Special contracts

Indemnity and Guarantee(S.124-147)

Contract of Indemnity(S.124)
 The term ‘Indemnity’ means to make good the loss or to
compensate the party who has suffered some loss.
 “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”.
 Indemnity holder is also entitled to all damages plus all costs of
suit and promised money to recover from indemnifier, if he
(indemnity holder) has incurred a liability and that liability is
absolute(without fault), he has right to require indemnifier to
put him/her in a position to meet the claim (S.125)
Indemnity and Guarantee(S.124-147)
 Contract of Indemnity(S.124)
 For example - A contracts to indemnify B against the
consequences of any proceedings which C may take against B
in respect of a certain sum of Rupees. This is a contract of
indemnity
Indemnity and Guarantee(S.124-125)

 A contract of insurance is a contract of 'indemnity'.

 It means that the insured, in case of loss against which the
policy has been issued, shall be paid the actual amount of loss
not exceeding the amount of the policy, i.e. he shall be fully
indemnified.
 The object of every contract of insurance is to place the
insured in the same financial position, as nearly as possible,
after the loss, as if the loss has not taken place at all.
 This is applicable to all types of insurance except life, personal
accident and sickness insurance.
Indemnity and Guarantee

 Parties
 The person who promises to make good the loss is called the
‘Indemnifier’ (promisor), and the person whose loss is to be made
good is called the ‘Indemnified or Indemnity holder’ (promisee).
Contract of Guarantee(S.126-147)
Meaning(S.126)
 “A contract of guarantee is a contract to perform the promise or
discharge the liability of a third person in case of his default”.

 For example - A and B go into a shop. A says to the shopkeeper, C,

“Let B have the goods, and if he does not pay, I will”. This is a
contract of guarantee.
Contract of Guarantee
Parties to a Contract of Guarantee(S.126)
 There are three parties to a contract of guarantee.
 i. Principal Debtor: The person in respect of whose default the
guarantee is given is called the principal debtor. In the above
example B is the principal debtor.
 ii. Creditor: The person to whom the guarantee is given is
called the ‘creditor’. C is the creditor in the above said
example.
 iii. Surety: The person who gives the guarantee is called the
‘surety’ A is the surety in the above said example.
Kinds of Guarantee
Guarantee may be classified under the following two categories:
 a) Specific Guarantee: A guarantee which extends to a single
debt or specific transaction is called a ‘specific guarantee’. The
liability of the surety comes to an end when the guaranteed
debt is duly discharged or the promise is duly discharged.
 b) Continuing Guarantee: A guarantee which extends to a
series of transactions is called a ‘continuing guarantee’. A
surety’s liability continues until the revocation of the
guarantee.
Discharge of Surety from Liability
 A surety is said to be discharged when his liability as surety
comes to an end. A surety is freed from his obligation under a
contract of guarantee under any of the following
circumstances:
a)Notice of Revocation: A specific guarantee cannot be revoked
once it is acted upon. But a continuing guarantee may at any
time, be revoked by the surety as to future transactions by giving
notice to the creditor(130).
Discharge of Surety from Liability
b) Death of Surety: In case of a continuing guarantee the
death of a surety also discharges him from liability as regards
transactions after his death, unless there is a contract to the
contrary(S.131).
Discharge of Surety from
Liability
 C) by novation(replacing existing contract by fresh one S.62)
Discharge of Surety from Liability

 d) Variance in Terms of Contract: “Any variance made without

the surety’s consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance”(S.133).
Discharge of Surety from Liability
e) Release or Discharge of Principal Debtor: 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 of omissions of the creditor, the legal consequence of which is
the discharge of the principal debtor(S.134).
Discharge of Surety from Liability
 f) Arrangement by Creditor with Principal Debtor without
Surety’s Consent: A contract between the creditor and
principal debtor, by which creditor makes a composition
with, or promises to give time to, or not to sue the
principal debtor, discharges the surety, unless the
surety assents to such contract(S.135).
Discharge of Surety from Liability

g) Creditor’s Act or Omission Impairing Surety’s Eventual Remedy: If

a creditor does any act which is inconsistent with the rights of
the surety, or omits to do any act, which is his duty to the
surety requires him to do, and the eventual remedy of the
surety himself against the principal debtor is thereby
impaired, the surety is discharged(S.139).

