Unit 2

Special Contracts

2.1 INDEMNITY AND GURANTEE

Contracts of insurance and assurance are a kind of the universal contract.

CONTRACT OF INDEMNITY

“A bond of insurance as an agreement by which an individual party promises to accumulate the other from loss caused to him by the behavior of the promisor or himself or by the behavior of any other individual is called a “Contract of indemnity” this law comes under Sec 124 of Indian Contract.

On the top definitions it is cleared that contract of indemnity is a unique category of agreement.

1. Where one individual promises another individual to reimburse the loss caused by promisor interalia by another.
2. The individual who agrees to pay off the loss is called the indemnifier and the individual whose loss is to be made good is called the indemnified or indemnity owner, this kind of agreement is a class of conditional contracts.

Characteristics of Indemnity

1. A contract of indemnity should convince all the necessary fundamentals viz. Legal associations, free sanction etc.
2. Contract of indemnity may be expressed or implied.

Rights of Indemnity holder (Sec 125)

Indian Contract Act lays down the rights of indemnity holder in a contract of indemnity when sued. According to it, an insurance owner can recover from indemnifier

1. All indemnity had suffered.
2. All expenses which he may be bound to compensate in bringing such suit.
3. All sums which may have remunerated the towns of any negotiation of any suit.

Rights of indemnifier: -

Indian Contract Act is silent about the rights of the indemnifier in a bond of security. On the other hand, he has been held in number of cases that the rights of indemnifier are related to the rights of a security under Sec 141 of Indian Contract Act.

CONTRACT OF GURANTEE

An indenture of assurance is an agreement to carry out the pledge or release the legal responsibility of third individual in case of his non-payment or nonperformance. The individual who gives the assurance is called indemnity. The individual irrespective of whose non-payment the assurance is given is called the “principal debtor” and the individual to whom the assurance is given is called the “creditor”. This contract comes under Sec 126 of Indian Contract Act.

Mode of creating guarantee: -

To create contract of guarantee

1. At first there must be a contract between the principle debtor and the creditor.
2. Secondly there must be the contract between surety and creditor.
3. In addition to the above contract there may be a third contract, that is principle debtor expressly or impliedly request.
4. The surety to act as security.

Characteristics of Guarantee: -

1. Concurrence: - A contract of guarantee requires to concurrence of all the three parties to it viz. The principle debtor, the creditor and the security.

2.     Existence of debt: - A contract of guarantee can be performed only where there is an existence of debt and liability enforceable at law.

3.     Essentials of a valid contract: - A contract of guarantee must satisfy all the essential elements of a valid contract. If principal debtor is a minor in such case security is regarded as the principal debtor who is liable to pay personally.

4.     Writing not necessary: - A guarantee may be given either oral or written. It may be express or implied.

5.     Consideration of contract of guarantee: - A contract of guarantee must be supported with consideration. There can be no valid contract of guarantee if consideration to tally absent but it need not to be direct consideration between surety and creditor. Sec 127 clearly provide that “Anything done for the benefit of principal debtor may be sufficient consideration to the surety for giving guarantee”.

6.     When co-surety does not joint: - When in the contract of guarantee co-surety exists and he promise to act upon the credit only when other co-surety joins the guarantee. It is not availed unless until the co-surety does not join.

2.2 Contract of Bailment and Pledge

Contract of Bailment & Pledge are special classes of contracts. These are dealt within chapter ix i.e., from Sec 148 to 181. It does not deal all types of bailment. These are separate for special types of bailment e.g. The Carriers Act 1865, The Railways Act, 1890, The Carriage of Commodities Act by Sea Act, 1925.

Meaning of Bailment

A bailment is the delivery of commodities by an individual to another for specific purpose, on the situation that after the purpose is accomplished, the commodities have to be returned. Common example of bailment is hiring of commodities, furniture, or cycle etc. deliver cloth to a tailor for making suit, deliver a car or scooter for maintenance, deposit luggage etc. This word is derived from the French word Bailor meaning ‘deliver’.

A Bailment is the delivery of commodities by one individual to another for some purpose, upon a contract, that they shall, when the purpose is proficient, return or otherwise ready off according to the instructions of the person delivering them (Section 148 of the Indian Contract Act). The one delivering the commodities is called the Bailor and the other to whom they are delivered is called the Bailee. The transaction is called ‘bailment’. Bailment involves change of possession & not transfer of ownership. It implies a sort of connection in which the private possessions of one individual, temporarily, goes into the ownership of another being.

