All You Need to Know About Special Contracts

Contracts are an essential part of our daily lives and legal systems, serving as binding agreements between two or more parties. While most contracts are straightforward and general, some situations require agreements tailored to meet unique conditions. These are called special contracts. Special contracts go beyond the ordinary terms to address specific scenarios, providing detailed rights, obligations, and remedies for the parties involved.

What Are Special Contracts?

A special contract is a legally binding agreement designed to address unique circumstances or needs that cannot be adequately covered by general contract laws. These contracts are tailored for specific purposes and include terms and conditions that reflect the particular relationship or transaction between the parties.

In India, special contracts are governed by the Indian Contract Act, 1872, specifically under Sections 124 to 238. They are distinct from general contracts and include agreements like indemnity, guarantee, bailment, pledge, and agency.

Key Features of Special Contracts

Special contracts share some common features that make them distinct from ordinary agreements:

1. Tailored Agreements: Special contracts address specific needs and situations, unlike standard contracts that use generic terms.
2. Legal Recognition: They are explicitly recognised under contract law, ensuring enforceability in legal disputes.
3. Special Relationships: These contracts often involve unique relationships, such as principal-agent, bailor-bailee, or indemnifier-indemnified.
4. Focus on Equity: Courts often apply equitable principles to resolve disputes arising from special contracts, ensuring fairness.
5. Essentials of General Contracts Apply: Special contracts must fulfil the basic requirements of a valid contract, including offer, acceptance, consideration, free consent, and a lawful object.

Types of Special Contracts

The Indian Contract Act, 1872, categorises certain agreements as special contracts due to their specific nature and application. These include contracts of indemnity, guarantee, bailment, pledge, and agency. Each type of contract serves distinct purposes and addresses unique relationships between the parties involved. Below is a detailed explanation of these special contracts.

1. Contract of Indemnity

A contract of indemnity is an agreement where one party, called the indemnifier, promises to protect another party, the indemnified, from losses caused either by the indemnifier’s actions or those of a third party.

Example

An insurance policy is a classic example of a contract of indemnity. The insurer (indemnifier) agrees to compensate the insured (indemnified) for specific losses, such as those caused by accidents, fire, or theft.

Essentials of a Contract of Indemnity

1. Two Parties: The indemnifier and the indemnified.
2. Promise to Compensate: The indemnifier must assure protection against losses.
3. Loss Due to Human Action: The loss must result from human conduct and not natural causes, such as storms.

Rights of the Indemnified

The indemnified can recover:

• Damages: Amounts paid in lawsuits related to the indemnity.
• Legal Costs: Expenses incurred in legal proceedings.
• Compromise Amounts: Sums paid to settle disputes reasonably.

Rights of the Indemnifier

• Reimbursement: Recover amounts paid on behalf of the indemnified.
• Suing Third Parties: Take legal action against those causing the loss.

2. Contract of Guarantee

A contract of guarantee involves a promise by one party (the surety) to fulfil the obligations of another party (the principal debtor) to a third party (the creditor) if the principal debtor fails to meet their responsibilities.

Example

If a borrower takes a loan from a bank and a third person guarantees repayment, the guarantor (surety) is liable to pay if the borrower defaults.

Essentials of a Contract of Guarantee

1. Three Parties: The principal debtor, surety, and creditor.
2. Promise to Fulfill Obligations: The surety agrees to meet the debtor’s commitments in case of default.
3. Consideration for the Surety: The creditor must provide something of value that benefits the principal debtor.

Rights of the Surety

1. Against the Principal Debtor: Recover amounts paid on the debtor’s behalf.
2. Against the Creditor: Demand enforcement of terms against the debtor.
3. Against Co-Sureties: Share liability equally with other sureties.

Types of Guarantees

1. Specific Guarantee: Applicable to a single transaction or debt.
2. Continuing Guarantee: Extends to a series of transactions over time.

3. Contract of Bailment

A contract of bailment arises when one party (the bailor) delivers goods to another party (the bailee) for a specific purpose, under the agreement that the goods will be returned after the purpose is fulfilled or disposed of according to the bailor’s instructions.

Example

Leaving your clothes at a dry cleaner for cleaning is an example of bailment.

