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3. Mr. Ardh and Mr. Barun entered into a contract to build a house for a specified
consideration Clause 14 of contract provides that in case of disputes, neither party may
move Court of Law but must accept the decision of an Arbitrator named in the contract.
Does this clause violate the provisions of law?

INDEMNITY & GUARANTEE

CONTRACT OF INDEMNITY

Meaning It is a contract by which one party promises to save the other from loss
[Sec. 124] caused to him by the conduct of the
⮚ promisor himself or
⮚ any other person
is called a ‘contract of indemnity’.
A and B go into the shop. B says to the shopkeeper, “let him (A) have the
goods I will see you paid.” The contract is one of indemnity

Parties o The person who promises to make good is called the indemnifier
(promisor)
o The person whose loss is to be made good is called indemnified or
indemnity holder (promisee)
o A contract of indemnity may be expressed, oral or written or implied
Modes of Express When a person expressly promises to save the other from loss.
contract of
indemnity Implied An implied indemnity is inferred from the conduct of the parties
or the circumstances of the case
Adamson v Jarvis (1927)

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A on the instruction of B sold certain cattle belonging to C. C held

A liable for it and recovered damages from him for selling it. It
was held that A could recover the loss from B as a promise by B
to A from any loss would be implied from his conduct in asking A
to sell the cattle.
It is an implied indemnity which can be inferred from the
instruction of A to B.

RIGHTS OF INDEMNITY-HOLDER WHEN SUED Sec. 125

1. Right to All damages which he may be compelled to pay in any suit in respect of any
Recover matter to which the promise to indemnify applies
Damages
2. Right to The indemnity holder has the right to recover all the costs which he is
Recover Cost compelled to pay in bringing or defending such suit. Condition:
a) The indemnifier authorized him to bring or defend the suit; or
b) The indemnity holder did not contravene the orders of the indemnifier;
and the indemnity holder acted as if a prudent man would act;

3. Right to The indemnity holder has the right to recover all the sums which he has
recover sums paid under the terms of a compromise of such suit.
paid (a) The indemnifier authorized him to compromise the suit; or
(b) The indemnifier holder did not contravene the orders of the
indemnifier; and it was a prudent decision of the promisee

CONTRACT OF GUARANTEE

Meaning A contract of guarantee is a contract to perform the promise or discharge the

Sec. 126 liability of a third person in case of his default.

Parties 1) The person who gives the guarantee known as the surety,
2) The person in respect of whose default the guarantee is given known as
the principal debtor,
3) The person to whom the guarantee is given known as the creditor

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A advances a loan of Rs. 5,000 to B and C promises to A that if B does not repay the
loan, C will do so. This is a contract of guarantee. Here B is the principle debtor, A is the
creditor and C is the surety or guarantor.

No. of Contracts 1) Between creditor & principal debtor: There is a contract out of
A contract which the guaranteed debt arises
of guarantee 2) Between surety & creditor: There is a contract by which S
is tripartite guarantees to pay to C, P’s debt in case of P’s default.
agreement 3) Between surety & principal debtor: There is a contract that P shall
indemnify S in case S pays in the event of the default by P. This
contract if not expressed between the parties, is always implied

Essential Features of a Contract of Guarantee

1. Valid contract All the essentials of a valid contract must be present in the contract of
guarantee. But following points should be noted:-
1) Even if principal debtor is incompetent to contract, the guarantee is
valid. But, if surety is incompetent to contract, the guarantee is void.
2) Consideration received by the principal debtor is a sufficient
consideration to the surety for giving the guarantee
P requests C to sell and deliver to him goods on credit. C agrees to do
so, provided S will guarantee the payment of the price of the goods.
S promises to guarantee the payment in consideration of C’s promise
to deliver the goods. This is sufficient consideration for S’s promise.

2. Primary liability The principal debtor must be primarily liable. However, even if the
of some person principal debtor is incompetent to contract the guarantee is valid.
⮚ The debt must be legally enforceable.
⮚ The debt must not be a time barred debt
The surety has a secondary and conditional liability. This means that
the payment is to be made by the surety only if the debtor does not
pay.

X took a loan of Rs. 50,000 from Y for which Z stood as a guarantor or

surety. Here the primary liability of discharge of the debt is that of X.
Y cannot ask Z to pay the loan taken by Y unless and until there is
default by Y.

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3. Need not be in It may be in writing or oral

writing

4. Concurrence All the three parties must concur without which a contract of
Guarantee is not Complete

C enters into a contract with P S without any communication with P,

undertakes for a consideration moving from C to indemnify C against
any damages that may arise from a breach of P’s obligation This does
not make S a surety for P, for a person cannot becomes a surety
without the consent of the principal debtor
KINDS OF GUARANTEE

1. Specific A guarantee extends to a single transaction or debt and comes to an

Guarantee end when guaranteed debt is duly discharged or the promise is duly
performed.
2. Continuing A guarantee which extends to a series of transactionsis called as
Guarantee continuing guarantee. The liability of surety extends to all
transactions completed until the revocation of guarantee.

