This article is Written by PRADEEP KUMAR PATWA, RAJJU BHAIYA UNIVERSITY PRAYAGRAJ, LL.B(3 YEAR) during his Internship at LeDroit India.

Introduction

A Contract governs the legal framework for agreements between two or more parties that are legally binding and enforceable. A contract typically involves the transfer of goods, services, or money, or a promise to transfer them in the future.

While contracts can be of various types, certain specific and special types of contracts have been recognized by Indian law to attribute some kind of formality to them.

Special contract have five various types according to THE INDIAN CONTACT ACT,1872 named as indemnity, guarantee, bailment, pledge and agency. Each of these categories of contracts has developed its jurisprudence. They are peculiar to one another and warrants individual discussion as has been done by this author.

Contract of Indemnity

“indemnity” refers to a promise to save a person and render them legally harmless from the consequences of a particular act or incident.

Definition of Indemnity Contract

In Section 124 of the Indian Contract Act, 1872 It states that a contract by which one party promises to save the other, from a loss caused to them by the contract of the promisor or by the conduct of any other person is called a “contract of indemnity”.

The person who gives the indemnity is called the “indemnifier” and the person for whose

protection it is given is called the “indemnity holder” or “indemnified”. Further, the promise of indemnity may be expressed or implied. An important case in this regard is the decision of the Privy Council in the Secretary of State for India in Council v. Bank of India Ltd. (1938). In this case the Government officer, when issuing the renewed note to the respondents, did not exact a security under Section 21. A fake endorsement was submitted to a bank, which accepted it for its face value and in good faith. In their name, the Bank sent it to the Public Debt Office for renewal. The actual owner of the note was compensated by the State, and the State was entitled to sue the bank based on an implied contract of indemnity.

Essentials of Indemnity Contract

1. There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.
2. A contract of indemnity is entered into, to protect the promisee from the loss. The loss may be caused due to the conduct of the promisor or any other person.
3. The contract of indemnity may be expressed (i.e., made by words spoken or written) or implied (i.e., inferred from the conduct of the parties or circumstances of the particular case).
4. A contract of indemnity is a special contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 apply to them. Therefore, it must possess all the essentials of a valid contract.
5. In indemnity contracts, there is only one contract that is between the Indemnifier and the Indemnified.

Rights of Indemnified

The rights of the indemnified or indemnity-holder, which can also be considered the duties of the indemnifier are as follows:

1. Section 125 (2) states that the indemnified would also be able to recover all costs from a suit which they initiated or a suit in which they are the defendants. In this case, the indemnified must have acted in a way that would have been reasonable even in the absence of a contract of indemnity and must not have gone against the orders of the indemnifier. Further suits in which the indemnified is involved with the permission of the indemnifier are also within this sub-clause.
   1. According to Section 125(1),the indemnified is entitled to recover all damages that they are compelled to pay in a suit with regards to any matter the contract of indemnity applies, from the indemnifier.
   1. Finally, Section 125(3) talks about sums made as a compromise concerning any suit. The suit must fulfil the same conditions as was required for costs of suits as in Section 125(2).

Rights of Indemnifier

The Indian Contract Act is silent about the rights of the indemnifier. From a general idea of an indemnity contract and case laws like Jaswant Singh v. the State (1965), the following can be made out:

1. After successful indemnification, the indemnifier gains rights over the indemnified property of the indemnity-holder. Consequently, the indemnifier will have the right to sue third parties over the indemnified property.
   1. Indemnifiers have the right to pay for only those losses that are covered in the indemnity contract.
   1. The indemnifier has the right to recover money and possession from the indemnity- holder in certain cases, as the contract may specify.

Contract of Guarantee

Defining contract of guarantee

According to Section 126 of the Idian Contract Act,1872 a “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety” and the person in respect of whose

default the guarantee is given is called the “principal debtor”. The person to whom the

guarantee is given is called the “creditor”. A guarantee may be either oral or written. In English law, a guarantee is defined as “a promise to answer for the debt, default or miscarriage of another”.

A basic illustration of a contract of guarantee is as follows. Suppose a person X buys an item from Y. W, another person states that if X does not pay Y for that item, W themself will pay for that. Thus, in the given scenario, X is the principal debtor, Y is the creditor and W is the surety. Thus, the primary motive behind the creation of contracts of guarantee is to provide additional security to the creditor.

But in an alternate scenario, suppose the delivery of the item already happens to X and then W promises that they will pay in case X defaults on the payment. In this case, there is no consideration and hence no valid contract.

Essentials in contract of guarantee

Thus, the essentials of a contract of guarantee can be summarised as follows-

1. Can be an oral or written contract.
2. Presence of principal debtor, surety and creditor
3. Fulfilment of essentials of a standard contract including but not limited to-

1. Consideration to surety must be present
   1. The guarantee should not be obtained by concealment or misrepresentation (Section 142 and Section 143)

Bailment Contract

Defining contract of bailment

The word “bailment” comes from the French word “ballier”, which means “to deliver”. Bailment is derived from the words ‘handing over’ and ‘change of possession’. According to Section 148 of the Act, a bailment is defined as the conveyance of goods by one person to another for a specific purpose with the condition that the items would be returned or otherwise disposed of according to the directives of the person who delivered them. The “bailor” is the person who delivers the merchandise. The “bailee” is the individual to whom they are handed.

