Indian Contract Act, 1872 (Part – II Special Contracts) 63

Indian Contract
2 Act, 1872 (Part – II
Special Contracts)
Synopsis…
2.1 Contract of Indemnity
A. Meaning
B. Essential of a Contract of Indemnity
C. Rights of Indemnity Holder
D. Commencement of Liability of Indemnity
2.2 Contract of Guarantee
A. Meaning
B. Essentials of a Contract of Guarantee
C. Distinction between Contract of Indemnity
D. Kinds of Guarantee
E. Revocation of Termination of a Continuing Guarantee
F. Rights of Surety
G. Liabilities of Surety
H. Discharge of Surety's Liabilities
I. When a Surety is not discharged
2.3 Bailment
A. Definition
B. Essentials of Bailment
C. Classification of Bailment
D. Duties and Liabilities of a Bailor
E. Rights of Bailor
F. Duties and Liabilities of a Bailee
G. Rights of Bailee
H. Distinction between Particular Lien and General Lien
2.4 Pledge
1. Definition of Pledge
2. Essentials of Pledge
3. Duties of a Pawnee or Pledgee
4. Rights of Pawnee or Pledgee
5. Duties of Pawnor
6. Rights of Pawnor
7. Distinction between Bailment and Pledge
8. Finder of Goods
64 Business Law (F.Y.B.B.I. – Sem. II)

2.5 Agent
1. Definition and Meaning
2. Methods/Modes of Creation of an Agency
3. Essentials of Valid Ratification
4. Kinds of Agent
5. Duties of an Agent
6. Rights of an Agent
7. Duties of Principal
8. Rights of Principal
9. Termination of an Agency
Self Study
Answer the following
Practical Problems
Objective Questions
Fill in the blanks
Indian Contract Act, 1872 (Part – II Special Contracts) 65

2.1 CONTRACT OF INDEMNITY [SECTION 124]

A. Meaning
The word indemnity means to compensate or to make good the loss. A
contract of indemnity refers to the promise made by one person to make good any
loss or damages incurred or may incur by acting at his/her request or for his/her
benefit. The object of a contract of indemnity is essentially to protect the promise
against anticipated loss.
According to Indian Contract Act, 1872, a Contract of Indemnity is "a
contract by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or by the conduct of any other person.
The person who promises to make good the loss is called the indemnifier
(promisor) and person, whom the loss is to be made good is known as
Indemnified or Indemnity holder (promisee).
The definition can be represented in a systematic manner namely :
A contract by which

One party

Promises to

Save the other

From loss caused

By the conduct of the promisor himself or by any other person
E.g. "A" Contract to indemnify "B" against the consequences of an
proceedings which "C" may take against "B" in respect of a certain sum of
\s\do0(` 200/-. This is a contract of indemnity.
A contract of indemnity is like any other contract and must fulfill all the
essentials of a valid contract, e.g. consideration, free consent etc.
B. Essentials of a Contract of Indemnity
The following two conditions must be satisfied :
1. Loss to Promisee
The wording of Section 24 clearly suggest that under a contract of indemnity,
the promisee or the indemnity holder must have actually suffered a damage or
loss before he can hold the promisor liable for actual loss.
2. An object or Consideration must be lawful
The object or consideration of a contract of indemnity must be lawful
otherwise it cannot be enforced.
3. Parties
There are 2 parties in a contract of indemnity. The person who promises to
make good the loss is called the indemnifier or promisor and the person to whom
the loss is made good is known as indemnified or Indemnity holder (promisee).
4. Express or Implied
The contract of indemnity can be oral or written or may be inferred from the
behaviour or conduct or prevailing circumstances.
5. Operation of Law
Duty to indemnify may arise by operation of law in case of contract.
66 Business Law (F.Y.B.B.I. – Sem. II)

C. Rights of Indemnity Holder (Section 125)

Section 125 of the Indian Contract Act lays down that the indemnity holder
(promisee) is entitled to recover from the indemnifer (promisor) the following :
1. All Damages
Indemnity holder is entitled to recover all damages, which he might have
been compelled to pay in any suit in respect of a matter covered by the contract.
2. All Costs
He is entitled to all costs, which he might be compelled to pay in any suit of
indemnity. The cost must be such as would be incurred by a prudent man.
3. All Sums
All sums which he may have paid under the terms of any compromise of
any such suit provided the compromises was an act of prudence; or was
authorized by the indemnifier.
4. Suit for Specific Performance
An indemnity holder can sue for specific performance of the contract of
indemnity if he incurs absolute liability which is covered by the contract of
indemnity.
It is essential for the indemnity holder to act within the scope of his authority
and not to contravene the specific directions of the promisor.
D. Commencement of Liability of Indemnifier
The liability of an indemnifier arises as soon as the loss or injury to
indemnity holder becomes imminent and is not postponed till the indemnity
holder actually suffers the loss or injury.
Illustrations
a) X and Y go to shopkeeper. "Let Y have the goods, I will see that you
are paid". This is a Contract of Indemnity.
b) X contracts to indemnify Y against consequences of any proceedings
which "C" may take against Y in respect of a certain sum of 5,000. This is
contract of indemnity.
2.2 CONTRACT OF GUARANTEE [SECTION 126]
A. Meaning
A contract of guarantee is a contract to perform the promise or to discharge
the liability of a third person in case of default. A contract of guarantee involves
three parties the creditor, the surety and the principal debtor.
A contract of guarantee

is a contract to

perform a promise

OR

discharge the liability

of a third person

in case of his default
Indian Contract Act, 1872 (Part – II Special Contracts) 67

Section 126 defines four different terms name, a "Contract of Guarantee",

"Surety", "Principal Debtor" and Creditor as under :
A Contract of Guarantee also known as Suretyship has been defined as "a
contract to perform the promise, or discharge the liability of a third person in
case of his default".
The person who gives the guarantee, is called the surety or the guarantor.
The person to whom the guarantee is given, is called the Creditor.
Illustrations
a) 'A' lends `\s\do0( 1000 to 'B' and 'C' promises to 'A' that if 'B' does not
repay the money 'C' will do so. Here 'A' is Creditor, 'B' the Principal Debtor
and 'C' the Guarantor. This is a contract of guarantee.
b) 'S' and 'P' go to shop 'S' says to shop-keeper, "Let 'P' have the goods, and
if he does not pay you. I will". This is a contract of guarantee. The primary
liability is with 'P' and secondary liability with 'S'.
B. Essentials of a Contract of Guarantee [Section 126 & 127]
A contract of guarantee, like other ordinary contracts must satisfy all the
essentials of a Contract. Moreover, a contract of guarantee has the following
characteristics :
1. Tripartite Privity of Contract
Every contract of guarantee is a tripartite agreement, which includes the
principal debtor, the creditor and the surety, hence it is a triangular relationship
which follows the three collateral contracts.

i) Between principal debtor and creditor, out of which the guaranteed

debt arises.
ii) Between surety and creditor where surety guarantees to pay principal
debtors debt in case the principal debtor defaults.
iii) Between surety and principal debtor, when principal debtor shall
indemnity the surety, in case where the surety pays for the default of the
principal debtor. This contract if not expressed is always implied.
2. Consideration for Guarantee
Section 127 lays down "Anything done, or any promise made, for the benefit
of the Principal Debtor may be a sufficient consideration to the surety for giving
the guarantee".
68 Business Law (F.Y.B.B.I. – Sem. II)

