Indemnity And Guarantee MCQ Quiz - Objective Question with Answer for Indemnity And Guarantee - Download Free PDF

The correct answer is Contract of indemnity

Key Points

• Section 124 of the Indian Contract Act says that "A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity."
• There are two parties: the indemnifier (who promises to compensate) and the indemnified (who is protected from loss).
• The loss may arise from:
  • The conduct of the promisor himself, or
  • The conduct of any third party.
  • The contract can be express or implied.
• Example: A promises to compensate B if B suffers any loss because A has published a book that may result in a defamation lawsuit. If B is sued and suffers a loss, A must indemnify B.

The correct answer is option 1.Key Points

•  Section 126 of Indian Contract Act 1872 deals with  “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.
• A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default.
• The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

The correct answer is Option 2

Key Points

•  According to Section 138 of the Indian Contract Act, when a creditor decides to release one of the co-sureties, it doesn't mean that the other co-sureties are relieved from their obligations.
• Instead, only the surety who is released is freed from their obligations towards the creditor.
• Nevertheless, this released surety continues to have obligations towards the other co-sureties.
• This ensures that the principle of shared responsibility among co-sureties is maintained, even if the creditor chooses to release one of them from their contractual obligations.

The correct answer is A is not liable to B on his guarantee.

Key Points

• The above question is taken from the illustration (c) of Section 139 of the Indian Contract Act, 1872.
• Section 139 provides for the Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.
• It states that —If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.
• Illustration (c): A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part that he will, at least once a month, see M make up the cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee.

The correct answer is Option 3

Key Points

• Section 141 specifies that if the creditor loses or parts with the security without the consent of the surety, the surety is discharged to the extent of the value of the security.

Key Points

 Section 126 of The Indian Contract Act, 1872 defines a guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default.

• The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor‘.

illustration:

• ​Assuming party A and party B enter into a contract with Party C as the surety. Now according to this contract of guarantee Party B has to pay Party A a sum of Rs. 1000, but fails to do so for any variety of reasons. Now Party C will now be liable to discharge the 1000 Rs. to Party A.

Basic Essentials for Contract of Guarantee under the Indian Contract Act: 
Along the lines of every other type of contract, a contract of guarantee in the Indian Contract Act also has certain basic essentials of a Contract of Guarantee that make it valid. Those essentials can be classified into the following:

1. Agreement by all Parties

• All three parties who are the creditor, principal debtor and surety must agree to the terms of the contract.

2.Liability

• In all contracts of guarantee, the creditor can only ask the surety to discharge the liability after the principal debtor has not discharged his promise i.e. the liability.

3. Existence of debt

• No contract of guarantee can exist without a debt for consideration which is accepted by the law. Additionally, if the debt is barred by a time limit or has become void, the surety will not be liable.

4. Consideration

•  This means that any benefit received by the principal debtor can be considered as a suitable consideration.

5. Two forms of a guarantee contract

• Contracts of guarantee can be of two forms, either verbal or written

6. Essentials of a Valid Contract

• This means that just like any other contract, a contract of guarantees requires certain common essentials of a contract such as acceptance, intention to contract, acceptance, ability to contract, the legality of the contract, creation of a legal relationship, lawful object if any, legal consideration, free and fair consent, performance standards, legal formalities etc.

7. All facts must be brought to light

• The creditor must inform the surety of all the facts that affect his liability. Concealment of any facts will invalidate the contract.
• This is highlighted in section 143 of the Indian Contracts Act, 1872

8.No misrepresentation of facts

• The guarantee should not be obtained through misrepresenting facts to the surety.
• Though not all facts need to be mentioned to him, any facts that affect the surety’s extent in the liability must be brought to his notice accurately.
• This can be seen in Section 142 of The Indian Contracts Act.

The correct answer is Option 4. 

Key Points Section 124.   "Contract of indemnity" defined

• A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.

Illustration: 

• A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
• A tells B, the shopkeeper, “Give Z the Goods, I will see you paid” - this contract is indemnity. 

This definition provides the following essential elements –

1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person (in Indian context loss is to be caused by only by a human agency.)
3. Indemnifier is liable only for the loss.

Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss occurs. 

Additional InformationThis was held in the case of United Commercial Bank vs Bank of India AIR 1981.

• In this case, Supreme Court held that the courts should not grant injunctions restraining the performance of contractual obligations arising out of a letter of credit or bank guarantee if the terms of the conditions have been fulfilled.
• It held that such LoCs or bank guarantees impose on the banker an absolute obligation to pay.

In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997, Calcutta HC held that: 

• the indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the surveyor.
• Any settlement at lesser value is arbitrary and unfair and violates Article 14 of the constitution. 

The correct answer is option 1.Key Points

•  Section 126 of Indian Contract Act 1872 deals with  “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.
• A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default.
• The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

The correct answer is option 3

Key Points According to section 126, a "contract of guarantee" is specifically defined as a contract to perform the promise or discharge the liability of a third person (principal debtor) in case of his default.

The correct the Section 140

Key Points

•  The surety's right of subrogation is incorporated under Section 140 of the Indian Contract Act, 1872.
• This section details the rights of a surety upon the discharge of his obligations, granting him the right to step into the shoes of the creditor, allowing the surety to exercise all the rights that the creditor had against the principal debtor regarding the debt or obligation fulfilled by the surety.

The correct answer is either 1) or 2).

