BL/U2 Topic 1 Contingent contract

Contracts are of different types. Since people can get into various kinds of agreement for performance or non-
performance of certain acts. One way of understanding contracts is by dividing them into two types: Absolute
and Contingent. Let us take a detailed look at contingent contracts.

An absolute contract is one where the promisor performs the contract without any condition. Contingent
contracts, on the other hand, are the ones where the promisor performs his obligation only when certain
conditions are met.

If you look at the contracts of insurance, indemnity or guarantee, they have one thing in common – they create
an obligation on the promisor if an event which is collateral to the contract does or does not happen.

For example, in a life insurance contract, the insurer pays a certain amount if the insured dies under certain
conditions. The insurer is not called into action until the event of the death of the insured happens. This is a
contingent contract.

Under Section 31 of the Indian Contract Act, 1872, contingent contracts are defined as follows: “If two or more
parties enter into a contract to do or not do something, if an event which is collateral to the contract does or
does not happen, then it is a contingent contract.”

Example: Sam is a private insurer and enters into a contract with Raj for fire insurance of Raj’s house.
According to the terms, Sam agrees to pay John an amount of Rs 5 lakh if his house is burnt against an annual
premium of Rs 5,000. This is a contingent contract.

Here, the burning of the house is neither a performance promised as a part of the contract nor a consideration.
Sam’s liability arises only when the collateral event occurs.

Essentials of Contingent Contracts

1) Depends on happening or non-happening of a certain event

The contract is contingent on the happening or the non-happening of a certain event. These said events can be
precedent or subsequent, this will not matter. Say for example Peter promises to pay John Rs 5,000 if the
Rajdhani Express reaches Delhi on time. This is a contingent event.

2) The event is collateral to the contract

It is important that the event is not a part of the contract. It cannot be the performance promised or
a consideration for a promise.

Peter enters into a contract with John and promises to deliver 5 television sets to him if Brazil wins the FIFA
World Cup provided John pays him Rs 25,000 before the World Cup kicks-off. This is a contingent contract
since Peter’s obligation arises only when Brazil wins the Cup which is a collateral event.

3) The event should not be a mere will of the promisor

The event cannot be a wish of the promisor. Say for example Peter promises to pay John Rs 5,000 if Argentina
wins the FIFA World Cup provided he wants to. This is NOT a contingent contract. Actually, this is not a
contract at all.

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4) The event should be uncertain

If the event is sure to happen, then the contract is due to be performed. This is not a contingent contract. The
event should be uncertain.

Peter promises to pay John Rs 500 if it rains in Mumbai in the month of July 2018. This is not a contingent
contract because in July rains are almost a certainty in Mumbai.

Enforcement of Contingent Contracts

Sections 32 – 36 of the Indian Contract Act, 1872, list certain rules for the enforcement of a contingent contract.

Rule #1: Contracts Contingent on the happening of an Event

A contingent contract might be based on the happening of an uncertain future event. In such cases, the promisor
is liable to do or not do something if the event happens. However, the contract cannot be enforced by law unless
the event takes place. If the happening of the event becomes impossible, then the contingent contract is void.
This rule is specified in Section 32 of the Indian Contract Act, 1872.

Rule #2: Contracts Contingent on an Event not happening

A contingent contract might be based on the non-happening of an uncertain future event. In such cases, the
promisor is liable to do or not do something if the event does not happen. However, the contract cannot be
enforced by law unless happening of the event becomes impossible. If the event takes place, then the contingent
contract is void. This rule is specified in Section 33 of the Indian Contract Act, 1872.

Rule #3: Contracts contingent on the conduct of a living person who does something to make the event or
conduct as impossible of happening

Section 34 of the Indian Contract Act, 1872 states that if a contract is a contingent upon how a person will act at
a future time, then the event is considered impossible when the person does anything which makes it impossible
for the event to happen.

Rule #4: Contracts Contingent on an Event happening within a Specific Time

There can be a contingent contract wherein a party promises to do or not do something if a future uncertain
event happens within a fixed time. Such a contract is void if the event does not happen and the time lapses. It is
also void if before the time fixed, the happening of the event becomes impossible. This rule is specified in
Section 35 of the Indian Contract Act, 1872.

Rule #5: Contracts Contingent on an Event not happening within a Specific Time

Contingent contracts might be based on the non-happening of an uncertain future event within a fixed time. In
such cases, the promisor is liable to do or not do something if the event does not happen within the said time.
The contract can be enforced by law if the fixed time has expired and the event has not happened before the
expiry of the time. Also, if it becomes certain that the event will not happen before the time has expired, then it
can be enforced by law. This rule is specified in Section 35 of the Indian Contract Act, 1872.

Rule #6: Contracts Contingent on an Impossible Event

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If a contingent contract is based on the happening or non-happening of an impossible event, then such a
contract is void. This is regardless of the fact if the parties to the contract are aware of the impossibility or
not. This rule is specified in Section 36 of the Indian Contract Act, 1872.

BL/U2 Topic 2 Implied contract

An implied agreement is an obligation between two or more parties in the absence of a written contract.

An implied agreement is an obligation between two or more parties in the absence of a written contract, based
on the interest of fairness implied by circumstance or conduct. In some cases, an implied warranty agreement is
provided by law, such as the guarantee you receive that a new product you purchase will work as expected. In
others, contracts are implied by fact because both parties assumed that an agreement existed and acted as such.
Although it’s beneficial to document an agreement with a written contract, implied agreements may also be
legally binding.

