The term “Contract” is defined under section 2(h) of the Indian Contract Act, 1872 as “An agreement enforceable by law.” In simple words, a contract is a promise enforceable by law. The promise to do something or to refrain from doing something. It is a paramount part of our legal system, where two or more parties bind each other into an agreement. These are common contracts for general situations. However, some situations are quirky and require special agreements. These are called Special Contracts.
What are Special Contracts?
In the realm of law, special contracts are those agreements which are governed by specific provisions under Indian Contract Act, 1872. Sections 124 to 238 of Indian Contract Act, deal with such contracts. Special contracts go beyond the usual situations to address specific scenarios. There are five kinds of special contracts, namely, indemnity, guarantee, bailment, pledge and agency.
Special Contract in Indian Contract Act, 1872
The Indian Contract Act, 1872, contains provisions that specifically address the elements and rules governing special contracts. Here are a few major types of contracts under the Act:
1. Contract of Indemnity
Section 124 of Indian Contract Act, 1872 defines the contract of Indemnity. According to it – “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.” In simple words, a Contract of Indemnity is such a contract under which one party promises to save the other party from loss caused to him by the conduct of the promisor or any other person. In this, a third person accepts the liability to compensate the other person for loss suffered, whereas in general contracts the liability to compensate is on the party itself.
Essential Elements of Indemnity Contract
Contract of indemnity has the following essential elements:
- Contract of indemnity has two parties – Indemnifier and Indemnity holder. The person giving the promise to compensate is an Indemnifier and to whom it is promised is the Indemnity holder.
- Contract of Indemnity contains all elements of a valid contract, like two parties, offer, acceptance, free consent, valid object, and valid consideration, etc.
- A party promises the other to protect him from certain losses.
- The indemnity holder is mostly entitled to receive compensation for actual loss not the agreed complete amount.
- Contract of Indemnity can be written, oral or by conduct.
- Contracts of Indemnity are contingent contracts.
- Such contracts are based on faith.
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.
Case Law on Indemnity
In New India Assurance Company Ltd. v. State Trading Corporation of India (2007), the Supreme Court clarified that in a contract of indemnity, the indemnifier’s liability is limited to the terms of the agreement. If the indemnity holder had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.
2. Contract of Guarantee
Section 126 of the Indian Contract Act, 1872 defines the Contract of Guarantee. According to it- “A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.” In simple words, when any person does not perform his promise, then another person accepts the liability to perform for him.
In common language, such contracts are also called contracts of security because the security or guarantee is given by a third party for performance of promise in these cases.
Essential Elements of Guarantee
The contract of Guarantee has following essential elements:
- Three parties- Contract of Guarantee requires three parties, i.e., Creditor, Principal debtor, and Surety.
- Can be an oral or written contract.
- Fulfilment of essentials of a standard contract including but not limited to- consideration to surety must be present and the guarantee should not be obtained by concealment or misrepresentation.
The person who lends security is called the Surety; the person to whom security is given is called the Creditor and the person in respect of whose default the security is given is called Principal debtor.
Case Law
In Lakeman v. Mount Stephen (1874), the court dealt with the enforceability of a guarantee contract. The case established that in a contract of guarantee, the guarantor’s liability is secondary and contingent upon the principal debtor’s default. This case reinforced the principle that a guarantee contract is an agreement to be liable for another’s debt or performance, but only after the primary obligation is not met.
3. Contract of Bailment
Section 148 of the Indian Contract Act, 1872 defines the Bailment as – “A Bailment is 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 word Bailment originated from the French word “Bailor” which means- “to deliver”. Thus, the contract of Bailment is a contract which is based from the delivery of goods.
The transaction of Bailment has two parties – Bailor and Bailee. The person delivering goods is called “Bailor”, and the person to whom it is delivered is called “Bailee”.
Essential Elements of Bailment
Contract of Bailment has following essential elements:
- The property should be movable.
- Delivery of possession of goods shall be there.
- The goods are required to be delivered for a specific purpose or use.
- Return of the goods to the bailor after the end of Bailment.
