MODULE 2 - SPECIAL CONTRACTS

Contract of Indemnity and Guarantee:

 The Contract of Indemnity and Guarantee are specific types of Contract.

 The special legal provisions relating to these contracts are contained in Sections 124 to 147 of the Indian
Contract Act, 1872.

Contract of Indemnity:

 According to Sec. 124 of the Contract Act, the contract of indemnity has been defined 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 by the conduct of any other person".
 The object of a contract of indemnity is to protect the promisee against anticipated loss.
 A contract of Fire Insurance or Marine Insurance is a Contract of Indemnity.
 It involves two parties. They are;
1. Indemnifier: The person who promises to save the other from the loss is known as indemnifier.
2. Indemnified: The person to whom the promise is made is called indemnified or indemnity holder.

Characteristics of a Contract of Indemnity:

1. Essentials of a valid contract: It must have all the essential elements of a valid contract.
2. Compensation of loss: One party must promise to save the other party from any loss which he may suffer.
3. Express or Implied: The promise to indemnify a person against the loss suffered by him, may be express or
implied.

Rights of Indemnity Holder:

1. Damages: All damages which he is compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.
2. Costs: all costs he may be compelled to pay in any such suit.
3. All sums: All sums which he has paid under the terms of any compromise of any such suit, provided such
suit, provided such compromise is not contrary to the orders of the promisor.
4. Suit for specific performance: An indemnity holder is entitled to sue the indemnifier even before he has
suffered any damage provided an absolute liability has been incurred by him.

Contract of Guarantee:

 According to Section 126 of the Act, “A contract of guarantee is a contract to perform the promise,
or discharge the liability, of a third person in case of his default.”
 It involves three parties. They are creditor, the surety and the principal debtor.
1. Creditor: The person to whom the guarantee is given is called creditor.
2. Principal Debtor: The person in respect of whose default the guarantee is given is called the principal
debtor.
3. Surety: The person who gives the guarantee is called the surety.
Features of Contract of Guarantee:

1. Three parties: There must be three parties in a contract of guarantee.

2. Identity of mind: The contract of guarantee requires the identity of mind of all the said three persons in
respect of the subject matter of the contract.
3. Existence of liability: There must be an existing liability or a promise whose performance is guaranteed.
4. Primary and secondary liability: the primary liability lies with the principal debtor. The liability of the surety
is only secondary in the sense that it arises only when the debtor fails to pay his debt.
5. Essentials of a valid contract: All the essential elements of a valid contract must be present in a contract of
guarantee.
6. No misrepresentation: Any guarantee which has been obtained by means of misrepresentation made by
the creditor concerning a material part of the transaction is invalid.

Kinds of Guarantee:

1. Specific guarantee: Where a guarantee is given for a single and particular transaction or debt, it is called
specific or simple guarantee.
2. Continuing guarantee: A guarantee which extends to a series of transactions called a continuing guarantee.
3. Retrospective guarantee: Where a guarantee is given for an existing debt, is called a retrospective guarantee
4. Prospective guarantee: When a guarantee is given for a future debt, it is called prospective guarantee.
5. Absolute guarantee: It means a guarantee where the surety unconditionally promises to pay in case of
default of the principal debtor.
6. Conditional guarantee: It means a guarantee where the surety promises to pay in case of some event, in
addition to the default of the principal debtor, happens.
7. Fidelity guarantee: A guarantee given for the good conduct or honesty of a person employed in a particular
office is called a fidelity guarantee.

Revocation of Continuing Guarantee:

1. By notice of revocation by the surety: A continuing guarantee may at any time be revoked by the surety
after due notice to the creditor in respect of any future transactions.
2. By the death of the surety: the death of the surety revokes a continuing guarantee as regards future
transactions.
3. By modes of discharging the surety: A continuing guarantee is also revoked in the same manner in which
the surety is discharged such as:
a. By novation
b. By altering terms of contract without the consent of the surety
c. By release of principal debtor
d. By loss of security
Rights of Surety:

1. Rights against creditor

a) Right to claim securities: A surety is entitled to the benefit of every security which the creditor has
against the principal debtor on the payment of guaranteed debt.
b) Right to claim set-off: The surety is also entitled to the benefit of the principal debtor’s set off against
the creditor.

