Jurisprudence, Interpretation and General Laws · Contract Law

Indemnity, Guarantee, Bailment and Agency Explained

Updated 11 October 2026 · Fact-checked

Special contracts are contracts of indemnity (promise to save another from loss), guarantee (promise to perform a third person's promise on default), bailment and pledge (delivery of goods for a purpose), and agency (one person acts for another). Solve questions by identifying the contract, the parties, their rights and duties, and then concluding.

Understand Special Contracts: Indemnity, Guarantee, Bailment and Agency

The general law of contract applies to every agreement. Special contracts add extra rules because the relationship between the parties is unusual. You must first spot which special contract the facts describe.

A contract of indemnity (Section 124) is one where a promisor promises to save the other from loss caused by the promisor's own conduct or by the conduct of any other person. It has two parties: the indemnifier and the indemnified (indemnity-holder).

A contract of guarantee (Section 126) is a contract to perform the promise, or discharge the liability, of a third person in case of his default. It has three parties: the surety (gives the guarantee), the principal debtor (whose default is covered) and the creditor (to whom it is given). A guarantee may be oral or written. The key difference from indemnity: in guarantee there are three parties and the liability of the surety is secondary; in indemnity there are generally two parties and the liability is primary.

A bailment is delivery of goods by one person to another for some purpose, on a contract that the goods will be returned or disposed of as directed once the purpose is accomplished. A pledge is a bailment of goods as security for payment of a debt or performance of a promise. The pledger is the pawnor and the pledgee is the pawnee. These definitions come from the Act's provisions on bailment and pledge, which are not in the extracted text supplied here, so state them without section numbers unless you are certain.

An agency is where an agent acts on behalf of a principal and binds the principal to third parties. You must know how an agent is appointed, the agent's authority, the effect of sub-agents and the position when the principal is undisclosed.

Key rules to remember

Indemnity defined: Section 124: promise to save the other from loss caused by the promisor's conduct or by the conduct of any other person; Two-party relationship in the usual case: indemnifier and indemnified.
Guarantee defined: Section 126: contract to perform the promise, or discharge the liability, of a third person in case of his default; Three parties: surety, principal debtor, creditor. May be oral or written.
Discharge by variance: Section 133: variance in the contract between principal debtor and creditor, without surety's consent, discharges the surety as to transactions after the variance; Earlier transactions remain covered.
Discharge by release of principal debtor: Section 134: surety is discharged by a contract releasing the principal debtor, or by an act or omission of the creditor whose legal consequence is the discharge of the principal debtor; Both contract and act or omission count.
Composition, time or promise not to sue: Section 135: such a contract between creditor and principal debtor discharges the surety unless the surety assents; Surety's assent saves the guarantee.
Creditor impairing surety's remedy: Section 139: creditor's act inconsistent with the surety's rights, or omission of a duty owed to the surety, which impairs the surety's eventual remedy against the principal debtor, discharges the surety; Example: prepaying instalments without the surety's knowledge.
Surety's rights on payment: Section 140: on payment or performance of all he is liable for, the surety gets all the creditor's rights against the principal debtor; Applies once the debt is due or default has occurred.
Guarantee conditional on co-surety: Section 144: if a guarantee is given on condition that the creditor will not act until another joins as co-surety, it is invalid if that person does not join; Condition must be part of the contract.
Pledge by mercantile agent: Section 178: pledge by a mercantile agent in possession with owner's consent, in the ordinary course of business, is valid if the pawnee acts in good faith without notice of lack of authority; Agent must be in possession with the owner's consent.
Person named by agent: Section 194: where an agent with express or implied authority to name another person names him, that person is not a sub-agent but an agent of the principal for that part of the business; Contrast with an ordinary sub-agent.
Undisclosed principal: Section 231: principal may require performance; other party has against the principal the same rights as against the agent. Section 232: principal's performance is subject to the rights and obligations between agent and the other party; Set-off against the agent's debt is allowed.

How to solve Special Contracts: Indemnity, Guarantee, Bailment and Agency questions

Use the same sequence for any problem or theory question on special contracts.

1Identify the contract from the facts: loss-saving promise (indemnity), promise on a third person's default (guarantee), delivery of goods for a purpose (bailment or pledge), or acting for another (agency).
2Name the parties with their technical labels: indemnifier and indemnified; surety, principal debtor and creditor; bailor and bailee, pawnor and pawnee; principal, agent and third party.
3State the definition with the section number where you are sure of it.
4Apply the specific rule that fits: for guarantee, check Sections 133 to 135 and 139 for discharge; for agency, check authority, disclosure and sub-agency.
5Test the exact conditions: was there consent, assent, good faith, possession with owner's consent, or an impaired remedy?
6Write the conclusion clearly: who is liable, who is discharged, and who may recover from whom.

Quickest way: Three-question scan

When to use it: Use this when time is short and the facts look crowded.

Ask: how many parties, and whose default or conduct is covered? Three parties and a default point to guarantee.
For a guarantee, ask what the creditor did to the principal debtor: changed terms (Section 133), released, gave time or promised not to sue (Sections 134, 135), or harmed the surety's remedy (Section 139). Then ask whether the surety consented.
For agency, ask whether the third party knew of the agency and whether the agent had authority. Then write the answer in the order of provision, facts, conclusion.

