CAF-4 · Chapter 11

Indemnity and guarantee MCQs with Answers

10 multiple-choice questions on Indemnity and guarantee for CAF-4 Business Law Dynamics. Try each one before revealing the answer and explanation.

1. Question 1

   A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his:

   • A) Success.
   • B) Death.
   • C) Default.
   • D) Bankruptcy.
   Show answer & explanation

   Answer: C) Default.

   Section 126 defines a contract of guarantee as a contract to perform the promise or discharge the liability of a third person in case of his default.

2. Question 2

   In a contract of guarantee, the person who gives the guarantee is called the ________, the person for whom it is given is the ________, and the person to whom it is given is the ________.

   • A) Indemnifier; Indemnity-holder; Stranger
   • B) Surety; Principal Debtor; Creditor
   • C) Creditor; Surety; Principal Debtor
   • D) Principal Debtor; Creditor; Surety
   Show answer & explanation

   Answer: B) Surety; Principal Debtor; Creditor

   These are the three parties in a contract of guarantee under Section 126.

3. Question 3

   A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is a:

   • A) Contract of Guarantee.
   • B) Contract of Indemnity.
   • C) Contingent Contract.
   • D) Quasi-Contract.
   Show answer & explanation

   Answer: B) Contract of Indemnity.

   This is the definition of a contract of indemnity under Section 124.

4. Question 4

   In a contract of indemnity, there are ________ parties, whereas in a contract of guarantee, there are ________ parties.

   • A) Three; Two
   • B) Two; Three
   • C) One; Two
   • D) Two; Four
   Show answer & explanation

   Answer: B) Two; Three

   Indemnity involves only the indemnifier and indemnity-holder. Guarantee involves the surety, principal debtor, and creditor.

5. Question 5

   The liability of the surety is 'co-extensive' with that of the principal debtor. This means:

   • A) The surety is only liable for 50%.
   • B) The surety's liability is the same as the principal debtor's liability.
   • C) The surety is only liable after the debtor dies.
   • D) The surety is not liable if the debtor is a minor.
   Show answer & explanation

   Answer: B) The surety's liability is the same as the principal debtor's liability.

   Section 128 states that the liability of the surety is co-extensive with that of the principal debtor unless the contract says otherwise.

6. Question 6

   A guarantee which extends to a series of transactions is called a:

   • A) Specific guarantee.
   • B) Continuing guarantee.
   • C) Invalid guarantee.
   • D) Conditional guarantee.
   Show answer & explanation

   Answer: B) Continuing guarantee.

   Section 129 defines a continuing guarantee as one that covers a series of transactions rather than a single one.

7. Question 7

   A continuing guarantee may at any time be 'revoked' by the surety, as to future transactions, by:

   • A) Notice to the creditor.
   • B) Notice to the principal debtor.
   • C) Filing a lawsuit.
   • D) Stopping payments.
   Show answer & explanation

   Answer: A) Notice to the creditor.

   Section 130 allows a surety to revoke a continuing guarantee for 'future' transactions by giving notice to the creditor.

8. Question 8

   The death of the surety operates as a 'revocation' of a continuing guarantee, so far as regards 'future' transactions:

   • A) Only if the creditor knows of the death.
   • B) Unless there is a contract to the contrary.
   • C) In all cases automatically.
   • D) Only if the principal debtor also dies.
   Show answer & explanation

   Answer: B) Unless there is a contract to the contrary.

   Section 131 states that death revokes a continuing guarantee for future transactions unless the contract provides otherwise.

9. Question 9

   If the creditor makes any 'variance' (change) in the terms of the contract between himself and the principal debtor, without the surety's consent, the surety is:

   • A) Still liable for the original terms.
   • B) Discharged as to transactions subsequent to the variance.
   • C) Fully discharged from the entire guarantee.
   • D) Given a 50% discount.
   Show answer & explanation

   Answer: B) Discharged as to transactions subsequent to the variance.

   Section 133 provides that any variance made without the surety's consent discharges the surety as to all transactions after the change.

10. Question 10

    Any guarantee which has been obtained by means of 'misrepresentation' made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is:

    • A) Valid.
    • B) Voidable.
    • C) Invalid (Invalidated).
    • D) Illegal.
    Show answer & explanation

    Answer: C) Invalid (Invalidated).

    Section 142 states that a guarantee obtained by misrepresentation is invalid.