Characteristics of Bailment

1. Contract: - A bailment is formed by contract between the bailor and the bailee. The agreement may be express or implied.
2. Delivery of commodities/possession: - A bailment involves delivery of commodities from one person to another. Delivery includes only change in possession of the commodities not the ownership. Delivery or possession may be actual or constructive.
3. For some specific purpose: - The delivery of the commodities from bailor to the bailee must be for some purpose. Delivery by mistake to a person is not a bailment.
4. Return of specific commodities: - After completion of purpose the commodities are returned or disposed of according to the directions of the bailor. If the commodities are not to be returned there is no bailment.
5. Bailment is concerned only with commodities: -According to Sec. 2 (1) of the Sale of Commodities Act, 1930 Commodities means every kind of moveable property other than money and actionable claims. Bailment is concerned only with commodities.
6. Ownership: - In a bailment bailor continues to be the owner even if the commodities are in possession of the bailee.

CLASSIFICATION OF BAILMENT

A)   Bailment may be classified according to the benefit delivered by the parties. That may be-

• Bailment for the benefit of the bailor. Ex. The delivery of commodities to a neighbor for safe custody, with pout charge.
• For the advantage of the bailee. E.g. Lending a bike to a friend for his use.
• For mutual benefit of the bailee and the bailor. Ex. Hiring a car or giving a cycle for repair.

B)   Voluntary and involuntary bailment: -

Voluntary bailment is the result of express contract between bailor and bailee whereas involuntary bailment is the result of operation of law

C)  Gratuitous and non-gratuitous Bailment: -

Gratuitous bailment is a bailment where no consideration passes between the bailor and bailee. Ex. A lends a book to his friend B. Whereas non-gratuitous bailment is a bailment where consideration passes between the bailor and the bailee. Ex. A hires a car from B.

PLEDGE

Pledge means the Bailment of commodities as a protection for the imbursement of debt or performance of a promise. In this case the bailor is called the ‘Pledger’ or ‘Pawned’ and the bailee is called the ‘Pledge’ or the ‘Pawnee” Sec 172. Contract between them is called Pawn

This is a special type of bailment where both moveable and immovable properties are pledge. Pledge by Non-owners: - The general rule is that it is the owner who ordinary can create a valid pledge. But in the following even non-owner can make a valid pledge.

(a)  Pledge by mercantile representative: - Where a mercantile mediator is in possession of commodities or the credentials of the title of the commodities, any pledge made by him with the approval of the proprietor by valid because he is express by approved by the possessor of the commodities to make the sale. (Sec 178).

(b)  Pledge by seller a buyer in possession after sale: - A seller left in possession of commodities after sale and a buyer who obtains possessions of commodities with the consent of the vendor before sale can make a valid pledge.

(c)   Pledge by co-owner in possession: - One of the co-owners of commodities in possession may have a valid pledge of the commodities with the consent of another co-owners.

(d)  Pledge by person in possession under a void able contract: - Where a person obtains possession of commodities under a void able contract, the pledge created by him is void.

RIGHTS OF PAWNEE: -

1. Rights of retainer: - The Pawnee may retain the commodities pledged till his sum are paid. He may retain them not only for the clearance of the dues but for

• The interest due on the debt, and
• All necessary expresses incurred by him in respect of the preservation of the commodities pledged (Sec 173)

2.     Right of retainer for subsequent advances: - When the Pawnee borrows money to the same pawned after the time of the pledge, it is assumed that the right of retainer over the pledge of commodities extends to succeeding advance also (Sec174).

3.     Rights to extra ordinary express: - The Pawnee is to receive from the extraordinary express from the pawner extra ordinary expresses incurred by him for the preservation of the commodities pledged. For such expenses he has no right to retain the commodities. He can only sue to recover  those. (Sec 175).

4.     Right against true owner, when the pawner’s title is defective: - When the pawner obtained possession of the commodities pledged by him under avoidable contract i.e. (by fraud, undue influence, coercion) but the contract has not been rescinded at the time of the pledge, the Pawnee acquires a good title to the commodities (Sec 178-A)

5.     Pawnee’s right’s where pawner makes difficult: - Where the pawner fails to payment debt the Pawnee can exercise the following rights.

