Indian Contract Act, 1872 - Indemnity, Guarantee, Bailment, Pledge and Agency
What the exam tests
This domain covers indemnity, guarantee, bailment, pledge and agency: the parties, rights, duties and termination rules under the Indian Contract Act, 1872.
Core rules
- Indemnity (s 124): one party promises to save the other from loss caused by the promisor or another person. Guarantee (s 126): the surety promises to perform the principal debtor's obligation on default. Surety liability is co-extensive with the debtor's (s 128) and may be continuing (s 129).
- Material variation in the terms of the principal contract without the surety's consent discharges the surety (s 133); release of the debtor, composition, or impairment of securities may also discharge the surety (ss 134-139). The surety has subrogation (s 140) and contribution rights (s 145).
- Bailment (s 148): delivery of goods for a purpose, with return or disposal. The bailee must take reasonable care (s 151), use goods only as agreed, and may have particular lien (s 170) or, in trade, general lien (s 171).
- Pledge (s 172) is bailment as security. The pledgee may retain goods, and on default may sue or sell after reasonable notice (s 176).
- Agency (s 182) is created by agreement, ratification, necessity or estoppel. The agent binds the principal when acting within actual or apparent authority; undisclosed agency and termination are tested under ss 196-210.
Worked example
A guarantees B's loan to C up to ₹5 lakh. The bank later increases the loan limit and C defaults. A is discharged to the extent of the variation made without consent (s 133). If A had consented to the variation, the guarantee would continue up to ₹5 lakh.
Traps
- Mixing indemnity (two parties) with guarantee (three parties).
- Ignoring notice before sale of pledged goods.
- Treating a sub-agent as the principal's agent.
- Missing that a surety's liability is secondary but co-extensive.