GROUP :: 7

UNIT : 2 [ special contract ]


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 CONTRACT OF INDEMNITY

Contract of indemnity meaning is a special kind of

contract. The term ‘indemnity’ literally means
“security or protection against a loss” or
compensation. According to Section 124 of the Indian
Contract Act, 1872 “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, is called a contract of
indemnity.” Example: P contracts to indemnify Q
against the consequences of any proceedings which R
may take against Q in respect of a certain sum of
money.
 OBJECTIVE OF CONTRACT OF INDEMNITY

The objective of entering into a contract of indemnity is to

protect the promisee against unanticipated losses.

PARTIES TO THE CONTRACT OF INDEMNITY

A contract of indemnity has two parties.

1. The promisor or indemnifier
2. The promisee or the indemnified or indemnity-
holder
The promisor or indemnifier: He is the person who promises to bear
the loss.
The promisee or the indemnified or indemnity-holder: He is
the person whose loss is covered or who are compensated. In the above-stated
example,
* P is the indemnifier or promisor as he promises to bear the loss of Q.
* Q is the promisee or the indemnified or indemnity-holder as his loss is
covered by P
ESSENTIALS OF CONTRACT OF INDEMNITY

1. PARTIES TO A CONTRACT: There must be two

parties, namely, promisor or indemnifier and the
promisee or indemnified or indemnity-holder.
2. PROTECTION OF LOSS: A contract of indemnity is
entered into for the purpose of protecting the
promisee from the loss. The loss may be caused due
to the conduct of the promisor or any other person.
3. EXPRESS OR IMPLIED: The contract of indemnity
may be express (i.e. made by words spoken or
written) or implied (i.e. inferred from the conduct of
the parties or circumstances of the particular case).
4. ESSENTIALS OF A VALID CONTRACT: A contract of
indemnity is a special kind of contract. The principles of the general law
of contract contained in Section 1 to 75 of the Indian Contract Act,
1872 are applicable to them. Therefore, it must possess all the
essentials of a valid contract.
5. NUMBER OF CONTRACTS: In a contract of Indemnity, there is
only one contract that is between the Indemnifier and the Indemnified
 RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY
HOLDER

As per Section 125 of the Indian Contract Act, 1872 the following rights
are available to the promisee/ the indemnified/ indemnityholder against
the promisor/ indemnifier, provided he has acted within the scope of his
authority.

1. RIGHT TO RECOVER DAMAGES PAID IN A SUIT

[SECTION 125(1)]: An indemnity-holder has the right to
recover from the indemnifier all damages which he may be
compelled to pay in any suit in respect of any matter to which
the contract of indemnity applies.
2. RIGHT TO RECOVER COSTS INCURRED IN
DEFENDING A SUIT [SECTION 125(2)]: An
indemnity-holder has the right to recover from the
indemnifier 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 authorized
him to bring or defend the suit.
3. RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE
[SECTION 125(3)]: An indemnity-holder also has the right to recover
from the indemnifier 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 authorized him to compromise the suit
4. RIGHT TO SUE FOR SPECIFIC PERFORMANCE- The indemnity
holder is entitled to sue for specific performance if he has incurred absolute
liability and the contract covers such liability.
COMMENCEMENT OF LIABILITY OF
PROMISOR/ INDEMNIFIER