Implied-in-Fact Contracts

One example of an implied-in-fact contract is when you take your pet to the veterinarian. The doctor’s actions
in establishing a practice imply that he or she will provide the best possible medical treatment of the animal in
exchange for a fee. This contract is breached if he or she fails to do so or if you do not pay for the services
rendered.

In another example, a neighborhood boy shovels an older man’s walk each time it snows, and each time the
man gives him $10. After this has occurred four or five times, the man stops paying. If the boy were to bring a
case to court, the judge would likely rule in his favor because both parties implied a contract by the fact of their
initial actions. Courts will look at the behavior pattern of both parties to determine whether an implied-in-fact
contract exists.

If you sit down in a restaurant and order a meal, you have entered an implied-in-fact contract. Your actions
indicate that you are purchasing food for the price indicated on the menu and will be responsible for paying the
bill. This is legally binding even though you didn’t sign anything.

Although this type of contract holds up in court, both parties must assent by their actions for it to be valid. What
qualifies as assent varies depending on the circumstances. For example, if you are a freelance writer and your
client mentions another component they want to add to the project, it’s best to get the specifics and cost in
writing. Otherwise, they may not be required to pay for it if you deliver it without clear assent. On the other
hand, if you fail to deliver it, you may be seen as in breach of contract if the client believes you have agreed to
complete the work in question.

Implied-in-Law Contracts

This type of contract is automatically established by the law imposed in a situation between two parties even if
they don’t intend to enter an agreement. If one party receives unjust benefits to another party’s
detriment, restitution must be paid for the goods, services, or other benefits in question.

Returning to the veterinarian example, let’s assume you were walking your dog in the park when the animal
began to choke. The vet, who happens to be nearby, performs the Heimlich maneuver and saves the dog. The
vet then sends you a bill, which you are obligated to pay for services rendered under an implied-in-law contract.

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 When implied-in-law contracts are heard in court, the law will require an individual to uphold his or her end of
the bargain even unwillingly. In the example above, you are unjustly enriched by the veterinarian’s rescue of
your dog and must make restitution for the services he or she provided.

A similar scenario occurred when a writer claimed that the NBC show Ghost Hunters used a script that he had
submitted without paying him for the work. The courts found in his favor, noting that an implied contract exists
between a writer submitting work with the expectation they would be paid for its use and the studio that uses it.

Oral Contracts

In most cases, oral contracts are treated as valid by the courts. Although specific laws vary by state, in most
cases the following types of contracts must be written:

 Land or real estate sales

 Promissory notes for significant debt
 Projects that last longer than a year
 Goods costing more than a specific amount
 Sale of certain kinds of goods

However, if a dispute arises, a written contract has more weight than a spoken one. It can be difficult to capture
specifics in an oral agreement.

BL/U1 Topic 5 Quasi Contract

An agreement enforceable by law is a contract but it is not mandatory that all the contracts are made by the
parties and with the proper procedure which includes an offer, acceptance, and consideration. Sometimes
contracts are made in the form of obligations imposed by courts. These contracts are called Quasi-contracts.
Chapter 5 of the Indian Contract Act, 1872 deals with quasi-contracts.

A contract when parties have not previously decided obligations on each other is a quasi-contract. These
contracts come in existence when there is a dispute with regards to payment for goods and for services
provided. The aim of these contracts is to prevent one party from getting unfair benefit which he doesn’t
deserve. Quasi-contracts works on the maxim “No man must grow rich out of other’s loss”. It follows the
principle of justice, equity and good conscience. Quasi Contracts are generally known as constructive or
implied-in-law contracts.

Let’s take a look at an example of Quasi Contracts

Seema bought a cake. The shop seller promised to deliver it to Seema’s home. Later, a delivery boy delivered
the cake to Megha’s house. Megha, believing that it is her birthday gift, consumed the cake. Seema and Megha
were not in a binding contract but here the court may impose an obligation on Megha to return or pay for the
cake.

Theory of Implied Contract

Quasi-contracts are generally based on the theory of implied contracts. Implied contracts are not written
contracts, they come into existence due to the action of the parties.

Illustration

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A buys a refrigerator from B. The implied contract between A and B is that the refrigerator is fit to keep food
cool. If the refrigerator is not capable of doing that then A is entitled to either return it or change it with any
other working refrigerator.

Theory of Unjust Enrichment

Quasi-contracts are based on the theory of unjust enrichment, which says that nobody must enrich or get
benefited at the expense of others. If such a condition arises then the person who got benefited must pay to the
other.

Illustration
A bought a laptop from B. while doing online payment A mistakenly added a wrong account number and the
whole amount for laptop got transferred to C’s account. C got benefited at the expense of A, or we can say that
C got unjustly enriched at the expense of A.

Let’s take a look at the situations defined in Indian Contracts Act, 1872 when can Quasi Contract be made.

Section 68 to 72 deals with these conditions

Section 68
Claims for necessaries supplied to a person incapable of contracting, or on his account

Section 11 of the act says that every person is allowed to enter into a contract who is of the age of majority,
who is of sound mind and not disqualified from contracting from any law to which he is subject.

What is the majority age?

