UNIT 1 CONTRACTS

INDEMNITY
 According to Section 124 of the Indian Contract
Act, 1872 a contract of indemnity means, “a
contract by which one party promises to save
the other from loss caused to him by the
conduct of the promisor himself or by conduct
of any other person”
 A contract where one party promises to save
the other from loss which may be cause, either
by the conduct of the promisor himself or by
the conduct of any other person.
 Section 124 recognizes only such contract as a
contract of indemnity where there is a promise
to save another person from loss which may be
caused by the conduct of the promisor himself,
or by conduct of any other person. It does not
cover a promise to compensate for loss not
arising due to human agency. Therefore, a
 contract of insurance is not covered by the
definition of Section 124. Such a contract does
not come within the purview of Section 124.
They are contingent contracts as defined in
Section 31.

RIGHT OF THE INDEMNITY HOLDER

In a suit against the indemnity holder, he may have

been compelled to pay damages, and incurred
costs, etc. In his own turn, he can bring an action
against the promisor(indemnifier) to recover
damages and costs, etc. paid by him, if the
indemnifier has promised the indemnity in such a
case. (Section 125)

When can an indemnifier be made liable? Can he

claim to be indemnified before he is indemnified?

 According to English Common Law, no action

could be brought against the indemnifier until
the indemnity holder had suffered actual loss.
This situation created a great hardship in those
cases where the indemnity holder was not in a
 position to meet the claim out of his pocket.
Relief was provided to the indemnity- holder in
such cases by the court of Equity. According to
the rules evolved by the court of equity, it was
no more necessary for the indemnity holder to
be demnified before he could be indemnified. In
other words, the indemnity holder can now
compel the indemnifier to save him from the
loss in respect of liability against which
indemnity has been promised.
 There has been a difference if opinion between
the various High Courts in India as to whether
the indemnity- holder can claim indemnity
before he has actually suffered the loss.
 The high courts of Lahore and Nagpur are of the
view that, a person must be demnified before
he can indemnified i.e., no indemnity can be
claimed until the indemnity – holder has
already actually suffered the loss. Whereas the
high courts of Bombay, Kolkata, Patna,
Allahabad are of in favor of the application of
law similar to the one’s recognized in England
by the court of Equity.
GUARANTEE

 Section 126 of the Indian Contract Act, 1872

defined a contract of guarantee as “a contract
to perform the promise, or discharge the
liability of a third person in case of his default”.
The section further provides that “the person
who gives the guarantee is called the “surety”,
the person in respect of whose default the
guarantee is given is called “principle debtor”,
and the person to whom the guarantee is given
is called the “creditor””.
 In every contract of guarantee, there are three
parties, the creditor, the principal debtor and
the surety. There are three contracts in a
contract of guarantee. Firstly, the principal
debtor himself makes a promise in favor of the
creditor to perform a promise, etc. Secondly,
the surety undertakes to be liable towards the
creditor if the principal debtor makes a default.
Thirdly, an implied promise by the principal
debtor in favor of the surety that in case the
surety has to discharge the liability of the
 default of the principal debtor, the principal
debtor may indemnify the surety for the same.

MAIN FEATURES OF CONTRACT OF GUARANTEE

1. The contract may be either oral or written

According to Section 126, a guarantee may be oral

or written. On this point, the position in India is
different from that in England. According to English
Law, for a valid contract of guarantee, it is
necessary that it should be in writing and signed by
the party to be charged therewith.

2. There should be a principal debt

A contract of guarantee pre – supposes a principal

debt or an obligation to be discharged by the
principal debtor. The surety undertakes to be liable
only if the principal debtor fails to discharge his
obligation.
 3. Benefit to the principal debtor is sufficient
consideration

As in any other contract, the consideration is also

needed for a contract of guarantee. For the surety’s
promise it is not necessary that there should be
direct consideration between the creditor and
surety, it is enough that the creditor had done
something for the benefit of the principal debtor.
Benefit to the principal debtor constitutes a
significant consideration to the surety for giving the
guarantee as mentioned under Section 127.