2. Rights against principal debtor

a) Right to be relieved from the liability: before making any payment under the guarantee, the surety can
compel the principal debtor to relieve him from liability by paying off the debt.
b) Right of subrogation: after paying off the creditor, the surety can claim all those rights which the
creditor had against the principal debtor.
c) Right to indemnity: In every contract of guarantee, there is an implied promise by the principal debtor
to indemnify the surety, and the surety is to recover from the principal debtor whatever sum he has
paid rightfully under the guarantee.

3. Rights against co-sureties: Where a debt is guaranteed by more than one surety, they are called co-sureties.
a) Right to contribution: if there are two or more co-sureties, each surety would be liable to
contribute equally towards the debt.
b) Right to share benefits of securities: the co-sureties are entitled to share the benefit of the
securities received from the creditor on payment of the debt.

Nature and Extend of Surety’s Liability:

1. Secondary liability: The surety’s liability arises only when the principal debtor makes a default.
2. Surety’s liability is coextensive: the surety is liable for what the principal debtor is liable.
3. Commencement of surety’s liability: The liability of surety arises immediately on default of the principal
debtor.
4. If the creditor has obtained the guarantee by misrepresentation or by concealing some material
information then the guarantee shall be invalid and the surety will not be liable.

Discharge of Surety from Liability:

1. Discharge of Surety by Revocation

a) Revocation by giving notice: A surety may revoke the guarantee at any time by giving notice of
revocation to the creditor.
b) Revocation by death: In the absence of any contract to the contrary, the death of the surety operates
as termination of a continuing guarantee as to future transactions.
c) Revocation by novation: A surety is discharged when a new contract of guarantee is substituted for an
old one.

2. Discharge of Surety by the conduct of the creditor:

a) By variance in terms of contract: If without the consent of the surety, the creditor makes any material
change in the nature or terms of his contract with the principal debtor, the surety is discharged from
liability.
 b) By release or discharge of the principal debtor: If there is any contract between the creditor and the
principal debtor by which the debtor is released, then the surety will also be discharged.
c) Composition with debtor: if the creditor without the consent of the surety makes an arrangement with
the principal debtor, give time to him or promises not to sue him the surety will be discharged from the
liability.
d) By loss of securities: If the creditor loses the security, the surety is discharged from his liabilities to the
extent of the value of the security.
e) Creditor’s act or omission impairing surety’s remedy: if the creditor does any act which is against the
rights of surety, the surety is discharged.

3. Discharge of Surety by invalidation of contract:

a) Guarantee obtained by misrepresentation: Any guarantee which has been obtained by means of
misrepresentation made by a creditor concerning a material part of the transaction is invalid.
b) Guarantee obtained by concealment: Any guarantee which a creditor has obtained by means of keeping
silence to material circumstances is invalid.
c) Lack of essential element of a valid contract: If any of the elements is not present, the contract is void
and the surety is discharged.
d) Failure of consideration: The surety will be discharged on a substantial failure of consideration.
e) Condition regarding the joining of co-surety: Where a person gives a guarantee upon a contract that a
creditor shall not act upon it until another has joined in it as co- surety, the guarantee is not valid if that
person does not join.

Difference between contract of indemnity and contract of guarantee

Contract of Indemnity Contract of Guarantee

 There are two parties namely indemnifier and  Contract of guarantee has three parties i.e.,
the indemnified. creditor, principal debtor and surety
 There is only one contract between the  It has three contracts. i.e., between the principal
indemnifier and the indemnified. debtor and the creditor, between the creditor and
surety and between the surety and principal debtor.
 The liability of indemnifier is primary.  Liability of surety is secondary and it arises only if
the principal debtor does not pay.
 Indemnifier need not act at the request of  Surety acts at the request of the principal debtor.
indemnified.
 The liability of the indemnifier arises only on  There is an existing liability the performance of
the happening of a contingency. which is guaranteed by the surety.
 The object of indemnity is to compensate  The object of guarantee is to provide security to the
against loss. creditor against default by the principal debtor.

