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CMA Foundation · Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Ravi Traders agrees to compensate Meena Exports for any loss arising if a supplier, Kiran, files a claim against Meena Exports over a disputed payment of Rs 50,000. Which statement best describes this arrangement?

It is a contract of indemnity. Ravi Traders promises to save Meena Exports from loss that may be caused by the proceedings of another person, Kiran. Section 124 expressly covers loss caused by the conduct of any other person, not merely the promisor's own conduct.

  1. AIt is a contract of indemnity, because Ravi Traders promises to save Meena Exports from loss caused by the conduct of another personCorrect
  2. BIt is a contract of guarantee, because Kiran is a third person
  3. CIt is a contract of pledge, because a sum of money is involved
  4. DIt is not a contract of indemnity, because indemnity covers only loss caused by the promisor's own conduct

Explanation

Section 124 covers loss caused by the promisor's own conduct or by the conduct of any other person. Here the loss may arise from Kiran's proceedings, so this is indemnity, as in the section's illustration on proceedings by C against B. Option D is wrong because it wrongly limits indemnity to the promisor's own conduct.

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