Contract of Indemnity and Guarantee

1. What is a contract of indemnity?

a) A contract to compensate for loss caused to a third party
b) A contract to compensate for loss caused to the promisee
c) A contract of guarantee
d) A contract between two companies
Answer: b) A contract to compensate for loss caused to the promisee

2. Who is the indemnifier in a contract of indemnity?

a) The person who promises to compensate for loss
b) The person who suffers loss
c) The third party
d) The guarantor
Answer: a) The person who promises to compensate for loss

3. A contract of guarantee involves how many parties?

a) One
b) Two
c) Three
d) Four
Answer: c) Three

4. Which of the following is NOT a party to a contract of guarantee?

a) Principal debtor
b) Surety
c) Creditor
d) Indemnifier
Answer: d) Indemnifier

5. The liability of the surety in a contract of guarantee is:

a) Primary
b) Secondary
c) Joint and several
d) Unlimited
Answer: b) Secondary

6. When does the surety’s liability arise?

a) When the principal debtor defaults
b) At the time of contract
c) When the creditor demands payment
d) When the creditor forgives the debt
Answer: a) When the principal debtor defaults

7. In a contract of indemnity, who can claim compensation?

a) The indemnifier
b) The indemnity holder who suffers loss
c) The creditor
d) Any third party
Answer: b) The indemnity holder who suffers loss

8. Which Act governs contracts of indemnity and guarantee in India?

a) Indian Contract Act, 1872
b) Sale of Goods Act
c) Negotiable Instruments Act
d) Companies Act
Answer: a) Indian Contract Act, 1872

9. A contract of guarantee must be:

a) Oral only
b) In writing only
c) Written or oral
d) Not necessary to be in writing
Answer: c) Written or oral

10. Which of the following is true regarding the revocation of a guarantee?

a) It cannot be revoked once given
b) It can be revoked at any time without notice
c) It can be revoked after giving notice to the creditor
d) It can be revoked only by the principal debtor
Answer: c) It can be revoked after giving notice to the creditor

11. Which of the following is NOT essential for a valid contract of guarantee?

a) Consideration
b) Free consent
c) Agreement in writing only
d) Competent parties
Answer: c) Agreement in writing only

12. A continuing guarantee applies to:

a) A single transaction
b) A series of transactions
c) Only cash loans
d) None of the above
Answer: b) A series of transactions

13. A surety is discharged from liability when:

a) The creditor releases the principal debtor
b) The surety demands it
c) The principal debtor pays partial amount
d) The debtor becomes insolvent
Answer: a) The creditor releases the principal debtor

14. A contract of indemnity is a contract:

a) To compensate loss
b) To discharge a liability
c) Of bailment
d) For sale of goods
Answer: a) To compensate loss

15. The liability of the surety is:

a) Greater than that of the principal debtor
b) Co-extensive with that of the principal debtor
c) Independent of the principal debtor
d) Lesser than the principal debtor
Answer: b) Co-extensive with that of the principal debtor

16. In which of the following cases is the surety discharged from liability?

a) By variance in the terms of contract without surety’s consent
b) Death of the principal debtor
c) Death of the creditor
d) Increase in interest rate
Answer: a) By variance in the terms of contract without surety’s consent

17. In a contract of guarantee, the party who gives the guarantee is called:

a) Principal debtor
b) Indemnity holder
c) Surety
d) Creditor
Answer: c) Surety

18. When can an indemnity holder recover the loss?

a) Only after actual loss is incurred
b) As soon as the liability is absolute
c) Whenever he wishes
d) After approval from court
Answer: b) As soon as the liability is absolute

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19. Which of the following is NOT true regarding contracts of indemnity?

a) There must be a loss
b) The contract may be express or implied
c) It can be only for actual loss
d) It includes punishment for crime
Answer: d) It includes punishment for crime

20. Who is primarily liable in a contract of guarantee?

a) Surety
b) Principal debtor
c) Creditor
d) Court
Answer: b) Principal debtor