BUSINESS LAW (105)

Unit 2

Prof. Samarth Singh

Assistant Professor
BBA Department
DIMS, Meerut
 Unit 2
• Void Contracts;

• Contingent Contracts;

• Quasi Contract;

• Contract of Indemnity and Guarantee;

• Bailment, Lien, Pledge and

• Agency.
 Contingent Contract
• According to the Contract Act a contingent contract is one whose
performance us uncertain. The performance of the contract which
comes under this category depends on the happening or non-
happening of certain uncertain-events. On the other hand, an
ordinary or absolute contract is such where performance is certain
or absolute in itself and not dependent on the happening or non-
happening of an event.
• A contingent contract is defined as a contract to do or not to do
something, if some event, collateral to such contract, does or does
not happen (sec. 31).
• Example-
• (A) A contracts to pay Rs. 50,000 if B’s house is destroyed by five.
This is a contingent contract as the performance depends on the
happening of an event.
 Characteristics of a Contingent
Contract
• (1) The performance of the contract depends on he
happening or non-happening of a certain event in future.
This dependence on a probable future event distinguishes a
contingent contract from an ordinary contract.
• (2) This event must be uncertain, that means happening or
non-happening of the future event is not certain, i.e., it
may or may not happen. If the event is hundred percent
sure to happen, and the contract in that case has to be
performed any way, such a contract is not called a
contingent contract.
• (3) The event must be collateral or incident to the contract.
• Therefore, contracts of indemnity, guarantee and insurance
are the most common instances of a contingent contract.
 Rules regarding contingent contracts
• 1. Where the performance of a contingent depends on the happening of an uncertain
future event, it cannot be enforced till the event takes place. And if the happening of the
event becomes impossible, such contracts become void (sec. 32).
• Example- A contracts to sell B a piece of land if he (A) wins the legal case involving that
piece of land. A loses the case. The contract becomes void.
• 2. Where the performance of a contingent contract depends on the non-happening of
a future event, the contract can be enforced if the happening becomes impossible (sec.
33).
• Example- A agrees to sell his house to B if Y dies. This contract cannot be enforced till Y
is alive.
• 3. If the contract is dependent on the manner in which a person will act at an
unspecified time, the event shall be considered to become impossible when such person
does anything which makes it impossible that he should so act within any definite time
or otherwise than under further contingencies (sec. 34).
• 4. Contingent contract to do or not to do anything, if a specified uncertain event
happens within a fixed time, becomes void if the event does not happen and the time
expires or its happening becomes impossible before the time expires [sec. 35(1)].
• 5. Contingent contract to do or not to do anything, if a specific event does not happen
within a specified time, may be enforced when the time so specified expires and such
event does not happen, or before the time so specified it becomes certain that such
event will not happen [sec. 35(1)].
• 6. Contingent agreements to do or not to do anything, if an impossible event happens,
are void, whether or not the fact is known to the parties at the time when it is made
(sec. 36).
 Quasi-Contracts
• Generally a contract comes into existence as a
result of offer made by one party and its
acceptance by the other party, with free will of
both the parties. However under certain
conditions even though no will is expressed by
both the parties for creating contractual
relations, the law creates and enforces legal
rights and obligations. Such contracts are known
as Quasi Contracts. The principle behind Quasi
Contracts is that a person shall not be allowed to
enrich himself at the expense of another.
 Section 68 to 72 of the Contract Act deals with 5
different kinds of Quasi Contracts explained below:
• 1. Claim for necessaries supplied to a person
Incapable of contracting or on his account
(Section 68): If a person incapable of entering
into a contract, or anyone whom he is legally
bound to support, is supplied by another person
with necessaries, suited to his condition in life,
the person who has furnished such supplies is
entitled to be reimbursed from the property of
such incapable person.
• Example: A supplies B, a lunatic, with necessaries
suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
• 2. Reimbursement of person paying money due by
another, in payment of which he is interested (Section
69): A person, who is interested in payment of money,
which another is bound by law to pay, and who
therefore, pays it, is entitled to be reimbursed by the
other.
• Example: A holds land in Bengal on a lease. B is the
owner of the land. The land revenue payable by B to
the government is in arrears and therefore the
government advertised the land for sale to recover the
dues. To prevent the sale of land A pays the arrears of
land revenue. In this case B is bound to reimburse the
amount to A.
• 3. Obligation of person enjoying benefit of Non-
gratuitous act (Section 70): Where a person
lawfully does anything for another person or
delivers anything to him not intending to do so
gratuitously and such other person enjoys the
benefit thereof, the later is bound to make
compensation to the former in respect of, or, to
restore the thing so done or delivered.
• Example: A, a tradesman, leaves his good at B’s
house by mistake. B treats the goods as his own
and uses them. B is bound to pay for the goods.
• 4. Responsibility of Finder of Goods (Section 71): A person
who finds the goods belonging to another, and takes them
into his custody is subject to same responsibility as a bailee.
He must take reasonable care of the goods and keep them
in sound condition and try to find out its true owner.
• 5. Liability of a person to whom money is paid, or thing
delivered by Mistake or under Coercion (Section 72): A
person to whom money has been paid or anything
delivered by mistake or under coercion must repay or
return it.
• Example: A and B jointly owe Rs.5,000 to C. A alone pays
this amount to C. B not knowing this again pays Rs.5,000 to
C. In this case C is bound to repay Rs.5,000 to B as this
amount is paid to him by mistake.
 Indemnity and Guarantee
• Contract of Indemnity:
• “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 and other person, is called a
contract of indemnity.”
• In other words a contract where one person promise to compensate the other from the
loss, which may arise due to the conduct of the promisor himself or any other person, is
called a contract of indemnity.
• Parties:
• There are two parties to a contract of indemnity:
• 1. Indemnifier
• 2. Indemnity Holder
• 1. Indemnifier: The person who promises to make good the loss is called the
indemnifier (promisor).
• 2. Indemnity Holder: The person whose loss is to be made good is called the indemnity
holder or indemnified (promise).
• Example:
• 1. A parked his scooter at the college scooter stands. He lost his token given by the
contractor. The contractor refuses to return the scooter to A unless he (A) gives him an
indemnity bond against any loss which he may suffer if any other person claims the
scooter from the contractor.
• 2. A and B went to a shop. A says to the shopkeeper. ”Let B have the goods I shall
see you are paid” It is contract of indemnity.
 Rights of Indemnity and Indemnity Holder

• Rights of Indemnity Holder:

