Indian Contract Act, 1872: Indemnity and Guarantee

Indian Contract Act, 1872: Indemnity and Guarantee – CA Inter Law Question Bank

Question 1.
Answer the following:
Define a contract of Indemnity and State the rights of the indemnity holder when sued. (Nov 1998, 5 marks)
OR
Briefly answer of the following:
What are the rights of an indemnity-holder, against the indemnifier in a contract of indemnity? (May 1999, Nov 1999, May 2001, 5 marks each)
Answer:
The term Indemnity means to make good the loss or to Compensate. It is an act of the party to compensate the other party for he loss suffered by him. Sec. 124 of the Indian Contract Act defines a Contract of Indemnity as: A contract by which one party promises to save the oter from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called contract of indemnity. This can be explained by the following flow diagram:

The rights of the indemnity holder-As per section 125 of the Act, the indemnity-holder is entitled to recover from the promisor:
(i) All the costs of suit which he had paid in bringing or defending the suit provided:
(a) he worked under the authority of indemnifier and
(b) he worked in such a way as a normal man would act in his own case. [Sec. 125(1)]
(ii) Any sum paid under the terms of any compromise of any such suit. it the compromise is not against to the order of the indemnifier and was one which it would have been prudent for the promisee to make. [Sec. 125(2)]
(iii) All the damage which he may be forced to pay in any Suit in respect of any matter to which the promise to indemnity is used. [Sec. 125(3)]

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Question 2.
State with the reasons whether the following statement is correct or incorrect:-
A Contract of indemnity is not a Contingent contract’, (2002- May 2 marks)
Answer:
Incorrect: A contract of indemnity is a type of a contingent contracts. Because, in these contracts, the performance depends upon the happening or non-happening of certain event that is loss is caused by the conduct of the promisor of any other person.

Question 3.
State with reasons whether the following statements is correct or incorrect:
(ii) The contract of Insurance is not fully covered under the contract of Indemnity. (Nov 2008, 1 mark)
Answer:
Correct: According to Sec. 124 0f the Indian Contract Act 1872, loss should occur due to conduct of promisor or some other person. It does not include loss due to natural calamity. On the other hand, contract of Insurance includes loss due to natural calamity also. Thus, contract of insurance, though a contract of indemnity, but is not fully covered under Indian Contract Act, 1872.

Question 4.
Pick out the correct answer from the following and give reasons:
(i) A contracts to save B against the consequences of any proceedings which C may take against B in respect of a certain sum of 500 rupees.
This is a,
(1) Contract of guarantee
(2) Quasi contract
(3) Contract of Indemnity
(4) Void contract. (Nov 2009, 1 mark)
Answer:
(3) Contract of Indemnity’: According to Sec. 124 of Indian Contract Act, 1872, a Contract of Indemnity is a contract by which one party promises to save or indemnify the other from loss caused to him by the promisor himself or by the conduct of any other person.

Question 5.
Objective
State with the reasons whether the following statement is correct or incorrect:-
A Contract of guarantee is a tripartite contract. (May 2000, Nov 2000, 2 marks each)
Answer:
Correct: There are three contracts in the contracts of guarantee, one between the principal debtor and the creditor, second between the principal debtor and the surety and third between the surety and the creditor.

Question 6.
State with the reasons whether the following statement is correct or incorrect:-
A contract of guarantee is required to be in writing. (May 2001, 2 marks)
Answer:
Incorrect: Section 126 of the Indian Contract Act,1872 states that a guarantee may be either oral or written. Thus, ¡t is not important that the contract of guarantee must be expressed in writing.

Question 7.
Each subdivision carries one mark, Píck-tip the correct answer from the following:
(i) In a contract of guarantee a person, who promises to discharge another’s liability is called:
(a) Principal Debtor
(b) Creditor
(c) Indemnifier
(d) Surety. (May 2007, 1 mark)
Answer:
(d) Surety.

Question 8.
Choose the correct answer from the following and give reasons.
(ii) In a contract of guarantee there are:
(a) one contract
(b) two contracts
(c) three contracts
(d) four contracts. (Nov 2010,1 mark)
Answer:
(c) Three contracts

Reason: As per Sec. 126 of the Indian Contract Act, 1872, a ‘Contract of Guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. In a Contract of Guarantee, there are three contracts arising between
(i) the Creditor and Principal debtor.
(ii) Creditor and Surety, and
(iii) Principal debtor and Surety.
While the contract between Principal debtor and Creditor is primary the other two contracts are secondary.

Question 9.
State whether the following statement is correct or incorrect:
(ii) In contract of guarantee there are three contracts. (Nov 2013, 1 mark)
Answer:
(ii) Correct.

Question 10.
‘C’ advances to ‘B’ ₹ 2,00,000 on the guarantee of ‘A’. ‘C’ has also taken a further security for the same borrowing by mortgage of B’s furniture worth ₹ 2,00,000 without knowledge of ‘A’. ‘C’ cancels the mortgage. After 6 months ‘B’ becomes insolvent and ‘C’ sues ‘A’ on his guarantee. Decide the liability of ‘A’ if the market value of furniture s worth ₹ 80,000, under the Indian Contract Act, 1872. (Nov 2019, 4 marks)
Answer:
As per Section 141 of the Indian Contract Act, 1872, a surety is entitled to the benefit of every security which the creditor has against the principal debtors at the time when the contract of surety-ship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses or without the consent of the surety, parts with such security, the survey is discharged to the extent of the value of the security.