Key Points

• Section 126 of the Indian Contract Act, 1872, provides for the “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.
• It states that—A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”.
  A guarantee may be either oral or written.

The correct answer is option 3.

Key Points

•  Under the Indian Contract Act, 1872, there are specific circumstances where a surety's liability can be discharged.
• Two such circumstances include the release or discharge of the principal debtor and any variance in the terms of the contract without the surety's consent.
• Discharge by Release or Discharge of the Principal Debtor: The discharge of a surety through the release or discharge of the principal debtor is addressed in Section 134 of the Indian Contract Act, which states:
  • "Discharge of surety by release or discharge of principal debtor.—The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor."
  • This provision highlights that if the creditor releases the principal debtor from the obligation, or any act or omission legally results in the discharge of the principal debtor, the surety is consequently discharged from liability. This is based on the principle that the surety's obligation is secondary and contingent upon the liability of the principal debtor. If the principal debtor is no longer liable, the surety's basis for liability is voided.
• Discharge by Variance in the Terms of Contract: The effect of variance in the terms of the contract on the surety's liability is outlined in Section 133 of the Indian Contract Act, which reads:
  • "Discharge of surety by variance in terms of contract.—Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance."
  • According to Section 133, any change in the terms of the contract between the principal debtor and the creditor, done without the surety's consent, releases the surety from any liability for transactions that occur after the change. The rationale behind this provision is to protect the surety, who consented to be liable under specific terms known to them at the time of the contract. Any unilateral alterations to those terms without the surety's consent could impose unforeseen liabilities on the surety, thus justifying their discharge.
• Both these sections of the Indian Contract Act, 1872, lay down clear grounds under which a surety's liability can be discharged, either due to actions affecting the status or liability of the principal debtor or due to changes in the contractual terms that were not agreed upon by the surety. These provisions ensure that the surety's liability is not extended or altered without their consent, protecting their interests and upholding the principles of fairness and consent inherent in contract law.

The correct answer is option 1.Key Points

• Section 126 of Indian Contract Act 1872 deals with “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.
• A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default.
• The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”.
• A guarantee may be either oral or written.
• Section 129 deals with “Continuing guarantee”.
• A guarantee which extends to a series of transactions, is called a “continuing guarantee”
• Section 130.   Revocation of continuing guarantee.
  A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

Additional Information

• Section 130 deals with Revocation of continuing guarantee.
• A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
• Section 131 deals with revocation of continuing guarantee by surety’s death.
• The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

Key Points

 Section 126 of The Indian Contract Act, 1872 defines a guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default.

• The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor‘.

illustration:

• ​Assuming party A and party B enter into a contract with Party C as the surety. Now according to this contract of guarantee Party B has to pay Party A a sum of Rs. 1000, but fails to do so for any variety of reasons. Now Party C will now be liable to discharge the 1000 Rs. to Party A.

Basic Essentials for Contract of Guarantee under the Indian Contract Act: 
Along the lines of every other type of contract, a contract of guarantee in the Indian Contract Act also has certain basic essentials of a Contract of Guarantee that make it valid. Those essentials can be classified into the following:

1. Agreement by all Parties

• All three parties who are the creditor, principal debtor and surety must agree to the terms of the contract.

2.Liability

• In all contracts of guarantee, the creditor can only ask the surety to discharge the liability after the principal debtor has not discharged his promise i.e. the liability.

3. Existence of debt

• No contract of guarantee can exist without a debt for consideration which is accepted by the law. Additionally, if the debt is barred by a time limit or has become void, the surety will not be liable.

4. Consideration

•  This means that any benefit received by the principal debtor can be considered as a suitable consideration.

5. Two forms of a guarantee contract

• Contracts of guarantee can be of two forms, either verbal or written

6. Essentials of a Valid Contract

• This means that just like any other contract, a contract of guarantees requires certain common essentials of a contract such as acceptance, intention to contract, acceptance, ability to contract, the legality of the contract, creation of a legal relationship, lawful object if any, legal consideration, free and fair consent, performance standards, legal formalities etc.

7. All facts must be brought to light

• The creditor must inform the surety of all the facts that affect his liability. Concealment of any facts will invalidate the contract.
• This is highlighted in section 143 of the Indian Contracts Act, 1872

8.No misrepresentation of facts

• The guarantee should not be obtained through misrepresenting facts to the surety.
• Though not all facts need to be mentioned to him, any facts that affect the surety’s extent in the liability must be brought to his notice accurately.
• This can be seen in Section 142 of The Indian Contracts Act.

The correct answer is Option 4. 

Key Points Section 124.   "Contract of indemnity" defined

• A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.

Illustration: 

• A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
• A tells B, the shopkeeper, “Give Z the Goods, I will see you paid” - this contract is indemnity. 

This definition provides the following essential elements –

1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person (in Indian context loss is to be caused by only by a human agency.)
3. Indemnifier is liable only for the loss.

Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss occurs. 

Additional InformationThis was held in the case of United Commercial Bank vs Bank of India AIR 1981.

• In this case, Supreme Court held that the courts should not grant injunctions restraining the performance of contractual obligations arising out of a letter of credit or bank guarantee if the terms of the conditions have been fulfilled.
• It held that such LoCs or bank guarantees impose on the banker an absolute obligation to pay.

In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997, Calcutta HC held that: 

• the indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the surveyor.
• Any settlement at lesser value is arbitrary and unfair and violates Article 14 of the constitution.