Section 3(1) of The Majority Act, 1875 says that every person who is domiciled in India shall attain the age of
majority after completing the age of eighteen years.

In simple words, a person who hasn’t attained the age of majority/ is a minor or a person who is of unsound
mind can’t enter into a contract but under some circumstances, these incapable persons are liable to fulfill the
conditions of a contract which actually arose due to consequences of a quasi-contract.

Section 68 of the Act says that if a person supplies some life necessaries to a person who is incapable of
entering into a contract then the supplier is entitled to be reimbursed from the property of that incapable person.

Section 69
Reimbursement of the person paying money due by another in payment of which he is interested

Section 69 says that if a person pays an amount which another person is bound to pay then the first person is
entitled to be reimbursed by the other person.

Section 70
Obligation of person enjoying benefit of non-gratuitous act

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Article 70 of the Act says that if a person lawfully does something for another person or delivers something to a
person without an intention to do such act out of ‘kindness’, and another person enjoys the benefit thereof, the
latter is liable to pay for the benefit he has enjoyed.

Principle behind this section is that no person shall enjoy the benefit of any other person’s property. If one does
then he/she is bound to pay for the benefit.

Section 71
Responsibility of finder of goods

Section 71 says that if a person finds something which he knows belongs to someone else, the person has the
same responsibility as that of a bailee.

BL/U2 Topic 5 Contract of indemnity

A contract of indemnity is one of the most important forms of commercial contracts. Several industries, such as
the insurance industry, rely on these contracts. This is because of the nature of these contracts. They basically
help businesses in indemnifying their losses and, therefore, reduce their risks. This is extremely important for
small as well as large businesses.
Contract of Indemnity
A contract of indemnity basically involves one party promising the other party to make good its losses. These
losses may arise either due to the conduct of the other party or that of somebody else.

To indemnify something basically means to make good a loss. In other words, it means that one party will
compensate the other in case it suffers some losses.

For example, A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in and promises to
indemnify B’s losses if A fails to so deliver the goods. This is how B and C will enter into contractual
obligations of indemnity.

A contract of insurance is very similar to indemnity contracts. Here, the insurer promises to compensate the
insured for his losses. In return, he receives consideration in the form of premium. However, the Contract Act
does not strictly govern these kinds of transactions. This is because the Insurance Act and other such laws
contain specific provisions for insurance contracts.

Parties under Indemnity Contracts

There are generally two parties in indemnity contracts. The person who promises to indemnify for a loss is the
Indemnifier. On the other hand, the person whose losses the indemnifier promises to make good is the
Indemnified. We can also refer to the Indemnified party as the Indemnity Holder. For example, in the earlier
example, C is the Indemnifier and B is the Indemnity Holder.

Nature of Indemnity Contracts

An indemnity contract may be either express or implied. In other words, parties may expressly create such a
contract as per their own terms. The nature of circumstances may also create indemnity obligations impliedly.
For example, A does an act at the request of B. If B suffers some losses and A offers to compensate him, they
impliedly create an indemnity contract.

Rights of an Indemnity Holder

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When parties expressly make a contract of indemnity, they can determine their own terms and conditions.
However, sometimes they may not do so. In such a case, the indemnity holder can enforce the following rights
against the indemnifier:

1) The indemnifier will have to pay damages which the indemnity holder will claim in a suit.

2) The indemnity holder can even compel the indemnifier to pay the costs he incurs in litigating the suit.

3) If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount.

Contract of Guarantee
Apart from indemnity contracts, the Contract Act also governs contracts of guarantee. These contracts might
appear similar to indemnity contracts but there are some differences between them.

In guarantee contracts, one party contracts to perform a promise or discharge a liability of a third party. This
will happen in case the third party fails to discharge its obligations and defaults. However, the burden of
discharging the burden will first lie on the defaulting third party.

The person who gives the guarantee is the Surety. On the other hand, the person for whom the Surety gives the
guarantee is the Principal Debtor. Similarly, the person to whom he gives such a guarantee is the Creditor.

Differences between Indemnity and Guarantee

There are some important differences between the contracts of indemnity and guarantee.

Firstly, there are just two parties in indemnity, while there are three in contracts of guarantee.

Secondly, in a guarantee, there is an existing debt/duty which the surety guarantees to discharge. On the other
hand, liability in indemnity is contingent and may not arise at all.

Thirdly, an indemnifier might act without the debtor’s behest, while a surety always waits for the principal
debtor’s request.

Finally, the liability of an indemnifier towards the indemnity holder is primary. Whereas, in guarantee, the
surety’s liability is secondary. This is because the primary liability lies on the principal debtor himself.

BL/U2 Topic 1 Purpose and Meaning of the Contract of the Guarantee

Section 126 of Indian Contract Act defines Contract of guarantee. It defines a contract of guarantees a
contract to perform the promise or discharge the liability of a third person in case of his default

The person who gives the guarantee is called “surety”. The person of whose default the guarantee is given is
called the “Principal debtor”. The person to whom the guarantee is given is called the creditor.