4. Consent of the surety should not have been

obtained by misrepresentation or concealment

The creditor should not obtain guarantee either by

any misrepresentation or concealment of any
material facts concerning the transaction. If the
guarantee has been obtained that way the
guarantee is invalid as explained in Section 143.
DIFFERENCE BETWEEN INDEMNITY AND
GUARANTEE

1. There are two parties in a contract of

indemnity, the indemnifier and the indemnity
holder. There are three parties in a contract of
guarantee, the creditor, the principal debtor,
and the surety.
2. Contract of indemnity consists of only one
contract under which the indemnifier promises
to indemnify the indemnity – holder in the
event of a certain loss. There are three
contracts in guarantee (as mentioned above)
3. The object of a contract of guarantee is the
security of the creditor. A contract of indemnity
is made to protect the promisee against some
likely loss
4. In a contract of guarantee, the liability of the
surety is only a secondary one. Surety’s liability
arises only when the principal debtor makes a
default. The liability of the indemnifier in a
contract of indemnity is a primary one. He
 undertakes to be liable when the contemplated
situation is there.
5. In a contract of guarantee, after the surety has
discharged his liabilities and paid to the
creditor, he steps into the shoes of the creditor
and he can realize the payments made by him,
from the principal debtor. In a contract of
indemnity, the loss falls on the indemnifier and,
therefore, after the indemnifier had
indemnified the indemnity – holder, he cannot
recover the amount from anybody.
6. In England, a contract of guarantee should be in
writing, whereas a contract of indemnity may
be either in oral or writing. There is no such
distinction in India. In India, whether it is a
contract of indemnity or guarantee , the same
may be either in oral or writing.
DISCHARGE OF SURETY FROM LIABILITY

When the liability of surety, which he had

undertaken under a contract of guarantee, is
extinguished or comes to an end, he is said to be
discharged from liability. The different modes are:

1. By revocation by the surety

 According to Section 130, “a continuing

guarantee may at any time be revoked by the
surety, as to future transaction, by notice to the
creditor”
 This can be done by notice to the surety to the
creditor in that regard. Once notice revoking
guarantee is issued, the liability of the surety
would fasten only up to that date and not
thereafter.
 When a transaction has already been made,
surety’s liability with regard to that transaction
cannot be revoked by a subsequent notice.
Revocation as to future transaction is possible,
when there are separate distinct transactions.
2. By surety’s death

 According to Section 131, “the death of the

surety operates, in the absence of any contract
to the contrary, as a revocation of a continuing
guarantee, so far as regards future transaction”.
 The effect of the death of the surety is that it
results in automatic revocation of the
continuing guarantee as to future transactions.
There may, however, be no revocation of
guarantee on the death of the surety, if there is
a contract to that effect.
 For example, if it is said that on the death of the
surety, his legal representative or somebody
else will be responsible for such liability. In such
a case, the guarantee is not revoked even if the
surety dies.

3. By variance in terms of the contract (Section

133)

 When the surety has undertaken liability on

certain terms, it is expected that they will
 remain unchanged during the whole period of
guarantee. If there is any variance in terms of
the contract between the principal debtor and
the creditor, without the consent of the surety,
the surety gets discharged as regards
transaction subsequent to such a change.
 The reason for such a discharge is that the
surety agreed to be liable for a contract which is
no more there, and he is not liable on the
altered contract because it is different from the
contract made by him.

4. By release or discharge of the principal debtor

 According to Section 134, “the surety is

discharged by any contract between the
creditor and the principal debtor, by which the
principal debtor is released, or by any act or
omission of the creditor, the legal consequence
of which is the discharge of principal debtor”
 It has already been noted that according to
section 128, the liability of the surety is co-
extensive with that of the principal debtor.
 Therefore, if by any contract between the
creditor and the principal debtor, the principal
debtor is released, or by any act or omission of
the creditor, the principal debtor is discharged,
the surety will also be discharged from his
liability accordingly.
 If there is no voluntary act of the creditor in the
discharge of the principal debtor, the surety
continues to be liable in spite of discharge of
principal debtor.

5. When creditor compounds with, gives time to,

or agrees not to sue the principal debtor

 According to Section 135, “a contract between

the creditor and the principal debtor by which
the creditor makes a composition with, or
promises to give time to, or not to sue, the
principal debtor, discharges the surety, unless
the surety assents to such contract”.
 Creditor compounding with the principal debtor
- when the creditor makes composition with the
principle debtor without the consent of the
 surety, this means variation in the original
contract. Its obvious consequence, therefore, is
the discharge of the surety from the liability.
 Creditor promising to give time to the principal
debtor – promise to give time to the principal
debtor means extending the period of payment
which was not contemplated in the contract of
guarantee. When the creditor gives time to
principal debtor without the consent of the
surety, the surety is discharged even though the
extension of time is for the benefit of the
surety.
 Creditor promising not to sue the principal
debtor – a contract between the creditor and
principal debtor, whereby the creditor promises
not to sue the principal debtor, also results in
the discharge of surety.

