Special Contracts: Indemnity, Guarantee, Bailment, Pledge, and Agency

1. Contract of Indemnity

A contract of indemnity is a specific type of contract where one party (the indemnifier) promises to save the other party (the indemnified or indemnity holder) from loss caused either by the conduct of the indemnifier himself or by the conduct of any other person, or by any accident in the execution of a promise made by the indemnifier.

Definition: According to Section 124 of the Indian 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, is called a contract of indemnity."

Essential Features:

• Two Parties: An indemnifier (the one who promises to indemnify) and an indemnified or indemnity holder (the one who is promised to be saved from loss).
• Loss: There must be a possibility of loss or actual loss occurring.
• Promise to Indemnify: A specific promise to make good the loss.
• Contingent Nature: The liability of the indemnifier arises only upon the happening of a contingency (the loss).
• Consideration: The consideration for the indemnity is usually the benefit derived from the main contract or the forbearance from entering into a contract.

Example: A, a shipping company, agrees to carry goods for B. C, a warehouse owner, agrees to indemnify A against any loss that A might suffer due to damage to B's goods while they are in C's warehouse. If B's goods are damaged in C's warehouse, C will have to compensate A for the loss.

Rights of the Indemnity Holder (Indemnified): When the indemnity holder becomes entitled to receive the indemnity, his rights against the indemnifier are as follows (as per Section 125 of the Indian Contract Act, 1872):

• To recover all damages which he may be compelled to pay in any suit in respect of the matter covered by the indemnity.
• To recover all costs which he may be compelled to pay in any such suit if he defended it with the authority of the indemnifier.
• To recover all sums of money which he may become liable to pay under the terms of any compromise of any such suit, if the compromise was made with the authority of the indemnifier, or if the indemnifier authorized or ratified the defence of the suit.

Rights of the Indemnifier: The indemnifier has the right to subrogate to the rights of the indemnity holder against third parties once the indemnity holder has been compensated.

Distinction from Guarantee: While similar, indemnity is a contract to cover loss, whereas guarantee is a contract to perform a promise or discharge a liability in case of the default of a third person.

2. Contract of Guarantee

A contract of guarantee is a tripartite contract where a surety undertakes to perform the promise or discharge the liability of a principal debtor to a creditor in case of his default.

Definition: According to Section 126 of the Indian Contract Act, 1872, "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; the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor."

Parties Involved:

• Principal Debtor: The person whose debt or obligation is guaranteed.
• Creditor: The person to whom the debt or obligation is owed.
• Surety: The person who gives the guarantee.

Essential Features:

• Tripartite Agreement: It involves three parties (though the contract between the creditor and the principal debtor is primary, and the surety's contract is collateral).
• Existence of a Principal Debt: There must be a lawful debt or obligation that the surety guarantees.
• Consideration: The surety's promise needs consideration, which usually flows from the benefit the principal debtor receives from the creditor.
• Surety's Liability is Secondary: The surety is liable only if the principal debtor defaults.
• Discharge of Liability: The surety's liability is discharged if the principal debtor performs his obligation.
• Written or Oral: Unlike the Statute of Frauds in English law, a contract of guarantee in India need not be in writing; it can be oral or written.

Types of Guarantees:

• Specific Guarantee: Given for a single debt or specific transaction.
• Continuing Guarantee: Given for a series of transactions, extending over a period of time.

Example: A wants to borrow money from B. C, a friend of A, guarantees B that A will repay the loan. Here, A is the principal debtor, B is the creditor, and C is the surety. If A fails to repay the loan, B can demand repayment from C.

Rights of the Surety:

• Right to Subrogation: On payment of the guaranteed debt, the surety steps into the shoes of the creditor and can recover the amount from the principal debtor.
• Right to Contribution: If there are co-sureties, a surety who has paid more than his share can recover the excess from other co-sureties.
• Right to Indemnity from Principal Debtor: The surety has the right to be indemnified by the principal debtor for any sum he has paid under the guarantee.