Present Case:
In this case, C advances to B ₹ 2,00,000 on the guarantee of A – C has also taken a further security for the same borrowing by mortgage of B’s furniture worth ₹ 2,00,000 without knowledge of A – C cancels the mortgage. After 6 months B become insolvent and C sues A on his guarantee. So as per the above provisions, A is discharged from his liability to the amount of furniture worth ₹ 80,000 and will remain liable for the balance ₹ 1,20,000.

Question 11.
Satya has given his residential property on rent amounting to ₹ 25,000 per month to Tushar. Amit became the surety for payment of rent by Tushar. Subsequently, without Amit’s consent, Tushar agreed to pay higher rent to Satya. After a few months of this, Tushar defaulted in paying the rent.
(i) Explain the meaning of contract of guarantee according to the provisions of the Indian Contract Act, 1872.
(ii) State the position of Amit in this regard. (Jan 2021, 4 marks)

Question 12.
Distinguish between ‘Contract of Indemnity’ and ‘Contract of Guarantee’. (May, 1998 May 1999, Nov 2017, Nov 2020, 4 marks each)
Answer:
Difference between Contract of Indemnity and Contract of Guarantee

Question 13.
Comment on the following:
(C) The Liability of a Surety is co-extensive with that of the principal debtor. (May 1998, Nov 2000, 5 marks each)
Answer:
According to Sec. 128 of the Indian Contract Act, the liability of the surqty is co-extensive with that of the principal debtor. Unless it is otherwise provided by the contract. In other words, the surety is liable for all those amounts, the principal debtor is liable for. The surety would not be liable, it the principal debtor is not liable on the principal debt. If the principal debt is unenforceable or illegal, the principal debtor, and surety are not liable. If the principal debtor is discharged by the creditors breach, surety will not liable (Unity Finance Ltd. V. Woodcock, 1963).

The liability of surety is called as secondary or contingent, as his liability arises only whom default is made by principal debtor. Thus, as soon as the principal debtor defaults, the liability of surety; begins and runs co-expensive with the liability of principal debtors. A suit can be filed by the creditor against the surety without suing the principal debtor. The creditor is also not responsible to give notice of default to the surety unless it is expressly provided for.

Question 14.
Write brief answers the following:
(c) Nature of surety’s liability. (Nov 2001, 5 marks)
Answer:
Nature of sureties liability:

1. The nature of surety’s liability is secondary.
2. Surety can be made responsible only to the extent defaulted by the principal debtor, because his liability is a primary one under the contract of guarantee.
3. The surety’s liability comes to an end, it the principal debtor does not makes a default and performs the contract according to agreed terms and conditions.
4. If a partial default is made by the principal debtor, then the surety will be liable only for that part of contract which Is not performed by the principal debtor.
5. Since, Surety’s liability is secondary it begins as soon as the principal debtor defaults.

Question 15.
Mr. D was in urgent need of money amounting ₹ 5,00,000. He asked Mr. K for the money. Mr. K lent the money on the sureties of A, B, and N without any contract between then in case of default in repayment of money by D to K. D makes default in payment. B refused to contribute, examine whether B can escape liability? (May 2018, 4 marks)
Answer:
Co-sureties liable to contribute equally:
As per Sec. 146 of the Indian Contract Act, 1872, when two or more persons are co-sureties for the same debt or duty either jointly, or severally and whether under the same or different contracts and whether with or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between themselves to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.

Present Case:
A, B and N are co-sureties without any contract between them. D makes default in payment. B refused to contribute. As per the provision, B can not escape liability and has to pay equally with A and N.

Question 16.
Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two years contract at a monthly salary of ₹ 50,000. Mr. Pawan gave a surety in respect of Mr. Cietan’s conduct. After six months the company was not in position to pay ₹ 50,000 to Mr. Chetan because of financial constraints. Chetan agreed for a lower salary of ₹ 30,000 from the company. This was not communicated to Mr. Pawan. Three months afterwards it was discovered that Chetan had boon doing fraud since the time of his appointment. What is the liability of Mr. Pawan during the whole duration of Chetan’s Appointment? (Nov 2018, 4 marks)
Answer:
Provision:
As per Sec. 133 of the Indian Contract Act, 1872, if the creditor makes any variance (i.e. change in terms) without the consent of the surety, then surety discharged with as to the transactions subsequent to the change.

Present Case:
In the instant case Mr. Pawan is liable as a surety for the loss suffered by the company due to fraud by Mr. Chetan during the first six months but not for fraud committed after the reduction in salary. Mr. Pawan, wiil thus be liable as a surety for the act of Mr. Chetan before the change in the terms of the contract i.e., during the first six months. Variation in the terms ot the contract (as to the reduction of salary) without consent of Mr. Pawan, will discharge Mr. Pawari from all the liabilities towards the act of the Mr. Chetan after such variation.

Question 17.
Aarlhi is the wife of Naresh. She purchased some sarees on credit from M/s Rainbow Silks, Jaipur. M/s Rainbow Silks. Jaipur demanded the amount from Naresh. Naresh refused. M/s Rainbow Silks, Jaipur filed a suit against Naresh for the said amount. Decido in the light of provisions of the Indian Contract Act, 1872, whether M/s Rainbow Silks. Jaipur would succeed? (May 2019, 4 marks)
Answer:
Provision:
As per the provisions of the Indian Contract Act, 1872, if a person permits or represents another to act on his behalf so that a reasonable person would infer that the relationship of principal and agent had been created then he will be stopped from denying his agent’s authority and getting himself relieved from his obligation to a third party by proving that no such relationship intact exist. However, where, a married woman lives with her husband, there is a presumption that she has the authority to pledge his credit for necessaries.