S guarantees payment to C, a tea-dealer, to the amount of Rs. 10000/-

for any tea he may from time to time supply to P. C supplies P with
tea to the value of above 10000/- and P pays C for it. Afterward C
supplies P with tea to the value of Rs. 20000/-. P fails to pay. The
guarantee given by S is a continuing guarantee and S is accordingly
liable to C to the extent of Rs. 10000/-

REVOCATION OF A CONTINUING GUARANTEE

• By Notice
Continuing guarantee may be revoked, at anytime, by the surety by giving a
notice to the creditor. However, revocations shall be effective only in respect
of future transactions (i.e. the liability of the surety with regard to previous
transactions remains unaffected)

• By Death of Surety
Death of the surety operates as a revocation of a continuing guarantee as to
future transaction. The liability of the surety with regard to previous
transactions remains unaffected

• By Other Modes

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By novation, by variation in terms of contract, by release or discharge of principal

debtor etc,.

There can be a continuing guarantee for a fixed

period

NATURE OR EXTENT OF SURETY’S LIABILITY

1. Surety’s liability is co- ✔ The liability of the surety is co-extensive with that of the
extensive with liability principal debtor unless the contract otherwise provides by a
of principal debtor contract. It means liability of the surety will be same as that of
the principal debtor.
✔ As soon as the debtor has made default in payment of debt,
the surety is immediately liable. But until default, the creditor
cannot call upon surety to pay.
✔ However, a creditor is not bound to proceed against the
principal debtor. He can sue the surety without suing the
principal debtor
2. Surety’s liability may The surety may fix a limit on his liability up to which the
be limited guarantee shall remain effective and in no case the liability of a
surety is greater than principal debtor

Mr. M guarantees payment to Mr. B to the extent of INR 50,000 for time to time
supply of paper by Mr. B to Mr. C. B supplies paper to C more than the value of INR
50,000 and Mr. C pays. Later on Mr. B, at the request of C, supplies paper valued INR
60,000. This time C fails to pay. What action B can take against M?

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RIGHTS OF SURETY

1. RIGHT AGAINST CREDITOR

A) Right of A surety is entitled to the benefit of every security which the principal
security debtor has provided to the creditor at the time when the contract of
(Sec.141) guarantee is entered into; whether the surety knows of the existence of
such security or not; and,
⮚ If the securities are returned by the creditor to the principal debtor the
surety is discharged to the extent of value of the securities so returned.
C advances to P Rs. 2000 on guarantee of S. C have also a further security
for Rs. 2000 by a pledge of P’s furniture. C cancels the pledge. P becomes
insolvent and C sues S on his guarantee. S is discharged from his liability
to the amount of the value of furniture

B) Right of set on being sued by the creditor, the surety can rely on any set-off or claim
off which the debtor has against the creditor
C) Rights to If the principal debtor becomes insolvent, the surety may claim
share proportionate reduction in his liability.
reduction

2. RIGHT AGAINST PRINCIPAL DEBTOR

A) Right of When the surety has paid the guaranteed debt on default of the
subrogation principal debtor he is then entitled to all the rights which the creditor
had against the principal debtor
B) Right of ▪ There is an implied promise by the principal debtor to indemnity the
indemnity surety.
▪ The surety is entitled to claim from the principal debtor all the sums
which he has rightfully paid.
▪ If he sustains any damage beyond the amount paid, he can recover that
damage also.

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3. RIGHTS AGAINST CO-SURETIES

A) Right to When a surety has paid more than his share of debt to the creditor,
contribution he has a right of contribution from the co- Securities who are
equally bound to pay with him.
Exceptions
Under the contract of guarantee, the co-sureties may fix limits on
their respective liabilities. Even in such a case, the co-sureties shall
contribute equally, subject to maximum limit fixed by the co-
sureties
A, B and C are sureties to D for the sum of Rs. 1,000 lent to E, and
there is a contract between A, B and C that A is to be responsible
to the extent of ¼ , B to the extent of ¼ and C to the extent of ½ .
E makes default in payment.
As between the sureties, A is liable to pay Rs. 250, B Rs. 250, and C
Rs. 500
B) Liability of co Co-sureties who are bound in different sums are liable to pay
sureties bound in equally as far as the limits of their respective obligations permit.
different sums A, B and C, as sureties for D, enter into three several bonds, each in
(Section 147) a different penalty, namely, A in the penalty of Rs. 10,000, B in that
of Rs. 20,000, C in that of Rs. 40,000, conditioned for D’s duly
accounting to E. D makes default to the extent of Rs. 40,000; A is
liable to pay Rs. 10000, and B and C Rs.15000 each

C) Right to share If one co-surety receives any security, all the other co-sureties are
benefit of securities entitled to share the benefit of such security.

DISCHARGE OF SURETY
1. BY REVOCATION
(1) Discharge by A specific guarantee can be revoked only if liability of principal
surety by giving a debtor has not arisen. A continuing guarantee can be revoked only
notice in respect of future transactions
(2) Revocation by A continuing guarantee is automatically revoked in respect of future
death transactions.
(3) Revocation by • Novation means substitution of a new contract of guarantee for
novation an old one • The consideration of new contract being the mutual

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discharge of the old contract.

2. BY CONDUCT OF CREDITOR

(1) Variance in terms of • Any variation is made subsequent to formation of contact of

contract guarantee; and such variation is made without the consent of
surety;

• The surety shall be released for such transactions as take place

after such variation.

