Special Contracts

Indemnity, Bailment, Pledge,

Guarantee and Agency
The spread
• Contract of indemnity – (Section 124,125)
• (Definitions and essentials, Rights of indemnity holder, Time of commencement to
indemnifier’s liability)
• Contract of guarantee - (Section 126-147)
• (Definitions and essentials, Distinction between indemnity and guarantee, Kinds of
guarantee, Nature and extent of surety’s liability)
• Contract of bailment - (Section 148-171)
• (Definitions and essentials, Kinds, Rights and duties of Bailor and Bailee)
• Contract of pledge - (Section 172-181)
• (Definitions and essentials, Difference with bailment)
• Contracts of agency – (Section 182-238)
• (Definitions and essentials, Principal agent relationship, Creation of agency, Extent of
agents authority, Liability of principal, Personal liability of agent towards third party)
Contract of Indemnity
• Indemnity Meaning –
• To make good the loss incurred by another person
• To compensate the party who has suffered some loss
• To protect a party from incurring a loss

‘Contract of indemnity’ Definition

• A ‘contract of indemnity’ is made when 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.
• It could be expressed or implied
Essential elements of a contract of indemnity
• All the essentials of a valid contract must also be present in the contract of
indemnity
• X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and is
fined Rs.1,000. Y cannot claim this amount from X because the object of the agreement was
unlawful.
• Loss to one party
• A person can indemnify another person only if such other person incurs some loss or it has
become certain that he will incur some loss.
• Indemnity by the promisor
• The purpose of contract of indemnity is to protect the indemnity holder from any loss that
may be caused to the indemnity holder.
• Reason for loss
• The contract of indemnity must specify that indemnity holder shall be protected from the
loss caused due to –
• Action of the promisor himself; or
• Action of any other person; or
• Any act, event or accident which is not in the control of the parties.
Rights of indemnity holder
• Right to recover damages
• All damages which he is compelled to pay in any suit in respect of any matter
covered by the contract of indemnity.
• Right to recover costs
• All costs which he is compelled to pay in bringing or defending such suit. If the
indemnifier had authorised him to bring or defend the suit; or the indemnity holder
did not contravene the orders of the indemnifier; and acted as it would have been
prudent for him to act in the absence of any contract of indemnity.
• Right to recover from the indemnifier all sums which he may have paid
under the terms of any compromise of any such suit,
• not contrary to the orders of the promisor, and would have been prudent to make in
the absence of any contract of indemnity, or if it was pre-authorized
• Right to sue for specific performance if he has incurred some covered
under the contract.
Commencement of Liability of Promisor/Indemnifier
• Courts in India have held that the Indemnifier is not liable until the
indemnified has suffered the loss and the Indemnified can compel the
indemnifier to make good his loss although he has not discharged his
liability.
• Gajanan Moreshwar vs. Moreshwar Madan(1942), it was observed
that “If the indemnified has incurred a liability and the liability is
absolute, he is entitled to call upon the indemnifier to save him from
the liability and pay it off”.

• What about life insurance – is it a contract of indemnity

Contract of Guarantee
• Contract of Guarantee performs the promises made or discharges the
liabilities of the third person in case of his failure to discharge such
liabilities.
• Such contract has three parties: –
• Surety: A surety is a person giving a guarantee in a contract of guarantee. A person
who takes responsibility to pay a sum of money, perform any duty for another
person in case that person fails to perform such work.
• Principal Debtor: A principal debtor is a person for whom the guarantee is given in a
contract of guarantee.
• Creditor: The person to whom the guarantee is given is known as the creditor.
• X advances a loan of 25000 to Y and Z promise that in case Y fails to repay the loan,
then he will repay the same. In this case of a contract of guarantee, X is a Creditor, Y
is a principal debtor and Z is a Surety.
• A guarantee may be either oral or written.
• Essentials of a contract of guarantee
• Essentials of valid contract, Consideration for guarantee, Competency of the
parties
• Existence of a recoverable debt
• No misrepresentation or concealment of facts
• Conditional liability of surety
• Concurrence of all the three parties
• Mode of creation of contract
• Kinds of Guarantee
• Retrospective or prospective
• Specific or continuing
• Entire or partial debt
• Revocation of continuing guarantee could be by notice
Nature of liability
• Nature of liability in the contract of indemnity is of the indemnifier;
primary liability in a contract of guarantee is of the principal debtor and
secondary liability is of surety.
• Surety carries a joint liability along with the principal debtor. The creditor
has a choice to make recovery from either of them after a default occurs.
• Bank of Bihar v Damodar Prasad - held that the creditor do not have to
exhaust all the remedies against principal debtor before suing the surety. It
is the duty of the surety to pay the debt if the principal debtor does not
pay. The purpose of contract of guarantee is defeated if the creditor is
asked to postpone his remedies against the surety. The liability of surety is
immediate.
Contract of Bailment
• “Bailment” is derived from the French word “ballier” which means
“to deliver”. It etymologically means ‘handing over’ or ‘change of
possession’.