1. He may file a suit against the pawner upon the debt a promise and may retain the commodities pledged as security.
2. He may sell the property pledged on giving the pawner reasonable notice of the sale.
3. He can recover from the pawner any deficiency arising on the sell, of the commodities by him but he shall have to handover the surplus realized on the sell, of the commodities pledged, to the Pawnee.

RIGHTS OF PAWNER: -

1. Right to get back commodities: - The pawner is entitled to get back the commodities pledged on the repayment of the loan and interest.
2. Rights to redeem the debt: - The pawner has a right to redeem the debt at any time for which the pledge is made (Sec 177).

Preservation and maintenance of the commodities: - The Pawner has a right to sue that the Pawnee preserve the commodities pledged and property maintenance them or not.

3.     Right of an ordinary debtor: - The pawner has the right of ordinary debtor which are conformed on him by various status meant for his protection of debtors.

2.3 Contract of Agency

The complexity of current trade is such that it is not convenient for anyone to transact all his business by himself. He cannot personally attend all his legal matters and brought into legal relationship with other people.  So, he has to depend on the services of other persons in order to run his day to day business affairs. Such other persons are called agents.

An Agent is one who acts on behalf of another or who has been delegated the power.

The individual who authorizes another individual to act is called principal or the indenture which shaped the connection of principal and mediator is called ‘Agency’.

The act connecting to agency is contained in Sec 182 to 238 of the Indian Contract Act 1872.

DEFINITION OF AGENT AND PRINCIPAL

A person who has capacity to contract may enter into a contract with another either by himself or through another person when he adopts the later course, he is said to be acting through an “Agent”. An agent is an individual engaged to stand for another in communication with third person. The individual for whom such act is done is called the “Principal”.

Characteristics of Agency: -

A contract of agency has all the essential of a contract with some special features of its own.

They are as follows:

1. There should be appointed by the principal of an agent.
2. The principal must delegate the power to the agent to act on his behalf.
3. By the agency principal should be answerable to the third party.
4. The object of appointment must be to establish relationship between principal and third parties.
5. The relationship of agency being based on confidence between the principal andagent. No consideration is necessary.

Test of agency: -

To determine whether agency relationship exist between the parties, following questions may be answered

1. Whether the agent has capacity to bind the principal and make him answerable to third parties?
2. Whether he can create legal relations between the principal and such third party? If both the questions are answered ‘yes’ then he is an agent otherwise he is not.

Who may be an agent?

A person who is authorized to act as such may be an agent even a minor may be an agent but the principal is liable to the third party for the acts of the agent. (Sec 184)

Difference between Agent and Servant: -

1. An agent is employed on behalf of the principal and he can bring legal relations with third party. But the servant does not create any legal relations between the employer and the third persons.
2. A principal has a right to direct agent for a particular work. But master of a servant has a right to direct and say how to do the work
3. A principal is liable for the wrongs of his agent done within the scope of his authority. A master is liable for the wrongs of the servant which are done during the employment.
4. An agent is paid commission whereas servants are paid salary.
5. An agent may work for several principal the same time, but servant usually services only one master.

CLASSIFICATION OF AGENTS

A common classification of agents according to coverage of their authority is as follows: -

1. Specific agent: - A special agent is one who is appointed to perform a particular act or to represent his principal in some particular transaction. For example: - Auctioneer.
2. General agent: - A general agent is one who has authority to do all acts conducted with a particular trade, business or employment. Ex: - The manager of a firm.
3. Universal agent: - A universal agent is one who usually has authority to act for the principal is unlimited; he has authority to bind his principal by an act.
4. Specific agent: - A special agent is one who is appointed to perform a particular act or to represent his principal in some particular transaction. For example: - Auctioneer.
5. General agent: - A general agent is one who has authority to do all acts conducted with a particular trade, business or employment. Ex: - The manager of a firm.
6. Universal agent: - A universal agent is one who usually has authority to act for the principal is unlimited; he has authority to bind his principal by an act.

Another classification of agents on basis of nature of work done by them is as follows: -

1. Commercial or mercantile agent: - According to Sec 2(9) of the Sale of Goods Act 1930 “a mercantile agent having in the customary course of business as such agent, power either to trade commodities, or to transfer goods. For the reason of sale, or purchase, commodities or to scrounge on the security of goods.

