SJMVS ARTS

AND COMMERCE

COLLEGE FOR WOMEN

J C NAGAR HUBLI
ASSIGNMENT

INDUSTRIAL ECONOMICS
TOPIC: - SPECIAL CONTRACTS
SUBMITTED TO: - KEERTI.P
(DEPARTMENT OF COMMERCE)

SUBMITTED BY:-
NAME: - VIDYASHREE.R.P
ROLL.NO: - 185
DIVISION: - ‘B’
CLASS:- B.COM 3rd year
 Special contracts
CONTRACTS OF INDEMNITY AND GUARANTEE
Introduction:
Contract of indemnity and guarantee are special of general
contracts. Hence, the principles of the general law of contract are applicable to
them. The principles of the general law of contract are applicable to them. The
special principles relating to them are contained in selections 124 to 147 of the
Indian contract act 1872. They are discussed below.

Contract of indemnity
Definition:
According to sec.124 defines “A contract, by which one party
promises to save the other from loss caused to him by the caused to him by
the conduct of the promise himself, or by the conduct of any other person, is
called a contract of indemnity.

There are two parties involved for contract:

1. Indemnifier
2. Indemnified or indemnity-holder

Indemnifier: - The person who promises to make good the loss is called
the indemnifier.
Indemnified or indemnity-holder: - the person whose loss is to be made
good is called the indemnified or indemnity holder.

The definition of the contract of indemnity as given sec.124 is not

exhaustive. It includes,
(i) Express promises to indemnity
(i) Cases where the loss caused by the conduct of the promisor
himself or by the conduct of any third person.
But not include

(i) Implied promise to indemnity.

(ii) Cases where loss arises from accidents and events depending on
the conduct of the promisor or any other person.

Kinds of contract of indemnity

Contract of indemnity may be express or implied. As

implied contract of indemnity may be inferred from the circumstances of
the case or from the relationship between parties.

Rights of indemnity-holder when sued (sec.125)

Sec.125 deals with the rights of the indemnity-holder

(i.e. promisee) when sued. According to it, an indemnity-holder is
entitled to recover from the indemnifier (i.e. promisor)

(i) All damages which he may be compelled to pay in any suit in

respect of any suit to which the promise to indemnity applies;
(ii) All costs reasonably incurred by him in bringing defending the suit,
provided he has acted prudently or with the authority of the
promisor i.e. the indemnifier;
(iii) All sums paid under any compromise of any such suit provided the
compromise was not contrary to the orders of the indemnifier and
was prudent or was authorised by the indemnifier.

Rights of the indemnifier:

The Indian contract Act is silent regarding the rights of

the indemnifier (i.e. promisor) in a contract of indemnity. According to
English Law, the rights of the indemnifier are analogous to the rights of a
surety.
 CONTRACTS OF GUARANTEE
Definition:

According to sec. 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”.

There are three persons involved in this contract:

(i) Surety or guarantor

(ii) Principal debtor
(iii) Creditor

Surety or guarantee: The person who gives the guarantee

Principal debtor: the person in respect of whose default the guarantee

is given.

Creditor: the person to whom the guarantee is given.

The guarantee may be oral or written. It may also be

expressed or implied and may be inferred from the course of the
conduct of the parties concerned.

Essential features of a contract of guarantee:

1. Three parties: there are three parties in a contract of guarantee the

principal debtor, the creditor and the surety.

2. Concurrence: it requires the concurrence of all the above mentioned

three parties.

3. Primary liability of the principal debtor: the liability of the surety is

collateral or secondary while the liability of the principal debtor is
 primary. The liability of the surety arises only when the principal
debtor fails to pay.

4. Competent to contract: the principal debtor may be a minor. But the

surety and the creditor must be capable of entering into a contract.
5. Consideration: the creditor need not furnish fresh consideration to
the surety for his promise because the consideration already supplied
to the principal debtor is sufficient to the surety for giving the
guarantee.

6. Not a contract of uberrimae fidei: A contract of guarantee is not a

contract of uberrimae fidei. The creditor need not disclose to the
surety any material facts affecting the credit of the debtor, or making
the surety’s position more onerous.

7. Surety and principal debtor distinct: the surety and the principal
debtor are distinct persons. Therefore, a decree, obtained against the
principal debtor, cannot be executed against the surety.