But the legal presumption can be rebutted In the following cases:

• Where the goods purchased on credit are not necessary.
• Where the wife is given sufficient money for purchasing necessaries.
• Where the wife is forbidden from purchasing anything on credit or contracting debts.
• Where the trader has been expressly warned not to give credit to his wife.

If the Wile lives apart for no fault on her part, wile has authority to pledge her husband’s credit for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv) above.

In this case, Aarthi. wile of Naresh purchased some Sarees on credit from M/s. Rainbow silks of Jaipur. Upon non-payment of amount, Naresh will be held personally liable for this dues as per above provisions. So, suit filed by M/s. Rainbow silks against Naresh on refusal by Naresh for payment would succeed.

Question 18.
(i) Mr. CB was invited to guarantee an employee Mr. BD .who was previously dismissed for dishonesty by the same employer. This fact was not told to Mr. CB. Later on, the employee embezzled funds. Whether CB is liable for the financial loss as surety under the provisions of the Indian Contract Act, 1872? (Nov 2020, 2 marks)
(ii) Mr. X agreed to give a loan to Mr. Y on the security of four properties. Mr. A gave guarantee against the loan. Actually Mr. X gave a loan of smaller amount on the security of three properties. Whether Mr. A is liable as surety in case Mr. Y failed to repay the loan? (Nov 2020, 2 marks)

Question 19.
X,Y and Z, as Sureties for D, enters into a bond, each in difkrent penalty, X in the penalty of ₹ 10,000, Y of ₹ 20,000 and Z of ₹ 20,000, conditioned for D’s duly accounting to R. What if, D makes a default to the extent of ₹ 40,000?
Answer:
Provision: According to Sec. 128 of the Indian Contract Act, the liability o the surety is co-extensive, with that of the principal debtor. Unless it is otherwise provided by the contract. In other words, the surety is liable for all those amounts, the principal debtor is liable for.

Present Case: In case of default of D to the extent of ₹ 40,000, X is liable to pay ₹ 10,000 and y as well as Z ₹ 15,000 each.

Question 20.
Write short notes on the following:
(c) Continuing guarantee. (May 1998, May 1999, 5 marks each)
OR
Write brief answers of the following:
(a) Continuing guarantee. (May 2001, 5 marks)
Answer:
continuing Guarantee: Meaning:
Sec. 129 of the Indian Contract Act, 1872 detinos continuing guarantee as, a guarantee which extends to a series of transactions. “The essence of Continuing guarantee is that it applies not to the specific number of Transactions but to any number of transactions and makes the surety liable the unpaid balance at the end of the guarantee.

Features of Continuing Guarantee:

1. The guarantee is not exhausted by the first advance or credit or supply up to the pecuniary limit.
2. Revocation can be made by notice to the creditor in relation to future transactions. Continuing guarantee is terminated by the death of the surety as regards the future transactions.

Revocation of Continuing Guarantee: Following are the circumstances in which the continuing guarantee can be revoked:
1. By notice: According to Section 130, the continuing guarantee may be revoked at any timo by the surety as to future transactions by due notice to the creditor.

2. By death of Surety: Death of the surety operates as revocation of the continuing guarantee with reference to the future transactions unless the contract otherwise provide. (Sec. 131)

3 By variation in contract: II any variation is done in the terms of contract of guarantee between the creditor and the principal debt without the knowledge of the surety, the contract of guarantee is revoked. [Sec. 133]

4. By Novation: The contract of guarantee will be revoked when the parties agree to substitute a new contract for the old contract or rescind or alter the old contract.

5. By creditors act of omission: Any omission by the creditor which repairs the eventual remedy of the surety against the debtor amounts to revocation of the contract of guarantee. [Sec. 139].

Question 21.
Manoj guarantees for Ranjan, a retail textile merchant, for an amount of ₹ 1,00,000, for which Sharma, the supplier may from time to time supply goods on credit basis to Ranjan during the next 3 months. After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on credit for ₹ 40,000. Referring to the provisions of the Indian Contract Act, 1872, decide whether Manoj is discharged from all the liabilities to Sharma for any subsequent credit supply. What would be your answer in case Ranjan makes default in paying back Sharma for the goods already supplied on credit i.e. ₹ 40,000? (May 2019, 4 marks)
Answer:
Provision:
As per Sec. 130 of the Indian Contract Act, 1872. me continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditors. Sec. 129 of the Indian Contract Act, 1872, a continuing guarantee means a guarantee which extends to a series of transactions is called a continuing guarantee. The essence of continuing guarantee is that it applies not to a specific number of transactions but any number of transactions and makes the surety liable for the unpaid balance at the end of guarantee.

Question 22.
X guarantees payment o Y of the price of the four laptop sets to be sold by Y to X and to be paid for in a month. Y delivers the sets to X. X pays for them. Later on, Y delivers three more sets to X. State the liability of X.
Answer:
Provision: As per Sec. 126 of the Indian Contract Act, 1872, ‘Contract of Guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. Sec. 129 of the Indian Contract Act, 1872 define. continuing guarantee as. a guarantee which ex fends to a series of transactions”

Present Case: The Guarantee given by X is not a continuing Guarantee but in act it is a Specific Guarantee. Therefore, X is not liable for the price of the three sets which are supplied later to Y.

Present Case:
In this case, Manoj guarantees for Ranjan, for an amount of ₹ 1,00,000 for which Sharma, the supplier may from time to time supply goods on credit basis to Ranjan during the next 3 months, so as per provision of Section 130. it is a continuing guarantee.