6. By creditor’s act or omission impairing surety’s

eventual remedy

Section 139 incorporates the rule that when the act

or omission on part of the creditor is inconsistent
with the interest of the surety, the same results in
impairing surety’s eventual remedy against the
principal debtor, the surety is discharged thereby.

CASE LAW: State of M.P v. Kaluram

The state of M.P made a contract for the sale of

“felled trees” with one Jagat Ram, who was the
highest bidder in the auction sale. The payment for
these trees was to be made by installments.
Kaluram was a surety for the payment by the
purchaser of the trees. The purchaser failed to pay
the second and subsequent installments. The state
of M.P did not take any steps to recover this
amount, nor did they stop the removal of the felled
trees on default of payment.
It was held that since the State Government had
failed to take necessary steps to recover the
amount from the purchaser by allowing him to take
away the trees, the surety’s remedy against the
purchaser(Jagat Ram) had thereby been impaired,
the surety(Kaluram) was discharged from his
liability.

7. By loss of the security by the creditor

 According to Section 141, the surety is entitled
to all the securities which the creditor has
against the principal debtor at the time when
the contract of suretyship is entered into. If the
creditor loses, or without the consent of the
surety, parts with such security the surety is
discharged to the extent of the value of the
security.
 It may be noted that if the creditor does not
lose the securities but they are lost without his
fault, the surety is not discharged thereby.
BAILMENT (Section 148)

 Bailment, involves the transfer of possession of

goods to a person, who holds the good either
for or at the direction of their owner, to whom-
they will be returned. Bailment is subject of
common public importance.
 It implies a sort of relationship in which the
personal property(moveable) of one person
temporarily goes into the possession of
another.
 The main characteristic of a bailment is that the
delivery of possession contemplated is for
temporary purpose. The delivery of good is
thus, made on one condition that the recipient
would ultimately restore them to the owner. In
bailment there must be delivery of possession
but not transfer of ownership.
 Bailment consists of delivery goods by one
person, who is generally the owner thereof, to
another person for some purpose. The goods
are to be returned to their owner after the
purpose is accomplished, or they are to be
 disposed of according to the directions of the
persons delivering them. In a contract of
bailment, the person who delivers the goods is
called the “bailor” and the person to whom the
goods are delivered is called the “bailee”.

ESSENTIALS OF BAILMENT

1. Delivery of goods for some purpose

 “Delivery” means transfer of possession of
goods from one person to another. Delivery
need not always be actual. It may sometimes be
a constructive or symbolic delivery. Section 149
recognizes other than actual delivery.
 CASE LAW: Jagdish Chandra Trikha v. Punjab
National Bank
The plaintiff’s father had entrusted a box containing
5600 grams of gold ornaments and jewelry to the
defendant Bank at Peshawar (now in Pakistan)
before the partition of the country. The jewelry box
was locked, wrapped and sealed when delivered. A
proper receipt describing the contents of the box
was given by the Bank. From Peshawar the box
came to Lahore branch of the bank and thereafter
to the Delhi branch. It was found that when the
jewelry box was delivered to the plaintiff in Delhi, it
was not in the same condition as it was delivered at
Peshawar. The Lahore branch of the bank had put
their own wrapper on the box and it was not locked
now.
The plaintiff claimed the gold ornaments and
jewelry deposited with the bank or their value
amounting to Rs.3,72,000. It was held that the
position of the bank was that of a bailee and it
failed in its duty to take care of the goods and
return them to the plaintiff. The Bank was held
liable to pay Rs.3,72,000 along with the simple
interest @ 12% p.a. from the date of the institution
of the suit till the date of the realization of the
amount.

2. Return of the goods after the purpose is

achieved
 The delivery of the goods, in a bailment, is only
for some purpose, e.g., for safe custody, for
carriage, or for repair, etc. When the purpose is
accomplished the goods are to be returned or
 otherwise disposed of according to the
directions of the person delivering them.
 As stated by Section 148, the goods “shall when
the purpose is accomplished, be returned or
otherwise disposed of according to the
direction of the person delivering them”. In
every bailment, the same thing is to be
returned either in the same form or in an
altered form. When the cloth is given for
tailoring, or gold for converted into ornaments,
or wheat for being converted into flour, there is
bailment in each case. When the money is
deposited in a bank, it is not bailment, because
the bank is not to return the same money to the
depositor.
 When the goods are delivered without an
intention to take them back and the exact cost
of the goods has been charged, it would be a
transaction of sale rather than a contract of
bailment.
DUTIES OF A BAILEE

1. Duty to take reasonable care of the goods

bailed

 According to Section 151, “in all cases of

bailment the bailee is bound to take as much
care of the goods bailed to him as the man of
ordinary prudence would, under similar
circumstances, take of his own goods of the
same bulk, quality, and value of the goods
bailed”.
 If the bailee has taken due care, he will not be
liable for any loss which may be caused to the
goods bailed to him. If due care has not been
taken and there is damage to the goods as
consequence of his negligence, he will be
answerable for the same.