3. Primary and Secondary Liabilities

In a contract of guarantee, the primary liability is always that of the principal
debtor. The liability of the surety is secondary. The surety need to indemnify the
creditor only in case of default committed by the principal debtor.
4. Surety's Distinct Promise to be Answerable
There must be a distinct promise, made by the surety, to be answerable for
the liability of the principal debtor in case of his default.
5. The liability must be legally enforceable. If there is no such liability there
cannot be a contract of guarantee.
6. Finally, the contract of guarantee must have all essentials of a contract.
Thus it is a kind of contingent contract depending upon happening or non-
happening of certain events. Such contracts also requires consideration but in
some other form. The concession given by the creditors to the principal debtor
itself is the consideration for the contract. There need not be any consideration
between surety and the creditor.
C. Distinction between Contract of Indemnity and Contract of Guarantee
Contract of Indemnity Contract of Guarantee
1. Definition
Section 124 : "A contract of Section 126 : "A contract guarantee is a contract
indemnity is a contract, by which one to perform the promise or discharge the liability
party promises to save the other from of third person in case of his default".
loss caused to him by the conduct of
any other person".
2. Parties
In a contract of indemnity there are In a contract of guarantee there are three parties,
two parties namely indemnifier and namely the creditor, the principal debtor and the
indemnity holder. surety.
3. Liability
The liability of indemnifier to the The liability of surety is secondary. It means that
indemnified is primary and surety is liable only if the principal debtor fails to
independent. perform his obligations.
4. Contract
There is only one contract in the case In a contract of guarantee there are three
of contract of indemnity i.e. between contracts one between the principal debtor and
the indemnifier and the indemnified. the creditor, the second between the creditor and
The indemnifier is primarily liable the surety and the third between the surety and
under the contract of indemnity. the principal debtor.
5. Aim of the Contract
Aim is the reimbursement of loss, if Aim is the security of the creditor.
any to be indemnified.
6. Act of the Indemnifier
It is not necessary for the indemnifier It is necessary that the surety should give
to act at the request of the indemnified. guarantee at the request of the debtor.
7. Contingency
The liability of the indemnifier arises There is usually an existing debt or duty, the
only on the happening of a performance or which is guaranteed by the
contingency. surety.
8. Discharge of Liability
An indemnifier cannot sue a third A surety, on discharging the debt due by the
party for loss in his own name, principal debtor, steps into the shoes of the
because there is no privity of contract. creditor. He can proceed against the principal
He can do so only if there is an debtor in his own right.
assignment in his favour.
Indian Contract Act, 1872 (Part – II Special Contracts) 69

D. Kinds of Guarantee
Kinds of Guarantee
    

General Absolute Conditional Specific Continuing

1. General Guarantee
A general guarantee is such that anyone to whom it is presented may on
compliance with its terms hold the guarantor liable on it.
2. Absolute Guarantee
In an absolute guarantee, the surety is unconditionally bound to make
payment or perform a promise on default by the principal debtor.
3. Conditional Guarantee
A conditional guarantee is enforceable upon some contingency and the
creditor must take necessary steps to fix the liability of the surety.
4. Specific Guarantee
A specific guarantee is accountable for one single transaction only and
comes to an end on discharge of that transaction.
Further it is important that a specific guarantee cannot be revoked.
Example : 'X' guarantees the repayment of a loan of 10,000 to 'Y' by 'S'
(a banker). The guarantee in this case is a specific guarantee.
5. Continuing Guarantee
A continuing guarantee is a guarantee, which extends to a series of
transactions i.e. two ore more transactions. Section 129 of the Act lays down that
"A guarantee which extends to a series of transactions is called a continuing
guarantee".
A guarantee may be in respect of single transaction or in respect of
number of transaction. When a guarantee extends to a number of transactions, it
is called a continuing guarantee.
The essence of a continuing guarantee is that it applies not to a specific
number of transactions, but to any number of them and makes the surety liable
for the unpaid balance at the end of the contract. For example, 'A' guarantees
payment to 'B', a tea dealer to the amount of 50,000, for any tea he may from
time to time supply to 'C'. B supplies C with tea in a number of consignments
aggregating to a value of 2,00,000. 'C' pays 1,20,000 by various cheques but
fails to pay the balance. The guarantee given by 'A' was continuing guarantee,
and 'A' is accordingly liable to 'B' to the extent of 50,000.
E. Revocation or Termination of a Continuing Guarantee
1. By a Notice of Revocation by the Surety (Section 130)
A continuing guarantee may at any time be revoked by the Surety, as to
future transactions, entered into prior to the notice.
2. By Death of Surety (Section 131)
The death of surety operates, in the absence of any contract to the contrary,
as a revocation of a continuing guarantee, so far as regards future transactions.
3. By Discharge of Surety
Continuing guarantee is also revoked when the surety is discharged in any
one of the following ways :
i) By variation of contract without consent of surety (Section 133).
ii) By discharge of principle debtor without the consent of surety
(Section 134).
70 Business Law (F.Y.B.B.I. – Sem. II)

iii) By compounding with principal debtor without consent of surety

(Section 135).
iv) By creditor's Act impairing surety's eventual remedy (Section 139).
v) By creditor losing security against the principal debtor (Section 141).
vi) By misrepresentation or by concealment (Sections 142 and 143).
vii) By failure of co-surety to join the surety (Section 144).
F. Rights of a Surety (Section 140-141, 145-147)
Rights of Surety

Against Principal Debtors Against the Creditor Against the Co-sureties

1. A Surety's Rights Against the Principal Debtor (Section 140 and 145)
i) Right of Subrogation : Where a surety has paid the guaranteed
debt on its becoming due, or has performed the guaranteed duty on the
default of the principal debtor, he is vested with all the rights, which the
creditor has against the debtor. In other words, the surety steps into the
shoes of the creditor and will be able to exercise as against the principal
debtor all those rights and remedies which could be exercised by the
creditor, that is to say, the surety is subrogated to all the rights which the
creditor had against the principal debtor.
ii) Right to the Benefit of Creditor's Securities : A surety is entitled
to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered
into, whether the surety knows the existence of such security or not, and
if the creditor loses or without the consent of surety, parts with such
security, the surety is discharged to the extent of the value of security.
iii) Right to Indemnify : In every contract of guarantee there is an
implied promise by the principal debtor to indemnify the surety and the
surety is entitled to recover from the principal debtor whatever sum he
has rightfully paid under the guarantee but no sums which he has paid
wrongfully.
2. Surety's Right Against the Creditor (Section 141)
Rights against the Creditor
(a) (b)

Before payment of the On the payment of principal

Principal debt debt

i) Before Payment of the Principal Debt

a) A surety has a right to see that the creditor does not make any variation
without the surety's prior consent.
b) A surety has a right to ensure that the creditor does not act or abstain
from doing anything, the legal consequence of which is the discharge of
principal debtor.
c) A surety has a right to prohibit the creditor from making a compromise
with, or promising to give time or for bear to sue the principal debtor.
d) A surety can file a suit for declaration that the principal debtor shall be
the person liable to pay the amount.
e) A surety may, after the guaranteed debt has become due and before he
his called upon to pay, require the creditor to sue the principal debtor.
Indian Contract Act, 1872 (Part – II Special Contracts) 71

ii) On the Payment of Principal Debt

a) On payment of guaranteed debt, the surety steps into the shoes of the
creditor, i.e. he is subrogated to all the rights of the creditor. In other
words, a surety has a right to recover from the principal debtor all moneys
so paid.
b) A surety is entitled to the benefit to every security which the creditor has
against the principal debtor at the time when the contract of suretyship is
entered into, whether the surety knows of the existence of such security
or not.
3. A Surety's Right Against Co-sureties
When a debt is guaranteed by two or more sureties, they are called
co-sureties.
a) Where there are co-sureties a release by the creditor of one of them does
not discharge the others, neither does it free the surety so released from
his responsibility to the other sureties.
b) Whereby two or more persons are co-sureties for the same debt either
jointly or severally and whether under the same or different contracts,
and whether with or without the knowledge of each other, the co-sureties
in the absence of any contract to the contrary, are liable, as between
themselves to pay an equal share of the whole debt or of that part of it
which remains unpaid by the principal debtor.
c) Co-sureties who are contract in different sums are liable to pay equally as
far as the limits of their respective obligations permit.
G. Liabilities of the Surety (Section 128)

