Chapter 31: Contracts of Guarantee and Bank Guarantee (JAIIB – Paper 2)
1. In a contract of guarantee, who is the person giving the guarantee?
A. Creditor
B. Principal Debtor
C. Surety
D. Banker
The person who gives the guarantee is called the Surety, the person on whose behalf the guarantee is given is the Principal Debtor, and the person to whom the guarantee is given is the Creditor.
2. Which of the following is NOT a party in a contract of guarantee?
A. Creditor
B. Principal Debtor
C. Surety
D. Beneficiary
Only three parties are involved in a contract of guarantee: Creditor, Principal Debtor, and Surety. The term "Beneficiary" is not separately recognized in the Indian Contract Act.
3. A contract of guarantee is valid only if:
A. It is signed only by the surety
B. Basic principles of contract such as free consent, capacity, and lawful consideration are complied with
C. It is registered with RBI
D. It is in writing and attested by two witnesses
A contract of guarantee must fulfill the basic principles of contract under the Indian Contract Act, including offer, acceptance, lawful consideration, free consent, and capacity of parties.
4. Consideration for the surety in a contract of guarantee is:
A. Anything done or any promise made for the benefit of the principal debtor
B. A separate payment to the surety by the creditor
C. Personal benefit received by the surety
D. Compensation given by the bank
As per Section 127 of the Indian Contract Act, the consideration for the surety is anything done or any promise made for the benefit of the principal debtor.
5. Which of the following statements is TRUE about contracts of guarantee?
A. They are always oral agreements
B. Only the surety and debtor are parties
C. Consideration must move directly to the surety
D. They may be oral or written, but must satisfy essentials of a valid contract
A contract of guarantee may be oral or written (Section 126, Indian Contract Act), but it must satisfy the essentials of a valid contract like lawful object, free consent, and consideration.
6. In a contract of guarantee, the liability of the surety is:
A. Greater than that of the principal debtor
B. Co-extensive with that of the principal debtor, unless otherwise provided in the contract
C. Lesser than the principal debtor by default
D. Limited only to 50% of the debt
As per Section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal debtor unless the contract specifies otherwise.
7. A continuing guarantee is one which:
A. Covers only one specific transaction
B. Ends automatically after 1 year
C. Requires renewal every financial year
D. Extends to a series of transactions until revoked
A continuing guarantee applies to a series of transactions until it is revoked by the surety or comes to an end by law.
8. Which of the following is an example of a continuing guarantee?
A. Guarantee given by a director to secure repayment of all future loans granted by the bank to a company
B. Guarantee for repayment of a single housing loan
C. Guarantee given for performance of a one-time contract
D. Guarantee for one bill of exchange only
A guarantee covering all future loans is a continuing guarantee, whereas one-time guarantees (like a single housing loan or bill) are specific guarantees.
9. How can a continuing guarantee be revoked?
A. Only by court order
B. Only if the creditor agrees
C. By notice of revocation from the surety or by death of the surety
D. It cannot be revoked once given
As per Sections 129-131, a continuing guarantee can be revoked either by notice from the surety or by the death of the surety (with respect to future transactions).
10. If a surety revokes a continuing guarantee, his liability is:
A. Limited to transactions prior to revocation
B. Extinguished completely, including past debts
C. Limited only to half of the outstanding debt
D. Extended for 6 months after revocation
Revocation of a continuing guarantee applies only for future transactions. The surety remains liable for obligations already incurred before revocation.
11. On the death of a surety, the surety’s liability:
A. Continues for all future and past transactions
B. Continues only for obligations already incurred, not for future transactions
C. Automatically transfers to the creditor
D. Ends immediately for all transactions
As per Section 132 of the Indian Contract Act, on the death of the surety, liability continues only for obligations already incurred. Future obligations are automatically discharged.
12. Any variance in the terms of the contract without the surety’s consent:
A. Strengthens the surety’s liability
B. Has no effect on the contract
C. Transfers liability to another surety
D. Discharges the surety from liability
Any material change in the terms of the contract without the surety’s consent discharges the surety from liability as per Section 133.
