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JAIIB Paper 2 • Functions of Banks
Contracts of Indemnity & Contracts of Guarantee, Bank Guarantee
Two of the Indian Contract Act's most bank-relevant chapters â indemnity (promising to make good a loss) and guarantee (promising to pay if someone else doesn't) â underpin every Bank Guarantee a bank issues. Covers indemnity basics, surety liability, continuing guarantee, discharge of surety, co-sureties, and Bank Guarantee types/precautions, with 50 exam-style MCQs with hidden answers.
đ Updated: September 2026 • 34 min read
đ At a Glance
Concept
Number of Parties
Indemnity
2 (Indemnifier + Indemnified)
Guarantee
3 (Creditor + Principal Debtor + Surety)
1 Contract of Indemnity
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A Promise to Make Good a Loss
Under Section 124 of the Indian Contract Act, 1872, a contract of indemnity is one where one party (the indemnifier) promises to save the other (the indemnified/indemnity-holder) from loss caused by the conduct of the indemnifier or any other person. It is a two-party contract, contingent â the indemnifier's liability arises only when the specified loss actually occurs.
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Rights of an Indemnity Holder
Once liability has become absolute, the indemnity-holder can recover all damages, costs, and sums paid under a compromise from the indemnifier (Section 125).
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Implied Indemnity
Indemnity need not always be express; it can arise by implication from the circumstances/conduct of parties (e.g., an agent acting for a principal implicitly expects indemnification for authorised acts).
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Scope in Banking
Banks routinely take letters of indemnity â e.g., for issuing a duplicate DD/FD receipt against a lost original, or for allowing operations on an account pending probate.
2 Contract of Guarantee â Basics
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Creditor
The party to whom the guarantee is given (e.g. the bank, or the beneficiary of a BG).
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Principal Debtor
The person whose default is guaranteed (e.g., the borrower, or the contractor whose obligation is BG-backed).
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Surety
The person who gives the guarantee, undertaking to perform/pay if the principal debtor defaults.
Distinctive features vs. Indemnity: A guarantee involves 3 parties (vs. 2 for indemnity) and there is always a primary/existing liability of the principal debtor which the surety promises to make good on default â indemnity has no such pre-existing third-party liability.
3 Liability of Surety & Continuing Guarantee
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Liability of Surety
The surety's liability is co-extensive with that of the principal debtor (Section 128) â the surety is liable for the same amount/extent as the debtor, unless the contract provides otherwise; the creditor may sue the surety directly without first exhausting remedies against the debtor.
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Continuing Guarantee
A guarantee extending to a series of transactions (e.g., covering all future advances in a cash credit account) rather than a single transaction (Section 129) â common in banking for CC/OD facilities.
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Revocation
A continuing guarantee may be revoked by the surety as to future transactions by notice to the creditor (Section 130); liability for transactions already entered into remains.
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Death of Surety
Death of the surety (absent a contract to the contrary) revokes a continuing guarantee as to future transactions (Section 131) â the estate remains liable for past transactions.
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Memory Trick: "Co-Extensive, Not Secondary"
A common misconception: surety liability is often thought "secondary," but it is legally co-extensive â the creditor can sue the surety directly, without first suing the principal debtor.
4 Discharge of Surety & Co-Sureties
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Variance in Contract Terms
Any material variance in the terms of the contract between creditor and principal debtor, made without the surety's consent, discharges the surety as to transactions after the variance (Section 133).
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Discharge of Principal Debtor
If the creditor discharges the principal debtor (e.g., releases them from liability), the surety is also discharged, unless the surety consented to such an arrangement (Section 134).
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Forbearance to Sue
Mere forbearance (delay) by the creditor in suing the principal debtor does NOT, by itself, discharge the surety â a specific statutory clarification (Section 137).
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Misrepresentation by Creditor
A guarantee obtained by the creditor's misrepresentation of a material fact, or by concealment of a material circumstance, is invalid.
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Co-Sureties & Contribution
Where two or more persons guarantee the same debt, they are co-sureties; on default, they must contribute equally (or per agreed proportion) to discharge the debt (Section 146) â one co-surety cannot be made to bear the entire loss alone.
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Release of One Co-Surety
Release of one co-surety by the creditor does NOT discharge the others, but reduces their liability proportionately, and does not free the released surety from liability to the other co-sureties for contribution (Section 138).
5 Bank Guarantees â Types
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Financial Guarantee
Guarantees payment of a specified sum on the principal's failure to fulfil a financial obligation (e.g., loan repayment).
