SPECIAL CONTRACTS

Indemnity
Bailment
Pledge
Guarantee and
Agency
 WHY SPECIAL CONTRACTS ?
 The contracts where rules, framework, rights and obligations of the contracting parties has been provided in the
Indian Contract Act, 1872 are called as special contracts.
 These cannot be changed as per the agreement between the parties
 Main contract provisions will be applicable
INDEMNITY

 According to Section 124 of the Contract Act, 1872, - “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 person who gives the indemnity is called the ‘indemnifier’ and the person for whose protection it is given is
called the ‘indemnity-holder’ or indemnified’.
 A contract with B to kill C. A also agrees to indemnify B in case of any loss, either monetary or otherwise. Is this a
valid contract?
 A hires a security firm Group 5. Can A ask Group 5 to indemnify her in case of any loss at the hands of security
personals?
 A is an employee of B. The company asks A to purchase items worth INR 5,000/-. The items were bought for INR
6,000/-. Can A recover excess INR 1000 from B?
 
 INDEMNITY - RISK SHIFTING TOOL
 Indemnity contracts are where one party takes responsibility of liability/loss of another party.
 To make good loss of other
 It is non gratuitous i.e. with consideration
 Nature of contract- contingent (depends on happening or non-happening of future event)
 Contract term defines the scope of obligation
 Inclusions or exclusions terms- an off shore project, real estate projects, sole negligence of another party
 Contracting parties must have a control on what is included and what is excluded
 Circumstances, products and services
 An editor of a newspaper was entitled to receive from his employer legal and accounting costs and expenses arising
from having to appear or defend in any proceedings as a result of being an editor.
Implied- relationship between the contracting or
Express-generally statutory like partnerships
 INSURANCE CONTRACTS
 Car Insurance- insure from any loss from theft or accident
 Insurance company – ICICI Lombard Insurance Ltd promisor and A is a promisee
 Formation - Expected losses
 Performance - Absolute loss, contingent contract
 Discharge - premium paid, will it be value of car ?
 Value of car- 10,00,000 Essentials of indemnity contracts
 Premium – 10,000  Nature-contingent
 Indemnifier and indemnified
 Loss – 20,000 (To make good loss of other)  Consideration
 Exception- life insurance is not an indemnity contract  Excluded or included as per scope
agreed between the contracting parties
 Illustration- A and B friends  Make good for loss either caused by
indemnifier or third party
 INDEMNITY BOND

 An indemnity bond which permits an employee to leave the employment earlier than the minimum agreed period
only at the cost of the forfeiture of his bond money is valid only if the period of restriction and the bond money
are reasonable.
 Only that part of the bond money can be retained which is necessary to indemnify the employer for his loss.
BAILMENT

 According to Section 148 of the Contract Act, 1872, “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 directions 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”.
 If a person, who is already in possession of the goods of another, contracts to hold them as a bailee, he thereby
becomes the bailee, and the owner becomes the bailor of such goods, although they may not have been delivered
by way of bailment.
 Hence, a bailment is delivery of goods by bailor to the bailee on a condition, to which the law usually attaches an
obligation to redeliver the goods, or otherwise deal with them as directed, when the condition is satisfied; but
there may be, in particular cases, a bailment without an enforceable obligation.
 It is a relationship in which goods of one person temporarily go in the possession of another person.
 The ownership of the goods is in one person whereas possession of goods rests with another person.
 TYPES OF BAILMENT

 Delivery of possession may be of two types:

 Actual delivery- goods are physically delivered to the bailee, it is actual delivery.
 Constructive delivery. no change in physical possession of goods, goods remain at the same place where they were
earlier but something has been done which has the effect of putting them in the possession of the bailee, this is
known as bailment by constructive delivery.
 Delivery upon contract: goods should be delivered for some specific purpose and upon a contract that when the
purpose is accomplished the goods will be returned to the bailor, either express or implied.
 Conditional Delivery: goods are delivered for some specific purpose and the delivery is subject to the condition that
as and when the purpose is accomplished the goods will be returned to the bailor.
 DUTY OF BAILOR

