SPECIAL CONTRACTS

Special Contracts are called as such because one or the other elements of a
contract are missing and yet it is a valid contract. For example in the case of an
agency contract it is not necessary for consideration to be there. Similarly when we
leave our car with our neighbor while on vacation no doubt he is contractually
bound to return the car and take good care of the car even if there is no
consideration. Special Contracts are Bailment/Indemnity/Pledge/Surety and
Agency.

UNDERSTANDING CONTRACTS OF BAILMENT

When one person delivers

some goods to another CHARACTERISTICS OF
person under a contract The person delivering the BAILMENT
for a specified purpose goods is called the 1. Delivery of Goods - it may
and when that specified "Bailor", and the person be express or constructive
purpose is accomplished to whom goods are (implied).
the goods shall be delivered is called the
delivered to the first "Bailee". 2. There must be a Contract
person, it is known as 3. Return of goods in specie.
Bailment

KINDS OF BAILMENTS: Bailment

may be classified as follows:
•Deposit - Delivery of goods by one
man to another to keep for the use RIGHTS AND DUTIES
of the bailor. TERMINATION OF OF BAILOR AND
• Commodatum - Goods lent to BAILMENT BAILEE
friend gratis (free of charge) to be have been discussed in
1. On the expiry of the
used by him. the following table.
stipulated period
•Hire - Goods lent to the bailee for Imp : Bailment contracts
hire, i.e., in return for payment of 2. On the accomplishment
of the specified purpose have been called special
money. because in case of
•Pawn or Pledge - Deposit of goods 3. By bailee's act gratuitous bailment for eg
with another by way of security for inconsistent with goods lent to a friend
money borrowed. conditions. there are no charges i.e
•Delivery of goods for being no consideration .
transported by the bailee - for
reward.
 Bailor Bailee

DUTIES
To disclose faults in the goods
Liability for breach of warranty as to
title.
To bear expenses in case of
Gratuitous bailments
In case of non-gratuitous bailments,
the bailor is held responsible to bear
only extra-ordinary expenses.
DUTIES
To take care of the goods bailed
Not to make unauthorised use of
goods
Not to mix bailor's goods with his own
To return the goods bailed
To return any accretion to the goods
bailed

RIGHTS
The bailor can enforce by suit all
duties or liabilities of the bailee.
In case of gratuitous bailment (i.e.,
bailment without reward), the bailor
can demand their return whenever
he pleases, even though he lent it for
a specified time or purpose.
RIGHTS
The bailee can sue bailor for
•claiming compensation for damage
resulting from non-disdosure of faults
in the goods;
•for breach of warranty as to title and
the damage resulting therefrom; and
•for extraordinary expenses incurred
•The bailee has lien over the goods
which means he can retain the goods
till he gets paid.

INDEMNITY (SECTIONS 124-125)

What is a contract of indemnity

 A contract of indemnity is a contract whereby one party promises to save the

other from loss caused to him by the conduct of the promissor himself or by the
conduct of any other party.
 A contract of indemnity may arise either (1) by an express promise or (2) by
operation of law i.e. the duty of a principal to indemnify an agent from
consequences of all lawful acts done by him as an agent.1

1
See page ___ for agency contracts.
 RIGHTS OF INDEMNIFIED (THE INDEMNITY HOLDER)

The indemnity holder is entitled to recover from the promisor

a) All the damages which may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies
b) All costs of suit which he may have to pay to such third party provided in
bringing or defending the suit (i) he acted under the authority of the indemnifier
or (ii) he did not act in contravention of the orders of the indemnifier and in
such a such as a prudent man would act in his own case.
c) All sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contrary to the orders of the indemnifier,
and was one which it would have been prudent for the promisee to make.

RIGHTS OF INDEMNIFIER

 The Contract Act makes no mention of the rights of the indemnifier. It has been
held in Jaswant Singh Vs. Section of State 14 Bom 299 that the indemnifier
becomes entitled to the benefit of all the securities, which the creditor has
against the principal debtor whether he was aware of them, or not.

Similarities and Difference between Indemnity and Surety/Guarantee

In both there is an element of compensation in the event of a loss. In indemnity

there are two parties and only one contract while in surety there are three parties
and there are two contracts. The simplest example to understand the difference
contracts is that while insurance is an indemnity contract a student loan from a
bank guaranteed by a third party is an example of a surety/guarantee contract.
 GUARANTEE /SURETY

Surety/Guarantor eg. father of

student or relative

Principal Debtor MAIN CONTRACT eg .of Creditor eg. .bank

eg. borrowing study loan
student

What is Contract of Guarantee

 A contract of guarantee is defined as a contract to perform the promise or
discharge the liability of a third person in case of his default. (for example if a
student fails to pay his loan to the bank his surety or guarantor say his father or
Uncle or whosever stood guarantee would be contractually bound to pay the
loan to the bank.)
 The person who gives the guarantee is called the “Surety”, the person for whom
the guarantee is given is called the “Principal Debtor” and the person to whom
the guarantee is given is called the “Creditor”.

Requirement of two contracts

 It must be noted that in a contract of guarantee there must, in effect be two
contracts,
(i) a principal contract - the principal debtor and the creditor ; and
(ii) a secondary contract - the creditor and the surety.