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Performance Guarantee
Guarantees the principal's satisfactory performance of a contract (e.g., completion of a construction project as per specifications).
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Bid Bond / Earnest Money Guarantee
Ensures a tender bidder will honour their bid and sign the contract if selected, in lieu of a cash earnest money deposit.
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Advance Payment Guarantee
Secures a mobilisation/advance payment made by a buyer to a contractor, ensuring its return if the contractor fails to deliver.
6 Precautions in Issuance & Payment
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Precautions in Issuance
Verify the customer's creditworthiness/limit, ensure the BG's wording is precise (amount, validity, claim period), obtain counter-indemnity/margin, and ensure proper authorisation of signatories.
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Precautions in Payment
Honour a genuine claim within the BG's validity/claim period, without demanding proof of actual loss (an unconditional BG must be honoured on first demand per its terms) â but verify the claim is within the BG's tenor and the invocation is procedurally proper.
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Banker's Duty to Honour
A bank issuing an unconditional/irrevocable BG must honour a valid demand strictly per the BG's terms â courts generally refuse to interfere with genuine BG invocations (the "autonomy of bank guarantees" principle), except in cases of fraud or irretrievable injustice.
â Key Takeaways
Indemnity is a 2-party contract (indemnifier-indemnified); guarantee is a 3-party contract (creditor-principal debtor-surety).
Surety liability is co-extensive with the principal debtor's â the creditor need not first exhaust remedies against the debtor.
A continuing guarantee covers a series of transactions; it can be revoked prospectively, and dies with the surety (as to future transactions).
Material variance without consent, discharge of the principal debtor, or creditor misrepresentation discharges the surety; mere forbearance to sue does NOT.
Co-sureties share liability by contribution; releasing one does not discharge the others.
Bank Guarantees (financial, performance, bid bond, advance payment) follow the "autonomy" principle â banks must honour genuine invocations strictly per BG terms.
đ Top 50 JAIIB-Style MCQs on Contracts of Indemnity & Bank Guarantee
Test your understanding with these 50 practice MCQs, closely modelled on the JAIIB (PPB) exam pattern. Each question has 5 options â the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
đĄī¸ Contract of Indemnity
1 A contract of indemnity is defined under:
A. Section 124 of the Indian Contract Act, 1872
B. Section 138 of the RBI Act
C. Section 45 of the Companies Act
D. Section 13 of SARFAESI
E. No specific section governs indemnity
Answer: A. Indemnity is defined in Section 124 of the Contract Act.
2 A contract of indemnity involves how many parties?
A. 2 (indemnifier and indemnified)
B. 3
C. 5
D. 1
E. No fixed number
Answer: A. Indemnity involves 2 parties.
3 The indemnifier's liability under an indemnity contract arises:
A. Only when the specified loss actually occurs
B. Immediately upon signing, regardless of any loss
C. Never; indemnity creates no liability
D. Only after a criminal conviction
E. Automatically after 10 years
Answer: A. Liability is contingent on the actual occurrence of loss.
4 An indemnity holder, once liability becomes absolute, can recover:
A. Damages, costs, and sums paid under a compromise
B. Nothing at all
C. Only punitive damages
D. Only costs, never damages
E. Only sums paid in cash, excluding any compromise
Answer: A. The indemnity holder recovers damages, costs, and compromise sums.
5 Indemnity can arise:
A. Expressly or impliedly from circumstances/conduct
B. Only through a court order
C. Only via a registered deed, never implication
D. Never impliedly under any circumstance
E. Only in writing, notarised, and stamped
Answer: A. Indemnity can be express or implied.
đĨ Contract of Guarantee â Basics
6 A contract of guarantee involves how many parties?
A. 3 (creditor, principal debtor, surety)
B. 2
C. 1
D. 5, always
E. No fixed number
Answer: A. Guarantee involves 3 parties.
7 The person who gives the guarantee, undertaking to pay/perform on default, is the:
A. Surety
B. Creditor
C. Indemnifier exclusively
D. Principal debtor
E. Beneficiary
Answer: A. The surety gives the guarantee.
8 A distinctive feature of guarantee versus indemnity is:
A. Guarantee involves a pre-existing primary liability of the principal debtor
B. Guarantee has fewer parties than indemnity
C. Indemnity always involves 3 parties
D. Guarantee never requires consideration
E. There is no distinction whatsoever
Answer: A. Guarantee involves a pre-existing principal debtor liability.
