Special Contracts:

Indemnity; Guarantee; Bailment

and pledge; Agency.
Special Contracts
Indemnity
The term ‘Indemnity` Simply means ‘Making Somebody Safe` or ‘Paying Somebody back`.

Section 124 of contract Act defines that ‘‘A contract by which one party. Promises to save
the other from loss caused to him by the conduct of the promise himself by the conduct of
any other person, is called a conduct of indemnity”.

The party who gives indemnity or who promises to compensate for or to make good the
loss, is called. Indemnifier and the party for whose protection or safety the indemnity is
given or the party whose loss is made good is called ‘Indemnified’ or ‘indemnity holder’.
Important features of an indemnity contract –

1. Two party.
2. Promises for pay compensation of loss/damage.
3. Loss/damage may be the own or other person.
4. Creation of liabilities.
5. It must be faith.
6. All essential features of valid contract.
7. Compensation for actual loss/damage.
8. It may be express or implied. Loss/damage may be caused by some event, or accident,
or some natural phenomenon or disaster.

Rights of Indemnified (Indemnity-Holder)

1. Rights to claim for all damages/losses.
2. Rights to claim for all costs which is related to contract.
3. Rights to claim for all sums which his may have paid for contract.

Liabilities/Duties of Indemnified
1. Liabilities to pay all damages/losses.
2. Liabilities to pay all costs related to contract.
3. Liabilities to pay all sum which is received by sell for contract from indemnified.

Guarantee Contract
The object of the contract of guarantee is to enable. A person to obtain an employment,
or a loan, or some goods or service on credit.

According to section 126 of the contract 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.”
The person who gives the guarantee is called the ‘Surety’ or ‘guarantor’ & the person in
respect of whose default the guarantee is given is called the principal debtor or he is the
party on whose behalf. Guarantee is given and the person to whom the guarantee is given
is called the ‘Creditor’.

Essential features of a Guarantee Contract

1. Three parties
2. Three agreement
3. Concurrence of the three parties
4. Control may be experts or implies
5. It may be oral or written
6. Liability of surety is secondary is dependent on principal debtor’s default.
7. Guarantee must be in the knowledge of debtor.
8. All essential of a valid contract.
9. Guarantee must not be obtained by means of misrepresentation.
10. Existence of a primary liability.
Kinds of Guarantee

1. Specific or Simple Guarantee: When a guarantee is given in respect to a single debt or specific
transaction is to come to an end when the guarantee debt is paid or the promise is duly
performed. It is called a specific or simple guarantee.
2. Continuing guarantee: Section 129, of the contract Act defines a guarantee which towards to
a series of transaction, is called a continuing guarantee, thus, a continuing guarantee is not
confined to a single transaction but keeps on moving to several transaction continuously.

Revocation of Guarantee

Revocation of guarantee means cancellation of guarantee already accrued, it may be noted that
the specific guarantee cannot be revoked if the liability has already secured. However a continuing
guarantee can be revoked and on the revocation of such a guarantee. The liability of the surely or
guarantor comes to an end for the future transaction. The surety continues to be liable for the
transactions which have taken place up to the time of revocation. A continuing guarantee may be
revoked in any of the following waysA Guarantee may be revoked in any of the following ways-

1. By notice of revocation.
2. By death of surely.
3. By discharge of surely in various circumstances
4. By novation (Sec.62)
5. By variance in terms (Sec. 133)
6. By release/discharge of principal Debtor (Sec.-134)
7. When the creditor events in to an agreement with the principal debtors (Sec.13..)
8. By creditor act or omission impairing surety’s eventual remedy (Sec. 139)
9. By loss of security “(Sec. 141)
10. By invalidation of contract (Sec.142,143,144)
Bailment
Bailment the world ‘bailment’ is derived from the French world the French world ‘baillier’ which
means ‘to deliver Etymologically, it means any kind of handling over’. In legal sense, it involves
change of possession of goods from one person to another for some specific purpose.