 Bailor’s foremost duty is to disclose faults in goods bailed by him: The bailor is bound to disclose to the bailee
faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them, or
expose the bailee to extraordinary risks. If he does not make such disclosure, he is responsible for damage arising
to the bailee directly from such faults.
 Goods bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the
existence of such faults in the goods bailed.
 DUTIES OF BAILEE

 Duty of Reasonable care [S.151]: In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as
a man of ordinary prudence would, under similar circumstance, take of his own goods of the same bulk, quality and value as the
goods bailed. If the goods are stolen from the custody of the bailee due to his negligence, he will be liable. If he proves to the
court that he had exercised reasonable care, he will not be liable.
 Duty not to make unauthorized use of goods bailed [S.154]: If the bailee makes any use of the goods bailed, which is not
according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods
from or during such use of them. Goods bailed must be strictly used for the purpose for which they have been delivered. If loss
or damage is caused to the goods bailed by unauthorized use of them, the bailee will be liable for such loss or damage.
 Termination of bailment by bailee’s act inconsistent with conditions [S. 153]: A contract of bailment is avoidable at the
option of the bailor, if the bailee does any act with regards to the goods bailed, which is inconsistent with the conditions of the
bailment.
 Duty not to mix[Ss.155-157]: It is necessary for the bailee to maintain separate identity of the goods of bailor. Bailee should not
mix his own goods with that of the bailor without his consent. Few principles are relating to duty not to mix are given below: 
 Effect of mixture, with bailor’s consent, of his goods with bailee’s : If the bailee, with the consent of the bailor, mixes the
goods of the bailor with his own goods, the bailor and the bailee shall have an interest, in proportion to their respective shares, in
the mixture thus produced.
DUTIES OF BAILEE- CONT..

 Effect of mixture without bailor’s consent, when the goods can be separated: If the bailee, without the consent of the
bailor, mixes the goods of the bailor with his own goods, and the goods can be separated or divided, the property in the
goods remains in the parties respectively; but the bailee is bound to bear the expense of separation or division, and any
damage arising from the mixture.
 Effect of mixture, without bailor’s consent, when the goods cannot be separated: If the bailee, without the consent
of the bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to separate the
goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the
loss of the goods.
 Duty to return [Ss. 160 and 165]: It is the duty of the bailee to return, or deliver according to the bailor’s directions, the
goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose of which they
were bailed has been accomplished. In case of bailment by several joint owners, where several joint owners of goods bail
them, the bailee may deliver them back to, or according to the directions of, one joint owner without the consent of all.
 BAILMENT

 Bailment is contract of movable properties wherein one person (the bailor- owner or possessor of property), passes
actual or constructive possession of his goods to another (the bailee) for some purpose and is obliged to return the
goods or deal with them as per the directions of the bailor.
 These goods may be required to be returned in their original form or an altered form, depending on agreed terms of
the contract.
 An act of delivering goods to a bailee for a particular purpose, without transfer of ownership.
 Bailor and Bailee
 Dry cleaning of cloths, servicing of automobiles

Essentials of Bailment
 Only change in physical possession not ownership
 Always to perform certain action on the goods
 To look after the property as if it belongs to Bailee
 PLEDGE
 Pedge is a contract wherein the goods are delivered by the debtor (the pawnor) to the creditor (the pawnee) as a
security for payment of debt or performance of a promise.
 It is a bailment of personal property as a security for some debt or engagement.
 Pledge is different from hypothecation, as in the later goods are made available as security for a debt without actual
transfer of either the property or possession thereof to the creditor.
Illustration
 Shares certificates deposited as security to secure loan from creditor is a pledge.

Essentials of Pledge
Same as bailment but
reason is to keep the
moveable items as a
collateral
 QUESTIONS

 What is the main business of banking companies?

 How should the banks secure their loans?
 How should the banks hedge their risks ?
 If A takes loan of INR 50,000 from SBI and B

becomes the guarantor.