Indian Contract Act, 1872 does not provide the time of the
commencement of the indemnifier’s liability under the
contract of indemnity. But different High Courts in India
have held the following rules in this regard:
*Indemnifier is not liable until the indemnified has
suffered the loss.
*Indemnified can compel the indemnifier to make good his
loss although he has not discharged his liability. In the
leading case of Gajanan Moreshwar vs. Moreshwar
Madan(1942), an observation was made by the judge that
“ If the indemnified has incurred a liability and the liability
is absolute, he is entitled to call upon the indemnifier to
save him from the liability and pay it off”
Thus, Contract of Indemnity is a special contract in which one party to a
contract (i.e. the indemnifier) promises to save the other (i.e. the
indemnified) from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person. Section 124 and 125 of
the Indian Contract Act, 1872 are applicable to these types of contracts.
 Case study
Two furniture dealers Ram and Sham makes a contract in which
RAM provide Sham furniture and in return Sham pays for the
same . In addition Ram incurred the transportation expenses
while holding all the liabilities of the furniture . During the
transportation most the furniture got damaged .
Then who is liable for the damage ?
SOLUTION : According to the contract Ram is liable to compensate the loss happen to the
furniture during transporation .
 CONTRACT OF GUARANTEE
Contract of Guarantee means a contract to perform the promises made or discharge the liabilities
of the third person in case of his failure to discharge such liabilities.

ACCORDING TO SECTION 126 OF INDIAN CONTRACT ACT, 1872

“A contract of guarantee is a contract to perform the promise or discharge the liability of the
defaulting party in case he fails to fulfill his promise.”

PARTIES TO CONTRACT OF GUARANTEE

There are three parties to the contract of guarantee:

Surety: A surety is a person giving a guarantee in a contract of guarantee. A person who

takes responsibility to pay a sum of money, perform any duty for another person in case that
person fails to perform such work.

Principal Debtor: A principal debtor is a person for whom the guarantee is given in a contract of
guarantee.

Creditor: The person to whom the guarantee is given is known as the creditor.
EXAMPLE: Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promise that in case Mr. Y fails to
repay the loan, then he will repay the same. In this case of a contract of guarantee, Mr. X is a
Creditor, Mr. Y is a principal debtor and Mr. Z is a Surety.

ESSENTIALS OF A CONTRACT OF
GUARANTEE

1) MUST BE MADE WITH THE AGREEMENT OF ALL THREE PARTIES

ALL the three parties to the contract i.e the principal debtor, the creditor, and the surety must
agree to make such a contract with the agreement of each other. Here it is important to note that
the surety takes his responsibility to be liable for the debt of the principal debtor only on the
request of the principal debtor. Hence communication either express or implied by the principal
debtor to the surety is necessary. The communication of the surety with the creditor to enter into
a contract of guarantee without the knowledge of the principal debtor will not constitute a contract
of guarantee.

EXAMPLE
Sam lends money to Akash. Sam is the creditor and Akash is the principal debtor. Sam
approaches Raghav to act as the surety without any information to Akash. Raghav agrees. This
is not valid.

2) CONSIDERATION

According to section 127 of the act, anything is done or any promise made for the benefit of the
principal debtor is sufficient consideration to the surety for giving the guarantee. The
consideration must be a fresh consideration given by the creditor and not a past consideration. It
is not necessary that the guarantor must receive any consideration and sometimes even
tolerance on the part of the creditor in case of default is also enough consideration.

EXAMPLE

In State Bank of India v Premco Saw Mill(1983), the State Bank gave notice to the
debtor-defendant and also threatened legal action against her, but her husband agreed to
become surety and undertook to pay the liability and also executed a promissory note in favor of
the State Bank and the Bank refrained from threatened action. It was held that such patience and
acceptance on the bank’s part constituted good consideration for the surety.

3) LIABILITY

In a contract of guarantee, the liability of a surety is secondary. This means that since the primary
contract was between the creditor and principal debtor, the liability to fulfill the terms of the
contract lies primarily with the principal debtor. It is only on the default of the principal debtor that
the surety is liable to repay.

4) PRESUPPOSES THE EXISTENCE OF A DEBT

The main function of a contract of guarantee is to secure the payment of the debt taken by the
principal debtor. If no such debt exists then there is nothing left for the surety to secure. Hence in
cases when the debt is time-barred or void, no liability of the surety arises. The House of Lords in
the Scottish case of Swan vs. Bank of Scotland (1836) held that if there is no principal debt, no
valid guarantee can exist.