KINDS OF GUARANTEE
a) Fidelity guarantee
A contract of guarantee is entered into with the
object of enabling a person to get (i) a loan or (ii) goods on credit or
(iii) an employment. Thus, guarantee may be given for i) the
repayment of the loan, or ii) the repayment of the price of the goods
sold on credit, or iii) the good conduct or honesty of a person
employed. This type of guarantee is called Fidelity guarantee.

b) Retrospective and prospective guarantee:

Further, a guarantee may be given for an
existing or a future debt or obligations. In the former case, it is called
prospective guarantee.

c) Specific and continuing guarantee

 When a guarantee is given for a single specific
debt or transaction, it is called ordinary or specific guarantee. It
comes to an end when the guaranteed debt is duly discharged or the
promise made is duly performed.
When a guarantee extends to a series of distinct and separable
transactions, it is called a continuing guarantee (sec.129).

Rights of surety
A surety has certain rights against
a) The creditor
b) The principal debtor
c) The co-sureties.

a) Surety’s Rights Against The Creditor:

1. Right to ask the creditor to sue the debtor:
Before the payment of the guaranteed debt, a
surety has a right to sue for declaration of the principal debtor
as liable to pay the debt. After the guaranteed debt, a surety
has a right to sue for declaration of the principal debtor as
liable to pay the debt. After he can ask the creditor to sue the
principal debtor.
2. Right of subrogation:
On the payment of the guaranteed debt in full, the
surety has a right to be subrogated to all the rights of the
creditor and to demand from him, at the time of payment, all
the securities whether they had been acquired by him either
before or at the time of or after the contract of guarantee.
3. Right of set off:
On being sued by the creditor, the surety has a
right to the benefit of set-off or counter-claim which the
principal debtor possesses against the creditor.
b) Surety’s Rights Against The Principal Debtor:
1. Right of subrogation: when the survey pays off the
guaranteed debt on default of the principal debtor, hr is
 invested with all the rights which the creditor had against the
principal debtor. This means that the surety steps into the
shoes of the creditor.
2. Right to claim indemnity: “in every contract of guarantee,
there is an implied promise by the principal debtor to
indemnify the surety, and the surety is entitled to recover from
the principal debtor all payments properly and rightfully
made”.
c) Surety’s Rights Against Co-Sureties:
When a debt is guaranteed by two or more
sureties, they are called co-sureties. When one of them makes
payment to the creditor, he has a right to claim contribution from
the other co-surety or co-sureties, as the case may be. The rules of
contribution are laid down in sections 146 and 147.

Discharge Of Surety
A surety is discharged from his obligation under any one of the
following:
1. Notice of revocation (sec.130): the question of revocation
does not arise in case of a specific guarantee. But a contract of
continuing guarantee may be revoked at any time by the
surety as to future transactions, by giving a notice of
revocation to the creditor.
2. Death of surety (sec.131): in the case of continuing guarantee,
the death of a surety discharges him from liability as to future
transactions, unless there is a contract to the contrary.
3. Variance in terms of contract (sec.133): any variance made
without the consent of the surety, in the terms of the contract
between the principal debtor and the creditor, discharges the
survey as to transactions subsequent to such variance.
4. Release or discharge of principal debtor (sec. 134): (a) the
surety is discharged by any contract between the creditor and
the principal debtor, by which the principal debtor is released.
(b) The surety is also discharged by any act or omission of the
 creditor, the legal consequence of which is the discharge of the
principal debtor.
5. Compounding by the creditor with the principal debtor
(sec.135): where the creditor, without the consent of the
surety. Makes an arrangement with the principal debtor for
composition, or promises to give time or not to sue him, the
surety will be discharged.
6. Creditor’s act or omission impairing surety’s eventual remedy
(sec.139): “if the creditor does any act which is inconsistent
with the rights of the surety, or omits to do any act remedy of
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”.

CONTRACT IF BAILMENT AND PLEDGE

Introduction:
Contracts of Bailment and pledge are also a special
kind of contracts. The special principles applicable to them are
contained in sections 148 to 181 of the Indian contract Act, 1872. The
Act, however, does not deal with all types of bailments. There are
separate acts to deal with different types of bailments e.g. the
carriers act 1865, the carriage of goods by sea act, 1925 etc.

Bailment
Definition:
Section 148 of the act defines bailment as
follows: “A bailment is the delivery of goods by one person to
another for some purpose, upon a contract that shall, when the
purpose is accomplished, be returned or otherwise disposed off
according to the directions of person delivering them”. The person
delivering the goods is called the ‘bailor’. The person to whom they
are delivered is called the ‘bailee’. And the transaction between
them is called ‘bailment’.
Essential features of bailment:
1. Bailment is always based upon a contract between a bailor and a
bailee. In exceptional cases, it may be implied by law e.g. as
between a finder of lost goods and the owner.
2. There can be bailment of only movable goods. But money is not
included in the category of movable goods. Hence, a deposit of
money in a bank is not a bailment.
3. Bailment requires temporary delivery of goods by the bailor to the
bailee for some specific purpose.
4. The delivery of goods may be actual or constructive.
5. In a bailment, since ownership is not transferred, the bailor
continues to be the owner of the goods.
6. The delivery of goods is made on the condition that the goods are
to be returned in species.

