The Indian Contract Act Notes by CA Ankita Patni Mam

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Indian Contract Act, 1872
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UNIT–1: CONTRACT OF INDEMNITY AND GUARANTEE
 Contract of Indemnity and Guarantee are the specific types of contracts provided
under sections 124 to 147 of the Indian Contract Act, 1872. In addition to the
specific provisions (i.e. Section 124 to Section 147 of the Indian Contract Act, 1872),
the general principles of contracts are also applicable to such contracts. Even though
both the contracts are modes of compensation based on similar principles, they
differ considerably in several aspects.
 In this unit, the law relating to indemnity and guarantee are discussed in detail.
Contract of Indemnity
 The term “Indemnity” literally means “Security against loss” or “to make good the loss”
or “to compensate the party who has suffered some loss”.
 The term “Contract of Indemnity” is defined under Section 124 of the Indian Contract
Act, 1872. It is “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 the conduct of any other
person.”
 Example 1: Mr. X contracts with the Government to return to India after completing
his studies at University of Cambridge and serve the Government for a period of 5
years. If Mr. X fails to return to India, he will have to reimburse the Government. It is
a contract of indemnity.
There are two parties in this form of contract.
a) The party who promises to indemnify/ save the other party from loss- ‘indemnifier’,
b) The party who is promised to be saved against the loss- “indemnified” or “indemnity
holder”.
Indemnifier Indemnified
Promises to Indemnify/ Save who is promised to be

the other Party from Loss saved against the loss
 Example 2: A may contract to indemnify B against the consequences of any proceedings

which C may take against B in respect of a sum of ₹ 5000/- advanced by C to B. In
consequence, when B who is called upon to pay the sum of money to C fails to do so
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Indian Contract Act, 1872 1A.
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C would be able to recover the amount from A as provided in Section 124.
 Example 3: X, a shareholder of a company lost his share certificate. He applied for the
duplicate. The company agreed to issue the same on the term that X will compensate
the company against the loss where any holder produces the original certificate. Here,
there is contract of indemnity between X and the company.
 Example 4: X may agree to indemnify Y for any loss or damage that may occur if a tree
on Y’s neighboring property blows over. If the tree then blows over and damages Y’s
fence, X will be liable for the cost of fixing the fence.
Analysis
 To indemnify means to compensate or make good the loss. Thus, under a contract of
indemnity the “existence of loss” is essential. Unless the promisee has suffered a loss,
he cannot hold the promisor liable on the contract of indemnity.
 However, the above definition of indemnity restricts the scope of contracts of
indemnity in as much as it covers only the loss caused by:
i) the conduct of the promisor himself, or
ii) the conduct of any other person.
 Thus, loss occasioned by an accident not caused by any person, or an act of God/ natural
event, is not covered.
Mode of contract of indemnity:

 A contract of indemnity like any other contract may be express or implied.
a) A contract of indemnity is said to be express when a person expressly promises to
compensate the other from loss.
b) A contract of indemnity is said to be implied when it is to be inferred from the conduct
of the parties or from the circumstances of the case
 A contract of indemnity is like any other contract and must fulfil all the essentials of a
valid contract which includes:
a) Offer and acceptance
b) Intention to create legal obligation
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1A. Indian Contract Act, 1872
c) Consideration .
d) Competency to contract
e) Free consent
f) Lawful object
g) The agreement must not be expressly declared to be void- eg: an agreement in
restraint of trade/ marriage etc.
h) The terms of the agreement must not be vague or uncertain.
i) The agreement must be capable of performance- An agreement to do an impossible act
is void.
j) Legal formalities
 Example 5: A asks B to beat C promising to indemnify him against the consequences.
The promise of A cannot be enforced. Suppose, B beats C and is fined ₹ 1000, B cannot
claim this amount from A because the object of the agreement is unlawful.
A contract of Fire Insurance or Marine Insurance is always a contract of indemnity.
But there is no contract of indemnity in case of contract of Life Insurance.
Rights of Indemnity—holder when sued
The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor/indemnifier—
(1) all damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending
it, he did not contravene the orders of the promisor, and acted as it would have been
prudent for him to act in the absence of any contract of indemnity, or if the promisor
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authorised him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not contrary to the orders of the promisor, and was one which it
would have been prudent for the promisee to make in the absence of any contract of
indemnity, or if the promisor authorised him to compromise the suit.
Analysis:
 We can understand from the above provisions that, in a contract of indemnity, the
promisee i.e., indemnity- holder acting within the scope of his authority is entitled to
recover from the promisor i.e., indemnifier the following rights:
a) all damages which he may be compelled to pay in any suit
b) all costs which he may have been compelled to pay in bringing/ defending the suit and
c) all sums which he may have paid under the terms of any compromise of suit.
 It may be understood that the rights contemplated under section 125 are not
exhaustive. The indemnity holder/ indemnified has other rights besides those mentioned
above. If he has incurred a liability and that liability is absolute, he is entitled to call
upon his indemnifier to save him from the liability and to pay it off.
Please note that the Indian Contract Act is silent about the rights which the
Indemnifier has on carrying out his promise to indemnify. But they are similar to the
rights of a surety under section 141 of the Indian Contract Act.
When does the liability of an indemnifier commence?

 Although the Indian Contract Act, 1872, is silent on the time of commencement of
liability of indemnifier, however, on the basis of judicial pronouncements it can be stated
that the liability of an indemnifier commences as soon as the liability of the indemnity-
holder becomes absolute and certain. This principle has been followed by the courts in
several cases.
 Example 6: A promises to compensate X for any loss that he may suffer by filling a suit
against Y. The court orders X to pay Y damages of Rs. 10000. As the loss has become
certain, X may claim the amount of loss from A and pass it to y.
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Contract of Guarantee
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“Contract of guarantee”, “surety”, “principal debtor” and “creditor” [Section 126]
Contract of guarantee -
 A contract of guarantee is a contract to perform the promise made or discharge
the liability, of a third person in case of his default.
 Three parties are involved in a contract of guarantee -
Surety Principal debtor Creditor

person who gives the person in respect of whose person to whom the
guarantee default the guarantee is given guarantee is given
 Example 7: When A requests B to lend ₹ 10,000 to C and guarantees that C will repay
the amount within the agreed time and that on C falling to do so, he (A) will himself pay
to B, there is a contract of guarantee.
Here, B is the creditor, C the principal debtor and A the surety.
 Example 8: Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay
LIC Housing in the event of ‘A’ failing to repay, it is a contract of guarantee.
 Example 9: X and Y go into a car showroom where X says to the dealer to supply latest
model of Wagon R to Y, and agrees that if Y fails to pay he will. In case of Y’s failure
to pay, the car showroom will recover its money from X.
This is a contract of guarantee because X promises to discharge the liability of Y in
case of his defaults.
Analysis -
 From the definition, it can be analysed that, Guarantee is a promise to pay a debt owed
by a third person in case the latter does not pay.
 Any guarantee given may be oral or written.
 From the above definition, it is clear that a contract of guarantee is a tripartite
agreement between principal debtor, creditor and surety. There are, in effect three
contracts
i) A principal contract between the principal debtor and the creditor.
ii) A secondary contract between the creditor and the surety.
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iii) .
An implied contract between the surety & the principal debtor whereby principal debtor
is under an obligation to indemnify the surety; if the surety is made to pay or perform.
The right of surety is not affected by the fact that the creditor has refused to sue the
principal debtor or that he has not demanded the sum due from him.
Essential Features of Guarantee –
The following are the requisites of a valid guarantee:-

(1) Principal The purpose of a guarantee being to secure the payment of a debt,
Debt: the existence of recoverable debt is necessary. It is of the essence of
a guarantee that there should be someone liable as a principal debtor
and the surety undertakes to be liable on his default. If there is no
(2) Consideration principal debt, there can be no valid guarantee.
 Like every other contract, a contract of guarantee should also be
supported by some consideration. A guarantee without consideration

is void, but there is no need for a direct consideration between the
surety and the creditor.
 As per Section 127 consideration received by the principal debtor
is sufficient consideration to the surety for giving the guarantee,

but past consideration is no consideration for the contract of
guarantee. Even if the principal debtor is incompetent to contract,
the guarantee is valid. But, if surety is incompetent to contract, the
guarantee is void
 Example 10: B requests A to sell & deliver to him goods on credit.
A agrees to do so provided C will guarantee the payment of the price

of the goods. C promises to guarantee the payment in consideration
of A‘s promise to deliver the goods. As per Section 127, there is a
sufficient consideration for C’s promise. Therefore, the guarantee is
valid.
 Example 11: A sell and delivers goods to B. C afterwards requests A
to forbear to sue B for the debt for a year, and promises that if he
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does so, C will pay for them in default of payment by B. A
agrees to forbear as requested. This is a sufficient
consideration for C’s promise.
 Example 12: A sells and delivers goods to B. C afterwards,
without consideration, agrees to pay for them in default of B.

The agreement is void.
Any promise made
+
Consideration
Anything done, or
for guarantee
+
For the benefit of
principal debtor
(3) Existence of a There must be an existing liability or a promise whose performance

Liability is guaranteed. Such liability or promise must be enforceable by
law. The liability must be legally enforceable and not time barred.
(4) No  Any guarantee which has been obtained by the means of
misrepresentation misrepresentation made by the creditor, or with his knowledge

or concealment and assent, concerning a material part of the transaction, is
(section 142 & 143) invalid (section 142)
 Any guarantee which the creditor has obtained by means of
keeping silence as to material circumstances, is invalid (section

143).
 Example 13: A engages B as clerk to collect money for him. B
fails to account for some of his receipts, and A in consequence

calls upon him to furnish security for his duly accounting. C
gives his guarantee for B’s duly accounting. A does not acquaint
C, with his previous conduct. B afterwards make default. The
guarantee is invalid.
 Example 14: A guarantees to C payment for iron to be supplied
by him to B to the amount of 2,000 tons. B and C have privately
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agreed that B should pay ₹ 5 per ton beyond the market price, such
excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety.
(5) Writing not Section 126 expressly declares that a guarantee may be either oral or
necessary written.
(6) Joining of Where a person gives a guarantee upon a contract that the creditor shall
the other not act upon it until another person has joined in it as co-surety, the
co-sureties guarantee is not valid if that other person does not join. That implies,
(Section the guarantee by a surety is not valid if a condition is imposed by a
144) surety that some other person must also join as a co-surety, but such
other person does not join as a co-surety.
Types of Guarantee
Guarantee may be classified under two categories:

(1) Specific Guarantee-
A guarantee which extends to a single debt/ specific transaction is called a specific
guarantee. The surety’s liability comes to an end when the guaranteed debt is duly
discharged or the promise is duly performed.
 Example 15: A guarantees payment to B of the price of the five bags of rice to be
delivered by B to C and to be paid for in a month. B delivers five bags to C, C pays for
them. This is a contract for specific guarantee because A intended to guarantee only
for the payment of price of the first five bags of rice to be delivered one time [Kay v
Groves]
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(2) Continuing Guarantee [Section 129] – .
A guarantee which extends to a series of transaction is called a continuing guarantee. A
surety’s liability continues until the revocation of the guarantee.
The essence of continuing guarantee is that it applies not to a specific number of
transactions but to any number of transactions and makes the surety liable for the
unpaid balance at the end of the guarantee.
 Example 16: On A’s recommendation B, a wealthy landlord employs C as his estate
manager. It was the duty of C to collect rent on 1st of every month from the tenant of
B and remit the same to B before 5th of every month. A, guarantee this arrangement
and promises to make good any default made by C. This is a contract of continuing
guarantee.
 Example 17: A guarantees payment to B, a tea-dealer, to the amount of ₹ 100, for any
tea he may from time to time supply to C. B supplies C with tea to above the value of
₹ 100, and C pays B for it. Afterwards B supplies C with tea to the value of ₹ 200. C
fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly
liable to B to the extent of ₹ 100.
 Example 18: A guarantees payment to B of the price of five sacks of flour to be
delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for
them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee
given by A was not a continuing guarantee, and accordingly he is not liable for the price
of the four sacks.
In the continuing guarantee, the liability of surety continues till the performance or
the discharge of all the transactions entered into or the guarantee is withdrawn.
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Distinction between a Contract of Indemnity & a Contract of Guarantee
Point of Contract of Indemnity Contract of Guarantee

