Test: Contract of Indemnity and Guarantee - CA Foundation MCQ

• Principal Debtor: The person in respect of whose default, the guarantee is given is called the principal debtor. This means that the guarantee is provided to ensure that the principal debtor fulfills their obligations towards the creditor.


• Importance of Principal Debtor: Understanding the role of the principal debtor is crucial in guarantee agreements as it helps in determining the obligations and responsibilities of all parties involved.


• Legal Protection: By identifying the principal debtor, the guarantee agreement can outline the consequences of default and the actions that can be taken by the creditor to recover the debt.


• Liability: The principal debtor is the primary party responsible for the debt, and the guarantor steps in only if the principal debtor fails to fulfill their obligations.

• Single Transaction Guarantee: This type of guarantee ensures that a specific transaction will be completed successfully without any issues.


• General Guarantee: This type of guarantee covers a broad range of transactions and may not specifically focus on a single transaction.


• Continuous Guarantee: This type of guarantee ensures ongoing support or coverage for a series of transactions, rather than just a single transaction.


• Implied Guarantee: This type of guarantee is not explicitly stated but is understood to be part of a transaction based on common practices or industry standards.


• None of these: This option indicates that the guarantee in question does not fall under any of the categories mentioned above.

Therefore, in this case, the guarantee of a single transaction would fall under the category of a general guarantee.

• Creditor: A creditor is a person or institution to whom money is owed.


• Debtor: A debtor is a person or institution that owes money to another.


• Surety: A surety is a person who takes responsibility for the debt of another person, in case the debtor fails to fulfill their obligations.


• Third Party: A third party is a person or entity that is not directly involved in a transaction but may be affected by it.

Based on the definition provided, the correct answer is creditor. The person to whom the guarantee is given is the one who is owed the money, hence they are the creditor in this situation.

• Secondary Liability: The liability of a surety is considered secondary to that of the principal debtor. This means that the surety is responsible for fulfilling the obligation only if the principal debtor fails to do so.


• Preliminary Liability: Before the surety can be held liable, the principal debtor must first default on the obligation. The surety's liability is triggered by the failure of the principal debtor to fulfill their obligations.


• Subsidiary Liability: The surety's liability is considered subsidiary to that of the principal debtor. This means that the surety is only responsible for fulfilling the obligation if the principal debtor is unable to do so.

Therefore, the liability of a surety is best described as secondary liability, as it is contingent upon the failure of the principal debtor to fulfill their obligations.

• Guarantor: The guarantor is the individual or entity who provides the guarantee to the creditor that the debtor will fulfill their obligations. They are protected under the contract of guarantee as they are the ones taking on the responsibility if the debtor fails to fulfill their obligations.


• Creditor: The creditor is the party to whom the guarantee is provided. They are protected under the contract of guarantee as it ensures that they will receive the payment or performance promised by the debtor, even if the debtor defaults.


• Third Person: In some cases, a third person may also be protected under the contract of guarantee if they have a vested interest in the performance of the debtor. This could include situations where the third person is a beneficiary of the debtor's obligations.


• Debtor: While the debtor is not directly protected under the contract of guarantee, they benefit indirectly as the guarantee provides assurance to the creditor, which may result in better terms or conditions for the debtor in the underlying transaction.

• Default: Default refers to the failure of the principal debtor to fulfill their obligations under the contract.


• Discharge of Liability: When the principal debtor defaults, the guarantor steps in to fulfill the obligations on their behalf.


• Promise of Discharge of Liability: In a contract of guarantee, the guarantor promises to discharge the liability of the principal debtor in case of default.


• Given on Principal Debtor: The promise of discharge of liability is given on the principal debtor, as it is their default that triggers the guarantor's obligation.


• Role of Subsidiary Debtor: The subsidiary debtor is not directly involved in the guarantee contract and does not bear the primary liability.


• Principal Guarantor: The principal guarantor provides the guarantee and promises to fulfill the obligations in case of default by the principal debtor.


• Conclusion: Therefore, the promise of discharge of liability in a contract of guarantee is given on the principal debtor.

• Definition: A contract of guarantee is a contract where one party, known as the guarantor, agrees to fulfill the obligations of another party, known as the debtor, in case the debtor fails to do so.



• Purpose: The main purpose of a contract of guarantee is to provide protection to the creditor in case the debtor is unable to fulfill their obligations.



• Role of Creditor: The creditor is the party to whom the debt is owed. The creditor benefits from the contract of guarantee as it ensures that they will receive payment even if the debtor defaults.