5) MUST CONTAIN ALL THE ESSENTIALS OF A VALID CONTRACT

Since a contract of guarantee is a type of contract, all the essentials of a valid contract will apply
in contracts of guarantee as well. Thus, all the essential requirements of a valid contract such as
free consent, valid consideration offer, and acceptance, intention to create a legal relationship etc
are required to be fulfilled.

6) NO CONCEALMENT OF FACTS
The creditor should disclose to the surety the facts that are likely to affect the surety’s liability.
The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is
invalid if the creditor obtains it by the concealment of material facts.

7) NO MISREPRESENTATION

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

8) WRITING NOT NECESSARY

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

CONTINUING GUARANTEE
A continuing guarantee is defined under section 129 of the Indian Contract Act,1872. A
continuing guarantee is a type of guarantee which applies to a series of transactions. It applies to
all the transactions entered into by the principal debtor until it is revoked by the surety. Therefore
Bankers always prefer to have a continuing guarantee so that the guarantor’s liability is not
limited to the original advances and would also extend to all subsequent debts.

EXAMPLE

b) On M’s recommendation S, a wealthy landlord employs P as his estate manager. It was the
duty of P to collect rent every month from the tenants of S and remit the same to S before the
15th of each month. M, guarantee this arrangement and promises to make good any default
made by P. This is a contract of continuing guarantee.

The most important feature of a continuing guarantee is that it applies to a series of separable,
distinct transactions. Therefore, when a guarantee is given for an entire consideration, it cannot
be termed as a continuing guarantee.

Revocation of Continuing Guarantee

So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an
offer is accepted it becomes final. However, a continuing guarantee can be revoked for future
transactions. In that case, the surety shall be liable for those transactions which have already
taken place.

A contract of guarantee can be revoked in the following two ways:

1) By giving a notice (Section 130)
Continuing guarantees can be revoked by giving notice to the Creditor but this applies only to
future transactions. Just by giving a notice the surety cannot waive off his responsibility and still
remains liable for all the transactions that have been placed before the notice was given by him.
If the contract of guarantee includes a clause that a notice of a certain period of time is required
before the contract can be revoked, then the surety must comply with the same as said in Offord
v Davies (1862).

Illustration

A guarantees to B to the extent of Rs. 10,000, that C shall pay for all the goods bought by him
during the next three months. B sells goods worth Rs. 6,000 to C. A gives notice of revocation,
C is liable for Rs. 6,000. If any goods are sold to C after the notice of revocation, A shall not be,
liable for that.

2) By Death of Surety(Section 131)

Unless there is a contract to the contrary, the death of surety operates as a revocation of the
continuing guarantee in respect to the transactions taking place after the death of surety due to
the absence of a contract. However, his legal representatives will continue to be liable for
transactions entered into before his death. The estate of deceased surety is, however, liable for
those transactions which had already taken place during the lifetime of the deceased. Surety’s
estate will not be liable for the transactions taking after the death of surety’even if the creditor
had no knowledge of surety’s death.
DISCHARGE OF A SURETY (SEC.130 - 141)
A Surety is discharge from his liability on:

1).The death of a surety as regrads future transactions in case of a continuing guarantee

in the absence of a contract to the country.

2).Notice of revocation as regards future transactions in case of a continuing guarantee.

3).Any variation in the terms of the contract between the principal debtor and the

creditor
without surety’s consent.

4). If the creditor releases the principal debtor, the surety also automatically discharges.

5).When the creditor makes an arrangement for composition or promises to give time or

not
sue the principal debtor without surety’s consent, the surety will be discharged.

6) .Any act or omission to do an act by the creditor which results in harming the rights of
the surety, and also impairs the eventual remedy of the surety himself against the
principal debtor, discharges the surety.

