Special Contracts: Indemnity, Guarantee, Bailment, Pledge and Agency (Basics) Questions

Question 1

Define contract of indemnity.

Accepted Answer

A contract of indemnity is a contract by which one party promises to save the other from loss caused by the conduct of the promisor or by the conduct of any other person.

Question 2

Define contract of guarantee.

Accepted Answer

A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.

Question 3

Who is a surety?

Accepted Answer

Surety is the person who gives guarantee and undertakes to discharge the liability of the principal debtor in case of default.

Question 4

Define bailment.

Accepted Answer

Bailment is delivery of goods by one person to another for some purpose upon a contract that the goods shall be returned or disposed of when the purpose is accomplished.

Question 5

Define pledge.

Accepted Answer

Pledge is bailment of goods as security for payment of a debt or performance of a promise.

Question 6

Define agency.

Accepted Answer

Agency is the relationship where an agent is employed to act on behalf of a principal and represent him in dealings with third parties.

Question 7

State any three rights of an indemnity-holder.

Accepted Answer

Rights of indemnity-holder (any three):

1) To recover damages paid in a suit in respect of the matter indemnified.
2) To recover costs of the suit if acted prudently.
3) To recover sums paid under compromise if acted prudently.

Question 8

Write any three differences between indemnity and guarantee.

Accepted Answer

Indemnity vs guarantee (any three):

| Basis | Indemnity | Guarantee |
|---|---|---|
| Parties | two (indemnifier, holder) | three (creditor, debtor, surety) |
| Liability | primary | secondary (on default), co-extensive |
| Purpose | protection against loss | assurance of debtor’s performance |

Question 9

Explain bailment and state any two duties of bailee.

Accepted Answer

Bailment is delivery of goods for a purpose with an obligation to return/dispose as directed.

Duties of bailee (any two):
1) Take reasonable care of goods.
2) Not use goods unauthorizedly and return goods after purpose.
(Also: return accretions.)

Question 10

Differentiate between bailment and pledge (any three points).

Accepted Answer

Bailment vs pledge:

| Basis | Bailment | Pledge |
|---|---|---|
| Purpose | some purpose (repair/storage) | security for debt/performance |
| Right to sell | no right to sell | pledgee can sell after notice on default |
| Relation to debt | not necessary | linked to debt/obligation |

Question 11

State any three duties of an agent.

Accepted Answer

Duties of agent (any three):

1) Follow principal’s instructions.
2) Act with skill, care and diligence.
3) Render proper accounts and avoid conflict of interest.

Question 12

State any three modes of termination of agency.

Accepted Answer

Agency terminates by (any three):

1) Revocation by principal.
2) Renunciation by agent.
3) Completion of business or expiry of time.
(Also: death/insanity/insolvency as applicable.)

Question 13

Explain contracts of indemnity and guarantee and differentiate them using a neat table with examples.

Accepted Answer

Indemnity and guarantee are special contracts used widely in business.

**Contract of indemnity:** One party (indemnifier) promises to save the other (indemnity-holder) from loss. Example: A promises to indemnify B against loss from a lawsuit.

**Contract of guarantee:** Surety promises the creditor that he will discharge the liability of the principal debtor if the debtor defaults. Example: Bank loan guarantee by a guarantor.

| Basis | Indemnity | Guarantee |
|---|---|---|
| Parties | two | three |
| Liability | primary | secondary on default (co-extensive unless agreed otherwise) |
| Purpose | protect against loss | assure performance/payment |
| Example | insurance-like protection | guarantor for loan |

Thus, indemnity focuses on compensation for loss, whereas guarantee ensures performance of a third person’s obligation.

Question 14

Explain bailment and pledge and differentiate them using a table. Include rights of pledgee (pawnee).

Accepted Answer

Bailment is delivery of goods by bailor to bailee for a purpose, with an obligation to return/dispose goods after the purpose is completed. Example: giving a watch for repair.

Pledge is a special type of bailment where goods are delivered as security for payment of debt or performance of a promise. Example: pledging gold to bank for loan.

| Basis | Bailment | Pledge |
|---|---|---|
| Purpose | for some purpose | security for debt/performance |
| Right to sell | bailee has no right to sell | pledgee can sell after giving notice on default |
| Interest | return after purpose | retention until debt paid |

Rights of pledgee (pawnee):
1) Right to retain goods until debt/interest/expenses are paid.
2) On default, right to sue for debt while retaining goods.
3) On default, right to sell pledged goods after giving reasonable notice.

Therefore, pledge is bailment with the additional element of security, giving pledgee special rights.

Question 15

Write a detailed note on agency: meaning, types, duties and termination. Use a table and conclude.

Accepted Answer

Agency is the relationship where an agent is employed to act on behalf of a principal and represent him in dealings with third parties. Acts of the agent done within authority bind the principal.

| Aspect | Key points |
|---|---|
| Types of agents | general agent, special agent, mercantile agent, del credere agent |
| Duties of agent | obey instructions, act with care/skill, maintain accounts, avoid secret profit |
| Duties of principal | pay remuneration, indemnify for lawful acts, reimburse expenses |
| Termination | revocation by principal, renunciation by agent, completion of work, expiry of time, death/insanity (as applicable) |

Example: A company appoints a sales agent to sell products; the agent’s contracts with customers bind the company within authority.

Thus, agency is essential in business because it allows principals to conduct trade through representatives while creating legal relations with third parties.

Special Contracts: Indemnity, Guarantee, Bailment, Pledge and Agency (Basics)

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