• Role of Debtor: The debtor is the party who owes the debt to the creditor. The debtor benefits from the contract of guarantee as it may help them secure a loan or conduct business transactions that they would otherwise not be able to do.



• Role of Guarantor: The guarantor is the party who agrees to fulfill the obligations of the debtor in case of default. The guarantor essentially acts as a safety net for the creditor, providing an additional layer of security in case the debtor fails to pay.



• Legal Protection: A contract of guarantee is legally binding and provides protection to all parties involved by clearly outlining the responsibilities and obligations of each party.

• Discharge of surety: Surety is discharged when the liability of the surety under the contract comes to an end.


• By variance in terms of the contract without his consent: If there is any change in the terms of the contract without the consent of the surety, the surety is discharged from his obligations.


• Revocation: Surety may be discharged if the contract is revoked by the principal debtor without the consent of the surety.


• Death: If the surety dies, his obligations under the contract come to an end.


• Option (c) is correct: The surety stands discharged by variance in terms of the contract without his consent. This means if there is any change in the terms of the contract without the consent of the surety, he is relieved from his responsibilities.

• Surety stands discharged:




• When there is an agreement between the creditor and the principal debtor, the surety stands discharged. This means that the surety is released from their obligations as the guarantor.


• Such an agreement implies that the creditor has agreed to release the surety from their obligations, usually because the principal debtor has fulfilled their obligations or the creditor has agreed to a new payment arrangement directly with the principal debtor.

• Parties Involved: In a contract of guarantee, there are three parties involved - the creditor, the principal debtor, and the surety (guarantor).



• One Contract: Despite there being three parties, there is only one contract in a contract of guarantee. The contract is between the creditor and the surety, where the surety agrees to pay the debt of the principal debtor if they default.



• Legal Relationship: The contract of guarantee creates a legal relationship between the three parties mentioned above. The surety is liable to fulfill the obligations of the principal debtor in case of default.



• Liability: The liability of the surety is secondary to that of the principal debtor. The surety's obligation to pay arises only when the principal debtor fails to do so.

• Indemnifier: This is the party that promises to compensate the other party for any loss or damage incurred.


• Indemnified: This is the party that is protected against any loss or damage and is entitled to receive compensation from the indemnifier.

• Surety: Sometimes a contract of indemnity may involve a surety who guarantees the performance of the indemnifier's obligation.


• Principal debtor: In some cases, there may be a principal debtor who is responsible for the primary obligation that the indemnifier is compensating for.

• A contract of indemnity typically involves at least two parties - the indemnifier and the indemnified.


• However, additional parties such as a surety or principal debtor may also be involved depending on the specific terms of the contract.

• Types of guarantees:




• General guarantee: A general guarantee is a promise made by a seller to a buyer that the product or service being sold meets certain standards or specifications. It is a broad guarantee that covers all aspects of the transaction.


• Implied guarantee: An implied guarantee is a guarantee that is not explicitly stated but is assumed to be part of the transaction. For example, when you purchase a product, there is an implied guarantee that the product will be fit for its intended purpose.


• Continuous guarantee: A continuous guarantee is a guarantee that remains in effect for a series of transactions or for a specified period of time. It provides ongoing protection to the buyer for multiple transactions.


• General and continuous guarantee: This type of guarantee combines the broad coverage of a general guarantee with the ongoing protection of a continuous guarantee. It ensures that the buyer is covered for a series of transactions with the same seller.




• Given for series of transactions:




• The type of guarantee given for a series of transactions is a continuous guarantee.


• A continuous guarantee provides ongoing protection to the buyer for multiple transactions with the same seller.

• Definition: A contract of guarantee is a contract where a person agrees to perform the promise or discharge the liability of a third person in case of his default.



• Types of Guarantee: There are two types of guarantees - Specific Guarantee and Continuing Guarantee.



• Requirement of Writing: As per the Indian Contract Act, 1872, a contract of guarantee must be in writing, or evidenced by some written memorandum, signed by the surety.



• Oral Guarantee: While the general rule is that a guarantee must be in writing, there are exceptions where an oral guarantee can be valid such as in cases of emergency or when the guarantee is for a short period.



• Validity: A contract of guarantee, whether written or oral, is legally binding and enforceable as long as it meets the necessary legal requirements.

In conclusion, a contract of guarantee can be either written or oral, but it is advisable to have it in writing to avoid any future disputes or misunderstandings. However, in certain situations, an oral guarantee may also be valid depending on the circumstances.

• Definition: A contract of indemnity is a contract where one party promises to compensate the other party for any loss or damage that may be incurred.


• Key Elements: A contract of indemnity must have certain key elements to be valid and enforceable.

