LAW OF CONTRACT-II

UNIT-I

SPECIAL CONTRACT

1 2 3 4
Contract of contract of contract of contract of pledge
Indemnity guarantee bailment

CONTRACT OF INDEMNITY (Sec 124 of Indian Contract Act)- wherein a person promises to save
another from loss caused to him.
1. by the act of promisor himself or
2. by act of other party.
Eg: ‘A’ contracts to indemnify ‘B’ against the consequences of any proceedings which ‘C’ may take
against ‘B’ in respect of sum of Rs.200 advanced by ‘C’ to ‘B’. In consequence, when ‘B’ is called
upon to pay the sum of money to ‘C’ fails to do so; ‘C’ would be able to recover the amount from ‘A’.
Essentials:
1. Promise between the two parties- promise should be express promise.
2. Protection against loss- promise should be to protect the other party from loss caused to him.
3. By promisor himself or other person- Loss may be caused by promisor himself or by any
other person. It does not include loss caused by natural reasons which are beyond human
control, fire, perils of sea etc.
NOTE: Contracts of insurance are not indemnity contracts under Indian Law.

2 parties:
1. 2.
Indemnifier Indemnity-holder/indemnified
(who makes promise (whose loss is made good)
to make good the loss
caused to another party)

Rights of Indemnity- holder (Sec 125): the promisee acting within the scope of his authority is
entitled to recover from the promisor-
(1) All damages- which he was compelled to pay in any suit in respect of matter to which promise of
indemnity applies.
(2) All costs- if in bringing/defending such suit he did not contravene the orders of the promisor and
he acted as it would have been prudent for him to act in absence of any indemnity.
(3) All sums- which he may have paid under the terms of any compromise of any such suit, if
promisor authorised him to compromise the suit.
Case: Bihal Chandra v Chattur Sen AIR 1967 All 506: where seller promised to the purchaser to
indemnify him against dues, if any, it was held that such indemnity clause would include only then
existing dues and not those subsequently imposed though retrospectively.
Duties of Indemnity-holder = Rights of Indemnifier:
• to act in accordance of the orders of the indemnifier;
• to act as a man of ordinary prudence;
• To bring all the material facts to the knowledge of the indemnifier.
Case: Osman Jamal & Sons ltd v Gopal Purushottam 1928 ILR 56 Cal 262: held indemnity is not
necessarily given by repayment after payment. Indemnity requires that the party to be indemnified
shall never be called upon to pay.

CONTRACT OF GUARANTEE (Sec 126)

A contract to perform a promise or discharge the liability of third person in case third person makes a
default.
Eg: ‘A’ says to ‘C’ “lend money at interest to B and if B fails to pay back, I shall”.
Here ‘A’ is guarantor/surety; ‘B’ is principal debtor; ‘C’ is creditor.
3 parties:
• Surety: who gives guarantee; person who undertakes liability of third person.
• Principal debtor: person who borrows the money.
• Creditor: to whom guarantee is given.
3 types of contract:
1. Between principal debtor and creditor
2. Between surety and creditor
3. Between principal debtor and surety
2 types of guarantee:
(a) Specific Guarantee: when surety is liable for a particular transaction only.
(b) Continuing Guarantee: when liability of surety extends to a series of transaction in
future; Eg: promise of surety to produce the debtor in court from time to time as and when required.
• Continuing guarantee can be revoked at any time by the surety as to future transactions by
giving a notice to creditor; except in case where continuing relationship is established.
Eg: ‘A’ becomes surety of ‘C’ for B’s conduct as manager in C’s bank and ‘B’ is appointed on faith of
this guarantee. Now ‘A’ cannot revoke the continuing guarantee so long as ‘B’ is the manager since
a continuing relationship has been established.

• On death of surety, continuing guarantee is revoked for all the future transactions in absence
of any contract to the contrary.