7).Where the creditor loses or parts with any security which he receives from the
principal debtor without the consent of the surety, this discharges the value of such
security
.
 CASE STUDY
A , B went to a stationary shop [ C is the owner ] . A wanted to buy
a book but he didn’t had money at that point of time , so he ask C
that he will pay later . And for surance C ask B whether A is
capable to pay for it or not but B denies to give any surance fot
that . Therefore later on C agrees to give A the book .
Question : Whether this could be consider as contract of
guarantee or not ?
Solution : no , this contract is not considered as contract of guarantee
because there no surety presence for A .
DEFINATION OF
BAILMENT
Bailment means transferring the
possession to another person to fulfill
some predetermined agreement that
might require the bailee (person to
whom possession is given) to do
something or vice versa in exchange
for some consideration that is not
mandatorily required to exist.
Generally, the bailor (owner of the
asset) does not enjoy the right to use
such bailed assets while they have
bailee.
Essential of contract of bailment
• There shall be a contract between the parties for the delivery of
goods.
• The goods should be delivered for a special purpose only.
• Bailment can be done for movable goods and not for immovable
goods or money.
• There shall be a transfer to bailee. Therefore bailor remains the
owner.
• Bailee is duty bound to deliver the goods same goods back to and
not any other goods.
 DUTIES OF BAILOR and bailee
• 1.Care of goods It is the duty of the Bailee that he should take as much care
of the goods as a man of ordinary prudence takes care about his own goods.
• 2.Act according to bailment Any act of the Bailee should not be against the
condition of the contract. Otherwise contract will be voidable at the option of
the bailor.
• 3.mixing is not allowed It is the duty of the Bailee that he should keep the
bailor goods separate from his own goods. If he mixed without the consent of
the bailor then he himself will bear the expenses of separation and loss.
• 4.should not deny the title It is the duty of the Bailee that he should not
deny or change the title of the bailor about the ownership of the goods.
 • 5.Default of responsibility It is the duty of the Bailee that
he should not deny or change the title of the bailor about
the ownership of goods.
• 6.Return of goods It is the duty of the Bailee to return or
deliver the goods bailed according to the bailors conditions.
• 7.Return at proper time It is the duty of the bailee that he
should return the goods bailed as the time or purpose of
bailment completes without the demand of the bailor.
• 8.Return of profit it is also the duty of Bailee that he should
deliver the profit or any increase occurred in the bailed
goods to the bailor.
• 9.Proper use of goods It is the duty of the bailee that he
should use the goods according the condition of the
 RIGHTS OF BAILOR
• Right to have property protected
and used as agreed.
• Right to have property back at end
of bailment with service or repair
done properly.
• Right to have bailee not convert.
• Right to not be bound to limitation
of liability unless bailor knows.
• Duty to provide safe goods.
RIGHT TO BAILEE
• Right to posses: bailee may
acquire or use property
temporarily. Title does not pass.
• Right to use bailed property.
• Right to compensation: reimbursed
for costs or services as provided in
the agreement.
• Right to limit liability.
• Duty to return bailed property in
same condition to bailor. Bailee
may liable for conversion and
 CASE STUDY

Aman owns a restaurant which needs renovation but he is incapable of renovating it ; so he made a
contract of bailment to Kisan . In this contract it was mentioned that until the full renovation of the
restaurant , Kisan have possession on restaurant and he is incharge to take a particular amount of daily
earning but not the profit earn in restaurant. This is done until and unless Kisan recover all the expense .
Question : What are the duties of Kisan related to the case ?
Solution:
1. Kisan cannot use restaurant under his name .
2. He is liable to maintain Aman’s restaurant .
3. Kisan cannot ask for profit after incurring the amount of expense done in renovation .
4. Kisan have to return daily profit to Aman .
 .