Contract of guarantee can be of two types. It can be oral or written. However, for a contract to form in between
the parties there should be meeting of minds that means all three parties should be privy to the contract.
Contract of guarantee is a promise to answer for the payment of the debt that the principal debtor takes from the
creditor or the performance of some duty. IN case the principal debtor fails who is in the first instance liable to
pay or perform. Therefore, the primary liability to pay is of the principal debtor. Whereas, the secondary
liability is of the Surety i.e. when the principal debtor fails to pay, the surety comes into role.
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 Therefore, the contract of guarantee is to indemnify if principal debtor fails to fulfil his promise. In this
indemnify is not equal to the contract of indemnify in Section 124 of ICA.

Continuing Guarantee
Section 129 of ICA defines continuing guarantee. A guarantee which extends to a series of transactions is called
continuing guarantee. It is not confined to a single transaction. In this guarantee, surety is liable to pay the
creditor for all the transactions. However, it is very important to find out if the guarantee is a continuing one or
not.

Difference between continuing guarantee and simple guarantee

 A continuing guarantee can be revoked by the surety any time either by the notice to the creditor or until the
surety’s death. Whereas, simple guarantee can not be revoked in any circumstances.
 In continuing guarantee, the transaction can go for long period of time therefore the surety will be held liable
for long time as well whereas in simple guarantee the surety liability is over when the debt is paid or the
performance is done.

To understand the nature of a guarantee, you must look at :

 The intention of the parties as expressed by the language in the contract.

o surrounding circumstances to see what was the subject matter which the parties examine.

Example of a continuing guarantee: A in consideration that B will employ C in collecting the rents of B’s
zamindari, promises B to be responsible to the amount of Rs 5000 for the due collection and payment by C of
those rents. This is a continuing guarantee.

Section 130 of ICA explains the revocation by notice. A continuing guarantee may be revoked anytime by the
surety for the future transactions only by notice to the creditor.

The main ingredients in this section is :

 As to future transactions
 Notice to the creditor

Continuing guarantee extends to a series of transactions, surety has a right to withdraw such guarantee. As soon
as the surety sends the notice of revocation to the creditor, the surety does not remain liable for any transaction
that happens after he has given notice, however, the surety continues to remain liable for any transactions that
has already taken place. If the mode of revocation by notice is mentioned in the contract, then notice must be
given in that mode only and if no mode is given in the contract then the notice may be given in any form.

Section 131 of ICA explains the revocation by death of surety. The liability for any transactions that took place
prior to the death of the surety will be borne by his heirs. This contract could be implied from the
circumstances.

Essentials of a Contract of Guarantee

1. Concurrence of All the Parties

All the three parties namely, the principal debtor, the creditor and the surety must agree to make such a
contract.

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2. Liability

In a contract of guarantee, liability of the surety is secondary i.e., the creditor must first proceed against the
debtor and if the latter does not perform his promise, then only he can proceed against the surety.

3. Existence of a Debt

A contract of guarantee pre-supposes the existence of a liability, which is enforceable at law. If no such liability
exists, there can be no contract of guarantee. Thus, where the debt, which is sought to be guaranteed is already
time barred or void, the surety is not liable.

4. Consideration

There must be consideration between the creditor and the surety so as to make the contract enforceable. The
consideration must also be lawful. In a contract of guarantee, the consideration received by the principal debtor
is taken to be the sufficient consideration for the surety.

Anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration to
the surety for giving the guarantee

– Sec. 127 of Indian Contract Act, 1872..

Thus, any benefit received by the debtor is adequate consideration to bind the surety. But past consideration is
no consideration for a contract of guarantee. There must be a fresh consideration moving from the creditor.

5. Writing not Necessary

A contract of guarantee may either be oral or written. It may be express or implied from the conduct of parties.

6. Essentials of a Valid Contract

It must have all the essentials of a valid contract such as offer and acceptance, intention to create a legal
relationship, capacity to contract, genuine and free consent, lawful object, lawful consideration, certainty and
possibility of performance and legal formalities.

7. No Concealment of Facts

The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee
obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by
the concealment of material facts.

8. No Misrepresentation

The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract of
guarantee is not a contract of uberrimae fidei i.e., of absolute good faith, and thus, does not require complete
disclosure of all the material facts by the principal debtor or creditor to the surety before he enters into a
contract. But the facts, that are likely to affect the extent of surety’s responsibility, must be truly represented

BL/U2 Topic 6 Bailment and its kind

Contract of bailment and pledge are different from each other. According to section 148 of The Indian Contract
Act, 1872, Bailment means delivery of goods from one person to another person for some purpose. On the
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 accomplishment of such purpose, the person receiving the goods returns or otherwise disposes of them as per
the instructions of the person delivering them. The person who delivers the goods is known as bailor. The
person to whom such goods are delivered is known as bailee.

Gratuitous Bailment
In this type of bailment, neither the bailor nor the bailee receives any remuneration. Such a bailment may be for
the exclusive benefit of either the bailor or the bailee. However, it terminates on the death of either the bailor or
the bailee.

Section 159 states that in the case of the gratuitous bailment, the bailor or the lender may require the bailee to
return the goods at any time, even before the expiration of the period of lending. Also, he can do so even before
the fulfillment of the purpose of bailment.

However, if the bailee or the borrower incurs any loss due to this act of the bailor, the bailor needs to indemnify
him for the loss or damages.

Bailment for Reward

It is for the mutual benefit of both the bailor and the bailee. For example, A hands over his goods to B for
transporting them to Delhi. A has the benefit of transportation and B gets transportation charges. Thus, both of
them are benefitted.

