CMA Intermediate · Business Laws and Ethics
Special Contracts: Indemnity, Guarantee, Bailment, Pledge and Agency
Special contracts are contracts with extra rules beyond the general law of contract: indemnity, guarantee, bailment, pledge and agency. To solve a question, name the contract, identify the parties, apply the rule to the facts, and state the result. For surety questions, check whether the surety consented to any change.
What this chapter covers
This chapter covers five special contracts under the Indian Contract Act, 1872. Indemnity and guarantee deal with protecting a person against loss or default. Bailment and pledge deal with goods handed over for a purpose or as security. Agency deals with a person acting for another and binding that person to third parties.
The chapter sits on top of the general law of contract you study first in the paper: offer, acceptance, consideration, capacity and free consent. Every special contract here is still a contract, so those basics apply. Pledge is a special kind of bailment, and a guarantee often has an agency or sale angle in problems, so the topics link to each other.
It also links to the rest of the paper. Sale of goods, partnership and company law all use ideas of agency and authority. If you understand agency well, those chapters become easier.
This chapter is full of short, rule-based situations, which suits both Section A MCQs and the descriptive questions. Examiners like it because one fact pattern can test a section directly: for example, whether a surety is discharged when the creditor gives time to the principal debtor without the surety's consent. The sections are precise and the answers are usually clear once you know the rule, so careful preparation here turns into reliable marks.
Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency: topics in the order to study them
- 1Contract of IndemnityIt is the simplest special contract and sets up the idea of protection against loss, which you then contrast with guarantee.
- 2Contract of Guarantee: Surety, Principal Debtor, CreditorLearn the definition in section 126 and the three parties before you study what releases the surety.
- 3Rights and Discharge of SuretyThis is the most tested part of the chapter, so study it right after the basics of guarantee while they are fresh.
- 4Bailment: Meaning, Duties and RightsBailment is the base concept that pledge is built on, so it must come before pledge.
- 5Pledge: Pawnor and PawneePledge is bailment of goods as security for a debt or promise (section 172), so it follows bailment and uses its terms.
- 6Agency: Creation and Kinds of AgentsStart agency with who an agent is and how the relationship begins, before looking at what the agent can do.
- 7Authority, Duties and Rights of AgentOnce you know the kinds of agents, you can understand the scope of their authority and the duties and rights on both sides.
- 8Termination of AgencyStudy it last, as it needs the whole agency picture, including what happens to sub-agents (section 210).
How to prepare Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency
Treat this chapter as a set of rules plus facts. Learn the rule in your own words, then practise applying it to short situations.
- Read each topic once for understanding and write a one-line definition for indemnity, guarantee, bailment, pledge and agency.
- Build a comparison note: indemnity versus guarantee (parties, liability, who is primary), and bailment versus pledge.
- For surety discharge, list the sections in a table of your own: variance (133), release of principal debtor (134), composition, time or promise not to sue (135), third-party agreement to give time (136), mere forbearance (137), creditor's act impairing remedy (139). Note the exception or condition in each.
- Learn the key conditions exactly, such as consent of the surety in section 135 and good faith without notice in section 178.
- Solve past MCQs and case-based problems. For each, write the party names, the rule, the section if you are sure of it, and the conclusion.
- For written answers, use a fixed format: rule, application to the facts, conclusion. This earns step marks even if your final view differs.
- Revise with a one-page sheet of definitions and discharge situations in the last days.
Common mistakes in Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency
Mixing up indemnity and guarantee.
Fix: Remember that guarantee involves three parties and is about the default of a third person. Write the party list first in every answer.
Saying the surety is discharged whenever the creditor delays.
Fix: Check the facts: a contract with the principal debtor to give time discharges the surety unless he assents, but mere forbearance to sue does not.
Forgetting the surety's consent or assent.
Fix: Underline the words 'without the surety's consent' or 'unless the surety assents' in sections 133 and 135 and look for consent in every fact pattern.
Treating pledge and bailment as the same thing.
Fix: Link purpose to the term: bailment for any purpose, pledge only as security for a debt or promise, with pawnor and pawnee as the parties.
Giving a section number from memory when unsure.
Fix: Quote a section only when you are certain. A correct rule stated in plain words earns marks, a wrong number can lose them.
Writing only the final answer in descriptive questions.
Fix: Use rule, application and conclusion in three short parts so the examiner can award step marks.
Last-day revision: Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency
- A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default (section 126).
- The three parties to a guarantee are the surety (gives it), the principal debtor (whose default is covered) and the creditor (to whom it is given).
- A guarantee may be oral or written (section 126).
- Variance in the contract terms without the surety's consent discharges the surety for transactions after the variance (section 133).
- Release of the principal debtor by contract with the creditor discharges the surety (section 134).
- Composition, giving time, or promise not to sue the principal debtor discharges the surety unless the surety assents (section 135).
- Time given by the creditor to a third person, not the principal debtor, does not discharge the surety (section 136).
- Mere forbearance to sue does not discharge the surety unless the guarantee says otherwise (section 137).
- A creditor's act inconsistent with the surety's rights that impairs the surety's eventual remedy discharges the surety (section 139).
- On paying all he is liable for, the surety gets all the rights the creditor had against the principal debtor (section 140).
- Pledge is bailment of goods as security for a debt or promise; the bailor is the pawnor and the bailee is the pawnee (section 172).
- Ending an agent's authority ends the authority of the sub-agents he appointed (section 210).
Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency practice questions
- Mehta Textiles, Surat, appoints Vikram to buy and sell goods on its behalf and Vikram receives no payment from the firm, and Vikram is a min…
- Under the Indian Contract Act, 1872, where an agent holding express or implied authority to name another person to act for the principal in …
- Ravi Traders supplies goods on credit to Mohan on the guarantee of Suresh. Later Mohan, being in financial trouble, enters into a contract w…
- Under a contract, Rao builds a godown for Sethi for a fixed price, with Sethi to supply the cement. Nair guarantees Rao's due performance. S…
- Under the Indian Contract Act, 1872, the bailment of goods as security for payment of a debt or performance of a promise is called a pledge.…
- Rohit lends his car to Vikas for a trip to Pune only. Vikas, without Rohit's permission, uses it to carry goods for his business, and the ca…
- Under the Indian Contract Act, 1872, which statement about the form of a contract of guarantee is correct?
- Under Section 125 of the Indian Contract Act, 1872, an indemnity-holder sued by a third party in respect of a matter covered by the indemnit…
Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency: frequently asked questions
What is the difference between indemnity and guarantee?
A guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default, and it has three parties: surety, principal debtor and creditor. Indemnity is a promise to protect another against loss and usually involves two parties. Study both together and compare them.
When is a surety discharged?
The Act lists several situations. Examples are a variance in the contract terms without the surety's consent, release of the principal debtor, and a contract to give time or not to sue without the surety's assent. A creditor's act that impairs the surety's eventual remedy also discharges the surety.
Does the creditor's delay in suing discharge the surety?
No, not by itself. Mere forbearance to sue the principal debtor does not discharge the surety unless the guarantee provides otherwise. It is different when the creditor makes a contract with the principal debtor to give time.
What is a pledge?
A pledge is the bailment of goods as security for payment of a debt or performance of a promise. The bailor is the pawnor and the bailee is the pawnee.
Should I memorise section numbers for this chapter?
Learn the main ones for guarantee, such as 126 and 133 to 140, because they help you structure answers. Always focus on the rule and its conditions first. Quote a number only if you are sure of it.