Special Contracts: Indemnity, Guarantee, Bailment, Pledge and Agency (Basics)

Overview

Some contracts have special rules due to their nature and business importance. The Indian Contract Act covers special contracts such as indemnity, guarantee, bailment, pledge and agency. These are common in insurance, banking, warehousing, loans and commercial representation. This topic gives exam-focused meanings, key features, and differences.

Contract of indemnity: meaning

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 or by the conduct of any other person.

Parties:

• indemnifier (promisor)
• indemnity-holder (promisee)

Rights of indemnity-holder (brief)

Indemnity-holder can recover from indemnifier:

• damages paid in a suit
• costs of the suit (if acted prudently)
• sums paid under compromise (if acted prudently)

Contract of guarantee: meaning

A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.

Parties:

• creditor
• principal debtor
• surety (guarantor)

Types of guarantee (brief)

• specific guarantee (single transaction)
• continuing guarantee (series of transactions)

Surety’s rights and liabilities (brief)

Liability:

• surety’s liability is co-extensive with principal debtor (unless otherwise agreed).

Rights (exam keywords):

• right of subrogation (step into creditor’s shoes after payment)
• right of indemnity (recover from principal debtor)
• rights against creditor (securities/benefit of securities)

Indemnity vs guarantee (table)

Bailment: meaning

Bailment is the delivery of goods by one person to another for some purpose, upon a contract that the goods shall be returned or otherwise disposed of according to directions when purpose is accomplished.

Parties:

• bailor (delivers)
• bailee (receives)

Duties of bailor and bailee (brief)

Bailor’s duties: disclose faults, repay necessary expenses (in some cases).
Bailee’s duties: take reasonable care, not misuse, return goods, return accretions.

Pledge: meaning

Pledge is bailment of goods as security for payment of a debt or performance of a promise.

Parties:

• pledgor (pawnor)
• pledgee (pawnee)

Pledge vs bailment (table)

Agency: meaning

Agency is a relationship where one person (agent) is employed to act on behalf of another (principal) and represent him in dealings with third parties.

Types of agents (brief)

• general agent, special agent
• mercantile agent
• del credere agent (guarantees credit sales)

Duties of agent and principal (brief)

Agent: follow instructions, act with skill and diligence, render accounts, avoid conflict of interest.
Principal: pay remuneration, indemnify agent for lawful acts, reimburse expenses.

Termination of agency (brief)

Agency terminates by:

• revocation by principal
• renunciation by agent
• completion of business
• expiry of time
• death/insanity/insolvency (as applicable)

Mini case scenarios (exam style)

1. Bank asks a person to guarantee a borrower’s loan → contract of guarantee.
2. Warehouse stores goods for a trader and returns later → bailment.
3. Jeweller gives gold as security for loan → pledge.
4. Company appoints sales agent to sell products → agency.

Common exam mistakes

• Mixing indemnity and guarantee (2 parties vs 3 parties).
• Writing pledge as ordinary bailment (pledge is bailment + security).
• Forgetting co-extensive liability of surety (unless agreed otherwise).

Key Terms

• Indemnity: protection against loss.
• Guarantee: surety promises on debtor’s default.
• Bailment: delivery of goods for purpose with return.
• Pledge: bailment as security.
• Agency: agent acts on behalf of principal.

Quick Recap (1-minute revision)

• Indemnity (2 parties) protects against loss; guarantee (3 parties) assures debtor’s performance.
• Bailment is delivery for purpose; pledge is bailment for security.
• Agency creates principal–agent relationship with authority to bind principal.