Under Section 126 of the Indian Contract Act, 1872, a Contract of Guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. It involves three parties:
Surety: The person who gives the guarantee.
Principal Debtor: The person in respect of whose default the guarantee is given.
Creditor: The person to whom the guarantee is given.
Example: "A" requests a banker "B" to lend ₹10,000 to "C" and promises "B" that if "C" does not repay the loan, "A" will do so. This is a contract of guarantee. Here, A is the Surety, B is the Creditor, and C is the Principal Debtor.
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