What is the main reason for B to be the guarantor/surety ?
GUARANTEE CONTRACTS ARE LIKE A TRIANGLE
GUARANTEE – THREE PARTIES

CREDITOR

 ONLY IN CASE OF

A DEFAULT

GURANTORS PRINCIPAL
or SURETY DEBTOR
 GUARANTEE CONTRACTS

 Guarantee- these are tripartite contract between three person: principal-debtor, creditor and the surety, wherein
the surety pays the creditor, only if principal debtor commits a default in payment.
 These contracts also called as ‘collateral’. ‘parallel’ or ‘conditional’ is conditional to the principal debtor, and
hence is not uberrimae fidei (utmost good faith) but a contract of strictissimi juris (strictly construed) is under a
contractual obligation wherein it is strictly construed in favour of the surety.
 Same consideration for guarantor as that for PD. s

Essentials of Guarantee contracts

 3 parties
 PDs risk is surety/guarantor risk
 Only in case of PDs default
TYPES OF GUARANTEE
CONDITIONAL GUARANTEE
 The surely may place a limit upon his liability.
 The contract may provide that whatever may be the liability of the principal debt on, the surely would a liable only up to
a certain amount and no more.
 Surety’s liability is coextensive with liability of principal debtor
 General rule –
 • Surety is liable for all the debts payable by the principal debtor to the creditor.
 • Accordingly, interest, damages, costs etc. may also be recovered from the surety.
 Commencement of surety’s liability
 • The liability of surety arises immediately on default by the principal debtor.
 • The creditor is not required to either first sue the principal debtor or first give a notice to the principal debtor.
 Surety’s liability may be limited to the limit , he may fix and the guarantee shall remain effective only till that limit.
 Continuing Guarantee
 A guarantee which extends to a series of transactions is called “continuing guarantee”.
DISSOLUTION OF GUARANTOR’S LIABLITY
 By Revocation [S.130]: A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the
creditor.
 By surety’s death [S.131]: The death of the surety operates as a revocation of a continuing guarantee, so far as regards future
transactions.
 By variance in terms of contract [S.133]: Any variance, made without the surety’s consent, in the terms of the contract between
the principal debtors and the creditor, discharges the surety as to transactions subsequent to the variance.
 By release or discharge of principal debtor [S.134]: The surety is discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is
the discharge of the principal debtor.
 Composition, extension of time, or promise not to sue [S.135]: A contract between the creditor and the principal debtor, by which
the creditor makes any changes with the principal debtor without consulting the surety discharges the surety. These changes
inevitably involes variation in the terms of the original contract.
 Creditor’s forbearance to sue does not discharge surety [S. 137]: Mere forbearance on the part of the creditor to sue the principal
debtor or to enforce any other remedy against him does not discharge the surety.
 Promise made with third person to give time[S. 136]: Surety is not discharged when an agreement is made with a third person to
give time to the principal debtor. Where a contract to give time to the principal debtor is made by the creditor with a third person,
and not with the principal debtor, the surety is not discharged.
 BASIS FOR COMPARISON INDEMNITY
Meaning A contract in which one party
promises to another that he will
compensate him for any loss
suffered by him by the act of the
promisor or the third party.
Defined in Section 124 of Indian Contract Act, Section 126 of Indian Contract Act,
1872
Parties Two, i.e. indemnifier and
indemnified
Number of Contracts One
Degree of liability of the promisor Primary
Purpose To compensate for the loss
Maturity of Liability When the contingency occurs.
GUARANTEE
A contract in which a party promises
to another party that he will perform
the contract or compensate the loss,
in case of the default of a their
person, it is the contract of
guarantee.
1872
Three, i.e. creditor, principal debtor
and surety
Three
Secondary
To give assurance to the promisee
Liability already exists.
 QUESTIONS ?
 A incorporates a company in Jammu with an objective of selling apples. She wants to operate across the length and
breath of the country. Is it possible and how?
 She hires B to sell apples in Mumbai. B sells apples to C. The apples are rotten. Who will be liable?
 Can B be a minor ?
 What is the consideration for B to sell apples to C?
 What is the relationship between B and C in the above transaction?
AGENCY CONTRACTS IS LIKE A TRIANGLE
AGENCY – THREE PARTIES