“Pledge” “Pawnor” and“Pawnee”

Defined [setion172]
 The bailment of goods as security for payment of debt or
performance of a promise is called a PLEDGE .
• The bailor in this case is callled “ PAWNOR” .
• The bailee is called “ PAWNEE”.
PLEDGE is a variety or specie of bailment .
:: It is a bailment of goods as security for payment of debt or performance of
promise .
# The person who pledges [ or bails] is known as “ PLEDGOR” or also as “PAWNOR” .
# The bailee is known as “ PLEDGEE” or “PAWNEE” .
# The bailor / pledgor is the one who gives his goods as security for performance of
the promise .
# the bailee / pledgee is the one to whom the goods are held as security .
:: In pledge , there is no change in ownership of the property .
Under EXECPTIONAL circumstances , the pledgee has right to sell the property
pledged . SECTION 172 to 182 of the
INDIAN CONTRACT ACT , 1872 deal specifically with the bailment of pledge.
EXAMPLE :- A lends money to B against the security of jewellery deposited by B with
him i.e. A . This bailment of jewellery is a pledge as a security for the lending the
money . B is a PAWNOR and A is a PAWNEE .
 Essential of pledge

There should be bailment of security .

:- In the contract of pledge there should be bailment of security against the payment of debt and a performance of a promise.
 The subjects matter of pledge is a good .
:- The goods is the matter that is putted as security against debt and promise.
 Goods pledge should be in existence .
:- The goods pledge should exist , they should be tangible ( that means it could be seen and touched ).
 There shall be delivery of goods from pawnor to pawnee.
:- The good that is pledge needed to be given to the pawnee in physical mode.
 Transfer of possession of goods from pawnor to pawnee.
:- The physical control of the goods is shifted from Pawnor to Pawnee .
 Ownership cannot be transfer.
:- As the physical control is transferred : according to the contract it is not followed to transfer the ownership from pawnor to pawnee .
Even after change in possession the pawnor is the only owner .
 Return of pledge goods on repayment .
:- According to the contract ; when the payment of the debt or the promise have been perform the pawnee is required to return the good
pledged to pawnor.
 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 good pledged.
e. Duty not to do any act which is inconsistent with the terms of pledge .
f. Duty to return accretion to the goods, if any .
 PAWNEE’S RIGHTS
Rights of Pawnee can be classified as under the following
headings :
1. Right to retain the pledged goods [Section 173]: The pawnee may retain the goods
pledged, not only for payment of the debt or the performance of the promise, but for the
interest of the debt and all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
Example: 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 retention of subsequent debts [Section 174]: The Pawnee shall not, in the
absence of a contract to that effect, retain the goods pledged for any debt or promise other
than the debt or promise for which they are pledged .

3. Pawnee’s right to extraordinary expenses Incurred [Section 175]: The pawnee is

entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged. For such expenses, however, he does not have the right
to retain the goods.
 .
4. Pawnee’s right where pawnor makes default [ SECTION 176 ] :
: If pawnor makes default in payment of the debt , or performance , at stipulated time of the
promise , in respect of which the goods were pledged , the pawnee may bring a suit against
the pawnor .
: The suit may be for the debt or the promise , and retain the goods pledged as a collateral
security ; or he may sell the good pledged on the giving pawnor reasonilbe notice of the sale.
: If the proceeds of such sale are led 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 THE PAWNOR
As the bailor of goods ; pawnor has all the
rights of the bailor –
Enforcement of the Pawnee’s duties
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 , he may
redeem the goods pledged
 Duties by 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.
 CASE STUDY
Ravi took a loan of Rs.50,000 against his jewellery as security to Tarun .
The possession of jewellery transferred from Ravi to Tarun . Tarun took the
jewellery at home and putted it with his wife’s other jewellery . And his
wife used the jewellery [ as she wore it ] . After few days Ravi returned all
the money and for the same Tarun returned Ravi’s jewellery .
QUESTION: Does all the duties are followed by the bailee ?
Answer: No , some duties are not followed by the bailee
1. Duty not to mix bailor’s goods with his own goods.
2. Duty not make an unauthorised use of bailor’s goods.
 Agency can be
defined as the
relationship between

CONTRACT OF two people , wherein

a person has the

AGENCY authority to act on

behalf of another ,
bind him/her into a
legal relationship
with the third party.
DEFINITION OF AGENT & PRINCIPLE
Agent and principal are defined under Section 182 of the Indian Contract Act,
1872.
There are two parties in a contract of agency :-
AGENT:-
Agent is a person employed to do any act for another or to represent another
in dealings with third persons.
PRINCIPAL:-
The person for whom such act is done, or who is so represented, is called
the principal.
ESSENTIAL FEATURES OF A CONTRACT
OF AGENCY
1.Express or implied agreement between the Principal and the Agent.
Agency relationship arises from an agreement between the principal and the agent. It may be
an express or implied agreement.