âī¸ Surety Liability & Continuing Guarantee
9 The surety's liability is described as:
A. Co-extensive with that of the principal debtor
B. Always less than the principal debtor's liability
C. Non-existent unless the debtor is first sued and fails to pay
D. Automatically doubled compared to the debtor's
E. Irrelevant to the creditor
Answer: A. Surety liability is co-extensive with the principal debtor's.
10 A creditor can sue a surety:
A. Directly, without first exhausting remedies against the principal debtor
B. Only after fully exhausting all remedies against the debtor
C. Never; sureties cannot be sued under Indian law
D. Only with the principal debtor's written consent
E. Only after 10 years have passed
Answer: A. A creditor can sue the surety directly.
11 A continuing guarantee extends to:
A. A series of transactions, not just one
B. Only a single, one-time transaction
C. No transactions at all
D. Only transactions occurring on a Sunday
E. Only transactions above âš1 crore
Answer: A. A continuing guarantee covers a series of transactions.
12 A continuing guarantee can be revoked by the surety, as to future transactions, by:
A. Notice to the creditor
B. No means at all; it is permanently irrevocable
C. Only a court order
D. Only the creditor's own initiative
E. Verbal mention to an unrelated third party
Answer: A. Notice to the creditor revokes future liability under a continuing guarantee.
13 On the death of a surety, a continuing guarantee (absent contrary agreement) is revoked as to:
A. Future transactions only; past transaction liability remains with the estate
B. All transactions, past and future, with zero estate liability
C. Nothing; the guarantee continues unchanged
D. Only transactions before the surety's birth
E. The creditor's liability, not the surety's
Answer: A. Death revokes future liability; past liability remains with the estate.
đĒ Discharge of Surety & Co-Sureties
14 A material variance in terms between creditor and principal debtor, made without the surety's consent, generally:
A. Discharges the surety as to transactions after the variance
B. Has no effect on the surety's liability
C. Doubles the surety's liability
D. Always requires the surety's death first
E. Applies only to indemnity, not guarantee
Answer: A. Unconsented material variance discharges the surety prospectively.
15 If a creditor discharges the principal debtor from liability, the surety is generally:
A. Also discharged, unless they consented to such arrangement
B. Never discharged, regardless of circumstances
C. Automatically liable for double the amount
D. Liable only if the debtor dies
E. Unaffected in every scenario
Answer: A. Discharging the principal debtor generally discharges the surety too.
16 Mere forbearance (delay) by the creditor in suing the principal debtor:
A. Does NOT, by itself, discharge the surety
B. Always discharges the surety immediately
C. Automatically doubles the creditor's claim
D. Applies only to indemnity contracts
E. Discharges the creditor instead of the surety
Answer: A. Mere forbearance does not discharge the surety.
17 A guarantee obtained through the creditor's misrepresentation of a material fact is:
A. Invalid
B. Always fully valid regardless of misrepresentation
C. Enforceable only against the creditor, not the surety
D. Automatically converted into an indemnity
E. Enforceable after 10 years
Answer: A. A guarantee based on creditor misrepresentation is invalid.
18 Where two or more persons guarantee the same debt, they are called:
A. Co-sureties
B. Indemnifiers
C. Beneficiaries
D. Principal debtors
E. Creditors
Answer: A. Multiple guarantors of the same debt are co-sureties.
19 On default, co-sureties must:
A. Contribute equally (or per agreed proportion) to discharge the debt
B. Let one co-surety bear the entire loss alone
C. Have no liability whatsoever
D. Each pay double the debt amount
E. Only the first co-surety named is liable
Answer: A. Co-sureties contribute equally/proportionately.
20 Release of one co-surety by the creditor:
A. Does not discharge the other co-sureties, but reduces their liability proportionately
B. Discharges all co-sureties automatically
C. Doubles the liability of the remaining co-sureties
D. Has no effect on anyone's liability
E. Converts the guarantee into an indemnity
Answer: A. Releasing one co-surety doesn't discharge the rest, but reduces their proportional liability.
đĻ Bank Guarantee Types
21 A guarantee ensuring payment of a specified sum on failure of a financial obligation is a:
A. Financial guarantee
B. Performance guarantee
C. Bid bond exclusively
D. Advance payment guarantee only
E. None of these categories exist
Answer: A. A financial guarantee covers a financial obligation default.
