Beyond general contract rules, the Indian Contract Act, 1872 separately regulates four common special contracts -- indemnity (Sections 124-125), guarantee (Sections 126-147), bailment (Sections 148-171), and agency (Sections 182-238) -- each with its own rules on formation, rights, and discharge that differ from ordinary contract principles.
Indemnity and guarantee
Sections 124-125 define a contract of indemnity as one where one party promises to save the other from
loss caused by the promisor or a third person, entitling the indemnity-holder to recover damages, costs, and
sums paid under any compromise. Sections 126-147 govern guarantee -- a contract to perform the promise, or
discharge the liability, of a third person (the principal debtor) if that person defaults. A “continuing
guarantee” (Section 129) extends to a series of transactions, and Sections 133-139 set out how a surety
can be discharged, including by a material variance in the contract without the surety’s consent.
Bailment and pledge
Sections 148-171 govern bailment -- the delivery of goods by one person (the bailor) to another (the
bailee) for a purpose, on the condition the goods be returned or disposed of as directed once the purpose is
accomplished. Both parties owe duties of reasonable care over the goods. Pledge (Sections 172-181) is a
specific type of bailment where goods are delivered as security for a debt or the performance of a promise,
giving the pledgee a right to retain the goods until the debt is repaid.
Agency
Sections 182-238 govern the relationship where one person (the agent) is employed to act for another (the
principal) in dealings with third parties. The Act covers how an agency is created (express or implied),
when an agent can appoint a sub-agent, how an agency can be revoked, and the respective rights and duties of
principal and agent -- including the agent’s duty to act within the scope of authority and the
principal’s duty to indemnify the agent for lawful acts done in the course of the agency. This chapter is
the statutory foundation underlying every Power of Attorney an NRI executes for use in India -- a POA holder
is, in Contract Act terms, an agent acting within the scope of authority the principal has granted, and acts
exceeding that scope do not bind the principal unless later ratified.
What is the difference between indemnity and guarantee?
An indemnity involves two parties, where one promises to compensate the other for loss. A guarantee
involves three parties -- the creditor, the principal debtor, and the surety -- where the surety promises to
perform the debtor’s obligation if the debtor defaults; the surety’s liability is secondary to the
principal debtor’s primary liability.
Can a bailee use the goods for their own purposes while holding them?
Not unless the bailment’s purpose or the parties’ agreement permits it -- a bailee who uses
bailed goods in a manner inconsistent with the terms of the bailment can be held liable for any resulting loss
or damage, even if the misuse itself did not directly cause the loss.
Can an agency be revoked at any time?
Generally yes, subject to giving reasonable notice and honouring obligations already undertaken with third
parties -- but an agency coupled with interest (where the agent has a personal interest in the subject matter)
cannot be revoked to the agent’s prejudice, per the exceptions built into the Act’s agency
provisions.