There are three different types of bailments:

1. A Bailment that Benefits Both the Bailor and Bailee: An example of this would be parking your car in a paid
parking lot. You would get the benefit of parking your car and the owner of the lot would get the benefit of the
fee that is paid. A bailee can face liability for damaging the bailed items if they were negligent.
2. A Bailment that Only Benefits the Bailor: This is referred to as a gratuitous bailment. Free valet service
would be an example of this because the valet service (bailee) would not be receiving compensation for parking
your car. A bailee can face liability for damaging the bailed items if they have been grossly negligent or acted
in bad faith.
3. A Bailment that Only Benefits the Bailee: A common example of this would be checking out a book or
movie from the library. You would be the bailee in this situation because you would be taking the book or
movie. The library (bailor) would receive no benefit from loaning out the book, but would still expect it to be
returned at the end of the rental period. In this scenario, a bailee can face liability for basically any damage
done to the bailed item. This is the highest standard of care required out of the three categories.

When is a Bailment Terminated?

A bailment can be terminated in the following situations:

 When the Purpose of the Bailment has ended: For example, if you remove your parked car from the lot it
was parked in, the bailment will be terminated.
 At the End of a Fixed Term: If the parties agree that an item will only be bailed for a specific period of time,
the bailment will be terminated when that time frame ends.
 If the Bailed Property is destroyed: If there isn’t a property for the bailment, then the bailment will naturally
end.
 If One Party Gives Notice of Termination: This only applies to bailments that have been set for an indefinite
period.

What Happens if the Item Isn’t Claimed By the Bailor?

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 If you are the bailee and the bailment period is over, then the bailor has a right to reclaim the item. But if the
bailment ended after a fixed term, and the bailor hasn’t reclaimed the item, then the bailee has a right to say that
the item has been abandoned.

If the bailor has made not attempts to reclaim the property and it was clearly understood that at a fixed time, the
bailor would be the one to reclaim it, then common law applies. This means that the bailee can claim the
property as their own.

However, the bailee should make a good faith effort to not conceal the property or to deceive the bailor in
hopes that the property would be considered abandoned.

BL/U2 Topic 7 Lien

Right of Lien
Lien is the right of an individual to retain goods and securities in his possession that belongs to another until
certain legal debts due to the person retaining the goods are satisfied. Lien does not endorse a power of sale but
only to retain the property. This varies from other forms of charges as it does not arise from an implied or
express agreement. Whereas, it arises from the dealings between the parties.

Conditions for Exercising Lien

There are three important conditions to exercise the right of lien. These are

 The goods for which this right is to be executed has to be possessed by the creditor who exercises it.
 There has to be a lawful debt due to the person in possession of the goods by the owner.
 There should not be any contract to the contract.

Types of Lien
There are three different types of Lien namely

1. Possessory Lien
2. Equitable Lien
3. Maritime Lien

Possessory Lien
A possessory lien can be exercised only by the person in possession of the goods. It is lost by

 Loss of possession
 When money due is paid
 Substitution of security
 When a right of lien is waived

The pre-requisite that is required for a possessory lien is that the possession has to be continuous, rightful and
not for any special purpose. Further, this can be divided into

1. Particular Lien
2. General Lien

Particular Lien

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 Particular Lien is that which confers the right to retain a specific commodity for which the particular debt arose.
Such debts usually arise from services that are provided or labourer or money that is spent on the goods on
which the right it is to be exercised.

The ingredients of a Particular Lien are

 A right to retention of goods till debt due is paid off.

 It does not need any specific agreement.
 Arises in the ordinary course of business.

The essentials of a Possession Lien are

 A possession that is acquired in the ordinary course of business.

 The owner has a lawful debt of an obligation that has to be discharged.

General Lien
A general lien refers to the right to retain goods and securities of a particular debt but in respect of the general
balance that is due by the owner of the goods and securities, to the individual who is in possession of the goods.
This may be conferred by an agreement to that effect or by custom and usage or by the provisions of any statue.
The right of general lien is particularly given by law to bankers, solicitors, brokers, wharfingers and warehouse-
keepers. A banker comprises cash, cheque, bill of exchange and securities that are deposited or any money that
is due to him as a banker.

The ingredients of a general lien are given below.

 It extends to a general balance of accounts.

 It is a right of defence, not a right of action.
 It also extends to prior transactions.
 It extends to properties/ securities which a banker has come in possession of in the ordinary course of business
such as cheques that are deposited for collection.
 Securities/ goods that are held for a special purpose are not subjects of General Lien.

Banker’s Lien
Banker’s Lien is an implied pledged and the banker has the right to sell the property after reasonable notice
where the property comes into the hands in the ordinary course of business. Section of the contract act lays
down that a banker’s lien can be applied if

 The property is in the control of the banker.

 The instruments of the money or goods of the banker are not for a particular purpose inconsistent with the lien.
 The possession of the instruments is obtained lawfully as a banker.
 There is no implied or expressed agreement contrary to the lien.

The banker only obtains a lien over pledged goods for the recovery of his dues and is liable to sell those goods
to reimburse himself. A banker’s general lien will not be extended to securities that are deposited with him for a
specific purpose inconsistent with the lien. Therefore, the following situations are not covered by the banker’s
lien.

1. It does not extend to securities that do not belong to the customer of the banker.
2. The articles and goods that are deposited by the owner for safe custody.
3. The securities or valuables that are lying in safe deposit locker.