22 A guarantee ensuring satisfactory contract performance (e.g., project completion) is a:
A. Performance guarantee
B. Bid bond
C. Financial guarantee exclusively
D. Advance payment guarantee
E. None of these
Answer: A. A performance guarantee ensures satisfactory contract execution.
23 A Bid Bond/Earnest Money Guarantee substitutes for:
A. A cash earnest money deposit in a tender process
B. A performance guarantee entirely
C. A loan repayment obligation
D. A fixed deposit
E. A locker rental agreement
Answer: A. A bid bond substitutes for a cash EMD in tenders.
24 An Advance Payment Guarantee secures:
A. Return of a mobilisation/advance payment if the contractor fails to deliver
B. A borrower's home loan EMI
C. A depositor's savings account balance
D. An ATM's cash cassette
E. A locker's contents
Answer: A. Advance payment guarantees secure return of advance payments.
â BG Precautions & Honouring
25 Before issuing a BG, a bank should verify:
A. The customer's creditworthiness/limit and obtain counter-indemnity/margin
B. Nothing; BGs require no due diligence
C. Only the beneficiary's identity, never the applicant's
D. The exchange rate of a foreign currency, regardless of the BG's currency
E. The weather forecast
Answer: A. Creditworthiness verification and counter-indemnity are pre-issuance precautions.
26 An unconditional BG must generally be honoured:
A. On first demand, per its terms, without requiring proof of actual loss
B. Never, regardless of a valid claim
C. Only after a full civil trial establishing loss
D. Only if the beneficiary provides a notarised loss certificate first
E. Only with the principal debtor's separate written consent
Answer: A. Unconditional BGs are honoured on first demand per their terms.
27 Courts generally refuse to interfere with genuine BG invocations, except in cases of:
A. Fraud or irretrievable injustice
B. Any minor disagreement between the parties
C. A simple change in market conditions
D. The beneficiary's personal preference
E. Courts always interfere with every BG invocation
Answer: A. Fraud/irretrievable injustice are the narrow exceptions to BG autonomy.
𧊠Mixed / Comprehensive
28 Which of the following best distinguishes indemnity from guarantee in a banking scenario?
A. Indemnity has no pre-existing third-party liability; guarantee always involves a principal debtor's existing obligation being guaranteed
B. Both are legally identical concepts
C. Guarantee always has fewer parties than indemnity
D. Indemnity always requires 3 parties
E. Guarantee never involves a surety
Answer: A. Guarantee involves a pre-existing principal debtor obligation; indemnity does not.
29 A bank issuing a duplicate FD receipt against a lost original would typically require the customer to execute a:
A. Letter of indemnity
B. Bank guarantee for a third party
C. Continuing guarantee
D. Co-surety agreement
E. No document is required
Answer: A. A duplicate-instrument scenario typically requires an indemnity letter.
30 A guarantee covering all future advances made under a customer's cash credit account is an example of a:
A. Continuing guarantee
B. One-time, single-transaction guarantee
C. Contract of indemnity
D. Bid bond
E. None of the above
Answer: A. A CC account guarantee covering future advances is a continuing guarantee.
31 Which of the following would be an appropriate reason for a bank to seek fresh consent from a surety before materially changing loan terms?
A. Without consent, a material variance could discharge the surety as to future transactions
B. Surety consent is never legally required for any change
C. Material variance always increases, never affects, surety liability
D. Sureties have no rights regarding contract variations
E. Consent is required only from the principal debtor, never the surety
Answer: A. Unconsented material variance risks discharging the surety.
32 Three co-sureties guarantee a âš9 lakh debt equally. If the debtor defaults and one co-surety pays the entire âš9 lakh, that surety can seek contribution of:
A. âš3 lakh from each of the other two co-sureties
B. Nothing; contribution rights do not exist
C. âš9 lakh from each other co-surety, tripling recovery
D. Only from the principal debtor, never co-sureties
E. âš1 lakh only, regardless of the number of co-sureties
Answer: A. Equal contribution among 3 co-sureties for âš9 lakh means âš3 lakh each.
33 Which of the following best explains why a bank should NOT delay honouring a genuine, properly invoked, unconditional BG?
A. Unjustified delay could constitute a breach of the bank's obligation and damage its market credibility as a guarantor
B. Delay has no consequence for the bank
C. Banks are legally required to delay every single BG claim by at least a year
D. BGs can be indefinitely postponed with no legal risk
E. Timely payment has no bearing on a bank's reputation
Answer: A. Delay breaches the BG obligation and harms the bank's credibility.