THIRD PARTY

Because principal
cannot be present
everywhere

AGENTS PRINCIPAL
 CHAPTER X OF THE INDIAN CONTRACT ACT, 1872
 When one party delegates some authority to another party whereby the latter performs his actions in a more or
less independently on behalf of the first party, the relationship between them is called an agency.
 Section 182 in The Indian Contract Act, 1872
 ‘Agent’ and ‘principal’ defined.—An ‘agent’ is a person employed to do any act for another, or to represent
another in dealings with third person. The person for whom such act is done, or who is so represented, is called the
‘principal’.
 An ‘agent’ is a person employed to do any act for another, or to represent another in dealings with third person.
The person for whom such act is done, or who is so represented, is called the ‘principal’."
ILLUSTRATION

Board of
Directors

SHAREHOLDER
S

Managers
ILLUSTRATION

Board of
Directors
PRINCIPAL IS
SHAREHOLDER
COMPANY IS A &
SEPARATE SHAREHOLDER BOD +
LEGAL ENTITY MANAGERS ARE
S
AGENTS

Manager
s CONTRACTS ARE
BETWEEN
AGENTS AND
THIRD PARTY
 ESSENTIALS OF A VALID CONTRACT

 Sec 2(h) and Sec 10 of Indian Contract Act, 1872

 Contract is between the 3rd party and principal
 Can an agent be incompetent to enter into a contract ?
 Can minor be a sales person?
Both principal and agent have be competent to enter into a contract.
 Consideration- not mandatory between the principal and the agent
 TYPES OF AGENTS

 Direct (express) appointment– The standard form of creating an agency is by direct appointment. When a person,
in writing or speech appoints another person as his agent, an agency is created between the two.
 Implication– When an agent is not directly appointed but his appointment can be inferred from the circumstances,
an agency by implication is created.  
 Necessity– In a situation of necessity, one person can act on behalf of another to save the person from any loss or
damage, without expressly being appointed as an agent. This creates an agency out of necessity.
 Estoppel– An agency can also be created by estoppel. In a situation where one person behaves in such a manner in
front of a third person, as to make someone believe he is an authorized agent on behalf of someone, an agency by
estoppel is created.
 Ratification– When an act of a person, who acted as another person’s agent (on his behalf) without his knowledge
is later ratified by that person, this creates an agency by ratification between the two.
TYPES OF AGENTS

 Special Agent- Agent appointed to do a singular specific act.

 General Agent- Agent appointed to do all acts relating to a specific job.
 Sub-Agent-An agent appointed by an agent.
 Co-Agent- Agents together appointed to do an act jointly.
 Factor- An agent who is remunerated by a commission (one who looks like the apparent owner of the things
concerned)
 Broker- An agent whose job is to create a contractual relationship between two parties.
 Auctioneer- An agent who acts a seller for the Principal in an auction.
 Commission Agent- An appointed to buy and sell goods (make the best purchase) for his Principal
 Del Credere- An agent who not acts as a salesperson, broker and guarantor for the Principal but also guarantees
the credit extended to the buyer.
AUTHORITY OF AN AGENT

 Express authority
 According to Section 187, the authority is said to be express when it is given by words spoken or written.
 Implied authority
 According to Section 187, authority is said to be implied when it is to be inferred from the facts and circumstances
of the case. In carrying out the work of the Principal, the agent can take any legal action. That is, the agent can do
any lawful thing necessary to carry out the work of the Principal.
 Implied authority is of four main types
  Incidental authority- doing something that is incidental to the due performance of express authority
 Usual authority- doing that which is usually done by persons occupying the same position
 Customary authority- doing something according to the pre-established customs of a place where the agent acts
 Circumstantial authority- doing something according to the circumstances of the case