9

The Indian Contract Act, 1872: Indemnity and Guarantee

9.1 INDEMNITY CONTRACT

A contract of indemnity is a special contract. All the general principles of the contract are equally applicable to it.

The contract by which one party promises to save the other from the 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’— Section 124.

The person who promises to make good the loss is called the indemnifier (Promisor) and the person whose loss is to be made good is called the indemnified or indemnity holder (Promisee). A contract of indemnity is really a class of contingent contracts.

Example

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. This is a contract of indemnity. A is an indemnifier or a promisor while B is an indemnity holder or a promisee.

9.2 ESSENTIAL ELEMENTS OF AN INDEMNITY CONTRACT

All the essentials of a valid contract must also be present in the contract of indemnity. The contract of indemnity is possible by the express or implied manner. It is a class of contingent contract. Following are the essential elements of the indemnity contract:

9.2.1 Loss to One Party

A person can indemnify another person, only if such other person incurs some loss or is about to incur some loss. Therefore, a contract of indemnity can be performed only when the loss has incurred to the promisee or the loss to the promisee has become certain.

9.2.2 Indemnity by the Promisor

The purpose of the contract of indemnity is to protect the indemnity holder from any loss that may be caused to the indemnity holder in future (i.e., such a loss has not already been caused to the indemnity holder).

9.2.3 Reason for Loss

The contract of indemnity may specify that the indemnity holder shall be protected from the loss caused due to the action of the promisor, or the action of any other person or any act, event or accident, which is not in the control of the parties.

9.3 RIGHT OF AN INDEMNITY HOLDER—SECTION 125

The indemnity holder has the right to recover the following from the indemnifier by the way of compensation:

9.3.1 Right to Recover Damages

The indemnity holder is entitled to recover from the indemnifier all the damages which he is compelled to pay in any suit in respect of any matter covered by the contract of indemnity.

9.3.2 Right to Recover Costs

The indemnity holder is entitled to recover from the indemnifier all the costs which he is compelled to pay in bringing or defending such suit. It may be noted that the indemnity holder must act within the scope of his authority and while bringing or defending the suit, he must act as a prudent person.

9.3.3 Right to Recover Sums Paid in Compromise

The indemnity holder is entitled to recover from the indemnifier all the amount which he has paid under the terms of a compromise of the suit. However, he must act within the scope of his authority. While in a compromise, he must act like a prudent man.

9.4 GUARANTEE

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 126). The contract of guarantee may be express, or implied, and may even be inferred from the course of conduct of the parties concerned.

Example

Sagar requests Chetan to lend ₹ 500 to Paresh and guarantees that if Paresh fails to pay the amount, he will pay. This is a contract of guarantee. Sagar, in this case, is the surety, Chetan, the creditor and Paresh, the principal debtor.

The contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditor, and the surety. Here, the following three collateral contracts may be distinguished:

1. As between the creditor and the principal debtor, there is a contract out of which the guaranteed debt arises.
2. As between the surety and the creditor, there is a contract by which the surety guarantees to pay to the creditor, the principal debtor’s debt, in case of his debtor’s default.
3. As between the surety and the principal debtor, there is a contract that the debtor shall indemnify the surety, in case the surety pays, in the event of a default by the principal debtor. This contract if it is not expressed between the parties is always implied.

9.5 ESSENTIAL ELEMENTS OF CONTRACT OF GUARANTEE

The essential elements of the contract of guarantee are discussed as under:

9.5.1 Concurrence

A contract of guarantee requires the concurrence of all the three parties to it viz., the principal debtor, the creditor and the surety.

9.5.2 Primary Liability in Some Person

There must be a primary liability in some person other than the surety. The word ‘liability’, as used in the definition of guarantee, means a liability which is enforceable at law. If that liability does not exist, there cannot be a contract of guarantee. But a guarantee given for the debt of a minor is an exception to this rule.

9.5.3 Essentials of a Valid Contract

A contract of guarantee must have all the essential elements of a valid contract like free consent, capacity of parties, lawful object and consideration. But the following two points should be noted:

1. All the parties must be capable of entering into a valid contract though the principal debtor may be a person suffering from the incapacity to contract. In such a case, the surety is regarded as the principal debtor and is liable to pay personally, even though the principal debtor (e.g., a minor) is not liable to pay.
2. A consideration received by the principal debtor is sufficient for the surety and it is not necessary that it must necessarily result in some benefit to the surety himself. It is sufficient if something is done or some promise is made for the benefit of the principal debtor.

