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

Which of the following correctly distinguishes a contract of indemnity from a contract of guarantee as defined in the Indian Contract Act, 1872?

The correct distinction is that indemnity is a promise to save the other from loss caused by the promisor or by anyone else, whereas guarantee is a promise to perform the promise or discharge the liability of a third person if he defaults. Section 126 also allows guarantees to be oral or written.

  1. AIndemnity must be written, while a guarantee may be oral or written
  2. BIndemnity protects against loss caused by the promisor's conduct or another person's conduct, while a guarantee is a promise to perform the promise or discharge the liability of a third person on his defaultCorrect
  3. CIndemnity always involves three parties, while a guarantee involves two
  4. DIndemnity is a promise to discharge a third person's liability, while a guarantee is a promise to save from loss

Explanation

Section 124 defines indemnity as a promise to save from loss caused by the promisor or any other person. Section 126 defines guarantee as a promise to perform or discharge a third person's liability in case of his default. Option A is wrong because the Act does not require indemnity to be written, and Section 126 itself says a guarantee may be oral or written.

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