2.The principal should be Competent to Contract. (section 183)

According to section 183 of the Act, “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”. Therefore, to constitute a
valid contract of agency, The principal must be competent to contract.
3. Agent not to be Competent to Contract.
According to section 184 of the act, “ As between the principal and the third persons any
person may become an agent”.
Thus, law does not stop a minor from becoming an agent. Though it is risky proposition
for principal because minor can not be held liable even for his wrongful acts.

4.Consideration Not Required. (section 185)

According to section 185 of the Act, no consideration is needed to establish an agency
contract.

5. Creation of Legal Relations.

An agent establish the legal relations between the principal and the third parties. The
principal is answerable for the acts of the agent to the third parties.
All the acts of the agent are considered to be the acts of the principal
 MODES OF CREATION OF AGENCY
1. Agency by express agreement: [section 186 and 187]
A contract of agency may be made by express words, whether written or oral.

Example:-X who owns a shop, appoints Y to manage his shop by executing a power of attorney in Y’s favour . Here, the relationship of principal and agent
has been created between X and Y by an express agreement .

2. Agency by Ratification :[section 196]

Ratification means confirmation of an act which has already been done. Sometimes, an act is done by a person on behalf of another person but without
another person’s knowledge and authority. If he accepts and confirm the act, he is said to have ratified it.

Example:-A gives B’s property on rent basis to C . Afterwards B accepts monthly rent from C. B’s conduct implies a ratification of rented property.

3. Agency by operation of law :

In certain circumstances the law treats a person as an agent of another person.

Example:-

(a) when a partnership is formed, every partner automatically becomes agent of another partner.

(b) when a company is formed its promoters are treated as its agents by operation of law.
4 . Agency by implied agreement:[section 187]
An authority is said to be implied when it is to be inferred from the circumstances of the case.

(a) Agency by estoppels : When a person by his conduct or act allows a third person to believe that a certain person is his
authorized agent, the agency is said to be an agency by estoppels.
Example:-X tells Y in the presence and within the hearing of Z that he is Z’s agent. Z does not object to this statement. Later on Y
enters into a contract with X believing that X is Z’s agent. In such a case Z is bound by this contract and in a suit between Z and Y , Z
cannot be permitted to say that X was not his agent. Even though X was not actually his agent.

(b) Agency by necessity : In certain urgent circumstances, a person is required to act as an agent for another without his consent,
such an agency is called an agency of necessity.
Example:-X consigned some vegetables from delhi to Bombay by a truck. The truck met with an accident. The vegetables being
perishable were sold by the transporter. This sale is binding on X. in this case , the transporter became an agent by necessity.

(c) Agency by holding out : When a principal by his active conduct or act and without any objection permits another to act as his
agent, the agency is the result of principal’s conduct as to the agent.
Example:-X allows Y, his servant to purchase goods for him on credit from Z and later on pays for them. One day X pays cash to Y to
purchase goods. Y misappropriates the money and purchases goods on credit from Z. This is agency of holding out therefore X is
liable to pay amount to Z.
 CASE STUDY