9.5.4 Writing Not Necessary

A guarantee may be either oral or written. It may be express or implied. The implied guarantee may be inferred from the course of conduct of the parties concerned.

9.6 KINDS OF GUARANTEE

A guarantee may either be prospective or retrospective guarantee.

9.6.1 Retrospective Guarantee

A guarantee given for an existing debt or obligation is called the ‘retrospective guarantee’.

9.6.2 Prospective Guarantee

A guarantee given for a future debt or obligation is called the ‘prospective guarantee’.

A guarantee may be classified either as a specific guarantee, or a continuing guarantee.

9.6.3 Specific Guarantee

When a guarantee extends to a single transaction or debt, it is called the specific guarantee. The specific guarantee is also known as a simple guarantee. On the completion of a specific transaction, the guarantee is discharged.

9.6.4 Continuing Guarantee—Section 129

When a guarantee extends to a series of transactions, it is called the continuing guarantee. The continuing guarantee does not come to an end on the performance of a single transaction, or the discharge of debt but it will be enforceable for the subsequent transactions also. At the time of giving a continuing guarantee, the surety can either fix the amount of time.

Examples

1. A, in consideration that B will employ C in collection the rents of B’s Zamindari, promises B to be responsible to the amount of ₹ 5000 for the due collection and payment by C of those rents. This is a continuing guarantee.
2. ‘A’ becomes the surety of ‘C’ for B’s conduct as a manager in C’s bank, and ‘B’ is appointed on the faith of this guarantee. ‘A’ is precluded from annulling the guarantee so long as B acts as a manager in C’s bank.

A guarantee for the faithful discharge of his duties by a person appointed to a place of trust in a bank is not a continuing guarantee. It is a guarantee of appointment.

A guarantee for payment of a certain sum by installments, within a definite time, is not a continuing guarantee. It is a guarantee of loan.

9.7 REVOCATION OF A CONTINUING GUARANTEE

On the revocation of a continuing guarantee, the surety’s liability comes to an end for the future transactions. However, the surety is liable for the previous transactions. A continuing guarantee can be cancelled in the following manner:

9.7.1 By Notice—Section 130

The surety may cancel the continuing guarantee for further transaction at any time.

9.7.2 By Death of Surety—Section 131

A continuing guarantee is cancelled on the death of the surety. In such case, no notice is required to be given to the creditor. However, the contract may provide contrary to the above rule. On the death of the surety, the guarantee is cancelled but for the future transaction. For the past transaction which has already taken place, the surety’s estate will be liable.

9.7.3 On Discharge of Surety

A continuing guarantee is revoked when the surety is discharged from the liability.

9.8 SURETY’S LIABILITY—SECTION 128

Section 128 of Contract Act, 1872 explains about the surety’s liability as under:

9.8.1 Liability Is Secondary and Conditional

The liability of the principal debtor is primary. However, the surety’s liability is secondary and conditional. The surety is liable to the creditor only when a default is made by the principal debtor. The creditor can sue the surety without suing the principal debtor. As soon as the debtor has made a default in the payment of a debt, the surety is immediately liable. But until the default, the creditor cannot call upon the surety to pay. In this way, the nature of the surety’s liability is secondary.

If the principal debtor performs the contract in part, the surety shall be liable only in the respect of that part of the contract, which has not been performed by the principal.

9.8.2 Liability Is Coextensive with Liability of Principal Debtor

The liability of the surety is co-extensive with that of the principal debtor. It means the surety is liable for all the debts, payable by the principal debtor to the creditor. Accordingly, the interest, damages and costs which may be recovered from the principal debtor may also be recovered from the surety. Thus, ordinarily, the liability of the surety shall be the same as that of the principal debtor. However, the contract of guarantee may provide otherwise, i.e., the surety has a right to limit his liability.

Example

Amar guarantees to Balram, the payment of a bill of exchange by Chetan, the acceptor. The bill is dishonored by Chetan. Amar is liable not only for the amount of the bills but also for any interest and charges which may have become due on it.