Discharge of Surety's Liability: The liability of a surety can be discharged in several ways, including:

• Revocation of the guarantee (by notice for continuing guarantees).
• Death of the surety (unless otherwise agreed).
• Variance in the terms of the contract between the principal debtor and the creditor without the surety's consent.
• Release or discharge of the principal debtor by the creditor.
• Compounding or agreeing not to sue the principal debtor.
• Impairment of the surety's remedy against the principal debtor.

3. Contract of Bailment

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.

Definition: According to Section 148 of the Indian Contract Act, 1872, "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 directions of the person delivering them."

Parties Involved:

• Bailor: The person who delivers the goods.
• Bailee: The person to whom the goods are delivered.

Essential Features:

• Delivery of Goods: There must be a transfer of possession of goods from the bailor to the bailee. This delivery can be actual or constructive.
• Movable Goods: Bailment pertains only to movable goods.
• Purpose: The delivery is for a specific purpose.
• Return or Disposal: There is a contract, express or implied, that the goods will be returned or disposed of as directed by the bailor once the purpose is fulfilled.
• Ownership Remains with Bailor: The ownership of the goods does not pass to the bailee; only the possession is transferred.

Types of Bailment based on Consideration:

• Gratuitous Bailment: Bailment for the benefit of either the bailor or the bailee, without any charge (e.g., lending a book to a friend).
• Non-Gratuitous Bailment (Bailment for Reward): Bailment where both parties derive some benefit, usually involving payment (e.g., leaving a car at a paid parking lot, giving clothes to a dry cleaner).

Duties of the Bailee:

• Duty to Take Reasonable Care: The bailee must take reasonable care of the goods bailed as a man of ordinary prudence would take of his own goods.
• Duty not to Make Unauthorized Use: The bailee must not make any use of the goods bailed inconsistent with the contract of bailment.
• Duty not to Mix Goods: The bailee must not mix his own goods with the bailed goods without the bailor's consent.
• Duty to Return the Goods: The bailee must return the goods upon the fulfillment of the purpose or expiry of the time.
• Duty to Return Accretions: Any natural increase or profit from the goods bailed belongs to the bailor.

Duties of the Bailor:

• Duty to Disclose Defects: The bailor must disclose any known defects in the goods bailed which materially interfere with their use or expose the bailee to extraordinary risks.
• Duty to Bear Extraordinary Expenses: In gratuitous bailment, the bailor bears extraordinary expenses incurred by the bailee. In non-gratuitous bailment, expenses are usually borne by the bailor, but the contract may specify otherwise.
• Duty to Indemnify the Bailee: The bailor must indemnify the bailee for any loss incurred due to defects not disclosed.

Example: A gives his watch to B for repair. This is a bailment. A is the bailor, and B is the bailee. B has a duty to repair the watch with reasonable skill and care and return it to A once repaired.

4. Contract of Pledge (Pawn)

Pledge is a special type of bailment where goods are delivered as security for the payment of a debt or the performance of a promise.

Definition: According to Section 172 of the Indian Contract Act, 1872, "The bailment of goods as security for the payment of a debt or for the performance of a promise is called 'pledge'. The bailor in this case is called the 'pawnor', and the bailee is called the 'pawnee'."

Parties Involved:

• Pawnor: The person who pledges the goods (the debtor).
• Pawnee: The person to whom the goods are pledged (the creditor).

Essential Features:

• Delivery of Goods: Possession of the goods must be transferred from the pawnor to the pawnee.
• Movable Goods: Pledge applies only to movable goods.
• Security for Debt/Promise: The primary purpose is to provide security for a debt or performance of a promise.
• Ownership Remains with Pawnor: The ownership of the goods remains with the pawnor. The pawnee has only a possessory right and a right to sell in case of default.

Rights of the Pawnee:

• Right to Retain Possession: The pawnee has the right to retain the goods pledged until the pawnor repays the debt or performs the promise.
• Right to Sell in Case of Default: If the pawnor defaults in payment of the debt or performance of the promise on the stipulated date, the pawnee has the right to sell the pledged goods. Reasonable notice must be given to the pawnor before selling.
• Right to Sell Extraordinary Expenses: The pawnee can also sell the goods to recover extraordinary expenses incurred for the preservation of the pledged goods.
• Right to Sue: The pawnee can sue the pawnor for the debt and also retain the goods as collateral.

