Last Updated on: 26th November 2024, 11:50 am
Indemnity and Guarantee – Multiple Choice Questions (MCQ)
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1. The person in respect of whose default, the guarantee is given is called ………..
(a) principal debtor
(b) principal creditor
(c) principal surety
(d) principal bailee
Central Intent of the Question is : To identify the party whose liability the guarantee secures.
Options Analysis:
(a) Principal debtor: Correct. The guarantee is given for the liability or default of the principal debtor.
(b) Principal creditor: Incorrect. The creditor is the party receiving the guarantee, not the one in default.
(c) Principal surety: Incorrect. The surety is the guarantor, not the one whose liability is secured.
(d) Principal bailee: Incorrect. Bailee is unrelated to the contract of guarantee.
Correct Option is – (a) : The principal debtor is the party whose default triggers the liability of the surety under a contract of guarantee.
2. In contract of indemnity how many parties are required ?
(a) 4
(b) 6
(c) 7
(d) 2
Central Intent of the Question is : To determine the number of parties involved in a contract of indemnity.
Options Analysis:
(a) 4: Incorrect. It is irrelevant distracting number.
(a) 6 : Incorrect. It is irrelevant distracting number.
(a) 7: Incorrect. It is irrelevant distracting number.
(d) 2: Correct. A contract of indemnity involves only two parties—the indemnifier and the indemnified.
Correct Option is – (d): The indemnifier promises to protect the indemnified against losses, requiring only two parties.
3. The guarantee of single transaction is ………..
(a) general guarantee
(b) continuous guarantee
(c) implied guarantee
(d) none of these
Central Intent of the Question is : To identify the type of guarantee for a single transaction.
Options Analysis:
(a) General guarantee: Correct. A general guarantee applies to a single transaction.
(b) Continuous guarantee: Incorrect. A continuous guarantee applies to series of multiple or recurring transactions.
(c) Implied guarantee: Incorrect. Implied guarantees arise through conduct or circumstances, not specific transactions.
(d) None of these: Incorrect. Option A is correct.
Correct Option is – (a) : A general guarantee is specifically limited to one transaction, as opposed to a series.
4. Which type of guarantee is given for series of transaction ?
(a) general guarantee
(b) implied guarantee
(c) continuous guarantee
(d) general and continuous guarantee
Central Intent of the Question is : To determine the type of guarantee covering multiple transactions.
Options Analysis:
(a) General guarantee: Incorrect. This applies to a single transaction.
(b) Implied guarantee: Incorrect. Implied guarantees do not explicitly cover multiple transactions.
(c) Continuous guarantee: Correct. A continuous guarantee is designed to cover a series of transactions.
(d) General and continuous guarantee: Incorrect. This is redundant and not recognized terminology.
Correct Option is – (c) : A continuous guarantee is explicitly provided for a series of recurring or multiple transactions under Indian Contract Act.
5. The person to whom the guarantee is given is called ………..
(a) creditor
(b) debtor
(c) surety
(d) third party
Central Intent of the Question is : To identify the recipient of a guarantee.
Options Analysis:
(a) Creditor: Correct. The creditor receives the guarantee to secure their dues.
(b) Debtor: Incorrect. The debtor is the party whose liability is secured.
(c) Surety: Incorrect. The surety provides the guarantee.
(d) Third party: Incorrect. This is too vague and not legally specific.
Correct Option is – (a) : The creditor is the party who benefits from the guarantee and has a legal right to enforce it.
6. The contract of Guarantee should be ………..
(a) Implied
(b) only written
(c) only oral
(d) written or oral
Central Intent of the Question is : To identify the permissible forms of a guarantee contract.
Options Analysis:
(a) Implied: Incorrect. Guarantees may be implied but are not limited to this form.
(b) Only written: Incorrect. Guarantees are not required to be exclusively written.
(c) Only oral: Incorrect. Guarantees are not required to be exclusively oral
(d) Written or oral: Correct. Guarantees to be written or oral.
Correct Option is – (d) : The law recognizes both written and oral guarantees, depending on the nature of the agreement.
7. Liability of surety is ………..
(a) secondary liability
(b) preliminary liability
(c) subsidiary liability
(d) co-related liability
Central Intent of the Question is : To define the nature of a surety’s liability.
Options Analysis:
(a) Secondary liability: Correct. The surety’s liability arises only if the principal debtor defaults.
(b) Preliminary liability: Incorrect. The surety’s liability is not primary or preliminary.
(c) Subsidiary liability: Incorrect. This term is not legally accurate for a surety’s role.
(d) Co-related liability: Incorrect. This is vague and does not align with legal terminology.