Definition of Bailment
Sec. 148 defines Bailment as” 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’ and the person the person to whom they are delivered is called the
‘bailee’.

Consideration in a contract of bailment

In a contract of bailment, the consideration is generally in the form money payment either by the
bailor or the bailee, as for example, when A gives his bicycle to B for repair, or when A gives his
car to B on hire. Such consideration in money form, however, is not necessary to support the
promise on the part of the bailee to return to goods. The detrainment suffered by the bailor, in
parting with possession of the goods, is a sufficient consideration to support the contract of
bailment.

1. Agreement
There must be an agreement between the bailor and the bailee.This agreement may be either
express or implied.However,a bailment may be implied by law also. For example,bailment between
a finder of goods and owner of goods.

2. Delivery of Goods
There must be delivery of goods.It means that the possession of goods must be transferred.In this
this connection,The following points may be noted:
i. The delivery must be voluntary,for example the delivery of jewellery by its owner to a thief who
shows a revolver,does not create a bailment because the delivery is not voluntary.

ii. Delivery may be actual or constructive.

3. Purpose
The delivery of goods must be for some intented purpose.For example,wrong delivery of goods to
Jaipur Golden Roadways instead of Patel Roadways,does not create any bailment.

4. Return of specific Goods

The goods which form the subject matter of a bailment must be returned to the bailor or otherwise
disposed off according to the directions of the bailor,after the accomplishment of purpose or after
the expiry of period of the bailment.it may be noted that the same goods must be returned in their
original form or desired.

Kinds/types of Bailment

i. On the basis of reward

a) Gratuitous Bailment
It is a contract of bailment where no consideration passes between the bailor and the bailee.

b) Non-gratuitous Bailment
It is a contract of bailment where some consideration passes between the bailor and the bailee.
 Difference between Gratuitous bailment and non-gratuitous bailment

ii. On the basis of Benefit

a) Bailment for the exclusive benefit of the bailor

It is a contract of bailment which is executed only for the benefit of the bailor and the bailee does
not derive any benefit from it.

b) Bailment for the exclusive benefit of the bailee

It is a contract of bailment which is executed only for the benefit of the bailee and the bailor does
not derive any benefit from it.

c) Bailment for the mutual benefit

It is a contract of bailment which is executed for the mutual benefit of bailor and bailee.
DUTIES OF A BAILOR

 Duty to disclose defects [Section 151]

In case of gratuitous bailment:

The bailor must disclose all the defects in the goods-

1. Which are known to him,and

2. Which materially interfere with the use of them or expose the bailee to extraordinary risks.

In case of non gratuitous bailment

If the bailee suffers any loss due to any defect in the goods,the bailor is liable to bailee for such
loss whether he knows those defects or not.

 Duty to bear expenses [Section 158]

In case of gratuitous bailment

The bailor must repay to the bailee all the necessary expenses which the bailee has already
incurred for the purpose of bailment.

In case of non gratuitous bailment

The bailor must repay to the bailee all the extraordinary expenses which the bailee has incurred
for the purpose of bailment.

 Duty to indemnity the bailee in case of premature termination of gratuitous bailment

[Section 159]
A gratuitous bailment may be terminated by the bailor at anytime even though the bailment was
for a specified time or purpose.The bailor must indemnify the bailee in case the loss arising due
to premature termination of the bail,ment exceeds the benefits actually derived by the bailee.

 Duty to indemnity the bailee against the defective title of bailor [Section 164]
The bailor is responsible to the bailee for any loss which the bailee may suffer because of the
defective title of the bailor.

 Duty to receive back the goods [Section 164]

The bailor must receive back the goods when the bailee,in accordance with the terms of
bailment,returns the goods to him.If the bailor refuses to receive back the goods,he must repay
to the bailee all the expenses which the bailee has incurred for the safe custody of goods.

 Duty to bear the risk of loss [Section 152]

The bailor must bear the risk of loss of goods provided the bailee has taken all responsible steps
to protect the goods from loss.