Further, after 1 month, Manoj revokes the guarantee. when Sharma had supplied goods on credit for ₹ 40,000. So as per the above provisions of Section 130 of the Indian Contract Act, 1872, Manoj is discharged from all the liabilities to Sharma for any subsequent credit supply. However, it Ranjan makes any defaults in paying back to Sharma for the goods already supplied on credit i.e. ₹ 40,000, Manoj is liable to Sharma for ₹ 40,000.

Question 23.
If a variance in terms of contract between principal debtor and a creditor is made without the consent of surety, it cannot absolutely discharge the surety’s liability. (May 1998, 2 marks)
Answer:
Incorrect:
As per Section 133, surety liability will be discharged It any variance is made without his consent in terms of contract between the principal debtors and the creditor,

Question 24.
A surety is discharged from his liability where there is failure of consideration between the creditor and the principal debtor, in a contra of guarantee. (Nov 1998, 2 marks)
Answer:
Correct: According to the provision of the Indian Contract Act, one of the essential elements of a valid Intract is the presence of consideration. Thus, the surety will be discharged r a contract of guarantee where there is a failure of consideration between of creditor and the principal debtor.

Question 25.
Guarantee obtained by concealment of material facts is invalid. (May 1999, 2 marks)
Answer:
Correct: According to Section 143, when a guarantee is obtained by the creditor by means of keeping silence regarding some material part of circumstances relating to the contract, the contract is invalid.

Question 26.
Any variance made without the suretys consent in the terms of the contract, discharges the surety as to transactions subsequent to variation. (Nov 1999,2 marks)
OR
State with reasons whether the following statements are correct or incorrect:
(ii) Any variation in terms of contract made between principal debtor and a creditor without the consent of surety, automatically discharges the liability of the surety. (May 2009, 1 mark)
Answer:
Correct: According to Section 133. any variance made without the consent of the surety in terms of the contract between the principal debtors and the creditor, the surety is discharged as to transactions subsequent to the Variation.

Question 27.
Release by the creditor of any one co-surety discharges the other cosureties. (Nov 2001, 2 marks)
Answer:
incorrect: According to Section 138 of the Indian Contract Act, 1872 a release by the auditor of any one co-surety wilt not discharge the OEher co securities nor absolve the released co-surety from his responsibility to other.

Question 28.
State with reasons whether me following statements are correct or incorrect:
(a) in a contract of guarantee. tolerance by the creditor to sue the Principal Debtor discharges the surety. (May 2002, May 2008, 1 mark each)
Answer:
Incorrect: As per Sec. 137 of the Indian Contract Ad. 1872, the surety would not be discharged by mere forbearance on the part of the creditor to sue the Principal Debtor.

Question 29.
Explain the circumstances under which a surety In a contract of guarantee stands discharged irom the liability, by the conduct of the creditor, and also by invalidation of contract. (May 2002, 10 marks)
Answer:
Discharge et surety by the conduct of the creditor:
According to Section 126, surety is a person who promises to take the responsibility to cover up the promise or discharge the liability ot the third person in case of his default. When the liability comes to an end, a surety is said to be discharged.

Following are the cases through which the surety may be discharged from his liability by the conduct of the creditor:
1. Variance In terms of contract: As per Sec. 133, any variance, made without the opinion of the surety. ¡n terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to variance.

2. Discharge of principal debtors: Under Sec. 134, a surety is discharged by any contract between the principal debtors and the creditors by which the principal debtors, released or by any act or omission of the creditor. The consequence or effect of this is the discharge of the principal debtor.

If the principal debtor is discharged by operation of law or if the creditor omits to sue the principal debtor within the period of fixed time, the surety will not be discharged, even though the principal debtors is released.

3. CompoundIng by creditor with the principal debtor: According to Sec. 135, if there s any contract between the principal debtor and the creditor, with which the creditor makes composition wth, or promises to give time to ca not to sue, the principal debtors discharge the surety, till the surety gives his consent to such contract.

Under the following circumstances, the surety Is not discharged under this head:

• Where a contract to give time to the principal debtor is made by the creditor with a third person and not with principal debtor (Sec. 136).
• As per Sec. 137, the surety would not be discharged by mere forbearance on the part f the creditor to issue the principal debtors.
• Where there are two sureties, a release by the creditor of one of them will not discharge the other; nor does it free the surety so released from his responsibility to the other sureties (Sec. 138)
• By loss of security (Sec. 141): The surety is discharged from his liability to the level of me value of security if the creditor loses or without the consent of the surety pasts with any security given to him at the time of the contract of guarantee.
• The surety will be discharged where a guarantee is obtained by misrepresentation or concealment of the material fact.

Discharge by invalidation of the Contract: According to the Indian Contract Act, 1872, a contract of guarantee may like any other contract be avoided. If it becomes void? voidable at the consent of the surety Sections 142, 143 and 144. lays down the provišions regarding the invalidation of guarantee the provision are as follows:
1. Guarantee obtained by misrepresentation (Sec. 142) : The Contract becomes invalid, when the guarantee is obtained by means of misrepresentation of the material fact.

2. Guarantee obtained by concealment (Sec. 143): When the guarantee is given by the creditor by means of keeping silence as the material part of the contract, the contract becomes invalid.

3. Failure of co-surety to join a surety (Sec. 144): Where the condition is that the creditor wil not act upon it unfull another person has joined In it as co-surety fails, the guarantee becomes invalid.