CONTRACT OF BAILMENT AND PLEDGE

Contract of Bailment:

 Section 148 of Contract Act defines a bailment “a bailment is the delivery of goods by one person to
another for some purpose, when the purpose is accomplished be returned or otherwise disposed of
according to the person delivering them”.
  The person who delivered the goods is called the bailor and the person to whom they are delivered is
called the bailee.

Characteristics of Bailment:
 There must be a delivery of goods by one person to another for some specific purpose.
 Delivery may be actual or constructive: A delivery is said to be actual where the goods are physically
handed over by the bailor to the bailee. When the goods may be transferred symbolically it is called
constructive delivery.
 Delivery should be made for some purpose.
 Goods must be returned by the bailee to the bailor when the purpose is fulfilled.
 In the bailment ownership is not transferred from the bailor to the bailee. Possession alone is transferred.

Duties of Bailor:

1. To disclose known defects in the goods: the bailor is bound to disclose to bailee the faults in the goods
bailed.
2. To bear extraordinary expenses: if the bailment is gratuitous and the bailee is to receive no remuneration
then it becomes the duty of the bailor to pay such extraordinary expenses.
3. To indemnify bailee: The bailor is responsible to the bailee for any loss which the bailee may suffer
because of the defective title of the bailor.
4. To receive back the goods: It is the duty of the bailor to take back the goods when the bailee returns them
after the expiry of period of bailment, or the accomplishment of the purpose of bailment.
5. To bear the risks: The bailor must bear the risk of loss of goods provided the bailee has taken all reasonable
steps to protect the goods from loss.

Duties of Bailee:

1. To take reasonable care of the goods bailed: the bailee is required to take reasonable care of the goods
bailed to him.
2. Not to mix goods bailed with his own goods: it is the duty of the bailee is to keep the goods of the bailor
separate from his own goods.
3. Not to make any unauthorized use of goods bailed: bailee must use the goods strictly for the purpose for
which they have been bailed to him.
4. To return the goods: The bailee must return the goods to the bailor after the accomplishment of purpose
or after the expiry of period of bailment.
5. Not to set up adverse title: He must not set up his own title or a third party’s title on the goods bailed to him.

Rights of Bailor

1. Right to get back the goods: The bailor has a right to demand return of goods after the accomplishment of
the purpose or after the expiry of period of bailment.
2. Right to terminate the bailment: If the bailee fails to follow the conditions of bailment, the bailor may
terminate the bailment.
3. Right to claim damages in case of negligence: If the bailee has not taken reasonable care, the bailor has a
right to claim damages for the loss.
4. Right to claim any increase in value or profits: the bailor has a right to demand any increase or profit
which may have accrued from the goods bailed.
 5. Right to enforce the duties imposed upon a bailee: the bailor has a right to enforce the duties imposed
upon a bailee by filing a suit against him.

Rights of Bailee

1. Right to enforce bailor duties: The bailee can, by a suit, enforce the duties of the bailor towards him.
2. Right to claim compensation in case of faulty goods: Bailee can sue the bailor for his failure to disclose
faults in the goods bailed.
3. Right to claim reimbursement of expenses: The bailee can claim reimbursement of expenses incurred by
him in the case of a gratuitous bailment.
4. Right to remuneration: the bailee is entitled to lawful charges for providing services.
5. Right to recover loss in case of bailor’s defective title: The bailee has a right to be indemnified in case he
suffers any loss because of the defective title of the bailor.

Right of lien:

 The bailee has a right to claim his lawful charges and if they are not paid, the bailee is given the right to
retain the goods until the charges due in respect of those goods are paid.
 This right is known as right of lien. A lien may be either a particular lien or a general lien.
1. Particular or Special Lien [Section 170]: A particular lien is a right to retain only those goods in respect
of which some charges are due.
2. General Lien [Section 171]: A general lien is a right to retain any goods belonging to the other as
security for general balance of accounts. The persons who are entitled to general lien are (i) Bankers (ii)
Factors (iii) Wharfinger (iv) Attorneys of a High Court, and (v) Policy brokers.