distinction
Number There
of are only two parties There are three parties creditor,
party/parties namely the indemnifier [promisor] principal debtor and surety.
to the contract & the indemnified [promisee]
Nature of The liability of the indemnifier is The liability of the surety is secondary
liability primary and unconditional and conditional as the primary liability
is that of the principal debtor.
Time of liability The liability of the indemnifier The liability arises only on the non-
arises only on the happening of a performance of an existing promise or
contingency. non-payment of an existing debt.
Time to Act The indemnifier need not act at The surety acts at the request of
the request of indemnity holder. principal debtor.
Right to sue Indemnifier cannot sue a 3 rd party Surety can proceed against principal
third party for loss in his own name as there debtor in his own right because he
is no privity of contract. Such a gets all the right of a creditor after
right would arise only if there is discharging the debts.
an assignment in his favour.
Purpose Reimbursement of loss For the security of the creditor
Competency to All parties must be competent to In the case of a contract of
contract contract guarantee, where a minor is a principal
debtor, the contract is still valid.
Nature & Extent of Surety’s Liability (Section 128)
The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract. [Section 128]
Analysis –
i) The term “co-extensive with that of principal debtor” means that the surety is liable
for what the principal debtor is liable. However, the liability of the surety may be
made less than that of the principal debtor by an express contract to that effect.
ii) The liability of a surety arises only on default by the principal debtor. But as soon as
the principal debtor defaults, the liability of the surety begins and runs co-extensive
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with the liability of the principal debtor, in the sense that the surety will be liable for
all those sums for which the principal debtor is liable. If there is a condition precedent
for surety’s liability, the surety would be liable only when such condition is fulfilled. A
partial recognition of this principal is found in Section 144 (Joining of co surety)
iii) Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
iv) Surety’s liability continues even if the principal debtor has not been sued or is omitted
from being sued. In other words, a creditor may choose to proceed against a surety
first, unless there is an agreement to the contrary.
 Example 19: A guarantees to B the payment of a bill of exchange by C, the acceptor.
The bill is dishonoured by C. A is liable not only for the amount of the bill but also for
any interest and charges which may have become due on it.
 Nature of Surety’s liability can be summed up as:

a) Liability of surety is of secondary nature as he is liable only on default of principal
debtor.
b) His liability arises immediately on the default by the principal debtor.
c) The creditor has a right to sue the surety directly without first proceeding against
principal debtor.
Liability of Two Persons, Primarily Liable, not affected by Arrangement

between them that one shall be surety on others Default
 Where two persons contract with a third person to undertake a certain liability, and
also contract with each other that one of them shall be liable only on the default of
the other, the third person not being a party to such contract, the liability of each of
such two persons to the third person under the first contract is not affected by the
existence of the second contract, although such third person may have been aware of
its existence. (Section 132)
 Example 20: A and B make a joint and several promissory note to C. A makes it, in fact,
as surety for B, and C knows this at the time when the note is made. The fact that A, to
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the knowledge of C, made the note as surety for B, is no answer to a suit by C against A
upon the note.
Discharge of a Surety
A surety is said to be discharged when his liability as surety comes to an end. The
various modes of discharge of surety are discussed below:
i) By revocation of the contract of guarantee.
ii) By the conduct of the creditor, or
iii) By the invalidation of the contract of guarantee
Modes of Discharge
By Revocation By Conduct of the On Invalidation of

Creditor Contract of Guarantee
By revocation of the Contract of Guarantee
a) Revocation of continuing guarantee by Notice (Section 130) -

 The continuing guarantee may at any time be revoked by the surety as to future
transactions by notice to the creditors. Once the guarantee is revoked, the surety is
not liable for any future transaction however he is liable for all the transactions that
happened before the notice was given.
 A specific guarantee can be revoked only if liability to principal debtor has not accrued.
 Example 21: Arun promises to pay Rama for all groceries bought by Carol for a period of
12 months if Carol fails to pay. In the next three months, Carol buys ₹ 2000/- worth of
groceries. After 3 months, Arun revokes the guarantee by giving a notice to Rama. Carol
further purchases ₹ 1000 of groceries. Carol fails to pay. Arun is not liable for ₹ 1000/-
of purchase that was made after the notice but he is liable for ₹ 2000/- of purchase
made before the notice.
 Example 22: A guarantees to B, to the extent of ₹ 100,000, that C shall pay all the bills
that B shall draw upon him. B draws the bill upon C. C accepts the bill. A gives notice of
revocation after the bill is drawn and accepted. C dishonors the bill at maturity. A is
liable upon his guarantee.
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Example 23: X gives guarantee to the extent of ₹ 50,000 for the loans given from time
to time by A to B. A gave a loan of ₹ 10,000 to B. Afterwards, X gives notice of
revocation. X is discharged from all liability to A for any loan granted after the
revocation of guarantee but he is liable to A for ₹ 10,000 on default of B.
b) Revocation of continuing guarantee by surety’s death (Section 131):
In the absence of any contract to the contrary, the death of surety operates as a
revocation of a continuing guarantee as to the future transactions taking place after
the death of surety. However, the surety’s estate remains liable for the past
transactions which have already taken place before the death of the surety.
c) By novation [Section 62]:
The surety under original contract is discharged if a fresh contract is entered into
either between the same parties or between the other parties, the consideration
being the mutual discharge of the old contract.
By conduct of the creditor

a) By variance in terms of contract (Section 133):
Where there is any variance in the terms of contract between the principal debtor and
creditor without surety’s consent, it would discharge the surety in respect of all
transactions taking place subsequent to such variance.
 Example 24: A becomes surety to C for B’s conduct as a manager in C’s bank.
Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised, and
that he shall become liable for one-fourth of the losses on overdrafts. B allows a
customer to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent, and is not liable to make good this
loss.
 Example 25: A guarantees C against the misconduct of B in an office to which B is
appointed by C, & of which the duties are defined by an Act of the Legislature. By a
subsequent Act, the nature of office is materially altered. Afterwards, B misconducts
himself. A is discharged by the change from future liability under his guarantee, though
the misconduct of B is in respect of a duty not affected by the later Act.
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 .
Example 26: C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s
becoming surety to C for B’s duly accounting for moneys received by him as such clerk.
Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a
commission on the goods sold by him and not by a fixed salary. A is not liable for
subsequent misconduct of B.
 Example 27: A gives to C a continuing guarantee to the extent of ₹ 3,00,000 for any oil
supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the
knowledge of A, B and C contract that C shall continue to supply B with oil for ready
money, and that the payments shall be applied to the then existing debts between B and
C. A is not liable on his guarantee for any goods supplied after this new arrangement.
 Example 28: C contracts to lend B ₹ 5,00,000 on the 1st March. A guarantees
repayment. C pays the ₹ 5,00,000 to B on the 1st January. A is discharged from his
liability, as the contract has been varied, in as much as C might sue B for the money
before the 1st March.
 Variation which is not substantial or material or which is beneficial to the surety will
not discharge him of his liability. In M.S Anirudhan v Thomco’s Bank Ltd. AIR 1963 SC
746, the surety guaranteed the repayment of loan provided by the bank to the principal
debtor of only upto ₹ 25,000. Subsequently, since the bank was willing to provide loan
only upto ₹ 20,000, the principal debtor reduced the amount to ₹ 20,000 in the
guarantee form and without intimation to the surety gave it to the bank which was then
accepted. On default by the principal debtor, the court held that the surety’s liability
was not discharged as the alteration was beneficial to him and not substantial.
b) By release or discharge of principal debtor (Section 134):
The surety is discharged if the creditor:
i) enters into a fresh/ new contract with principal debtor; by which the principal debtor is
released, or
ii) does any act or omission, the legal consequence of which is the discharge of the
principal debtor.
 Example 29: A contracts with B for a fixed price to build a house for B within a
stipulated time, B supplying the necessary timber. C guarantees A’s performance of the
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contract. B omits to supply the timber. C is discharged from his suretyship.
 Example 30: A gives a guarantee to C for goods to be delivered to B. Later on, B
contracts with C to assign his property to C in lieu of the debt. B is discharged of his
liability and A is discharged of his liability.
c) Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor [Sector 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 promises not to sue, the principal
debtor, discharges the surety, unless the surety assents to such contract.
i) Composition: If the creditor makes a composition with the principal debtor, without
consulting the surety, the latter is discharged. Composition inevitably involves variation
of the original contract, and, therefore, the surety is discharged.
ii) Promise to give time: When the time for the payment of the guaranteed debt comes,
the surety has the right to require the principal debtor to pay off the debt.
Accordingly, it is one of the duties of the creditor towards the surety not to allow the
principal debtor more time for payment.
iii) Promise not to sue: If the creditor under an agreement with the principal debtor
promises not to sue him, the surety is discharged. The main reason is that the surety is
entitled at any time to require the creditor to call upon the principal debtor to pay off
the debt when it is due and this right is positively violated when the creditor promises
not to sue the principal debtor.
 Cases where surety not discharged
i) Surety not discharged when agreement made with third person to give time to principal
debtor [Section 136]: Where a contract to give time to the principal debtor is made by
the creditor with a third person, and not with the principal debtor, the surety is not
discharged.
Example 31: C, the holder of an overdue bill of exchange drawn by A as surety for B,
and accepted by B, contracts with M to give time to B. A is not discharged.
ii) Creditor’s forbearance to sue does not discharge surety [Section 137]: Mere
forbearance on the part of the creditor to sue the principal debtor or to enforce any
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other remedy against him does not in the absence of any provision in the guarantee to
the contrary, discharge the surety.

Example 32: B owes to C a debt guaranteed by A. The debt becomes payable. C does not
sue B for a year after the debt has become payable. A is not discharged from his
suretyship.
d) Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy
[Section 139]:
 If the creditor does any act which is inconsistent with the rights of the surety, or
omits to do any act which his duty to the surety requires him to do, and the eventual
remedy of the surety himself against the principal debtor is thereby impaired, the
surety is discharged. It is the plain duty of the creditor not to do anything
inconsistent with the rights of the surety. A surety is entitled after paying off the
creditor, to his indemnity from the principal debtor. If the creditors act or omission
deprives the surety of the benefit of this remedy, the surety is discharged.
 In a case before the Supreme Court of India, “A bank granted a loan on the security of
the stock in the godown. The loan was also guaranteed by the surety. The goods were
lost from the godown on account of the negligence of the bank officials. The surety was
discharged to the extent of the value of the stock so lost.” [State bank of Saurashtra
V Chitranjan Rangnath Raja (1980) 4 SCC 516]
 Example 33: C contracts with B to build a ship the payment of which is to be made in
installments at various stages of completion. A guarantee's C's performance. B prepays
last two installments. A is discharged of his liability. A is discharged by this prepayment.
 Example 34: A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B
promises on his part that he will, at least once a month, see that M make up the cash. B
omits to see this done as promised, & M embezzles. A is not liable to B on his guarantee.
By the invalidation of the contract of guarantee

a) Guarantee obtained by misrepresentation invalid [Section 142]:
Any guarantee which has been obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the
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the transaction, is invalid.
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b) Guarantee obtained by concealment invalid [Section 143]:
Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is invalid.
 Example 35: A engages B as a clerk to collect money for him, B fails to account for
some of his receipts, and A in consequence calls upon him to furnish security for his
duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C
with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
 Example 36: A guarantees to C payment for iron to be supplied by him to B for the
amount of ₹ 2,00,000 tons. B and C have privately agreed that B should pay five rupees
per ton beyond the market price, such excess to be applied in liquidation of an old
debt. This agreement is concealed from A. A is not liable as a surety.
c) Guarantee on contract that creditor shall not act on it until co-surety joins
(Section 144):
Where a person gives a guarantee upon a contract that the creditor shall not act upon it
until another person has joined in it as co- surety, the guarantee is not valid if that
other person does not join.
Rights of a Surety
The surety enjoys the following rights against the creditor:
a) Rights against the creditor,
b) Rights against the principal debtor,
c) Rights against co-sureties.
Rights of surety
Against the Against the creditor Against the

principal debtor co-sureties
Right of Right of Right to Right to Right to share Right to

subrogation indemnity security set off reduction Contribution
1A.17
Right against the principal debtor
.
a) Rights of subrogation [Section 140]:
 Where, a guaranteed debt has become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the surety, upon payment or performance
of all that he is liable for, is invested with all the rights which the creditor had
against the principal debtor.
 This right is known as right of subrogation. It means that on payment of the
guaranteed debt, or performance of the guaranteed duty, the surety steps into the
shoes of the creditor.
b) Implied promise to indemnify surety [Section 145]:
 In every contract of guarantee there is an implied promise by the principal debtor to
indemnify the surety. The surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but not sums which he paid
wrongfully.
 Example 37: B is indebted to C, and A is surety for the debt. C demands payment from
A, and on his refusal sues him for the amount. A defends the suit, having reasonable
grounds for doing so, but is compelled to pay the amount of the debt with costs. He can
recover from B the amount paid by him for costs, as well as the principal debt.
 Example 38: B is indebted to C and A is surety for the debt. Upon default, C sues A. A
defends the suit on reasonable grounds but is compelled to pay the amount. A is
entitled to recover from B the cost as well as the principal debt.
In the same case above, if A did not have reasonable grounds for defence, A would still
be entitled to recover principal debt from B but not any other costs.
 Example 39: A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to
be supplied by C to B. C supplies to B rice to a less amount than 2,00,000 rupees, but
obtains from A payment of the sum of 2,00,000 rupees in respect of the rice supplied.
A cannot recover from B more than the price of the rice actually supplied.
1A.18
Right against the Creditor .
a) Surety’s right to benefit of creditor’s securities [Section 141]:
 A surety is entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered into, whether
the surety knows of the existence of such security or not; and, 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.
 Example 40: C advances to B, his tenant, 2,00,000 rupees on the guarantee of A. C
has also a further security for the 2,00,000 rupees by a mortgage of B’s furniture. C
cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture.
 Example 41: C, a creditor, whose advance to B is secured by a decree, receives also a
guarantee for that advance from A. C afterwards takes B’s goods in execution under
the decree, and then, without the knowledge of A, withdraws the execution. A is
discharged Example 42: A, as surety for B, makes a bond jointly with B to C, to secure
a loan from C to B. Afterwards, C obtains from B a further security for the same debt.
Subsequently, C gives the up the further security, A is not discharged.
b) Right to set off:
If the creditor sues the surety, for payment of principal debtor’s liability, the surety
may have the benefit of the set off, if any, that the principal debtor had against the
creditor.
c) Right to share reduction:
The surety has right to claim proportionate reduction in his liability if the principal
debtor becomes insolvent.
Rights against co-sureties