LIABILITIES OF SURETY
    

General Operation Can sue surety Death

Minor debtor
Principal of Law without suing
principal debtor

Suretyliable Surety not

liable
1. General Principal
Section 128 lays down the liability of the surety as "the liability of the
surety is co-extensive with that of the principal debtor unless it is otherwise
provided by the contract". E.g. 'A' guarantees to 'B' the payment of a bill of
exchange by 'C', the acceptor. The bill is dishonoured by 'A' is liable, not only for
the amount of the bill, but for any interest charges which may have been due on
it.
2. Where the Principal Debtor is Discharged by an Operation of Law
Where the principal debtor is discharged, not by any voluntary act of the
creditor, but by the operation of a statutory law, the question arises whether the
surety is entitled to claim discharge protanto with the principal debtor or not.
According to the decision of Madras High Court, the surety in the above
circumstances, cannot claim discharge protanto with the principal debtor.
3. A Creditor can Sue Surety without Suing the Principal Debtor
72 Business Law (F.Y.B.B.I. – Sem. II)

A creditor is not bound first to proceed against the principal debtor. He

can sue the surety without suing the principal debtor, or even without making
the principal debtor a co-defendant.

4. A Liability of Surety in Case of Death of Principal Debtor

The death of the principal debtor does not operate as the discharge or
release of the surety from his liability under the contract of guarantee, unless it is
otherwise provided in the contract of guarantee.
5. Liability of Surety in Case of a Minor Debtor
i) Surety liable : According to the decision of Bombay High Court,
where the principal debtor is a minor, no doubt the minor debtor is not
liable, but his fact does not put an end to the liability of the surety, the
surety if major is fully liable on his promise.
ii) Surety is not liable : In a number of decisions of Bombay and
Madras High Court, it was held that the surety is not liable where the
principal debtor is a minor because the liability of the surety under
Section 128 of Indian Contract Act, is co-extensive with that principal
debtor.
H. Discharge of Surety's Liabilities
Discharge of Surety's Liabilities
        

Notice of
Revocation

Death
Variation
Without the
consent
Compounds
with or gives
time not to sue
Creditors
Act or omission
Losing the
Security
Misrepresentation
Or Concealment
Failure on the
part of some
person to join
surety
The Indian Contract Act, 1872 provides numerous ways, in which a surety
can be discharged :
1. By notice of Revocation by Surety (Section 130)
Section 130 of the Indian Contract Act, 1872 provides that a continuing
guarantee may at any time be revoked by the surety, as to future transactions by
notice to the creditor. Specific guarantee cannot be revoked by notice if the
liability has already accrued.
2. By Death of Surety (Section 131)
Indian Contract Act, 1872 (Part – II Special Contracts) 73

The death of surety operates in the absence of any contract is the contrary,
as revocation of a continuing guarantee so far as regards future transactions.
3. By Variation in the Contract without Surety's Consent (Section 133)
Any variance made without the Surety's consent in terms of the contract
between the principal debtor and the creditor discharges the surety as to
transactions subsequent to the variance.
4. By Discharge of Principal Debtor without the Consent of Surety
(Section 134)
The surety is discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released, or by any act or
omission of the creditor, the legal consequences of which is the discharge of the
principal debtor.
5. When Creditor Compounds with or give time to or agrees not to sue the
principal debtor (Section 135)
When a creditor makes settlement with or promises to give time to, or not
to sue, the principal debtor, by a contract between the creditor and the principal
debtor, the surety is discharged from his liability, unless surety gives his assent
to such new contract.
6. By Creditor's Act or Omission (Section 139)
If the creditor does any act, which is inconsistent with the rights of the
surety or omits to do any act, which his duty to the surety requires him to do,
and the eventual remedy of the surety himself against the principal debtor is
thereby impaired, the surety is discharged.
7. By Creditor Losing the Security Against the Principal Debtor
(Section 141)
If the creditor loses or parts with any security given to him/her by the
principal debtor at the time when the contract or guarantee was entered into the
surety is discharged to the extent of the value of the security, unless the surety
gave his consent to the release of such security.
8. Guarantee obtained by Misrepresentation or Concealment Invalid
(Sections 142 and 143)
Any guarantee which has been obtained by means of misrepresentation,
made by the creditor (Section 142), or by means of keeping silence as to material
circumstances is by itself invalid (Section 143).
9. By Failure on the Part of Some Person to Join the Surety
When a person gives guarantee upon a contract that the creditor shall not
act upon it until another person has joined in it as co-surety, the guarantee is
not valid, if that other person does not join.
I. When a Surety is not Discharged
A surety is not discharged from his liability in the following
circumstances :
i) Surety not discharged when promise to give time is made with
a third person (Section 136) : Under Section 136 the creditor has no
right, in law, to give time to the principal debtor, without the surety's
assent. However under section 136 where a contract to give time to the
principal debtor is made by the creditor with a third person, and not with
the principal debtor, in that case the surety is not discharged.
ii) Creditors forbearance to sue does not discharge surety
(Section 137) : Mere forbearance on the part of the creditor to sue the
principal debtor, or to enforce any other remedy against him, does not, in
74 Business Law (F.Y.B.B.I. – Sem. II)

the absence of any provision in the guarantee to the contrary discharge

the surety.
iii) Co-sureties not discharged on the release of Co-surety (Section
138) : Where there are co-sureties a release by the creditor of one of them
does not discharge the others, neither it free the surety so released from
his responsibility to the other surety.
2.3 BAILMENT
A. Section 148 of the Indian Contract Act defines bailment as – "A bailment
is 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". The person to whom
they are delivered is called the "bailee". E.g. 'P' delivers a piece of cloth to 'Q' a
tailor, to be stitched into a suit. This delivery of cloth from 'P' to 'Q' creates a
contract of bailment.
Similarly delivering a watch or radio for repair, or leaving a car or scooter
etc at a parking stand, or leaving luggage in a clockroom, or delivering gold to
goldsmith for making ornaments or leaving garments with a dry cleaner, etc.
Bailment

is the delivery

of goods

by one person to another

for some purpose

upon a contract

goods shall

when the purpose is accomplished

be returned

otherwise disposed of

according to the directions

of the person delivering them

B. Essentials of Bailment
i) Contract : Delivery of goods is made upon an express or implied
contract that, as soon as the purpose is accomplished they shall be
returned or otherwise disposed of according to the direction of the bailor.
The agreement may be expressed or implied.
Indian Contract Act, 1872 (Part – II Special Contracts) 75

ii) Delivery of Goods for Some Purpose : The delivery of goods is the
most essential element of contract of bailment. Change of possession by
delivery of goods must be for a temporary period. It should be for a
specific purpose. E.g. a servant is a custodian of his master's goods.
iii) Delivery of Goods may be Actual or Constructive : Actual
delivery of goods means handling physical possession of goods by bailor to
bailee. E.g. 'X' delivers mobile phone to 'Y' for repairing.
Constructive delivery is also known as symbolical delivery, where
the goods are in the possession of a person, who agrees to hold them on
behalf of the bailee, or when the bailee is already in possession of the
goods on behalf the bailor and agrees to hold them on his own behalf.
E.g. delivery of railway receipt, bill of lading, etc.
iv) Return of Specific Goods : The bailee, i.e. the person to whom the
goods have been delivered, shall return the specific goods to the bailor or
to dispose it according to the directions of the bailor. Even if the goods
bailed undergo a change in form e.g. cloth converted into a suit, corn
converted into flour etc., there is a contract of bailment.
v) Change of Possession and Not Ownership : Bailment involves only
change of possession and not ownership from one party to another.
Hence, it is not necessary that the bailor must be owner of the goods,
which he delivers because, he is only concerned with the transfer of
possession and not of ownership.
vi) Bailment of Movable Goods : Only movable goods can be bailed.
Accepting rare and ancient coins, money otherwise is not included in the
category of movable goods.
vii) Consideration : Generally, in a contract of bailment, the consideration is
in the form of money payment either by the bailor or by the bailee, e.g.
when A gives his car to 'B' for repairs, or when 'A' gives his car to 'B' on
hire.
viii)Purpose : The delivery of goods must be for some specific purpose.
Delivery of goods by mistake does not amount to bailment.
C. Classification of Bailment
Classification of Bailment