2. Duty to not make unauthorized use of the

goods bailed
 When the goods have been bailed for a
particular purpose, the bailee is supposed to
use them only for that purpose and none else. If
he makes unauthorized use of the goods bailed,
there are two remedies available to the bailor:
i. The bailor may terminate the bailment:
According to Section 153, if the bailor finds
that the bailee is making such use of the
goods which is inconsistent with the
conditions of bailment, he may terminate the
bailment and claim back the goods.
ii. Damages for loss due to unauthorized use:
According to Section 154, if the bailee makes
such use of the goods which is contrary to the
conditions of bailment, he is liable to make
compensation to the bailor for any damage to
the goods due to unauthorized use.

3. Duty not to mix bailor’s goods with his own

goods
 According to Section 155, a bailee should not
mix the bailor’s goods with those of his own
without the bailor’s consent. If the bailor
consents, the bailee may mix the bailor’s goods
 with those of his own, and in such a case, the
bailor and the bailee shall have an interest in
the mixed goods in proportion to their
respective shares.
 When the bailee mixes the bailor’s goods with
those of his own without the consent of the
bailor, depending upon the nature of the goods,
there are two possibilities:
i. The mixed goods can be separated: According
to section 156, when the goods mixed can be
separated, the bailor and the bailee remain
the owners in accordance with their
respective shares. The bailee is responsible to
bear the expense of separation or division of
the goods and also for any damage arising
from the mixture.
ii. The mixed goods cannot be separated:
According to Section 127, in case the nature
of the goods is such that the bailor’s goods
cannot be separated from those of the bailee,
it is deemed to be the loss of goods and the
bailor can recover compensation for the same
from the bailee.
4. Duty to return the goods on the fulfillment of
the purpose

 According to Section 160, “it is the duty of the

bailee to return, or deliver the goods according
to the bailor’s direction, the goods bailed,
without demand, as soon as the time for which
they were bailed has expired or the purpose for
which they were bailed has been accomplished”
 According to Section 161, if the bailee is not in a
position to deliver back the goods, for instance,
when they are lost due to the fault of his
servants, the responsibility of such loss is that
of the bailee.
 A bailee is liable for the loss due to non- return
or non- delivery of goods if that is due to his
fault. A bailee is excused from returning the
subject- matter of the bailment to the bailor or
his agent where the subject- matter was taken
away from him by the authority of law
exercised through regular and valid law
proceedings.
 5. Duty to deliver to the bailor increase or profit
on the goods bailed

According to Section 163, “in the absence of

any contract to the contrary, the bailee is
bound to deliver to the bailor, or according to
his directions, any increase or profit which may
have accrued from the goods bailed”. for
instance, if A leaves the cow in the custody of B
to be taken care of. The cow has a calf. B is
bound to deliver the calf and the cow to A.

RIGHTS OF THE BAILEE

1. Right to recover necessary expenses incurred

on bailment

According to Section 158, when under a contract of

bailment, some remuneration is to be paid to the
bailee for services he renders in respect of them, he
has a right to recover the same, or to exercise the
right of lien in respect of such goods until he
receives the necessary payment.

2. Right to recover compensation from the bailor

According to Section 164, sometimes the bailor may

not be entitled to make the bailment, or to receive
back the goods. This may result in some loss to the
bailee. The bailee is entitled to recover from the
bailor such loss as may be caused due to the above
stated reason.

3. Right of Lien on the goods bailed

Lien is the right of the bailee under which the bailee

can retain the goods of the bailor, and refuse to
deliver them to the bailor, until his due
remuneration for services in respect of the goods
bailed or the amount due is paid. There are two
types of lien:
i. Particular Lien
According to Section 170, particular lien means the
right of the bailee to retain those goods which have
been bailed and in respect of which some service
involving the exercise of the labor or skill has been
rendered but the remuneration for the same has
not been paid.

ii. General Lien

According to section 171, general lien entitles the
bailee to retain goods of the bailor “for a general
balance of account”. According to this right, the
bailee may retain not only those goods of the bailor
in respect of which some particular services are
rendered, but also other goods in the possession of
the bailee belonging to the bailor.
The right of general lien has been conferred on the
following kind of bailees:

a) General lien of bankers

 According to Section 171, bankers can exercise
general lien i.e., they can retain as a security,
goods bailed to them, for a general balance of
account.
 When a banker has advanced money to
another, he has a lien on all securities which
come into his hands for the amount of his
 general balance, unless there is an express
contract or circumstances to the contrary.
 Thus, if cheques or other securities have been
deposited with a bank, he can exercise lien over
them. A banker can exercise lien over bills,
cheques, moneys entrusted or paid to him in his
character as a banker.