13. When is the principal debtor discharged from liability to the creditor?
A. When the debt is paid or lawfully waived by the creditor
B. Only when the surety pays the debt
C. When the contract is oral
D. Never, the debtor is always liable
The principal debtor is discharged when the debt is either fully paid or lawfully waived by the creditor, as per Sections 141-142.
14. If the creditor releases the principal debtor without the surety’s consent:
A. The surety’s liability increases
B. The principal debtor becomes liable again
C. The surety is discharged from liability
D. There is no effect on the surety
Any release or discharge of the principal debtor without the consent of the surety discharges the surety as it changes the basis of the contract.
15. Which of the following can discharge a surety from liability?
A. Payment of debt by another surety without notice
B. Creditor’s act that releases the principal debtor or materially varies the contract without consent
C. Principal debtor borrowing from a different bank
D. Interest rate change by RBI
The surety is discharged if the creditor releases the principal debtor, materially alters contract terms, or does any act affecting the surety’s liability without consent.
16. If the creditor, without the consent of the surety, refrains from suing the principal debtor, the surety is:
A. Fully liable for all future obligations
B. Released from past obligations only
C. Discharged from liability for obligations affected by the forbearance
D. Required to pay double the debt
If the creditor refrains from suing the principal debtor without the surety’s consent, it constitutes forbearance to sue and discharges the surety from liability for obligations affected by such forbearance.
17. After paying the creditor, the surety has the right to:
A. Demand additional payment from the creditor
B. Claim reimbursement from the principal debtor
C. Waive the principal debtor’s liability
D. Sue the bank for interest
As per Section 140 of the Indian Contract Act, the surety, after discharging the creditor, can recover the amount paid along with incidental expenses from the principal debtor.
18. Security given by the principal debtor to the creditor:
A. Can be enforced by the surety only if he pays the debt and the principal debtor fails to reimburse
B. Is always available for the surety before payment
C. Relieves the surety from liability automatically
D. Cannot be claimed by the surety under any circumstances
If the surety pays the creditor, he has a right to enforce any security provided by the principal debtor to recover the amount paid. The surety’s claim is derivative of the creditor’s rights.
19. When the creditor agrees to extend time or grants indulgence to the principal debtor without surety’s consent:
A. Surety’s liability increases
B. Surety must pay interest on future loans
C. Liability is unaffected
D. Surety is discharged to the extent of the indulgence granted
Granting indulgence or forbearance without the surety’s consent discharges the surety to the extent it affects his liability.
20. A surety’s right to claim from the principal debtor arises:
A. Only before paying the creditor
B. Only after the contract is revoked
C. After discharging the debt to the creditor
D. Automatically at the time of contract formation
The surety can claim reimbursement or any incidental expenses from the principal debtor only after paying the creditor as per Section 140 of the Indian Contract Act.
21. The principal debtor’s implied promise to indemnify the surety arises:
A. Automatically when the surety pays the creditor
B. Only if expressly written in the contract
C. When the creditor forgives the debt
D. After the death of the surety
By law, the principal debtor is impliedly bound to indemnify the surety for any payment made to the creditor and any expenses properly incurred by the surety.
22. If the creditor makes a misrepresentation to the surety, the surety:
A. Must pay the debt regardless
B. Can be discharged from liability to the extent the misrepresentation influenced the contract
C. Can sue the principal debtor only
D. Becomes jointly liable with the creditor
Misrepresentation by the creditor that induces the surety to enter the contract can discharge the surety partially or fully, depending on the effect of the misrepresentation.
23. When multiple co-sureties are liable for the same debt, the liability is:
A. Limited to the first surety who pays
B. Joint only and cannot be divided
C. Joint and several, meaning each surety is liable for the entire debt, but contribution can be claimed from other co-sureties
D. Always limited to their proportion in the contract
Co-sureties are generally jointly and severally liable. If one surety pays more than his share, he can claim contribution from other co-sureties under Section 146 of the Indian Contract Act.
24. A co-surety who pays the entire debt can:
A. Keep the amount paid without recourse
B. Sue the creditor for excess payment
C. Demand the principal debtor to pay double
D. Claim contribution from other co-sureties for their proportionate share
Section 146 allows a co-surety who pays more than his share to recover the excess from other co-sureties proportionately.
