In a contract of guarantee, one party (the guarantor) agrees to be liable for the debts or obligations of another party (the principal debtor). The guarantor’s promise to be liable is called the guarantee.
The consideration for the guarantee is the benefit that the guarantor receives from the principal debtor. This benefit can be anything of value, such as money, goods, or services.
Types of Consideration in Banking Contracts of Guarantee
There are two types of consideration in banking contracts of guarantee:
- Direct consideration: This is the benefit that the guarantor receives directly from the principal debtor. For example, a guarantor may agree to guarantee a loan to a friend in return for the friend’s promise to pay the guarantor back for a loan that the guarantor had previously given to the friend.
- Collateral consideration: This is the benefit that the guarantor receives indirectly from the principal debtor. For example, a guarantor may agree to guarantee a loan to a company in return for the company’s promise to provide the guarantor with a security interest in some of the company’s assets.
Requirements for Consideration in Banking Contracts of Guarantee
The consideration for a guarantee must meet the following requirements:
- It must be something of value.
- It must be bargained for. This means that the guarantor must have received something in return for their promise to be liable.
- It must be possible to give. This means that the guarantor must be able to provide the benefit that they have promised to provide.
- It must be legal. This means that the benefit that the guarantor has promised to provide cannot be illegal or immoral.
MCQs on Consideration in Banking Contracts of Guarantee
- Which of the following is not a requirement for consideration in a banking contract of guarantee?
- It must be something of value.
- It must be bargained for.
- It must be possible to give.
- It must be legal.
- It must be in writing.
- Answer: It must be in writing. Consideration does not need to be in writing for a contract of guarantee to be valid.
- A friend asks you to guarantee a loan for them. You agree to do so in return for their promise to pay you back for a loan that you had previously given to them. Is this a valid contract of guarantee?
- Yes, this is a valid contract of guarantee. The consideration is direct consideration because you are receiving the benefit directly from the principal debtor.
- A company asks you to guarantee a loan for them. You agree to do so in return for their promise to provide you with a security interest in some of the company’s assets. Is this a valid contract of guarantee?
- Yes, this is a valid contract of guarantee. The consideration is collateral consideration because you are receiving the benefit indirectly from the principal debtor.
- A guarantor promises to guarantee a loan to a company. The company does not provide the guarantor with any benefit in return. Is this a valid contract of guarantee?
- No, this is not a valid contract of guarantee. The consideration is not bargained for because the guarantor did not receive anything in return for their promise to be liable.
- A guarantor promises to guarantee a loan to a company. The company promises to pay the guarantor a fee for their guarantee. Is this a valid contract of guarantee?
- Yes, this is a valid contract of guarantee. The consideration is something of value and it is bargained for.