b) General lien of factors

A factor is an agent entrusted with the
possession of goods of his principal for selling
them. He has a right of general lien over the
goods belonging to his principal, which are in
his possession for the general balance of
account.

c) General lien of Wharfingers

Wharf means a loading stage alongside a sea or
a river for loading and unloading vessels.
Wharfinger means a person who owns, or has
the care of a wharf. A wharfinger has a lien over
the goods of his customer, until his wharfage,
i.e., the charges for the use of the wharf, are
paid to him.
 d) General lien of Attorneys
 According to section 171, the attorneys of high
court have also got a general lien. This right is
presumed to be available to the Advocates and
other legal practitioners. The right can be
exercised in respect of the documents etc.
belonging to the client which are with him.
 He can retain them until his fees for his
professional services and other costs and
expenses incurred by him for a client are paid to
him.

e)General lien of Policy- brokers

A policy broker means a person who acts as an
insurance agent to effect marine insurance. He can
exercise such a right until the balance of account
due to him from a client has been paid.

4. Right of suit against a wrongdoer

 When the goods have been bailed, if a third
person wrongfully deprives the bailee of their
use or possession, or causes an injury to the
 goods, the bailee can sue such third person for
wrong to the goods.
 It may be noted that not only the bailee but the
bailor can also bring an action against such third
party. If a person fraudulently or forcibly takes
away the goods from the bailee, the bailee has
a right to recover the same.

PLEDGE

 Pledge is defined under Section 172 of the

Indian Contract Act, 1872. ‘Pledge’ also called
‘Pawn’ is a kind of bailment of goods with a
special purpose. The goods pledged or pawned
serve as security for the payment of the debt or
performance of a promise. The person pledging
the goods is known as the ‘Pawnor’ and the
person with whom the goods are pledged is
known as the ‘Pawnee’ or ‘Pledgee’. The term
pledge literally means “thing given over as
security”.
 Essentials of a pledge:
 1. Delivery of goods
 Since pledge is a bailment, the delivery of the
goods from the pawnor to the pawnee is a
must. There must be a delivery of the goods i.e.,
the transfer of possession from one person to
another. The delivery may, however, be either
actual or constructive.

2. Purpose of pledge is security for payment of

debt
In a transaction of pledge, the purpose for which
the goods are bailed is that the bailed goods should
serve as a security for the payment of debt, or
performance of a promise.

WHO CAN PLEDGE

Ordinarily, it is the owner of the goods, or any

person authorized by him in that behalf, who can
pledge the goods. There are some exceptional
cases, where a person who is neither the owner nor
does he have a authority, can make a pledge:
 1. Pledge by a mercantile agent

According to Section 178, a mercantile agent having

possession of the goods with the consent of the
owner but having no authority to pledge them can
make a pledge provided the pledgee is acting in
good faith. For the application of these provision,
the following essentials are to be satisfied:
i. The pledge should be by a mercantile agent
ii. The mercantile agent should have obtained
the possession of the goods or documents of
title in his capacity as a mercantile agent.
iii. He must pledge the goods while acting in the
ordinary course of his business of a
mercantile agent.
iv. The pledge should have acted in good faith
and without notice that such a mercantile
agent did not have an authority to pledge.

2. Pledge by person in possession under a voidable

contract
Section 178- A recognizes another exception to the
rule. According to this exception, a person who has
obtained the possession of the goods under a
voidable contract, a pledge by him, before the
contract has been rescinded, to a pledgee acting in
goof faith and without any notice of the pawnor’s
defect in title, confers a good title on the pledgee.

3. Pledge by a person with a limited interest

A person having a limited interest in the goods, for

instance, a pledgee may pledge the goods.
According to section 179, where a person pledges
goods in which he has only a limited interest, the
pledge is valid to the extent of that interest.

4. Pledge by seller in possession after sale

After the seller has sold certain goods and the

property in respect of them has passed to the
buyer, the seller has no right to deal with such
goods.

5. Pledge by buyer in possession after sale

 A buyer of the goods, who may have obtained the
possession of the goods, but has not yet become
the owner of those goods, cannot deal with such
goods.