• A "bailment" is the delivery of goods by one person to another for

some purpose, upon a contract, that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them. The person delivering the
goods is called the "bailor". The person to whom they are delivered is
called the "bailee".
• Giving car for service or cloths for stiching
Essentials of a valid Contract of Bailment (Sec.148)
• Essentials of a Contract
• There must be a contract.
• The contract may be expressed or implied.
• Bailment of goods only.
• There must be delivery of goods by one person to another person.
• The goods must be delivered for some purpose.
• The purpose may be expressed or implied.
• The delivery of goods must be conditional
• The condition shall be that the goods shall be returned (either in original
form or in any altered from); or
• Disposed of according to the directions of the bailor, when the purpose is
accomplished.
Delivery of goods
• It involves the delivery of goods from one person to another for some
purposes. Bailment is only for moveable goods and never for
immovable goods or money. The delivery of the possession of goods
is of the following kinds:
• Actual Delivery: When goods are physically handed over to the Bailee by the
bailor.
• Eg: delivery of a car for repair to workshop
• Constructive Delivery: Where delivery is made by doing anything that has the
effect of putting goods in the possession of the Bailee or of any person
authorized to hold them on his behalf.
• Delivery of the key of a car to a workshop dealer for repair of the car.
Possession
• In bailment, possession of goods changes. Change of possession can
happen by physical delivery or by any action which has the effect of
placing the goods in the possession of Bailee.
• Change of possession does not lead to change of ownership. In
bailment, bailor continues to be the owner of goods as there is no
change of ownership.
• Where a person is in custody without possession he does not became
a Bailee.
• Servants of a master who are in custody of goods of the master do not
become bailees.
• Similarly, depositing ornaments in a bank locker is not bailment, because
ornaments are kept in a locker whose key are still with the owner and not
with the bank. The ornaments are in possession of the owner though kept in
a locker at the bank.
Classification of bailment
• On the basis of benefit derived, bailment can be classified into
• Exclusive benefit of bailor
• Exclusive benefit of bailee
• On the basis of reward, bailment can be classified into Gratuitous and
non Gratuitous bailment
• Gratuitous bailment
• Bailment without any charges or reward, i.e. – No hire charges are paid by
bailee; and No custody charges are paid by bailor.
• Free of charge such bailment would be either for the exclusive benefits of
bailor or bailee.
• Non gratuitous bailment
• Bailment for some charges or reward, i.e.- Hire charges are paid by bailee; or
Custody charges are paid by bailor
• bailment for the benefit of both bailor & bailee
Duties of a bailor
• Disclose faults in goods to Bailee, of which he has knowledge.
• Also disclose such information which materially interferes with the use of
goods, or exposes the Bailee to extraordinary risk.
• Liability for Defects in Goods
• In case of Gratuitous bailment - Bailor is liable only for those losses which arise due
to non – disclosed risks.
• In case of Non Gratuitous Bailment - Bailor is liable for damages whether or not he
was aware of the existence of faults.
• Bear expenses (Sec.158)
• In case of Gratuitous bailment, Bailor to repay to Bailee, all necessary expenses
incurred by him for the purpose of Bailment
• In case of Non Gratuitous bailment, Bailor is liable to repay only extraordinary
expenses, and not the ordinary expenses
Duties of a bailee
• Take reasonable care
• The bailee must take such case of goods as a man of ordinary prudence would
take care of his own goods.
• The bailee shall not be liable for any loss or destruction of goods, if he is not
negligent; or the loss was caused due to an act of God or other unavoidable
reasons.
• Not to make unauthorized use of goods
• The bailee must not make any unauthorized use of the goods. If he does, then
the bailment becomes voidable at the option of the bailor; and the bailee
shall be liable for any loss or damage even if such loss is caused due to an act
of God or other unavoidable reasons.
Duties of a bailee
• Not to mix goods
• If goods are mixed with bailor’s consent The parties shall have a proportionate
interest in such mixture.
• Goods are mixed without bailor’s consent, but the goods are separable. The bailee
shall pay the expenses of separation. The bailee shall pay damage incurred by the
bailor.
• Goods are mixed without bailor’s consent, and goods are not separable The bailee
shall compensate the bailor for any loss caused to him
• Return the goods
• The bailee must return the goods, without waiting for demand from bailor, if the
time specified in the contract has expired; or the purpose specified in the contract is
accomplished. If the goods are not so returned, then the goods shall be at the risk of
the bailee; the bailee shall be liable for any loss or damage, even if such loss is
caused without any fault or negligence of the bailee or due to an act of God or other
unavoidable reasons.
Rights of a bailor
• Terminate the bailment if the bailee does any act inconsistent with
the terms and conditions of the contract of bailment. Bailment
becomes voidable at the option of the bailor.
• Demand back the goods
• if the bailment is gratuitous and for a specific period then the bailor may
compel the bailee to return the goods before expiry of the period of bailment.
• File suit against wrongdoer
• Bailor has the right to sue a third party who does any damages to the goods;
or a third party who deprives the bailee from using the goods
• Sue the bailee to enforce his duties.
Rights of a bailee
• Right to compensation
• The bailee has the right to be indemnified by the bailor, if the bailor has no
title to the goods; and as a consequence, the bailee suffers some loss
• Return the goods
• It is the duty as well as the right of the bailee to return the goods to the
bailor.
• Recover charges incurred
• The bailor is liable to pay the extraordinary expenses
• If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary
expenses,
Contract of Pledge
• The bailment of goods as security for payment of a debt or performance of
a promise is called “pledge”. The bailor is in this case called the “pawnor”.
The bailee is called the “pawnee”.
• Pledge is a variety or specie of bailment.
• It is bailment of goods as security for payment of debt or performance of a
promise. The person who pledges [or bails] is known as pledgor or also as
pawnor, the bailee is known as pledgee or also as pawnee.
• In pledge, there is no change in ownership of the property.
• Under exceptional circumstances, the pledgee has a right to sell the
property pledged.
• Example: A lends money to B against the security of jewellery deposited by B with
him i.e. A. This bailment of jewellery is a pledge as security for lending the money. B
is a pawnor and A is a pawnee.
Contract of Agency (S.182)
• An 'Agent' is a person employed to do any act for another or to
represent another in dealings with third persons. The person for
whom such act is done, or who is so represented, is called the
'principal'.
• Thus, an agent is a connecting link between his principal and third
parties.
• Contracts of agency are based on two important principles, namely:
• Whatever a person can do personally shall also be allowed to be done
through an agent except in case of contracts involving personal services such
as painting, marriage, singing, etc.
• He who does not act through a duly authorized agent does it by himself, i.e.,
the act of the agent are considered the acts of the principal
Essential features of contract of agency
An agency agreement is a legal contract creating a fiduciary relationship whereby
the first party (the principal) agrees that the actions of a second party (the agent)
binds the principal to later agreements made by the agent as if the principal had
himself personally made the later agreements.

