Law of Guaranty

As in English law in Islamic law under the law of guaranty a third party (the guarantor) becomes liable for the debt or obligations of another (‘the claim’).[1] The principal debtor and the guarantor are jointly liable with respect to the creditor under a contract of Guaranty. The creditor then has the option of demanding payment from either party.

The Parties and Offer/Acceptance

The majority view is that only the principal debtor and the guarantor (not the creditor) must agree to the contract.

In an exception to the usual stipulations regarding the majority and capacity of the parties, the principal debtor need not be of age nor mentally competent — the guarantor may in effect act as a guardian and in this case the principal debtor may not be present and the guarantor may undertake his or her role unilaterally.

Knowledge of the Parties

Whatever the age and legal status of the principal debtor the guarantor must have personal knowledge of them and of their financial position.

Half of the legal schools also require the guarantor to know the creditor.

The particulars of the claim must be known to the parties.

Terms of Guaranties

A guaranty can be conditional upon the passage of time or the incidence of particular events. For example a guaranty may not come into effect until a specified installment of a loan is due, or until the principal debtor leaves a country. A contract of guaranty may be concluded before or after a debt has been incurred; a minority view holds that a guaranty may begin at a specified point in time, not attached to any particular event.

A guarantor may not charge a fee[2].

Termination

  •  the discharge of the debt or obligation
  • the transfer of debt from the principal debtor  to another by means of Transfer of Debt
    • which has the effect of releasing both principal debtor and guarantor
  • the creditor voluntarily cancels the debtm
    • which has the effect of releasing  guarantor as well
  • the creditor terminates the guaranty with or without agreement of the principal debtor or guarantor
  • the death of the principal debtor
    • however the death of the guarantor does not as the debt could be paid  by means of the guarantor7s estate

Law of Agency

Mejelle, 3rd Book, Preface-Definitions and Chapters I-III.

[1] These may not include trust-based liabilities, such as those contracts based on Deposit, Partnerships (including Sleeping Partnerships), Lease, or Pledge. In addition to property (whether a debt or a specific physical object), the claim may also include the presence of a person, for example before a Court — i.e. a surety.

[2] The Contract of Guaranty is not tantamount to commercial insurance, which would involve gharar — unless practiced in its Islamic variant.