Correct Option is – (a) : The surety’s liability is secondary, as it depends on the principal debtor’s default
8. Contract of indemnity must be for ………..
(a) five parties
(b) agreement without consideration
(c) implied consideration
(d) lawful consideration and object
Central Intent of the Question is : To identify the essential elements required for a valid contract of indemnity.
Options Analysis:
(a) Five parties: Incorrect. Indemnity involves only two parties, not five.
(b) Agreement without consideration: Incorrect. Consideration is essential for any valid contract.
(c) Implied consideration: Incorrect. While consideration can be implied, it must be lawful and stated explicitly.
(d) Lawful consideration and object: Correct. Contracts of indemnity, like all contracts, must have a lawful purpose and consideration.
Correct Option is – (d) : For a contract of indemnity to be valid, it must be for lawful consideration and object.
9. Who is protected under the contract of guarantee ?
(a) guarantor
(b) creditor
(c) third person
(d) debtor
Central Intent of the Question is : To determine who benefits from the protection offered by a guarantee.
Options Analysis:
(a) Guarantor: Incorrect. The guarantor assumes liability rather than receiving protection.
(b) Creditor: Correct. The creditor benefits from the guarantee, as it secures their dues.
(c) Third person: Incorrect. This term is too vague and not specific to law of contract of guarantee.
(d) Debtor: Incorrect. The debtor’s Primary liability remains, they are not “protected.” by guarantee.
Correct Option is – (b) : The creditor is the beneficiary of the guarantee, ensuring repayment or fulfillment of obligations in case of debtor default.
10. Whose consent is necessary in the contract of guarantee ?
(a) Surety
(b) Creditor
(c) Debtor
(d) All the above
Central Intent of the Question is : To determine whose agreement is legally essential to form a valid guarantee.
Options Analysis:
(a) Surety: Correct. The surety’s consent is necessary to enter into the contract.
(b) Creditor: Correct. The creditor must agree to accept the guarantee.
(c) Debtor: Correct. The debtor must consent to the arrangement.
(d) All the above: Correct. The agreement of all three parties is required to establish the contract.
Correct Option is – (d) : Contract of guarantee involves three parties, all of whom must consent.
11. On whose default, the promise of discharge of liability is given in contract of guarantee ?
(a) Principal debtor
(b) Subsidiary debtor
(c) Principal guarantor
(d) All above
Central Intent of the Question is : To identify the defaulting party to trigger surety’s liability.
Options Analysis:
(a) Principal debtor: Correct. The surety’s liability arises when the principal debtor defaults.
(b) Subsidiary debtor: Incorrect. No person like Subsidiary Debtor is recognized in contract of guarantee.
(c) Principal guarantor: Incorrect. The surety is the guarantor, not the party in default.
(d) All above: Incorrect. Options B and C are invalid.
Correct Option is – (a) : The principal debtor’s default triggers the surety’s secondary liability
12. How many parties are there in contract of guarantee ?
(a) One
(b) At will
(c) Three
(d) Two
Central Intent of the Question is : To identify the number of parties in a guarantee contract.
Options Analysis:
(a) One: Incorrect. A single party cannot constitute a contract.
(b) At will: Incorrect. This is irrelevant and undefined.
(c) Three: Correct. A contract of guarantee involves three parties: creditor, principal debtor and surety.
(d) Two: Incorrect. A two-party contract is a simple agreement, not a guarantee.
Correct Option is – (c) : Section 126 defines the contract of guarantee as involving three distinct parties.
13. The contract of guarantee is for protection of ………..
(a) creditor
(b) debtor
(c) guarantor
(d) none of these
Central Intent of the Question is : To determine whose interests are safeguarded by a guarantee.
Options Analysis:
(a) Creditor: Correct. The guarantee ensures that the creditor will be compensated in case of debtor’s default.
(b) Debtor: Incorrect. The debtor’s primary liability is secured, debtor is not “protected.”
(c) Guarantor: Incorrect. The guarantor assumes liability and does not benefit from protection.
(d) None of these: Incorrect. Option A is correct.
Correct Option is – (a) : The primary aim of a guarantee is to secure the creditor’s interests and reduce their risk.
14. A continuing guarantee applies to:
(a) a specific transaction
(b) a specific number of transactions
(c) all transactions of specific transaction series
(d) reasonable number of transactions.
Central Intent of the Question is : To identify the scope of a continuing guarantee.
Options Analysis:
(a) A specific transaction: Incorrect. This applies to a general guarantee.
(b) A specific number of transactions: Incorrect. A continuing guarantee does not limit itself to a predetermined number.
(c) All transactions of a specific series: Correct. A continuing guarantee secures all transactions within a defined series.
(d) Reasonable number of transactions: Incorrect. This is not a legally valid condition.
Correct Option is – (c) : Continuing guarantee as applicable to all transactions in a series until it is revoked.