RIGHTS OF PLEDGEE OR PAWNEE

1. Right to retain the goods pledged

According to Section 173 and 174, the right of a

pawnee to retain the goods pledged shall be not
only for the payment of the debt, or the
performance of promise, but he can also exercise
the right for the interest on the debt and all the
necessary expenses incurred by him in respect of
the possession or for the preservation of the goods
pledged.

2. Right to recover extraordinary expenses

incurred by the pawnee.
According to section 175, the pawnee is entitled to
receive from the pawnor extraordinary expenses
incurred by him for the preservation of the goods
pledged. In addition to Section 173 where a pawnee
can retain the goods for various claims, Section 175
confers a right i.e., a right to receive from the
pawnor extraordinary expenses incurred by him for
the preservation of the goods.
For example: if the pawnee has to arrange for a
bank locker for the safety of the goods or he spends
some amount for insuring them against theft, etc.,
he can recover such expenses from the pawnor.

3. Right of suit to recover the debt, etc. and sale of

the pledged goods

According to Section 176, confers rights on the

pawnee, including the right of selling the pledged
goods, if the pawnor makes a default in payment of
the debt, or performance of the promise at the
stipulated time. This section confers the following
rights on the pawnee, on the pawnor’s default in
fulfilling his promise:
 i. He may bring a suit against the pawnor upon
the debt or promise and retain the goods
pledged as a collateral security,
ii. He may sell the thing pledged, on giving the
pawnor reasonable notice of the sale

AGENCY

 Section 182 defines the term “Agent” and

“Principal” as, “an agent is a person employed
to do any act for another or to represent
another in dealing with third person. The
person for whom such act is done, or who is so
represented, is called the principal”.
 Agency as is well- settled, is a legal concept,
which is employed by the court when it
becomes necessary to explain and resolve the
problems created by certain facts situation
 Use of the words “agent” for a person is not
conclusive proof of the fact that there is agency
in law between the parties. “The court must
 examine the true nature of the agreement and
the subsequent dealings between the parties
and then decide whether it established a
relationship of agency under the law.”
CASE LAW: Loon Karan v. John and Co.
It has been held that conferring a license on a
person by the government of assam to have the
exclusive right to purchase yarn and sell it to the
consumers, did not make such a person as
government’s agent even though he had been
described as such in the agreement. In this case, it
was found that in fact the person so authorized was
acting solely in his own name, and there was no
indication to suggest that he was an agent, even by
implication.

DIFFERENT KIND OF AGENTS

1. Auctioneers

An auctioneer is an agent whose business is to sell

goods or other property by auction i.e., by open
sale. The authority vested in him is to sell the goods
only, and not to give warranties on behalf of the
seller unless expressly authorized in that behalf. If
he has been authorized to sell the goods only
subject to a reserved price but he sells the same to
an innocent and bona fide buyer below the
reserved price, the buyer will get a good title in
respect of such goods.

2. Factors

A factor is a mercantile agent who is entrusted with

the possession of the goods for the purpose of sale.
He also has the power to sell goods on credit and
also to receive the price from the buyer. If the
owner has put a factor in possession of the goods or
the document of title but without authorizing him
to sell the goods, the sale of goods by him will
convey a good title to a bona fide buyer.

3. Brokers

A broker is an agent who has an authority to

negotiate the sale or purchase of goods on behalf of
his principal, with a third person. Unlike a factor, he
himself has no possession of the goods. He merely
makes the two parties to enter into a contract. He
gets his commission whenever any transaction
materializes through his efforts

4. Del Credere Agents

Generally, the function of an agent is over after a

contract is established between his principal and a
third person. He is not answerable to the principal
for the failure of the third person to perform the
contract. A Del Credere agent constitutes an
exception to this rule. He is a mercantile agent, who
on the payment of some extra commission, known
as del credere commission, guarantees the
performance of the contract by the third person. If
in such a case, the third person for instance, fails to
pay for the goods supplied to him, the principal can
bring an action against the del credere agent for the
same.
FEATURES OF CONTRACT OF AGENCY