S guaranteed payment for goods supplied by C to P, upon

condition that 18 months credit was given. C gives only 12
months credit. Held the surety is discharged

(2) Release or discharge ⮚ If creditor makes a fresh contract with the principal debtor
of principle debtor whereby the principal debtor is released from his liability; or

⮚ The creditor does any act or omission resulting in discharge of

the principal debtor, the surety is discharged

C employs P at one place on S standing surety for P. this

employment is terminated by C. C employs P again at a different
place, taking a security bond from another. S is discharged

P contracts with C to build his a house for C within a stipulated

time, C supplying the necessary timber. S guarantees P’s
performance of the contract. C omits to supply the timber. S is
discharged.

(3) Compounding by The surety is discharged if the creditor makes a composition with
creditor with principal the principal debtor or extends the time for repayment of the
debtor debt without obtaining the consent of surety.

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(4) Creditor’s act or ⮚ If the creditor does any act which is against the rights of the
omission impairing surety, or ⮚ omits to do an act which his duty to the surety
surety’s eventual requires him to do, and ⮚ The eventual remedy of the surety
remedy himself against the principal debtor is thereby impaired, the
surety is discharged

C let some goods to P under a hire-purchase agreement. S

guaranteed the installment payable under the agreement. On
the installment being arrear, C

(5) Loss of Security ⮚ The surety is discharged to the extent of security lost by the
creditor.

⮚ It is immaterial whether the surety was or is aware of such

security or not.

3. BY INVALIDATION OF CONTRACT
(1) Guarantee obtained by misrepresentation

(2) Guarantee obtained by concealment

(3) Failure of consideration: where in a contract of guarantee there is a failure of consideration as

between the creditor and the principal debtor, the surety is discharged.

DISTINGUISH BETWEEN CONTRACTS OF INDEMNITY AND GUARANTEE

S.N CONTRACTS OF INDEMNITY GUARANTEE

1 There are only two parties; the There are three parties; the surety, the
indemnifier and the indemnified. principal debtor and the creditor

2 The liability of the indemnifier is primary The liability of the surety is secondary

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3 The number of contract is one, between The number of contract is three,(a)

indemnifier and indemnified. between principal debtor and creditor
(b) between creditor and surety (c)
between surety and principal debtor.
4 The indemnifier need not necessarily act The surety gives guarantee only at the
at the request of the debtor request of the principal debtor

5 The liability of the indemnifier arises onlyThere is usually an existing debt or duty,
on the happening of a contingency the performance of which is guaranteed
by the surety
6 The indemnifier cannot sue third-parties in The surety, on payment of the debt when
his own name, because there is no Privity the principal debtor has failed to pay is
of contract. He can do so only if there is entitled to proceed against the principal
an assignment in his favor. debtor in his own right

BAILMENT & PLEDGE

BAILMENT

Meaning ‘Bailment’ as the delivery of goods by one person to another for some
Sec.148 purpose, on a contract, that the goods shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them.
A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a
contract of bailment between A & B.

Explanation:-
If a person already in possession of the goods of another contract to hold them as a bailee,
he thereby becomes the bailee, and the owner becomes the bailor, of such goods,
although they may not have been delivered by way of bailment

Parties • The person delivering the goods is called the ‘bailor’ and
• The person to whom they are delivered is called the ‘bailee’.

CHARACTERISTICS OF BAILMENT

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1. Contract • A bailment is usually created by agreement between the bailor and bailee.
• The agreement may be expressed or implied.
• In certain exceptional cases, bailment is implied by law as between the
finder of goods and the owner.
In a contract of bailment it is only possession that passes from bailor to bailee

2. Delivery There must be delivery of possession of movable goods by bailor to bailee and
of not the ownership.
possession The delivery of possession may be actual or symbolic.

3. For ▪ The goods must be delivered for some purpose.

some ▪ The purpose may be expressed or implied.
purpose If goods are delivered by mistake to a person, there is no bailment.

4. Return It is agreed between the bailor and bailee that as soon as the purpose is
or achieved the goods shall be:-
dispose of • Returned (either in original form or in any altered from); or
specific ▪ Disposed of according to the directions of the bailor, when the purpose is
goods accomplished.

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OTHER EXAMPLES OF BAILMENT

 Acceptance of goods by a transport company or railway for carriage
 Hire-purchase contract
 Seizure of goods by custom authority, who after seizure are in
position of a bailee

CLASSIFICATION OF BAILMENT

Based on Benefit Based on Reward

Exclusive Exclusive
Mutual benefit
benefit of benefit of Gratutous Non-Gratutous
of both
Bailor Bailee

As the delivery Bailor or Bailee

of some Neither Bailor gets
valuable goods As the lending nor Bailee gets consideration
A hires
to neighbor for of a bicycle to any e.g. G gives his
furniture from
safe custody a friend for his consideration, television set
B, by payment
without charge use without for repair to H,
of hire e.g. A lends a
charge a technician. H
charges, Both book to his gets paid for
A and B are friend B. the job.
benefited.