DUTIES OF A BAILEE
 Duty to take care of the goods bailed [Section 151&152]
The bailee is bound to take as much care of the goods bailed to him as a man of ordinary
prudence would,under similar circumstances take of his own goods of the same bulk,quality and
value as the goods bailed.

 Duty not to make any unauthrosed use of goods [Section 154]

The bailee must use the goods bailed according to the conditions of the bailment.If he does not
use the goods bailed 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.

 Duty not to mix bailor‘s goods with his own goods [Section 155 to 157]
i. In case of mixture with bailor’s consent[Section 155]

The bailor and the bailee shall have an interest in proportion to their reppective shares in the
mixture thus produced.

ii. In case of mixture without bailor’s consent when the goods can be separated[Section 156]

iii. In case of mixture without bailor’s consent when the goods cannot be separated[Section 157]

 Duty to return the goods [Section 160 & 161]

The bailee must return or deliver the goods according to the bailor’s directions without
demand,after the accomplishmenmt of purpose or after the expiry of period of bailment.

 Duty to return accretion to the goods [Section 163]

In the absence of,any contract to the contrary,the bailee is bound to deliver to the bailor,or
according to his directions,any increase or profit which may have accrued from the goods bailed.

 Duty not to set up any adverse title

The bailee must not do any act which is inconsistent with the title of the bailor.
Rights of a Bailor
 Right to claim damage in case of negligence [Section152]
If the bailee has not taken reasonable care or special care,the bailor has a right to claim
damages for the loss,destruction or deterioration of the goods bailed.

 Right to terminate the contract in case of unauthorized use [Section 153]

If the bailee does any act in respect of goods bailed,which is inconsistent with the conditions of
the bailment,the bailor has a right to terminate the contract of bailment.

 Right to claim compensation in case of unauthorized use [Section 154]

If the bailee doest not use the goods bailed according to the conditions of the bailment,the bailor
has aright to claim compensation from bailee for any damage arising to the goods from or during
such use of them.

 Right to claim the separation of goods in case of unauthorized mixture of goods [Section
156]
If the bailee,without the consent of the bailor mixes bailor’s goods with his own goods and the
goods can be separated,the bailor has a right to claim his goods after separation.

 Right to claim compensation in case of unauthorized mixture of goods which canoot be

separated[Section 157]
If the bailee,without the consent of the bailor mixes bailor’s goods with his own goods and the
goods cannot be separated,the bailor has a right to claim compensation from bailee for the loss
of the goods.

 Right to demand return of goods [Section 160]

The bailor has a right to demand return of goods after the accomplishment of the purpose or after
the expiry of period of bailment.

 Right to claim compensation in case of unauthorized retention of goods [Section 161]

If the bailee does not return or deliver the goods according to the bailor’s directions after the
accomplishment of purpose or after the expiry of period of bailment,the bailor has a right to claim
compensation for any loss,destruction or deterioration of the goods from that time.

 Right to demand accretions to goods[Section 163]

In the absence of contract to the contrary,the bailor has a right to demand any increase or profit
which may have accrued from the goods bailed.
RIGHTS OF A BAILEE
 Right to claim damage [Section 150]

In case of gratuitous bailment

If th ebailor does not disclose the defect in the goods which are known to him and the bailee
suffers dome loss due to such defects,the bailee has a right to claim damages.

In case of non gratuitous bailment

If the bailee suffers any loss due to any defect in the goods,the bailee has a right to claim
damages.

 Right to claim reimbursement of expenses [Section 158]

In case of gratuitous bailment

The bailee has a right to claim reimbursement of all the necessary expenses which he has
already incurred for the purpose of bailment.

In case of non-gratuitous bailment

The bailee has a right to claim reimbursement of all the extraordinary expenses which the bailee
has already incurred for the purpose of bailment.

 Right to be indemnified in case of premature termination of gratuitous bailment [Section

159]
Th ebailee has a right to be indemnified in case the loss arising due to premature termination of
th egratuitous bailment exceeds the benefits actually derived by him.