1. The principal should be competent to contract

 According to Section 183, “any person who is of
the age of majority according to the law to
which he is subject and who is of sound mind,
may employ and agent”.
 It has already been noted that for the validity of
a contract, the parties have to be competent to
contract. Since in an agency the agent, creates a
contractual relationship between his principal
and the third persons, it is necessary that the
principal and the third person should be
competent to contract.
 If a person is not competent to contract and,
therefore, is incapable of making a contract, he
cannot make a contract through an agent
either. A person can do only such thing through
an agent which he is himself personally capable
of doing.
2. The agent may not be competent to contract
 According to Section 184, “as between the
principal and third person, any person may
become an agent but no person is not of the
age of majority and of sound mind can become
an agent, so as to be responsible to his principal
according to the provisions in that behalf herein
contained.
 The capacity of an agent would be looked from
two angles:
 Firstly, the capacity of an agent to act on behalf
of the principal, so as to bind the principal and
the third party, in this case any person may
become and agent. It means that even if an
agent is minor or otherwise incompetent to
contract, he is capable of creating a valid
contract between the principal and third
person.
 Secondly, his capacity to bind himself by a
contract between himself and his principal, in
this case it is necessary that the agent should be
competent to contract. Section 184, therefore,
provides that no person who is not of the age of
 majority and of sound mind ca become an
agent, so as to be responsible to his principal
according to the provisions in that behalf.

3. No consideration is necessary to create an

agency

 Section 185 provides that no consideration is

necessary to create an agency. From the very
nature of the contract of agency, the principal
agrees to be bound by the acts done by the
agent on his behalf and that serves as a
sufficient detriment to the principal. Moreover,
the principal’s duty to indemnify agent is also
there. The law does not require any
consideration as such for the validity of a
contract of agency.
 CASE LAW: Adamson v. Jarvis
The plaintiff, an auctioneer, sold certain cattle on
the instructions of the defendant. It subsequently
turned out that the livestock did not belong to the
defendant, but to another person, who made the
auctioneer liable and the auctioneer in his turn sued
the defendant for indemnity for the loss he had
thus suffered by acting on the defendant’s
directions.

MODES OF CREATION OF AGENCY

In the following situations, the principal is bound by

the acts of the agent i.e., in such situations, the
agent has the power to bind this principal:

1. Acts done with principal’s actual authority

A principal is bound by the acts done by his agent

with his authority. The authority of the agent may
be express or implied. Section 187 defined express
and implied authority as:
i. Express Authority: an authority is said be
express when it is given by words spoken or
written
ii. Implied Authority: an authority is said to be
implied when it is to be inferred from the
circumstances of the case.
 2. Agent’s authority in an Emergency

According to Section 189, agent’s authority in an

emergency is defined as, “an agent has authority in
an emergency to do all such acts for the purpose of
protecting his principal from loss as would be done
by a person of ordinary prudence in his own case,
under similar circumstances.

3. Principal bound by estoppel

According to Sec 237, sometimes the agent has

neither express nor implied authority to do an act
on behalf of the principal. But the principal by his
conduct creates an impression in the mind of the
third person that the agent has an authority to act
on his behalf. In such a case, the principal is liable
towards the third person for the acts done by the
agent, on the ground of the application of the law
of estoppel.

4. Principal bound by Ratification

It is noted that the agent act with the authority of
the principal and the principal can be liable for such
acts of the agent. But it is noted that when the
agent does an act for which he does not have any
authority, the principal is not bound for the same.
To this there is an exception when the principal may
be bound even for acts done without any authority
i.e., if the principal ratifies.

5. Agency is husband- wife relationship

 A married women cohabiting with her husband

is presumed to have the power to pledge the
credit of her husband for necessaries. She may
receive the supply of the goods and services as
necessary for herself, her children or for
domestic use and the husband is bound to pay
for them.
 If the man and women stay together and
appear to be husband and wife to a third
person, the women will be able to bind the
man in the same way as if she was his wife. The
implied authority to the wife to bind the
husband arises only if they stay together.
  Even though the husband and wife stayed
apart, due to any justifiable reason, the
common law recognized the right of the wife to
pledge the credit of the husband in respect of
necessaries suitable to the style of living to
which she was accustomed.

RATIFICATION

 Section 196 defined ratification as, when an act

has been done by one person on behalf of
another, though without his authority or
knowledge, the person on whose behalf the act
is done has the option of either disowning the
act or to ratify the act.
 If a person falsely represents that he is an
agent of another, the principal may ratify the
act even though the same was done without
his authority. On ratification, the principal
becomes bound by the act. If the principal does
not ratify act and disowns it, the agent is
personally liable to the third person who had
 entered into the contract on the basis of
misrepresentation.

ESSENTIALS OF VALID RATIFICATION

1. The act should be done on behalf of another

person.

According to Section 196, for the act to be ratified,

it is necessary that the same has been done on
behalf of the person who seeks to ratify the same.

2. Principal should be in existence and competent

to contract

When a principal ratifies an act, the validity of the

act relates back to the time of doing of the act by
the agent. So that ratification is valid, it becomes
necessary that the principal must have been in
existence, and also competent to contract at the
time the act was done. The act must have been
done when the principal was capable of making the
contract , if an agent purports to make a contract
on behalf of the principal, who at the time is himself
incapable of making that contract, the principal
cannot validate the contract by subsequent
ratification.