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DUTIES OF BAILOR
1. To disclose known ⮚ Bailor is bound to disclose to Bailee, faults in the goods
faults: bailed, of which he has knowledge.
⮚ If he does not disclose, he is responsible of any damages
caused to bailee directly from such faults.
A lends a horse, which he knows to be vicious, to B. He does
not disclose that the horse is vicious. The horse runs away and
B is thrown and injured. A is responsible to B for damages
sustained.
In the case of bailment for hire, a still greater responsibility is
placed on the bailor.
⮚ He will be liable even if he did not know of the defects
A hires a carriage of B. The carriage is unsafe though B does
not know this. A is injured. B is responsible to A for the injury

2. To bear extraordinary The bailee is bound to bear ordinary and reasonable expenses
expenses of bailment of the bailment but for any extraordinary expenses the bailor is
responsible

If a horse is lent for a journey, the expense of feeding the house

would, of course, subject to any special agreement be borne by
the bailee. If however the horse becomes ill and expenses have
been incurred on its treatment, the bailor shall have to pay
these expenses
3. To indemnify the ⮚ A gratuitous bailment can be terminated by bailor at any time
bailee for loss in case for even though the bailment was for a specific time or purpose.
premature termination ⮚ But is such a case, the bailor shall indemnify the bailee for any
loss incurred by the bailee in excess of benefit derived out of
bailment

A lends an old discarded bicycle to B gratuitously for 3 months.

B incurs Rs. 120 on its repairs. If A asks for return the bicycle
after 1 month, he will have to compensate B for the expenses
incurred by B in excess of the benefit derived by him

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4. To receive back the • It is the duty of the bailor to receive back the goods, when
goods returned by bailee.
• If the bailor wrongfully refuses to receive back the goods, he
shall be liable to pay ordinary expenses of custody of goods
incurred by the bailee.
5. To indemnify the The bailor is bound to indemnify the bailee for any cost or costs
bailee for defective title which the bailee may incur because of the defective title of the
bailor of the goods bailed

A gratuitous bailment terminates by the death of either the bailor or

the bailee (Section 162)

DUTIES OF BAILEE

1. To take The bailee must take such case of goods as a man of ordinary
reasonable care of prudence would take care of his own goods.
the goods bailed The onus of proof
The bailee shall not be liable for any loss or destruction of goods, if –
(a) He is not negligent; or
Is on bailee
(b) The loss was caused due to an act of God or other unavoidable
reasons.
A entered into an restaurant for dinning. His coat was taken by a
waiter who hung it on a hook behind A. When A rose to leave, the coat
was gone. Held, the proprietor of the restaurant was liable for loss

2. Not to make The bailee is under a duty not to use the goods in an unauthorized
unauthorized use manner or for unauthorized purpose.
of goods bailed: ▪ If he does so, the bailment becomes voidable at the option of the
bailor and
▪ he shall be liable for any loss even though he is not guilty of
negligence and even if the damages is the result of an accident
A lends a horse to B for his riding only. B allows C, member of his
family, to ride the horse. C rides with care, but the horse accidently
falls and is injured. B is liable to compensate B for the injury caused to
the horse.
3. Not to mix the He must keep the goods bailed to him separate from his own goods. If
goods bailed with he mixes-
his own goods: (1) With the consent of bailor, both the parties shall have a

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proportionate interest in such mixture.

(2) Without the consent of bailor:-

Goods can be separated Goods cannot be separated

Bailee is to bound to bear the The bailee shall compensate the
expenses of separation as well bailor for any loss caused to him.
as damages arising from the
mixture

X bails a bag of farm wheat worth Rs. 850 Y. Y, without the consent of
X mixes the wheat with imported wheat of his own, worth only Rs.
750/bag. B must compensate A for the loss of his wheat
4. To return the It is the duty of the bailee to return the goods without demand:
goods to bailor 1) On the expiry of the time fixed or
(Section 160) 2) When the purpose is accomplished

If he fails to return them, he shall be liable for any loss, destruction or

deterioration of the goods even without negligence on his part

Shaw & co. v. Symmons & Sons (1917)

A delivered some books to B for binding. A pressed for their return,
but B neglected to return them although more than a reasonable time
had elapsed. A fire accidentally broke out B’s premises and books
were burnt. Held, B was liable for the loss even he was not negligent,
because of failure to deliver the books within reasonable time
5. To return any In the absence of any contract to the contrary, the bailee must return
accretion to the to the bailor any increase or profits which may have accrued from the
goods goods bailed

A leaves a cow in the custody of B to be taken care of and the cow gets
a calf, B is bound is deliver the cow as well as the calf to A
6. Not to set up an ⮚ Bailee should hold the goods on behalf of the bailor.
adverse title ⮚ He cannot deny the right of bailor to bail the goods and receive them
back.

If he delivers the goods bailed to other persons, he must prove that

such third person has a right over the goods as against the bailor.

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RIGHTS OF BAILOR

1. To enforce duties of The bailor may sue the bailee to enforce his duties and
bailee liabilities

2. To terminate the If bailee does any act inconsistent with the terms and
contract of bailment conditions of the contract of bailment.

3. To demand back the Where the bailment is gratuitous:

goods The bailor can demand their goods return whenever he
pleases even though he lent them for specific time or
purpose.