Essentials of a Contract of Bailment

1. Delivery of Goods: The goods must be handed over to the bailee.
2. Specific Purpose: Delivery is for a defined purpose.
3. Return of Goods: The goods must be returned or dealt with as per the bailor’s instructions.

Rights and Duties of the Bailor

1. Rights:
   • Terminate the Contract: If the bailee violates the terms of bailment.
   • Claim Profits: Recover any profits made by the bailee from the goods.
2. Duties:
   • Disclosure: Inform the bailee about known defects in the goods.
   • Reimbursement: Compensate the bailee for expenses incurred while preserving the goods.

Rights and Duties of the Bailee

1. Rights:
   • Retain Goods: Until dues or expenses are settled.
   • Recover Extraordinary Expenses: Incurred during the preservation of the goods.
2. Duties:
   • Reasonable Care: Protect the goods as per agreed terms.
   • Return Goods: Deliver them in the agreed condition once the purpose is fulfilled.

4. Contract of Pledge

A contract of pledge is a type of bailment where goods are delivered by the pawnor (pledgor) to the pawnee (pledgee) as security for the repayment of a debt or fulfilment of a promise.

Example

Pledging gold jewellery as collateral for a bank loan is a common example of a pledge.

Essentials of a Contract of Pledge

1. Delivery of Goods: Goods are transferred as security.
2. Purpose of Security: Delivery is for securing payment or performance.
3. Ownership Remains with Pawnor: Only possession, not ownership, is transferred to the pawnee.

Rights of the Pawnee (Pledgee)

1. Retention of Goods: Until the debt or obligation is settled.
2. Sale of Goods: After giving reasonable notice to the pawnor in case of default.

Duties of the Pawnee

1. Return of Goods: Upon repayment of the debt or fulfilment of the promise.
2. Reasonable Care: Protect the pledged goods from damage or loss.

Rights and Duties of the Pawnor (Pledger)

1. Rights:
   • Redemption: Reclaim the goods upon repayment of the debt.
2. Duties:
   • Repayment: Pay the debt or meet the obligation.
   • Compensation: Cover any expenses incurred by the pawnee for preserving the goods.

5. Contract of Agency

A contract of agency creates a relationship where one party (the agent) acts on behalf of another party (the principal) in dealings with third parties.

Example

A real estate agent negotiating a property sale for a homeowner is an example of an agency.

Essentials of a Contract of Agency

1. Agreement to Act: The agent agrees to act on behalf of the principal.
2. Representation: The agent represents the principal in dealings with third parties.
3. Authority: The agent acts within the authority granted by the principal.

Duties of the Agent

1. Best Interest: Act in the best interest of the principal.
2. No Conflict of Interest: Avoid situations where personal interests conflict with the principal’s interests.
3. Reasonable Care: Perform tasks diligently and skillfully.

Rights of the Agent

1. Remuneration: Receive agreed-upon payment for services.
2. Indemnity: Be compensated for losses or liabilities incurred while acting in good faith.
3. Retention: Retain goods until dues are cleared.

Liabilities of the Principal

1. Bound by Agent’s Acts: Held responsible for actions taken by the agent within the scope of authority.
2. Liable for Misrepresentation: Accountable for fraud or misrepresentation committed by the agent in the course of business.

Special Contracts in Everyday Life

Special contracts have practical applications across various domains:

1. Business Transactions:
   • Indemnity: Used in insurance policies.
   • Guarantee: Common in financial transactions like loans.
2. Personal Dealings:
   • Bailment: Occurs when leaving valuables for safekeeping, like in repair shops.
   • Pledge: Used in securing loans.
3. Professional Relationships:
   • Agency: Essential in employment, real estate, and corporate dealings.

Special Contracts and Contingent Contracts

Special contracts are sometimes confused with contingent contracts. While both involve specific conditions, they are distinct:

• Special Contracts: Governed by specific sections of the Indian Contract Act (124–238).
• Contingent Contracts: Defined under Section 31, where the contract depends on the occurrence of a future uncertain event.

Conclusion

Special contracts play a vital role in addressing unique and specific needs that general contracts cannot fulfil. By providing a tailored approach to agreements, they ensure clarity, fairness, and enforceability in various legal and business contexts. Whether it’s an insurance policy, a loan guarantee, or leaving goods for safekeeping, understanding the nuances of special contracts can help individuals and businesses safeguard their interests and meet their obligations effectively.