Contract of guarantee is a legal contract in which one person agrees to be responsible for the debts or obligations of another person. This agreement is made between the creditor and the guarantor, and it is governed by certain legal principles that must be followed. One such principle is the concept of consideration.
Consideration is the exchange of something of value between two parties in a contract. It is an essential element of a contract, and without it, the contract is not legally enforceable. In the context of a contract of guarantee, the consideration is the benefit that the guarantor receives in exchange for agreeing to be responsible for the debts or obligations of another person.
For example, if a business owner wants to borrow money from a bank, the bank may require a guarantee from a third party, such as a family member or a friend, to ensure that the loan will be paid back. In this case, the consideration for the guarantor is the benefit of helping the business owner obtain the loan. Additionally, the guarantor may also benefit from the interest that the business owner pays on the loan.
Consideration in a contract of guarantee can also take the form of a promise from the creditor to the guarantor. For instance, the creditor may promise to release the guarantor from the obligation to pay the debt once the business owner has paid back the loan in full. In this situation, the consideration for the guarantor is the promise of being released from the obligation to pay.
It is important to note that the consideration in a contract of guarantee must be sufficient but not necessarily equal. In other words, the consideration does not have to be of the same monetary value as the debt or obligation being guaranteed. However, it must be a benefit or a promise of a benefit that is of some value to the guarantor.
In conclusion, consideration is a crucial aspect of a contract of guarantee as it establishes the benefit or promise of a benefit that the guarantor receives in exchange for agreeing to be responsible for the debts or obligations of another person. Understanding the concept of consideration is vital for both creditors and guarantors to ensure that the contract is legally enforceable and that both parties receive a fair exchange.