 Right to recover loss in case of bailor‘s defective title [Section 164]

The bailee has a right to be indemnified in case he suffers any loss because of the defective title
of the bailor.

 Right to recover loss in case of bailor‘s refusal to take the goods back [Section 164]
The bailor has a right to be indemnified in case he suffers any loss because of bailor’s refusal to
take the goods back.

 Right to deliver goods to any one of the joint bailors [Section 165]
In the absence of any contract to the contrary,the bailee has a right to deliver back the goods to
anyone of the joint owners or may deliver the goods back according to the directions of one joint
owner without the consent of all.

 Right to deliver goods to bailor in case of bailor‘s defective title [Section 166]
If the bailor has no title to the goods,the bailee, in good faith,delivers them back to,or according
to the directions of the bailor,the bailee is not responsible to the owner in respect of such
delivery.

 Right to particulars lien [Section 170]

Where the bailee has,in accordance with the purpose of the bailment rendered any service
involving the exercise of labour or skill in respect of the goods bailed,he has,in absence of a
contract to the contrary,a right to retain such goods until he receives due remuneration for the
services he has rendered in respect to them.

TERMINATION OF BAILMENT

I. Termination of every Contract of Bailment (whether Gratuitous or not)

Every contract of bailment comes to end under the following circumstances:

a) On the Expiry of Fixed Period

A bailment is terminated on the expiry of fixed period if the goods are bailed for a fixed period.

b) On fulfillment of the Purpose

A bailment is terminated on the fulfillment of the purpose if the goods are bailed for a specific
purpose.

c) Inconsistent Use of Goods

A bailment may be terminated if the bailee does not use the goods according to the conditions of
the bailment.

d) Destruction of the subject Matter of Bailment

A bailment is terminated if the subject matter of the bailment

1. Is destroyed
2. Becomes incapable of being used for bailment because of some change in the nature of
goods.
II. Termination of Gratuitous Bailment

A contract of gratuitous bailment is terminated in the following circumstances also.

a) Before the Expiry of fixed Period

A gratuitous may be terminated by the bailor at any time even though the bailment was for a
fixed period. However , the bailor is required to indemnify the bailee in case the loss due to
premature termination exceeds the benefit actually derived by the bailee.

b) On Death of Bailor/Bailee

A gratuitous bailment is terminated by the death of either the bailor or bailee.

PLEDGE

Meaning of pledge (or pawn) [Section 172]

The bailment of goods as security for payment of a debt or performance of a premise is called
pledge (or pawn).

Meaning of A pawner (or pledgor) [Section 172)

The person who delivers the goods as security for payment of a debt or performance of promise
is called the pawnor or pledgor. In aforesaid example X is pawnor

Meaning of Pawnee (or pledge) [Section 172)

The person to whom the goods are delivered as security for payment of a debt or performance of
promise is called the Pawnee or Pledgee

Rights of Pawnee
 Right of retainer [Section 173]
The pawnee may retain the goods pledged

1. For payment of the debt of the performance of the promise,

2. For the interest of the debt,
 All necessary expenses incurred by him in respect of the possession or for the preservation
of the goods pledged.
 Right to claim reimbursement of extraordinary expenses [Section 173]
The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for
the preservation of the goods.

 Right to sue pawnor [Section 176]

If the pawnor makes default in payment of the debt or performance of the promise,the pawnee
has a right to sue the pawnor for the recovery of the amount due or for the performance of the
promise sand to retain the goods pledged as collateral security.

 Right to sell [Section 176]

If the pawnor makes default in payment of the debt or performance of the promise,the pawnee
has a right to sell the goods pledged after giving a reasonable notice of the intended sale,to the
pawnor.Any loss from such sale is recoverable from the pawnor but profits resulting therefrom is
returnable to the pledgor.