On the basis of benefit On the basis of reward

On the basis of benefit

Safe deposit Hire Commodation Pledge Minor debtor

Repair

On the basis of rewards

Gratuitous Non-Gratuitous
1. On the Basis of Benefit
i) Bailment for safe deposit : In this case the goods are bailed by one
person with another for safe custody.
ii) Bailment for hire purpose : Here, goods are bailed for the benefit
of, and the use by, the bailee in return for payment of money.
76 Business Law (F.Y.B.B.I. – Sem. II)

iii) Commodatum bailment : When goods are lent to a friend to be

used by him without any charges or consideration is called commodatum
bailment.
iv) Bailment by pledge or pawn : When borrower of money delivers
goods to the lender as a security for the payment of the amount of loan
and interest thereon it is bailment by pledge.
v) Bailment for carriage : When goods are delivered by one person to
another, for carriage from one place to another, for reward payable to the
bailee.
vi) Bailment for repairs : Goods may be delivered by one person to
another, for repairs, with reward payable to the bailee.
2. Bailment may also be classified on the basis of reward as
i) Gratuitous Bailment : A bailment which springs into existence
without any consideration is known as gratuitous bailment. E.g. where A
lends a book to his friend 'B' without taking any consideration from 'B'.
ii) Non-Gratuitous Bailment : Where some consideration passes
between the bailor and the bailee the nature of transaction is known as
non-gratuitous bailment. E.g. where certain goods are kept in a godown
for hire, or where 'A' hires a bicycle.
D. Duties and Liabilities of a Bailor
1. To Disclose Known Faults (Section 150)
It is the first and foremost duty of the bailor to disclose the known faults
about the goods bailed to the bailee. If the bailor does not make such disclosure,
he is responsible for damage caused to the bailee directly from such faults. In
case the goods are bailed for hire, there is greater responsibility, he becomes
liable to the bailee about fault which are not known to the bailee. But in case of
gratuitous bailments, the bailor is responsible only for the defects which are
known to him.
2. To Bear Extraordinary Expenses of Bailment (Section 158)
The bailee is bound to bear ordinary and reasonable expenses of the
bailment but for any extraordinary expenses the bailor shall be responsible. In
case of gratuitous bailment the bailor shall repay to the bailee all the necessary
expenses incurred by him for the purpose of bailment.
3. To Receive Back the Goods (Section 166)
It is the duty of the bailor to receive back the goods when the bailee
returns them after the expiry of the term of the bailment or when the purpose for
which the bailment was created has been accomplished. If the bailor refuses to
receive back the goods, the bailee is entitled to receive compensation from the
bailor for the necessary expenses of custody.
4. To Indemnify the Bailee (Section 164)
Where the title of the bailor to the goods is defective and the bailee suffers
a loss the bailor is responsible to the bailee for any loss, which the bailee may
sustain by reason that the bailor was not entitled to make bailment, or to receive
back the goods, or to give directions respecting them.
5. To indemnify bailee for the loss in Case of Premature Termination of
Gratuitous Bailment (Section 159]
The bailor have to compensate to the bailee in case of premature
termination of gratuitous bailment for any loss, which exceeds the benefit
actually delivered by him.
6. Give Possession of goods to bailee (Section 149)
Indian Contract Act, 1872 (Part – II Special Contracts) 77

It is the duty of the bailor to give delivery of the goods to the bailee.
Delivery of goods means giving possession of goods.
E. Rights of Bailor
i) Bailor's right to enforce Bailee's duties : The bailor has a right to
enforce, by suit, all the liabilities or duties of the bailee.
ii) Bailors right to avoid contract (Section 153) : A contract of
bailment is voidable at the option of the bailor, if the bailee does any act
with regard to the goods bailed, in consistent with the conditions of the
bailment. In other words, the bailor has a right to avoid or terminate the
contract of bailment.
iii) Bailor's right to demand return of goods at any time in
Gratuitous Bailment (Section 159) : In case of gratuitous bailment, the
bailor has a right to demand the return of the goods bailed at any time,
even though he lent them for a specified time or purpose. However, if the
bailee suffers any loss or damage because of returning the goods pre-
maturely then the bailor must compensate for that loss.
iv) Bailor's right to sue a wrong-doer (Section 180) : If a third person
wrongfully deprives the bailee for the use of possession of the goods
bailed, or does them any injury, the bailor or the bailee may bring a suit
against a third person for such deprivation or injury.
v) Bailors right to have a share in Compensation (Section 181) :
Section 181 lays down that whatever is obtained, by way of relief or
compensation in a suit against wrong doer, shall be divided between the
bailor and the bailee, according to their respective interests.
F. Duties and Liabilities of a Bailee
i) To take reasonable care of the goods bailed (Section 151 & 152)
: The first and the foremost duty of a bailee is to take care of the goods
bailed. Section 151 says that a bailee is bound to take as much care of
the goods bailed to him as a man of ordinary prudence would, under
similar circumstances, taken of his own goods of the same bulk quantity
and value as the goods bailed.
Section 152 of the Act further provides that if, inspite of that care,
goods are damaged or destroyed in any way, the bailee is not liable for the
loss, destruction or deterioration of the thing bailed. The bailee, is
however, liable for the loss caused due to dishonestly or negligence of his
servants.
ii) Not to make any unauthorized use of the goods (Section 154) :
The bailee must use the goods bailed according to the conditions of
bailment. If he uses the goods in a manner which is inconsistent with the
terms of contract, he shall be liable for any loss even though he is not
guilty of negligence, and even if the damage is the result of an accident.
iii) To return the goods (Section 160) : It is the duty of the bailee to
return or deliver the bailed goods according to the bailor's direction. It
should be done without any demand and as soon as the fixed time is
expired. But if he fails to do so then he is responsible to the bailor for any
damage or the destruction of the goods from that time.
iv) Bailee's responsibility when goods are not duly returned
(Section 161) : If by the fault of the bailee, the goods are not returned,
delivered at the proper time, he is responsible to the bailor for any loss
destruction or deterioration of the goods from that time.
78 Business Law (F.Y.B.B.I. – Sem. II)