Question 30
A’ stands surety for ‘B for any amount which ‘C’ may lend to B from time to time during the next three months subject to a maximum of ₹ 50,000. One month later A revokes the guarantee, when C had lent to B ₹ 5,000. Referring to the provisions of the Indian Contract Act. 1872 decide whether ‘A’ is discharged from all the liabilities to ‘C’ for any subsequent loan. What would be your answer in case ‘B’ makes a default in paying back to ‘C’ the money already borrowed i.e. ₹ 5,000? (Nov 2002,6 marks)
OR
Ravi becomes guarantor for Ashok for the amount Which may be given to him by Nalin within six months. The maximum limit of the said amount is 1 lakh. After two months Ravi withdraws his guarantee. Upto the aime of revocation of guarantee, Nalin had given to Ashok ₹ 20,000. Referring to the provisions of the Indian Contract Act. 1872 decide:
(i) Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan.
(ii) Whether Ravi is liable if Ashok fails to pay the amount of ₹ 20,000 to Nalin? (May 2006, 5 marks)
OR
‘Amit’ stands surety for Etkram’ for any amount which ‘Chander’ may lend to ‘Bikram’ from time to time during the next three months subject to a maximum amount of ₹ 1,00,000 (one lakh only). One month later ‘Amit’ revokes the surety, when Chander’ had already lent to ‘Bikram’ ₹ 10,000 (ten thousand). Referring to the provisions of the Indian Contract Act, 1872. Decide:
(i) Whether ‘Amit’ is discharged from all the liabilities to ‘Chander’ for any subsequent loan given to ‘Bikram’?
(ii) What would be your answer in case ‘Bikram’ makes a default in paying back to ‘Chander’ the already borrowed amount of ₹ 10,000? (Nov 2015, 5 marks)
OR
‘Ramesh’ and ‘Suresh’ are engaged in business having same nature. ‘Ramesh’ stands surety for Suresh’ for any amount which ‘Kamlesh may lend to Suresh’ from time to time during the next 6 months subject to a maximum of ₹ 85,000. 3 months later, ‘Ramesh’ revokes the guarantee, when ‘Kamlesh’ had lent to ‘Suresh’ ₹ 35,000. Decide whether Ramesh’ is discharged from all the liabilities to ‘Kamlesh’ for any subsequent loan under the provisions of the Indian Contract Act, 1872. Would your answer differ in case ‘Suresh’ makes a default in paying back to ‘Kamlesh’ the money already borrowed i.e. ₹ 35,000? (Nov 2017, 5 marks)
Answer:
The problem as asked ¡n the question depends on the provisions of the Indian Contract Act, 1872 as contains in Section 130. The section relates to the revocation of a continuing guarantee as to future transactions which can be done in any of the two ways:

1. By notice: By notice to the creditor, the continuing guarantee can be revoked at any time by the surety as to future transactions.

2. By death of surety: In regard to the future transaction the death of the surety operates. in the absence of any contract to the contrary, as a revocation.

The liability of the surety remains same for the previous transactions. Thus by using the above rule in the question. A is discharged from all the liabilities to C for any subsequent loan. In second case the answer will change that is A will be liable to C for ₹ 5,000 on default of B because the loan was taken before the notice of revocation was given to C.

Question 31.
Explaining the provisions of the Indian Contract Act. 1872, answer the following: C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with X to give time to B. Is A discharged from his liability? (Nov 2006, 5 marks)
Answer:
As per the provision laid in Section 136 of the Indian Contract Act. 1872, where a contract to give time to the principal debtor is made by the creditor with a third person and not with the principal debtor, the surety is not discharged, In the given question, the contract to give time to the principal debtor is made by the creditor with X who is a third person and not the principal debtor. Hence A is not discharged.

Question 32.
A gives to C a continuing guarantee to the extent of ₹ 5,000 for the vegetables to be supplied by C to B from time to time on credit. Afterwards, B became embarrassed, and without the knowledge of A, B, and C contract that C shall continue to supply B with vegetables for ready money. and that the payments shall be applied to the then-existing debts between B and C. Examining the provision of the Indian Contract Act, 1872, decide whether A is liable on his guarantee given to C. (Nov 2008,5 marks)
OR
‘A’ gives to ‘M’ a continuing guarantee to the extent of ₹ 8,000 for the fruits to be supplied by ‘M’ to ‘S’ from time to time on credit. After wards, ‘S’ became embarrassed and without the knowledge of ‘A’, ‘M’, and ‘S contract that ‘M’ shall continue to supply ‘S’ with fruits for ready money and that payments shall be applied to the then existing debts between ‘S’ and ‘M’. Examining the provision of the Indian Contract Act, 1872, decide whether ‘A’ is liable on his guarantee given to ‘M’. (Nov 2017, 4 marks)
Answer:
Provision:
Variance in terms and composition with Principal Debtor. (Sec. – 133 & Sec. 135 of the Indian Contract Att, 1872):

Provision:
According to Sec. 133, where there is any variance ¡n the terms of contract between the principal debtor and creditor without surety’s consent it would discharge the surety in respect of all transactions taking place subsequent to such variance. On the other hand, Sec. 135 provides that, if the creditor makes a settlement with the principal debtor, the surety is discharged If the consent of surety is not obtained,

Present Case: –
Hence, in the first instance, since S and M have varied the terms of the contract, without A’s consent, it has discharged A from all the transactions taking place after such variation under Sec. 133.

In the second instance, S and M have made a settlement that the further supply of vegetables will be for cash, and the payment shall be applied to the existing debts without the consent of A.

Hence, A is discharged in respect of all the transactions taking place after the variation in the terms of contract. However, A will remain liabte on his guarantee given to M for the existing debts i.e. if S is unable to settle off the debts existing before the variation, the liability of A will arise.