 Right against true owner [Section 178A]

When the pawnor has obtained possession of the goods pledged by him under a contract
voidable under Section 19 or 19A but the contract has not been rescinded at the time of the
pledge,the pawnee acquired a good title to the goods provided he acts in good faith and without
notice of the pawnor’s defect of title.

Duties of a Pawnee
 Duty to take reasonable care of the goods pledged
 Duty not to make unauthorized use of goods
 Duty not to mix pawnor’s goods with his own goods
 Duty to return goods
 Duty to return accretion to the goods
Rights of Pawnor
 Right to get pawnee’s duties duly enforced
The pawnor has the right to get pawnee’s duties duly enforced(for example,right to get back the
goods pledged,right to receive any accretions to the goods pledged).

 Right to redeem [Section 177]

 If a time time is stipulated for the payment of the debt,or performance of the promise,for
which the pledge is made and the pawnor makes default in payment of the debt or
performance of the promise at stipulated time,he may redeem the goods pledged at any
subsequent time before the actual sale of them;but he must;in case’ pay’in addition ,any
expenses which have arisen from his default.
Duties of Pawnor
 Duty to comply with the terms of pledge
 Duty to compensate the Pawnee for extraordinary expenses [Section 185]

Distinction between Pledge and Bailment

AGENCY

Meaning of Agency: Agency is relation between an agent his principal created by an agreement.
Section 182 of the Contract Act defines an Agent as ‘‘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 whom is so represented is called the principal”.

Essential Features of Agency

1. The principal
2. The agent
3. An agreement
4. Consideration not necessary
5. Representative capacity
6. Good faith
7. The competence of the principal

Modes or Methods or Creation of Agency

1. Agency by express agreement[Section 186 and 187]

A contract of agency may be made by express words, whether written or oral.

2. Agency by implied agreement[Section 187]

‘‘An authority is said to be implied when it is to be inferred from the circumstances of the case.

(a) Agency by estoppels : When a principal by his conduct or act cause a third person to believe
that a certain person is his authorized agent the agency is aid to be an agency by estoppels.

(b) Agency by necessity : It mean the agency which comes into existence when certain
circumstances compel a person to act as an agent for an other without his express authority.
(c) Agency by holding out : When a principal by his active conduct or act and without any
objection permits another to act as his agent, the agency is the result of principal’s conduct as to
the agent.

3. Agency by ratification [Section 196]

Ratification means confirmation of an act which has already been done. Sometimes, an act is
done by a person on behalf of another person but without another person’s knowledge and
authority. If he accepts and confirm the act, he is said to have ratified it.

4. Agency by operation of law:

In certain circumstances the law treats a person as an agent of another person.

For example, (a) when a partnership is formed, every partner automatically becomes agent o
another partner. (b) when a company is formed its promoters are treated as its agents by
operation of law

RIGHTS AND DUTIES OF AGENT

Rights of an Agent

1. Right to retain money received on principal’s account.

2. Right to receive remuneration.
3. Right of lien on principal’s property.
4. Right to be indemnified.
5. Right to compensation for injury caused by principal’s neglet.

Duties of an Agent

1. To follow the direction of the principal.

2. To conduct the business of agency with reasonable skill and diligence.
3. To render accounts on demand
4. To communicate with the principal.
5. Not to deal on his own account
6. To pay the amounts received for the principal
7. Not to delegate his authority
8. Not to act in excess of authority
9. Duty on termination of agency by principal’s death or insanity.

TERMINATION OF AGENCY

Termination of agency means revocation (cancellation) of authority of the agent the modes of
termination of agency may be classified are as :

(a) Termination of Agency by the act of the Parties.

1. By revocation o authority by the principal

2. By renunciation (giving up) of business of agency by the agency
3. By mutual agreement
(b) Termination of agency by Operation of Law

1. Completion of business of agency

2. Death or insanity of principal or agent
3. Insolvency of the principal
4. Destruction of subject matcer
5. Expiry of time
6. Agency subsequently becoming unlawful.
7. Termination of sub agent’s authority