee, according to Section 126 of the Indian Contract Act, is a contract to perform a promise or discharge the liability of a third party in the event of his default. A bank guarantee is a contractual guarantee that a bank provides to a third-party creditor. The concerned bank assumes liability on behalf of the principal debtor to satisfy his contractual obligations in the case of default under this commercial instrument.
This protects the transaction by guaranteeing that the creditor is not harmed.
The nature of the principal debtor's obligations is primary, whereas the ban k's obligations are secondary.
When a bank issues a guarantee, it usually commits to paying the amounts mentioned in the guarantee agreement to the beneficiary on demand, subject to predetermined terms and conditions. The purpose of a bank guarantee is to ensure that specific work contracts are completed on time. The guarantee can also be used as a deposit for a contract or for any other purpose.
