BL 8 Special Contracts

Indemnity and Guarantee: 

Indemnity and Guarantee Contract of Indemnity: A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity. The person who promises to make good the loss is called the indemnifier (promisor) and the person whose loss is to be made good is called the indemnified or indemnity holder (promisee). Examples: (a) A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs.200. This is a contract of indemnity. 1

Contd..: 

Contd.. (b) A and B claim certain goods from a railway company as rival owners. A takes delivery of the goods by agreeing to compensate the railway company against loss in case B turns out to be the true owner. There is a contract of indemnity between A and the railway company. Definition is not exhaustive: According to the definition given in Sec.124 of the Indian Contract Act, a contract of indemnity includes: ( i ) only express promise to indemnify, and (ii) cases where loss is caused by the conduct of the promisor himself or by the conduct of any other person. The definition does not include: ( i ) implied promise to indemnify and (ii) cases where the loss is caused by accidents and events not depending on the conduct of the promisor or any other person. 2

Contd..: 

Contd.. A contract of indemnity may be express or implied. An implied contract of indemnity may be inferred from the circumstances of the case or from relationship of the parties. Example: A, on the instruction of T, sold certain cattle belonging to O. O held A liable for it and recovered damages from him for selling it. Held, A could recover the loss from T as a promise by T to A from any such loss would be implied from his conduct in asking A to sell the cattle. 3

Contd..: 

Contd.. It is to be noted that a contract of indemnity being a specie of the general contract, and, therefore, must satisfy all essentials of a valid contract such as competent parties, free consent , lawful object etc., otherwise it will not be valid. Example: A agrees to indemnity B for all consequences which may arise as a result of his (B) giving a good beating to C. The object being unlawful the agreement is also void. 4

Contract of Guarantee: 

Contract of Guarantee 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’, the person in respect of whose default the guarantee is given is called the ‘principal debtor' and the person to whom the guarantee is given is called the creditor’. A guarantee may be either oral or written. It may be express or implied and may even be inferred from the course of conduct of the parties concerned. S, P, and C. S stands for surety, P for principal debtor, and C for creditor. 5

Contd…: 

Contd… Examples: (a) S requests C to lend Rs.500 to P and guarantees that if P fails to pay the amount, he will pay. This is a contract of guarantee. S in this case is the surety, C, the creditor and P, the principal debtor. (b) S and P go into a shop. S says to the shopkeeper, C, “Let P have the goods, and if he does not pay, I will, .” This is a contract of guarantee. A contract of guarantee is a tripartite agreement which contemplates the principal debtor P, the creditor C, and the surety S. In it, there is a triangular relationship. (1) As between C and P, there is a contract out of which the guaranteed debt arises. (2) As between S and C, there is a contract by which S guarantees to pay to C, Ps debt in case of his (P’s ) default. (3) As between S and P, there is a contract that P shall indemnify S in case S pays in the event of a default by P. This contract, if it is not expressed between the parties, is always implied. 6

Essential Features of a Contract of Guarantee: 

Essential Features of a Contract of Guarantee 1. Concurrence: A contract of guarantee requires the concurrence of all the three parties to it, viz., the principal debtor, the creditor, and the surety. 2. Primary liability in some person: There must be a primary liability in some person other than surety. The word liability means a liability which is enforceable at law. If that liability does not exist, there cannot be a contract of guarantee. But a guarantee given for the debt of a minor is an exception to this rule. Example: P owes a debt to C, S gives a guarantee to C for the payment of the debt after it is barred by the law of limitation. S pays the amount to C. He cannot recover the amount from P as there is no enforceable liability against P. 7

Contd..: 

Contd.. The primary liability in a contract of guarantee is that of the principal debtor. The liability of the surety is secondary. It arises only when there is a default by the principal debtor. 3. Essentials of a valid contract: A contract of guarantee must have all the essential elements of a valid contract. But the following two points should be noted: (1) All the parties must be capable of entering into a valid contract, though the principal debtor may be a person suffering from incapacity to contract. In such a case, the surety is regarded as the principal debtor and is liable to pay personally even though the principal debtor is not liable to pay. 8

Contd..: 

Contd.. (2) Consideration received by the principal debtor is sufficient for the surety, and it is not necessary that it must necessarily result in some benefit to the surety himself. It is sufficient if something is done or some promise is made for the benefit of the principal debtor. Sec.127 lays down that “Anything done, or promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. Examples: (a) P requests C to sell and deliver to him goods on credit. C agrees to do so, provided S will guarantee the payment of the price of the goods. S promises to guarantee the payment in consideration of C’s promise to deliver the goods. This is a sufficient consideration for S’s promise. 9

Contd..: 