“Co-sureties (meaning) - When the same debt or duty is guaranteed by two or more
persons, such persons are called co-sureties”
a) Co-sureties liable to contribute equally (Section 146):
 Equality of burden is the basis of Co-suretyship. This is contained in section 146 which
1A.19
.
states that “when two or more persons are co-sureties for the same debt, or duty,
either jointly, or severally and whether under the same or different contracts and
whether with or without the knowledge of each other, the co-sureties in the absence
of any contract to the contrary, are liable, as between themselves, to pay each an equal
share of the whole debt, or of that part of it which remains unpaid by the principal
debtor”.
 Example 43: A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E
makes default in payment. A, B and C are liable, as between themselves, to pay
1,00,000 rupees each.
 Example 44: A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E,
and there is a contract between A, B and C that A is to be responsible to the extent of
one-quarter, B to the extent of one-quarter, and C to the extent of one- half. E makes
default in payment. As between the sureties, A is liable to pay 25,000 rupees, B
25,000 rupees, and C 50,000 rupees.
b) Liability of co-sureties bound in different sums (Section 147):
 The principal of equal contribution is, however, subject to the maximum limit fixed by a
surety to his liability. Co-sureties who are bound in different sums are liable to pay
equally as far as the limits of their respective obligations permit.
 Example 45: A, B and C, as sureties for D, enter into three several bonds, each in a
different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000
rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D
makes default to the extent of 3,00,000 rupees. A, B and C are each liable to pay
1,00,000 rupees.
different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000
rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D
makes default to the extent of 4,00,000 rupees; A is liable to pay 1,00,000 rupees, and
B and C 1,50,000 rupees each.
different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 Rs.
1A.20
.
C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default
to the extent of 7,00,000 rupees. A, B & C have to pay each the full penalty of his bond.
1A.21
Indian Contract Act, 1872 1B.
.
UNIT – 2: BAILMENT AND PLEDGE
What is Bailment?
 The word “Bailment” has been derived from the French word “ballier” which means “to
deliver”. Bailment etymologically means ‘handing over’ or ‘change of possession’.
 As per Section 148 of the Act, bailment is the delivery of goods by one person to
another for some purpose, upon a contract, that the goods shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of the
person delivering them.
Parties to bailment -
a) Bailor: The person delivering the goods.
b) Bailee: The person to whom the goods are delivered.
 Example 1: Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the
bailee.
 Example 2: X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. It is
contract for bailment.
 Example 3: Goods given to a friend for his own use, without any charge.
 Example 4: X delivers goods to blue dart for carriage.
Analysis -
 The essential elements of a contract of bailment are—
a) Contract - Bailment is based upon a contract. The contract may be express or implied.
No consideration is necessary to create a valid contract of bailment.
b) Delivery of goods - It involves the delivery of goods from one person to another for
some purposes. Bailment is only for moveable goods and never for immovable goods or
money. The delivery of the possession of goods is of the following kinds:
i) Actual Delivery - When goods are physically handed over to the bailee by the bailor.
Eg: delivery of a car for repair to workshop
ii) Constructive Delivery - Where delivery is made by doing anything that has the effect
1B.1
1B. Indian Contract Act, 1872
.
of putting goods in the possession of the bailee or of any person authorized to hold
them on his behalf. Eg: Delivery of the key of a car to a workshop dealer for repair of
the car.
c) Purpose - The goods are delivered for some purpose. The purpose may be express or
implied.
d) Possession - In bailment, possession of goods changes. Change of possession can happen
by physical delivery or by any action which has the effect of placing the goods in the
possession of bailee. The change of possession does not lead to change of ownership. In
bailment, bailor continues to be the owner of goods. Where a person is in custody
without possession he does not become a bailee.
 For example, servant of a master who is in custody of goods of the master does not
become a bailee.
 Similarly, depositing ornaments in a bank locker is not bailment, because ornaments are
kept in a locker whose key are still with the owner and not with the bank. The
ornaments are in possession of the owner though kept in a locker at the bank.
e) Return of goods - Bailee is obliged to return the goods physically to the bailor. The
goods should be returned in the same form as given or may be altered as per bailor’s
direction. It should be noted that exchange of goods should not be allowed. The bailee
cannot deliver some other goods, even not those of higher value.
 Deposit of money in a bank is not bailment since the money returned by the bank would
not be identical currency notes.
Essentials of Bailment
Contract Delivery of goods Purpose Possession Return of Goods
Different forms of Bailment: Following are the popular forms of bailment –

a) Delivery of goods by one person to another to be held for the bailor’s use.
b) Goods given to a friend for his own use without any charge.
c) Hiring of goods.
d) Delivering goods to a creditor to serve as security for a loan.
1B.2
e) .
Delivering goods for repair with or without remuneration.
f) Delivering goods for carriage.
Note: On the basis of reward, bailment can be classified into two types:
a) Gratuitous Bailment - The word gratuitous means free of charge. So a gratuitous
bailment is one when the provider of service does it gratuitously i.e. free of charge.
Such bailment would be either for the exclusive benefits of bailor or bailee.
b) Non-Gratuitous Bailment - Non gratuitous bailment means where both the parties get
some benefit i.e. bailment for the benefit of both bailor & bailee
Bailment
Gratuitous Bailment Non Gratuitous Bailment
for the exclusive for the exclusive For the benefit of the
benefit of bailor benefit of the bailee bailor & the bailee
Duties of a Bailor
 The duties of bailor are spelt out in a number of Sections [Section 150, 158, 159, 164].
These are categorized under the following headings:
 Disclose known facts

Duties
 Bear necessary expenses
of
 Indemnify bailee
Bailor
 Bound to accept the goods
 These are enumerated hereunder –

(1) Bailor’s duty a) In case of gratuitous bailment –
to disclose The bailor is bound to disclose to the bailee faults in the goods
faults in bailed, of which the bailor is aware, and which materially interfere
goods bailed with the use of them, or expose the bailee to extraordinary risks;
[Section 150] and if he does not make such disclosure, he is responsible for
damage arising to the bailee directly from such faults.
Example 5: A lends a horse, which he knows to be vicious, to B. He does
1B.3
.
not disclose the fact that the horse is vicious. The horse runs away. B
is thrown and injured. A is responsible to B for damage sustained.
b) In case of non- gratuitous bailment –
If the goods are bailed for hire, the bailor is responsible for such
damage, whether he was or was not aware of the existence of such
faults in the goods bailed
Example 6: A hires a carriage of B. The carriage is unsafe, though B is
not aware of it, and A is injured. B is responsible to A for the injury.
In Hyman & Wife v. Nye & Sons (1881), A hired from B a carriage
along with a pair of horses and a driver for a specific journey. During
the journey a bolt in the under-part of the carriage broke away. As a
result of this, the carriage became upset and A was injured. It was
held that B was liable to pay damages to A for the injury sustained by
him. The court observed that it was the bailor’s duty to supply a
carriage fit for the purpose for which it was hired.
Sometimes, the goods bailed are of dangerous nature (e.g., explosives).
In such cases it is the duty of the bailor to disclose the nature of
goods. [Great Northern Ry’ case (1932)]
(2) Duty to pay a) In case of Gratuitous bailment –
necessary Where, by the conditions of the bailment, the goods are to be kept
expenses or to be carried, or to have work done upon them by the bailee for
[Section 158] the bailor, and the bailee is to receive no remuneration (gratuitous
bailment), the bailor shall repay to the bailee the necessary
expenses incurred by him and any extraordinary expenses incurred
by him for the purpose of the bailment.
b) In case of non-gratuitous bailment –
the bailor is liable to pay the extraordinary expenses incurred by
the bailee.
Example 7: A hired a taxi from B for the purpose of going to Gurgaon

from Noida, during the journey, a major defect occurred in the engine.
1B.4
.
A had to pay ₹ 5000 as repair charges. These are the
extraordinary expenses and it is the bailor’s duty to bear such
expenses. However, the usual and ordinary expenses for petrol, toll
tax etc. are to be borne by the bailee itself.
(3) Duty to indemnify The bailor must compensate the bailee for the loss or damage
the Bailee for suffered by the bailee that is in excess of the benefit received,
premature where he had lent the goods gratuitously and decides to terminate
termination the bailment before the expiry of the period of bailment.
[Section 159]
(4) Bailor’s The bailor is responsible to the bailee for the following:
responsibility to a) Indemnify for any loss which the bailee may sustain by reason
bailee that the bailor was not entitled to make the bailment, or to
[Section 164] receive back the goods or to give directions, respecting them
(defective title in goods).
b) It is the duty of the bailor to receive back the goods when the
bailee returns them after the time of bailment has expired or
the purpose of bailment has been accomplished. If the bailor
refuses to take delivery of goods when it is offered at the
proper time the bailee can claim compensation for all necessary
expenses incurred for the safe custody.
Example 8: X delivered his car to S for five days for safe keeping.
However, X did not take back the car for one month. In this case,
S can claim the necessary expenses incurred by him for the
custody of the car.
Duties of a Bailee
Take No No mixing of Return To return any extra

reasonable care unauthorized bailor’s goods the profit accruing from
of goods bailed use of goods with his own goods bailed.
Goods
1B.5
(1) Take 
.
In all cases of bailment, the bailee is bound to take as much care of the
reasonable goods bailed to him as a man of ordinary prudence would, under similar
care of the circumstances, take care of his own goods of the same bulk, quality and
goods value, as the goods bailed.
(Section  Example 9: If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments
151 & 152) in his own locker at his house along with his own ornaments and if all the
ornaments are lost/stolen in a riot ‘Y’ will not be responsible for the
loss to ‘X’. If on the other hand ‘X’ specifically instructs ‘Y’ to keep
them in a bank, but ‘Y’ keeps them at his residence, then ‘Y’ would be
responsible for the loss [caused on account of riot].
 Example 10: A deposited his goods in B’s warehouse. On account of
unprecedented floods, a part of the goods were damaged. It was held
that, B is not liable for the loss (Shanti Lal V. Takechand).
 Exception: Bailee when not liable for loss, etc., of thing bailed [Section
152]: The bailee, in the absence of any special contract, is not
responsible for the loss, destruction or deterioration of the thing
bailed, if he has taken reasonable care as required under section 151.
(2) Not to make  As per Section 154, if the bailee makes any use of the goods bailed,
inconsistent which is not according to the terms and conditions of the bailment, he
use of goods is liable to compensate the bailor for any loss or destruction of goods.
(section 153  Example 11: A lends a horse to B for his own riding only. B allows C, a
& 154) member of his family, to ride the horse. C rides with care, but the
horse accidentally falls and is injured. B is liable to make compensation
to A for the injury done to the horse.
 Example 12: ‘A’ hires a horse in Kolkata from B expressly to march to
Varanasi. ‘A’ rides with due care, but marches to Cuttack instead. The
horse accidentally falls and is injured. ‘A’ is liable to make compensation
to B for the injury to the horse.
 As per Section 153, a contract of bailment is voidable at the option of
the bailor, if the bailee does not use the goods according to the terms
1B.6
.
and conditions of bailment.
 Example 13: A lends to B, a horse for his own riding. B gives the horse
to C for riding. This contract is voidable at the option of A, bailor.
(3) Not to mix i) If the Bailee, mixes the goods bailed with his own goods, with the
the goods consent of the bailor, both the parties shall have an interest in
(Section proportion to their respective shares in the mixture thus produced
155, 156 (Section 155).
and 157) ii) If the bailee, without the consent of the bailor, mixes the goods
bailed with his own goods and the goods can be separated or divided,
the property in the goods remains in the parties respectively; but the
bailee is bound to bear the expense of separation or division and any
damage arising from the mixture (Section 156).
Example 14: A bails 100 bales of cotton marked with a particular mark
to B. B, without A’s consent, mixes the 100 bales with other bales of
his own, bearing a different mark; A is entitled to have his 100 bales
returned, and B is bound to bear all the expenses incurred in the
separation of the bales, and any other incidental damage.
iii) If the bailee, without the consent of the bailor mixes the goods of
the bailor with his own goods in such a manner that it is impossible to
separate the goods bailed from the other goods and to deliver them
back, the bailor is entitled to be compensated by the bailee for loss
of the goods (Section 157).
 Example 15: A bails a barrel of Cape flour worth ₹ 4500 to B. B,
without A’s consent, mixes the flour with country flour of his own,
worth only ₹ 2500 a barrel. B must compensate A for the loss of his
flour.
(4) Return the  It is the duty of bailee to return, or deliver according to the bailor’s
goods directions, the goods bailed without demand, as soon as the time for
(Section which they were bailed, has expired, or the purpose for which they
160 & 161) were bailed has been accomplished. [Section 160]
1B.7
 .
If, by the default of the bailee, the goods are not returned, delivered
or tendered at the proper time, he is responsible to the bailor for any
loss, destruction or deterioration of the goods from that time.
[Section 161]
 Example 16: X delivered books to Y to be bound. Y promised to return
the books within a reasonable time. X pressed for the return of the
book. But Y, failed to deliver them back even after the expiry of
reasonable time. Subsequently the books were burnt in an accidental
fire at the premises of Y. In this case Y was held liable for the loss.
(5) Return an  In the absence of any contract to the contrary, the bailee is bound to
accretion deliver to the bailor, or according to his directions, any increase or
from the profit which may have accrued from the goods bailed.
Goods  Example 17: A leaves a cow in the custody of B. The cow gives birth to
[Section 163] a calf. B is bound to deliver the calf along with the cow to A.
(6) Not to setup  Bailee must not set up a title adverse to that of the bailor. He must
Adverse Title hold the goods on behalf of and for the bailor. He cannot deny the
title of the bailor.
1B.8
Rights of a Bailor .
Right to terminate the bailment
Right to demand back the goods at any time
Right to file a suit against any wrong doer
Right to file a suit for enforcement of duties