34 Which of the following would be a valid ground for a bank to refuse a BG invocation?
A. The claim is made after the BG's validity/claim period has expired
B. The claim is made strictly within the BG's terms and validity
C. The beneficiary is a genuine, entitled party
D. The invocation follows all procedural requirements
E. No refusal is ever valid under any circumstance
Answer: A. A claim outside the validity/claim period is a valid refusal ground.
35 Which of the following best explains why an "irrevocable" BG is preferred by beneficiaries over a revocable one?
A. It cannot be cancelled/modified without the beneficiary's consent, providing certainty of the guarantee's protection
B. Irrevocable BGs offer no more certainty than revocable ones
C. Revocable BGs are always preferred by beneficiaries
D. Irrevocability has no bearing on a BG's reliability
E. Irrevocable BGs can be cancelled at any time by the issuing bank alone
Answer: A. Irrevocability gives the beneficiary certainty of protection.
36 Which of the following best explains why a bank obtains "counter-indemnity" from its customer when issuing a BG?
A. To secure the bank's own right to recover from the customer if the bank is called upon to pay the beneficiary
B. Counter-indemnity has no purpose in BG issuance
C. Counter-indemnity is obtained only from the beneficiary, never the applicant
D. Counter-indemnity eliminates the bank's need to ever pay the beneficiary
E. Counter-indemnity applies only to performance guarantees, never financial ones
Answer: A. Counter-indemnity secures the bank's recourse against its own customer.
37 Which of the following would be an example of a scenario where "implied indemnity" might apply?
A. An agent incurring expenses while acting within their authority on behalf of a principal, expecting to be made whole
B. A written, notarised, explicit indemnity agreement
C. No scenario can ever give rise to implied indemnity
D. A situation entirely unrelated to any agency relationship
E. A pledge of gold ornaments
Answer: A. An agent's authorised-act expenses can imply an indemnity expectation.
38 Which of the following best explains why a bank might reject a guarantee if it later discovers the creditor concealed a material fact from the surety?
A. Concealment of a material fact by the creditor can render the guarantee invalid
B. Concealment has no bearing on guarantee validity
C. Only the surety's own concealment matters, never the creditor's
D. Guarantees are always valid regardless of any concealment
E. This principle applies only to indemnity, never guarantee
Answer: A. Material concealment by the creditor can invalidate the guarantee.
39 Which of the following would be a reasonable interpretation if a bank grants the principal debtor an extension of time to repay, without the surety's knowledge?
A. A simple time extension alone (absent other variance) does not automatically discharge the surety, per the forbearance principle
B. Any time extension automatically and immediately discharges the surety
C. Time extensions have no legal treatment under the Contract Act
D. The surety is automatically liable for double the amount after any extension
E. Time extensions convert the guarantee into an indemnity
Answer: A. Mere time extension/forbearance doesn't automatically discharge the surety.
40 Which of the following best describes a "performance guarantee" scenario in banking practice?
A. A construction company's BG ensuring project completion per contract specifications
B. A guarantee covering only a borrower's loan EMI default
C. A guarantee substituting for a tender's earnest money deposit
D. A guarantee securing return of an advance payment only
E. None of the above describe a performance guarantee
Answer: A. A performance guarantee ensures contract completion per specs.
41 Which of the following best explains why banks are cautious about issuing BGs to customers with weak financials, despite BGs being "off-balance-sheet"?
A. A weak customer's default on the underlying obligation could still crystallise into an actual payment liability for the bank upon BG invocation
B. Off-balance-sheet items carry zero risk for the bank
C. BGs can never be invoked regardless of the underlying default
D. Bank caution has no connection to customer creditworthiness
E. BGs are risk-free by definition
Answer: A. A weak customer's default could still trigger real payment liability upon BG invocation.
42 Which of the following would be an appropriate application of "co-extensive liability" in a bank's recovery strategy?
A. Pursuing the surety directly for the full guaranteed amount without first suing the principal debtor
B. Always suing the principal debtor first, exhausting all remedies, before ever approaching the surety
C. Co-extensive liability means the surety can never be sued
D. Co-extensive liability applies only to indemnity, never guarantee
E. Sureties are liable only for a token nominal amount regardless of the debt
Answer: A. Co-extensive liability lets the bank sue the surety directly.
43 Which of the following would be a plausible reason for the "autonomy of bank guarantees" principle in judicial practice?
