Section 126 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 126 defines four terms that run through the rest of Chapter VIII: "contract of guarantee", "surety", "principal debtor" and "creditor". It also says that a guarantee may be either oral or written. Anyone who has stood guarantee for a loan, a lease or a supply contract is dealing with this definition. If you are drafting or reviewing a guarantee, our agreement drafting service can help you set out the three-party structure clearly.
A contract of guarantee is 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 the surety; the person in respect of whose default it is given is the principal debtor; the person to whom it is given is the creditor. A guarantee may be either oral or written. The section has no illustration in the source.
The definition
"A 'contract of guarantee' is 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'. A guarantee may be either oral or written."
The three parties
| Term in the Act | Who this is | Role |
|---|---|---|
| Surety | The person who gives the guarantee | Promises to perform or discharge if the principal debtor defaults |
| Principal debtor | The person in respect of whose default the guarantee is given | The party whose promise or liability the guarantee covers |
| Creditor | The person to whom the guarantee is given | Receives the benefit of the guarantee |
Element by element
- A contract. The guarantee is itself a contract between the surety and the creditor.
- To perform the promise, or discharge the liability, of a third person. The promise or liability belongs to the principal debtor, a third person to this contract. The surety does not promise his own performance; he promises to answer for the principal debtor's.
- In case of his default. The surety's obligation arises if the principal debtor defaults. The text builds the idea of default into the definition.
- Oral or written. The last sentence says "A guarantee may be either oral or written." The section does not say that writing is required, and it does not discuss proof; a written document is, in practice, easier to prove.
The section does not state the surety's extent of liability (that is section 128), the consideration needed (section 127) or the continuing guarantee (section 129). Those are in the next articles: see section 127 and section 128.
Guarantee compared with indemnity
Section 124 defines indemnity as a promise to save the other from loss caused by the promisor's or any other person's conduct. Section 126 defines guarantee as a contract to perform the promise or discharge the liability of a third person in case of his default. See section 124.
| Point | Indemnity (s.124) | Guarantee (s.126) |
|---|---|---|
| Number of parties in the definition | Two: one promises the other | Three: surety, principal debtor, creditor |
| Subject of the promise | To save from loss caused by conduct | To perform or discharge the liability of a third person on his default |
A modern example (ours)
Karan runs a small trading firm and wants a Rs. 10 lakh credit line from Lotus Finance. Lotus asks for a guarantee. Karan's father, Mahesh, signs a letter promising Lotus Finance that if Karan's firm does not repay, Mahesh will pay. Here Mahesh is the surety, Karan's firm is the principal debtor, and Lotus Finance is the creditor. The promise is to discharge the liability of a third person (the firm) in case of its default. If Mahesh had only said, on a phone call, "Don't worry, I'll see that Lotus is paid", the last sentence of section 126 means a guarantee "may be either oral or written", but proving what was said would be harder.
What can the parties change?
Section 126 is a definition and has no "contrary intention" proviso. The parties decide who the surety, principal debtor and creditor are, what obligation the guarantee covers, and whether the guarantee is in writing. Many financial documents, such as a bank's or a lender's standard guarantee, record the covered obligation, the amount limits and the notice of demand. The text of s.126 does not set these; they come from the contract and from the later sections.
Practical points
- Name all three roles in the document: surety, principal debtor and creditor.
- Describe the covered obligation precisely: the loan, the supply contract, the lease or the performance.
- Put it in writing even though the section allows an oral guarantee.
- Do not sign without reading the underlying contract between the creditor and the principal debtor.
- Check for continuing guarantee wording if the guarantee will cover a series of transactions; see section 129.
- For specimen wording of a bank or performance guarantee, and for stamping, see the guides listed under Read next; this article gives no figures.
Need help drafting or reviewing a guarantee?
A guarantee has three parties and a promise about someone else's default, so the wording must make clear what the guarantee covers and when the surety must pay. Our agreement drafting team can draft or review the guarantee and the related loan or supply contract. Send the documents and the names of the three parties.
Key takeaways
- A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default (s.126).
- The surety gives the guarantee; the principal debtor is the person whose default is covered; the creditor receives the guarantee.
- A guarantee may be either oral or written.
- Consideration is in section 127; the extent of the surety's liability in section 128; continuing guarantee in section 129.
- The section carries no illustration.
Read next
- Section 125: rights of indemnity-holder when sued
- Section 127: consideration for guarantee
- Specimen deed of guarantee: bank and performance guarantee format
- Stamp duty on guarantee and indemnity deed
Disclaimer: Based on the text of the Indian Contract Act, 1872 as consulted on 1 October 2026. Many questions under this Act turn on case law and on the wording of the particular contract, which this article does not cover. It is general information, not legal advice; check the official text and take advice before acting.