Chapter 30: Contracts of Indemnity (JAIIB – Paper 2)

1. Which section of the Indian Contract Act, 1872 defines a contract of indemnity?

• A. Section 124A
• B. Section 126
• C. Section 124
• D. Section 128

As per Section 124, a contract of indemnity is an agreement where one party promises to save the other from loss caused by the conduct of the promisor or another person.

2. In a contract of indemnity, how many parties and contracts are essentially involved?

• A. Two parties, one contract
• B. Three parties, one contract
• C. Two parties, two contracts
• D. Three parties, two contracts

A contract of indemnity is bilateral. It involves two parties (indemnifier and indemnified) and a single contract of promise to compensate for loss.

3. Which of the following is a distinctive feature of a contract of guarantee, as compared to indemnity?

• A. Only two parties are involved
• B. Only one contract exists
• C. Liability is primary
• D. Involves three parties and three contracts

A contract of guarantee involves three parties (principal debtor, creditor, surety) and three distinct contracts, unlike indemnity which has only two parties and one contract.

4. In indemnity, whose liability is considered?

• A. Secondary liability of the indemnifier
• B. Primary liability of the indemnifier
• C. Secondary liability of the indemnified
• D. Primary liability of the third party

In indemnity, the indemnifier’s liability is primary. He promises to make good the loss directly to the indemnified.

5. Case Study: A bank issues an indemnity bond in favor of a customer for issuing a duplicate fixed deposit receipt. What type of contract is this?

• A. Contract of indemnity
• B. Contract of guarantee
• C. Bailment
• D. Pledge

When a bank issues a duplicate FD against an indemnity bond, the customer indemnifies the bank against potential future claims, making it a contract of indemnity.

6. Which section of the Indian Contract Act provides the rights of an indemnity holder when sued?

• A. Section 125A
• B. Section 124
• C. Section 125
• D. Section 126

Section 125 of the Indian Contract Act, 1872 specifies the rights of the indemnity holder against the indemnifier when sued.

7. Which of the following is NOT a right of the indemnity holder under Section 125?

• A. Recover damages paid in a suit
• B. Recover costs incurred in defending a suit (if prudent and within authority)
• C. Recover amounts paid under compromise of a suit (if not against indemnifier’s orders)
• D. Claim profit for business losses

The indemnity holder can recover damages, costs of suits, and sums paid under compromise, but cannot claim profits or general business losses.

8. Case Study: A bank indemnifies a customer for losses due to wrongful dishonor of a cheque. The customer incurs legal expenses to defend a suit. Can the customer recover these costs from the bank?

• A. Yes, if the expenses were incurred prudently and within authority
• B. No, legal costs are not covered under indemnity
• C. Yes, even if incurred carelessly
• D. Only if ordered by the court

Under Section 125, the indemnity holder can recover legal costs if they are prudently incurred and within the indemnifier’s authority.

9. In indemnity, when can the indemnity holder enforce his rights against the indemnifier?

• A. Only after paying the damages
• B. As soon as liability arises, even before payment
• C. Only if indemnifier admits liability
• D. After court’s final judgment

Courts have held that the indemnity holder can compel the indemnifier to perform once liability becomes absolute, even if payment has not yet been made.

10. Which of the following best summarizes the rights of an indemnity holder?

• A. Right to recover damages only
• B. Right to recover damages and profits
• C. Right to recover profits and business losses
• D. Right to recover damages, legal costs, and compromise sums

Section 125 provides that the indemnity holder has the right to recover damages, costs of suits, and sums paid in compromise (if done prudently).

11. Which of the following is an example of an implied contract of indemnity?

• A. Agent is indemnified by the principal for acts done in good faith
• B. Surety paying off the debt of a principal debtor
• C. Banker providing a loan against security
• D. Customer opening a savings account

As per the Contract Act, certain relationships like principal–agent create implied indemnity. The principal must indemnify the agent for acts done lawfully and in good faith.

12. Which section of the Indian Contract Act provides for implied indemnity of an agent?

• A. Section 126
• B. Section 128
• C. Section 222
• D. Section 124

Section 222 states that the employer (principal) is bound to indemnify the agent against consequences of all lawful acts done by him in exercise of authority.

13. Case Study: A bank clerk, acting on manager’s written instructions, wrongfully dishonors a cheque. The customer sues the clerk. Who is bound to indemnify the clerk?

• A. Customer
• B. Clerk himself
• C. RBI
• D. Bank (as principal)

Since the clerk acted as an agent of the bank, the bank as principal must indemnify him for consequences of acts done under authority.

14. When does the indemnity holder get the right to enforce indemnity against the indemnifier?

• A. Only after making actual payment
• B. As soon as liability becomes absolute
• C. Only when court issues decree
• D. After indemnifier accepts liability in writing

Courts have clarified that indemnity holder can enforce his rights once liability is absolute, even before actual payment is made.

15. Which of the following statements about enforceability of indemnity is correct?

• A. Indemnity can be enforced only if written
• B. Indemnity cannot be implied
• C. Indemnity is enforceable only after indemnified pays damages
• D. Indemnity may be express or implied, and enforceable once liability is certain

A contract of indemnity can be either express (written/oral) or implied, and it is enforceable when liability becomes certain.

16. Which of the following is a common situation where banks use indemnity contracts?

• A. Granting term loans
• B. Issuing duplicate fixed deposit receipts
• C. Opening savings bank accounts
• D. Providing locker facility

When duplicate FD receipts are issued, the customer executes an indemnity bond protecting the bank from future claims on the lost instrument.

17. In banking, indemnity bonds are often taken from customers for:

• A. Loan disbursement
• B. Cheque book issue
• C. Loss of share certificates or securities
• D. ATM card activation

Banks require customers to sign indemnity bonds when issuing duplicate share certificates or securities, ensuring protection against third-party claims.

18. Case Study: A bank pays out a deceased customer’s balance without insisting on a succession certificate, based on indemnity given by legal heirs. What is the purpose of this indemnity?

• A. To protect the bank from future claims by other legal heirs
• B. To guarantee repayment of loan
• C. To substitute for a will
• D. To provide collateral security

In such cases, banks take indemnity from heirs to safeguard against future claims by other heirs who might contest the payment.

19. Which of the following best describes the scope of indemnity contracts in banks?

• A. Limited only to loan agreements
• B. Applicable only to government bonds
• C. Rarely used in banking operations
• D. Widely used in various banking transactions like lost instruments, deceased claims, and duplicate issues

Indemnity contracts are widely used in banking, especially where banks face risk of future claims, such as in issuance of duplicates, settlement of deceased claims, etc.

20. Why are indemnity contracts important for banks in day-to-day operations?

• A. They help banks earn extra revenue
• B. They reduce the need for KYC compliance
• C. They protect banks from unforeseen legal and financial liabilities
• D. They substitute all other contracts

Indemnity contracts act as a safeguard for banks, protecting them from future claims and legal risks in transactions with customers.