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School of LAW Faculty of MITTAL SCHOOL OF BUSINESS

Name of the faculty member POOJA AGRAWAT

Course Code: LAW202 Course Title: SPECIAL CONTRACT

Academic Task No: 1 Academic Task Title: ASSIGNMENT
Date of Allotment: 20/8/2020 Date of Submission: 26/8/2020
Student Roll No: A08 Student Reg. No: 11915048
Term: 2 Section: 1902
Max. Marks: 30 Marks Obtained:
Evaluation Parameters

Learning Outcomes: (Student to write briefly about learnings obtained from the academic tasks)

Declaration: I declare that this Assignment is my individual work. I have not copied it from any
other students’ work or from any other source except where due acknowledgement is made explicitly
in the text, nor has any part been written for me by any other person.

Student’ Signature:

Evaluator’s Comments (For Instructor’s use only):

General Observations Suggestions for Improvement Best part of assignment
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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 neighbour 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 friend BAILMENT BAILEE
gratis (free of charge) to be used by 1. On the expiry of the have been discussed in
him. stipulated period the following table.
Hire - Goods lent to the bailee for 2. On the Imp : Bailment contracts
hire, i.e., in return for payment of accomplishment of the have been called special
money. specified purpose because in case of
Pawn or Pledge - Deposit of goods 3. By bailee's act gratuitous bailment for
with another by way of security for inconsistent with eg 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.
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Bailor Bailee

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

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

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
1
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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.
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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

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(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

Credito The creditor is entitled to The obligations of a creditor

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

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

Creditor called as secondary or
In case of fidelity guarantee, contingent, as his liability
the surety can direct creditor arises only on default by the
to dismiss the employee principal debtor.
whose honesty he has  But as soon as the principal
guaranteed, in the event of debtor defaults, the liability of
proved dishonesty of the the surety begins and runs co-
employee. extensive with the liability of
2. Rights against the the principal debtor, in the
Principal Debtor sense that the surety will be
(a) Right of Subrogation liable for all those sums for
(stepping into the shoes of the which the principal debtor is
original) liable. The creditor may file a
Where a surety has paid the suit against the surety without
guaranteed debt on its suing the principal debtor.
becoming due or has  Where the creditor holds
performed the guaranteed securities from the principal
duty on the default of the debtor for his debt, the
principal debtor, he is creditor need not first exhaust
invested with all the rights, his remedies against the
which the creditor has securities before suing the
against the debtor. surety, unless the contract
(b) Right to be indemnified specifically so provides.
The surety has the right to DISCHARGE OF SURETY
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recover from the principal 1. By notice of revocation in case

debtor, the amounts which he of a continuing guarantee
has rightfully paid under the 2. By death of surety in case of
contract of guarantee. continuing guarantee unless
otherwise provided.
Rights of Contribution 3. By variation in terms of
Where a debt has been contract without consent of
guaranteed by more than surety.
one person, they are called 4. By release or discharge of
as co-sureties. When a Principal Debtor
surety has paid more than 5. By compounding with, or
his share, he has a right of giving time to, or agreeing not to
contribution from the other sue, Principal Debtor
sureties who are equally 6. By creditor's act or omission
bound to pay with him. 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 unauthorised use.
on giving suitable notice. • Return of goods including
• Right to claim damages accruals.
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because of non disclosure of

any default or fault. Note: Pledge is normally for moveable
• Right to claim damages goods such as jewellery and shares
suffered because of defective while mortgage is used for
title of the pledgor. immoveable property. Mortgage is
• Pledgee’s rights are not limited dealt separately under Transfer of
to his interest in goods. Property Act.
• Right to recover any
extraordinary expenditure.
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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 The person for whom or on whose behalf
An agent is defined as a "person employed to person.
do
he acts is called the Principal. The function
any act for another or to represent another in
of an agent is to bring about contractual
dealings with third person". In other words, an
relations between the principal and third
agent is a person who acts in place of another.
parties.

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

PRINCIPAL'S DUTIES TO AGENT

TERMINATION OF AGENCY
is bound to indemnify the agent against
By revocation by the Principal
the consequences of all lawful acts done
by such agent in exercise of the authority On the expiry of fixed period of time.
conferred upon him On the performance of the specific purpose.
liable to indemnify an agent against the Insanity
consequences of an act done in good Death of the principal or Agent
faith. An agency shall also terminate in case subject
compensation to his agent in respect of matter is either destroyed or rendered
injury caused to such agent by the unlawful
principal's neglect or want of skill. Insolvency of the Principal. Insolvency of the
principal, and not of the agent, terminates the
agency
By renunciation of agency by the Agent
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CONCLUSION
Indemnity is a legal discharge from the penalties or liabilities incurred by any
course of action. In simpler words, indemnity needs that one party should
indemnify the other if certain costs mentioned in the contract of indemnity
are acquired by another party.  For example, car rental companies lay down
that the person hiring the car will be responsible for the damage or losses
caused to the car because of reckless or negligible driving by the person
himself and he or she will have to indemnify the car rental company.

Recently, indemnity contracts are being executed quite frequently in the IT

industry. There are some conditions or situations in which continuation of an
indemnity does make a meaningful change for some whereas for other it
does make little changes or no changes at all. A new concept known as
“Indemnity Lottery” can be found in the law of contract that states that in
civil cases of indemnity, results can never be predicted.

A simple indemnity clause can never be an answer to liability issues. The law
leans disfavour ably towards for those who try to prevent liability or look for
dispensation from liability for their actions. The fundamental reason is that a
careless party should not be able to completely shift all claim and damages
made against him to another, non-negligent party. For e.g. A ticket to an
amusement park claims that a person entering into park can’t hold
management responsible for any accident of his/her due to malfunctioning of
rides or any other events. But seldom, such a defense works in the court of
law because it is not based on a contract.