Special Contracts

Indemnity
A

contract by which one party promise 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 a
Contract of Indemnity"
X purchased DD of Rs 50,000 from a bank. The draft was lost in
transit. Xrequested the concerned branch to issue a duplicate
DD.Hehad tofurnishanindemnitybond that in case of any
claim on the bank, X(indemnifier) shall be liable to make good
the loss suffered by the bank (Indemnity holder/ Indemnified)

The

definition provides the following essential elements There must be a loss

The loss must be caused either by the promisor or by any
other person.
Indemnifier is liable only for the loss.
This contract is contingent in nature and is enforceable
only when the loss occurs

Contract of Guarantee
A

contract of guarantee is a contract to perform

the promise, or to discharge the liabilities of a
third person in case of his default.
The person who gives the guarantee is called
Surety, the person in respect of whose default
the guarantee is given is called Principal
Debtor, and the person to whom the guarantee
is given is called Creditor.
A Guarantee may be either oral or written.
Illustration: X promises to a shopkeeper Y that
X will pay for the items being bought by Z if Z
does not pay, this is a contract of guarantee. In
this case, if Z fails to pay, Y can sue X to
recover the balance.

Differences between Indemnity

and Guarantee

In

a contract of indemnity there are two parties i.e.

indemnifier and indemnified. A contract of guarantee
involves three parties.

An indemnity is for reimbursement of a loss, while a

guarantee is for security of the creditor.

In a contract of indemnity the liability of the indemnifier

is primary and arises when the contingent event occurs.
In case of contract of guarantee the liability of surety is
secondary and arises when the principal debtor defaults.

The indemnifier after performing his part of the promise

has no rights against the third party, whereas in a
contract of guarantee, the surety steps into the shoes of
the creditor on discharge of his liability, and may sue the
principal debtor

Function of Guarantee
Is

to enable a person to get a

loan, or goods on credit, or an
employment.
A guarantee can be given for:
Repayment of a debt
Payment of the price of the goods
sold on credit
The good conduct or honesty of a
person employed in a particular
office

Special features
Surety's

obligation is dependent on principaldebtor's default

If the promise is not conditional on default, it will not be a
contract of guarantee but of indemnity

Separate

consideration for guarantee not

necessary
Sec. 127 provides that anything done or any promise
made, for the benefit of the principal-debtor, may be a
sufficient consideration to the surety for giving the
guarantee. Thus, there is no need for a separate
consideration between the Principal debtor and the
surety consideration received by the Principal debtor is
sufficient for the surety.

Principal

debtor need not be competent to

contract:
In such a case, the principal-debtor is not liable but the
surety is liable as the principal- debtor.

Bank Guarantee
In

business transactions, client may

request for financial guarantee from a
third party usually Banks

Eg:

Reliance bags a project to build a Power

project in China. China has limited ability to assess
all companies for financial stability and
creditworthiness.

Performance

BG: bid-bond guarantee,

advance payment BG, stage payment

guarantee
Financial BG: These are used to secure a
financial commitments such as a loan, a
security deposit, etc.

Bailment
oA

'bailment' involves 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
disposed of according to the directions of the
person delivering them.
oThe person delivering the goods is called the
'bailor' and the person to whom the goods
are delivered is called the 'bailee'.
oThe examples of a contract of bailment are:carriage by rail; sea etc.
o The important feature of bailment is the
transfer of possession.

Essentials of Bailment
1.
2.
3.
4.

Delivery of possession
Delivery of goods should be upon a contract
Delivery of goods must be for a specific
purpose
Return of goods

.The

ownership remains with the owner and there

cannot be a bailment of immovable property like
land.
.Does not deal with all types of bailment special
Acts Carriage Act 1965, Railways Act 1989,
Carriage of Goods by Sea Act 1925

Test cases
A

lends a book to B to be returned after

the exam.
A sells certain goods to B who leaves
them in the possession of A
An insurance co. places a damaged
insured car of A in possession of R
(repairer).
Finder of Goods?
Es stolen gold chain in police custody
gets stolen.

Duties of the bailor and bailee

Bailers

disclose known facts

Gratuitous bailment and bailment for reward

Bailers

duty to indemnify for loss in case of

premature termination of gratuitous bailment
Bailees duty to care: man of ordinary
prudence would under similar circumstances,
take of his own goods of the same bulk, quality
and value as the goods bailed.
Bailee not to make unauthorized use of the
goods
Bailee not to mix the goods bailed with his own
goods
To return the goods

Pledge
A

'pledge' involves a bailment of goods

where the goods are delivered as a security
for payment of a debt or performance of a
promise.
The bailor is called the 'pledgor' or 'pawnor'
and the bailee is called the 'pledgee' or
'pawnee'.
Thus, pledge is a special kind of bailment
and can be made only of movable properties.
In order to make the pledge legally valid it is
essential that the pledgor has the legal
right/title to retain the goods.