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4. The securities that are deposited for sale, the collection of interest, dividend etc. Although he will not be able to
exercise his right of lien on Government promissory notes and shares, he is entitled to do so for any interest that
is earned and the dividend is collected.
5. A banker has no lien for fully paid-up shares except for partly-paid shares.
6. A banker has no lien on an insurance policy that is pledged as a security for a loan post the repayment of debt.
7. A banker has no lien on the current account balance on any bill discounts made by him.
8. Conveyance of land is not subject to such lien but title deeds that are left without a memorandum of deposit are
subject to such lien.
9. Fixed deposit for the collection of interest from another bank will not come under the right of lien.

 The securities that are deposited upon a particular trust.

 Any security that is left in the banker’s hands to cover a proposed advance which will be subsequently declined.
 A banker cannot forfeit share in the satisfaction of a debt due to a shareholder.
 A bank does not have a lien over the credit balance lying in a customer’s account. The banker’s right, in this
case, is a right of ‘set-off’.

Negative Lien
When an advance is made, the banker sometimes asks a borrower to execute a letter declaring that the assets are
free from all charges or encumbrance. The borrower also undertakes the assets that are stated in the declaration
will not be encumbered or disposed of without a bank’s written permit. This undertaking is called Negative
Lien. The arrangement is normally drafted in the form of an agreement. The banker cannot directly realize hid
debts from such assets. However, the interests of the banker are protected to a certain extent.

Equitable Lien
An equitable lien is an equitable right that is conferred by law to a charge on the immovable or movable
property of another until the satisfaction of certain specific claims. An equitable lien is created by the operation
of law. The instances of the equitable lien are given below.

 Where the banker releases the pledged goods to the borrower using a trust receipt, the sale proceeds of these
goods will be deposited in the loan account.
 An unpaid vendor of the immovable property has an equitable lien on the property for the whole or part of the
purchase money until the actual payment.
 A partner who remits partnership debts on dissolution has an equitable lien on the property of the partnership.

Maritime Lien
A maritime lien is a right for binding a ship, furniture, machinery, cargo and freight for the payment of the
claim which is based on the maritime law.

BL/U2 Topic 9 Contract of Bailment & Pledge

Bailment and Pledge are two special contracts that are often confused. Every pledge is a bailment but every
bailment is not pledge. Bailment means a delivery of goods from one person to another for a special purpose.
Whereas Pledge means delivery of goods as security for the payment of debt or performance of a promise.
Therefore, Bailment & Pledge are two different contracts. Pledge is a special kind of bailment.

Bailment
A bailment is a special contract defined under section 148 of the Indian Contract Act, 1872. It is derived from a
French word i.e. “bailer” which means “to deliver”. The etymological meaning of bailment is “handing over”or
“change of possession of goods”. By bailment, we mean delivery of goods from one person to another for a
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 special purpose on the contract that they shall reimburse the goods on the fulfilment of the purpose or dispose
of them as per the direction of the bailor. The person who delivers the goods is known as bailor. And the person
to whom the goods are given is known as Bailee. And the property bailed is known as Bailed Property.

Essentials of Bailment

 There shall be a contract between the parties for the delivery of goods,
 The goods shall be delivered for a special purpose only,
 Bailment can only be done for movable goods and not for immovable goods or money,
 There shall be a transfer of possession of goods,
 Ownership is not transferred to Bailee, therefore Bailor remains the owner,
 Bailee is duty bound to deliver the same goods back and not any other goods.
 Exception:The money deposited in the bank shall not account to bailment as the money returned by the bank
would not be the same identical notes. And it is one of the essentials of the bailment that same goods are to be
delivered back.

Duties of a Bailor

Section 150 of the Indian Contract Act, 1872 bound the bailor with certain duties to disclose the latent facts
specifically pertaining to defect in goods. Bailor’s duty of disclosure are:

 Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods that he is aware of to
the Bailee that can interfere with the use of goods or can expose him to extraordinary risks. And failure to do
the same will make bailor liable for damages.
 Non Gratuitous Bailment (Bailment for Reward): This duty particularly deals with the goods given on hire.
As per this provision, when the goods are bailed for hire, then in such a situation even if the bailor is aware of
the defect in the goods or not will be held liable for the injury that has been caused due to the existence of such
defect.

Duties of Bailee

Bailee has to fulfil several obligations as per Indian Contract Act, 1872. That is:

 Duty to take reasonable care: It is the duty of the Bailee to take care of goods as his own goods. He shall
ensure all safety measures that are necessary to protect the goods. The standard of care should be such as taken
care by a prudent man. The goods shall be taken care of equally whether they are gratuitous or non-gratuitous.
The Bailee shall be held liable for payment of compensation if he fails to take due care. But if the Bailee has
taken due care and instead of that the goods are damaged then in such a situation Bailee will not be liable to pay
compensation. The Bailee is not liable for the loss of goods due to destruction by fire. (Section 151-152)
 Duty not to make unauthorized use of the goods: Bailee is duty bound to use the goods for a specific purpose
only and not otherwise. If he uses the goods for any other purpose than what is agreed for then the bailor has
the right to terminate such bailment or is entitled with compensation for damage caused due to unauthorized
use. (Section 153-154)
 Duty not to mix bailor’s goods with his own goods:It is the duty of the Bailee not to mix bailor’s goods with
his own. But if he wants to do the same then he shall seek consent from the bailor for mixing of goods. If the
bailor agrees for the mixing of the goods then the interest in the mixed goods shall be shared in proportion. In
case, Bailee without the consent of bailor mixes the goods with his own then two situations arise: goods can be
separated and goods can’t be separated. In the former case the Bailee has to bear the cost of separation and in
the latter case since there is the loss of the goods, therefore, bailor shall be entitled with damages of such loss.
(Section 155-157)
 Duty to return the goods on the fulfilment of purpose: Bailee is duty bound to return the goods once the
purpose is achieved or on the expiry of the time period for which the goods were bailed. But if the Bailee makes

