Law relating to

Special contracts
(Unit 2)
Indemnity and guarantee.
Bailment and pledge
Contract of Agency
 Contract of Indemnity
Sec 124 defines contract of Indemnity as a contract by which One party
promises to save the other from loss caused to him by the conduct of
the promisor himself or any other person.
Indemnifier ( promisor ) is a person who promises to make good the loss
Indemnified is the person whose loss is made good.
The definition is not exhaustive like English law (It is a promise to save another
harmless from loss caused as a result of transaction entered into at the instance of the
promisor) as it does not include a)implied promises to indemnify b)
cases were losses are out of accident and events not depending on
conduct of promisor
English definition is much wider and Indian courts follow the english law.
Sec 125 deals with the rights of the indemified (indemnity holder) when
suied He is entitled to recover from the indemnifier a) all damages b)
all costs which he may be compleed to pay in bringing or defending
the suits c) all sums which he may have paid under the terms of
compromise.
Indian contract act does not state the time of the commencement of the
indemnifier’s liability. Different high courts have been following
different rules.
 Contract of Guarantee
A contract of guarantee is a contract to perform the promise or discharge
the liabilities of the third person in case of his default. Person giving
guarantee is called surety (S). The person on whose behalf it is
given is called principal debtor (D) and the person to whom it is
given is called creditor. (C)
A guarantee may be oral or written .
Contract of guarantee is a tripartite agreement. ( i. Between C & D ii. S &
C and iii. S & D )
Essentials of the contract.
1. It requires the concurrence of all the three parties.
2. Primary liability lies with the debtor.
3. It should have all essentials of a valid contract.
4. It could be oral or written, express or implied. Implied guarantee is
inferred from the course of conduct of the parties concerned.
Contract of guarantee is not a contract of uberrimae fidel, which requires
full disclosure of all material facts by D or C
 Distinction between contracts of Indemnity & guarantee
Sl. Indemnity
No
1 Parties to the contract – 2
Indemnifier & indemnified.
2 Liability is primary ( Indemnifier
towards indemnified)
3 No of contracts - 1
4 Liability arises on the happening of
contingency, (the nature of which is
loss to indemnified)
5 The indemnifier cannot sue a third
party for loss in his own name
Guarantee.
Parties to the contract – 3
Creditor, debtor and surity.
Liability of surety is collateral or
secondary.
No of contracts – 3
Liability arises due to debtors refusal or
inability to repay/perform
A surety on discharging the debt can
proceed against the debtor in his own
right.