imposed upon a bailee
Right to claim compensation
(1) Right to terminate the bailment [Section 153]: A contract of bailment is voidable at
the option of the bailor, if the bailee does any act with regard to the goods bailed,
inconsistent with the conditions of the bailment.
 Termination of bailment may take place in the following circumstances:
(2) Right to demand back the goods (Section 159): When the goods are lent gratuitously,
the bailor can demand back the goods at any time even before the expiry of the time
fixed or the achievement of the object.
 Example 18: A, while going out of station delivered his ornaments to B for safe custody
for one month. But A returned to station after one week. He may demand the return of
his ornaments even though the time of one month has not expired.
 However, due to the premature return of the goods, if the bailee suffers any loss,
which is more than the benefit actually obtained by him from the use of the goods
bailed, the bailor has to compensate the bailee.
(3) Right to file a suit against a wrong doer [Section 180 and section 181] (discussed in
next pages)
(4) Right to sue the bailee: The bailor has a right to sue the bailee for enforcing all the
liabilities and duties of him.
(5) Right to compensation: If any damage is caused to the goods bailed because of the
unauthorized use of the goods or unauthorized mixing of the goods, the bailor has a
right to claim compensation for the same.
1B.9
Rights of a Bailee
.
Rights of bailee: The following are the rights of the bailee:-
(1) Right to Deliver the Goods to any one of the joint bailors [Section 165] - If several
joint owners bailed the goods, the bailee has a right to deliver them to any one of the
joint owners unless there was a contract to the contrary.
Example 19: A, B and C are the joint owners of a harvesting combine. They delivered it
on hire to D for one month. After the expiry of one month, D may return the “combine”
to any one of the joint owners namely, A, B or C.
(2) Right to indemnity (Section 166) - Bailee is entitled to be indemnified by the bailor for
any loss arising to him by reasons that the bailor was not entitled to make the bailment
or to receive back the goods or to give directions in respect to them. If the bailor has
no title to the goods, and the bailee in good faith, delivers them back to, or according
to the directions of the bailor, the bailee shall not be responsible to the owner in
respect of such delivery. Bailee can also claim all the necessary expenses incurred by
him for the purpose of gratuitous bailment.
(3) Right to claim compensation in case of faulty goods (Section 150) - A bailee is entitled
to receive compensation from the bailor or any loss caused to him due to the failure of
the bailor to disclose any faults in the goods known to him. If the bailment is for hire,
the bailor will be liable to compensate even though he was not aware of the existence
of such faults.
(4) Right to claim necessary expenses (Section 158) - In case of gratuitous bailment, the
bailor shall repay to the bailee the necessary expenses incurred by him and any
extraordinary expenses incurred by him for the purpose of the bailment.
(5) Right to Apply to Court to Decide the Title to the Goods [Section 167] - If the goods
bailed are claimed by the person other than the bailor, the bailee may apply to the
court to stop its delivery and to decide the title to the goods.
Example 20- A, a dealer in T.V. delivered a T.V. to B for using in summer vacation.
Subsequently, C claimed that the T.V. belonged to him as it was delivered only for
repairs, to A & thus, B should deliver it to him. In this case, B may apply to the Court to
decide the question of ownership of the T.V. so that he may deliver it to the right owner
1B.10
(6) .
Right of particular lien for payment of services [Section 170]- (Discussed in next pages)
(7) Right of general lien (Sec. 171) - (Discussed in next pages)
Rights of Bailor & Bailee against any Wrong Doer

 Suit by bailor & bailee against wrong doers [Section 180] -
If a third person wrongfully deprives the bailee of the use or possession of the goods
bailed, or does them any injury, the bailee is entitled to use such remedies as the
owner might have used in the like case if no bailment had been made; & either the
bailor or the bailee may bring a suit against a 3rd person for such deprivation or injury.
 Apportionment of relief or compensation obtained by such suits [Section 181] –

Whatever is obtained by way of relief or compensation in any such suit shall, as
between the bailor and the bailee, be dealt with according to their respective interests
Termination of Bailment
A contract of bailment shall terminate in the following circumstances –

(1) On expiry of If the goods were given for a stipulated period, the contract of
stipulated period bailment shall terminate after the expiry of such period.
(2) On fulfillment of If the goods were delivered for a specific purpose, a bailment shall
the purpose terminate on the fulfillment of that purpose.
(3) By Notice a) Where the bailee acts in a manner which is inconsistent with the
terms of the bailment, the bailor can always terminate the
contract of bailment by giving a notice to the bailee.
b) A gratuitous bailment can be terminated by the bailor at any
time by giving a notice to the bailee. However, the termination
should not cause loss to the bailee in excess of the benefit
derived by him. In case the loss exceeds the benefit derived by
the bailee, the bailor must compensate the bailee for such a loss
(Sec. 159).
(4) By death A gratuitous bailment terminates upon the death of either the bailor
1B.11
or the bailee.
.
(5) Destruction A bailment is terminated if the subject matter of the bailment is
of the subject destroyed or there is a change is in the nature of goods which
matter makes it impossible to be used for the purpose of bailment.
Expiry of Destruction/
Fulfilment of By death of Inconsistent
modification of
fixed period the purpose bailor or bailee use of goods
the subject
matter
Finder of Lost Goods

 Right of finder of lost goods; may sue for specific reward offered [Section 168]:
A person who finds some goods which do not belong to him, is called the finder of the
goods. It is the duty of the finder of goods to find the true owner and surrender the
goods to him. However, the finder of goods has no right to sue the owner for
compensation for trouble and expense voluntarily incurred by him in finding the owner
and preserving the goods found. But he has a right to retain the goods against the
owner until he receives such compensation; and, where the owner has offered a specific
reward on the lost goods, the finder may sue the owner for such reward, and may retain
the goods until then.
 Analysis-
The ‘finder of lost goods’ can ask for reimbursement of expenditure incurred for
preserving the goods and searching the true owner. If the real owner refuses to pay
compensation, the ‘finder’ cannot sue but retain the goods so found.
Further where the real owner has announced any reward, the finder is entitled to
receive the reward. The right to collect the reward is a primary and a superior right
even more than the right to seek reimbursement of expenditure.
 When finder of thing commonly on sale may sell it [Section 169] -

When a thing which is commonly the subject of sale if lost, if the owner cannot with
reasonable diligence be found, or if he refuses, upon demand, to pay the lawful charges
of the finder, the finder may sell it—
1B.12
2
a) .
when the thing is in danger of perishing or of losing the greater part of its value, or
b) when the lawful charges of the finder in respect of the thing found amount to two-
thirds of its value.
 Analysis -
The finder though has no right to sell the goods found in the normal course, however,
he may sell the goods if the real owner cannot be found with reasonable efforts or if
the owner refuses to pay the lawful charges subject to the following conditions:
a) when the article is in danger of perishing and losing the greater part of the value or
b) when the lawful charges of the finder amounts to two-third or more of the value of
the article found.
General Lien & Particular Lien

Bailee’s particular lien [Section 170] -
 Where the bailee has, in accordance with the purpose of the bailment, rendered any
service involving the exercise of labour or skill in respect of the goods bailed, he has,
in the absence of a contract to the contrary, a right to retain such goods until he
receives due remuneration for the services he has rendered in respect of them.
 Example 21: A delivers a rough diamond to B, a jeweller, to be cut and polished, which is
accordingly done. B is entitled to retain the stone till he is paid for the services he has
rendered.
 Example 22: A gives cloth to B, a tailor, to make into a coat. B promises A to deliver
the coat as soon as it is finished, and to give a three months’ credit for the price. B is
not entitled to retain the coat until he is paid
 Analysis: In accordance with the purpose of bailment if the bailee by his skill or labour
improves the goods bailed, he is entitled for remuneration for such services. Towards
such remuneration, the bailee can retain the goods bailed if the bailor refuses to pay
the remuneration. Such a right to retain the goods bailed is the right of particular lien.
He however does not have the right to sue.
 Where the bailee delivers the goods without receiving his remuneration, he has a right
to sue the bailor. In such a case the particular lien may be waived.
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The particular lien is also lost if the bailee does not complete the work within the time
agreed.
General lien of bankers, factors, wharfingers, attorneys and policy brokers

[Section 171]:
 Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the
absence of a contract to the contrary, retain, as a security for a general balance of
account any goods bailed to them; but no other persons have a right to retain, as a
security for such balance, goods bailed to them, unless there is an express contract to
the effect.
 Analysis: Bankers, factors, wharfingers, policy brokers and attorneys of law have a
general lien in respect of goods which come into their possession during the course of
their profession.
 For instance, a banker enjoys the right of a general lien on cash, cheques, bills of
exchange and securities deposited with him for any amounts due to him.
 Example 23: ‘A’ borrows ₹ 500/- from the bank without security and subsequently again
borrows another ₹ 1000/- but with security of say certain jewellery. In this illustration,
even where ‘A’ has returned ₹ 1000/- being the second loan, the banker can retain the
jewellery given as security to the second loan towards the first loan which is yet to be
repaid.
 Under the right of general lien the goods cannot be sold but can only be retained for
dues. The right of lien can be waived through a contract.
Difference between Bailee’s General and Particular Lien