v) Bailee is not responsible on re-delivery of goods to bailor

without title (Section 166) : If the bailor has no title to goods and the
bailee, in good faith, delivers them back to or according to the direction of
the bailor, the bailee is not responsible to the owner in respect of such
delivery.
vi) Bailee's duty not to mix the goods, bailed with his own goods
(Section 155-157) : The bailee must not mix the goods of the bailor with
his own goods. He must keep them separate from his own goods. Where
the goods of the bailor and bailee get mixed, the following rules shall
apply :
a) If the bailee, with the consent of the bailor, mixes the goods, the
bailor and bailee shall have an interest, in proportion to their
respective share in the mixture thus produced (Section 155).
b) If the bailee without the consent of the bailor, mixes the goods of the
bailor with his own goods and the goods can be separated or divided,
the bailor can claim expenses of separation and any damage arising
from mixture.
c) If the bailee, without the consent of the bailor, mixes the goods, in
such a manner that it is impossible to separate them, then the bailor
is entitled to be compensated by the bailee for the loss of goods
(Section 157).
vii) Not to set up an adverse title : The bailee must hold the goods on behalf
of the bailor and for the bailor. He cannot deny right of the bailor to bail
the goods and receive them back.
G. Rights of Bailee
i) Delivery of goods to one of several joint bailors of goods : If
there is no contrary contract or any specific direction then in that case
bailee has the right to return those goods to any of the several joint
bailers without consent of remaining bailors.
ii) Delivery of the goods to the bailor without title : If the bailor has
no good title and the bailee in good faith delivers them back to the bailor
or according to the direction of the bailor then the bailee is not
responsible to the owner in respect of such delivery.
iii) Right to apply to the court to stop delivery of goods : If any
person other than the bailor himself claims the goods which are bailed
then the bailee may apply to the court to stop delivery of goods to the
bailor until the correct title is decided.
iv) Bailee's lien : Where the lawful charges of the bailee in respect of
the goods bailed are not paid by the bailor, then the bailee may retain
those goods until the charges are paid. This right of the bailee is known
as particular lien.
H. Distinction between Particular Lien and General Lien
Particular Lien General Lien
1. Who can exercise?
Any bailee, or agent, or finder of goods or A general lien can be exercised only those
partner or vendor or seller can exercise a mentioned in Section 171. It is thus a special
particular lien. Hence, it is common to all privilege of such persons.
bailees.
2. Available against which goods?
A particular lien can be exercised only over A general lien can be exercised over the goods
the goods bailed and on which the bailee bailed.
has performed work in full.
3. Available for what?
Indian Contract Act, 1872 (Part – II Special Contracts) 79

A particular lien can be exercised only for A general lien can be exercised for non-receipt
non-receipt of remuneration due for work of any sum due on a general balance of
done on the goods bailed. accounts.
4. Example A deposits some jewellery with a bailor as a
'A' delivers a rough diamond to 'B' jeweler security for a debt. After discharging the debt,
to be cut and polished. This is done he demands the return of the jewellery. He is
accordingly. 'B' is entitled to retain the still indebted to the bailee for certain other
finished diamond till he is paid for services amounts. He is also entitled to recover until
he had rendered. the bank gives its general lien.

2.4 PLEDGE
1. Definition of Pledge
Section 172 of India contract Act defines pledge or pawn "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 "Pawnor or Pldger" and the bailee is
called the "Pawnee or Pledgee". A pledge is thus a security device based upon a
bailment. In pledge, pawnor must deliver the goods pledgd to the pawnee either
actually or constructively. The Pawnee is bound to take reasonable one of the
goods pledged with him. e.g. A borrows \s\do0( 4,000 against security of his
jewellery. The bailment of jewellery is a pledge.
2. Essential of a Pledge or Pawn
i) Bailment of goods as a security : A pledge is a special kind of bailment
of goods as and by way of security :
a) for repayment of debt or
b) for the performance of a promise.
ii) Bailment of only movable property : Only movable property i.e. goods,
documents, valuables, or jewellery can be pledged.
iii) Actual or constructive delivery of goods pledged : A valid pledged
involves the actual or contractive delivery of goods pledged. In other words
transfer of possession is essential to constitute a valid pledge.
iv) Juridical or De Jure Possession of Goods Pledged : It is only the
person, who is in juridical possession of goods or property that can make
a pledge. Mere de facto or Physical possession is not enough.
3. Duties of a Pawnee or Pledgee
Pledgee is nothing but an extension character of a bailee so whatever the
duties expressed to a bailee is also fixed for Pledgee or Pawnee. They are :
i) He has to take as much care of the pledged goods as a person of ordinary
prudence would, under similar circumstance take care of his own goods,
of a similar nature.
ii) He must not put the goods to an unauthorized use.
iii) He is bound to return the goods on payment of debt.
iv) He should return if any accruals arisen from the pledged goods.
4. Rights of Pawnee or Pledgee
i) Pawnee's rights or Retainer (Section 173) : The Pawnee may retain the
goods pledged not only for payment of the debt or the performance of the
promise, but the interest of the debt, and all necessary expenses incurred
by him in respect of the possession or for the preservation of pledged.
80 Business Law (F.Y.B.B.I. – Sem. II)

ii) Pawnee's right to retainer of subsequent advances (Section 174) : It is

a general presumption that when Pawnee lends the money to some
pawnor after the date of pledge then his right to retain those goods
extends for further advances also.
iii) Pawnee's right where Pawnor makes default (Section 176) : If the
pawnor makes default in payment of debt or performance of the promise,
at the stipulated time, in respect of which the goods were pledged, the
Pawnee has two alternatives.
a) The Pawnee may bring a suit against the pawnor upon the debt or
promise and retain goods pledged as collateral security, or
b) The Pawnee may sell the thing pledged, on giving the pawnor
reasonable notices of the sale.
Pawnee can avail these rights, only if the pawnor commits a default at the
stipulated time.
5. Duties of Pawnor (Pledger)
i) He must disclose to the pledger any material faults in the goods.
ii) He is responsible to bear any extraordinary expenses in preservation of
goods.
iii) Pledger has to make the short fall in case of sale of goods for repayment of
debt.
iv) The pledger is liable for any loss caused to the pledge because of defects
in his title of goods.
6. Rights of a Pawnor (or pledger)
i) Right to get back the goods : The Pawnor is entitled to get back the
goods pledged on the performance of the promise or repayment of the loan
and the interest if any to the Pawnee.
ii) Right to redeem the debt (Section 177) : Often is time fixed for
payment a debt or performance of the promise for which pledge is made.
In case of default by the pawnor to repay the debt before the stipulated
time he can still redeem the debt before the Pawnee actually sells those
goods. But he may have to pay some additional amount for some extra
expenses, which might have arisen due to his default.
iii) Preservation and Maintenance of goods : The pawnor being the real
owner of the goods, he can bind the Pawnee like a bailee to preserve and
maintain the goods pledged to him.
iv) Rights of an ordinary debtor : The pawnor has got some additional
rights also which might have been conferred on him by different statute
for the protection of the debtors, example : Money Lender Act, etc.
7. Distinction between Bailment and Pledge
Sr. Bailment Pledge
No.
1. Delivery of goods for some purpose Delivery of goods as security for debt or
like safe custody, hiring, repairing performance of some promise.
etc.
2. The bailee may use the goods bailed The pledgee cannot use the goods.
or mix the goods with his own goods.
3. Normally the bailed does not sell the Normally pledgee is given option to sell the goods
goods bailed for realization of his bailed to realize not only the principal amount
dues, though he has possessory lien but also accrued interest thereon.
on them.
Indian Contract Act, 1872 (Part – II Special Contracts) 81