B contracts to build a ship for C for a given sum, to be paid by

instalments as the work reaches certain stages. A becomes surety
to C for B’s due performance of the contract. C, without the
knowledge of A, prepays to B the last two instalments. A is
discharged by this prepayment
Discharge of Surety from Liability

 h) Loss of Security: If the creditor loses (by negligence or

carelessness) or (without the consent of the surety) parts with
security given to him, whether the surety knows of the
existence of such security or not, the surety is discharged
from liability to the extent of the value of security(S.141).

 C, advances to B, his tenant, 2,000 rupees on the guarantee of A.

C has also a further security for the 2,000 rupees by a mortgage
of B‟s furniture. C cancels the mortgage. B becomes insolvent
and C sues A on his guarantee. A is discharged from liability to
the amount of the value of the furniture.
Discharge of Surety from Liability
i) Invalidation of the Contract of Guarantee: (In between the
creditor and the surety)
 A contract of guarantee is invalid where such a contract has
been obtained by means of misrepresentation made by creditor
(S.142)
 keeping silence as to material part of the transaction, by the
creditor or with creditor’s knowledge or assent. (S.143)
 Failure of co-surety to join a surety also makes the guarantee
invalid(S.144).
Bailment and Pledge
Meaning of Bailment (S.148-S.171)
 The word ‘Bailment’ defined under section 148, is derived from
the French word ‘baillier’ which means to deliver. According to
the Act.
 “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 the goods are delivered is called the ‘bailee’.
Bailment and Pledge
Essential Features of Bailment A bailment has the following
characteristic features:
a) It is the delivery of movable goods.
b) The goods are delivered for some purpose.
c) Return of specific goods - The goods which form the subject
matter of a bailment must be returned to the bailor or otherwise
disposed of according to the directions of the bailor, after the
accomplishment of purpose or after the expiry of period of
bailment.
Bailment and Pledge
Kinds of Bailment
Bailment may be classified from the point of view of benefit or
reward. The benefit may be exclusive
to the bailor or bailee or mutual. Bailment on the basis of reward
may be:
 a) Gratuitous: Neither the bailor nor the bailee is entitled to any
remuneration i.e. depositing of goods for safe custody. It is for
the exclusive benefit of the bailor or bailee.
Bailment and Pledge
b) Non Gratuitous: Here the goods are given for reward,
remuneration or for some consideration, e.g. car let out on hire,
goods given for repairs or tailoring for charges.
c) Pawn or Pledge: Goods delivered to another as a security for
money borrowed is called Pledge.
Duties of Bailee/Bailor
 Duties of Bailee
His duties are as follows:
a) To take reasonable care of goods delivered to him.
b) Not to make unauthorised use of goods entrusted to him.
c) Not to mix goods bailed with his own goods.
d) To return the goods as soon as time for which they were bailed
has expired or purpose for which they were bailed has been
accomplished.
e) Not to set up any adverse title.
Duties of Bailee/Bailor

 Duties of Bailor
His duties are as follows:
a) To disclose faults / defects in goods bailed.
b) To repay necessary expenses in case of gratuitous bailment.
c) To repay any extra ordinary expenses in case of non-gratuitous
bailment.
d) To indemnify bailee.
e) To receive back the goods.
Rights of Bailee/Bailor