4. Compensation from a The bailor has the right to sue –

wrong-doer: o A third party who does any damages to the goods; or
o A third party who deprives the bailee from using the goods

Nishant lends a sum of Rs. 8,000 to Prashant on the security of ten shares of XYZ Ltd.
on 1st January, 2015. On 25th March 2015, XYZ Ltd. has issued one Bonus share.
Prashant return the loan amount of Rs. 8,000 with interest to Nishant. But Nishant
returns only ten shares which were pledged and refuse to give one bonus share. Advise,
Prashant in the light of the provisions of the Indian Contract Act, 1872

RIGHTS OF BAILEE

1. Return the ✔ To the bailor

goods ✔ In case of joint bailor: the goods may be returned to any of joint
bailor in the absence of any agreement to the contrary
2. Suit for deciding The bailee may apply to the Court for deciding the title to goods, if a
the title person other than the bailor claims that the goods belong to him

3. File suit against The bailee has the right to sue –

wrong-doer: o A third party who does any damages to the goods; or
o A third party who deprives the bailee from using the goods.

4. Right of lien The bailee has the right to retain the goods delivered to him until the
charges due to him are paid by the bailor
5. To enforce the duties of bailor

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LIEN

Meaning Lien means the right of a person to retain the possession of some goods
belonging to another until some debt or claim of the person in possession is
satisfied. It may be noted that possession is essential for exercising the right
of lien.
TYPES OF LIEN
1. Particular ⮚ A particular lien is one which is available to the bailee against only those
Lien goods in respect of which he has rendered some service involving the
exercise of labour or skill.
⮚ However if bailee does not complete the work within agreed time or
reasonable time, he cannot exercise the right of lien.
X gives a piece of cloth to Y, a tailor, to make a coat. Y promises to the deliver
the coat as soon as it is finished. Y is entitled to retain the coat till he is paid
for.

2. General A general lien is a right to retain all the goods or any property (which is in
Lien possession of the holder) of another until all the claims of the holder are
satisfied
If two securities are given to a banker but a loan is taken only against one of
the securities, the banker may retain both the securities until his claim is
satisfied

Distinguish between Particular Lien & General Lien

Particular lien General Lien

Particular lien gives right to retain only General lien gives right to retain any goods
such goods in respect of which charges belonging to another person for any amount
due remain unpaid. due from him.
Particular lien can be exercised only when General lien may be exercised even though no
some labour or skill has been expended on labour or skill has been expended on the
the goods goods.
Every bailee is entitled to particular lien. General lien can be exercised by only such
persons as are specified u/s 171. e.g., bankers,
wharfingers etc.

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TERMINATION OF BAILMENT

Situation Explanation Example

1. Expiry of When bailment is for specific Z lends a moped to Y for a period

specified period period, it terminates on the of 3 months April – June. The
expiry of the specified period Bailment terminates by the end
of June
2. Accomplishment Where bailment is for a specified G hires tables and chairs, utensils,
of specified purpose, it terminates when etc. from H for organizing his
purpose such purpose is accomplished son’s engagement. G shall return
them once the engagement
functions are over
3. Bailee’s act When bailee does some act J gives his car to K keeping it in
inconsistent with which is inconsistent with the K’s garage. K gives it to his son
conditions terms and conditions of for racing. J can terminate the
bailment, the Bailor may bailment
terminate the bailment.
4. Destruction of When goods bailed are K hires a cycle from L. When the
subject matter destroyed, Bailment comes to cycle is damaged beyond repair in
an end. an accident, bailment ends.

5. Gratuitous Gratuitous Bailment can be Note: Where premature

Bailment terminated at any time. termination of bailment by the
Bailor, causes loss to the Bailee
Also, a Gratuitous Bailment ends exceeding the benefits
by the death of either Bailor or derived by him, the Bailor shall
Bailee. indemnify the Bailee

PLEDGE

Meaning ⮚ Pledge or pawn is a contract

THE PLEDGE IS ⮚ whereby an article is deposited with a lender of money or
A BAILMENT FOR promisee ⮚ As security for the repayment of a loan or
SECURITY performance of a promise.
A borrows Rs. 200 from B and keeps his watch as security for
the payment of debt, the bailment of watch is a pledge

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Parties o The person who deposits the goods is called the “Pawnor”
and
o The person with whom the goods are deposited is called the
“Pawnee”
Essentials of Valid ✔ Pledge can be made of goods only
Pledge ✔ The property pledged should be delivered to the pawnee
✔ Delivery should be in pursuance of a contract
✔ Delivery should be for the purpose of security
✔ Delivery should be upon a condition to return

RIGHTS OF THE PAWNEE

1. Right to retain Right to retain the goods pledged with him until he is paid –
❖ Payment of the debt or the performance of promise,
❖ Any interest due on the debt; and
❖ All necessary expenses for preservation of goods pledged.
2. Retainer for ⮚ When the Pawnee lends money to the Pawnor subsequently,
subsequent advances after the date of pledge;
[Sec.174] ⮚ it shall be presumed that the he has a right of retainer over
the goods already pledged in respect of the subsequent
lending also.
This presumption can be rebutted only by a contract to the
contrary.
3. Reimbursement of • Where the Pawnee incurs extraordinary expenses to
extraordinary expenses preserve the goods pledged with him; he is entitled to receive
[Sec.175] such amount from the Pawnor.
• For such expenses, he has no right to retain the goods; he
can only sue to recover them
4. May file a Suit Pawnee may institute a suit against Pawnor when there is a
default in payment of debt or performance of promise at the
stipulated time
5. Sale of goods If –
i. The Pawnor has failed to pay the debt or perform his promise
ii. A reasonable notice has been given to the Pawnor
Surplus / Deficit on Sale:
When there is a surplus on sale, Pawnee shall pay the excess to
the Pawnor. In case of deficit, Pawnor shall be liable for the
balance amount.
If fails to give notice
Where the Pawnee does not give a reasonable notice to the

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Pawnor, the sale is valid, but Pawnee is liable to pay damages

to Pawnor.