• In a contract of indemnity, there must be a lawful consideration and object for the contract to be valid.


• The consideration must not be illegal, immoral, or against public policy.


• Both parties must agree to the terms of the contract willingly and with full understanding.

• If a contract of indemnity lacks lawful consideration and object, it may be deemed void by the courts.


• Void agreements are not enforceable by law and do not hold any legal standing.


• It is important to ensure that all elements of a contract of indemnity are legally sound to avoid any disputes or issues in the future.

• Surety: The consent of the surety is necessary in the contract of guarantee. The surety is the party who guarantees the repayment of the debt or performance of the obligation in case the debtor fails to do so.



• Creditor: The consent of the creditor is also essential in the contract of guarantee. The creditor is the party to whom the debt is owed or who is entitled to the performance of the obligation. They rely on the guarantee for the fulfillment of the debt or obligation.



• Debtor: The consent of the debtor may also be required in certain cases. The debtor is the party who owes the debt or is obligated to perform a certain task. Their consent may be necessary if the guarantee affects their rights or obligations.



• All the Above: Ultimately, the consent of all parties involved - the surety, creditor, and debtor - is crucial in the contract of guarantee. Each party plays a vital role in the guarantee agreement, and their agreement ensures the validity and enforceability of the contract.

• Principal Debtor: This is the person who is primarily responsible for fulfilling the terms of the contract.


• Creditor: The party to whom the guarantee is given, usually a lender or creditor.


• Surety: This is the party who provides the guarantee or assurance that the principal debtor will fulfill their obligations. The surety is secondary liable to the creditor.

• There are three parties involved in a contract of guarantee - the principal debtor, creditor, and surety.


• The principal debtor is the one who has the primary obligation to fulfill the terms of the contract.


• The creditor is the party to whom the guarantee is provided, usually a lender or creditor who is extending credit.


• The surety provides the guarantee and agrees to be liable if the principal debtor fails to fulfill their obligations.


• Each party plays a crucial role in ensuring the fulfillment of the contract and protecting the interests of all parties involved.

• Definition: A continuing guarantee is a type of guarantee that applies to all transactions of a specific transaction series.


• Scope: It covers a series of transactions rather than just a single transaction.


• Duration: The guarantee remains in effect until it is revoked or the specified transaction series comes to an end.


• Responsibility: The guarantor is liable for all transactions within the specified series, even if they occur over an extended period of time.


• Legal Implications: It is important for both the guarantor and the beneficiary to clearly understand the scope and duration of a continuing guarantee to avoid any misunderstandings in the future.

• Contract of 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.


• Creditor's Remedies: The creditor can enforce his rights under the contract of guarantee against the surety.


• Avail Remedies: The creditor has the option to avail his remedies first against the principal debtor before proceeding against the surety.


• Sequence of Remedies: Typically, the creditor must exhaust all remedies against the principal debtor before pursuing the surety for payment.


• Legal Protection: This sequence is designed to protect the surety and ensure that the principal debtor is given the opportunity to fulfill his obligations before the surety is held liable.

Contract of Guarantee

• Principal Debtor's Liability: In a contract of guarantee, the guarantor agrees to pay the debt or fulfill the obligation of the principal debtor in case the latter fails to do so.



• Guarantor's Liability: If the principal debtor is found to be liable and fails to fulfill their obligation, the guarantor becomes liable to fulfill the debt or obligation on behalf of the principal debtor.



• Non-Liability of Principal Debtor: If the principal debtor is not liable, then the guarantor is also not liable as there is no debt or obligation to fulfill in such a scenario.



• Liability of Guarantor: The guarantor's liability is contingent upon the liability of the principal debtor. If the principal debtor is found liable and fails to fulfill their obligation, then the guarantor becomes liable to fulfill the debt or obligation.

Therefore, in a contract of guarantee, the liability of the guarantor is directly linked to the liability of the principal debtor. If the principal debtor is liable, then the guarantor is also liable to fulfill the debt or obligation. On the other hand, if the principal debtor is not liable, then the guarantor is also not liable to fulfill any debt or obligation.

• Co-sureties: Co-sureties are individuals who together guarantee the same debt or obligation.


• Release of one surety: When a creditor releases one surety from their obligation, it means that particular surety is no longer liable for the debt.


• Does not amount to discharge of other sureties: The release of one surety does not automatically discharge the other co-sureties from their obligations.


• Liability of other sureties: The remaining co-sureties are still bound by the guarantee they provided, and they continue to be responsible for the debt if the primary debtor fails to fulfill their obligation.