Rights of Bailee
His rights are as follows:
a) Enforcement of bailor’s duties.
b) To deliver goods to one of several joint bailors.
c) To deliver goods, in good faith, to bailor without title.
Rights of Bailee
 d) (S.170)Lien (A right to keep property belonging to
another person until a debt is paid)
 Where bailee has in accordance with purpose of bailment
rendered any service involving exercise of labour or skill in
respect of goods bailed, he has, in absence of contract to the
contrary, a right to retain such goods until he receives due
remuneration for the services he has rendered in respect of
them;
 Example--A delivers a rough diamond to B, a jeweller, to be
cut and polished, which is accordingly done. B is entitled to
retain the stone till he paid for the services he has rendered;
Rights of Bailee
 Lien- is of two types - general or particular. Bailee has
particular lien unless the contract provides otherwise.
 ‘Particular lien’ means the right to retain that particular
property in respect of which the charge is due.
 ‘General lien’ means the right to retain all the goods of the
other party until all the claims of the holder against the party
are satisfied.
Rights of Bailee/Bailor
 Rights of Bailor
His rights are as follows:
a)Enforcement of bailee’s duties.
b) To terminate bailment if the bailee uses the goods wrongfully.
c) To demand return of goods at any time in case of gratuitous
bailment.
Termination of bailment

 Unauthorised use of goods bailed (S.153)

 Expiry of term of bailment (S.159)
 Accomplishment of purpose
 Gratuitous bailment terminated by death of either party(S.162)
 Destruction of subject matter
Pledge or Pawn
(S.172)“The bailment of goods as
security for payment of a debt or
performance of a promise is called
‘pledge’.
The bailor in this case is called the
‘pawner’. The bailee is called the
‘pawnee’.
Pledge is therefor a kind of
bailment.
 173. Pawnee’s 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.
Lien and pledge
 In lien, the lender can only detain the
property/assets/goods until payments are made, and
do not have the right to sell any such assets unless
explicitly stated in the lien contract.
A pledge is a contract between the borrower (or
party/individual that owes funds or services) and
lender (party or entity to which the funds or services
are owed) in which the borrower offers an asset
(pledges an asset) as a security to the lender.
Lien and pledge
 In a pledge, the assets will have to be delivered by
the pledger (borrower) to the pledgee (lender).
 The lender will have limited interest with
regard to the pledged asset.
 However, the possession of the pledged asset will
give the lender legal title to the asset and the
lender has the right to sell the asset in the event
that the borrower is unable to meet his obligation.
 Agency
General
It is not always possible for a person to
do everything himself, hence it
becomes necessary to delegate some
of the acts to be performed by another
person. Such other person is called an
agent.
 Definitions of Agent and Principal
 (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 represented, is called the principal”.

 The contract which creates the relationship of ‘principal’ and ‘agent’ is called an
‘agency’. For example - X appoints Y to buy ten bags of wheat on his behalf, X is
the principal, Y is the agent and the contract between the two is ‘agency’.
Agency
General Rules of Agency
 There are two important general rules regarding
agency, viz:
 a) What one person can himself lawfully do, can as
well get it done by any other person. This rule is
subject to some exceptions, e.g. in case of acts
required to be performed personally like marriage.

 b) What a person does by another, he does by

himself. In other words the acts of the agent are,
for all legal purposes, the acts of the principal.
Agency
 Who May Employ an Agent?
 (S.183)Any person who is competent to contract may employ an agent. A
minor or a person of unsound mind cannot employ an agent.
Who May be an Agent?
 (S.184)The Act lays down that “as between the principal and third
persons any person may become an agent”. Thus even a minor or a
person of unsound mind can be appointed as agent, but in such a case
the principal shall be liable.
No Consideration is Necessary
 (S.185)“No consideration is necessary to create an agency”.
 Agency
Creation of Agency(S.186 Express or Implied)
 An agency may be created in any one of the following ways:
a) Agency by Express Agreement: An agency by express agreement is
created when by spoken or written words an express authority is given to an
agent. For example - X who owns a shop, appoints Y to manage his shop by
executing a power of attorney in Y’s favour.
 Agency
 b) Agency by Implied Agreement: Implied agency arises when agency is
inferred from the circumstances of the case, or from the conduct of the
parties on a particular occasion, or from the relationship between parties.
 Implied agency may take following forms:
 Agency by estoppel

 Agency by holding out

 Agency by necessity
 Agency by estoppel: A tells B in presence of and within hearing
distance of P that he is P’s agent. P does not contradict. Later B
enters into contract with A presuming A is P’s agent as there is
agency by estoppel between him and A.