• The following are the rights of indemnity holder against the indemnifier:
• 1. He can recover all damages which he may be compelled to pay in
respect of any suit filed against him.
• 2. He can recover expenses in respect of any suit filed by him with the
authority of indemnifier.
• 3. He can recover all expenses which he may have paid under the terms of
any compromise of any such, provided the compromise was made with
the consent of indemnifier.
• Rights of Indemnifier:
• It is a well known principle of law that where one person has agreed to
indemnify another, he will on making good the loss, be entitled to all the
ways and means by which the person indemnified might have protected
himself against or reimbursed himself for the loss.
 Contract of Guarantee:
• Definition:
• “A contract of guarantee is a contract to perform the promise or discharge the
liability of a third person in case of his default.”
• A contract of guarantee is made with the object of enabling a person to get a loan or
goods on credit or an employment etc. It may be either oral or written. It is a promise
to pay a debt owing by a third person in case the later does not pay.
• Parties:
• There are three parties to a contract of guarantee:
• 1. Surety:
• The person who gives the guarantee is called the surety or guarantor;
• 2. Creditor:
• The person to whom the guarantee is given is called he creditor.
• 3. Principal Debtor:
• The person for whom the guarantee is given is called the principal debtor.
• Example:
• A) A requests B to lend Rs.5 lack to C and guarantees that if C fails to pay, he will
himself pay to B, there is a contract of guarantee.
• B) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay
for them in default of B. The agreement is void.
 Nature and Extent of Surety's Liability:

• Extent of Surety's Liability:

• Section 128 of the contract Act 1872 provides that the
liability of the surety is co-extensive with that of the
principle debtor, unless it is otherwise provided by the
contract. The phrase co-extensive with that of principle
debtor’ shows the quantum of the surety’s liability. The
quantum of obligation of surety is the general it will be
neither more nor less; the surety’s liability can be made
less than that of the principle debtor but never greater with
special contract.
• Example: A guarantee to B the payment of a bill of
exchange by C, the acceptor. The bill is dishonored by C. A is
liable not only for the amount of the bill.
• 1. Specific Guarantee: The guarantee which is given for a single debt or
transaction is called specific or ordinary guarantee. It comes to an end as soon as
the liability under the transaction ends.
• Example:
• G guarantees K for the payment of 5 bags of wheat purchased C.C makes payment.
Later on C again purchases 5 bags of wheat. C did not pay for that. K used g. Held,
G’s guarantee is specific guarantee and G is not liable.
•
• 2. Continuing Guarantee: According to section 129, a guarantee, which extends to
a series of transaction, is called continuing guarantee. In other words a guarantee
which covers a number of transactions over a period of time is called continuing
guarantee. It is just like a standing offer, which is accepted by the creditor every
time a subsequent transaction takes place. Being a sanding offer it may be revoked
at any time by the surety as to further transactions.
• Example:
• 1) A guarantee to C for B’s credit purchases with a running balance of account not
exceeding Rs.5,000. this is a continuing guarantee.
• 2) A guarantees to C for B’s purchases from C for six months to the extent of
Rs.5,000. this is a continuing guarantee.
Difference B/W Contract of Indemnity and Guarantee
 Bailment
• Bailment the world ‘bailment’ is derived from the French
world the French world ‘baillier’ which means ‘to deliver
etymologically, it means any kind of handling over’. In legal
sense, it involves change of possession of goods from one
person to another for some specific purpose.
• Definition of Bailment
• Sec. 148 defines Bailment as” the delivery of goods by one
person to another for some purpose, upon a contract, that
they shall, when the purpose is accomplished, be returned
or otherwise disposed of according to the directions of
the person delivering them”. The person delivering the
goods is called the ‘bailor’ and the person the person to
whom they are delivered is called the ‘bailee’.
 Consideration in a contract of bailment

