Contract Of Guarantee

Contract of Guarantee is a tripartite agreement governed by Indian Contract Act, 1872. However, in overseas guarantee prior permission of Authorized Dealer Bank is required 1. After the permission from AD bank2, a person resident in India is allowed to issue a corporate guarantee in favour of overseas lessor3. Also AD bank can give guarantees in favour of persons resident in India in respect of any debt or other obligation or liability of a person resident outside India, subject to such instructions as may be issued by RBI from time to time. Concerning the foreign governing clause, it has been settled that parties are free to select any governing law they wished, irrespective of any connection with the contract, provided that the choice was bonafide, legal and not contrary to public policy4. Even when the governing law of contract chosen by party is of some country of which no party belongs, it would be valid contract and parties would be governed by their express choice of law5.

1 Under the provisions of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000

2 Inserted by Notification No. FEMA 206 / 2010-RB dated June 1, 2010 3 In conformity with the Foreign Trade Policy in force and under the provisions of the Foreign 4 Vita Food Product Inc v Unus Shipping Co.Ltd 5 Rhodia Ltd. v. Neon Laboratories Ltd., AIR 2002 Bombay 502