1. Contract of Indemnity
Definition:
A contract of indemnity refers to a promise made by one party to safeguard the other from any financial loss that may result from the actions of the promisor or another person.
Key Features:
- It involves two parties: the indemnifier (who promises protection) and the indemnified (who is protected).
- The liability of the indemnifier is primary and begins as soon as the indemnified suffers a loss.
- Such contracts must satisfy the general requirements of a valid contract.
Rights of the Indemnified:
- To recover damages already paid.
- To claim litigation expenses incurred in good faith.
- To recover sums paid under lawful settlements.
Illustration: If A agrees to compensate B for losses caused during a business deal with C, B can claim expenses from A if he suffers losses.
2. Contract of Guarantee
Definition:
A contract of guarantee is an agreement where a person undertakes to fulfill the liability of another if that person defaults.
Parties Involved:
- Creditor – the person to whom the obligation is owed.
- Principal Debtor – the person who has to perform the obligation.
- Surety – the one who assures the creditor of repayment in case of default.
Nature of Liability:
- The surety’s liability is secondary, i.e., it arises only if the debtor fails.
Types:
- Specific Guarantee: Limited to a single debt or transaction.
- Continuing Guarantee: Extends to a series of transactions until revoked.
Rights of the Surety:
- To be indemnified by the debtor once he pays on the debtor’s behalf.
- To enjoy the benefit of securities held by the creditor.
- To step into the shoes of the creditor (right of subrogation).
Illustration: If X takes a loan and Y promises to pay if X defaults, Y acts as a surety.
3. Contract of Bailment
Definition:
Bailment means delivering goods from one person to another for a specific purpose, with the understanding that the goods will be returned once the purpose is achieved.
Parties:
- Bailor: The person delivering the goods.
- Bailee: The person receiving the goods.
Duties of Bailor:
- Must reveal known defects in the goods.
- Compensate the bailee for expenses related to the bailment.
Duties of Bailee:
- Take ordinary care of the goods as if they were his own.
- Use goods only for the agreed purpose.
- Return goods once the purpose is completed.
Illustration: Giving a laptop to a service center for repair is bailment.
4. Pledge
Definition:
A pledge is a special kind of bailment where goods are delivered as security for the repayment of a loan or fulfillment of a promise.
Parties:
- Pawnor (Pledgor): The person who delivers goods as security.
- Pawnee (Pledgee): The person to whom goods are delivered.
Rights of the Pawnee:
- To retain the goods until repayment of debt, interest, and expenses.
- To recover necessary expenses spent for preserving goods.
- To sell goods if the debtor defaults, after giving notice.
Duties of Pawnor:
- To repay the debt on time.
- To indemnify the pawnee for losses due to defective title.
Illustration: Pledging gold ornaments with a bank to secure a loan.
5. Contract of Agency
Definition:
Agency is a relationship in which one person (the agent) is authorized to act on behalf of another (the principal) to create legal obligations with third parties.
Ways of Creation:
- Expressly – by words (spoken/written).
- Impliedly – through conduct or circumstances.
- By Necessity – in urgent situations where prior approval cannot be obtained.
- By Ratification – when the principal later accepts an act done without prior authority.
Duties of the Agent:
- Follow instructions and act in the principal’s best interest.
- Maintain accounts and act with due care.
- Avoid conflict of interest.
Duties of the Principal:
- Pay the agent remuneration/commission.
- Compensate the agent for lawful acts and expenses.
Termination of Agency:
- By mutual consent.
- By revocation or renunciation.
- By death, insanity, or insolvency of principal/agent.
Illustration: A authorizes B to sell his property. Any sale made by B within his authority binds A.
🔑 Quick Distinctions
- Indemnity → Protection against loss (two parties, primary liability).
- Guarantee → Surety for another’s obligation (three parties, secondary liability).
- Bailment → Temporary delivery of goods for a purpose.
- Pledge → Bailment with security for debt.
- Agency → Representation of principal by agent in dealings.