• In a contract of bailment, the consideration is

generally in the form money payment either by
the bailor or the bailee, as for example, when A
gives his bicycle to B for repair, or when A gives
his car to B on hire. Such consideration in money
form, however, is not necessary to support the
promise on the part of the bailee to return to
goods. The detrainment suffered by the bailor, in
parting with possession of the goods, is a
sufficient consideration to support the contract of
bailment.
 Essential Elements of Bailment
• 1. Agreement
• There must be an agreement between the bailor and the bailee. This agreement may be
either express or implied. However, a bailment may be implied by law also. For example,
bailment between a finder of goods and owner of goods.
• 2. Delivery of Goods
• There must be delivery of goods. It means that the possession of goods must be
transferred. In this this connection, The following points may be noted:
• i. The delivery must be voluntary, for example the delivery of jewellery by its owner to a
thief who shows a revolver, does not create a bailment because the delivery is not
voluntary.
• ii. Delivery may be actual or constructive.
• 3. Purpose
• The delivery of goods must be for some intented purpose.For example,wrong delivery of
goods to Jaipur Golden Roadways instead of Patel Roadways,does not create any
bailment.
• 4. Return of specific Goods
• The goods which form the subject matter of a bailment must be returned to the bailor
or otherwise disposed off according to the directions of the bailor,after the
accomplishment of purpose or after the expiry of period of the bailment.it may be noted
that the same goods must be returned in their original form or desired.
 Kinds/types of Bailment
• Types/Kinds of Bailment
• i. On the basis of reward
• a) Gratuitous Bailment
• It is a contract of bailment where no consideration
passes between the bailor and the bailee.
• b) Non-gratuitous Bailment
• It is a contract of bailment where some consideration
passes between the bailor and the bailee.
• Difference between Gratuitous bailment and non-
gratuitous bailment
• ii. On the basis of Benefit
• a) Bailment for the exclusive benefit of the bailor
• It is a contract of bailment which is executed only for the
benefit of the bailor and the bailee does not derive any
benefit from it.
• b) Bailment for the exclusive benefit of the bailee
• It is a contract of bailment which is executed only for the
benefit of the bailee and the bailor does not derive any
benefit from it.
• c) Bailment for the mutual benefit
• It is a contract of bailment which is executed for the mutual
benefit of bailor and bailee.
 Duties of Bailor
• 1. Duty to Disclose Faults in Goods Bailed
• As per Sec. 150 of the Act, the bailor is bound to disclose to the
bailee the known defects in the goods bailed. If he fails to do so, he
is liable for damages arising to the bailee from such defects.
• Example: A lent his horse to his friend B. A knew that the horse was
mischievous. But did not disclose this fault to B. When B was riding
on the horse, it suddenly ran away and B was thrown and injured.
Here A is liable to B for the damages sustained by B.
• 2. Duty to pay necessary expenses in case of gratuitous bailment
Section 158 of the Indian Contract Act says that, where, by the
conditions of the bailment, the goods are to be kept or to be
carried, or to have work done upon them by the bailee for the
bailor, and the bailee is to receive no remuneration, the bailors shall
repay to the bailee the necessary expenses incurred by him for the
purpose of the bailment.
• 3. Duty to repay Extra-Ordinary Expenses in case of non-gratuitous bailment
• The ordinary and reasonable expenses are to be borne by the bailee. However, it is
the duty of the bailor to bear the extraordinary expenses made by the bailee for
the purpose of bailment.
• Example: A lends his scooter to B, a friend for one week. The usual and ordinary
expenses like the expenses for petrol and minor repairs etc., are to be borne by B
himself. However, if any major defect occurs like defect in the engine etc. A will
have to repay B the repair charges incurred by B.
• 4. Duty to Indemnify Bailee
• If the title of the bailor to the goods is defective and as a consequence the bailee
suffers, it is the bailor’s duty to indemnify i.e., compensate the bailee for the loss
suffered by him.
• The bailor is bound to make good the loss suffered by the bailee that is in excess of
the benefit actually derived, where he had delivered the goods gratuitously and
compelled the bailee to return them before the expiry of the period of bailment.
• Example: A found a diamond ring and delivered it to B for safe custody.
Subsequently C, the true owner, came to know that his ring is in B’s custody. C filed
a suit against B and recovered the ring and compensation from him. Here A is
bound to make good the loss suffered by B, the bailee.
• 5. Duty to Receive Back the Goods
• It is the duty of the bailor to receive the goods back
when they are returned by the bailee on the expiry of
the term of bailment or on the fulfillment of the
purpose of the bailment. If the bailor refuses to receive
the goods back, then he becomes responsible to pay
the compensation for the necessary expenses of
custody to the bailee.
• Example: A delivered a car to B a mechanic for repair to
be over by one week. But A didn’t take back the car for
one month. Here B can claim the necessary expenses
incurred by him for safe custody of the car.
 Duties of Bailee
• 1. Duty To Take Reasonable Care of the Goods Bailed or delivered to him
• It is the duty of the bailee to take reasonable care of the goods bailed to
him. He must take as much care as an ordinary sensible man would take,
under the similar circumstances, in respect of his own goods of the same
type. If he has taken the required degree of care, then he is not liable for
any loss or destruction of the goods bailed. However, if the bailee is
negligent in taking care of the goods bailed, then he is liable to pay
damages for loss or destruction of the goods.
• 2. Duty not to make Any Unauthorized Use of Goods
• The bailee should use the goods bailed to him strictly in accordance with
the conditions of the contract of bailment. If he unauthorisely uses the
goods bailed to him, the contract of bailment becomes voidable at the
option of the bailor. Further, the bailee is also liable to the bailor for any
loss or damage caused to the goods on account of such unauthorized use
of the goods, even though he is not guilty of negligence, and even if the
damage is the result of an accident.
• Duty Not to Mix the Goods Bailed with his Own Goods
• The bailee must keep the goods bailed separate from his own goods. He
should not mix them with his own goods.
• 4. Duty To Return the Goods
• The bailee should return the goods bailed to the bailor on the expiry of
the period or/on the fulfillment of the object for which the goods were
bailed. The goods must be returned or disposed of according to the
directions of the bailor. If he fails to do so, he is responsible to the bailor
for the loss, even if it arises without his negligence.
• 5. Duty To Return any Accretion to the Goods
• In the absence of any contract to the contrary, the bailee is bound to the
bailor, or according to his direction, any increase or profit, which may have
accrued from the goods, bailed.
• Example: A leaves a cow in the custody of B to be taken care of. The cow
has a calf. B is bound to deliver the calf as well as the cow to A.
 RIGHTS OF BAILOR
• 1. Enforcement of bailee's duties: You have just now read the
duties of the bailee. Duties of the bailee are the rights of the bailor.
For example, when the bailee returns the goods bailed, he should
also return all natural accretions to the goads. This is a duty of the
bailee and it is the right of the bailor to receive all natural
accretions in the goods baited, when the goods are returned to
him.
• 2. Right to claim damages: It is an inherent right of the bailor to
claim damages for any loss that might have been caused to the
goods bailed, due to the bailee's negligence.
• Example: A bailed 50 bags of rice to B, a godown keeper, for safe
custody. C a fraudulent man, prepared a fake delivery order for 10
bags of rice and claimed the delivery from B, the godown keeper. B
believing in good faith, that 10 bags have been sold by A to C,
delivered the same to C. Here A may file a suit against C to recover
the rice bags from him.
• 3. Right to Return the Goods Lent Gratuitously
• 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: 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.
• 4. Right to Avoid the Contract
• If the bailee does any act, which is inconsistent with the terms of the
bailment as regards the goods bailed, the bailor can terminate the