Question 33.
M advances to N ₹ 50,000 on the guarantee of P. The loan carries interest at 10% p.a. Subsequently, N becomes financially embarrassed. On N’s request, M reduces the interest to 6% pa. and does not sue N for one year after the loan becomes duo. N becomes insolvent. Can M sue P?
Answer:
Provision: Variance in terms of contract: As per Sec. 133, any variance, made without the opinion of the surety, in terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to variance Compounding by creditor with the principal debtor: According to Sec. 135, if there is any contract between the principal debtor and the creditor. with which the creditor makes composition with, or promises to give time to or not to sue, the principal debtors discharges the surety, till the surety gives his consent to such contract.

Present Case: Thus, as per provision of Sec. 133 and 135, M cannot sue P as there is variation in terms of contract and compounding between M and N without P’s consent.

Question 34.
Explaining the provisions of the Indian Contract Act. 1872. answer the following:
(i) A contracts with B for a fixed price to construct a house for B within a stipulated time. B would supply the necessary material to be used in the construction. C guarantòes A’s performance of the contract. B does not supply the material as per the agreement. Is C discharged from his liability?
Answer:
According to Section 134 of the Indian Contract Act, 1872, 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. In the given case, B does not supply the necessary material as per the agreement. Hence, C is discharged from his liability.

Question 35.
Answer the following:
(a) Explain the rights of surety against creditor Descriptive (Nov 1998,5 marks)
Answer:
Rights of a surety against the creditor:
Section 141 deals with the rights provided to surety against the creditor:
1. Right to securities: As per the section, when the surety has paid up off the liabilities of the principal debtor to the creditor, he becomes entitled to receive all the securities which were given by the principal debtor to the creditor at the time when the suretyship contract was entered into.

2. Right to seek dismissal of employee: In the case of faithful guarantee, the surety can direct the creditor to dismiss the employee, whose honesty he has guaranteed, if the dishonesty of the employee is proved.

3. Right to set-off: Set-ott means a counterclaim or deduction from the amount of loans, which the principal debtor may possess against the creditor in the respect of some transactions.

4. The surety has a right, any time before the guaranteed debt has become due and before he is called upon to pay, requires the creditor to sue the principal debtor. The surety will have to indemnify the creditor for any expenses or loss resulting therefrom.

Question 36
What are the Rights of surety against the Principal debtor and against co sureties? (Nov 1999, 5 marks)
Answer:
Rights of a surety against the principal debtors:
1. Right of Subrogation [Section 140] : After making a payment and discharging the liability of the principal debtor, the surety takes over all the rights of the creditors, which he can himself exercise against the principal debtors. This right of surety is called the right of subrogation. In this way, surety steps in the shoes of the creditors. The surety becomes liable to receive all the remedies which the creditors would have enforced not only against the principal debtor but also against all the persons claiming against him.

2. Right of indemnity [Section 141]: There is an implied promise to indemnify the surety between the surety and the principal debtor. This to Section 145, the surety is entitled to recover from the principal debtor whatever sum he has correctly paid under the guarantee. The surety can recover the actual amount and interest both from the creditor. It is so because the surety is entitled to full indemnification.

Right against co-sureties: When two or more sureties are guaranteed for debtors, they are called co-sureties. The rights are.

• Right to share security gained from the creditor
• Act to Sec. 146, liability of co-sureties to contribute equally if there is no contract to the contrary.
• Liability for equal limit (Sec. 147) where different sums are guaranteed by the co-sureties, they have to contribute to the maximum at guarantees by anyone.

Multiple Choice Question

Question 1.
A contract of indemnity as a contract by which one party promises to save the other party from the loss caused to him by the conduct of the promisor himself or of any other person has been defined
(a) under Section 124
(b) under Section 123
(c) under Section 125
(d) under Section 126
Answer:
(a) under Section 124

Question 2.
As per Section 124 of the Indian Contract Act, of 1872, a contract of is a contract by which one party promises to save the other party from loss caused to him by The conduct of the promisor himself, or by the conduct of any other person
(a) Indemnity
(b) Guarantee
(c) Specific performance
(d) Injunction
Answer:
(a) Indemnity

Question 3.
The person who promises to make the good loss is called as
(a) Indemnified
(b) Indemnity holder
(c) Indemnifier
(d) Surety
Answer:
(c) Indemnifier

Question 4.
The person who loss is to be made good is called as
(a) Indemnified
(b) Indemnity holder
(c) Indemnifier
(d) (a) or (b)
Answer:
(d) (a) or (b)

Question 5.
As per Section 125 of the Indian Contract Act, 1872, the Indemnity-holder acting within scope of his authority is entitled to recover:
(a) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.
(b) All cost for defending or binding any suit if worked as a prudent person.
(c) All sums which he may have paid under the terms of any compromise of any such suit.
(d) All of the above.
Answer:
(d) All of the above.

Question 6.
A and D go into a shop. A says to the shopkeeper, Let B have the goods. I will see you paid. This is ………………… .
(a) Contract of guarantee
(b) Contract of Indemnity
(c) Contract of Specific performance
(d) Contract of wagering
Answer:
(b) Contract of Indemnity

Question 7.
A contract of guarantee has been defined
(a) under Section 123
(b) under Section 124
(c) under Section 125
(d) under Section 126.
Answer:
(d) under Section 126.