4. General bailment may be gratuitous. Pledge cannot be gratuitous.

5. The bailor and the bailee have some The pledger and the pledgee have special rights.
common right.

8. Finder of Goods
A person who finds the goods belonging to another and takes them into his
custody is subject to the same responsibility as a bailee. The legal position of a
finder of goods is like that of a bailee.
A. Duties and Liabilities or Obligations (Section II)
i) The finder of goods must take as much care of the goods found, as a
reasonable man of ordinary prudence should take care of his own goods
of the same bulk, value and quality as the goods bailed. Inspite of his/her
reasonable care, the goods are destroyed, he/she is not responsible for
any loss.
ii) He must not use the goods found for his own purpose.
iii) He must not mix the goods found with his own goods.
iv) Finally, he must attempt to find out the true owner of the goods as
and when the owner is found, he is to return the goods to him.
B. Rights of a Finder of Goods
i) He acquires the rights of a bailee.
ii) He has a right to retain the goods against the whole world expect its
true owner.
iii) He has a right against the owner for expenses incurred by him to
preserve the goods and to find the true owner, by way of right of lien.
iv) The finder may sell the goods :
a) If the owner cannot be found with reasonable diligence.
b) If the owner refuses to pay the lawful charges.
c) If the goods are of a perishable nature.
2.5 AGENT
1. Definition
A person who has capacity to contract, can enter into contract with another :
i) Either by himself, or
ii) through some other person when such a person adopts the later
course, he/she is said to be acting through an agent.
Section 182 lays down that "an agent is a person, employed to do any act for
another, or to represent another in dealing with third persons. The person for
whom such an act is done or who is so represented is called the principal."
An agency therefore is an engagement in order to establish a privity of
contract. i.e. contractual relations, between one person (principal) who appoints
an agent and another third person with whom the agent contracts for and on
behalf of the principal.
Section 183 lays down that any person who is of the age of majority
according to the law to which he is subject, and who is of unsound mind, may
employ an agent. An idiot or a lunatic or a minor or a drunkard cannot employ
an agent.
Section 184 lays down that "as between the principal and third person, any
person may become an agent, but no person who is not of the age of majority and
82 Business Law (F.Y.B.B.I. – Sem. II)

of unsound mind can become an agent so as to be responsible to his principal

according to the provisions in that behalf therein contained.
Section 185 lays that "No consideration is necessary to create an agency. The
mere acceptance of the office of an agent is regarded as a sufficient consideration
for the appointment."
2. Methods/Modes of Creation of an Agency
Creation of an Agency
  
  
Express Agreement Implied Agreement Ratification

  
Estoppel Holding out Necessity

i) Creation of an Agency by Express Agreement (Section 186)

The authority is said to be express when it is given by words spoken or
written. No particular form or set of words is required for appointing an agent.
When a person gives a power of attorney to another person, an express agency is
created. The power of attorney may be either general or special.
ii) Creation of agency by implied agreement (Section 187)
When agency arises from the conduct of the parties or inferred from the
circumstances of the cause, it is called an implied agency. Partners, Servants and
wives are usually regarded as agents by implications because of their
relationship. Implied agency includes the following :
a) Agency by estoppels (Section 237) : Section 237 lays down that "When
an agent has; without authority done acts or incurred obligation to third
persons on behalf of his principal, the principal is bound by such act or
obligations to third persons if he has by his words, or conduct induced
such third person to believe that such acts and obligations were within
the scope of the agents authority the principle shall be bound by such
act." Examples : 'A' consigns goods to 'B' for sale and gives him
instructions not to sell under a fixed price. 'C' being ignorant of 'A's
instructions enter into a contract with 'B' to buy the goods at a price lower
than the reserved price. 'A' is bound by the contract.
b) Agency by holding out (Section 237) : An agency by holding out is
actually a branch of an agency by estoppel. In this case, a prior
affirmative or positive act in the part of the principal is essential in order
to establish agency subsequently. The Principal is bound by intra vires
act of the agent, if he has induced other person to believe that these acts
are done on his behalf.
Holding out means falsely leading another to believe something or
representing something which is not true. Representation must be
definite. The agent in fact has no real authority. It is created by estoppel.
Example : Where a husband holds out his wife on having his authority by
words or conduct and a third party advances money to the wife on the
faith of such conduct, the husband is liable for such debts.
c) Agency by necessity : Sometime extraordinary circumstances require
that a person who is not really an agent should act as an agent of
Indian Contract Act, 1872 (Part – II Special Contracts) 83

another. In such a case though there might not have been an express or
implied authority to do an act, the law implies such an authority in favour
of that person on account of the necessary that had risen. Example where
a consignee did not take delivery of a horse sent by rail and the railway
company had to feed the horse, it was held that the railway company was
an agent by necessity and was entitled to recover the money from the
owner However, before an agency of necessity can be inferred, the
following conditions should be fulfilled :
i) There should be a real and definite necessity of the creation of agency.
ii) It should be impossible to obtain the principal’s instructions. The
person acting as an agent should act bonafide and in the interest of
parties concerned.
iii) Agency by Ratification
All acts of an agent done and the discharge of his duties and within the scope
of his authority are binding upon the principal. Acts performed by an agent
beyond the scope of his authority are not binding upon the principal. However,
the principal may in such a case either adopt or reject the act of the agent. In
case the principal adopts the act of the agent done without his authority, he is
said to have ratified that act. On ratification the act of the agent becomes the act
of the principal and he becomes bound by the same, whether it be for his loss or
advantage. The agency in this case is called expost facts because it is created.
Subsequent to the contract. Example 'A' without 'B's authority buys goods for B.
Afterwards 'B' sells them to 'C' on his 'B's conduct implies a ratification of the
purchase made for him by A.
3. Essentials of a Valid Ratification
1. The act must have been done on behalf of the principal.
2. Principal must be in existence at the time of the Act.
3. Principal must have contractual capacity both at the time of contract and
at the time of ratification.
4. The act to be ratified, must be lawful and not void or illegal or criminal.
5. Ratification must have been with full knowledge of all material facts.
6. Ratification of whole transaction.
7. Ratification must not injure a third person.
8. Ratification of acts, which principal had the power to do.
9. Ratification of an act before expiry of period.
10.Ratification of an act within reasonable time.
11.Communication of ratification.
4. Kinds of Agent
Kinds of Agent
     
     
Special General Sub-agent Co-agent Substituted Mercantile
/specific
(a) (b) (c) (d) (e) (f) (g)
     
Brokers Factors Auctioners Commission Delcredere Indenting
Pakka Adatia
and Katcha Adatia
i) Special or Specific Agents
84 Business Law (F.Y.B.B.I. – Sem. II)

A special agent is also known as particular agent or specific agent. Such kind
of an agent is appointed to do a single or particular or special act, or to represent
his principal. Such an agent has limited authority to do an acts, as soon as the
act is done, his authority comes to an end. Moreover such an agent cannot bind
his principal in any act, other than that, for which he is specially appointed.
ii) General agents
A general agent is one, who, in a recognized business, trade or employment,
generally represents his principal. Such an agent has an authority to do all acts,
connected with a particular trade, business or employment. Example – the
manager (general agent) of a firm has an implied authority to bind his principal
by doing everything, required for carrying on the business of the firm, or which
falls within the scope of the business of the firm.
iii) Sub-agents (Section 191)
A sub-agent under section 191 is a person, who is employed by, and is
working or acting under the control of the original agent in the business of the
agency. If the sub-agent is properly employed, the principal is responsible for his
acts to the third parties, and the original agent is responsible for the sub-agents
acts to the principal.
iv) Co-agents
When two or more persons are appointed as agents jointly or severally, or
jointly and severally, they are called as co-agents. When nothing is about the
exercise of authority, there is a presumption that the authority is joint. However,
where the authority is several, any one of the co-agents can act without the
concurrence of the other.
v) Substituted agents (Section 194)
A substituted agent is a person who is appointed by the agent according to
the express or implied authority of the principal, to act for and on behalf of the
principal of the business of the agency. Thus a direct privity of contract is
established between the principal and substituted agent.
vi) Mercantile agent
a) Brokers : A broker is mercantile agent, who is employed to buy and or
sell property, or to bring about a contractual relation between the buyer
and the seller. Unlike a factor a broker has no possession of goods or
property, even if he is a broker for sale. And since he has no possession of
goods or property, he has no right of lien.
b) Factors : A factor is a mercantile agent, entrusted with the possession of
goods for the purpose of selling them in his own name as an apparent
owner. He has got discretionary powers to sell the goods upon such terms
as he deems fit.
c) Auctioners : An auctioner is an agent, who is appointed by a seller, for
the purpose of selling his goods by public auction, for a reward, usually in
the shape of a commission. He has no authority to sell the goods by
private contract. Originally an auctioneer is an agent of the seller, but
once the actual sale has taken place, he becomes an agent of the buyer as
well.
d) Commission agents : A commission agent is a person, who secures
buyers for a seller of goods and sellers for a buyer of goods, and receives,
in return for his labours and trouble, a commission on the actual sale
price. A commission agent may have possession of goods or not. His or
her position is very similar to that a broker. A commission agent has a
right of particular lien.
Indian Contract Act, 1872 (Part – II Special Contracts) 85