 Agency by holding out: Principal by words or conduct willfully

leads another to believe that agent is representing him. P allows
his servant to purchase goods from B’s shop on credit and later he
pays for goods; it is repeated many times; later when servant was
not in P’s employment, he purchased goods on P’s credit from
same shop and disappeared. B can recover price from P on
doctrine of holding out.
 Agency by necessity: shipmaster borrowing money at port where
shipping company has no agent to get ship repaired or fueled so as
to complete voyage; shipmaster becomes agent by necessity
Agency

 187. Definitions of express and implied

authority.—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.
A owns a shop in Serampore, living himself in
Calcutta, and visiting the shop occasionally.
The shop is managed by B, and he is in the
habit of ordering goods from C in the name of
A for the purposes of the shop, and of paying
for them out of A’s funds with A’s knowledge.
B has an implied authority from A to order
goods from C in the name of A for the
purposes of the shop.
Agency

c) Agency by Ratification: Where acts are done by

one person on behalf of another, but with out his
knowledge or authority, the latter may elect to ratify
(adopt and accept) or to disown such acts; if he ratifies
them, the same effects will follow as if they had been
performed by his authority (S.196);
 197. Ratification may be expressed or implied.—Ratification may be
expressed or may be implied in the conduct of the person on whose behalf
the acts are done.
 Illustrations
 (a) A, without authority, buys goods for B. Afterwards B sells them to C on his
own account; B’s conduct implies a ratification of the purchase made for him
by A.
 Agency by operation of law
 Partnership firm universal example of this type of agency; when partnership
formed every partner by operation of law becomes agent of other partners
and firm
 201. Termination of agency.—An agency is terminated by the principal
revoking his authority; or by the agent renouncing the business of the
agency;

 or by the business of the agency being completed; or by either the

principal or agent dying or becoming of unsound mind;

 or by the principal being adjudicated an insolvent under the provisions

of any Act for the time being in force for the relief of insolvent debtors.
 A, being B’s agent for the sale of goods, induces C to buy them
by a misrepresentation, which he was not authorized by B to
make. The contract is voidable, as between B and C, at the
option of C.
Rights of agent

 Right to remuneration (S.220)

 Right of retainer out of sums received all money due to
himself(S.217)
 Right of lien, i.e. to retain goods, papers, property received by
him(S.221)
 Right to be indemnified against consequences of lawful
acts(S.222)
 Right to be indemnified against consequences of acts done in
good faith(S.223)
 Right to compensation for injury caused by Principal’s
neglect(S.225)
 S.222. Agent to be indemnified against consequences of
lawful acts.—The employer of an agent is bound to indemnify
him against the consequences of all lawful acts done by such
agent in exercise of the authority conferred upon him.
 Illustrations
 (a) B, at Singapur, under instructions from A of Calcutta,
contracts with C to deliver certain goods to him. A does not send
the goods to B, and C sues B for breach of contract. B informs A
of the suit, and A authorizes him to defend the suit. B defends
the suit, and is compelled to pay damages and costs, and incurs
expenses. A is liable to B for such damages, costs and expenses
Agency

 S.238. Effect, on agreement, of misrepresentation of fraud, by agent.

—Misrepresentation made, or frauds committed, by agents acting in the
course of their business for their principals, have the same effect on
agreements made by such agents as if such misrepresentations or frauds had
been made or committed by the principals;

 but misrepresentations made, or frauds committed, by agents, in matters

which do not fall within their authority, do not affect their principals