15. The surety stands discharged:
(a) by revocation
(b) by death
(c) by variance in terms of the contract without his consent
(d) all of the above.
Central Intent of the Question is : To identify the circumstances in which a surety’s liability may be terminated.
Options Analysis:
(a) By revocation: Correct. A surety can revoke their liability for future transactions.
(b) By death: Correct. The surety’s liability ends for future obligations but remains for past ones unless otherwise agreed.
(c) By variance in terms of the contract without his consent: Correct. Any variation in terms of the original contract without the surety’s consent discharges them.
(d) All of the above: Correct. Each of these conditions discharges the surety.
Correct Option is – (d) : A surety’s liability can be discharged by revocation, death, or any material alteration in the contract without their consent.
16. 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).
Central Intent of the Question is : To determine the creditor’s legal options in enforcing the contract of guarantee.
Options Analysis:
(a) Has to avail his remedies first against the principal debtor: Incorrect. The creditor is not obligated to exhaust remedies against the debtor first.
(b) Can avail his remedies against the principal debtor as well as the surety: Correct. The creditor can claim from either the principal debtor or the surety.
(c) Can avail his remedy against the surety alone: Incorrect. The creditor cannot proceed solely against the surety if the debtor is solvent and able to pay.
(d) Both (b) & (c): Correct. The creditor has the right to recover from the surety or debtor
Correct Option is – (d) : Creditor can recover from either the debtor or the surety simultaneously or independently.
17. 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).
Central Intent of the Question is : To identify actions that release the surety from liability.
Options Analysis:
(a) By an agreement between the creditor and the principal debtor: Correct. Any such agreement without the surety’s consent can discharge them.
(b) By an agreement between the creditor & a third party for not to sue the principal debtor: Correct. Such an agreement indirectly releases the debtor and so discharges the surety.
(c) Both (a) & (b): Correct. Both conditions discharge the surety’s liability.
(d) Neither (a) nor (b): Incorrect. Scenarios (a) and (b) lead to discharge the surety.
Correct Option is – (c) : The surety is discharged if there are material changes or agreements made without their consent.
18. 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 is liable, guarantor is liable
(d) all the above.
Central Intent of the Question is : To establish the relationship between the liability of the principal debtor and the surety.
Options Analysis:
(a) If the principal debtor is not liable, guarantor is not liable: Correct. The surety’s liability is secondary and contingent on the debtor’s liability.
(b) If the principal debtor is not liable, guarantor is liable: Incorrect. This contradicts the principle of secondary liability. Guarantor’s liability is contingent on the debtor’s liability.
(c) If the principal debtor is liable, guarantor is liable: Correct. The surety becomes liable upon the debtor’s default.
(d) All of the above: Incorrect. Option B is invalid.
Correct Option is – (a): Principal debtor’s liability is Primary. Guarantor’s liability is secondary. So, Guarantor’s liability is dependent upon principal debtor’s liability.
19. In a contract of guarantee:
(a) there are two parties and one contract
(b) there are two parties and two contracts
(c) there are three parties & three contracts
(d) there are three parties & one contract.
Central Intent of the Question is : To identify the structural elements of a contract of guarantee.
Options Analysis:
(a) There are two parties and one contract: Incorrect. A guarantee requires three parties.
(b) There are two parties and two contracts: Incorrect. This applies to ordinary bilateral contracts.
(c) There are three parties & three contracts: Correct. A guarantee involves three parties and three interconnected contracts: between the debtor and creditor, creditor and surety, and surety and debtor.
(d) There are three parties & one contract: Incorrect. Each party has separate legal obligations to the other parties.
Correct Option is – (c) : A contract of guarantee involves three distinct agreements among the three parties.
20. In case of co-sureties, release of one surety by the creditor:
(a) amounts to discharge of other sureties
(b) does not amount to discharge of other sureties
(c) amounts to discharge of the surety so released vis-a-vis co-sureties as well
(d) none of the above.
Central Intent of the Question is : To clarify the effect of releasing one surety, on others.
Options Analysis:
(a) Amounts to discharge of other sureties: Incorrect. Release of one does not automatically discharge others, unless the terms dictate otherwise.
(b) Does not amount to discharge of other sureties: Correct. Co-sureties remain liable unless specifically discharged.
(c) Amounts to discharge of the surety so released vis-à-vis co-sureties as well: Incorrect. Release of one does not automatically discharge others.
(d) None of the above: Incorrect. Option B is correct.
Correct Option is – (b) : Co-sureties remain liable unless expressly released by the creditor.
21. 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 every security which the creditor has against the principal debtor
(c) is entitled to be indemnified by the principal debtor
(d) all the above.
Ans. (a)