25. If a co-surety is discharged by the creditor without the consent of other sureties:
A. Other sureties’ liability decreases automatically
B. The discharged surety is freed, but remaining sureties continue to be liable
C. All sureties become liable for double the debt
D. Principal debtor is automatically discharged
When a co-surety is discharged without affecting the contract of other sureties, the remaining sureties continue to be liable for the full debt, while the discharged surety is freed.
26. If one co-surety is released by the creditor with or without consent of other co-sureties:
A. All other co-sureties are automatically discharged
B. Principal debtor is discharged
C. Other co-sureties remain liable for the entire debt
D. Sureties’ liability is reduced proportionately automatically
As per Section 145, releasing one co-surety does not discharge other co-sureties; they continue to remain liable for the full debt.
27. A Bank Guarantee is:
A. A loan provided by the bank to the customer
B. A promise by the bank to pay the beneficiary if the customer defaults
C. An investment product of the bank
D. A fixed deposit issued in favor of the customer
A Bank Guarantee is a conditional undertaking by a bank to pay a specified amount to the beneficiary if the customer (applicant) fails to fulfill contractual obligations.
28. Which of the following is a type of Bank Guarantee?
A. Performance Guarantee
B. Recurring Deposit Guarantee
C. Savings Account Guarantee
D. Loan Sanction Guarantee
A Performance Guarantee is issued by a bank to assure that the contractor/supplier performs as per contract terms. Other types include Financial Guarantee, Advance Payment Guarantee, Bid Bond, etc.
29. An Advance Payment Guarantee is issued to:
A. Secure repayment of a housing loan
B. Guarantee the principal debtor’s general liability
C. Serve as a fixed deposit receipt
D. Protect the buyer if advance payment is made but seller fails to deliver
An Advance Payment Guarantee ensures that if the seller fails to deliver goods or services after receiving advance payment, the bank pays the beneficiary the amount specified.
30. A Financial Guarantee differs from a Performance Guarantee in that:
A. It covers project completion only
B. It is issued only for government contracts
C. It assures repayment of debt or financial obligations
D. It is automatically revoked after six months
A Financial Guarantee assures repayment of a loan, credit facility, or financial obligations, whereas a Performance Guarantee assures fulfillment of contractual performance obligations.
31. The banker’s primary duty under a Bank Guarantee is to:
A. Verify the principal debtor’s solvency before every transaction
B. Honour the guarantee upon demand, subject to terms of the guarantee
C. Provide legal advice to the beneficiary
D. Ensure the principal debtor repays the creditor first
The banker’s duty is to honour the guarantee when called upon, provided the claim meets the conditions stipulated in the Bank Guarantee. The bank does not need to investigate disputes between the applicant and the beneficiary.
32. While issuing a Bank Guarantee, the banker must:
A. Accept the beneficiary’s instructions without verification
B. Waive collateral if requested by the applicant
C. Guarantee unlimited liability
D. Verify the applicant’s creditworthiness and take adequate security
Before issuing a Bank Guarantee, the banker must assess the applicant’s creditworthiness and obtain sufficient security to mitigate the risk of default.
33. Before making payment under a Bank Guarantee, the banker should:
A. Ensure that the claim is strictly in accordance with the terms and conditions of the guarantee
B. Pay immediately without verification
C. Confirm the principal debtor’s default personally
D. Wait for the beneficiary’s confirmation in writing only
Payment under a Bank Guarantee must be made only when the demand strictly complies with the terms of the guarantee to avoid wrongful payment and legal liability.
34. Which of the following precautions is recommended while issuing a Bank Guarantee?
A. Guarantee should be open-ended without expiry
B. Bank should rely solely on verbal instructions
C. Clearly define the amount, validity period, and conditions for encashment
D. Waive all collateral requirements for faster processing
While issuing a Bank Guarantee, it is essential to define the guaranteed amount, validity period, and conditions clearly to protect the bank from disputes and wrongful claims.
35. Payment under a Bank Guarantee should be made:
A. After verifying the principal debtor’s financial position
B. Strictly in accordance with the terms of the guarantee on demand by the beneficiary
C. Only after the beneficiary’s approval of principal debtor
D. Only after legal proceedings against the principal debtor
The banker must make payment under a Bank Guarantee only when the beneficiary’s demand fully complies with the guarantee terms to avoid wrongful payment liability.