bailment.
• Example: A lets a car to B for his private use only. But B used it as taxi. A
can terminate the bailment.
 Rights of Bailee
• 1. Enforcement of Bailor’s duties: The bailee has the following rights against the bailor
based on the bailor’s duties discussed below:
• a.Right to claim damages: If the bailor has bailed the goods, without disclosing the
defects in take goods, and the bailee has suffered some ioss, the bailee has a right to
sue the bailor for damages. A hires a carriage of B. The carriage is unsafe, though B is
cot aware of it, and A is injured. B is responsible to A for the injury.
• b. Right to claim reimbursement: In case of non-gratuitous bailment the bailee has a
right to recover from the bailor, all necessary expenses, which the bailee had incurred
for achieving the purpose of bailment. In case of a gratuitous bailment, bailee has a
right to recover from the bailor, all extraordinary expenses, borne by the bailee lor the
purposes of bailment
• c. Right to recover losses: It is a right of bailee to recover from the bailor, all losses
suffered by him by reason of the fact that the bailor was not entitled to make the
bailment of the goods or to receive back the goods, or to give directions regarding
them.
• 2. Right to Deliver the Goods to any one of the Joint Bailors
• 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: 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.
• 3. Right to Deliver the Goods, in good faith, to Bailor without Title
• If the bailor has no title to the goods, and the bailee in good faith delivers
them back to or according to directions of the bailor, the bailee is not
responsible to the owner in respect of such delivery.
• 4. Right of Lien
• The bailee has a right to exercise lien i.e., to refuse to return the goods to
the bailor until his lawful charges are paid to him
• 5. Right to Apply to Court to Decide the Title to the Goods
• 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: 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 and 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.
 General Lien
• A general lien is a right of one person to retain any property or goods which are in
his possession belonging to another person until the promise or liability is
discharged.
• It is a right to retain the property belonging to another for a general balance of the
account.
• A general lien is available to bankers, factors, attorneys of High Court and policy
brokers.
• General Lien means the right of an individual to retain or detain as security any
movable property, which belongs to someone else, against a general balance of
the account, until the liability of the holder is discharged. It is described under
section 171 of the Indian Contract Act, 1872.
• A person can waive the right of lien through a contract. It is commonly available
to bankers, factors, policy broker, high-court attorneys, etc. who keep the goods
bailed to them, during the course of their profession and does not require any
contract to that effect. Unless there is an express contract in this regard, no other
person can retain the property of another as the security of the balance due to
them.
• In general lien, the property on which lien is exercised can only be retained, but
cannot be sold for any payment lawfully due to him.
• 1. Bankers: Banks are conferred with the right to retention of goods
or security (such as cheques, bill of exchange, deposits, etc) by way
of general lien, until some claim attaching to it, is satisfied or
discharged. The lien extends to all such documents under which
money will or maybe payable to the customers.
• 2. Factors: A factor is a agent entrusted with the possession of
goods in the ordinary course of his business for the purpose of sale.
He has a general lien on the goods of his principal whether for
advances made or for remuneration.
• 3. Attorneys of High Court: An attorney or solicitor of High Court
has a general lien on all papers and documents belonging to his
client which are in his possession in his professional capacity until
the fee for his professional service and other cost incurred by him
are paid. But if the solicitor refuses to act any more for the client,
he is not entitled to any lien..
• 4. Policy Brokers: They can retain the policy of fire or marine
insurance for their brokerage.
 Finder of Lost Goods
• According to section 71, a person who find goods
belonging to another and takes them into his
custody, is subject to the same responsibility as a
bailee. Since the position of the finder of the
goods is that of a bailee he is supposed to take
the same amount of care with regard to the
goods as is expected of a bailee under section
151. He is also subject to all the duties of a bailee,
including a duty to return the goods after the
true owner is found. If he refuses to return, he
could be made liable for conversion.
 RIGHTS OF FINDER OF GOODS
• 1. Right to sue for reward:
• The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him to preserve the goods and to find out the owner,
but he may retain the goods against the owner until he receives such compensation, and
where the owner has offered a specific reward for the return of goods lost, the finder
may sue for such reward, and may retain the goods until he receives it.
• 2. Right of lien over the goods for expenses:
• According to section 168, a finder of goods has no right to sue the owner for trouble and
expenses voluntarily incurred by him to preserve the goods and to find the owner. He
has, however, the right of particular lien in respect of those goods. He may retain the
goods against the owner until he receives compensation for trouble and expense
voluntarily incurred by him to preserve the goods and to find the owner
• 3. Right of Sale
• The finder of the goods has also been given the right to sell the goods found by him
under certain circumstances mentioned in section 169. Such a right is available to
the finder of the lost goods when the following conditions are satisfied:
• If the owner of the goods cannot be found; or if he refuses to pay the lawful charges of
the finder, and
• When the good is in danger of perishing its value; or when the lawful charges of the
founder in respect of the thing found amount to two-third of its value.
 Duties of Finder
• 1. Duty to find the true owner and return of goods found:
• It is the duty of the finder of the goods to return or deliver the
goods found to the true owner as per his directions before the
expiration of the time period specified by him.
• if by the default of the finder of goods, the goods are not returned
or delivered at the proper time, he is responsible to the loss or
destruction of goods from that time.
•
• 2. Duty to take reasonable care of goods as a bailee:
• The finder of goods should take such care of the goods as a man of
ordinary prudence would take of his own goods. If he fails to act like
an ordinary prudent man, he cannot be excused by pleading that he
had taken similar care of his own goods also, and his goods have
also been lost and damaged along with those of the ordinary
prudent man.
 Pledge
• The bailment of goods as security for payment of a debt
or performance of a promise is called “pledge”. The bailor,
in this case, is called the pawner and the bailee is called
the “Pawnee” sec. 172.
• According to the above definition, pledge (pawn) is a
special kind of bailment, under which the debtor deposits
his moveable goods to the creditor as a security for the
payment of the debt. The person who deposits the goods
(bailor) is called pawner and the person to whom the
possession of goods is given is called the Pawnee.
Illustration; A factory owner borrows Rs. 100.000 from the
bank keeping 1000 units of his product as security with the
Bank; This contract is called pledge where goods have been
bailed as security.
 Rights of a Pawnee
• 1. Right of retainer:
• The Pawnee may retain the goods pledged until his dues are paid. He may retain them not only for the
payment of the performance of the promise, but for the payment of the debt, and all necessary expenses
incurred by him in respect of the position or for the preservation of the goods pledged. The pawnee can
only exercise a particular lien over the goods.
2. Rigths of retainer subsequent advances:
When the Pawnee is lends money to the same pawnor after the date of right retainer over the pledged
goods extends to subsequent advance also .this presumption can be rebutted only by a contract to the
contrary.
3. Right to extraordinary expenses:
The Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged. or such expenses, he has no right to retain the goods; he can only sue
to recover them.
4. Rights against true owner:
when the pawonor’s title is defective .when the pawnor has obtained possession of the goods pledegd by