A man ask a child to pass a good to his neighbour as well to get a feedback for
the same . After this act was done the child was entitled with a chocolate .
QUESTION : Mention any characteristic of contract of agency if any ?
ANSWER: 1. the capacity of principal
[ man is 18+ and sound minded ] .
2. the capacity of agent [ though the child is minor ].
3. consideration is not required [as chocolate is given by the man with
free consent ].
 Nature and extent of agent authority
 The 'authority’ in the context of agency relationship
means capacity of an agent to bind the principle.
 The authority of an agent to bind the principal by his act
may be of the following types:
1. actual or real authority
2. Agent’s authority in an emergency
3. Delegation of authority
4. Ostensible or apparent authority
 1. Actual or real authority
(sec. 186)
According to section 186 an agent can bind the principal by all his acts performed within the
scope of his express or implied authority.
THE ACT LAYS DOWN :
 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.
 Agent having an authority to carry on business, has authority to do every lawful thing
necessary for the purpose, or usually done in the course, of conducting such business.
 Example
1. A is employed by b, residing in London to recover at Bombay depth due to be. Any legal
process necessary for the purpose of recovering the depth and may give a valid discharge
for the same.
2. X appoints Y, his agent to carry on his business of a ship builder.Y may purchase Timber
and other materials, and hire workmen for the purpose of carry on the business.
 2.Agent’s authority in an emergency
. (sec.189)
 An agent has authority in an emergency to do all such at 4G purpose
of pro acting his principle from loss as wood be done by and man of
ordinary intelligence in his own case under similar circumstances.
 Example :
1. A consigns provision to B at Calcutta, with directions to send them
immediately to C at Cuttack. B may sell the provision at Calcutta, if
they will not bear the journey to Cuttack without spoiling.
2. Where butter was In dangered of becoming useless owing to delay
in transit and it was impossible to obtain instructions of the
principal, the railway company sold the butter for the best
available price. It was held that the principle was bound by the
sale.
[Sim & Co. V. Midland rail Co.]
Express or Implied consent of principal. Where the principal has
expressly or impliedly permitted the delegation of such authority.
1. Nature of agency. Where the nature of business of agency is
such such that it requires or permits the appointment of such
agent.
2. Custom Of trade. Where the customer of trade permits The
appointment of sub-agent.
3. Ministerial act. Where the act to be done is purely ministerial
(eg.. Clerical or routine work) and involves no exercise of
discretion.
4. Unforeseen emergencies. Where delegation of authority has
become necessary due to some unforeseen emergencies
( eg.agent is too ill to act.)
 3.Delegation of authority (sec. 190)
 the general principle is “delegatus nonpotest
delegare”. Which means that ‘a delegate cannot
further delegate’.
 Sec.190 Provides that an agent himself being a
delegate cannot lawfully employ another to
perform acts which he has expressly or Impliedly
undertaken to perform personally.

EXCEPTION TO THE GENERAL

RULE [SECTION 190]
There are some exceptions to the general rule that a delegate cannot further
delegate, as follows:
4.Ostensible or apparent authority
 Thisis the authority which seems to be possessed by the agent,
keeping in mind the nature of agency and relevant trade
practices.
 An agent has the authority which seems to be possessed by such
agent.
 The word ostensible or apparent mean ‘something that seems to
exist’.
 Itmay or may not actually exist for the agent. But, if the agent
performs and act which is within the limits of this ostensible or
apartment authority principal salary bound by that act.
 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).
• Thus a person employed by an agent is known as sub-agent.
There is no privity of contract between the sub-agent and
the principal [Purshottam Haridas V. Amruth Ghee Co.]
• The relation between the original agent and the sub-agent
is that of principal and agent.
• All the rules which govern the agency will automatically
govern the relationship between the sub-agent and the
agent.
• The same rights and liabilities can be created by the sub-
agent on the original agent as created by the agent on the
principal.
 Substitute agent
(section 194)
 According to section 194,”where and agent,
holding an express or implied authority to name another person to act for the
principal in the business of the agency, has name 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 entrusted to him”
 thus a substituted agent is the agent of the principal but not of the agent.
Substituted agent is directly responsible to the principal and ‘privity of contract’
gets established between him and the principal.
 Example :
a direct 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.
Effects of appointment of sub-agent
(section 192 and 193)