- Creation of Contractual liability.
Case Law
In P.K. Kalasami Nadar v. Alwar Chettiar (1961), the case dealt with the issue of a bailee’s liability for the loss of goods entrusted to it. The Madras High Court held that the transport corporation, acting as a bailee, had the responsibility to ensure the safe custody of the goods entrusted to them by the bailor. The court emphasized that the bailee must exercise reasonable care in handling the goods, and if the goods were lost or damaged due to negligence, the bailee would be held liable for the loss under the provisions of the Indian Contract Act, 1872.
4. Contract of Pledge
Section 172 of the Indian Contract Act, 1872 defines pledge as – “The Bailment of goods as security for payment of debt or performance of a promise is called pledge.” Pledge, which is also called “pawn”, is a kind of bailment of goods. The bailor, in this case, is called the “Pawnor” and the bailee in this case is called the “Pawnee”.
Thus, Pledge is such a bailment of goods which –
- is for the payment of any debt, or
- is for the performance of any contract, or
- is for security
Essential Elements of Pledge
Contract of Pledge has following essential elements:
- The property shall be movable.
- Pledge requires delivery of possession.
- Pledge is required to be completed under a contract.
- There shall be a bailment for security against payment or performance of the promise.
Case Law
In Lallan Prasad v. Rehmat Ali (1966), the Supreme Court dealt with the concept of a pledge under the Indian Contract Act, 1872. The case clarified the nature of a pledge, where one party (the pawnor) provides goods to another party (the pawnee) as security for a debt or obligation. The Court ruled that the pledgee has a right to retain the goods until the debt is paid and can sell the pledged goods if the debtor defaults. The case emphasized that the relationship between the parties in a pledge is a special kind of bailment, where the goods are provided as collateral security for a loan or performance of a promise.
5. Contract of Agency
The Indian Contract Act, 1872 defines the words “Agent” and “Principal” but it does not define “Agency” or “Contract of Agency”. Section 182 of the Indian Contract Act,1872 defines them as – “An agent is a person employed to do any act for another or to represent another in dealings with a third person. The person for whom such an act is done or who is so represented is called the principal.”
According to Watson– “Agency is such a contract by which a person takes the obligation on his own discretion to represent another person in definite commercial relations.” Thus, the essence of Contract of agency is that of employment of one person by another in order to bring the latter into legal relation with the third person. The maxim on which the Contract of Agency is based is- “Qui facit per alium facit per se.” (He who acts through another does by himself)
Essential Elements of Agency
The Contract of Agency has following essential elements:
- The transaction of an Agency mainly has two parties- An agent and a Principal.
- Agent obtains authority with consent of his Principal.
- Agent creates a legal relationship between his Principal and third person. He himself is not liable to anyone.
- Principal is exclusively responsible towards the third person.
Case Law
In Ramanathan v. Kumarappa (1939), the court dealt with the issue of agency under the Indian Contract Act, 1872. An estate agent was appointed for selling a certain property. The Agent accepted a deposit from the prospective customer and misappropriated it. The Court held that the Principal was liable because an estate agent had an implied authority to take a deposit. The case highlighted that an agent acts on behalf of the principal and binds the principal through their actions within the scope of the authority given.
Conclusion
In conclusion, special contracts under the Indian Contract Act, 1872, play a pivotal role in governing various transactions that involve specific obligations and rights beyond general contracts. These contracts, such as indemnity, guarantee, bailment, pledge, and agency, address unique situations and provide legal clarity for parties involved in such agreements. Understanding the nuances of these contracts is essential for ensuring fairness and protecting the interests of all parties. Through case laws, the courts have further elaborated on the principles that govern these contracts, offering valuable insights into their enforcement. As businesses and individuals continue to engage in diverse contractual relationships, the importance of these special contracts cannot be overstated, as they serve to safeguard the rights and responsibilities of all stakeholders.
The Special Contracts under Indian Contract Act have been explained by our intern, Ms. Sanya Wadhwa. He joined the team to assist and bring informational legal blogs.