The main characteristic of bailment is that there is the delivery of possession for a temporary purpose. If there is a transfer of ownership, then it is no bailment. The delivery is done with the promise that the bailee will restore the property to the bailor as directed by the latter. In Tilendra Nath Mahanta v. United Bank of India (2002), it was stated that the primary responsibility of the bailee was to deal with the goods according to the directions of the bailor.

Essentials of contract of bailment

1. Delivery of possession of some goods.
2. Delivery of some goods for some purpose.
3. Return of the goods to the bailor after the end of bailment.

Delivery of possession is given in Section 149. The delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf. Essentially there are two types of delivery possible-

1. Constructive delivery involves a change of physical possession while goods remain where they are. For example, delivery of a railway receipt amounts to delivery of the goods.
2. Actual delivery involves physical handing over of goods by the bailor to the bailee.

Even if a person takes delivery of certain goods without a prior formal arrangement, the same can constitute bailment. For example in Ulzer v. Nichols (1894), a waiter took the plaintiff’s court when the latter entered a restaurant. Later the coat went missing and the defendant, i.e., was considered a bailee and thus liable. But if the bailor retains possession and control over a good, the same does not constitute bailment. In Kaliaperumal Pillai v. Visalakshmi Achi (1937), a lady was melting her jewellery and making new ones by a goldsmith. Every evening she used to keep the half-made jewels in a locked box in the premises of the goldsmith’s workshop but retained the key to the box with herself. The box then got stolen. The goldsmith was not held liable as they had not received possession of goods at all.

Contract of Pledge

Definition of Pledge Contract

“Pledge”, which is also called “pawn”, is a kind of bailment of good with a special purpose. It is defined in Section 172 of the Contract Act. The goods pledged to serve as security for the payment of a debt or performance of a promise. The bailor, in this case, is called the “pawnor” or “pledger” and the bailee in this case is called the “pawnee” or “pledgee”. The pawnee thus has a special property or special interest in the thing pledged. The special property or interest is continuous and exists to compel the payment of the debt or sell the property if the need arises. The special nature of a pledged property was explained by the Supreme Court in Bank of Bihar

• the State of Bihar (1971). Sometimes a case may arise when a pledge in which the pawnor has a limited interest is made. Even then, the pledge is valid to the extent of that interest (Section 179).

Essentials

The following are the essentials-

1. There shall be a bailment for security against payment or performance of the promise.
   1. The subject matter of the pledge is goods.
   1. Goods pledged for shall be in existence.
   1. There shall be the delivery of goods from pledger to the pledgee.

Contract of Agency

Defining contract of agency

According to Section 182, an “agent” is a person employed for acts/activities to be committed for another person and to represent that person in dealings with a third person. The person who employs an agent is called the “principal”. Thus, a “contract of agency” involves the

creation of a principal-agent relationship. The test of determining the existence of agency

relationships has been explained in the Allahabad High Court case of Loon Karan Sohan Lal v. John and Co. (1967).

Essentials contract of agency

1. Agreement between agency and principal
2. Competency of principal, as given in Section 183. Competency is determined by the same factors whose fulfilment is required for a basic standard contract. Although a minor is incompetent to appoint an agent, it was held in Madanlal Dhariwal v.

Bherulal (1964) that a guardian was allowed to appoint an agent for a minor and such an appointment was protected by Indian law.

• According to Section 184, an agent is just the connecting link between the principal and third party and need not be competent to make a contract with the third party on behalf of the principal. Thus, anyone can act as an agent of the principal and enter into contracts on behalf of them. However, an agent must be competent to enter into a contract when the contract is with the principal for the creation of a principal-agent relationship. If the agent is not competent, they cannot be made legally responsible to the principle.
• The contractual relationship must be created to enter into legal relations.
• Consideration is not required in a contract of agency and this is given in Section

185. The law does not require any consideration as for the validity of a contract of agency. Since consideration may be of some benefit to the plaintiff or some

detriment to the defendant, the principal’s willingness to be bound by the acts done by the agent on his behalf serves as a sufficient detriment to the principal. Also,

Section 222–223 of the Indian Contract Act imposes a duty on the principal to indemnify the agent.

Conclusion

Special contracts, governed by the Indian Contract Act, play a vital role in defining specific legal relationships and obligations in various commercial and legal scenarios. Whether it is a bailment, pledge, guarantee, indemnity, or agency, each type of special contract carries its unique features, requirements, and implications. Understanding these contracts is crucial for legal practitioners, as they often involve nuanced legal duties and rights. By mastering the intricacies of special contracts, legal professionals can better advise clients, ensure compliance with legal standards, and mitigate potential risks. The thorough comprehension of these contracts is not only a key aspect of legal practice but also essential for navigating complex business transactions effectively.

References

• Unit 2 – Special Contracts
• Indian Contract Act, 1872
• https://indiankanoon.org/doc/1494797
• Pollock and Mulla: Indian Contract and Specific Relief Acts – This book is a comprehensive guide to contract law in India and includes detailed commentary on special contracts.
• Avtar Singh: Law of Contract and Specific Relief – A widely recommended textbook for students, providing easy-to-understand explanations of special contracts.
• R.K. Bangia: Law of Contract – I & II – These books are helpful for understanding both general and special contract law concepts in India