The principal debtor and the surety are jointly and severally liable. If the principal debtor is not liable on the principal debt, the surety also shall not be liable. If the principal debt is illegal or is unenforceable, the principal debtor as well as the surety shall not be liable. If the principal debtor is discharged by the creditor’s breach, the surety shall also be discharged.

9.8.3 Surety’s Liability May Be Limited

Generally, the liability of the surety is the same as that of the principal debtor. However, the surety may limit his liability by the express provision in the contract of guarantee. Thus, the contract of guarantee may provide that the surety shall not be liable—

1. Beyond a fixed amount (where the guarantee is fixed on amount)
2. For any amount due after a fixed date (where the guarantee given with reference to the time period may be fixed during which the guarantee shall remain effective).

9.9 RIGHTS OF SURETY

The surety has certain rights against the creditors, the principal debtor and the co-sureties. These rights may be discussed as under:

9.9.1 Against the Principal Debtor—Sections 140 and 145

9.9.1.1 Right of Subrogation A subrogation means substitution of one person for another. According to this right, when the surety has paid the debt or discharged the performance of the debtor to the creditor, he is vested with all the rights which the creditor had against the principal debtor. The right of the surety is known as the right of the subrogation, namely the right to stand in the shoes of the creditor.

The surety is entitled to the benefit of all the security made available to the creditor by the principal debtor, whether the surety was aware of its existence or not.

9.9.1.2 Right of Indemnify The surety is entitled to recover from the principal debtor, whatever sums he has rightfully paid. The amount includes loan, interest and other costs, if any, paid to the creditor.

The surety can also claim indemnity for any special damages, which he has suffered, while discharging his duties. The surety can claim, even if he has paid a time barred debt, as it is a rightful payment, though there are contrary views on this issue.

Where the surety becomes a surety without the knowledge of the principal debtor, he is entitled for all the rights against the principal debtor but not the right to claim an indemnity against the principal debtor. However, the amount wrongfully paid cannot be recovered.

9.9.2 Against the Creditor

The rights of sureties against the creditor are the following:

9.9.2.1 Right to Claim Securities The surety is entitled for all the securities which the debtor has provided to the creditor, whether the surety is aware of it or not, on the payment of debt or discharge of the payment to the creditor.

Where the creditor loses any of the securities by the default or negligence, the liability of the surety reduces proportionately. If the creditor does not hand over the securities to the surety, he can be compelled to do so.

Example

C advances to B, his tenant, ₹ 2000 on the guarantee of A. C has also a further security for the ₹ 2000 by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from the liability to the amount of the value of the furniture.

9.9.2.2 Right of Set Off Set off means the deductions from the amount of loan. The surety has a right of set off against the principal debtor exactly as a creditor would have.

9.9.3 Against Co-sureties

When two or more persons give a guarantee for the same debt, they are termed as a co-sureties. All the co-sureties are equally liable to the creditor in the absence of any contrary contract. The rights of the co-sureties are discussed as under:

9.9.3.1 Right to Contribution When one co-surety pays the debt or discharges the entire obligation, he can recover equal contribution from the other co-surety. This rule is applicable whether the sureties are liable jointly or severally and whether their liability is under the same contract or a different contract. However, if the co-sureties fix their liability by an agreement, then they are liable to contribute as agreed among themselves.

Examples

1. A, B and C are sureties to D for the sum of ₹ 3000 lent to E. E makes default in payment. A, B and C are liable as between themselves, to pay ₹ 1000 each.
2. Amar has borrowed ₹ 1000 from a bank. Ram and Balram guaranteed for the repayment of the loan in the ration of 3:1. On default of Amar, Ram is liable to pay ₹ 750 and Balram is liable to pay ₹ 250.

It is important to note that where the co-sureties have agreed to guarantee different sums of one single debt to the principal debtor, even then they are liable to contribute equally, subject to the maximum limit fixed by them. Thus, within the maximum limit fixed by the co-sureties, they are liable to contribute an equal amount.

Examples

1. A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of ₹ 10,000, B in that of ₹ 20,000 and C in that of ₹ 40,000, conditioned for D’s duty accounting to E. D makes default to the extent of ₹ 30,000. A, B and C are each liable to pay ₹ 10,000.
2. A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of ₹ 10,000, B in that of ₹ 20,000 and C in that of ₹ 40,000, conditioned for D’s duly accounting to E. D makes default to the extent of ₹ 40,000. A is liable to pay ₹ 10,000, and B and C ₹ 15,000 each.
3. A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of ₹ 10,000, B in that of ₹ 20,000 and C in that of ₹ 40,000, conditioned for D’s duly accounting to E. D makes default to the extent of ₹ 70,000. A, B and C each have to pay the fully penalty of his bond.