him under a voidable contract has not been rescided at the time of the pledge , the panwee acquires a
goods title to the goods ,provided he acts in good faith and without notice of the pawnor’s defect of title.
5. Pawnee’s righs where pawnor makes default:
Where the pawnor fails to redeem his pledge, the Pawnee can exercise the following rights:
(a) he may file a suit against the pawnor upon the debt or promise and may retain the goods pledged as a
collateral security.
(b) he may sell the goods pledged after giving the pawnor a reasonable notice of the sale . out of these
rights ,while the right to retain or sed the pawned goods are not concurrent, the right to sue and sell are
concurrent rights,i.e the Pawnee may sue and at the same time retain the goods as concurrent security or
sell them after giving reasonable notice of the seal to pawnor.
(c) he can recover any deficiency arising on the sale of he goods by him from the pawnor .but the shall
have to hand over the suprplus, I any , realized on the sale of the goods to the pawnor
 DUTIES OF THE PAWNEE
• 1. CARE OF GOODS
It is the duty of the pawnee to take reasonable care of goods pledged with him.
2. NO UNAUTHORISED USE
It is the duty of the pawnee not to make any such use of the goods pledged with
him which has not been authorized to him according to the terms of the contract,
3. NO CHANGE OF FORM
• The pawnee cannot change the form of the goods pledged with him. If he does so,
the pawner can claim for damage.
4. NO MIXTURE
The pawnee cannot mix the goods of the pawner with his own goods or with
someone other goods do not belong to pawner. If he does so, the pawner can get
the compensation for separation of his goods from other goods.
5. NO INCONSISTENT ACT
The pawnee cannot take any act with the goods pledged with him which is
inconsistent with the terms of the contract. If he does so, the pawner can claim for
damages.
6. RETURN OF PROFIT
If the pawnee has earned any profit from the use of the goods pledged with him,
which he can not use according to the terms of the contract, he must return such
profits to the pawner.
7. RETURN OF GOODS
The pawnee must return the goods pledged with him to the pawner as soon as the
debt is paid in full or promise is performed by pawner.
 Rights of the Pawnor
• 1. Right to redeem:- Under section 177 of Indian
Contract Act 1872 the pawnor can redeem the
goods pawned by him to the Pawnee anytime
whenever there is a default in the repayment of
the loan but in addition to it he must pay the
extra expenses which have incurred because of
his default in paying off the loan.
• 2. Right to claim damages:- The pawnor can
claim the damages for the goods pawned if the
Pawnee mixes the goods pledged with his own
goods without the consent of the pawnor.
 Duties of Pawnor
1. DUTY TO PAY DEBT
It is the duty of the pawner to pay the amount of debt
or perform the contract within stipulated time
according to the terms of the contract.
2. DUTY TO COMPENSATE
It is the duty of the pawner to compensate the pawnee
for an extraordinary expenses incurred by him for the
preservation of the goods pledged (See. 175).
3. DUTY TO PLEDGE GOODS
It is the duty of the pawner to pledge only those goods
for which he has good title. If the pawner’s title is
defective and this fact is not in the knowledge of the
pawnee the pawnee has good title.
 PLEDGE BY NON-OWNER
• 1.Mercantile agent (sec 178) – A mercantile agent is an agent having the right to
buy/sell goods on behalf of his Principal and can consign goods for the purpose of sale
or raise money on the security of goods. Such agent with the consent of principle can
make a valid pledge.
• 2.A person in possession under voidable contract (Sec 178 A) – Person having
possession under voidable contract can make a valid contract of pledge of goods,
provided that the contract has not been cancelled at the time of pledge and the pledge
has acted in good faith and without knowledge of pledger’s defective title.
• example- where A purchase a watch from B, under coercion and pawns it with C
before the contract is cancelled by B. the pledge is valid. C will get a good title to the
watch and B can only claim damages from A
• 3. Pledger having Limited interest (sec. 179) – where a person pledges goods in which
he has limited interest, the pledge is valid to the extent of his interest. thus, a person
having a lien over goods can pledge it upto the extent of his interest.
• example – A goes to B( a tailor) to get his cloth sewed for a charge of 2000. in the
course when the suit was ready, B needed urgent cash and pledged the suit to C for rs.
3000. Pledge is valid to the extent of B’s interest i.e. 1500. here A can directly recover his
suit from C by giving him 1500.
• 4.Seller in possession of goods after sale ( sec 30(1) of sale of goods act)– A seller, left
in possession of goods sold, is no more owner of the goods, but a pledge created by him
is valid, provided the Pawnee has acted in good faith and has no knowledge of sale of
goods to the real owner. in this case, the original buyer can obtain damages from the
seller but cannot recover the goods from pledgee.
• 5. Co-owner in possession – where there are two or more than two co-owners in
possession of goods anyone of them can make a valid pledge after taking consent of co-
owners.
 AGENCY
• Definition of Agent and Principal
• “An agent is a person employed to do any act for another or to represent another in
dealings with third persons. The person for whom such act is done, or who is
represented, is called the principal.”
• The contract which creates the relationship of ‘principal’ and ‘agent’ is called
‘agency’.
•
• Example: 'A' appoints 'B' to buy five bags of Sugar on his behalf. Here in this
example 'A' is Principal and B is the Agent and the contract between them is Agency.
•
• An agency relationship is a fiduciary relationship, where one person (called the
“principal”) allows an agent to act on his or her behalf. The agent is subject to the
principal’s control and must consent to her instructions. Classic examples of agency
relationships include employer/employee, lawyer/client, and corporation/officer.
•
• General Rules of Agency
• 1. The principal is bound by the acts of his agent and can get the benefit of such acts
as if he had done them himself. The acts of the agent shall, for all legal purposes, be
considered to be the acts of the acts of the principal.
• 2. Whatever a person can lawfully do himself, he may also do the same through an
agent except in case of contracts involving personal services such as painting,
marriage, etc.
 Essential Elements of Agency
1. Principal:
To constitute Agency there must be Principal, who appoints another
person as agent to represent or work on his behalf.
2 Principal must be competent:
According to Section 183 principal must be competent to contract. Section
183 says that any person who is of the age of majority according to the
law to which he is subject, and who is of sound mind, may employ an
agent.
3 There must be an Agent:
In a Contract of Agency, Agent is a person one who is appointed by
Principal to work on his behalf. According to Section 184 any person may
become an agent, but no person who is not of the age of majority and
sound mind can become an agent.
4. Consideration not Necessary:
Section 185 of the Indian Contract Act 1872 says that, no consideration is
necessary to create an agency. It is exception to the general rule - a
contract without consideration is void. but as per this exception, it can be
say that a contract without consideration is valid.
 Kinds/Types of Agents
• 1. Special Agents:
• A special agent is also known as a specific or particular agent. Such agent appointed to perform a
particular work or to represents his principal in particular transaction only.
• As soon as the said period lapses, the agency stands terminated. Specific agents have a limited authority
and as soon as the entrusted to him is performed, his authority also comes to an end. A special agent
cannot bind his principal in any act other than for which he is specially appointed. If he does anything
outside his authority, his principal cannot be bound by it. The third parties that deal with a special agent
must ascertain the extent of the authority he has.
• 2. General agents:
• This type of agents has a general authority to do everything in the course of his agency and he has to
perform all the acts in the interest of his principal. Thus, general agent is one that ahs authority to do all
acts connected with the business of his principal. A manager of a branch shop of a firm or a commission
agent is instances of general agents. General agents have an implied authority to bind his principal by