Kinds of Mercantile Agents: -

1. Factor: - An agent with the ownership of the commodities for the purpose of selling them is known as Factor. He has authority to do such thing as are usually on the conduct of business. A factor has a general lien of the goods for money due to him.
2. Broker: - A broker is an agent who is employed to buy or sell goods on behalf of another. His duties are to be accomplished when buyer and seller brought together. Broker does not keep the goods in his possession and he has no right of lien.
3. Commission agent: - He is a type of agent who belongs to an indefinite class of agents. He is employed to buy and sell the goods or transaction business. A commission agent gets commission for work done by him.
4. Auctioneer: - An auctioneer is one who is authorized to sell the goods of his principal by auction. He keeps goods in his possession. He always auctions goods of his double capacity. It means: -
   • Up to the sell, he is an agent of the seller.
   • After the sell, he is the agent of the buyer.

5.     Declarer agent: - A declarer agent is one who guarantees his principal that the persons with whom he enters into contract on behalf of the principal shall perform their obligation. For this he receives an extra commission.

6.     Banker: - The relationship between a banker and his customer is like the principal and agent in some cases. Ex: - when a customer draws any cheque in such case banker is the agent of the customer.

Non-mercantile agent: -

Non-mercantile agents include legal practitioner, attorney, insurance persons, clearing and forwarding agents and wife etc.

Creation of Agency: -

An agency may be created indifferent ways. It need not to be created expressly. It is created from circumstances and conduct of the parties.

1. Agency by express bond: - A contract might be created by an express bond. He is appointed by the principal through written or oral agreement Sec (187). The usually from a written contract of agency is the power of attorney (a formal instrument by which

One person employs another to represent him or act in his stead, for certain purposes) on a stamped paper.

2.     Agency by implied bond: - Implied agency comes from the accomplishment, conditions or bond of parties. Implied agency may be of following types: -

(a)  Agency by estoppels: - In many cases an agency may be implied from the conduct of the party, through no express authority has been given. Where the principal knowingly permits a person to act in a certain business his name of on his behalf. Such principal is estopped from denying the authority of the agent.

(b) Agency by holding out: - Where a person permits another person to act on his behalf. Such person is known as agent by holding out.

(c)  Agency by necessity: - Sometimes extraordinary circumstances require a person who is not ready should act as an agent of another. There may not be any express or implied authority to act on behalf.

3.     Agency by Rectification: - Rectification means subsequent adoption and acceptance of an act originally done without instruction or authority.

4.     Agency by operation law: - Sometimes an agency arises by operation of law. Ex: - partners of firm, promoters of a company.

TERMINATION OF AGENCY

(Sec 201) The various modes of termination of agency are as follows: -

1.       Termination of the agency by an act of the parties: -

(a)  Agreement: - The relation of principal and agent is like any other agreement may be terminated at any time and at any state by the mutual agreement between the principal and agent.

(b) Revocation by the principal: - A principal has an authority to terminate the agency act any time before the agent has exercise his authority so as to bind the principal unless, the agency is irrevocable.

(c)  Revocation by the agent: - An agency may also be terminated by the agent after giving a reasonable notice to the principal.

2.       Termination of organization by function of law: -

1. Performance of the contract: - The most obvious mode of terminating the agency is to do what the agent has undertaken to do. An agency is terminated when the object of the appointment of agent is accomplished.
2. Death and insanity: - When the agent or the principal dies or becomes of unsound minded the agency is terminated.
3. Destruction of subject matter: - An agency which is created to deal with a certain subject matter comes to an end by the destruction of the subject matter.
4. Principal becoming an alien enemy: - When the agent and the principal are aliens, the contract of agency is void so long as the countries of the principal and the agent are at peace. If war breaks out between the two countries, two contracts of agency is terminated.

3.        Termination of sub-agents’ authority: - The termination of an agent’s authority puts an end to the sub-agent’s authority.

4.        Dissolution of a company: - When a company whether the principal or agent is dissolved, the contract of agency with or by the company, automatically comes to an end.

5.        Termination by subsequent impossibility: - When the implication of an agency becomes unlawful due to subsequent change of law. The agency automatically terminated.