9.9.3.2 Right to Share the Benefit of Securities If the one co-surety receives any security from the principal debtor at the time of guarantee or from the creditor on the discharge of debt or obligation of the principal debtor, other co-sureties are entitled to share the benefit of the securities.

9.10 DISCHARGE OF A SURETY

A surety may be discharged from the liability under the following circumstances:

9.10.1 By Notice of Revocation—Section 130

On the revocation of a continuing guarantee, the surety’s liability comes to an end for the future transactions. However, the surety is liable for previous transactions. A continuing guarantee can be cancelled in the following manner.

9.10.2 By Death of Surety—Section 131

On the revocation of a continuing guarantee, the surety’s liability comes to an end for the future transactions. However, the surety is liable for previous transactions. A continuing guarantee can be cancelled in the following manner:

9.10.3 By Variance in Terms of Contract—Section 133

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 the transactions subsequent to the variance.

Examples

1. A becomes the surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.
2. A guarantees C against the misconduct of B in an office, to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee though the misconduct of B is in the respect of a duty is not affected by the later Act.

9.10.4 By Release or Discharge of Principal Debtor—Section 134

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.

Example

A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his suretyship.

But where the creditor fails to sue the principal debtor within the limitation period, the surety is not discharged.

9.10.5 When Creditor Compound or Give Time to Debtor—Section 135

A contract between the creditor and the principal debtor is discharged when the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor without the consent of the surety.

9.10.6 By Creditor’s Act—Section 139

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.

Examples

1. B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes the surety to C for B’s due performance of the contract. C, without the knowledge of A, prepays to B, the last two instalments. A is discharged by this prepayment.
2. ‘A’ puts ‘M’ as the cashier under ‘B’ and agrees to stand as the surety, provided ‘B’ checks the cash every month. ‘M’ embezzles cash. ‘A’ was not held to be responsible as B failed to verify the cash every month.

9.10.7 By Release or Lose of Security by Creditor—Section 141

If the creditor loses or parts with any security given by the debtor at the time of entering into the contract of guarantee, the surety is discharged to the extent of the value of the security, unless the surety consented to the release of the security. It is immaterial whether the surety was or is aware of such a security or not.

9.10.8 By Invalidation of Contract of Guarantee

The surety is liable under the contract of guarantee, if the contract is valid. But in the following circumstances, the guarantee contract is treated as invalid:

1. When the guarantee has been obtained by the means of mis-representation.
2. When the guarantee is obtained by the concealment of facts or by remaining silent as to the material circumstances.
3. When the guarantee is given by the surety on the condition that the creditor shall not act until the co-surety join. And the co-surety fails to join.

Example

A engages B as a clerk to collect money for him and B fails to account for some of his receipts. There upon, A calls upon B to furnish security for his duly accounting the receipts. C gives the required guarantee. A does not inform C of the fact of a previous defalcation by B and thereafter, B again makes a default. The guarantee would be invalid.

9.11 DIFFERENCE BETWEEN A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEE

Contract of Indemnity	Contract of Guarantee
There are two parties to the contract viz., the indemnifier (promisor) and the indemnified (promise).	There are three parties to the contract viz., the creditor, the principal debtor and the surety.
Liability of the indemnifier to the indemnified is primary and independent.	Liability of the surety to the creditor is collateral or secondary, the primary liability being that of the principal debtor.
There is only one contract in the case of a contract of indemnity, i.e., between the indemnifier and the indemnified.	In a contract of guarantee, there are three contracts, between the principal debtor and the creditor, between the creditor and the surety, and between the surety and the principal debtor.
It is not necessary for the indemnifier to act at the request of the indemnified.	It is necessary that the surety should give the guarantee at the request of the debtor.
The liability of the indemnifier arises only on the happening of a contingency.	There is usually an existing debt or duty, the performance of which is guaranteed by the surety.
An indemnifier cannot sue a third party for the loss in his own name because there is no privity of contract. He can do so only if there is an assignment in his favour.	A surety, on discharging the debt due by the principal debtor, steps into the shoes of the creditor. He can proceed against the principal debtor in his own right.