Differences between Bailment and

Pledge
Purpose:

A pledge is made for a specific purpose (to

raise a loan), while bailment can be made for any
purpose
Property: In bailment, the bailee gets only the
possession of goods bailed and the ownership
remains with the bailor.
In the case of pledge, the pledgee acquires a special
property in the goods pledged whereby he gets
possession coupled with the power of sale, on
default.
Right of sale: Bailee can exercise a lien on the
goods bailed and he has no right of sale
But in case of a pledge, the pledgee can sell the
goods after due notice to pledgor.

Hypothecation and Mortgage

Hypothecationis

used for creating charge

against the security of movable assets, but
here the possession of the security remains with
the borrower itself. Thus, in case of default by
the borrower, the lender (i.e. to whom the goods
/ security has been hypothecated) will have to
first take possession of the security and then sell
the same.
Mortgage is used for creating charge against
immovable property which includes land,
buildings or anything that isattached to the
earth or permanently fastened to
anythingattachedto the earth.

Law of Agency
Agency is the legal relationship which
results from the consent by one person to
another that the other shall act in his behalf
and subject to his control, and consent by the
other so to act.
Qui facit per alium, facit per se, i.e. the
one who acts through another, acts in his or
her own interests.
Whatever a person can do personally, he can
do through an agent
It is a parallel concept to vicarious liability
and strict liability in which one person is
held liable in Criminal law or Tort for the acts

Law of Agency
Agent The person employed to do any act
for another or to represent another, in
dealing, with a third persons.
Principal The party from whom such act
is done, or who is represented.
Special form of contract which regulates the
legal relationship between the Agent,
Principal and the Third party.
Fiduciary relationship: Higher than ordinary
degree ofcareandresponsibilityfrom the
dominant or trustedparty

The Principal-Agent Relationship

Principal

Agency
Contract

Agent

Contract with third party on

behalf of principal

Third Party

Elements of Agency (s.

183)
Principal

should be competent to

contract
Agent need not be competent
any person can become an agent
Minor?
. Minor can bind his principal to others
but cannot bind himself to them
Consideration

necessary

for appointment not

Formation of the Agency

Relationship
Express
Agency

Agency by
Ratification

Implied
Agency

Apparent
Agency

Formation of Agency Relationships

Type of
Agency

Definition

Enforcement of the
Contract

Express

Authority is expressly given to the

agent by the principal.

Principal and third party are

bound to the contract.

Implied

Authority is implied from the conduct Principal and third party acts
of the parties, custom and usage of
are bound to the contract.
trade, or act incidental to carrying out
the agents duties.

Apparent

Authority created when the principal

leads a third party into believing that
the agent has authority.
The principal is estopped.

Principal and third party are

bound to the contract.

By
Acts of the agent committed outside
Ratification the scope of his authority.

Principal and third party are

not bound to the contract
unless the principal ratifies
the contract..

Cases
Harshad Shah v. LIC of India (SC)
Shah took four life insurance policy
through an LIC agent. Delay in deposit
of third premium. The Agent was given
a bearer cheque for the next
installment. The cash was deposited
after the grace period. Claim by wife on
death of the Shah. LIC denies payment.
Employer non-deduction of LIC premium
. Delhi Electricity Supply undertaking v. Basanti
Devi (SC)

Cases
A

directs B to sell As estate. B buys for himself

in the name of C. Can A repudiate the contract?
Decide.

X,

a company authorises its manager Y to enter

into a contract with Z. Y commits fraud or
misrepresent facts while entering into a contract
with Z. Decide:
Can X repudiate the contract with Z because it is
vitiated because of fraud or misrepresentation?
Is Y liable to X?

Principals duties
Principal

is bound to indemnify the agent

against the consequences of all lawful acts
done by the later within the scope of authority.
Liability for criminal acts of agent?
Principal is liable to the third party in all cases
done within authority
It is immaterial that the agent committed,
fraud, made misrepresentation or did some
other wrong for his own benefit
Respondent superior: anemployeris
responsible for the actions of employees
performed within the course of their
employment.

Termination of an Agency and

Employment Contract

An agency contract is similar to other

contracts in that it can be terminated
by:
Acts of the parties, or
Operation of law
Once an agency relationship is
terminated, the agent can no longer
represent the principal or bind the
principal to contracts.

Termination by Operation of
Law
An agency is terminated by operation of
law, including:
1. Death of the principal or agent
2. Insanity of the principal or agent
3. Bankruptcy of the principal
4. Impossibility of performance
5. Changed circumstances
6. War between the principals and
agents countries