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Questions and Answers
What effect does a creditor's promise not to sue the principal debtor have on the surety's responsibilities?
What effect does a creditor's promise not to sue the principal debtor have on the surety's responsibilities?
In a scenario where a creditor decides to give additional time to the principal debtor without consulting the surety, what is the likely outcome for the surety?
In a scenario where a creditor decides to give additional time to the principal debtor without consulting the surety, what is the likely outcome for the surety?
Which situation does NOT discharge a surety from the obligations of the guarantee?
Which situation does NOT discharge a surety from the obligations of the guarantee?
What is the primary reason a surety is discharged when the creditor makes a composition with the principal debtor?
What is the primary reason a surety is discharged when the creditor makes a composition with the principal debtor?
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When may a surety still be liable despite the creditor promising not to sue the principal debtor?
When may a surety still be liable despite the creditor promising not to sue the principal debtor?
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What happens to the surety under an original contract if a new contract is formed without the surety's consent?
What happens to the surety under an original contract if a new contract is formed without the surety's consent?
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In which scenario would a surety be discharged due to the release of a principal debtor?
In which scenario would a surety be discharged due to the release of a principal debtor?
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Which of the following correctly illustrates a situation that would discharge a surety by variance in terms of contract?
Which of the following correctly illustrates a situation that would discharge a surety by variance in terms of contract?
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How does novation affect the liability of a surety after a new contract is established?
How does novation affect the liability of a surety after a new contract is established?
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In the case where a creditor changes the terms with the principal debtor, what is the consequence for the surety?
In the case where a creditor changes the terms with the principal debtor, what is the consequence for the surety?
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Study Notes
Contract of Indemnity and Guarantee
- A contract of indemnity is a promise to save another party from loss caused by the promisor's actions or those of another person.
- The promisor is the indemnifier, the other party is the indemnified party.
- A contract of guarantee is an agreement to perform a promise or discharge the liability of a third party in case of default.
- Three parties are involved in a contract of guarantee: surety (guarantor), principal debtor, and creditor.
Essential Features of a Valid Guarantee
- A valid guarantee requires a clear purpose, e.g., securing payment of a debt.
- There must be valid consideration, which can be provided to the principal debtor.
- The subject of the guarantee must have existing liability.
Types of Guarantees
- Specific Guarantee: Applies to a single transaction. The surety's liability ends when the transaction concludes successfully.
- Continuing Guarantee: Covers an ongoing series of transactions. The surety's liability remains until revoked.
Distinction Between Indemnity and Guarantee
| Feature | Indemnity | Guarantee |
|---|---|---|
| Number of Parties | Two (indemnifier & indemnified) | Three (creditor, principal debtor, surety) |
| Nature of Liability | Primary, unconditional | Secondary, conditional |
| Time of Liability | Arises when the event or contingency occurs | Arises when the principal debtor defaults |
| Time to Act | Indemnifier acts when there is a contingency | Surety acts at the creditor's request |
Rights of a Surety
- Against the creditor: Right to benefit of creditor's security; right to set-off
- Against the principal debtor: Right of subrogation
- Against co-sureties: Co-sureties are liable to contribute equally in the absence of an agreement.
Modes of Discharge
- By revocation of the contract of guarantee (notice)
- By conduct of the creditor (variance in terms)
- By release of the principal debtor
- By the invalidation of the guarantee contract (e.g. misrepresentation, concealment)
- By the death of a surety (in continuing guarantees)
Contract of Indemnity and Guarantee (Additional)
- Contracts of indemnity and guarantee are specific types of contracts under the Indian Contract Act, 1872.
- General principles of contracts also apply.
- Both are similar but different.
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Description
This quiz explores the concepts of indemnity and guarantee in contracts. Learn about the roles of the indemnifier, indemnified party, surety, and principal debtor, as well as the essential features for a valid guarantee and the different types of guarantees. Test your understanding of these important legal principles.