LIST OF LANDMARK JUDGEMENTS

1. Osman Jamal and Sons vs Gopal Purshottam (1928)

   The disability of the indemnifier commences as soon as the liability of the indemnity holder becomes absolute.

2. Kashiba vs Shripat (1895)

   The contract of guarantee must be made by the parties, competent to the contract.

3. PN Bandak vs Sri Vikram Cotton Mills (1970)

   The liability of the surety should arise, only when the principal debtor makes a default.

4. Eastern Bank Ltd vs Parts Services of India (1986)

   The guarantee which is given for a series of transactions of continuing nature is a continuing guarantee.

5. Kanlu Bibi vs Abdullah (1880)

   If without the consent of the surety, the creditor makes any material change in the nature or terms of his contract with the principal debtor, the surety is discharged from the liability.

6. Midland Motors vs Newman (1929)

   When the creditors give more time to the principal debtor for the repayment without the consent of surety, he is discharged.

7. Gajanan Moreshwar vs Moreshwar Madan (1942)

   The indemnifier is to make the payment as soon as the liability arises. It is not that the indemnity holder should first pay, and then claim the reimbursement from the indemnifier.

8. Subramanian vs Narayanswami (1951)

   If the liability of principal debtor is reduced by the operation of law, the liability of surety is also reduced as liability is co-extensive with that of the principal debtor.

9. London General Omnibus Co. vs Holloway (1912)

   The continuing guarantee is uberrimaefidea. If material facts are concealed, the guarantee is invalid.

TEST YOUR KNOWLEDGE

1. Define the contract of indemnity.

   (Ref. Para-9.1)

2. What are the essentials of the contract of indemnity?

   (Ref. Para-9.2)

3. What are the legal rules for the contract of indemnity?

   (Ref. Para-9.2)

4. What are the rights of the indemnity holder?

   (Ref. Para-9.3)

5. Define the contract of guarantee.

   (Ref. Para-9.4)

6. What are the essentials for a valid contract of guarantee?

   (Ref. Para-9.5)

7. There is no consideration in case of the contract of guarantee. Comment.

   (Ref. Para-9.5)

8. The contract of guarantee may be oral or in writing. Comment.

   (Ref. Para-9.5)

9. What are the various kinds of guarantee?

   (Ref. Para-9.6)

10. What is a continuing guarantee? How it can be revoked?

    (Ref. Para-9.6,9.7)

11. A continuing guarantee can never be revoked. Comment.

    (Ref. Para-9.7)

12. The death of the surety operates as a revocation of the continuing guarantee and not of the specific guarantee. Comment.

    (Ref. Para-9.7)

13. State the nature and extent of the surety’s liability.

    (Ref. Para-9.8)

14. Liability of the surety is primary and independent. Comment.

    (Ref. Para-9.8)

15. In the contract of guarantee, the primary liability is of the surety. Comment.

    (Ref. Para-9.8)

16. What are the surety’s rights against the principal debtor and the creditor?

    Does he have any right against the co-sureties?

    (Ref. Para-9.9)

17. What are the rights of surety against the other co-surety?

    (Ref. Para-9.9)

18. What are the rights of surety against the principal debtor?

    (Ref. Para-9.9)

19. What are the rights of surety against the creditor?

    (Ref. Para-9.9)

20. How, and in what circumstances, is the surety discharged from his liability?

    (Ref. Para-9.10)

21. In what circumstances is the contract of guarantee regarded as invalid?

    (Ref. Para-9.10)

22. Variance in the terms of contract of guarantee do not affect contract. Comment.

    (Ref. Para-9.10)

23. When does the creditor’s act discharge surety?

    (Ref. Para-9.10)

24. Loss of security by the surety means the loss of surety. Explain.

    (Ref. Para-9.10)

25. Explain the difference between the contract of indemnity and the contract of guarantee.

    (Ref. Para-9.11)