doing various acts necessary for carrying on the business of his principal. Sufficiently wide powers are
vested in him to affect the business deals, enter into trade bargains, to make purchases and also
payments of the purchases, to receive money on behalf of his principal.
• 3. Universal Agent:
• A universal agent has a universal or an unlimited power to act on behalf of his principal. A universal agent
is one whose authority is unlimited and who can do any act on behalf of his principal provide such act is
legal and is agreeable to the law of land. Universal agent is practically substituted for his principal for all
those transactions wherein his principal cannot participate.
• For Example:
• When a person leaves his country for a long time, he may appoint his son, wife or friend as his universal
agent to act on his behalf in his absence.
• 4. Mercantile Agent: A mercantile agent is one who has authority either to sell goods or to buy goods or to
raise money on the security of goods. The various kind of mercantile agents are as follows:
• a. Commission Agents: A commission agent is generally, appointed for selling or buying goods on behalf of
his principal. Such types of agents belongs to a somewhat indefinite class of agents. He/She tries to secure
buyer for a seller of a goods and sellers for a buyer of goods and receives a commission in return for his
work on the actual sales price.
• b. Del Credere Agents: A Del Credere agent is a mercantile agent who is employed to sell goods on behalf
of his principal. He undertakes to guarantee the payment of dues in consideration for an extra commission.
We can say that besides being a mercantile agent a del credere agent finds himself into the shoes of a
guarantor as well.
• c. Factor: A factor is a mercantile agent to home goods is entrusted for sale. He enjoys wide discretionary
powers in relation to the sale of goods. A Factor is an agent who is entrusted with the possession and
contract of the goods to be said by him for his Principal.
• d. Broker : He is one who is employed to make contracts for the purchase and sale of goods. He is not
entrusted with the possession of goods. He simply act as a connecting link and bring it to parties together
to bargain and if the circumstances materialise he becomes entitled to his commission called brokerage. He
makes a contract in the name of his Principal. Thus, a broker is an agent primarily employed to negotiable a
contract between two parties where he is a broker for sale he has no position of the goods to be sold.
• 5. Auctioneer: Auction is usually a public sale of goods made in the highest of several bidders. An
auctioneer is a mercantile agent who is appointed to sell goods on behalf of principal, compensated in
terms of commission.
• 6. Forwarding Agents: Forwarding agents render services of collecting goods from their principals and
forwarding the same to shipping companies. As foreign trade procedures are more complex that the
procedures of home trade, the service of forwarding agents hence help the producers and exporters to a
great extent.
• 7. Clearing Agents: As forwarding agents help the exporters of goods, clearing agents help the importers of
goods. They complete various complicated customs and exchange formalities on behalf of the importers
who appoint them.
• 8. Indenting Agents: An indenting agent is a commission agent who procures a sale or purchase on behalf
of his principal with a merchant abroad for a commission at the rate mentioned in the indent. He is an
important mercantile agent who facilitates the distribution of goods at international level.
 Creation of Agency
• A person who has capacity to contract can enter into contract either by himself or though some
other person. If he adopts the first method there is no question of agency. If he adopts the second
method, then there is agency. The person who represents another in his dealing with third parties
is called agent and that person who is so represented by agent is called principal.
• The following are different modes of creation of agency.
• Agency by Express agreement.
• Agency by Operation of law.
• Agency by Ratification.
• Agency by Implied authority.
• 1. Agency by Express agreement: Number of agency contract come into force under this method. It
may be Oral or documentary or through power of attorney.
• 2. Agency by operation of law: At times contract of agency comes into operation by virtue of law.
• For example: According to partnership act, every partner is agent of the firm as well as other
parties. It is implied agency. On account of such implied agency only a partner can bind over firm as
well as other partners, to his activities. In the same way according to companies act promoters are
regarded as agents to the company.
• 3. Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after
ratification principal – agent relations will come into operation. The person who has done the
activity will become agent and the person who has given ratification will become principal
• Ratification can be express or implied. In case where adoption of activity is made by means of
expression, it is called express ratification. For example: Without A`s direction, B has purchased
goods for the sake of A. There after A has given his support (adoption) to B`s activity, it is called
Ratification. Now A is Principal and B is agent.
• The ratification where there is no expression is called implied ratification. For example: Mr. Q has
P`s money with him. Without P`s direction Q has lent that money to R. There after R has paid
interest directly to P. Without any debate P has taken that amount from R. It implies that P has
given his support to Q`s activity. It is implied ratification.
• 4. Agency by implied authority: This type of agency comes into force by virtue of relationship
between parties or by conduct of parties.
• For example: A and B are brothers, A has got settled in foreign country without any request from A,
B has handed over A`s agricultural land on these basis to a farmer and B is collecting and remitting
the amount of rent to A. Here automatically A becomes principal and B becomes his agent.
•
• Agency by implied authority is of three types as shown below;
• Agency by Necessity
• Agency by Estoppel
• Agency by Holding out.
• a. By Necessity: At times it may become necessary to a person to act as agent to the other. For
example: A has handed over 100 quintals of butter for transportation, to a road transport company.
Actually it is bailment contract, assume that in the transit all vehicles has got stopped where it takes
one week for further movement. So the transport company authorities have sold away the butter in
those nearby villages. Here agency by necessity can be seen.
•
• b. By Estoppel: In presence of A, B says to C that he (B) is A`s agent though it is not so actually. A has
not restricted B from making such statement. Here agency by Estoppel can be seen
•
• c. By Holding out: B is A`s servant and A has made B accustomed to bring good on credit from C. On
one occasion A has given amount to B to bring goods from C on cash basis. B has misappropriated
that amount and has brought goods on credit as usually, Here is agency by holding out and
therefore A is liable to pay amount to C.
• Extent of Agent’s Authority/Types of Authority
• An agent can act with two types of authority, actual and apparent.
• 1. Actual authority exists when the agent takes an action on behalf of the principal
and he reasonably believes that the principal wants this action taken. Actual authority
includes “express” authority, where the principal tells the agent exactly what to do, and
“implied” authority, where the agent takes actions reasonably necessary to accomplish
the objective of the agency. Principals can also limit agents’ authorities or revoke them
as they choose. For example, a principal who initially tasked an agent with purchasing a
piece of real property may amend the instructions to limit the agent’s authority to
leasing the property instead.[6]
• 2. Ostensible or Apparent authority exists when the agent takes actions for the
principal with a third party that the third party reasonably believes the agent has the
authority to take.[7] For example, assume that Principal employs Agent to manage his
business. Principal tells Agent he can’t buy more than $500 worth of goods from any
supplier. Principal tells or implies to a vendor, however, that Agent has unlimited
authority to buy from him. Agent buys $1,000 worth of goods from the vendor. Agent
has apparent authority to make this purchase because the vendor reasonably believed,
based on Principal’s conduct, that Agent had the authority to purchase more than $500
worth on Principal’s behalf.
•
• 3. Authority in emergency: 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.
 Delegation of agent’s authority