e) Del Credre agents : A del credre agent is one, who, in consideration of an

extra remuneration known as del credre commission guarantees the
performance of the contract, as regards the payment is concerned by the
third party.
f) Indenting agents : An indenting agent, also called an indentor, is an
agent, who procures a sale or purchase, on behalf of his principal, with a
merchant abroad receiving, in return for his labour, a commission at the
rate, mentioned in the indent.
g) Pakka Adatia and Katcha Adatia : Pakka adatia and katcha adatia are a
species of agents, and their transactions in Mumbai markets are known
as 'pakki adat' or 'katchi adat' respectively.
5. Duties of An Agent
i) Agents duty to conduct the principal's business according to his
directions (Section 211)
An agent is bound to conduct the business of principal according to the
directions given by the principal, or in the absence of any such directions
according to custom, which prevails in doing business of same kind at the place
where the agent conducts such business. When the agent acts otherwise, if any
loss is sustained, he must make it good to his principal, and if any profit accrues
he must account for it.
ii) To conduct business with skill and diligence (Section 212)
An agent is bound to conduct the business of the 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. The agent is always bound to act with
reasonable diligence and to use such skill as he possesses and to make
compensation to his principal in respect of the direct consequences of his own
neglect, want of skill or misconduct, but not in respect of loss or damage which
are indirectly caused by such neglect, want of skill or misconduct.
iii) To render accounts to his principal (Section 213) :
An agent is bound to render proper accounts to his principal on demand. If
the contract provides that account shall be rendered periodically, in that case,
accounts must be rendered periodically. The agent is bound to produce vouchers,
receipts and documents.
iv) To communicate with the principal in cases difficulty (Section 214)
If it is the duty of an agent, in cases of difficulty to use all reasonable
diligence in communicating with his principal and in seeking to obtain his
instructions.
v) Not to deal on his own account without principal’s consent
(Section 215 and 216) :
If an agent deals on his own account in the business of the agency, without
first obtaining the consent of his principal and acquainting him with all material
circumstances, which have come to his own knowledge on the subject, the
principal may repudiate the transactions.
vi) Agents duty to pay sums received for principal (Section 217-218)
Agent is bound to pay sums received in his account minus.
a) All money due to the agent himself in respect of advances made or
b) Expenses properly incurred by him in conducting such business and
c) Such remuneration as may be payable to him for acting as an agent.
vii) To protect and preserve the interest of the principal (Section 209)
86 Business Law (F.Y.B.B.I. – Sem. II)

When an agency is terminated by the principal dying or becoming 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.
viii) Not to make Secret profit
Except with the assent and knowledge of the principal, an agent must not
make any profit beyond the agreed commission for remuneration. If he makes
any secret profit; he is bound to account for it to his principal.
ix) Not to use information against the principal
An agent is duty bound to pass on any information, which receives in the
course of the agency, to his principal. He must not use such information against
the interest of principal, and, if he does so, the agent must compensate the
principal for any loss, suffered by him.
x) Not to set up an adverse title
The agent shall not set up an adverse title i.e. his own title or the title of third
parties to the goods, which he receives from the principal or from any other
source, for and on behalf of his principal, in the capacity of an agent.
xi) Not to delegate authority (Section 190)
An agent cannot lawfully employ another to perform acts, which he has
expressly or impliedly undertaken to perform personally.
6. Rights of an Agent
i) To enforce principal's duties
An agent has a right to enforce the principals duties to him because they are,
infact, indirectly the agents rights.
ii) Right to retain (Section 217) :
An agent may retain out the sums received on account of the principal in the
business of the agency, all money due to himself in respect of the advances made
of expenses properly incurred by him in conducting such business and also such
remuneration as may be payable to him for acting as agent.
iii) To receive remuneration (Section 219)
An agent has a right to receive his remuneration from the principal when it
becomes due to him.
iv) Not entitled to remuneration for misconduct (Section 220)
An agent is guilty of misconduct in the business of the agency is not entitled
to any remuneration in respect of that part of the business, which he has
misconducted.
v) Right of lien on principal’s property (Section 221)
An agent is entitled to retain goods; other property of the principal received
by him, until the amount due to himself for commission and services has been
paid or accounted for, to him.
vi) Right of indemnification against consequence of lawful acts
(Section 222)
An agent has a right to be indemnified by the principal against the
consequences of all acts, done by the agent in good faith.
vii) Right of compensation for injury caused by principals neglect
(Section 225)
Indian Contract Act, 1872 (Part – II Special Contracts) 87

The agent has a right to be compensated for any injury sustained by him due
to negligence or want of skill on the part of the principal.

7. Duties of Principal
i) To indemnify his agent against consequences of all lawful act
(Section 222)
The employer of an agent is bound to indemnify him against the consequence
of all lawful acts done by such agent in exercise of authority conferred upon him.
ii) To indemnify his agent against consequences of acts done in good faith
(Section 223)
Where one person employs another to do an act and the agent does the act in
good faith, the employer is, liable to indemnify the agent against the
consequences of that act though it causes an injury to the rights of third person.
iii) Principal not liable for criminal acts of his agent (Section 224) :
Where one person employs another to do an act, which is criminal, the
employer is not liable to the agent either upon the express or an implied promise,
to indemnify him against the consequences of that act.
iv) To compensate the agent for injury caused by principal's neglect
(Section 225)
The principal must make compensation to his agent in respect of injury
caused to such agent by the principal's neglect or want of skill.
v) Principal's duty to pay the agreed commission
Principal is duty bound pay the commission or remuneration, as agreed to
his agent.
8. Rights of principal
i) Right to enforce the agent's duties
The principal has a right to enforce all the duties of the agent, because they
are infact, indirectly the rights of the principal.
ii) Right to recover damages
Where the principal suffers any loss because of
a) disregard of the principal’s directions, shown by the agent, or
b) not following the custom of trade by agent, in the absence of principals
direction; or
c) the lack of requisite skill, care or diligence on the part of the agent, the
principal is entitled to recover the damages accruing as a result from the
agent.
iii) Right to recover the secret profit
Right to recover the secret profit, if any made by his agent out to the agency,
without the knowledge and assent of his principal. Agent also forfeits his right of
any commission, in respect of the transaction.
iv) Right to resists agent's claim for indemnity against liability incurred
The principal has a right to resist the agents claim for indemnity against
liability incurred by him in a transaction, in which, the agent acted not as the
agent but as a principal himself.
88 Business Law (F.Y.B.B.I. – Sem. II)

v) Right to revoke agents authority

Principal has a right to revoke his agents authority subject to certain
conditions.

