Indemnity, Guarantee, Bailment, Pledge and Agency

Handouts on

Special Contracts

1. Contract of Indemnity

 “A contract of indemnity is 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.” (Section 124)

Mr. A contracts with the Government to return to India from abroad after completing his studies and serve the Government for a fixed period. He fails to return to India. This is a contract of indemnity and he is bound to reimburse the Government.

1.1 Parties in the contract of Indemnity:

—  A person who promises to make good the losses, i.e., the promisor is called the indemnifier and the person whose loss is to be made good, i.e., the promisee is called the indemnity-holder or the person who is indemnified.

—  By a contract of indemnity, a security is provided to the promisee against any anticipated loss.

To ‘indemnify’ means to save from loss.

1.2 Essentials of an Indemnity Contract:

•      Must contain all the essentials of a valid contract.

•      Promisee must have suffered a loss.

2. Contract of Guarantee

It is a contract to perform the promise, or discharge the liability of a third person in case of his default. (Section 126)

The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is the principal debtor and the person to whom the guarantee is given is the creditor.

2.1 Essentials of Guarantee:

—  A guarantee may be oral or written; express or implied.

—  To invoke contract of guarantee, default must be committed by the third person on whose behalf a person stands surety.

—  Contract of guarantee is also known as a contract of suretyship.

A lends money to B, and C promises A that in case B fails to pay the money he will pay the money. This is contract a contract of guarantee.

—  Every contract of guarantee has 3 parties, viz., Principal Debtor (B), Creditor (A), and Surety or Guarantor (C).

2.2 Consideration

B requests A to sell and deliver to him goods on credit. A agrees to do so provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.

Section 127 expressly provides to this effect and states 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”

3. Bailment

According to section 148 “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, by returned or otherwise disposed of according to the directions of the person delivering them”

—  Examples: Common examples of bailment are –

Hiring of Goods, furniture or a cycle, delivering of cloth to a tailor for making a suit, delivering a watch or scooter for repair, depositing goods for safe custody etc.

The person delivering the goods is called the ‘bailer’, the person to whom they are delivered is called the ‘bailee’ and the transaction is called bailment.

1. It is a delivery of movable goods by one person to another person (not being his servant) - Section 149.

·         Actual Delivery: When the bailor hands over to the bailee physical possession of the goods.

·         Constructive delivery: Something is done which has the effect of putting the goods in the possession of the bailee.

2. The goods are delivered for some purpose: (section 148)
3. The goods are delivered subject to the condition that when the purpose is accomplished the goods are to be returned in specie or disposed of according to the direction of the bailor, either in their original form or in an altered form.

4. Pledge or Pawn

According to Section 172 “The bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. The bailor is this case is called the ‘pawnor’. The bailee is called the pawnee”

Thus pledge is a special kind of bailment \

4.1 Distinction between bailment and pledge:  

• As to purpose
• As to right of sale
• As to right of using the goods

5. Agency

“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” (Section 182 of The Indian Contract Act)

5.1 General Rules of Agency

—  Whatever a person competent to contract may do by himself, he may do through an agent, except for acts involving personal skill and qualifications.

—  He who does through another, does by himself – “the acts of the agent are, for all legal purposes, the acts of the principal”

Section 226 states that “Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal person”

5.2 Who may be an Agent

—  Section 184 lays down in this regard that “as between the principal and third person any person may become an agent”

Strictly prepared for class discussion.