Finder of Lost Goods

 Sec. 71 of the Act clearly lays down that a person, who finds goods belonging to another and takes them
into his custody, is called a finder of lost goods.
 Generally there is no obligation on the part of a person who finds goods, but if he picks them up or to take
charge of the goods, he becomes the bailee of those goods.

Rights of the finder of lost goods:

1. Right of Lien: The finder of goods has a right to retain the goods found until he receives the compensation
for trouble and expenses voluntarily incurred by him.
a) to preserve the goods; and
b) to find out the true owner.
It may be noted that the finder of goods has no right to sue the owner for such compensation.

2. Right to sue for reward: If the owner of the goods lost has offered a specific reward, for the return of goods
lost, the finder may sue for such reward, and may retain the goods unless he receives it.

3. Right to sell: A finder of goods has a right to sell the goods found under the following circumstances:
a) If the owner cannot with reasonable diligence be found; or
b) b) If the owner refuses to pay the lawful charges of the finder; or
c) c) If the goods are of a perishable nature; or
d) d) If the lawful charges of the finder in respect of the goods found exceed two-thirds of the total value
of goods.
Duties and Liabilities of the Finder of Lost Goods:
 The finder of goods must take reasonable care of the goods found.
 The finder of goods must return the goods to the real owner, who has paid the expenses incurred by the
finder.
 The finder of goods must not use the goods for his own purpose.
 The finder of goods must not mix up the goods with his own goods.
 The finder of goods must also return the increase in the goods.
 The finder of goods must make efforts to find the true owner.

PLEDGE OR PAWN:

 A pledge is a special kind of bailment.

 According to Sec. 172 of the Indian Contract Act defines pledge as, “the bailment of goods as security for
payment of a debt or performance of a promise”.
 Pawnor or Pledger: The person who delivers the goods as security for payment of a debt or performance of
a promise is called the Pawnor.
 Pawnee or Pledgee: The person to whom the goods are delivered as security for payment of a debt or
performance of a promise is called the Pawnee or Pledgee.

Rights of Pawnee or Pledgee:

1. Right of retainer: The Pawnee may retain the goods pledged not only for payment of the debt or the
performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him in
respect of the possession or for the preservation of the goods pledged.
2. Right of retainer for subsequent advance: When the Pawnee lends money to the same Pawnor after the
date of the pledge, it is presumed that the right of retainer over the pledged goods extends to subsequent
advances also.
3. Right to extraordinary expenses: The Pawnee is entitled to recover from the Pawnor extraordinary
expenses incurred by him for preserving the goods pledged.

Duties of Pawnee:

1. To take reasonable care of the goods pledged

2. Not to make any unauthorized use of goods
3. Not to mix goods pledged with his own goods
4. To return goods

Rights of Pawnor:

1. The Pawnor has a right to receive any increase of profits from pledged goods.
2. To ensure that whether the goods pledged are properly maintained or not.
3. To redeem the goods pledged, upon the satisfaction of the debt.

Duties of Pawnor:

1. Duty to repay the loan.

2. Duty to pay the expenses in case of default.
Pledge by Non-Owners:

According to the general rule, only the true owner can pledge the goods but under the following
cases, even a non-owner can make a valid pledge:

1. Pledge by mercantile agent: a mercantile agent who is with the consent of the owner in possession of the
goods can make a valid pledge provided that the Pawnee acts in good faith and has not at the time of
pledge any notice that the Pawnor has no authority to pledge.
2. Pledge by a person in possession under a voidable contract: Where a person obtains possession of goods
under a voidable contract, the pledge created by him is valid provided that the contract has not been
rescinded at the time of pledge, and the Pawnee acts in good faith and without notice of pawnor’s defect
of title.
3. Pledge by a Pawnor having only a limited interest: Where a person pledges goods in which he has only a
limited interest, the pledge is valid to the extent of that interest.
4. Pledge by co-owner in possession: Where there are several joint owners of goods then pledge by one of
them who is in possession of the goods, with the consent of other co-owners, shall be valid.
5. Pledge by a seller in possession after sale: A seller who continues to be in possession of the goods even
after their sale, can make a valid pledge provided the Pawnee acts in good faith and has no notice of sale.