General lien Particular lien
Section 171 of the Indian Contract Act, Section 170 of the Indian Contract Act,
1872 confer on Bailee the right of 1872 confers on the Bailee, the right of
General Lien. particular lien.
General lien alludes to the right to keep Particular lien implies a right of the bailee
possession of goods belonging to other to retain specific goods bailed for non-
against general balance of account. payment of amount.
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recognized through on agreement. It
.
A general lien is not automatic but is It is automatic
is exercised by the bailee only by name
It can be exercised against goods even It comes into play only when some labor or
without involvement of labor or skill. skill is involved has been expended on the
goods, resulting in an increase in value of goods.
Only such persons as are specified Bailee, finder of goods, pledgee, unpaid seller,
under section 171, e.g., Bankers, agent, partner etc. are entitled to particular
factors, wharfingers, policy brokers lien
etc. are entitled to general lien
Pledge
 “Pledge”, “pawnor” and “pawnee” defined [Section 172]: The bailment of goods as
security for payment of a debt or performance of a promise is called “pledge”. The
bailor is in this case called the “pawnor”. The bailee is called the “pawnee”.
 Analysis: Pledge is a variety or species of bailment. It is bailment of goods as a
security for payment of debt or performance of a promise. The person who pledges [or
bails] is known as pledger or pawnor. The person to whom the goods are delivered is
known as pledgee or pawnee. In pledge, there is no change in ownership of the
property. Under exceptional circumstances, the pledgee has a right to sell the
property pledged.
 Section 172 to 182 of the Indian Contract Act, 1872 deal with the contract of pledge.
 Example 24: A lends money to B against the security of jewellery deposited by B with
him. This bailment of jewellery is a pledge as security for lending the money. B is a
pawnor/ pledger and A is a pawnee/ pledgee.
 Essentials of Contract 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 . The subject matter of pledge is
against payment or performance of goods,
the promise
Goods pledged for shall be There shall be the delivery of goods

in existence, from pledger to pledgee,
 Rights of Pawnee/ Pledge –

Rights of Pawnee can be classified as under the following headings:
(1) Right to The pawnee may retain the goods pledged, not only for payment of
retain the the debt or the performance of the promise, but for the interest,
pledged goods of the debt, and all necessary expenses incurred by him in respect
[Section 173] of the possession or for the preservation of the goods pledged.
Example 25: Where ‘M’ pledges stock of goods for certain loan from
a bank, the bank has a right to retain the stock not only for
adjustment of the loan but also for payment of interest.
(2) Right to The Pawnee can retain the goods pledged for any debt or promise
retention of other than the debt or promise for which they are pledged. But he
subsequent debts can exercise this right only when there is a contract to this effect.
[Section 174] i.e. a right to retain goods for subsequent debts can be exercised
only when it has been provided for in a contract to this effect.
(3) Pawnee’s right to The pawnee is entitled to receive from the pawnor extraordinary
extraordinary expenses incurred by him for the preservation of the goods pledged.
expenses incurred For such expenses, however, he does not have the right to retain
[Section 175] the goods, but he can sue the pawnor for such expenses.
(4) Pawnee’s right If the pawnor makes default in payment of the debt, or
where pawnor performance, at the stipulated time of the promise, in respect of
makes default which the goods were pledged, the pawnee has the following rights
[Section 176]: i) the pawnee may bring a suit against the pawnor upon the debt or
promise, and retain the goods pledged as a collateral security; or
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ii) he may sell the thing pledged on giving the pawnor reasonable notice of
the sale.
If the proceeds of such sale are less than the amount due in respect of
the debt or promise, the pawnor is still liable to pay the balance. If the
proceeds of the sale are greater than the amount so due, the pawnee shall
pay over the surplus to the pawnor.
 Rights of a pawnor –
As the bailor of goods pawnor has all the rights of the bailor. Along with that he also
has the right of redemption to the pledged goods which is enumerated under section
177 of the Act.
Right to redeem [Section 177]: If a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is made, and the pawnor makes
default in payment of the debt or performance of the promise at the stipulated time,
he may redeem the goods pledged at any subsequent time before the actual sale of
them; but he must, in that case, pay, in addition, any expenses which have arisen from
his default.
 Duties of the Pawnee

Pawnee has the following duties –
a) Duty to take reasonable care of the pledged goods.
b) Duty not to make unauthorized use of pledged goods.
c) Duty to return the goods when the debt has been repaid or the promise has been
performed.
d) Duty not to mix his own goods with goods pledged.
e) Duty not to do any act which is inconsistent with the terms of the pledge.
f) Duty to return accretion to the goods, if any.
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 Duties of a Pawnor .
Pawnor has the following duties:
a) The pawnor is liable to pay the debt or perform the promise as the case may be.
b) It is the duty of the pawnor to compensate the pawnee for any extraordinary
expenses incurred by him for preserving the goods pawned.
c) It is the duty of the pawnor to disclose all the faults which may put the pawnee under
extraordinary risks.
d) If loss occurs to the pawnee due to defect in pawnor’s title to the goods, the pawnor
must indemnify the pawnee.
e) If the pawnee sells the good due to default by the pawnor, the pawnor must pay the
deficit
Pledge by Non - Owners

 Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf,
who can pledge the goods. But in order to facilitate mercantile transactions, the law
has recognised certain exceptions. These exceptions are for bonafide pledges made by
those persons who are not the actual owners of the goods, but in whose possession the
goods have been left.
(1) Pledge by mercantile agent [Section 178]:

 Where a mercantile agent is, with the consent of the owner, in possession of goods or
the documents of title to goods, any pledge made by him, when acting in the ordinary
course of business of a mercantile agent, shall be as valid as if he were expressly
authorised by the owner of the goods to make the same; provided that the pawnee acts
in good faith and has not at the time of the pledge notice that the Pawnor has no
authority to pledge.
 Explanation: In this section, the expressions ‘mercantile agent and documents of title’
shall have the meanings assigned to them in the Sale of Goods Act, 1930.
 Analysis: Though generally only a owner of goods can pledge, the Act recognizes the
right of certain mercantile agents to pledge provided that the mercantile agent should
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be in custody of goods with the consent of the owner. Such a pledge done in the
ordinary course of business is valid. Pledge in this case can be effected through pledge
of documents like a bill of lading or a railway receipt etc.
 The necessary conditions of validity under the section 178 are as follows:
a) The person pledging the goods must be a mercantile agent,
b) Mercantile agent must be in possession either of the goods or the documents of title to
goods,
c) Such possession must be with the consent of the owner. If possession has been
obtained dishonestly or by a trick, a valid pledge cannot be effected,
d) Pledge must have been made by the mercantile agent, when acting in the ordinary
course of business of a mercantile agent,
e) The pledgee must act in good faith;
f) The pledgee should have no notice of the pledger's defect of title. If the pledgee
knows that the pledger has a defective title, the pledge will not be valid.
(2) Pledge by person in possession under voidable contract [Section 178A] –

When the pawnor has obtained possession of the goods pledged by him under a contract
voidable under section 19 or section 19A (contracts where consent has been obtained by
fraud, coercion, misrepresentation, undue influence), but the contract has not been
rescinded at the time of the pledge, the pawnee acquires a good title to the goods,
provided he acts in good faith and without notice of the pawnor’s defect of title.
(3) Pledge where pawnor has only a limited interest [Section 179] –
Where a person pledges goods in which he has only a limited interest i.e. pawnor is not
the absolute owner of goods, the pledge is valid to the extent of that interest.
Example 26: Mr. X finds a defective mobile phone lying on the road. He picks it up, gets
it repaired for Rs. 5000. He later pledges the mobile phone for Rs. 2000. The true
owner can recover the mobile phone only on paying Rs. 5000
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(4) Pledge by a co-owner in possession –
.
Where the goods are owned by many person and with the consent of other owners, the
goods are left in the possession of one of the co-owners. Such a co-owner may make a
valid pledge of the goods in his possession.
(5) Pledge by seller or buyer in possession -

A seller, in whose possession, the goods have been left after sale or a buyer who with
the consent of the seller, obtains possession of the goods, before sale, can make a
valid pledge, provided the pawnee acts in good faith and he has no knowledge of the
defect in title of the pawnor.
Example 27: A buys a cycle from B. But leaves the cycle with the seller. B then pledges
the cycle with C, who does not know of sale to A, and acted in good faith. This is valid
pledge.
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Distinction between Bailment & Pledge .
Basis of Bailment Pledge
Distinction
Meaning Transfer of goods by one person to Transfer of goods from one person
another for some specific purpose to another as security for repayment
is known as bailment. of debt is known as the pledge.
Terms The person delivering the goods The person who delivers the good as
Applicable under a contract of bailment is security is called the “Pawnor”.
called as “Bailor”.
The person to whom the goods are The person to whom the goods are
delivered under a contract of delivered as security is called the
bailment is called as “Bailee”. “pawnee”.
Purpose Bailment may be made for any Pledge is made for the purpose of
purpose (as specified in the delivering the goods as security for
contract of bailment, eg: for safe payment of a debt, or performance
custody, for repairs, for processing of a promise.
of goods).
Consideration The bailment may be made for Pledge is always made for a
consideration or without consideration.
consideration.
Right to sell The bailee has no right to sell the The pawnee has right to sell the
the goods goods even if the charges of goods if the pawnor fails to redeem
bailment are not paid to him. The the goods.
bailee’s rights are limited to suing
the bailor for his dues or to
exercise lien on the goods bailed.
Right to use of Bailee can use the goods only for a Pledgee or Pawnee cannot use the
goods purpose specified in the contract goods pledged.
of bailment and not otherwise.
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1C. Indian Contract Act, 1872
.
UNIT – 3: AGENCY
Introduction
A relationship of agency is established when one party (agent) is authorized by
another party (principal) to act on his/ her behalf. Such relationships are initiated
when one party desires to extend his/her activities beyond his/her present limits or
capacity. In modern life, it would be impossible for a man to do everything by himself.
Thus, he needs agents, to perform activities. A relationship of agency is commonly
visible in all business transactions. These include hiring employees or retaining the
services of other professionals such as an attorney, design professional, software
developer etc. An agent has potential to form contracts on behalf of the principal
and in doing so, will bind the principal. As a result, the relationship of agency is one of
trust and confidence and an agent must perform his/her activities in a capable and
conscientious manner. The law of agency is contained in sections 182 to 238 of the
Indian Contract Act, 1872.
What is Agency?
 The Indian Contract Act, 1872 does not define the word ‘Agency’. However, section
182 of the Indian Contract Act, 1872 defines Agent and Principal as:
Agent: means a person employed to do any act for another or to represent another in
dealing with the third persons and
The principal: means a person for whom such act is done or who is so represented.
Test of Agency
(a) Whether the person has the capacity to bind the principal and make him answerable
to the third party.
(b) Whether he can establish privity of contract between the principal and third parties.
 If the answer to these questions is in affirmative (Yes), then there is a relationship
of agency.
 Thus, ‘Agency’ is a comprehensive word used to describe the relationship between
one person and another, where the first mentioned person brings the second
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Indian Contract Act, 1872 1C.
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mentioned person into legal relation with others.
 The Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e., he
who acts through an agent is himself acting.
Appointment and Authority of Agents

 Who may employ an agent -
According to Section 183, “any person who has attained majority according to the law
to which he is subject, and who is of sound mind, may employ an agent.” Thus, a minor
or a person of unsound mind cannot appoint an agent.
 Who may be an agent -

Section 184 provides that “as between the principal and third persons any person may
become an agent, but no person who 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”.
Thus, according to Section 184 of the Act any person may become an agent i.e. even a
minor or a person of unsound mind may become an agent and the principal shall be
bound by his acts. But as a rule of caution, a minor or a person of unsound mind should
not be appointed as an agent because he is incompetent to contract and in case of his
misconduct or negligence, the principal shall not be able to proceed against him.
Example 1 - P appoints Q, a minor, to sell his car for not less than ₹ 2,50,000. Q sells
it for ₹ 2,00,000. P will be held bound by the transaction and further shall have no
right against Q for claiming the compensation for having not obeyed the instructions,
since Q is a minor and a contract with a minor is ‘void-ab-initio’.
 Consideration not necessary -

According to Section 185, no consideration is necessary to create an agency. The
acceptance of the office of an agent is regarded as a sufficient consideration for the
appointment.
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Creation of Agency .
 In the words of Desai J, of the Supreme Court of India “The relation of agency arises
whenever one person called the agent has the authority to act on behalf of another
called the principal and consents to act. The relationship has genesis in a contract”
 The relationship of the principal and the agent may be created in any of the following
ways —
Modes of Creation of Agency
Express Appointment Implied Estoppel/ Agency by

Necessity
Appointment holding out ratification
Words Spoken Written
 The authority may be express or implied: According to Section 186, the authority of
an agent may be express or implied.
1. Definitions of express and implied authority [Section 187]
a) Express Authority - An authority is said to be express when it is given by words,
spoken or written.
Example 2: A is residing in Delhi and he has a house in Kolkata. A authorizes B under a
power of attorney, as caretaker of his house. Agency is created by express
agreement.
Example 3: If a customer of a bank wishes to transact his banking business through
an agent, the bank will require written evidence of the appointment of the agent and
will normally ask to see the registered power of attorney appointing the agent.
b) Implied Authority - An authority is said to be implied when it is to be inferred from
the circumstances of the case, conduct of the parties & things spoken or written, or
in the ordinary course of dealing, may be accounted from the circumstances of the
case.
Example 4: If a person realises rent and gives it to the landlord, he impliedly acts for
the landlord as an agent.
Example 5: A owns a shop in Selampur, living himself in Kolkata & visiting the shop
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occasionally. The shop is managed by B, and he is in the habit of ordering goods from
C in the name of A for the purposes of the shop, and of paying for them out of A’s
funds with A’s knowledge. B has an implied authority from A to order goods from C in
the name of A for the purposes of the shop.
2. Agency by Estoppel [Section 237]: An agency by estoppel is based on the principle of

estoppel. The principle of estoppel lays down that “when one person by declaration
(representation), act or omission has intentionally caused or permitted another
person to believe a thing to be true and to act upon such belief, he shall not be
allowed to deny his previous statement or he shall be stopped to deny his previous
statement or conduct”.
The agency by Estoppel is provided under section 237 of the Indian Contract Act.
Section 237 states: “When an agent has without authority done acts or incurred
obligations to third persons on behalf of his principal the principal is bound by such
acts or obligations if he has by his words or conduct induced such third persons to
believe that such acts and obligations were within the scope of the agent's authority”.
According to section 237 of the Contract Act, an agency by estoppel may be created
when following essentials are fulfilled:
a) the principal must have made a representation;
b) the representation may be express or implied;
c) The representation must state that the agent has an authority to do certain act
although really he has no authority;
d) The principal must have induced the third person by such representation; and
e) The third person must have believed the representation and made the contract on the
belief of such representation.
Example 6: A consigns goods to B for sale and gives him instructions not to sell below a
fixed price. C being ignorant of B's instruction enters into a contract with B to buy
the goods at a price lower than the reserved price. A is bound by the contract. A
cannot plead that he had given instructions to B to not sell the goods below certain
price. An agency by estoppel is, consequently, deemed between A and B.
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Example 7: If Piyal (the principal) has for several months permitted Sunil to buy goods
on credit from Prasad and has paid for the goods bought by Sunil, Piyal cannot later
refuse to pay Prasad who had supplied goods on credit to Sunil in the belief that he
was Piyal’s agent and was buying the goods on behalf of Piyal. Piyal is estopped from
now asserting that Sunil is not his agent because on earlier occasions he permitted
Prasad to believe that Sunil was his agent and Prasad had acted in that belief.
3. Necessity: An agency of necessity arises due to some emergent circumstances. In