MULTIPLE-CHOICE QUESTIONS

1. The number of contracts in the contract of guarantee are
   1. two.
   2. three.
   3. four.
   4. none of the above.
2. Liability of the surety is
   1. coextensive with the principal debtor.
   2. primary with the principal debtor.
   3. secondary to the principal debtor.
   4. all of these.
3. A contract in which one person promises to compensate the other for the loss suffered by him, due to the conduct of the promisor or of any other person, is known as a
   1. contract of indemnity.
   2. contract of guarantee.
   3. quasi-contract.
   4. none of the above.
4. The party who gives the indemnity is known as
   1. the indemnity-holder.
   2. the indemnifier.
   3. the surety.
   4. the principal debtor.
5. Section 124 defines the contract of indemnity in a wider sense as it also covers all the contracts of insurance, whereas the English Law defines this term in a narrower sense as it does not cover the insurance contracts.
   1. True
   2. False
6. One of the following is not an essential of a valid contract of indemnity, which states that it must
   1. have requisites of a valid contract.
   2. be to save a party from some loss.
   3. be in writing and signed.
   4. be lawful in nature.
7. Co-sureties bound in different sums are liable to pay
   1. equally, as far as the limits of their respective obligation permit.
   2. proportionally, according to their respective obligation.
   3. none of the above.
8. On making the payment of the loss suffered by the indemnity-holder, the indemnifier’s rights are not provided in any section of the Contract Act, thus he gets
   1. the right of surety.
   2. the moral right.
   3. the fundamental rights.
   4. none of the above.
9. The liability of the indemnifier to compensate the indemnity-holder commences when
   1. the indemnity-holder has suffered actual loss.
   2. the liability of the indemnity-holder becomes clear and certain.
   3. he is called upon to pay.
   4. he fixes the date for the same.
10. A contract in which a person promises to discharge the liability of another person, in case of default by such person, is known as a
    1. quasi-contract.
    2. contract of indemnity.
    3. contract of guarantee.
    4. none of the above.
11. In a contract of guarantee, a person who promises to discharge another’s liability is known as
    1. the principal debtor.
    2. the creditor.
    3. the indemnified.
    4. the surety.
12. A guarantee given for the minor’s debts is
    1. valid.
    2. void.
    3. voidable.
    4. illegal.
13. The liability of a surety is
    1. more than that of the principal debtor.
    2. less than that of the principal debtor.
    3. same as that of the principal debtor.
    4. dependent on the court’s discretion.
14. The liability of a surety arises when
    1. the principal debtor commits a default in payment.
    2. the creditor fails to recovery anything from the principal debtor.
    3. the surety is reimbursed by the principal debtor.
    4. the court directs him to pay.
15. On default of the principal debtor, the creditor cannot proceed against the surety, until he exhausts all the remedies against the principal debtor.
    1. True
    2. False
16. A surety is discharged from the liability by
    1. revocation notice by surety.
    2. material alteration in terms.
    3. discharge of principal by the creditor.
    4. all of the above.
17. Two parties, namely the ‘indemnifier’ and the ‘indemnity-holder’, are involved in a contract of indemnity. And the parties in a contract of guarantee are
    1. three, the creditor, the principal debtor and the surety.
    2. two, the creditor and the principal debtor, as surety is simply a guarantor not a party.
18. A contract of insurance is also a contract of indemnity.
    1. True
    2. False
19. The liability of the indemnifier is the primary liability.
    1. True
    2. False
20. The discharge of the principal debtor will discharge the surety also.
    1. True
    2. False
21. The death of the surety brings an end to a continuing guarantee.
    1. True
    2. False
22. The guarantee given for a person incompetent to enter into a contract is not enforceable?
    1. True
    2. False
23. The rights of surety may be discussed under the
    1. rights against the principal debtor.
    2. rights against the creditor.
    3. rights against the co-sureties.
    4. all of the above.
24. A surety is discharge from the liability
    1. on the death of the surety.
    2. on the notice of revocation by the surety.
    3. on composition with the principal debtor.
    4. all of the above.
25. A surety is discharged from the liability
    1. by giving more time to the principal debtor.
    2. by impairing the surety’s remedy.
    3. all of the above.
    4. none of the above.

ANSWER KEYS

1. i
2. i
3. i
4. ii
5. ii
6. iii
7. i
8. i
9. ii
10. iii
11. iv
12. i
13. iii
14. i
15. ii
16. iv
17. i
18. i
19. i
20. ii
21. i
22. ii
23. iv
24. iv
25. iii