A guarantee is given for a) Repayment of debt b) Payment of goods received on

credit c) Good conduct or honesty of a person. (This is also called “fidelity
guarantee”
Guarantee may be specific or simple (for a single transaction or debt and ends when the
debt/promise is discharged ) or continuing ( for a series of transactions and the liability
extends till the guarantee is revoked.)
 Rights and Discharge of Surety.
Surety has right against a) creditor b) debtor c) co sureties.
a) creditor Before the payment of the debt : The surety may require the
creditor to sue the debtor. However he has to indemnify the creditor for the
expenses or loss if any
On Payment of the Debt surety gets the right to demand from creditor all the
securities received from the debtor and he is vested with all rights which the
creditor had against the debtor.
b) Debtor The surety is entitled to recover all payments properly made.(Sec 145
c) co sureties. He has right to claim payment by co surety. In the absence of
any contract to the contrary the co sureties are liable to contribute equally.
Discharge of Surety: i) By revocation ii) creditor’s conduct iii) By
invalidation of contract.
i) Revocation : a. Revocation by surety – only in case of continuing debts( Sec
130) b. death of surety (Sec 131) c. novation (sec 62)
ii) creditor’s conduct : a. variation in contract terms (sec133) b. release by
contract between creditor & debtor. C.loss of security (Sec 141)
iii) Invalidation of contract. Guarantee obtained by
a. misrepresentation (Sec 142
b. concealment of facts (sec 143)
c. guarantee that the creditor shall not act on it until a co surety joins.
d. There is a failure of consideration.
 Bailment and Pledge
Sec 148 defines Bailment as the delivery of goods by one person (bailor)
to another (bailee) for some purpose, upon a contract that when the
purpose is accomplished be returned or disposed according to
directions of person delivering them ( Ex. A lends a book to B to be returned
after the exam.
The detriment suffered by the bailor, in parting with the possession of
goods is sufficient consideration.
Duties of bailor: 1. to disclose known facts 2. to bear the expenses of
bailment 3. to indemnify the bailee for loss in case of premature termination
of contract. 4.to receive the goods back
Duties of bailee. 1. To take reasonable care of the good bailed. 2.not to
make unauthorised use of the goods 3. not to mix goods bailed with his own.
If the goods are mixed
a. with the bailor’s consent both shall have proportionate interest in the mixture thus
produced.
b. Without bailors concent If the goods can be separated the bailee is bound to bear
the expenses of separation. If the mixture is beyond separation the bailor is entitled for
compensation for loss of goods.
4.Not to set up adverse title 5.return any accretion( any benefit derived) of
goods 6.return the goods
“Lien “ or General lien means right of a person to retain possession of
goods belonging to other person until some debt or claim of the
person is satisfied.
A particular lien is available to the bailee against goods for which he has
rendered some service involving labour or skill.
Sec 71 specifies that a Finder of goods who takes the goods in his
custody is subject to the same responsibility as a bailee. The finder
of the goods has i) right of lien ii) right to sue for reward iii) right
for sale.
The contract of bailment is terminated 1. on the expiry of the period
2.On the achievement of the objective 3. Inconsistent use of goods
4.destruction of subject matter 5. death of bailer or bailee.
Pledge is (the special case of) bailment of goods as security for payment
of debts or performance of promise. The bailor is called Pawnor or
Pledger and the bailee is called Pawnee or Pledgee
In case of default The Pledger may by giving notice to pledgee sell the
goods. The bailee (in general) will bave to retain the goods or sue for
his charges.
 Contract of Agency
Sec 182 defines agent as a person employed to do any act for
another or to represent another in dealing with third
persons.
A person who is represented is called the Principal. The
function of an agent is to bring his principal into
contractual relations with the third parties.
As agent does not make contracts on his own behalf it is not necessary that he should have a
contractual capacity. Sec 184 stipulates that a person who is not of the age of majority
and of sound mind is responsible for his principal. It is therefore in the interest of the
principal he appoints a person with contractual capacity as an agent. An agent is
bound to act within the scope of his express or implied authority.
The relationship of a principal and agent may arise by
1. Express agreement
2. Implied agreement
3. By ratification
4. By operation of law.
1. Express agreement The usual form is that of Power of attorney
on a stamp paper.
2. Implied agreement Implied agency arises from the conduct,
situation or relationship of the parties.
3. By ratification A person acting on behalf of another with out his
knowledge or consent could be considered as an implied agent if
the person on whose behalf he acts ratifies the decisions taken.
4. By operation of law. Ex. When a company is formed its
promoters are its agents by operation of law. Or a partner is an
agent of a partnership firm.
The termination of agency could be by act of parties
(termination of the agreement, revocation either by Principal or agent) or by
operation of law.(performance of contract, expiry of time, death,
insolvancy, destruction of subject matter, dissolution of company etc)

Classification of Agents.
a. From the point of view of the extent of their authority.
b. Based on the nature of work performed.
a. From the point of view of the extent of their authority.
i) General agent : One who has authority to do all acts concerned
with a particular trade, business or employment.
ii) Special agent : One appointed to perform a particular task. His
authority is limited to performing that task alone.
iii) Universal agent : A person with unlimited authority to act for the
principal.
b. Based on the nature of work performed.
i) Mercantile or commercial agent :
a. Factor: Agent in possession of goods for selling.
b. Auctioneer : Agent appointed to sell goods by public auction.
c. Brokers : Employed to buy or sell goods. He creats contractual
relationships.
d. Commission agent.
e. Del credere agent : who in consideration of extra commission,
guarnatees his principal that the person will perform the obligation.
f. Banker
ii) Non mercantile agent : Attorneys, solicitors, insurance agents,
clearing and forwarding agents belongs to this group.