Common mistakes in Special Contracts: Indemnity, Guarantee, Bailment and Agency

Treating indemnity and guarantee as the same because both protect against loss.
Both involve a promise to make good a loss, so they look alike.
Fix: Count the parties. Guarantee under Section 126 has surety, principal debtor and creditor, and covers a third person's default. Indemnity under Section 124 is a promise to save from loss.
Saying a variance discharges the surety from all liability.
Students remember only that variance discharges the surety.
Fix: Section 133 discharges the surety only as to transactions subsequent to the variance, and only if the variance was made without the surety's consent.
Forgetting the surety's assent in Section 135.
Students memorise that giving time discharges the surety and drop the exception.
Fix: Always add: unless the surety assents to the contract. If the facts show assent, the surety stays liable.
Calling every person appointed by an agent a sub-agent.
The word sub-agent is used loosely.
Fix: Under Section 194, a person named by an agent with express or implied authority to name one is an agent of the principal for that part of the business, not a sub-agent.
Missing the good faith and possession conditions in a pledge by a mercantile agent.
Students focus on the agent's apparent authority.
Fix: Section 178 needs possession with the owner's consent, an ordinary-course pledge, and a pawnee who acts in good faith without notice of lack of authority.
Ignoring the other party's set-off against an undisclosed principal.
Students assume the principal simply steps into the agent's shoes without limits.
Fix: Under Section 232, the principal obtains performance subject to rights and obligations between the agent and the other party, so the other party may set off the agent's debt.

Worked examples

Example 1

A guarantees to C the repayment of a loan of ₹5,00,000 that C will lend to B. After C lends the money, C and B agree, without A's knowledge, to extend the repayment date by one year. B then defaults at the extended date. Can C recover from A?

Show the solution

Provision: Section 126 makes A a surety, B the principal debtor and C the creditor. Section 135 provides that a contract between the creditor and the principal debtor to give time to the principal debtor discharges the surety, unless the surety assents.
Facts: C and B agreed to extend time without A's knowledge, so A could not have assented to it.
Analysis: The promise to give time falls squarely within Section 135, and there is no assent by A.
Conclusion: A is discharged from his suretyship, so C cannot recover the amount from A. C may still sue B.

Answer: C cannot recover from A. A is discharged under Section 135 because time was given to B without A's assent.

Example 2

X appoints Y as his agent to sell goods. Y sells goods to Z, who neither knows nor has reason to suspect that Y is an agent. Y owes Z ₹20,000. The sale price is ₹50,000. X demands the full price from Z. What is the position?

Show the solution

Provision: Section 231 allows the principal to require performance where the other party neither knew nor had reason to suspect the agency, but the other party has against the principal the same rights it would have had against the agent. Section 232 says the principal can obtain performance only subject to the rights and obligations between the agent and the other party.
Facts: Z did not know of the agency, and Y owes Z ₹20,000.
Analysis: Z may set off Y's debt of ₹20,000 against the price, in the same way as illustrated in Section 232.
Calculation: ₹50,000 − ₹20,000 = ₹30,000.
Conclusion: X can recover ₹30,000 from Z. If X had disclosed himself before the contract was completed, Z could refuse to perform only by showing he would not have contracted had he known the real position (Section 231).

Answer: X can compel Z to pay only ₹30,000, because Z is entitled to set off Y's debt of ₹20,000 under Section 232.

Exam tips

Begin every answer with the definition and section number you are sure of. Examiners reward the provision first, then facts, then conclusion.
For surety discharge problems, list Sections 133, 134, 135 and 139 mentally and match the creditor's act to one of them.
Always write the exceptions: surety's consent in Section 133 and assent in Section 135, good faith in Section 178.
For the difference between indemnity and guarantee, write points in two columns of text: parties, liability, nature of promise and the rights of the person who pays.
Give a section number only when you are sure. If unsure, state the rule in words.

Practice questions from Contract Law

Special Contracts: Indemnity, Guarantee, Bailment and 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, Guarantee, Bailment and Agency: frequently asked questions

What is the difference between indemnity and guarantee?

Indemnity under Section 124 is a promise to save another from loss. Guarantee under Section 126 is a contract to perform a third person's promise or discharge his liability on default, involving a surety, principal debtor and creditor. Guarantee has three parties, while indemnity usually has two.

What is the difference between bailment and pledge?

Bailment is delivery of goods for a purpose, to be returned or disposed of as directed afterwards. Pledge is a special bailment where the goods are delivered as security for a debt or the performance of a promise.

When is a surety discharged?

A surety is discharged by a variance in the contract without his consent (Section 133), by release of the principal debtor (Section 134), by composition, time or a promise not to sue without his assent (Section 135), or by the creditor impairing his eventual remedy (Section 139).

What rights does a surety get after paying the debt?

Under Section 140, once the debt is due or default has occurred, a surety who pays or performs all he is liable for is invested with all the rights the creditor had against the principal debtor.