Duties of the Pawnee:

• Duty to Take Reasonable Care: The pawnee must take reasonable care of the goods pledged.
• Duty not to Make Unauthorized Use: The pawnee must not make any unauthorized use of the pledged goods.
• Duty to Return Goods: The pawnee must return the goods upon repayment of the debt or performance of the promise.
• Duty to Return Accretions: Any natural increase or profit from the pledged goods must be delivered to the pawnor.

Rights of the Pawnor:

• Right to Redeem: The pawnor has the right to get back the goods pledged upon repayment of the debt and performance of the promise.
• Right to Notice: The pawnor has the right to receive reasonable notice from the pawnee before the sale of the goods.
• Right to Accretions: The pawnor is entitled to any natural increase or profit derived from the pledged goods.

Example: A goes to a moneylender, B, and pledges his gold ornaments as security for a loan of ₹50,000. A is the pawnor, B is the pawnee, and the ornaments are the pledged goods. If A fails to repay the loan by the due date, B can sell the ornaments after giving A notice.

5. Contract of Agency

An agency is a legal relationship where one person (the agent) is authorized to act on behalf of another person (the principal) in dealings with third parties.

Definition: According to Section 182 of the Indian Contract Act, 1872, "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'."

Parties Involved:

• Principal: The person on whose behalf the agent acts.
• Agent: The person who acts on behalf of the principal.
• Third Party: The person with whom the agent interacts on behalf of the principal.

Essential Features:

• Authority to Act: The agent must have authority, express or implied, to act for the principal.
• Representation: The agent represents the principal in dealings with third parties.
• Binding Effect: Acts done by the agent within the scope of their authority bind the principal.
• Capacity: A principal must be competent to contract. An agent does not need to be competent to contract; a minor can be an agent, but their principal (if they are acting for someone else) must be competent.

Creation of Agency:

• Express Agreement: By words spoken or written (e.g., a power of attorney).
• Implied Agreement: By conduct, situation, or necessity of the case (e.g., a partner acting for the firm).
• Ratification: When a person acts without authority, but the principal later approves or adopts the act.
• By Estoppel: When a person, by their words or conduct, leads a third party to believe that another person is their agent, they are estopped from denying the agency.
• By Operation of Law: In certain situations, like agency arising from marriage or partnership.

Types of Agents:

• Special Agent: Appointed for a specific act or transaction.
• General Agent: Authorized to act on behalf of the principal in all matters connected with a particular business.
• Universal Agent: Authorized to do all acts that the principal can lawfully delegate.
• Factors, Brokers, Auctioneers, etc.: Agents acting in specific capacities with defined roles.

Duties of an Agent to the Principal:

• Duty to Obey Principal's Instructions: Act according to the directions given by the principal.
• Duty to Exercise Care and Skill: Use reasonable skill and diligence in performing his duties.
• Duty to Render Proper Accounts: Render accounts of all business transacted by him.
• Duty to Communicate: Use all reasonable diligence in communicating to the principal any proposal from the third party.
• Duty not to Deal on Own Account: Not to deal on his own account in the business of the agency without the principal's consent.
• Duty not to Make Secret Profits: Not to make any secret profit from the agency.
• Duty to Pay and Account for Monies: To pay sums received for the principal.

Duties of the Principal to the Agent:

• Duty to Indemnify Agent: To indemnify the agent against expenses properly incurred and losses suffered in carrying out the principal's instructions.
• Duty to Pay Remuneration: To pay the agent the agreed remuneration.
• Duty to Compensate Agent: To compensate the agent for injuries sustained due to the principal's neglect or want of skill.

Termination of Agency: An agency can be terminated by:

• Agreement between the parties.
• Revocation by the principal.
• Renunciation by the agent.
• Completion of the business.
• Expiry of time.
• Death or insanity of either party.
• Insolvency of the principal.
• Dissolution of a partnership firm.
• Destruction of the subject matter.

Example: A authorises B, a stockbroker, to buy shares on his behalf. B is the agent, and A is the principal. When B buys shares from a third-party seller, the transaction binds A, provided B acted within the scope of his authority.