Question 8.
Surety is a person
(a) in respect of whose default the guarantee Is given
(b) who gives the guarantee
(c) to whom the guarantee is given
(d) none of the above.
Answer:
(b) who gives the guarantee

Question 9.
Creditor is a person
(a) to whom the guarantee is given
(b) who gives the guarantee
(c) In respect of whose default the guarantee is given
(d) none of the above.
Answer:
(a) to whom the guarantee is given

Question 10.
A guarantee
(a) has to be in writing
(b) can be oral
(c) can be oral or in writing
(d) neither (a) or (b).
Answer:
(c) can be oral or in writing

Question 11.
A valid guarantee can be given
(a) only if there is no principal debt
(b) only if there is a principal debt
(c) irrespective of any debt
(d) both (a) & (b)
Answer:
(b) only if there is a principal debt

Question 12.
A guarantee to be valid
(a) can only be of a present debt
(b) can be of past debt if some further debt is incurred after the guarantee
(c) can be of future debt if some debt is incurred after the guarantee
(d) all the above.
Answer:
(d) all the above.

Question 13.

Which of the following is a valid guarantee

(a) guarantee of a minor’s debt
(b) guarantee of a debt of a company acting ultra vires in obtaining the loan
(c) both (a) & (b)
(d) neither (a) nor (b)
Answer:
(a) guarantee of a minor’s debt

Question 14.
Under a contract of guarantee
(a) if principal debtor is not liable, guarantor is not liable
(b) if principal debtor is not liable, guarantor is liable
(c) if principal debtor ¡s liable, guarantor is liable
(d) all the above.
Answer:
(c) if principal debtor ¡s liable, guarantor is liable

Question 15.
In a contract of guarantee
(a) there are two parties and one contract
(b) there are two parities and two contract
(c) there are three parties & three contracts
(d) none of the above.
Answer:
(c) there are three parties & three contracts

Question 16.
A contract is a contract to perform the promise made or discharge liability incurred by a third person ¡n case of his default.
(a) Indemnity
(b) Guarantee
(c) Specific performance
(d) Injunction
Answer:
(b) Guarantee

Question 17.
The person on whose behalf guarantee is given is called as ………………. .
(a) Surety
(b) Principal debtor
(c) Creditor
(d) Indemnity holder.
Answer:
(b) Principal debtor

Question 18.
The person who gives guarantee is called as ………………….. .
(a) Surety
(b) Principal debtor
(c) Creditor
(d) Indemnity holder.
Answer:
(a) Surety

Question 19.
The person to whom guarantee is given is called as …………………. .
(a) Surety
(b) Principal debtor
(c) Creditor
(d) Indemnity holder.
Answer:
(c) Creditor

Question 20.
A and B go into a shop. A ways to the shopkeeper, “Let B have the goods and if he does not pay. I will. This is ………………… .
(a) Contract f guarantee
(b) Contract of Indemnity
(c) Contract of Specific performance
(d) Contract of wagering.
Answer:
(a) Contract of guarantee

Question 21.
There are ……………… to the contract of indemnity while there are ……………. to the contract of guarantee.
(a) Three parties, two parties
(b) Two parties, three parties
(c) Two parties, four parties
(d) Four parties, two parties
Answer:
(b) Two parties, three parties

Question 22.
The liability of indemnifier is ……………… .
(a) Primary
(b) Coflaterat
(c) Secondary
(d) (b) or (c)
Answer:
(a) Primary

Question 23.
Liability of the surety is
(a) conditional on default
(b) independent of default
(c) can be conditional and can be independent
(d) either (a) or (b).
Answer:
(a) conditional on default

Question 24.
The liability of the surety
(a) is co-extensive with that of the principal debtor
(b) extends to the whole of the amount for which the principal debtor is liable
(c) both (a) & (b)
(d) neither (a) nor (b).
Answer:
(a) is co-extensive with that of the principal debtor

Question 25.
Under the contract of guarantee, the liability of the surety
(a) can be limited
(b) cannot be limited and has to extend to the whole of the amount due from the principal debtor
(c) can be extended to penalties also
(d) both (b) & (c).
Answer:
(b) cannot be limited and has to extend to the whole of the amount due from the principal debtor

Question 26.
The liability of surety is ………………… .
(a) Primary
(b) Collateral
(c) Secondary
(d) (b) or (c)
Answer:
(d) (b) or (c)

Question 27.
The liability of the surety is co-extensive with that of the principal debtor unless the contract otherwise provides.
(a) True
(b) False
(C) Partly true
(d) None of the above.
Answer:
(a) True

Question 28.
A surety is favoured debtor.
(a) True
(b) False
(c) Partly true
(d) None of the above.
Answer:
(a) True

Question 29.
On payment of a guaranteed debt surety is subrogated all the rights of …………………. .
(a) Creditor
(b) Principal debtor
(c) Other co-surety
(d) None of the above.
Answer:
(a) Creditor

Question 30.
On being sued by the creditor, the surety can rely on any …………………….. which the debtor has against the creditor.
(a) Set-oil
(b) Counter claim
(c) Set-ott or counter claim
(d) None of the above
Answer:
(c) Set-ott or counter claim

Question 31.
A guarantee which extends to a series of transactions under section 129 is called
(a) an absolute guarantee
(b) a continuing guarantee
(c) an invalid guarantee
(d) a conditional guarantee.
Answer:
(b) a continuing guarantee

Question 32.
A continuing guarantee applies to
(a) a specific transaction
(b) a specific number of transactions
(c) any number of transactions
(d) reasonable num’er of transactions.
Answer:
(c) any number of transactions

Question 33.
A continuing guarantee under section 130 is
(a) revocable absolutely
(b) irrevocable absolutely
(c) revocable as regards future transaction
(d) either (a) or (b).
Answer:
(c) revocable as regards future transaction

Question 34.
The liability of surety on his death under section 131 in case of continuing guarantee
(a) is terminated absolutely
(b) does nnt stand terminated as regards past transaction
(c) stands terminated as regards future transaction
(d) both (b) & (c).
Answer:
(d) both (b) & (c).