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 default in returning the goods on proper time then he will be responsible with the loss, destruction or
deterioration of the goods if any. (Section 160-161)
 Duty to deliver to the bailor increase or profit if any on the goods bailed: The Bailee has a duty to return
the goods along with increase or profit subject to contract to the contrary. Accretion that has accrued from the
bailed goods is the part of the bailed goods and therefore bailor has the right over such accretions if any. And
such accretions shall be handed over to the bailor along with the goods bailed. For instance, A leaves a cow in
the custody of B and cow gives birth to the calf. Then B is duty bound to hand over the bailed goods along with
accretion to the bailor. (Section 163)

Rights of a Bailor
As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a Bailor is same as
Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee. So the rights of bailor are:

 Enforcement of Bailee’s Duty:Since Right of the bailor is same as the right of the Bailee, therefore on the
fulfilment of all duties of Bailee the bailor’s right is accomplished. For example, it is the duty of the Bailee to
give the accretions and it is the right of bailor to demand the same.
 Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the right to claim damages
for such loss. (Section 151)
 Right to Termination the Contract: If the Bailee does not comply with the terms of the contract and acts in a
negligent manner in such case the bailor has the right to rescind the contract. (Section 153)
 Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or mixes the goods
which cause loss of goods in such case bailor has the right to claim compensation.
 Right to demand the return of goods: It is the duty of the Bailee to return the goods and the bailor has the
right to demand the same.

Rights of a Bailee

 Right to recover expenses:In the contract of Bailment, the Bailee incurs expenses to ensure the safety of
goods. The Bailee has the right to recover such expenses from the bailor. (Section 158)
 Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration
for services that he has rendered. But in case of gratuitous bailment, the Bailee is not awarded any
remuneration.
 Right to recover compensation:At times a situation arises wherein bailor did not have the capacity to contract
for bailment. Such a contract causing loss to the Bailee, therefore the Bailee has the right to recover such
compensation from the bailor. (Section 168)
 Right to Lien:Bailee has the right over Lien. By this, we mean that if the bailor fails to make payment of
remuneration or does not pay the amount due, the Bailee has the right to keep the goods bailed in his possession
till the time debtor dues are cleared. Lien is of two types: particular lien and general lien. (Section 170-171)
 Right to suit against a wrongdoer:After the goods have been bailed and any third party deprives the Bailee of
use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180)

Pledge
Pledge is a kind of bailment. Pledge is also known as Pawn.It is defined under section 172 of the Indian
Contract Act, 1892. By pledge, we mean bailment of goods as a security for the repayment of debt or loan
advanced or performance of an obligation or promise. The person who pledges the goods as security is known
as Pledger or Pawnor and the person in whose favour the goods are pledged is known as Pledgee or Pawnee.

Essentials of Pledge

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the
pledge. Apart from that, the other essentials of the pledge are:

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 There shall be a bailment for security against payment or performance of the promise,
 The subject matter of pledge is goods,
 Goods pledged for shall be in existence,
 There shall be the delivery of goods from pledger to pledgee,
 There is no transfer of ownership in case of the pledge.
 Exception:In exception circumstances pledgee has the right to sell the movable goods or property that are been
pledged.

Rights of Pawnor

As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. By this, we mean
that on the repayment of the debt or the performance of the promise, the Pawnor can redeem the goods or
property pledged from the Pawnee before the Pawnee makes the actual sale. The right of redemption is
extinguished once the actual sale is done by the Pawnee as per his right under section 176 of the Indian
Contract Act, 1872.

Rights of a Pawnee

The rights of the Pawnee as per Indian Contract Act, 1872 are:

 Right to retain the goods: If the Pawnor fails to make the payment of a debt or does not perform as per the
promise made, the Pawnee has the right to retain the goods pledged as security. Moreover, Pawnee can also
retain goods for non-payment of interest on debt or non-payment of expenses incurred. But Pawnee cannot
retain goods for any other debt or promise other than that agreed for in the contract. (Section 173-174)
 Right to recover extraordinary expenses: The expenses incurred by Pawnee on the preservation of goods
pledged can be recovered from Pawnor. (Section 175)
 The right of suit to procure debt and sale of pledged goods: On the failure to make repayment to Pawnee of
the debt, the Pawnee has two right: either to initiate suit proceedings against him or sell the goods. In the former
case, the Pawnee retains the goods with himself as collateral security and initiate the court proceedings. He
need not provide any notice of such proceedings to the Pawnor. And in the latter case, the Pawnee can sell the
goods after giving due notice of sale to the Pawnor. If the amount received from the sale of goods is less than
the amount due then the rest amount can be recovered from Pawnor. And if the Pawnee gets more amount than
the due amount then such surplus is to be given back to Pawnor. (Section 176)

Difference between Bailment and Pledge

Basis Bailment Pledge

Transfer of goods from one person to Transfer of goods from one person to another as
Meaning another for a specific purpose is known security for repayment of debt is known as the
as the bailment. pledge.