emergency a person is authorised to do what he cannot do in ordinary circumstances.
Thus, where an agent is authorised to do certain act, and while doing such an act, an
emergency arises, he acquires an extra-ordinary or special authority to prevent his
principal from loss.
Example 8: Raja has a large farm on which Shyam is the caretaker. When Raja is in
Canada, there is a huge fire on the farm. Shyam becomes an agent of necessity for
Raja so as to save the property from being destroyed by fire. Raja (the principal) will
be liable for any expenses, Shyam (his agent of necessity) incurred to put out the fire
and save the farm from destruction during Raja’s absence from the country.
4. Ratification: Rights of person as to acts done for him without his authority, Effect of
ratification [Section 196]: Where acts are done by one person on behalf of another,
but without his knowledge or authority, he may elect to ratify or to disown such acts.
If he ratifies them, the same effects will follow as if they had been performed by
his authority. In simple words, “Ratification” means approving a previous act or
transaction. Ratification may be express or implied by the conduct of the person on
whose behalf the act was done.
Example 9: X who is Y’s agent has on 10th January 2020 purchases goods from Z on
credit without Y’s permission. After the purchase, on 20th January 2020, Y tells X
that he will accept responsibility to pay for the purchases although at the time of
purchase the agent had no authority to buy on credit. Y’s subsequent statement on
20th January 2020 amounts to a ratification of the agent’s (X’s) purchase of goods on
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10th January 2020. .
Essentials of a valid Ratification –
a) Ratification may Ratification may be expressed or may be implied in the conduct
be expressed or of the person on whose behalf the acts are done.
Implied Example 10: A, without authority, buys goods for B. Afterwards
[Section 197] B sells them to C on his own account; B’s conduct implies a
ratification of the purchase made for him by A.
Example 11: A, without B’s authority, lends B’s money to C.
Afterwards B accepts interests on the money from C. B’s
conduct implies a ratification of the loan.
b) Knowledge No valid ratification can be made by a person whose knowledge
requisite for of the facts of the case is materially defective.
valid Example 12: A has an authority from P to buy certain goods at
ratification the market rate. He buys at a higher rate but P accepts the
[Section 198] purchase.
Afterwards P comes to know that the goods purchased by A for
P belonged to Ahimself. The ratification is not binding on P.
If, however the alleged principal is prepared to take the risk of
what the purported agent has done, he can choose to ratify
without full knowledge of facts.
c) Effect of ratifying A person ratifying any unauthorized act done on his behalf
unauthorized act ratifies the whole of the transaction of which such act formed a
forming part of a part. There can be ratification of an act in entirely or its
transaction rejection in entirely. The principal cannot ratify a part of the
[Section 199] transaction which is beneficial to him and reject the rest.
d) Ratification of An act done by one person on behalf of another, without such
unauthorized act other person’s authority, which, if done with authority, would
cannot injure 3rd have the effect of subjecting a third person to damages, or of
person [Sec 200] terminating any right or interest of a third person, cannot, by
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ratification, be made to have such effect. In other words, when
the interest of third parties is affected, the principle of
ratification does not apply. Ratification cannot relate back to the
date of contract if third party has in the intervening time
acquired rights.
Example 13: A, not being authorized thereto by B, demands on
behalf of B, the delivery of a chattel, the property of B, from C,
who is in possession of it. This demand cannot be ratified by B, so
as to make C liable for damages for his refusal to deliver.
Example 14: A holds a lease from B, terminable on 3 months’
notice. C, an unauthorized person, gives notice of termination to A.
The notice cannot be ratified by B, so as to be binding on A.
e) Ratification within Ratification must be made within a reasonable period of time.
reasonable time
f) Communication of Ratification must be communicated to the other party.
Ratification
g) Act to be ratified Act to be ratified should not be void or illegal, for e.g. payment
must be valid of dividend out of capital, forgery of signatures, any other
criminal offence, or anything which is not permitted under law.
Extent of Agent’s Authority

 The authority of an agent means his capacity to bind the principal to third parties.
 The agent can bind the principal only if he acts within the scope of his authority. The
extent of an agent’s authority, whether expressed or implied is determined by:
a) the nature of the act or the business he is appointed to do
b) things which are incidental to the business or are usually done in the course of such
business,
c) the usage of trade or business.
 Whatever be the nature or extent of the agent’s authority, it will always include the
authority to do:
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i)
.
every lawful thing necessary for the purpose of carrying it out,
ii) every lawful thing justified by various customs of trades,
iii) in an emergency, all such acts for the purpose of protecting the principal from loss as
will be done by a person of ordinary prudence in his own case under similar
circumstances.
 The agent’s authority is governed by two principles, namely (a) in normal circumstances
and (b) in emergency.
a) Agent’s authority in normal circumstances [Section 188] -
An agent having an authority to do an act has authority to do every lawful thing which
is necessary in order to do such act.
An agent having an authority to carry on a business has authority to do every lawful
thing necessary for the purpose, or usually done in the course, of conducting such
business.
Example 15: A is employed by B, residing in London, to recover at Mumbai a debt due
to B. A may adopt any legal process necessary for the purpose of recovering the debt,
and may give a valid discharge for the same.
Example 16: A constitutes B as his agent to carry on his business of a shipbuilder. B
may purchase timber and other materials, and hire workmen, for the purposes of
carrying on the business.
b) Agent’s authority in an emergency [Section 189]:

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.
To constitute a valid agency in an emergency, following conditions must be satisfied.
i) Agent should not be a in a position or have any opportunity to communicate with his
principal within the time available.
ii) There should have been actual and definite commercial necessity for the agent to act
promptly.
iii) the agent should have acted bonafide and for the benefit of the principal.
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iv) .
the agent should have adopted the most reasonable and practicable course under the
circumstances, and
v) the agent must have been in possession of the goods belonging to his principal and
which are the subject of contract.
Example 17: An agent who has authority for sale of goods may repair it if necessary.
Example 18: A consigns perishable goods to B at Srinagar, with directions to send
them immediately to C at Tamilnadu. B may sell the good if they begin to perish before
reaching its destination.
Sub - Agents
1) When agent cannot delegate [Section 190] -
 An agent cannot lawfully employ another to perform acts which he has expressly or
impliedly undertaken to perform personally, unless by the ordinary custom of trade a
sub-agent may, or from the nature of the agency, a sub-agent must, be employed.
2) “Sub-agent” defined [Section 191] -

 A “Sub-agent” is a person employed by, and acting under the control of, the original
agent in the business of the agency.
 Analysis: Sub agency refers to case where an agent appoints another agent. The
appointment of sub agent is not lawful, because the agent is a delegatee and a
delegatee cannot further delegate. This is based on the Latin principle “delegatus
non potest delegare”.
Principal Agent Sub -Agent
(Delegates Act/ Work) (Further Delegates)
 A contract of agency is of a fiduciary character. It is based on the confidence

reposed by the principal in the agent & that is why a delegatee cannot further
delegate.
 Exception where an agent can appoint Sub-agent -
a) The appointment of a sub agent would be valid if the terms of appointment originally
contemplated it.
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b) .
Sometimes customs of the trade may provide for appointment of sub agents.
In both these cases the sub agent would be treated as the agent of the principal.
c) Where in the course of the agent’s employment, unforeseen emergency arise making it
necessary for him to delegate the authority that was given to him by the principal.
3) Representation of principal by sub-agent properly appointed [Section 192] –

Where a sub-agent is properly appointed,
a) the principal is, so far as regards third persons, is bound and responsible for the acts
of sub-agent as if he were an agent originally appointed by the principal.
b) Agents responsibility for sub agents: The agent is responsible to the principal for the
acts of the sub-agent.
c) Sub-agents liability to principal: The sub-agent is responsible for his acts to the
agent, but not to the principal, except in case of fraud or willful wrong.
4) Agent’s responsibility for sub-agent appointed without authority [Section 193]:

Where an agent, without having authority to do so, has appointed a person to act as a
sub-agent,
a) the agent stands towards such person in the relation of a principal to an agent, and is
responsible for his acts both to the principal and to third persons;
b) the principal is not represented by or responsible for the acts of the sub agent, the
sub agent is not responsible to the principal at all. He is answerable only to the agent.
Analysis –
a) Where the sub-agent is properly appointed: Where a sub agent is properly appointed,
the principal is bound by his acts and is therefore responsible to third parties as if
he were an agent originally appointed by the principal.
Example 19: A, a carrier, agreed to carry 60 bags of cotton waste from Morvi to
Bhavnagar by a truck. A asked B, another carrier, to carry the goods. The goods were
damaged in transit. Held, A was liable even though it was proved that B was the carrier.
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b)
.
In the case of appointment without authority: In case where the appointment of sub
agent takes place without authority, the principal is not bound by the acts of sub
agent and sub agent is not answerable to the principal. It is the agent who is the
principal of sub agent. Where the sub- agent purportedly acts in the name of first
principal, that first principal may ratify the act of sub agent. However if the sub
agent acts in his own name or in the name of the agent who has without authority
delegated to the sub agent the business which is in fact of the principal, the principal
cannot ratify such acts of sub agent.
Substituted Agent
 Substituted Agent is a person appointed by the agent to act for the principal, in the
business of agency, with the knowledge and consent of the principal. Substituted
agents are not sub agents. They are agents of the principal.
a) Relation between principal and person duly appointed by agent to act in business of
agency [Section 194] -
 Where an agent, holding an express or implied authority to name another person to
act for the principal in the business of the agency, has named another person
accordingly, such person is not a sub- agent, but an agent of the principal for such
part of the business of the agency as is entrusted to him.
 Example 20: A directs B, his solicitor, to sell his estate by auction, and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a
sub-agent, but is A’s agent for the conduct of the sale.
 Example 21: A authorizes B, a merchant in Kolkata, to recover the moneys due to A
from C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co.
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.
for the recovery of the money. D is not a sub-agent, but is a solicitor for A.
b) Agent’s duty in naming such person [Section 195] -
 In selecting such agent for his principal, an agent is bound to exercise the same
amount of discretion as a man of ordinary prudence would exercise in his own case;
and, if he does this, he is not responsible to the principal for the acts or negligence
of the agent so selected.
 Example 22: A instructs B, a merchant, to buy a ship for him. B employs a ship
surveyor of good reputation to choose a ship for A. The surveyor makes the choice
negligently and the ship turns out to be unseaworthy and is lost. B is not, but the
surveyor is, responsible to A.
 Example 23: A consigns goods to B, a merchant, for sale. B in due course, employs an
auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive
the proceeds of the sale. The auctioneer afterwards becomes insolvent without having
accounted for the proceeds. B is not responsible to A for the proceeds.
Difference between a sub-agent & a Substituted Agent
 Both a sub-agent and a substituted agent are appointed by the agent. But, however,
the following are the points of distinction between the two.
Sub Agent Substituted Agent
1. A sub-agent does his work under the A substituted agent works under the
control and directions of agent. instructions of the principal
2. The agent not only appoints a sub-agent The agent does not delegate any part of
but also delegates to him a part of his his task to a substituted agent.
own duties.
3. There is no privity of contract between Privity of contract is established between
the principal and the sub-agent. a principal & a substituted agent.
4. The sub-agent is responsible to the A substituted agent is responsible to the

agent alone and is not generally principal and not to the original agent who
responsible to the principal. appointed him
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5. The agent is responsible to the principal. The agent is not responsible to the
for the acts of the sub- agent. principal for acts of the substituted agent.
6. The sub-agent has no right of action The substituted agent can sue the
against the principal for remuneration principal for remuneration due to him.
due to him.
7. Sub-agents may be improperly appointed. Substituted agents can never be
improperly appointed.
8. The agent remains liable for the acts of The agent's duty ends once he has named
sub-agent as long as sub-agency continues. the substituted agent.
Duties and Obligations of an Agent
Duty to execute Mandate
Conduct business in accordance with directions given by principal
Duty of resonable care and skill
Duty to communicate with the principal
Duty to avoid conflict of interest
Duty not to make secret profit
Duty to remit sums
Duty to maintain accounts
Duty not to delegate
1) Duty to execute mandate –