• Agreement between agency and principal

• Competency of principal
• Competency not required for an agent
• Contractual relationship
• Creation of legal relations
• Consideration not required
• Intention of the person to act
Agency, Appointment and authority of agents
182. "Agent" and "principal" defined -
An "agent" is a person employed to do any act for another, or to represent another in
dealing with third persons. The person for whom such act is done, or who is so
represented, is called the "principal".
183. Who may employ agent -
Any person who is of the age of majority according to the law to which he is subject, and
who is of sound mind, may employ an agent.
184. Who may be an agent -
As between the principal and third persons, any person may become an agent, but no
person who is not of the age of majority and sound mind can become an agent, so as to be
responsible to the principal according to the provisions in that behalf herein contained.
185. Consideration not necessary -
No consideration is necessary to create an agency;
Agency, Appointment and authority of agents
186. Agent's authority may be expressed or implied -
The authority of an agent may be expressed or implied.
187. Definitions of express and implied -
An authority is said to be express when it is given by words spoken or
written. An authority is said to be implied when it is to be inferred from the
circumstances of the case; and things spoken or written, or the ordinary
course of dealing, may be accounted circumstances of the case.
188. Extent of agent's authority -
An agent, having an authority to do an act, has authority do every lawful
thing which is necessary in order to do such act. An agent having an
authority to carry on a business, has authority to do every lawful thing
necessary for the purpose, or usually done in the course, of conducting such
business.
Agency, Appointment and authority of agents
189. Agent's authority in an emergency -
An agent has authority, in an emergency, to do all such acts for the purpose
of protecting his principal from loss and would be done by a person or
ordinary prudence, in his own case, under similar circumstances.