The general principal is “A delegate cannot

further delegate”. (Delegatus non-protest
delegate). An agent, himself being the
delegate of his principal, cannot further
delegate his powers. However, under certain
circumstances the agent may delegate some
or all of his powers to another person. Such
person may be either a sub-agent or a
substituted agent.
 Sub-agent
• A ‘sub-agent” is a person employed by and acting under the control of the original
agent in the business of agency (Sec. 191). In the following cases an agent can
appoint a sub-agent unless he is expressly forbidden to do so:-
• (i) When the ordinary custom of trade permits the appointment of a sub-agent.
• (ii) When the nature of the agency business requires the appointment to a sub-
agent.
• (iii) When the act to be done is purely ministerial and involves no exercise of
discretion or confidence, e.g. routine clerks and assistants.
• (iv) When the principal agrees to the appointment of such a sub-agent expressly or
implidly. (v) When some unforeseen emergency has arisen.
• The relations of the sub-agent to the principal depend on the question whether
the agent had an authority to appoint the sub-agent and whether sub-agent is
properly appointed.
• Where the sub-agent is properly employed the principal is, so far as regard third
persons, represented by the sub-agent and is bound by and is responsible for his
acts as if he was an agent originally appointed by the principal, therefore, will be
responsible for the acts of a properly appointed sub-agent.
• Where an agent, without having authority to do so, has appointed a person to act
as a sub-agent, i.c., a sub-agent is improperly appointed, the principal is not
represented by or responsible for the acts of the sub-agent as between himself
and the third parties. The sub-agent is also not responsible to the principal for
anything. The agent is responsible for the acts of the sub-agent both to the
principal and to the third persons (Sec. 193).
 Substituted agent
• Where an agent holding an express or implied authority to name another
person to act in the business of the agency, has accordingly, named
another person such person is not a sub-agent but a substituted agent.
The substituted agent shall be taken as the agent of principal for such part
of the work as is entrusted to him (Sec. 194).
• Example: 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.
• In selecting substituted 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 acts or negligence of the substituted agent.
• Example: A instructs B, a merchant, to buy a ship for him. B employed a
ship surveyor of good reputation to choose a ship for A. The surveyor
makes the choice negligence and the ship turns to be unseaworthy and is
lost. B is not, but the surveyor is responsible to A.
 Duties of an Agent
• 1. To follow the instructions of his principal: The agent must conduct the
business of the principal according to the directions of the latter. In the
absence of any such directions, he must follow the custom of the business
prevailing in the locality where the agent is conducting such business. If the
agent acts otherwise and the principal sustains a loss, the former must
compensate the latter for it. He will have to account for the profits to the
principal if there are any. He will also lose his remuneration (Sec. 211).
• Example: A, an engaged in carrying on for B a business in which it is the
custom to invest from time to time, at interest, the money which may be in
hand omits to make such investment. A must take good to B the interest
usually obtained by such investment.
• 2. Duty to act, with skills and diligence (Sec. 212): The agent must conduct
the business of agency with as much skill as is generally possessed by persons
engaged in similar business unless the principal has notice of his want of skill.
• Example: 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 enquires as to the
solvency of B. B. at the time of such sale is insolvent. A must make
compensation to his principal in resepct of any loss thereby sustained.
• 3. Duty to render accounts: An agent is bound to render proper accounts to his principal on
demand. He must explain those accounts to the principal and produce the vouchers in support of
the entries (Sec. 213).
• 4. Duty to communicate with the principal: In cases of difficulty it is the duty of the agent to use
all reasonable diligence in communicating with the principal and in seeking to obtain the
instructions. It is only in an emergency where there is no time to communicate that he may act
bonafide without consulting the principal (214).
• 5. Duty not to deal on his own account: The relationship of principal and agent is of a fiduciary
character. An agent, therefore, should not deal on his own account and should not do anything
which may indicate a clash between his interest and duties. An agent shall have to pay all the
benefits to the principal, which may have resulted to him from his dealings on his own account in
the business of the agency without the knowledge of the principal (Secs. 215 & 216).
• Example: A directs B, his agent, to buy a certain house for him. B tells A that it cannot be bought;
any 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 delegate his authority: An agent cannot delegate his authority to another person
unless authorised or warranted by the usage of trade or nature of the agency. A work entrusted to
the agent must be done by him.
• 7. Duty to protect the interest of principal or his legal representative in the event of principal’s
unsoundness of mind or his death: 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 and preservation of the interests entrusted to him
(Sec. 209).
• 8. Duty to pay sums received for principal: The agent is bound to pay to his principal all sums
received on his account after deducting for his own claim (Sec. 218).
 Rights of an Agent
• 1. Right to claim reimbursement for expenses: Agent has the right to retain, out of the money
received on behalf of the principal, money advanced or expenses properly incurred in conducting
the agency business (Sec. 217). The agent may have paid the money at the request of the principal,
or on account of the understanding implied by the terms of the agency or through mercantile
usage.
• 2. Right to receive remuneration: He has also a right to claim remuneration as may be payable to
him for acting as an agent. In the absence of any contract to the contrary, this right to claim
remuneration will arise only when he has carried out the object of the agency in full without being
guilty of misconduct (Sec. 219).
• An agent who is guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of the part of that business which had been misconducted (Sec. 220).
• Example: A employs B to recover 1,00,000 rupees from C, and to lay it out on good security. B
recovers, 1,00,000 rupees and lays out 90,000 rupees on good security, but lays out 10,000 rupees
on security which he ought to have known to be had, whereby A losses 2,000 rupees. B is entitled
to remuneration for recovering the 1,00,000 rupees and for investing the 90,000 rupees. He is not
entitled to any remuneration for investing the 10,000 rupees and the he must make good the 2,000
rupees to A.
• 3. Right to indemnification against consequences of all lawful acts: An agent has a right to be
indemnified by the principal against the consequences of all lawful acts done in exercise of his
authority. (Sec. 222).
• Example: B, a broker at Calcutta, by the orders of A, merchant there, contracts with C for the
purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil and C sues B. B informs A,
who repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and
incurs expenses. A is liable to B for such damages, costs and expenses.
• 4. Rights of indemnification against consequences of acts done in good faith: An agent has a
right to be indemnified by the principal for any compensation which he may be required to pay to
the third parties for injuries caused to them by his wrongful acts within the scope of his actual
authority done in his good faith, i.e., without any wrong or dishonest intentions (Sec. 223).
• Example: B at the request of A, sells goods in the possession of A, but which A had no right to
dispose of B does not know his, and hands over the proceeds of the sale to A. Afterwards C, the
true owner of the goods sues B and recover the value of the goods and cost. A is liable to indemnify
B for what he has been compelled to pay to C and for B’s own expenses.
• But 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 the act (Sec. 224).
• Example: A employs to 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.,
• 5. Right of indemnification for injuries caused by Principal’s neglect: An agent has a right to claim
compensation from the principal for injuries caused to him by the negligence or want to skill on the
part of the principal (Sec. 225).
• Example: 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 make compensation to B.
• 6. Right of particular lien: An agent is entitled to retain under the possession both movable and
immovable of the property of the principal received by him until the amount due to him for
commission, disbursements and services has been paid or accounted for him, provided the contract
does not provide otherwise (Sec. 221).
 Rights and Duties of the Principal
• The agent’s duties are principal’s right and agent’s rights are principal’s duties.
• The duties and rights of an agent have already discussed in earlier pages.
•
• Principal’s liability for the Acts of Agent
• Liabilities of a principal in relation to third parties under contracts made by his
agent depend upon, whether an agent is
•
• Liabilities of Principal
• acting for a named principal,
• acting for an unnamed principal,
• acting for an undisclosed principal.
• Agent Acting for a Named Principal
• The rights and liabilities of a named principal for the acts of his agent may be
discussed as below:
• 1. Acts of an Agent within the Scope of his Authority
• If an act is carried on by an agent within his authority, his acts are binding on the
principal. However, the act done should be lawful.
• Example: A authorized his agent, B, to collect money on his behalf. Breceived
from C a sum of money due to A. This receipt of money is binding on A, and C is
discharged from his obligation to pay this amount to A.
• 2. Acts of an Agent Exceeding his Authority
• It can be discussed under two heads as shown below:
• a. Where the work can be separated – Where an agent exceeds his agency to do the
work of the principal, the principal is bound by that part of the work which is within his
authority if it can be separated from the part of the work which is beyond his authority.
• b. Where the work cannot be separated – When an agent does more than what he is
authorized to do, and such act cannot be separated from that which is within his
authority, the principal is not bound by the transaction. He is in such a case entitled to
repudiate the whole transaction. So if the agent does something in excess of his powers,
the transaction is not binding on the principal.
• 3. Notice Given to Agent
• The principal is bound by the notice given to the agent in the course of business. Thus,
the knowledge of the agent is the knowledge of the principal.
• However, if the knowledge is not acquired by the agent in the course of his employment,
it cannot be imputed to the principal. Further, if the agent had committed a fraud on the
principal, the rule of this section will not apply.
• 4. Liability by Estoppel
• The principal is liable for the unauthorized acts of the agent, if the principal has created
an impression on the third party by his conduct, that the agent has the authority to do
such acts.
• 5. Liability for Misrepresentation or Fraud
• The principal is liable for the misrepresentation or fraud committed by his agent while
acting in the course of his business. It is immaterial whether the misrepresentation or
fraud has been committed for the benefit of the principal or of the agent himself.
• B. Agent Acting for an Unnamed Principal
• When an agent contracts, as an agent for a principal but does not disclose his name, the principal is liable for the
contract of the agent. But the unnamed principal should be in existence at the time of the contract and the acts must be
within the scope of agent’s authority.
• Example: A appointed B as his agent to purchase some goods. B entered into an agreement with C for purchasing those
goods. B signed the agreement as a broker “to my principal” but did not disclose the name of the principal. Here, B is not
personally liable because he contracted in the capacity of an agent.
• However, the agent is personally liable if he declines to disclose the identity of the principal when asked by the third
parties.
• C. Agent Acting for an Undisclosed Principal
• In case of an agent acting for an undisclosed principal, the mutual rights and liabilities of the agent, principal and the
third party are as follows:
• 1. Rights and Liabilities of Agent
• Here agent contracts in his own name. So he is bound by the contract. He is personally liable to the third party also. On
such contracts, he can sue and be sued in his own name because in the eyes of law he is the real contracting party. In
such cases, the principal and the agent have their respective rights against each other.
• 2. Rights and Liabilities of Third Party
• If the third party has discovered that there is a principal, he may file a suit against the principal, or his agent or both. In
such a case, the third party must allow the principal, the benefit of all payments received by him from the agent.
• Example: A sold 100 bales of cotton to B on credit. Afterwards, A discovered that B was acting as an agent of C. In this
case, A may sue either B or C, or both for the performance of the contract.
• 3. Rights and Liabilities of Principal
• The principal has the right to intervene and require the performance of the contract from the third party. In such cases,
the other party may sue either the principal or the agent or both. The principal if he likes may also require the
performance of the contract from the other party. But in such a case, he should allow, the benefit of all payments made
by the third party to the agent, to the third party.
• Example: A contracted with B, a shopkeeper, to purchase furniture. A advanced a part payment of the price to B.
Afterwards, A discovered that B is the agent of C. In this case, C may ask A to perform the contract. But he must account
for the advance money received by his agent B.
• Personal liability of the agent
• Generally an agent is not personally responsible for the contracts made by him on behalf of his principal. But he
incurs personal liability in the following cases:
• 1. Foreign principal: When the contract is made by the sale or purchase of goods for a merchant resident
abroad, in case of breach of contract the third party can make the agent personally liable.
• 2. Undisclosed principal: When the agent does not disclose the name of the principal the third party can make
the agent personally likably if he has relied upon the responsibility of the agent.
• 3. Principal cannot be sued: Where the principal though disclosed cannot be sued, e.g. foreign sovereign,
ambassador, etc., or the principal is disqualified from contracting though otherwise competent to contrast and
this inability of the principal was not communicated to the third party at the time of contracting, he can hold the
agent personally liable.
• 4. Personal liability by agreement: When the agent expressly by agreement or impliedly by conduct undertakes
personal liability of the contract.
• 5. Agent’s liability for breach of warranty: When the agent acts without or beyond his authority and in this was
commits a breach of warranty of authority, he can be held personally liable.
• If the agent knows that he is exceeding his authority, the breach of warranty will amount to deceit (Polhill V.
Walter (1832) 3 B & Ad. 114).
• 6. Agent signs the contract in his own name: An agent who signs a Negotiable Instrument e.g. Bills of Exchange,
Promissory Notes etc., his own name without making it clear that he is signing as an agent, will be held, personally
liable.
• 7. Agency coupled with interest: Where the contract of agency relates to a subject matter in which the agent
has a special interest, agent shall be personally liable to the extent of his interest since he shall be a principal for
that interest.
• 8. Non-existent principal: If an agent acts for a non-existent principal, he shall be held personally liable as if he
had contracted on his own account, e.g., promoters entering into contracts on behalf of a company yet to come
into existence.
•
 Termination of Agency