Essential and legal rules for a valid contract of guarantee

The contract of guarantee must satisfy the requirements of a valid contract
(i) There must be someone primarily liable

(ii) The promise to pay must be conditional

Kinds of guarantee

(i) Specific Guarantee i.e for one transaction.

(ii) Continuing Guarantee i.e for a series of transactions

RIGHTS AND OBLIGATION OF CREDITOR/SURETY

PARTY RIGHTS OBLIGATIONS

Creditor The creditor is entitled to demand The obligations of a creditor are:

payment from the surety as soon  Not to change any terms of the
as the principal debtor refuses to Original Contract.
pay or makes default in payment.  Not to compound, or give time
to, or agree not to sue the
In other words the creditor is not Principal Debtor
obliged to exhaust other legal  Not to do any act inconsistent
remedies which may be available with the rights of the surety
to him.

Surety 1. Rights against the Creditor  The liability of a surety is called

In case of fidelity guarantee, the
surety can direct creditor to
dismiss the employee whose
honesty he has guaranteed, in 
the event of proved dishonesty
of the employee.
2. Rights against the Principal
Debtor
(a) Right of Subrogation (stepping
into the shoes of the original)
Where a surety has paid the
guaranteed debt on its
becoming due or has performed
the guaranteed duty on the
default of the principal debtor, 
he is invested with all the
rights, which the creditor has
against the debtor.
(b) Right to be indemnified
as secondary or contingent, as
his liability arises only on default
by the principal debtor.
But as soon as the principal
debtor defaults, the liability of
the surety begins and runs co-
extensive with the liability of the
principal debtor, in the sense that
the surety will be liable for all
those sums for which the
principal debtor is liable. The
creditor may file a suit against
the surety without suing the
principal debtor.
Where the creditor holds
securities from the principal
debtor for his debt, the creditor
need not first exhaust his
remedies against the securities
 The surety has the right to recover before suing the surety, unless
from the principal debtor, the the contract specifically so
amounts which he has rightfully provides.
paid under the contract of DISCHARGE OF SURETY
guarantee. 1. By notice of revocation in case of
a continuing guarantee
Rights of Contribution 2. By death of surety in case of
Where a debt has been continuing guarantee unless
guaranteed by more than one otherwise provided.
person, they are called as co- 3. By variation in terms of contract
sureties. When a surety has without consent of surety.
paid more than his share, he 4. By release or discharge of
has a right of contribution from Principal Debtor
the other sureties who are 5. By compounding with, or giving
equally bound to pay with him. time to, or agreeing not to sue,
Principal Debtor
6. By creditor's act or omission
impairing Surety's eventual remedy
7. Loss of (principal debtor’s)
Security by the creditor.

PLEDGE

• S 172."Pledge" "pawnor",and "pawnee" defined.-The bailment of goods as

security for payment of a debt or performance of a promise is called “Pledge”.
The bailor is called “pawnor”. The bailee is called the "pawnee".

• Pledge is a Special Contract because bailee/pledgee/pawnee has right to

sell pledged goods in case bailor/pawnor/pledgor fails to pay. Though
pledgee does not have ownership can sell the goods to recover his dues
provided notice is given to the pledgor.

• The rights and duties of the Pledgee (pawnee) are shown below.
 RIGHTS DUTIES

• Right to sue the pledgor on • Taking care of goods.

default. • Not putting the goods to
• Right to sell the things pledged on unauthorised use.
giving suitable notice. • Return of goods including
• Right to claim damages because accruals.
of non disclosure of any default or
fault. Note: Pledge is normally for moveable
• Right to claim damages suffered goods such as jewellery and shares
because of defective title of the while mortgage is used for immoveable
pledgor. property. Mortgage is dealt separately
• Pledgee’s rights are not limited to under Transfer of Property Act.
his interest in goods.
• Right to recover any extraordinary
expenditure.
 Agency is,a relation based upon an express or implied agreement whereby one
person, the agent, is authorised to act for another, his principal, in transactions with
third person.

An agent is defined as a "person employed to
do any act for another or to represent another
in dealings with third person". In other words,
an agent is a person who acts in place of
another.
The person for whom or on whose behalf
he acts is called the Principal. The function
of an agent is to bring about contractual
relations between the principal and third
parties.

Rights and Duties of an Agent

Conduct the agency as per principal's

Right to remuneration
Right of Lien ; Right of Indemnification
Right to compensation for injury caused by
principal’s neglect
Right to retain the Principal's money
towards expenses
directions. Not to make secret profits ; render
proper accounts ; conduct business with skill
and diligence ; work for the best interests of
the Principal; should not disclose confidential
information ; not to deal on his own account;
not entitled to remuneration for bad business
conduct

PRINCIPAL'S DUTIES TO AGENT TERMINATION OF AGENCY

•is bound to indemnify the agent against
the consequences of all lawful acts done
by such agent in exercise of the
authority conferred upon him
•liable to indemnify an agent against the
consequences of an act done in good
faith.
•compensation to his agent in respect of
injury caused to such agent by the
principal's neglect or want of skill.
By revocation by the Principal
On the expiry of fixed period of time.
On the performance of the specific purpose.
Insanity
Death of the principal or Agent
An agency shall also terminate in case
subject matter is either destroyed or
rendered unlawful
Insolvency of the Principal. Insolvency of the
principal, and not of the agent, terminates
the agency
By renunciation of agency by the Agent