Difference between Bailment and Pledge

Bailment Pledge
 The bailment can be made for any purpose.  The pledge is made for a specific purpose i.e.,
repayment of a debt or performance of a promise.
 Bailee can use the goods as per terms of  Pawnee cannot use the goods pledged.
bailment.
 Bailee can either retain the goods or sue the  After giving notice to the Pawnor in case of
bailor for his dues, but he cannot sell it. default, Pawnee can sell the goods pledged.
 Bailee gets only the possession of the goods  Pawnee acquires a special property in the goods
bailed. pledged.
 Consideration may or may not exist.  There is always consideration.

CONTRACT OF AGENCY:

 The contract which creates the relationship of principal and agent is known as ‘agency’. When a person
makes contracts through another person; he is said to be making a contract through an agent.
 Agent: The person who acts on behalf of another in dealing with third parties is called as an ‘agent’.
 Principal: The person for whom such act is done, or who is so represented, is called the principal.

Essentials of a Contract of Agency:

1. There must be an agreement by which a person is appointed as an agent by the other.

2. The principal should be competent to contract.
3. Any person may become an agent and he need not be competent to contract.
4. No consideration is necessary to create an agency.
Creation of Agency:

1. Agency by express agreement: when an agent is appointed by words spoken or written.

2. Agency by implied agreement: When agency arises from the conduct of the parties, or inferred from the
circumstances of the case, it is called an implied agency.
3. Agency by estoppel: where a person by his words or conduct led another to believe that a particular fact is
true, he cannot afterwards be permitted to deny that fact.
4. Agency by holding out: when a person by his past affirmative or positive conduct leads third person to
believe that person doing some act on his behalf is doing with authority.
5. Agency by necessity: In certain circumstances, a person may be compelled to act as an agent of the other.
6. Agency by ratification: it means subsequent acceptance by the principal in respect of an act done by the
agent without authority. Agency arising by ratification by the principal of the act of the agent is known as
agency by ratification or expost facto agency.

Sub agent: A sub-agent is a person who is employed by the original agent and who acts under the control of the
original agent. Agent can appoint a sub-agent in the following circumstances:

1. If such appointment is permitted by the custom of the trade.

2. If the nature of the business makes such appointment necessary.
3. If principal agrees to such appointment.
4. In case of an unforeseen emergency.

Substituted agent: he is a person appointed by the agent to act for the principal. The original agent is not
concerned about the work of the substituted agent. His only duty is to make the selection of the substituted
agent with reasonable care.

Different kinds of agents:

1. General agents: general agents have full authority to act in all matters concerning a trade or profession.
The authority of a general agent is continuous unless it is terminated.
2. Special agents: a special agent is appointed only for a particular purpose and he has only authority to act in
a particular transaction.
3. Universal agents: he is a person whose authority is unlimited and he can do anything for his principal.
4. Commercial or mercantile agent: A mercantile agent is a person having authority either to sell the
goods or to consign the goods or to raise money on the security of goods. They are as follows:
a. Auctioneer: an auctioneer is one who is authorised to sell goods of his principal by auction.
b. Broker: a broker is a person who is appointed to negotiate and make contracts either to buy or sell
goods. He brings a contractual relationship between the buyer and the seller.
c. Factor: A factor is entrusted with the possession of goods and who has the authority to buy, sell or
otherwise deal with the goods or to raise money on their security.
d. Del credere agent: an agent undertakes responsibility to be liable to the principal for the failure of third
party to perform the contract, he is called del credere agent.
e. Banker: Banker acts as an agent of the customer when he collects cheques or drafts or bills or buys or
sells securities on behalf of his customers.
 f. Commission agent: a commission agent is one who secures buyers for a seller for goods and sellers for
a buyer of goods.