5. Right against true ⮚ Where the Pawnor has acquired possession of pledged
owner of goods goods, under a voidable contract (i.e by fraud, undue
[Sec.178A]: influence, coercion etc.) but contract has not been rescinded
at the time of pledge,
⮚ The Pawnee acquires a good title to the goods, against the
true owner. Provided
▪ he acts in good faith and
▪ without notice of the owner’s defect of title

DUTIES OF PAWNEE
⮚ Not to use the goods for his own purpose unless authorized by Pawnor
⮚ The Pawnee must return the goods if the Pawnor pays the debt or performs his promise ⮚
The Pawnee must take such care of goods pledged as a man of ordinary prudence would
take care of his own goods.
⮚ The Pawnee must not mix his own goods with the goods pledged
⮚ The Pawnee must return to the Pawnor any accretion to the goods pledged with him

RIGHTS OF PAWNOR

1. Right to get back goods

2. Right to receive notice of sale
3. Enforce Pawnee’s duties

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DUTIES OF PAWNOR

⮚ The Pawnor is liable to pay the debt or perform his promise as the case may be.
⮚ If the Pawnee sells the goods due to default by the Pawnor, the Pawnor must pay the
deficit
⮚ The Pawnor is liable to pay to the Pawnee any extraordinary expenses incurred by the
Pawnee for preservation of goods
⮚ The Pawnor is liable to disclose all the faults which are material for use of the goods; or
may put the Pawnee to extraordinary risks
⮚ If loss is caused to the Pawnee due to defect in pawnor’s title to the goods, the Pawnor
must indemnify the Pawnee

DISTINGUISH BETWEEN PLEDGE & BAILMENT

Basis Pledge Bailment

Purpose Pledge is bailment of goods for a specific Bailment is the delivery of

purpose, i.e. to provide a security for a loan goods for purpose of any
or the performance of a promise kind

In case of Pawnee has a right of sale of goods pledged Bailee may either retain
default on default of Pawnor by giving a notice to the goods or sue for
the Pawnor damages
Right of using Pawnee has no right of use the goods Bailee can use the goods
the goods pledged bailed as per terms of
contract
Consideration Consideration is always present in pledge Bailment may be made
without consideration
One in another Every pledge amounts to bailment Every Bailment is not
pledge

PLEDGE BY NON-OWNER

Pledge by a mercantile 1) With the consent of owner,

agent 2) In possession of goods or document of title of goods.
(Sec. 178) 3) When acting in ordinary course of business of a mercantile
agent

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Pledge by seller in Can create a valid pledge provided:-

possession after sale 1) The pawnee acts in good faith and
2) Has no notice of previous sale of goods to the buyer or lien
of seller on the goods
Pledge where Pawnor has a ▪ Where a person pledge goods in which he has only a limited
limited interest interest, the pledge is valid to the extent of that interest.
(Sec. 179) ▪ A person having a lien over the goods or finder of goods
may pledge them to the extent of his interest
Pledge by person to Where a person obtains possession of goods under a
possession under a voidable contract, the pledge created by him is valid
voidable contract provided
(Sec. 178A) o The contract has not been rescinded before the contract of
ledge o The Pawnee acts in good faith and without notice of
the pawnor’s defect of title

LAW OF AGENCY
Meaning of Agent ❖ An ‘agent’ is a person employed to do any act for another; or
represent another in dealings with third persons.

Meaning of Principal ❖ ‘Principal’ is the person for whom an act is done by the agent; or
who is represented by the agent in respect of dealing with third
persons.
Essential Characteristics of Agency

Rules of Agency 1) Whatever a person can do personally he can do so through his

agent Except, where the act involved is of the personal nature
2) The acts of the agent are the acts of principal

Who may Employ Any person may employ an agent if

Agent (Sec 183) ✔ He is of the age of majority; and
✔ He is of sound mind
Who may be an ▪ Any person may become an agent.
Agent (Sec 184) ▪ Even a minor or a person of unsound mind can become an agent.

Liability of an agent • An agent is liable to the principal;

• An agent is not liable to the principal if he is a minor or is of
unsound mind.

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Principal is liable for The principal is liable for all the acts of an agent which are
acts of agent ✔ lawful and
✔ within the scope of agent’s authority
No consideration is No consideration is necessary for creating an agency
required

TEST OF AGENCY
Where a person has the capacity to bind the principal and make him
answerable to third person by his own acts and create contractual relations b/w the
principal and third party; there exists a relationship of agency.