Liability of surety is co-extensive i.e. up to the same extent as that of principal debtor. (Sec 128).
Eg: ‘A’ guarantees to ‘B’ payment of a bill of exchange due from ‘B’ to ‘C’, the acceptor. The bill is
dishonoured by ‘C’. ‘A’ is liable not only for amount of bill, but also for any interest and charges
which may have become due on it.
# Who must creditor sue first?
Case: Bank of Bihar v Damodar Prasad AIR 1969 SC 297: wherein the defendant guaranteed a
bank loan. On default, the defendant was sued. The trial court held that bank shall enforce the
guarantee only after having exhausting its remedies against the principal debtor. Patna
H.C. confirmed the decree. But SC held that it is on the discretion of creditor whether to first sue the
principal debtor or the creditor first. The very object of guarantee is defeated if the creditor is asked
to postpone his remedies against the surety.
Case: Union of India v Manku Narayan (1987)2 SCC 335: held that creditor must first proceed
against the mortgaged property and then against the surety for the balance.
Discharge of surety’s liability:
1. Variance in terms of contract: between principal debtor and creditor without the consent of
surety.
Eg: ‘A’ stands as surety for the rent payable by ‘B’ to ‘C’ for C’s house. If ‘B’ and ‘C’ agree on a
higher rent without the consent of ‘A’, then ‘A’ is discharged from his liability.

1. Discharge of principal debtor: the surety is discharged if the principal debtor is discharged by
a contract or by act or omission.
Eg: ‘A’ contracts with ‘B’ to build a house for him. ‘C’ stands as surety for ‘B’. If ‘A’ discharged ‘B’
from his obligation to build the house, ‘C’ will also stand discharged.

1. Compromise: if a compromise takes place between creditor and principal debtor without the
consent of surety, surety stands discharged.

1. Act/omission of creditor: which adversely affects the rights of surety, then surety gets
discharged.
 1. 5. Creditor loses the security: if creditor loses the security, surety gets discharged.

Rights of surety:
1. 1. Against principal debtor:
• Right of subrogation (Sec 140): on the failure of principal debtor to pay the debt---surety pays
off--- then surety comes into the position of a creditor and has all the rights which are
available to a creditor against principal debtor.
• Right to indemnity (Sec 145): there is an implied promise on behalf of debtor to indemnify the
surety after surety pays off his debts.

1. 2. Against the creditor (Sec 141): when surety pays off the debt on default of principal
debtor---- surety acquires some rights against creditor which are available to principal debtor:
• Right to securities
• Right to share reduction
• Right to set-off

1. 3. Against co-sureties (Sec 146): in case of more than one surety---if one of them pays off
the debt—then such surety has right to get contribution from all the sureties; release of one
surety does not discharge others.

CONSIDERATION for past debt: The section says that “anything done...for the benefit of principal
debtor” is good consideration. But will “anything done” include things done before the guarantee is
given?
Case: Gulam Husain v Faiyaz Ali AIR 1940 Oudh 346: answered in affirmative. A lessee was to pay
the sum due by certain instalments. After a few days a person become the surety of lessee.
Court held that the bond was not without consideration.

CONTRACT OF BAILMENT (Sec 148)

Bailment: an act of delivering goods by one person to another for some purpose. Herein delivery of a
thing is given but ownership is not transferred.
Eg: giving of cloth to tailor for stitching a shirt.
Bailor: the person delivering the goods.
Bailee: the person to whom they are delivered.
There is a contract between bailor and bailee wherein they agree that after the purpose if fulfilled,
the goods will either be returned to the bailor or delivered to any other person as per orders of the
bailor.
Case: Ultzen v Nicolls (1894)1 QB 92 wherein an old customer went into a restaurant, a waiter took
his coat and hung it on a hook behind him. When the customer was about to leave, the coat went
missing. Held that though what the waiter did might be no more than an act of voluntary courtesy
towards the customer, yet the restaurant was held liable as bailee.
Case: Ram Gulam v Govt of UP AIR 1950 All 206: the plaintiff’s ornaments, having been stolen,
were recovered by the police and while in police custody, were stolen again. The plaintiff’s action
against the state for loss was dismissed. Held that the ornaments were not made over to govt under
any contract therefore the govt never occupied the position of bailee and is not liable.