A. BGs function as a reliable, independent commercial instrument, and routine judicial interference would undermine their commercial utility and trust
B. Courts always interfere with every BG to protect the applicant
C. BGs have no commercial significance requiring protection
D. The autonomy principle applies only to indemnity contracts
E. BGs are treated identically to ordinary unsecured loans by courts
Answer: A. Autonomy preserves BGs' reliability as a trusted commercial instrument.
44 Which of the following would be an appropriate documentation step for a bank issuing a BG on behalf of a contractor for a government tender?
A. Ensuring the BG's wording, amount, and validity precisely match the tender's requirements
B. Issuing the BG with no reference to the tender's actual terms
C. Leaving the validity period blank
D. Omitting the claim period entirely
E. Issuing the BG without any counter-indemnity from the contractor
Answer: A. Precise alignment of BG terms with tender requirements is essential.
45 Which of the following best explains why "consideration" for a guarantee need not directly benefit the surety?
A. Under Section 127, anything done/promised for the benefit of the principal debtor is sufficient consideration for the surety's guarantee
B. Guarantees require no consideration whatsoever
C. Consideration must always flow directly and exclusively to the surety personally
D. Section 127 has no bearing on guarantee consideration
E. Guarantees are the only contracts exempt from consideration rules
Answer: A. Benefit to the principal debtor suffices as consideration under Section 127.
46 Which of the following would be an appropriate reason a bank requires margin money for issuing a BG?
A. To partially cover the bank's exposure and incentivise the customer's compliance with the underlying obligation
B. Margin money serves no risk-mitigation purpose
C. Margin is required only for indemnity contracts, never BGs
D. Margin money eliminates all risk to the bank entirely
E. BGs never require any margin under any circumstance
Answer: A. Margin money partially covers exposure and incentivises compliance.
47 Which of the following statements about a surety's right to be indemnified by the principal debtor after paying the creditor is accurate?
A. A surety who has paid the creditor is entitled to recover from the principal debtor (subrogation/indemnity rights)
B. A surety who pays the creditor has no further rights of any kind
C. The principal debtor owes nothing to a surety who has paid on their behalf
D. Subrogation rights apply only to indemnity contracts, never guarantee
E. A paying surety must forfeit all claims against the debtor
Answer: A. A paying surety can recover from the principal debtor via subrogation.
48 Which of the following best captures why banks treat "precautions in payment" of a BG as equally important as "precautions in issuance"?
A. Mishandling a genuine claim (wrongful refusal) or a fraudulent claim (wrongful payment) both expose the bank to legal and financial risk
B. Payment precautions have no significance once a BG is issued
C. Only issuance-stage precautions matter; payment-stage checks are unnecessary
D. BGs, once issued, can never be invoked, making payment precautions irrelevant
E. Precautions apply only to performance guarantees, never financial guarantees
Answer: A. Both wrongful refusal and wrongful payment carry real risk, making both stages critical.
49 Which of the following best summarises why JAIIB pairs "Contracts of Indemnity" with "Contracts of Guarantee & Bank Guarantee" as a single topic?
A. Both are closely related Indian Contract Act concepts underlying the legal foundation of Bank Guarantees, a core banking product
B. The two concepts have no relationship to each other
C. Bank Guarantees have no legal basis in either indemnity or guarantee law
D. Indemnity and guarantee apply only to insurance products, never banking
E. This pairing is arbitrary with no substantive rationale
Answer: A. Both concepts underpin Bank Guarantees' legal foundation, justifying the pairing.
50 Overall, which statement best summarises this topic?
A. Indemnity (2-party, loss-contingent) and guarantee (3-party, co-extensive surety liability) are distinct Contract Act concepts governing surety discharge, continuing guarantees, and co-surety contribution â together forming the legal basis for Bank Guarantees (financial, performance, bid bond, advance payment), which banks must issue and honour carefully under the "autonomy" principle
B. Indemnity and guarantee are legally identical with no distinction
C. Surety liability is always less than the principal debtor's
D. Bank Guarantees can be freely refused by banks with no legal consequence
E. Co-sureties bear no proportional contribution obligations
Answer: A. This correctly captures the full indemnity/guarantee/BG framework.
Disclaimer: This article is prepared for educational and exam-preparation purposes only, summarising indemnity/guarantee law as of September 2026. Candidates should cross-check the latest official IIBF syllabus and the Indian Contract Act, 1872 before the exam.