MODE OF CREATION OF AGENCY

1. Agency by The agreement may be either oral or written.

agreement (Sec.
187)
2. Agency by Implied agency may arise by conduct, situation of parties or inferred
implied from circumstances of the case.
agreement
(Sec.237) 1) Where a person makes a representation (by his words or conduct)
2) willfully led another person to believe that a certain person is his
(i) Agency by agent; and
estoppels: 3) the third party has acted on that belief

Then: he (P) is stopped from denying the truth of such statement

subsequently. He may be held liable as a principal
(ii) Agency by 1) when a person by his prior affirmative or positive conduct
holding out 2) leads third persons to believe that person doing some act on his
behalf
Then he is estopped from denying the agency

P allows his servant habitually to purchase goods for him on credit from
T and pay for them. On one occasion, he pays his servant cash to
purchase the goods. The servant misappropriates the money and
purchased goods on credit from T. T can recover the price from P as he
has held out his servant as his agent on prior occasion

(iii) Agency by In certain circumstances, law confers an authority on a person to act as

necessity: agent a person for the benefit of another, there being no opportunity
of communicating with that other. Such an agency is called an agency of
necessity.

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It arises in following cases:-

❖ Act in Emergency situation
✔ Agent exceeding his authority in an emergency:
✔ To protect the interests of principal and
✔ He acted bona fide.
P consigns provisions to A at Kolkata, with direction to send them
immediately to T, at Mumbai. A may sell the provisions at Kolkata, if
they will not bear the journey to Mumbai without spoiling
❖ A person entrusted with another’s property may have to incur
unauthorized expenses to protect or preserve it
A sent a horse by railway and on its arrival at the destination there was
no one to receive it. The railway company, being bound to take
reasonable steps to keep the horse alive, was an agent of necessity of
A.
3. Agency by ▪ Where a person having no authority purports to act as agent, or ▪ A
ratification: duly appointed agent exceeds his authority,
▪ The principal is not bound by the contract supposedly based on his
behalf. But the principal may ratify the agent’s transaction and so
accept liability
A insures P’s goods without his authority, if P ratifies A’s act the policy
will be valid as if A had been authorized to insure the goods
A, without authority, buys goods for P. Afterward P sells them to T on
his own account. P’s conduct implies a ratification of the purchase
made for him by A [implied ratification]

4.Agency by Where the law treats one person as an agent of another.

operation of law E.g. A partner is the agent of the firm for the purpose of the business of
the firm.

REQUISITES OF VALID RATIFICATION

Existence of principal The principal must be in existence at the time when the act was
done in his name
Who may ratify ⮚ Ratification can be made by only such person for whom the act
was done. Ratification can be made only for such acts which
principal had the power to do.
Contractual capacity The principal must have contractual capacity both at the time of
entering into the contract and at the time of ratification.
Lawful Act Only those acts which are lawful can be ratified. Void, illegal, or
ultra vires acts cannot be ratified.

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Full knowledge of The principal at the time of ratification has full knowledge of the
Material facts material facts, and must ratify the whole contract, within a
reasonable time.
A has an authority from P to buy certain goods at market price. He
buys at a higher price but P accepts the purchase. Afterward P
comes to know that the goods purchased by A for P belonged to
A himself. The ratification is not binding on P
Time of ratification Ratification must be within reasonable time
Ratification must be Ratification must be communicated to the third party so as to bind
communicated him
Ratification Whole The whole transaction can be ratified. The principal cannot ratify a
transaction part of the contract which is beneficial to him and reject the rest
Ratification should not ratification which has the effect of subjecting a third person to
put a third party to damages or of terminate any right or interest of a third person,
damage: cannot be made
T holds a lease from P, terminable on three months’ notice. A, an
unauthorized person gives notice of termination to T. the notice
cannot be ratified by P, so as such T is bound by the contract

KINDS OF AGENT

1. Special Agent ❖ Appointed to perform a particular transaction, e.g. sale of a house

property.
❖ Agent has limited authority
❖ Agent cannot bind Principal for acts other than for which he is
employed.
❖ The authority of the special agent comes to end as soon as such
particular transaction is completed
2. General Agent ▪ Appointed to do all acts connected with a particular trade, business
or employment.
▪ Authority is wide and continues till agency is terminated.

3. Universal Agent • Appointed to do all acts for the Principal.

• All acts of Agent bind his Principal provided that his acts are lawful

4. Commercial or One who is authorized to

Mercantile Agents o sell goods or
o consign goods for the purpose of sale or
o to buy gods or
o to raise money on the security of goods

Includes Banker, Auctioneer, Commission Agent, & Del Credere

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Agent.

5. Non – Mercantile ▪ Not engaged in business of selling or buying goods,

Agents. ▪ Act in their respective professional capacities. i.e. render
professional services for their Principal
Includes Solicitors, Attorneys, C & F Agents, Insurance Agents, etc.
6. Sub-Agent ❖ Sub-agent is an agent of the original agent.
❖ The relation of sub-agent and original agent is that of agent and
the principal.
❖ A sub-agent is bound by all the duties of the original agent.
❖ The sub-agent is not directly responsible to the principal except for
fraud and wilful wrong.
❖ The sub-agent is responsible to the original agent.
❖ The original agent is responsible to the principal for the acts of the
sub-agent.
❖ As regards third persons, the principal is represented by sub-agent
and he is bound and responsible for all the acts of sub-agent as if he
were an agent originally appointed by the principal.