190. When agent cannot delegate -

An agent cannot lawful employ another to perform acts which he has
expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub-agent may, or, from the nature or agency, a
sub-agent must, be employed.
Meaning of ‘agent’
• An ‘agent’ is a person employed to –
• Do any act for another; or
• Represent another in dealings with third persons.
Meaning of ‘principal’
• ‘Principal’ is the person –
• For whom an act is done by the agent; or
• Who is represented by the agent in respect of dealing with third persons.
Test of agency
• Where a person has the capacity to –
• Create contractual relations between the principal and a third party;
• Bind the principal by his own acts, there exists a relationship of agency.
Types of Agents
Based on Authority
• Special Agent - Appointed to perform a particular transaction, has
limited authority and cannot bind Principal for other acts
• Universal Agent - Appointed to do all acts connected with a particular
trade etc., Authority is wide and continues till agency is terminated.
• General Agent - Appointed to do all acts for the Principal. Authority is
unlimited and all acts of Agent bind his Principal provided that his
acts are legal and agreeable as per law of land.
Based on Nature of work
Modes of creation of agency (Sec.187, 189, 196, 214 and 237)
Express agreement
• A person may employ another person as his agent by entering into an express
agreement with him.
• The agreement may be either oral or written.

Implied agreement
• If a person makes a representation (by his words or conduct) to a third person that a
certain person is his agent; and
• the third party believing such representation to be true, enters into a contract with
the pretended agent.
• Then the person making the representation is prevented from denying the truth of
agency. He may be held liable as a principal by such third party.
Salient features of agency
Principal is liable for the acts of agent
• The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the same
legal consequences as if these contracts were made by the principal himself.
• Who may employ an agent?
• Any person may employ an agent if he is of the age of majority; and is of sound
mind.
• Who can be an agent?
• Any person may become an agent.
• Even a minor or a person of unsound mind can become an agent
• Liability of agent
• Generally an agent is liable to the principal
• An agent is not liable to the principal if he is a minor or is of unsound mind.
• Requirement of consideration
• No consideration is necessary for creating an agency
Liability of principal to third parties for the
acts of agent
• Principal is liable for the acts of agent
• The principal is liable for all the acts of an agent which are lawful and within
the scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the
same legal consequences as if these contracts were made by the principal
himself.
• When agent exceeds his authority
• Whether the acts done within the authority are separable from the acts done
beyond authority.
• If yes – The principal is not bound for excess acts done by the agent.
• If no – The principal is not bound by the transaction and the principal can
repudiate the whole transaction.
Vicarious liability of an agent
• Liability of agent to third party
• If the agent has actual or apparent authority, the agent will not be liable for
acts performed within the scope of such authority, so long as the relationship
of the agency and the identity of the principal have been disclosed.
• Liability of agent to principal
• If the agent has acted without actual authority, but the principal is
nevertheless bound because the agent had apparent authority, the agent is
liable to indemnify the principal for any resulting loss or damage.
• Liability of principal to agent
• If the agent has acted within the scope of the actual authority given, the
principal must indemnify the agent for payments made during the course of
the relationship whether the expenditure was expressly authorized or merely
necessary in promoting the principal's business.
Agency by necessity – Conditions
• There was an actual and definite necessity for acting on behalf of the
principal.
• The agent was not in a position to communicate with the principal.
• The act was done for the purpose of protecting the interest of his
principal.
• The agent has exercised such reasonable care as a man of ordinary
prudence would have exercised in his own case.
• The act was done bonafide.
Agency by ratification
• If a person (pretended agent) acts on behalf of another person (the
principal)
• the pretended agent acts without the knowledge or consent of the
principal; and afterwards, the principal accepts such act.
• Then Agency by ratification comes into existence.

Effects of ratification
• The principal is bound by the acts ratified by him as if such acts had been
performed by his authority.
• Ratification relates back to the actual date of the act that is ratified and not
from the date when the act ratified.
Essentials of a valid ratification (Sec. 197 to 200)
• No valid ratification can be made by a person whose knowledge of the facts
of the case is materially defective. In other words, the principal must have
full knowledge of all the material facts.
• It must be done for whole transaction in fact; ratification of the part of a
transaction operates as a ratification of the whole transaction.
• The acts done by a person (i.e. pretended agent) on behalf of another
person (i.e. pretended principal) can only be ratified.
• Ratification can be made by only such person for whom the act was done.
• The principal must be in existence at the time when the act was done in his
name
• The principal must have contractual capacity both at the time of entering
into the contract and at the time of ratification.