Question

Identify the wrong statement from the following

• A. An indemnity is for reimbursement of a loss, while a guarantee is for security of the creditor.
• B. In a contract of indemnity the liability of the indemnifier is secondary and arises when the contingent event occurs. In case of contract of guarantee the liability of surety is primary and arises when the principal debtor defaults.
• C. The indemnifier after performing his part of the promise has no rights against the third party and he can sue the third party only if there is an assignment in his favor. Whereas in a contract of guarantee, the surety steps into the shoes of the creditor on discharge of his liability, and may sue the principal debtor.
• D. In a contract of indemnity the liability of the indemnifier is primary and arises when the contingent event occurs. In case of contract of guarantee the liability of surety is secondary and arises when the principal debtor defaults.

Hint:

The key difference between indemnity and guarantee lies in the nature of liability. Indemnity = 2 parties, primary liability. Guarantee = 3 parties, secondary (contingent) liability for the surety. Memorizing this core distinction will help solve most related questions.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The question requires identifying the incorrect statement that distinguishes between a contract of indemnity (Section 124, Indian Contract Act) and a contract of guarantee (Section 126, Indian Contract Act).
Step 2: Detailed Explanation:
Let's analyze each statement:
- (A) Correct. A contract of indemnity is a promise to save another from loss caused by the promisor's conduct or another person's conduct. Its purpose is reimbursement. A guarantee is a promise to perform the promise or discharge the liability of a third person in case of his default. Its purpose is to give the creditor an additional layer of security.
- (C) Correct. In an indemnity contract, there is no privity of contract between the indemnifier and the third party causing the loss. Thus, the indemnifier cannot sue the third party in his own name without an assignment. In a guarantee, the surety, upon paying the creditor, is subrogated to the rights of the creditor and can sue the principal debtor.
- (D) Correct. In indemnity, there are only two parties. The indemnifier's liability is primary and absolute. In guarantee, there are three parties (creditor, principal debtor, surety). The principal debtor's liability is primary, and the surety's liability is secondary and co-extensive, arising only upon the principal debtor's default.
- (B) Incorrect. This statement makes two fundamental errors. It claims the indemnifier's liability is secondary (it is primary) and the surety's liability is primary (it is secondary). This is the exact opposite of the correct legal position described in statement (D).
Step 3: Final Answer:
The wrong statement is (B).