 The first and foremost duty of every agent is to carry out the mandate of his
principal. He should perform the work for which he has been appointed. Any failure in
this respect would make the agent absolutely responsible for the principal’s loss. In
Pannalal Jankidas V Mohanlal, a commission agent purchased goods for his principal
and stored them in a godown, pending their dispatch. The agent was under instruction
to insure them. He actually charged the premium for insurance but failed to insure
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.
the goods. The goods were lost in an explosion on Bombay harbor. The agent was held
liable to compensate the principal for his loss minus the amount received under the
Bombay Explosion (Compensation) Ordinance, 1944.
2) Duty to follow instructions or customs -

 According to Section 211 an agent is bound to conduct the business of his principal
according to the direction given by the principal, or, in the absence of any such
directions, according to the customs which prevails in doing business of the same kind
at the place where the agent conducts such business. When the agent acts otherwise
and any loss is sustained by the Principal, he must indemnify him, and, if any profit
accrues, he must account for it.
 Example 24: A, an agent is engaged for managing the business of B, in which it is a
custom to invest money at hand for interest. If A omits to make such investment he
must indemnify B for the losses i.e. for the interest B would have obtained for such
investment.
 Example 25: B, a broker, in whose business it is not the custom to sell on credit, sells
goods of A on credit to C. C, before payment, becomes insolvent. B will have to
indemnify A for the losses.
3) Duty of reasonable care and skill -

 According to section 212, an agent is bound to conduct the business of the principal
with as much skill as is generally possessed by persons engaged in similar business,
unless the principal has notice of his want of skill.
 The agent is always bound to act with reasonable diligence, and to use such skill as he
possesses; and to make compensation to his principal in respect of the direct
consequences of his own neglect, want of skill or misconduct, but not in respect of loss
of damage which are indirectly or remotely caused by such neglect, want of skill or
misconduct.
 Example 26: A, a merchant in Kolkata, has an agent, B, in London, to whom a sum of
money is paid on A’s account, with orders to remit. B retains the money for a
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.
considerable time. A, in consequence of not receiving the money, becomes insolvent. B
is liable for the money and interest from the day on which it ought to have been paid,
according to the usual rate, and for any further direct loss- e.g. by variation of rate
of exchange-but not further.
 Example 27: A, an agent for the sale of goods, having authority to sell on credit, sells
to B on credit, without making the proper and usual enquiries as to the solvency of B.
B, at the time of such sale is insolvent. A must compensate his principal for the loss
sustained by him.
 Example 28: A, an insurance-broker, employed by B to effect an insurance on a ship,
omits to see that the “usual clauses” are inserted in the policy.
The ship is afterwards lost. In consequence of the omission nothing can be recovered
from the underwriters. A is bound to make good the loss to B.
 Example 29: A, a merchant in England, directs B, his agent at Mumbai, who accepts the
agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to
send the cotton, omits to do so. The ship arrives safely in England. Soon after her
arrival the price of cotton rises. B is bound to make good to A the profit which he
might have made by the 100 bales of cotton at the time the ship arrived, but not any
profit he might have made by the subsequent rise.
4) Agent’s duty to communicate with principal [Section 214] -

 It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in
communicating with his principal, and in seeking to obtain his instructions.
5) Duty to avoid conflict of interest (Duty not to deal on his own account) -
 Right of principal when agent deals, on his own account, in business of agency without
principals consent: According to Section 215, if an agent deals on his own account in
the business of the agency, without first obtaining the consent of his principal and
acquainting him with all material circumstances which have come to his own knowledge
on the subject, the principal may repudiate the transaction, if the case shows either
that any material fact has been dishonestly concealed from him by the agent, or that
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the dealings of the agent have been disadvantageous to him.
 Example 30: A directs B to sell A’s estate. B buys the estate for himself in the name
of C. A, on discovering that B has bought the estate for himself, may repudiate the
sale if he can show that B has dishonestly concealed any material fact, or that the
sale has been disadvantageous to him.
 Example 31: A directs B to sell A’s estate. B, on looking over the estate before selling
it, finds a mine on the estate which is unknown to A. B informs A that he wishes to
buy the estate for himself, but conceals the discovery of the mine. A allow B to buy, in
ignorance of the existence of the mine. A, on discovering that B knew of the mine at
the time he bought the estate, may either repudiate or accept the sale at his option.
 Principals right to benefit gained by agent dealing on his account in business of
agency- According to section 216, if an agent, without the knowledge of his principal
deals in the business of the agency on his own account instead of on account of his
principal, the principal is entitled to claim from the agent any benefit which may have
resulted to him from the transaction.
 Example 32: A directs B, his agent, to buy a certain house for him. B tells A it cannot
be bought, and buys the house for himself. A may, on discovering that B has bought
the house, compel him to sell it to A at the price he gave for it.
6) Duty not to make secret profits -

 It is the duty of an agent not to make any secret profit in the business of agency. His
relationship with the principal is of fiduciary nature and this requires absolute good
faith in the conduct of agency.
 Secret Profit means any advantage obtained by the agent over and above his agreed
remuneration & which he would not have been able to make but for his position as
agent.
7) Duty to render proper accounts [Section 213] -

 An agent is bound to render proper accounts to his principal on demand. Rendering
accounts does not mean showing the accounts but the accounts supported by vouchers.
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8) Duty not to delegate –
.
 According to section 190, an agent cannot lawfully employ to perform acts which he
has expressly or impliedly undertaken to perform personally, unless by the ordinary
custom of trade a sub-agent may, or, from the nature of agency, a sub- agent, must
be employed.
9) Agent’s duty to pay sums received for principal [Section 218] –

 Subject to such deductions, the agent is bound to pay to his principal all sums
received on his account.
10) Duty not to use any confidential information received in the course of agency against
the principal.
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Rights of an Agent
.
1) Right of retain out of sums received on principal’s account [Section 217] -
 This section empowers the agent to retain, out of any sums received on account of the
principal in the business of the agency for the following payments:
(a) all moneys due to himself in respect of advances made
(b) in respect of expenses properly incurred by him in conducting such business
(c) such remuneration as may be payable to him for acting as agent.
 The right can be exercised on any sums received on account of the principal in the
business of agency.
2) Right to remuneration [Section 219] -

 The agent in the normal course is entitled for remuneration as per the contract. In
the absence of any agreed amount of remuneration, he is entitled for usual
remuneration which is customary in the business. However, an agent who is guilty of
misconduct in the business of the agency is not entitled to any remuneration in
respect of that part of the business which he has misconducted [Section 220].
 Example 33: A employs B to recover ₹ 1,00,000 from C, and invest it in securities that
give good returns. B recovers the amount and lays out ₹ 90,000 on good securities, but
lays out ₹ 10,000 on securities which he ought to provide poor returns, whereby A
loses ₹ 2,000. B is entitled to remuneration for recovering the ₹ 1,00,000 and for
investing the ₹ 90,000. He is not entitled to any remuneration for investing the ₹
10,000, and he must indemnify A for ₹ 2000.
 Example 34: A employs B to recover ₹ 1,00,000 from C. Because of B’s misconduct the
money is not recovered. B is entitled to no remuneration for his services, and must
make good the loss.
3) Agent’s lien on principal’s property [Section 221] -

 In the absence of any contract to the contrary, an agent is entitled to retain the
goods, papers and other property, whether movable or immovable, of the principal
received by him, until the amount due to himself for commission, disbursement and
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.
services in respect of the same has been paid or accounted for him.
 The conditions of this right are:

a) The agent should be lawfully entitled to receive from the principal a sum of money by
way of commission earned or disbursement made or services rendered in the proper
execution of the business of agency.
b) The property over which the lien is to be exercised should belong to the principal and
it should have been received by the agent in his capacity and during the course of his
ordinary duties as an agent. If the agent obtains possession of the property by
unlawful means, he cannot exercise particular lien.
 The agent’s right to lien is lost in the following cases:
a) When the possession of the property is lost.
b) When agent waives his right. Waiver may arise out of agreement express or implied.
c) The agent’s lien is subject to a contract to the contrary.
4) Right to indemnity –
a) Right of indemnification for lawful acts [Section 222] -

 The principal is bound to indemnify the agent against all consequences of lawful acts
done in exercise of his authority.
 Example 35: ‘A’ residing in Delhi appoints ‘B’ from Mumbai as an agent to sell his
merchandise. As a result ‘B’ contracts to deliver the merchandise to various parties.
But A fails to send the merchandise to B & B faces litigations for non- performance.
Here, A is bound to protect B against the litigations & all costs, expenses arising of
that.
 The right to indemnity extends to all losses and expenses incurred by the agent in the
conduct of the business. Where, for example, a stockbroker, on the instructions of a
solicitor, contracted to sell certain shares and had to incur liability to the purchaser
by reason of the owners refusal to complete the sale, the stockbroker was held to be
entitled to recover indemnity from the principal.
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b) .
Right of indemnification against acts done in good faith [Section 223] -
 Where the agent acts in good faith on the instruction of principal, agent is entitled
for indemnification of any loss or damage from the principal.
 Example 36: Where P appoints A as his agent and directs him to sell certain goods
which in fact turned out to be not those belonging to P and if third parties sue A for
this act, A is entitled for reimbursement and indemnification for such act done in
good faith.
 However, the agent cannot claim any reimbursement or indemnification for any loss
etc. arising out of acts done by him in violation of any penal laws of the country.
c) Non-liability of employer of agent to do a criminal act -

 According to section 224, where one person employs another to do an act which is
criminal, the employer is not liable to the agent, either upon an express or an implied
promise, to indemnify him against the consequences of that act.
 Example 37: A employs B to beat C, and agrees to indemnify him against all
consequences of the act. B thereupon beats C, and has to pay damages to C for so
doing. A is not liable to indemnify B for those damages.
 Example 38: B, the proprietor of a newspaper, publishes, at A’s request, a libel upon C
in the paper, and A agrees to indemnify B against the consequences of the publication,
and all costs and damages of any action in respect thereof. B is sued by C and has to
pay damages, and also incurs expenses. A is not liable to indemnify B.
5) Right to compensation for injury caused by principal’s neglect [Section 225] -

 Section 225 provides that the principal must compensate his agent in respect of
injury caused to such agent due to principal’s neglect or want of skill. Thus, every
principal owes to his agent the duty of care, and not to expose him to unreasonable
risks.
 Example 39: A employs B as a bricklayer in building a house, and puts up the
scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence
hurt. A must compensate B.
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Principal’s Liability to Third Parties .
 An agent does all acts on behalf of the principal but incurs no personal liability. The
liability remains that of the principal unless there is a contract to the contrary. This
is because there is no privity of contract and passing of consideration between the
agent and third party. An agent also cannot personally enforce contracts entered into
by him on behalf of the principal.
1) Principal’s liability for the Acts of the Agent [Section 226] -
 Principal liable for the acts of agents which are within the scope of his authority.
Contracts entered into through an agent, and obligations arising from acts done by an
agent, may be enforced in the same manner, and will have the same legal consequences,
as if the contracts had been entered into and the acts were done by the principal in
person.
 Example 40 - A buys goods from B, knowing that he is an agent for their sale, but not
knowing who is the principal. B’s principal is the person entitled to claim from A the
price of the goods, and A cannot, in a suit by the principal, set off against that claim
a debt due to himself from B.
 Example 41 - A, being B’s agent with authority to receive money on his behalf, receives
from C, a sum of money due to B. C is discharged of his· obligation to pay the sum in
question to B.
2) Principal’s liability when agent exceeds authority [Section 227] -

 When an agent does more than he is authorised to do, and when the part of what he
does, which is within his authority, can be separated from the part which is beyond his
authority, so much only of what he does as is within his authority is binding as between
him and his principal.
 Example 42: A, being owner of a ship and cargo, authorizes B to procure an insurance
for ₹ 4,00,000 on the ship. B procures a policy for ₹ 4,00,000 on the ship, and another
for the like sum on the cargo. A is bound to pay the premium for the policy on the
ship, but not the premium for the policy on the cargo.
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3) .
Principal not bound when excess of agent’s authority is not separable [Section 228] –
 Where an agent does more than he is authorized to do, and what he does beyond the
scope of his authority cannot be separated from what is within it, the principal is not
bound to recognize the transaction.
 Example 43: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200
lambs for one sum of ₹ 6,00,000. A may repudiate the whole transaction.
 Example 44: A authorizes B to draw bills to the extent ₹ 200 each. B draws bills in the
name of A for ₹ 1,000 each. A may repudiate the whole transaction.
4) Exception: Liability of principal inducing belief that agent’s unauthorized acts were
authorized [Section 237]:
 When an agent has, without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by such acts or obligations, if
he has by his words or conduct induced such third persons to believe that such acts
and obligations were within the scope of the agent’s authority.
 Example 45: A consigns goods to B for sale, and gives him instructions not to sell
under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B
to buy the goods at a price lower than the reserved price. A is bound by the contract.
 Example 46: A entrusts B with negotiable instruments endorsed in blank. B sells them
to C in violation of private orders from A. The sale is good.
5) Consequences of notice given to agent [Section 229] -