Question 35.
When guarantee extents to a single transaction it is known as ………………………….. .
(a) Continuing guarantee
(b) Specific guarantee
(c) Unlimited guarantee
(d) Fidelity guarantee.
Answer:
(b) Specific guarantee

Question 36.
When a guarantee extents to a series of transaction It is called as a …………………. .
(a) Continuing guarantee
(b) Specific guarantee
(c) Unlimited guarantee
(d) Fidelity guarantee.
Answer:
(a) Continuing guarantee

Question 37.
A specific guarantee is ……………….. .
(a) Irrevocable
(b) Revocable
(c) (a) or (b)
(d) None of the above
Answer:
(a) Irrevocable

Question 38.
A continuing guarantee ………………….. for transaction which has already taken place.
(a) Cannot be revoked
(b) Can be revoked
(c) Cannot be performed
(d) None of the above
Answer:
(b) Can be revoked

Question 39.
A continuing guarantee may be revoked by the surety at any time, as to ……………………. by notice to the creditor.
(a) Future transactions
(b) Past transactions
(c) Existing transactions
(d) None of the above
Answer:
(a) Future transactions

Question 40.
In which of the following circumstances a continuing guarantee can be revoked?
(a) By notice of revocation by the surety
(b) By the death of the surety
(c) Both (a) & (b)
(d) None of the above
Answer:
(c) Both (a) & (b)

Question 41.
The surety stands discharged
(a) by revocation
(b) by death
(c) by variance in terms of the contract without his consent
(d) in (a). (b) & (c) above.
Answer:
(d) in (a). (b) & (c) above.

Question 42.
Under the contract of guarantee a creditor
(a) has to avail his remedies first against the principal debtor
(b) can avail his remedies against the principal debtor as well as the surety
(c) can avail his remedy against the surety alone
(d) both (b) & (c).
Answer:
(d) both (b) & (c).

Question 43.
Surety stands discharged
(a) by an agreement between the creditor and the principal debtor
(b) by an agreement between the creditor & a third party for not to sue the principal debtor
(c) both (a) & (b) above
(d) neither (a) nor (b).
Answer:
(c) both (a) & (b) above

Question 44.
A surety may be discharged from liability …………………………. .
(a) by notice of revocation in case of a continuing guarantee as regards, future transaction
(b) by the ceath of the surety as regards future transactions, in a continuing guarantee
(c) any variation in the terms of the contract between the creditor and the principal debtors without the consent of the surety.
(d) all of above
Answer:
(d) all of above

Question 45.
A surety may be discharged from liability ……………………….. .
(a) If the creditor releases the principal debtor, a acts or makes an omission which results in the discharge of the principal debtor
(b) Where the creditor, without the consent of the surety, makes an arrangement with the principal debtor for cooe position, of promises to give time or not to sue him, the surety will be discharged.
(c) If the creditor does any act which is against the rights of the surety, or omits to do an 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
(d) All of the above
Answer:
(d) All of the above

Question 46.
On payment or performance of the liability the surety
(a) is invested with all the rights the creditor had against the principal debtor
(b) is entitled to the every security which the creditor has against the principal debtor
(c) is entitled to be indemnified by the principal debtor
(d) all of the above.
Answer:
(d) all of the above.

Question 47.
Surety is entitled to be indemnified by the principal debtor
(a) in respect of a sum rightfully paid
(b) in respect of a sum wrongfully paid
(c) in respect of a sum paid rightfully or wrongfully
(d) all of the above.
Answer:
(a) in respect of a sum rightfully paid

Question 48.
Under Section 146, the co-sureties are liable to contribute
(a) equally
(b) unequally
(c) according to their capacity
(d) either (a) or (b) or (c).
Answer:
(a) equally

Question 49.
If the co-sureties are bound in different sums, they are liable to pay
(a) equally subject to the limit of their respective obligation
(b) equally without any limit
(c) equally irrespective of their obligation but subject to the limit
(d) either (b) or (c).
Answer:
(a) equally subject to the limit of their respective obligation

Question 50.
Surety on payment or performance of his liability, against the principal debtor
(a) has right of subrogation
(b) has right like creditor had against principal debtor
(c) both (a) & (b)
(d) either (a) or (b).
Answer:
(c) both (a) & (b)

Question 51.
Under Section 141 a suroty is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into whether the surety knows of the existence of such security or not.
(a) False
(b) True
(c) Partly true
(d) None of above.
Answer:
(b) True

Question 52.
After discharging the debt, the surety ………………….. .
(a) Steps into the shoes of the creditor
(b) Is subrogateci to all the rights of the creditor against the principal debtor
(c) Both (a) & (b)
(d) None of the above.
Answer:
(b) Is subrogateci to all the rights of the creditor against the principal debtor

Question 53.
When a surety has paid more than his share of debt to the creditor, he has a right of contribution from the co-securities who are equally bound to pay with him.
(a) False
(b) True
(c) Party true
(d) None of the above
Answer:
(b) True

Question 54.
A. B and C jointly promise to pay D the sum of ₹ 3,000. C is compelled to pay the whole. A is insolvent but his assets are sufficient to pay one half of his debts. How much Is C entitled to receive from A’s estate and how much B?
(a) C is entitled to receive ₹ 500 from A’s state and ₹ 1,250 from B.
(b) C is entitled to receive ₹ 1,250 from A’s estate and ₹ 500 from B.
(c) C is entitled to receive ₹ 1,000 from A’s estate and ₹ 1,000 from B.
(d) C is entitled to receive ₹ 500 from A’s estate and ₹ 1,000 from B.
Answer:
(a) C is entitled to receive ₹ 500 from A’s state and ₹ 1,250 from B.