Special Contracts: Indemnity, Guarantee, Bailment, Pledge and Agency
Scope
This domain covers indemnity, guarantee, bailment, pledge and agency. The exam tests party structure, liability, rights and discharge.
Indemnity and guarantee
Indemnity (s 124) is a two-party promise to save another from loss caused by the promisor or another person. Guarantee (s 126) is a three-party contract: principal debtor, creditor and surety. Consideration for the surety is the creditor's act of advancing money to the principal debtor. A guarantee may be oral or written. The surety's liability is co-extensive with the principal debtor's (s 128), unless limited. A continuing guarantee (s 129) may be revoked for future transactions by notice (s 130) and ends on the surety's death for future transactions (s 131). Variance in terms without consent (s 133), release of the principal debtor (s 134) or composition (s 135) may discharge the surety. A surety who pays acquires subrogation (s 140) and indemnity rights (s 145).
Bailment and pledge
Bailment (s 148) is delivery of goods for a purpose with return. The bailee must take reasonable care (s 151) and is liable for negligence (s 152). A particular lien (s 170) secures charges for labour or skill on the goods; a general lien (s 171) is limited to bankers, factors, wharfingers, attorneys and policy brokers. Pledge (s 172) is bailment as security. The pawnee may retain goods (s 173) and, on default, sell after reasonable notice (s 176).
Agency
An agent acts for the principal (s 182); consideration is not necessary (s 185). Ratification (s 196) creates authority retrospectively. Agency terminates by revocation, renunciation, death, insanity or insolvency; notice is needed for revocation (s 206).
Worked example
S guarantees P's cash credit limit of 2 lakh. Without S's consent, the bank and P increase the limit to 3 lakh and vary the repayment schedule. Under s 133, the material variance discharges S for subsequent transactions. The bank cannot recover the increased amount from S merely because the original guarantee was continuing.
Traps
Indemnity has two parties; guarantee has three. Do not say a guarantee must be written. General lien is not available to every bailee. A pawnee cannot sell without reasonable notice.