Contd.. (b) C sells and delivers goods to P. S afterwards requests C to forbear to sue P for the debt for a year. He promises that if C does so, he will pay for the goods in default of payment by P. C agrees to forbear as requested. This is a sufficient consideration fro S’s promise. (c) C sells and delivers goods to P. S, afterwards without consideration, agrees to pay for them in default of P. The agreement is void. 4. Writing not necessary: A guarantee may be either oral or written. It may be express or implied. Implied guarantee may be inferred from the course of conduct of the parties concerned. 10

Distinction between a contract of indemnity and a contract of guarantee: 

Distinction between a contract of indemnity and a contract of guarantee 1. There are two parties to the contract, viz., the indemnifier (promisor) and the indemnified (promisee). There are three parties to the contract viz., the creditor, the principal debtor and the surety. 2. The liability of the indemnifier to the indemnified is primary and independent. The liability of the surety to the creditor is collateral or secondary, the primary liability being that of the principal debtor. 3. There is only one contract in the case of a contract of indemnity, i.e., between the indemnifier and the indemnified. In a contract of guarantee, there are three contracts; one between the principal debtor and the creditor, the second between the creditor and the surety and the third between the surety and the principal debtor. 11

Contd..: 

Contd.. 4. It is not necessary for the indemnifier to act at the request of the indemnified. It is necessary that the surety should give the guarantee at the request of the debtor. 5. The liability of the indemnifier arises only on the happening of a contingency. There is usually an existing debt or duty, the performance of which is guaranteed by the surety. 6. An indemnifier cannot sue a third party for loss in his own name, because there is no privity of contract. He can do so only if there is an assignment in his favor. A surety, on discharging the debt due by the principal debtor, steps into the shoes of the creditor. He can proceed against the principal debtor in his own right. 12

Contract of Bailment: 

Contract of Bailment The word ‘bailment’ is derived from the French word ‘ballier’ which means ‘to deliver’. In legal sense, it involves change of possession of goods from one person to another for some specific purpose. Sec. 148 defines ‘bailment' as the delivery of goods by one person to another for some purpose, upon a contract, that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’ and the person to whom they are delivered is called the ‘ bailee ’. 13

Contd..: 

Contd.. Examples: (a) A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a contract of bailment between A and B. (b) A lends a book to B to be returned after the examination , there is a contract of bailment between A and B. (c) A sells certain goods to B who leaves them in the possession of A. The relationship between B and A is that of bailor and bailee. (d) An insurance company places a damaged insured car of A in possession of R, a repairer. A is the bailor, the insurance company is the bailee, and R is the sub-bailee. 14

Contd..: 

Contd.. Sometimes there may be bailment even without a contract. For example, when a person finds goods belonging to another, a relationship of bailee and bailor is automatically created between the finder and the owner . Example: E’s ornaments having been stolen and recovered by the police disappeared from police custody. Held, the State was liable, the contract of bailment having been implied. 15

Requisites of bailment: 

Requisites of bailment 1. Contract: A bailment is usually created by agreement between the bailor and the bailee. The agreement may be express or implied. In certain exceptional cases, bailment is implied by law as between a finder of goods and the owner. 2. Delivery of possession: A bailment necessarily involves delivery of possession of goods by bailor to bailee. A mere custody of goods does not create relationship of bailor and bailee. A servant who receives certain goods from his master to take to a third party has mere custody of the goods; possession remains with the master and the servant does not become a bailee. 3. For some purpose: The delivery of goods from bailor to bailee must be for some purpose. If goods are delivered by mistake to a person, there is no bailment. 16

Contd..: 

Contd.. 4. Return of specific goods: It is agreed between the bailor and the bailee that as soon as the purpose is achieved, the goods shall be returned or disposed of according to the directions of the bailor. If the goods are not to be specifically returned, there is no bailment. But there is a bailment even if the goods bailed are, in the meantime, altered in form, e.g., when a piece of cloth is stitched into a suit. 17

Classification of Bailments: 

Classification of Bailments Bailments may be classified according to the benefit derived by the parties. It may be: 1. for the exclusive benefit of the bailor, as the delivery of some valuables to a neighbor for a safe custody, without charge. 2. for the exclusive benefit of the bailee, as the lending of a bicycle to a friend for his use, without charge. 3. for the mutual benefit of the bailor and the bailee, as the hiring of a bicycle or giving of a watch for repair. In these cases, consideration passes between the bailor and the bailee. Bailments may also be classified into : Gratuitous bailment: It is a bailment where no consideration passes between the bailor and the bailee, e.g. where A lends a book to his friend B. Non-gratuitous bailment or bailment for reward: It is a bailment where consideration passes between the bailor and the bailee. E.g. where certain goods are kept in warehouse for hire, or where A hires a bicycle from B. 18