It is defined under section 148 of the It is defined under section 172 of the Indian
Defined In
Indian Contract Act, 1872. Contract Act, 1872.

Parties The person who delivers the pledged goods is

The person who delivers the bailed
known as Pledger or Pawnor and the person
goods is known as Bailor and the person
receiving such goods is known as Pledgee or

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 receiving such goods is known as Bailee. Pawnee.

The consideration may or may not be

Consideration Consideration is always there.
present.

Bailee has no right to sell the goods Pledgee or Pawnee has the right to sell the
Right to Sell
bailed. goods.

Bailee can use the goods only for a Pledgee or Pawnee cannot use the goods
Use of Goods
specific purpose only and not otherwise. pledged.

The purpose of pledged goods is to act as

The purpose of bailed goods is for
Purpose security for repayment of debt or performance of
safekeeping or repairs etc.
the promise.

BL/U2 Topic 1 Contract of Agency: Definition of Agent and Agency; Creation

of Agency
Agent
A person who performs services for another person under an express or implied agreement and who is subject
to the other’s control or right to control the manner and means of performing the services. The other person is
called a principal. One may be an agent without receiving compensation for services. The agency agreement
may be oral or written.

The person to whom a power of attorney is given. An agent has authority to act on behalf of the grantor, as
specified by the grantor in a power of attorney document.

Agency

Contracts

An agreement, express , or implied, by which one of the parties, called the principal, confides to the other,
denominated the agent, the management of some business; to be transacted in his name, or on his account, and
by which the agent assumes to do the business and to render an account of it. As a general rule, whatever a man
do by himself, except in virtue of a delegated authority, he may do by an agent. Hence the maxim qui facit per
alium facit per se.

When the agency is express, it is created either by deed, or in writing not by deed, or verbally without writing.
When the agency is not express, it may be inferred from the relation of the parties and the nature of the
employment without any proof of any express appointment.

The agency must be antecedently given, or subsequently adopted; and in the latter case there must be an act of
recognition, or an acquiescence in the act of the agent, from which a recognition may be fairly implied.

Creation of Agency

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 Agency system is very popular in the current business scenario. There are two parties in the agency system one
is the principal and another the agent. An agent is a person acting on behalf of his principal. It’s a connecting
link between the principal and the third party. Herein we will discuss the creation of agency under Indian
Contract Act, 1872.

Creation of Agency

A contract of agency may be express or implied. Consideration is not an essential element in agency contract.
Agency contract may also arise by estoppel, necessity or ratification.

Types of an Agency Contract

1. Express Agency

A contract of agency can be made orally or in writing. Example of a written contract of agency is the Power of
Attorney that gives a right to an agency to act on behalf of his principal in accordance with the terms and
conditions therein.

A power of attorney can be general or giving many powers to the agent or some special powers, giving
authority to the agent for transacting a single act.

2. Implied Agency

Implied agency arises when there is any conduct, the situation of parties or is necessary for the case.

a. Agency by Estoppel (Section 237)

Estoppel arises when you are precluded from denying the truth of anything which you have represented as a
fact, although it is not a fact.

Thus, where P allows third parties to believe that A is acting as his authorized agent, he will be estopped from
denying the agency if such third-parties relying on it make a contract with an even when A had no authority at
all.

b. Wife as Agent

Where a husband and wife are living together, we presume that the wife has her husband’s authority to pledge
his credit for the purchase of necessaries of life suitable to their standard of living. But the husband will not be
liable if he shows that:

(i) He had expressly warned the tradesman not to supply goods on credit to his wife; or

(ii) He had expressly forbidden the wife to use his credit; or

(iii) He already sufficiently supplies his wife with the articles in question; or

(iv) He supplies his wife with a sufficient allowance.

Similarly, where any person is held out by another as his agent, the third-party can hold that person liable for
the acts of the ostensible agent, or the agent by holding out. Partners are each other’s agents for making
contracts in the ordinary course of the partnership business.
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c. Agency of Necessity (Sections 188 and 189):

In certain circumstances, a person who has been entrusted with another’s property may have to incur
unauthorized expenses to protect or preserve it. This is called an agency of necessity.

For example, a sent a horse by railway. On its arrival at the destination, there was no one to receive it. The
railway company, is bound to take reasonable steps to keep the horse alive, was an agent of the necessity of A.

A wife deserted by her husband and thus forced to live separate from him can pledge her husband’s credit to
buy all necessaries of life according to the position of the husband even against his wishes.

d. Agency by Ratification (Sections 169-200):

Where a person not having any authority act as agent, or act beyond its authority, then the principal is not
bound by the contract with the agent in respect of such authority. But the principal can ratify the agent’s
transaction and accept liability. In this way, an agency by ratification arises.

This is ex post facto agency— agency arising after the event. By this ratification, the contract is binding on
principal as if the agent had been authorized before. Ratification will have an effect on the original contract and
so the agency will have effect from original contract and not on ratification.

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