9. Termination of an Agency
The contract of agency may be terminated in one of the two ways :
 by an act of the parties or

 by the operation of the law. However in certain cases, the agency is

irrevocable. The various modes of terminating agency as mentioned in
section 201 and other modes are :
Termination

Act of the parties Operations of law Other modes

a b c d a b c a b c d e

Agree- Death- Destruc-
Ment tion of
Subject
Revocation Insanity Matter expiry
Renoucing Insolvency
Alien
Completion enemy
of performance Dissolution
of a company
Termination
of sub-agent
i) Termination of an Agency by an Act of the Parties
a) Agreement : A contract of agency may be terminated at any time and at
any stage by the mutual agreement between the principal and the agent.
b) Revocation by the principal : The contract of agency may be terminated
by the principal at any time by giving a notice to the agent.
c) Renouncing : When the agent renounces the business of agency, the
agency is terminated.
d) Completion of performance : The most obvious mode of putting an end
to a contract of agency is to do what agent has undertaken to do when the
object is accomplished agency is terminated
ii) Termination of agency by an operation of law
The relationship of principal and agent comes to an end by operation of law.
a) Death : When the agent or principal dies, a contract of agency is
terminated.
b) Insanity : When the agent or the principal becomes unsound mind, the
agency is terminated when an agency either due to death or insanity of
the principal, the agent, on behalf of the representatives of his late
principal, must take all reasonable steps for the protection and
preservation of the interest of his principal.
Indian Contract Act, 1872 (Part – II Special Contracts) 89

c) Insolvency : Insolvency of the principal puts an end to the agency on

principal being adjudicated an insolvent under the provisions of any act,
for the time being in force for the relief of insolvent debtors the agency is
terminated.

iii) Other modes of termination

a) Destruction of subject matter : If the subject matter of contract of
agency is destroyed, the agency comes to an end.
b) Principal becoming an alien enemy : Where the agent and the principal
are aliens the contract of agency is valid as long a their countries are at
peace. If war breaks out between the countries of principal and agent, the
principal and agent become alien enemies and hence the contract of
agency becomes terminated.
c) Dissolution of a Company : When a company, whether principal or
agent, is dissolved the contract of agency with or by the company
automatically comes to an end.
d) Termination sub-agent's authority : The termination of an agents
authority puts an end to the sub-agents authority.
e) Expiry of time : When the agent is appointed for a fixed period of time,
the agency comes to an end after the expiry of that time even if the work
is not completed.

I. Answer the Following :

1. Define contract of indemnity. What are its essentials?
2. What are the rights of indemnity holder?
3. What is contract of Guarantee? What are the essentials of a valid contract of
Guarantee?
4. Distinguish between contract of indemnity and contract of guarantee.
5. What are the rights and liabilities of surety?
6. What are the different ways in which a surety is discharged from a liability
7. Define contract of 'bailment' & explain its essentials?
8. What are the different classification of bailment?
9. What are the rights, duties and liabilities of bailor and bailee
10. Define pledge. What are the rights and duties of a pledgor and pledgee?
11. Distinguish between :
i) Bailment and Pledge
ii) Particular and lien and General lien
12. Write a note on finder of goods.
13. Define agent. What are the modes of creating an agent?
14. What is agency by ratification? What are the requisites of valid ratification?
15. What are the rights and duties of an agent and principal?
16. What are the various ways in which an agency can be terminated?

II. Practical Problem

1. 'A' contracts to indemnify 'B' against the consequences of proceedings which 'C'
may take against B in respect of a certain sum of money. 'C' obtains judgement
against 'B' for the amount. Without paying any portion of the decree, 'B' sues 'A'
for its recovery. Will 'B' succeed?
Ans: No, B has to py C & then recover from A. Contract of indemnity.
90 Business Law (F.Y.B.B.I. – Sem. II)

2. 'B' owes to 'C' a debt guaranteed by 'A'. The debt becomes payable. 'C' does not
sue 'B' for a year after the debt has become payable. 'B' then becomes insolvent.
Thereafter C sues 'A' for the debt. 'A' pleads C's forbearance to sue 'B' for a year
as a defence. Is this a good defence?
Ans: No. Any forbearance does not discharge the liability of the guarantor
3. 'A' gives some cloth to a 'tailor' for making a suit of it. The tailor's charges are
settled at \s\do0(` 1000. After the suit is ready 'A' tenders \s\do0(` 1000 for the
charges but the tailor refuses to deliver the suit till 'A' pays an old debt of `\s\do0(
200. Is the tailor entitled to do so?
Ans: No. Particular right of lien
4. 'A' enters into a contract with 'B' for buying 'B's' motor car as agent of 'C' and
without C's authority. 'B' repudiates the contract before 'C' comes to know of it.
'C' subsequently ratifies the contract and sues to enforce it. How would you
decide?
Ans: C cannot ratify. The ratification must be made when the contract is
kept open & must have the power to do.
5. 'A' enters into a contract with 'B' to sell him 1000 bales of cotton and afterwards
discovers that B was acting as agent of 'C'. Advise 'A' as to the person against
whom he should bring a suit for the price of the cotton.
Ans: Suit can be filed against B. An agent will be made liable when he
performs in his own name.

III. Objective Questions

Fill in the blanks :
1. Pledge means bailment of goods as ______
2. Only _______ property can be pledged.
3. Agent is bound to conduct the business of principal according to the ______ given
by principal.
4. If the agent makes any ______ profit, he is bound to account for it to the ______.
5. When the agent or ______ dies, a contract of agency is ______.
6. A contract of indemnity is a contract whereby one party promises to _______.
7. The surety has a right to see that the creditor does not make any ______ without
the surety's prior consent.
8. A ______ guarantee is enforceable upon some contingency.
9. In an absolute guarantee the surety is ______ bound to make payment.
10. A ______ guarantee is accountable for one single transaction only.
Answer: 1- Security, 2-movable, 3- direction, 4- secret, principal, 5- principal,
terminated, 7- variation, 8- conditional, 9- unconditionally, 10- specific

iv. Multiple choice

1.  "Indemnity" means
Security from damage or
A. B. Security for more profit
loss

C. An act for protection D. Both (a) and (b)

2. Section 124, of the Contract Act, define
A. Contracts of minor B. Contracts of conditions

C. Contracts of indemnity D. None of above

Indian Contract Act, 1872 (Part – II Special Contracts) 91

3. 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. Surety contract B. Simple contract

C. Contract of indemnity D. None of above

4. The contract of insurance is infact contract of
A. Urgency B. Indemnity

C. Both (a) and (b) D. None of above

5.  Section 124 to 147, of the Contract Act, deals with
A. Contracts of indemnity B. Contracts of guarantee

C. Both (a) and (b) D. None of above

6. A guarantee which extend to a series of transactions is called
A. Special guarantee B. Continuing guarantee

C. Specific guarantee D. None of above

7. A in consideration that B will employ C in collecting the rent of B's zamindari, promises
B to be responsible, to the amount of 5000 rupees for the due collection and payment by C
of those rents. This is a
A. Restricted guarantee B. Continuing guarantee

C. Limited guarantee D. None of above

8. Section 142 of the Contract Act 1872 deals with
Guarantee obtained by free
A. B. Guarantee obtained by fraud
consent

Guarantee obtained by
C.
miscrepresentation
9. Any guarantee obtained by means of misrepresentation made by the creditor or with his
knowledge and assent concerning a material part of the transaction is
A. Valid B. Invalid

C. Both (a) and (b) D. None of above

10. "Guarantee" means_______
The word is also used as a
A. Surety B. name, to denote the contract
of guarantee or the obligation
92 Business Law (F.Y.B.B.I. – Sem. II)

of grantor

C. All the above D. None of above

11.  The contract of guarantee is a contract in which a person perform
the promise or discharge the liability of
A. The contractor B. Stranger

C. Third person D. None of above

12. In contract of guarantee the person who gives guarantee is called
A. Surety B. Principal debtor
 
C. Both (a) and (b) D. None of above
13. In contract of guarantee the person at whose place guarantee given is called
A. Surety holder B. Principal debtor

C. Both (a) and (b) D. None of above

14. A continuing guarantee may at any time be revoked by the surety as to future
transaction by giving notice to
A. The creditor B. Principal debtor

Without giving any notice to

C. D. None of above
any person

15. Section_____ to_____, at the Contract Act, deals with discharge of surety
A. 130, 133 B. 133, 139

C. 139, 144 D. None of above