 Any notice given to or information obtained by the agent, provided it be given or
obtained in the course of the business transacted by him for the principal, shall, as
between the principal and third parties, have the same legal consequence as if it had
been given to or obtained by the principal.
 Example 47: A is employed by B to buy from C certain goods of which C is the
apparent owner, and buys them accordingly. In the course of the treaty for the sale,
A learns that the goods really belonged to D, but B is ignorant of that fact. B is not
entitled to set off a debt owing to him from C against the price of the goods.
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.
Thus, the knowledge of the agent is treated as the knowledge of the principal.
6) Principal’s liability for the agent’s fraud, misrepresentation or torts. [Section 238] -
 Misrepresentations made, or frauds committed, by agents acting in the course of
their business for their principals, have the same effect on agreements made by such
agents as if such misrepresentations or frauds had been made, or committed, by the
principals; but misrepresentations made, or frauds committed, by agents, in matters
which do not fall within their authority, do not affect their principals.
 Example 48: A, being B’s agent for the sale of goods, induces C to buy them by a
misrepresentation, which he was not authorized by B to make. The contract is voidable,
as between B and C, at the option of C.
 Example 49: A, the captain of B’s ship, signs bills of lading without having received on
board the goods mentioned therein. The bills of lading are void as between B and the
pretended consignor.
Personal Liability of Agent to Third Parties

Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
[Section 230] –
In the absence of any contract to that effect, an agent cannot personally enforce
contracts entered into by him on behalf of his principal, nor is he personally bound by
them. He can neither sue nor be sued on contracts made by him on his principal’s
behalf.
Exceptions -
In the following exceptional cases, the agent is presumed to have agreed to be
personally bound:
1) Where the contract is made by an agent for the sale or purchase of goods for a
merchant resident abroad/foreign principal: – When an agent has entered into a
contract for the sale or purchase of goods on behalf of a principal resident abroad,
the presumption is that the agent undertakes to be personally liable for the
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performances of such contract.
.
2) Where the agent does not disclose the name of his principal or undisclosed principal;
(Principal unnamed) - when the agent does not disclose the name of the principal then
there arises a presumption that he himself undertakes to be personally liable. When
the principal is undisclosed, the liability under Section 230 is of the agent only, and
the principal cannot be sued in such a case.
3) Non-existent or incompetent principal: Where the principal, though disclosed, cannot
be sued, the agent is presumed to be personally liable.
Example 50: An agent who contracts for a minor, the minor being not liable, the agent
becomes personally liable. This result, may not, however, follow where the other party
already knows that the principal is a minor.
4) Pretended agent – if the agent pretends but is not an actual agent, and the principal
does not rectify the act but disowns it, the pretended agent will be himself liable
(Section 235).
5) When agent exceeds authority- When the agent exceeds his authority, misleads the
third person in believing that the agent he has the requisite authority in doing the act,
then the agent can be made liable personally for the breach of warranty of authority
Rights of Third Parties

1) Rights of parties to a contract made by undisclosed agent [Section 231] -
 If an agent makes a contract with a person who neither knows, nor has reason to
suspect, that he is an agent, his principal may require the performance of the
contract; but the other contracting party has, as against the principal, the same
right as he would have had as against the agent if the agent had been the principal.
 If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfill the contract, if he can show that, if he had
known who was the principal in the contract, or if he had known that the agent was not
a principal, he would not have entered into the contract.
 Example 51: SS bought for himself a ticket of IPL match at Wankahde Stadium
through AB because on personal grounds Stadium management would not have issued
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the ticket to SS. Stadium management may repudiate the contract and refuse SS to
enter the stadium.
2) Performance of contract with agent supposed to be principal [Section 232] -

 Where one man makes a contract with another, neither knowing nor having reasonable
ground to suspect that the other is an agent, the principal, if he requires the
performance of the contract, can only obtain such performance subject to the rights
and obligations subsisting between the agent and the other party to the contract.
 Example 52: A, who owes 50,000 rupees to B, sells 1,00,000 rupees worth of rice to B.
A is acting as agent for C in the transaction, but B has no knowledge nor reasonable
ground of suspicion that such is the case. C cannot compel B to take the rice without
allowing him to set off A’s debt.
3) The Option of The Third Person to Sue The Agent or The Principal –
a) Right of person dealing with agent personally liable [Section 233] -
 In cases where the agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them, liable.
 Example 53: A enters into a contract with B to sell him 100 bales of cotton, and
afterwards discovers that B was acting as agent for C. A may sue either B or C, or
both, for the price of the cotton.
b) Consequence of inducing agent or principal to act on belief that principal or agent will
be held exclusively liable [Section 234]:
 When a person who has made a contract with an agent induces the agent to act upon
the belief that the principal only will be held liable, or induces the principal to act
upon the belief that the agent only will be held liable, he cannot afterwards hold liable
the agent or principal respectively.
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Revocation of Authority .
1) Termination of agency [Section 201] –
Termination of agency means putting an end to the legal relationship between
principal and agent. Section 201 provides for the following modes of termination:
a) Revocation  An agency may be terminated by the principal revoking the authority
of the agent. Principal may revoke the authority given to his agent at
any time before the authority has been exercised so as to bind the
principal [Section 203]. However, the principal cannot revoke the
authority given to his agent after the authority has been partly
exercised so far as regards such acts and obligations as arise for
acts already done in the agency. [Section 204]
 Example 54: A authorizes B to buy 1,000 bales of cotton on account
of A, and to pay for it out of A’s money remaining in B’s hands. B buys
1,000 bales of cotton in his own name, so as to make himself personally
liable for the price. A cannot revoke B’s authority so far as regards
payment for the cotton.
 Example 55: A authorizes B to buy 1,000 bales of cotton on account
of A, and to pay for it out of A’s money remaining in B’s hands. B buys
1,000 bales of cotton in A’s name, and so as not to render himself
personally liable for the price. A can revoke B’s authority to pay for
the cotton.
 Compensation for revocation by principal, [Section 205]: If there is
premature revocation of agency without sufficient cause, the

principal must compensate the agent, for such revocation
 Notice of revocation [Section 206]: When the principal, having
justification to do so, revokes the authority, he must give reasonable

notice of such revocation to the agent, otherwise, he can be liable to
pay compensation for any damage caused to the agent (Section 206).
 Revocation and renunciation may be expressed or implied [Section
207]: Revocation of agency may be expressed or implied in the
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conduct of the principal.
 Example 56: A empowers B to let A’s house. Afterwards A lets it
himself. This is an implied revocation of B’s authority.

b) Renunciation An agent may renounce the business of agency in the same manner in
by agent which the principal has the right of revocation. In the first place, if
[Section 206] the agency is for a fixed period, the agent would have to compensate
the principal for any premature renunciation without sufficient cause.
[Section 205] Secondly, a reasonable notice of renunciation is
necessary. Length of notice is to be determined by the same principles
which apply to revocation by the principal. If the agent renounces
without proper notice, he shall have to make good any damage thereby
resulting to the principal. [Section 206]
c) Completion of An agency is automatically and by operation of law terminated when its
business business is completed. Thus, for example, the authority of an agent
appointed to sell goods ceases to be exercisable when the sale is
completed.
d) Death or An agency is determined automatically on the death or insanity of the
insanity principal or the agent. Winding up of a company or dissolution of
partnership has the same effect. Act done by agent before death
would remain binding.
e) Principal’s An agency ends on the principal being adjudicated insolvent.
insolvency
f) On expiry of Where an agent has been appointed for a fixed term, the expiration
time of the term puts an end to the agency, whether the purpose of agency
has been accomplished or not. An agency comes to an automatic end on
expiry of its term.
2) When the agency is irrevocable?

 When the agent is personally interested in the subject matter of agency the agency
becomes irrevocable. Section 202 states that ”where the agent has himself an
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interest in the property which forms the subject matter of the agency, the agency
cannot, in the absence of an express contract, be terminated to the prejudice of
such interest.”
 Example 57: A gives authority to B to sell A’s land, and to pay himself, out of the
proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be
terminated by his insanity or death.
 Example 58: A consigns 1000 bales of cotton to B, who has made advances to him on
such cotton, and desires B to sell the cotton, and to repay himself, out of the price,
the amount of his own advances. A cannot revoke this authority, nor it is terminated
by his insanity or death.
3) Effects of Termination [Section 208]

 When termination of agent’s authority takes effect as to agent, and as to third
persons [Section 208]: The termination of the authority of an agent does not, so far
as regards the agent, take effect before it becomes known to him, or, so far as
regards third persons, before it becomes known to them.
 Example 59: A directs B to sell goods for him, and agrees to give B five per cent
commission on the price fetched by the goods. A afterwards, by letter, revokes B’s
authority. B, after the letter is sent, but before he receives it sells the goods for ₹
1,00,000. The sale is binding on A, and B is entitled to ₹ 5,000 as his commission.
 Example 60: A, at Chennai, by letter directs B to sell for him some cotton lying in a
warehouse in Mumbai, and afterwards, by letter, revokes his authority to sell, and
directs B to send the cotton to Chennai. B, after receiving the second letter, enters
into a contract with C, who knows of the first letter, but not of the second, for the
sale to him of the cotton. C pays B the money, with which B absconds. C’s payment is
good as against A.
 Example 61: A directs B, his agent, to pay certain money to C. A dies, and D takes out
probate to his will. B, after A’s death, but before hearing of it, pays the money to C.
The payment is good as against D, the executor.
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4) .
Agent’s duty on termination of agency by principal’s death or insanity [Section 209] –
 When an agency is terminated by the principal dying or becoming of unsound mind, the
agent is bound to take, on behalf of the representatives of his late principal, all
reasonable steps for the protection & preservation of the interests entrusted to him.
5) Termination of sub-agent’s authority [Section 210]

 The termination of the authority of an agent causes the termination (subject to the
rules herein contained regarding the termination of an agent’s authority) of the
authority of all sub-agents appointed by him.
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The Indian Contract Act Notes by CA Ankita Patni Mam

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The Indian Contract Act Notes by CA Ankita Patni Mam

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1A.

Indian Contract Act, 1872

Promises to Indemnify/ Save who is promised to be

 Example 2: A may contract to indemnify B against the consequences of any proceedings

Mode of contract of indemnity:

Rights of Indemnity—holder when sued

When does the liability of an indemnifier commence?

Surety Principal debtor Creditor

Essential Features of Guarantee –

The following are the requisites of a valid guarantee:-

supported by some consideration. A guarantee without consideration

is sufficient consideration to the surety for giving the guarantee,

A agrees to do so provided C will guarantee the payment of the price

without consideration, agrees to pay for them in default of B.

(3) Existence of a There must be an existing liability or a promise whose performance

misrepresentation misrepresentation made by the creditor, or with his knowledge

keeping silence as to material circumstances, is invalid (section

fails to account for some of his receipts, and A in consequence

by him to B to the amount of 2,000 tons. B and C have privately

Guarantee may be classified under two categories:

Point of Contract of Indemnity Contract of Guarantee

Nature & Extent of Surety’s Liability (Section 128)

 Nature of Surety’s liability can be summed up as:

Liability of Two Persons, Primarily Liable, not affected by Arrangement

By Revocation By Conduct of the On Invalidation of

By revocation of the Contract of Guarantee

a) Revocation of continuing guarantee by Notice (Section 130) -

By conduct of the creditor

the contrary, discharge the surety.

By the invalidation of the contract of guarantee

Against the Against the creditor Against the

Right of Right of Right to Right to Right to share Right to

Rights against co-sureties

Contract Delivery of goods Purpose Possession Return of Goods

Different forms of Bailment: Following are the popular forms of bailment –

Gratuitous Bailment Non Gratuitous Bailment

 Disclose known facts

 These are enumerated hereunder –

Example 7: A hired a taxi from B for the purpose of going to Gurgaon

Take No No mixing of Return To return any extra

Right to demand back the goods at any time

Right to file a suit against any wrong doer

Right to file a suit for enforcement of duties

Right to claim compensation

Rights of Bailor & Bailee against any Wrong Doer

 Apportionment of relief or compensation obtained by such suits [Section 181] –

A contract of bailment shall terminate in the following circumstances –

Finder of Lost Goods

 When finder of thing commonly on sale may sell it [Section 169] -

General Lien & Particular Lien

General lien of bankers, factors, wharfingers, attorneys and policy brokers

Difference between Bailee’s General and Particular Lien

is exercised by the bailee only by name

 Essentials of Contract of Pledge –

Goods pledged for shall be There shall be the delivery of goods

 Rights of Pawnee/ Pledge –

 Duties of the Pawnee

Pledge by Non - Owners

(1) Pledge by mercantile agent [Section 178]:

(2) Pledge by person in possession under voidable contract [Section 178A] –

(5) Pledge by seller or buyer in possession -

Appointment and Authority of Agents

 Who may be an agent -

 Consideration not necessary -