12.2 Contract of Guarantee

Meaning: a promise to answer for the debt, default or miscarriage of another person. Three parties: the principal debtor, the creditor, and the surety/guarantor (the collateral promisor). Three contracts coexist: principal debtor–creditor; creditor–surety; surety–principal debtor (an implied indemnity — the debtor must reimburse the surety who pays). Bank guarantees are the commercial species. Salient features: (i) tri-partite consent (express or implied from conduct); (ii) secondary, accessory liability — the surety's obligation is co-extensive with the principal debtor's unless confined by the deed (the Nepali Full Bench has confined it by the deed's stated sum — Lumbini Bank, below); (iii) a principal debt or obligation must exist (or be contemplated) — a guarantee of a void debt falls with it; (iv) consideration: anything done or promised for the principal debtor suffices (the surety need not benefit directly); (v) the guarantee presumed to secure honest performance — the creditor need not first exhaust remedies against the debtor unless the deed says so. Types of guarantee: specific (a single transaction) vs. continuing (a series — below); conditional (payable on default, judicially assessed) vs. unconditional/demand (payable on the beneficiary's mere demand — the bank-guarantee norm); financial (payment of money) vs. performance (construction completion, supply); personal vs. corporate; counter-guarantee (the back-to-back structure — a foreign bank counter-guaranteeing the local bank's guarantee; the two instruments autonomous…