Corporate Guarantees: The Contract Law Test For Enforceability

Corporate guarantees ("CG") are a cornerstone of lending and commercial transactions in India, offering creditors an additional layer of recourse beyond the principal debtor. However, the enforceability of a CG depends heavily on how it is drafted. This article examines the essential legal principles governing corporate guarantees under the Indian Contract Act, 1872, from the perspective of a creditor and sets out ten practical drafting considerations, along with related structuring and diligence points, to ensure that a CG is robust and enforceable.

Cardinal Principle – Section 126 to Section 147 of the Contract Act, 1872

Under Indian law, a CG is typically enforceable if it satisfies the basic requirements of the Indian Contract Act, 1872 (“Contract Act”). Chapter VIII of the Contract Act deals with the law relating to ‘Indemnity and Guarantee’, with the relevant provisions relating to guarantees being Sections 126 to 147.