3. Ratification may be express or implied.

According to section 197, ratification may be

express of implied in the conduct of the person on
whose behalf the acts are done.

4. Ratification with full knowledge of the facts

According to Section 198, no valid ratification can

be made a person whose knowledge of the facts of
the case is materially defective.

5. Ratification of the whole transaction

According to Section 199, a person ratifying any

unauthorized act done on his behalf ratifies the
whole of the transaction of which the act formed a
part.
 6. Ratified act should not be injurious to a third
person

According to section 200, if ratification of an act

done without the authority of the person would
result in injury to the interest of a third person, the
ratification would be invalid.

7. Ratification within a reasonable time

In order that the ratification is valid, it is necessary

that the same must be done within a reasonable
time. Delay in ratification could prejudice the
interest of the third person.

DUTIES OF AGENT

1. Duty not to delegate his duties

When an agent has undertaken to perform certain

duties personally, he is not allowed to delegate his
duties to another person. The agent to which the
some authority has been delegated cannot delegate
that authority to someone else. When the principal
has reposed trust in a particular agent, the agent
cannot substitute another person in his place. In
other words, an agent cannot employ a sub- agent
to get the work done.

2. Duty to follow principal’s directions.

According to Section 211, an agent has a duty to

follow the directions given to him by the principal.
An agent is bound to conduct the business of his
principal according to the directions given by the
principal. If there is no such directions, the agent
should conduct the business according to the
custom which prevails in doing business of the same
kind at the place where the agent conducts such
business.

3. Duty to show proper skill and care

According to section 212, the agent is supposed to

take due care and act with reasonable diligence in
the matter of agency. The agent should conduct the
business of agency with as much skill as in generally
possessed by persons engaged in similar business.

4. Duty to render proper accounts (Section 213)

Another duty of the agent is to render proper

accounts to his principal on demand. This means
that he should maintain proper accounts of the
sums belonging to the principal, which are in his
hands, he should not misutilize or misappropriate
them, and on demand from the principal, he should
render true accounts.

5. Duty to communicate with principal

According to section 214, it is the duty of an agent,

in case of a difficulty to use all reasonable diligence
in communicating with his principal, and in seeking
to obtain his instructions.

6. Duty not to deal on his own account

An agent is under a duty not to deal on his own

account in the business of the agency, unless the
principal consents thereto. If in any transaction, an
agent deals on his own account without the
principal’s prior consent, the principal has the
following two rights:
i. To repudiate the transaction by showing that
the material fact was dishonestly concealed
from him by the agent or that the dealing of
the agent has been disadvantageous
ii. To claim from the agent any benefit which
may have resulted to him from the
transaction.

7. Duty to pay sums received for principal

Another duty of the agent is to pay to his principal

all sums received by him on principal’s account.
Before making such payments to his principal, the
agent is, however, entitled to make such deductions
out of the same which are lawfully due to him.
RIGHTS OF AGENT AND DUTIES OF PRINCIPAL

1. Right to remuneration

According to section 219, an agent’s remuneration

does not become due to him until the completion of
the act assigned to him. This rule is subject to any
special contract between the principal and agent. If
the parties have agreed that the agent will be
entitled to commission when he finds a purchaser,
who is ready and willing to purchase the property,
the agent becomes entitled to commission on doing
that.

2. Right to retain sums

The agent has a duty to pay to the principal all sums

received on principal’s account. But he also has a
right to retain, out of any sums received on account
of the principal, all money due to himself in respect
of advances made, or expenses properly incurred by
him in conducting such business and also such
remuneration as may be payable to him acting as
agent.
 3. Right to lien on principal’s property

According to section 221, in the absence of any

contract to the contrary an agent is entitled to
retain goods, papers and other property, of the
principal received by him, until the amount due to
himself for commission, disbursement and services
in respect of the same has been paid or accounted
for to him.

4. Right to be indemnified

According to section 222, the employer of an agent

is bound to indemnify him against the
consequences of all lawful acts done by such agent
in exercise of the authority conferred upon him.
According to section 223,the agent is also entitled
to indemnity against the consequences of an act
done in good faith, even though the act causes an
injury to the rights of a third person.
Section 224, however, makes it clear that when the
agent commits a crime at the instance of the
principal , the agent cannot claim indemnity from
the principal for the consequences of the crime.
 5. Right to compensation for damages due to
principal’s neglect

According to section 225, the principal must make

compensation to his agent in respect of injury
caused to such agent by the principal’s neglect.