• Agency may be terminated by any of the following ways.

• By Act of Parties
• By Operation of Law
•
• By Act of Parties
• 1. By agreement between the principal and agent: In some cases contract of
agency itself may contain provisions as regard the termination of agency. They may
be express or implied, which may be inferred from the circumstances of the case
and terms of the contract.
• 2. By revocation of agency by the principal: Principal may either expressly or
impliedly, after giving reasonable notice, revoke the authority of the agent before
it has been exercised by the latter so as to bind the former (Sec. 207).
• Example: A empowers B to let A’s house. Afterwards A lets it himself. This is an
implied revocation of B’s authority.
• By renunciation of business by the agent: Agent, after giving reasonable notice to
the principal, may renounce the business of agency. In case the contract of agency
is interest into for a fixed period, agent shall have to pay compensation to the
principal for his earlier renunciation of the business of agency.
 By Operation of Law
• 1. By insolvency of the principal: The contract of agency will come to an end when
the principal becomes insolvent and the fact of his insolvency comes to the knowledge
of the agent. As against third persons, the agency will terminate when it comes to their
knowledge. Insolvency of an agent will not lead to the termination of the contract of
agency.
• 2. Destruction of the subject matter of the contract of agency: The contract of agency
will come to an end when the subject matter of the agency will come to an end or
when it ceases to exist or when the principal is deprived of his powers on the subject
matter of the contract of agency.
• 3. Principal becoming an alien enemy: Breaking out of war between two countries in
one of which resides principal and in the other resides the agent, shall cause the
termination of the authority of an agent.
• 4. When termination of agent’s authority takes effect as to agent, and as to third
person: 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 for as regards third persons,
before it becomes known to them. (Sec. 208).
• 5. Agent’s duty on termination of agency by principal’s death or insanity 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 and preservation of the interests entrusted to him (Sec. 209).
• 6. Termination of sub-agent’s authority: 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 (Sec. 210).
 Irrevocable Agency
• When the authority given to an agent cannot be revoked, it is said to be an irrevocable agency. An agency becomes
irrevocable in the following cases:
• 1. Where the agency is coupled with interest (Sec. 202):
• Where the agent has himself an interest in the subject-matter of agency, the agency is said to be coupled with interest.
Such an agency is created with the object of protecting or securing any interest of the agent.
• So where a creditor is employed for valuable consideration as an agent to collect rents due to the principal (debtor) for
adjusting the amount towards his debt, the principal thereby confers an interest on the agent and the authority cannot be
revoked unilaterally during the subsistence of the interest, in the absence of an express contract to the contrary.
• It is important that the doctrine of agency coupled with interest applies only, if the authority was intended for the
protection of an interest of the agent existing at the time of the creation of the agency and it is not sufficient that it does
so incidentally. It, therefore, cannot apply where the interest arises after the creation of the agency.
• It must also be noted that an agency coupled with interest is not terminated even by the death, insanity or insolvency of
the principal.
• Illustration:
• 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.
• 2. When revocation would cause the agent personal loss:
• Where the agent has, in pursuance of his authority, contracted a personal liability, the agency becomes irrevocable and
the principal cannot revoke the authority unilaterally. This is so because the principal cannot be permitted to defeat rights
already established.
• Illustration:
• A gives authority to B to pay A’s creditor C and places the necessary money in the hands of B for that purpose. Thereupon
B informs C that he has received money in his hands for payment of his debt and that C may collect the same any time
from him. A cannot revoke B’s authority to pay to C as B has incurred a personal liability.
• 3. When the authority has been partly exercised by the agent (Sec. 204):
• Where the agent has partly exercised his authority, it becomes irrevocable so far as regards such acts and obligations as
“arise from acts already done in the agency.
• Illustration (Appended To Sec. 204):
• A authorises 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 him personally liable for the price. A cannot revoke B’s
authority so far as regards buying the cotton but can revoke B’s authority to pay for the cotton.