Kinds Of Bailment:
Bailment may be classified on the basis of benefit and reward to the
parties.

A) On the basis of benefit, bailment is of three kinds:

i) Bailment for the exclusive benefit of the benefit of the
bailor: e.g. delivery of some valuables to a relative for safe
custody without any charge.
ii) Bailment for the exclusive benefit of the bailee: e.g. lending
of a scooter to a friend for examination purpose without
charge.
iii) Bailment for the mutual benefit of the bailor and the bailee:
e.g. giving radio for repairs.
B) On the basis of the reward: bailment is of two types.
1. Gratuitous bailment: here, neither the bailor nor the bailee is
entitled to remuneration e.g. (i) and (iii) above.
 2. Non gratuitous bailment: here, either the bailor or the bailee
is entitled to remuneration e.g. (iii) above. Such bailment is
also known as bailment for reward.

DUTIES AND RIGHTS OF BAILEE AND BAILOR

DUTIES OF BAILEE:
1. Duty to take reasonable care of the goods bailed:
The first and foremost duty of the bailee
is to take reasonable care of the goods bailed with him. According
to sec. 151, he is bound to take as much care of the goods bailed
to him as a man of ordinary Prudence would, under similar
circumstances, take of his own goods of the same bulk, quality
and value as the goods bailed.
2. Duty not to make any unauthorised use of goods bailed:
It is the duty of the bailee to use the goods
bailed according to the conditions of the bailment. If he makes an
unauthorised use of the goods bailed, he is liable to compensate
the bailor for any negligence or the damage arising from or during
such use.
3. Duty not to mix the goods bailed with his own goods:
It is the duty of the bailee not to mix the goods
bailed with his own goods without the bailor’s consent. He must
keep the goods bailed separate from his own goods. In this
connection, the following rules will apply:
a) If the bailee mixes the goods bailed with his own goods with
the consent of the bailor, there is no breach of duty and both
shall have proportionate interest in the mixture thus
produced(sec. 155).
b) If the bailee mixes the goods bailed with his own goods
without the consent of the bailor and the goods can be
separated or divided.
4. Duty to return the goods:
 It is the duty of the bailee to return or deliver the
goods bailed, according to the bailor’s directions, as soon as the
time for which they were bailed has expired or the purpose for
which they were bailed has been accomplished (sec.160).
5. Duty to deliver any accretion to the goods: it is the duty of the
bailee to deliver to the bailor any natural increase or profit
accruing from the goods bailed, unless there is a contract to the
country (sec.163).

Duties of bailor:

1. Duty to disclose faults in the goods bailed.sec.150 lays down this

duty. It makes a distinction between a gratuitous bailor and a
bailee for reward. It lays down as follows:
(a) In the case of a gratuitous bailor: he is bound to disclose to
the bailee all the known faults in the goods bailed. If he fails to
do so, he is liable to pay such damages to the bailee as may
have resulted directly from such faults.
(b) In the case of a bailor for reward: he is responsible for all the
defects in the goods bailed, whether he is aware of this defects
or not, if he does not disclose them to the bailee.
2. Duty to repay necessary expenses in cases of gratuitous
bailment (sec.158): if, under the terms of the bailment, the goods
are to be kept or carried or to have some work done upon them
by the bailee for the bailor, and the bailee is to receive no
remuneration, it is the duty of the bailor, and the bailee to repay
all the necessary expenses of bailment of the bailee.
3. Duty to repay extra-ordinary expenses in case of non- gratuitous
bailment (sec.158): where the bailee is to receive remuneration
for his services, it is the duty of the bailor to bear extra-ordinary
expenses of bailment.
4. Duty to indemnify bailee (sec.164): it is the duty of the bailor to
indemnify the bailee for any loss suffered by the bailee on account
of the defective title of the goods bailed.
5. Duty to receive back the goods: it is the duty of the bailor to
receive back the goods when the bailee returns them after the
 expiry of the time of bailment or the accomplishment of the
purpose if bailment.

RIGHTS OF BAILEE:
1. Right to enforce bailor’s duties
2. Right to deliver goods to one of several joint bailors
3. Right to deliver goods, in good faith, to bailor without title
4. Right of action against trespassers
5. Right of particular lien
RIGHTS OF BAILOR:
1. Right to enforce bailee’s duties
2. Right to terminate bailment if the bailee uses the goods
wrongfully.

Right to demand return of goods at any time in case of