RIGHTS OF BAILOR
1. Right to rescind the contract (Sec 153)- if bailee contravenes the terms of the contract.
2. Right to claim damages (Sec 154)- if bailee uses the thing in contravention of terms of
contract and the thing bailed gets damaged.
3. Right to get things back (Sec 160)- after completion of the object for which the thing was
bailed or after the completion of time.
4. Right to claim damages on mixture of goods by bailee (Sec 155, 156, 157)- if the things gets
mixed by the bailee with his own goods.
5. Right to get increase or profit from the goods bailed (Sec 163)- in the absence of a contract
to the contrary, the bailee is bound to deliver to the bailor any increase or profit which may
have accrued from the goods bailed.
Eg: ‘A’ leaves a cow in the custody of ‘B’. The cow has a calf while in B’s custody. ‘B’ is bound to
deliver the calf as well as cow to ‘A’.
DUTIES OF BAILOR
1. To disclose all the faults in the goods bailed (Sec 150)
2. Liability to pay necessary expenses (Sec 158)
3. To indemnify the bailee (Sec 164)
RIGHTS OF BAILEE
(A) To claim damages (Sec 150) – if bailee is injured or is put to loss because of the defect in the
goods bailed.
(B) Right to get expenses (Sec 158) – which the bailee has to incur for the maintenance of the thing
bailed.
(C) Right of lien (Sec 170) – right to keep the thing bailed with him until bailor makes the payment
due to him.
DUTIES OF BAILEE
(a) Duty to take good care of the goods bailed (Sec 151, 152)- care as expected from an ordinary
prudent man.
(b) Not to act in contravention of the terms of bailment (Sec 153)
(c) Not to make unauthorised use of goods (Sec 154)- if he does so and loss is caused to the thing
bailed, then bailee is liable to bailor.
(d) Not to mix bailed goods with his own goods (Sec 155, 156, 157) without the consent of bailor.
(e) To return goods (Sec 160, 161, 163) after completion of the time or after completion of the
object for which thing was bailed.

PLEDGE (Sec 172)

A pledge is a form of bailment, the only difference being that there is a delivery of goods as
security for a debt or promise. Pledge is only of movables.
Essentials:
1. Transfer of possession of thing- essential ingredient
2. Pawnee must hold legal possession over the thing. He is not the owner but it is not only
custody.
3. Delivery of thing can be actual or constructive.
Delivery by attornment: When goods are in possession of third person and the pawnor directs the
third person to hold them on pledgee’s (pawnee’s) behalf, that is enough delivery.

1. Delivery of goods is made for securing a debt or for performance of a promise. (particular
purpose)
2. Pledge is in connection with movables.
Case: Morvi Merchantile Bank v Union of India AIR 1965 SC 1954: certain goods were consigned
with the railways to “self” from Bombay for transit to Okhla. The consigner endorses the railway
receipts to the appellant bank against an advance of Rs.20,000. The goods having been lost in the
transit, the bank as endorsee of the railway receipts and pawnee of goods sued the Railways for the
loss. Held that delivery of railway receipts was the same thing as delivery of goods therefore it was
valid pledge and pawnee was entitled to sue for the loss.
RIGHTS OF PAWNEE
1. Right to lien (Sec 173, 174) till payment of dues is made to him by the pawnor. (Particular
lien)
2. Right to recover extraordinary expenses (Sec 175) for preservation of the thing pledged.
 3. Where pawnor makes default (Sec 176) default in making payment or in performing the
promise, pawnee has right to file a suit for recovering the amount; to retain the goods with
him; to sell the goods after due notice.
PLEDGE BY PERSON OTHER THAN THE OWNER
General rule: a thing can be validly pledged only by the owner of the goods.
Exceptions: sometimes possessor of the goods can pledge them.
1. By mercantile agent (Sec 178)- an agent who has such authority from his principal to sell
goods for the purpose of sale or to buy goods or to raise money for security of goods. Such
person can with the consent of the owner pledge goods in ordinary course of
business provided
• the pawnor acts in good faith and
• has no notice at the time of the pledge that the pawner has no authority to pledge

2. By person holding possession under a voidable contract (Sec 178A)- voidable at the option
of the lawful owner on the ground of fraud, misrepresentation, coercion or undue
influence provided
• Contract has not been rescinded at the time of pledge.
Case: Phillips v Brooks Ltd. (1919)2 KB 243: a fraudulent person induced the plaintiff to give him a
valuable ring in return for his cheque which later proved worthless. Before the fraud was discovered,
the ring was pledged with the defendant. Pledge was held valid because it was made by a person in
possession under a voidable contract.

1. By person holding limited interest in the thing pledged (Sec 179)- whenever a person has
limited interest in the goods in his possession, he has unconditional authority to charge at
least that interest.
2. By co-owner in possession- if one of several joint owners of goods is in sole possession of
the goods with the consent of the rest of the owners, he can make a valid pledge of the
goods.