5. Non-mercantile agent: An agent who does not deal in mercantile transactions. They engaged in the sale,
purchase and lease of immovable property or law agents who are engaged to look after the legal affairs
of their principal.

Duties of an Agent:

1. To conduct business as per directions or custom of trade: An agent is bound to conduct the business of his
principal according to principal’s directions or the custom of trade.
2. To act with reasonable care, skill and diligence: An agent is bound to conduct the business of the agency
with reasonable care and skill.
3. Duty to render proper records: An agent is bound to render proper accounts to his principal on demand.
4. To communicate with the principal in case of difficulty: in case of difficulty, it is the duty of the agent to
communicate with the principal and obtain suitable instructions from him.
5. Duty not to set up adverse title: agent should not claim any ownership over the goods or property of the
principal.
6. Duty to pass information to the principal: it is the duty of an agent to pass the information to the principal
which he has obtained during the course of agency.
7. Duty not to delegate his authority: An agent cannot lawfully employ another to perform acts entrusted to
him.

Rights of an agent:

1. Rights to remuneration: if the services rendered by the agent are not voluntary or gratuitous, the agent is
entitled to receive remuneration.
2. Right of retainer: the agent has a right to retain his principal’s money until his claim in respect of his
remuneration or advances made or expenses properly incurred in conducting the business of agency are
paid.
3. Right of lien: An agent has a right to retain goods, papers and other movable or immovable property of the
principal received by him until the amount due to him has been paid,
4. Right to indemnification: a principal is bound to indemnify an agent against losses sustained by the agent
in the course of the agency business.
5. Right to compensation: The agent has a right to be compensated for injuries sustained by him by neglect or
want of skill on the part of the principal.

Duties of Principal:

1. To remunerate the agent for his services.

2. To indemnify the agent against the consequences of all lawful acts.
3. To make compensation to the agent in respect of injury caused to agent by his negligence or want of skill.
4. If the agent does an act in good faith and within authority and it causes injury to a third person, the
principal must indemnify the agent against any loss, he may thereby sustain.
Rights of Principal:

1. To get proper accounts from his agent.

2. To see that the agency business is conducted according to his instructions.
3. He is entitled to get profit made by agent by dealing with the goods of the principal.
4. To give instructions in cases of difficulty.
5. The principal is entitled to all sums received by the agent on his behalf after deducting the agent’s due on
account of remuneration and expenses.
6. The principal is entitled to compensation for any breach of duty by the agent.
7. The principal can revoke the authority of the agent under certain circumstances.

Termination of Agency:

1. Termination by the act of parties: A contract of agency may come to an end either on account of the act of
the principal or agent or both in the following ways:
a) By agreement: An agency is terminated if the principal and agent mutually agree to do so.
b) By revocation by the principal: The principal has the power to revoke the authority given to his agent
at any time before the authority has been exercised.
c) By renunciation of agency: it is open to him to renounce the contract of agency at any time he likes.

2. By operation of law: The agency terminates by the operation of law in the following cases:
a) Completion of the business of agency: When the purpose for which the agency was created is
completed, the agency comes to an end automatically.
b) Expiry of time: Where the agent is appointed for a fixed period it will terminate on the expiry of that
period.
c) Death or insanity of the principal or agent: An agency comes to an end automatically on the death or
insanity of the principal or agent.
d) Insolvency of the principal: An agency comes to an end automatically on the insolvency of the principal.
e) Destruction of the subject matter: If the subject matter of the agency is destroyed, the agency comes
to an end.
f) Dissolution of company: When the principal or agent is an incorporated company, the agency will
come to an end on the dissolution of the company.
g) Principal becoming an alien enemy: If the principal and the agent belong to two different countries,
and war breaks out between the two countries, the authority of the agent ceases.
h) Termination of the sub-agent’s authority: The termination of the authority of an agent causes the
termination of the authority of all sub-agents appointed by him.