LEGAL RELATIONSHIP BETWEEN THE PRINCIPLE AND SUB-AGENT AND AGENT

Where a Sub-Agent a) Principal is bound to the third parties for the acts of sub-agent. b)
is Properly The agent is responsible to the principal for the acts of sub-agent. c)
Appointment The sub-agent is responsible to the agent for the acts done by him
but not responsible to the principle, except in case of fraud or willful
wrong.
Where a Sub – Agent a) Principal is not bound to the third parties for the acts of sub –
is Not Properly agent. b) The agent is responsible to the principle and third parties
Appointed for the acts of sub – agent.
c) The sub – agent is responsible to the agent for the acts done by
him. d) The sub – agent is not responsible to the principle.

DUTIES OF AGENT
1) To conduct the business in accordance with the directions given by the principal.
Where an agent acts otherwise and some loss is sustained, he must compensate
the loss to his principal
2) To work with reasonable diligence, care and skill.
3) To render proper accounts to the principal on demand.

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4) To communicate with his principal in case of difficulty and seek his instructions.
5) Not to deal on his own account unless all the material facts have been disclosed to
the principal and consent of the principal has been obtained.
6) Not to make any secret profit out of the agency business other than the agreed
remuneration
7) To remit to the principal all the sums received in the principal’s accounts in
accordance with the terms and conditions of contract of agency.
8) Not to delegate authority or appoint sub – agent subject to certain exceptions
9) He must not allow his interest to conflict with his duty, e.g., he must not compete
with his principal
10) Not to use information obtained in the course of the agency against the principal

RIGHTS OF AGENT
1. To receive the agreed remuneration. If the remuneration is not fixed, then he has the right
to recover such remuneration as is usual and customary in such business.
2. Right of lien on principal’s goods, papers and other property until the amount due to him
for commission, disbursement and services in respect of the same is paid.
3. 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
4. Agent may retain, out of the sums received on account of principal, all money due to him
in respect of o Advances made by him in conducting such business
 Expenses properly conducted by him in conducting such business
 Remuneration as may be due to him for acting as an agent
5. An agent has the right to be indemnified by the principal against the consequences of o
All lawful acts done in exercise of the authority conferred on him
 o Acts done in good faith that caused an injury to third person

EXTENT OF AGENT’S AUTHORITY

The authority of an agent means his right or capacity to bind the principal. The extent to
which an agent can exercise his authority, on behalf of the principal, can be discussed under
two heads:-
 Agent’s authority in normal circumstances
 o Agent’s authority in emergency
1. Agent’s authority in An agent, having authority to carry on a business, has authority to
normal circumstances do every lawful thing:-
• Necessary for the purpose of conducting such business
• Usually done in the course of conducting such business

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2. Agent’s authority in An agent has authority to do all such acts, for the purpose of
emergency: protecting his principal from loss, as would be done by a person of
ordinary prudence, in his own case under similar circumstances

WHEN AN AGENT IS PERSONALLY LIABLE TO THIRD PARTY

1. When the contract A person while entering into the agreement with an agent may
expressly provides expressly stipulates that he would hold the agent personally
liable in the case of breach of contract.
2. When the agent acts Where the contract is made by an Agent for the sale or
for a Foreign Principal purchase of goods for a merchant resident abroad.
However, He can exclude his personal liability by express
provision to this effect in the contract.

3. Undisclosed Principal Where the Agent does not disclose the name of his Principal.

4. Incompetent principal When he acts for a Principal who cannot be sued i.e Principal is
incompetent to enter into a contract.

5. Principal not in Where the Agent acts for a Principal who is not in existence at
existence the time of making contracts, he shall be personally held liable
Contracts entered into by Promoters before incorporation of a
Company are made in their personal capacity and hence
personally liable.

6. Execution of Contract ▪ Where an Agent executes a contract in his own name,

in his own name ▪ Without disclosing that he is acting as Agent for a Principal,
He shall be personally liable.

7. When Agent exceeds Where an Agent acts either without any authority or exceeds
authority & act not his authority, he shall be held personally liable when the
ratified principal does not ratify his acts.

8. Agency coupled with When the Agent has an interest in the subject matter of
interest contract entered into by him with a third party. He will be
personally liable to third party

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AGENCY COUPLED WITH INTEREST

 When agency is created for security some benefit to the agent over his
remuneration as an agent, it is called as agency coupled with interest.
 The interest should exist at the time of creation of agency.
 If the interest arises after the creation of agency then it would not be called as
agency coupled with interest.

P gives authority to A to sell P’s land and to pay himself, out of the proceeds, the debt
due to him from P. P cannot revoke this authority, nor can it be terminated by his
insanity or death

POSITION OF PRINCIPAL AND AGENT IN RELATION TO THIRD

PARTIES
A. NAMED PRINCIPAL (Where the principal’s existence and name disclosed by the
agent)
1. When agent acts ❖ The principal is liable for all the acts of an agent which are
within the scope of his lawful and within the scope of agent’s authority.
authority: ❖ The contracts entered into by the agent on behalf of the
principal have the same legal consequences as if these contracts
were made by the principal himself.
P authorizes A to receive money on his behalf. He receives from T
a sum of money due to P. T is discharged of his obligation to pay
the sum to P
2. When agent exceeds Whether the acts done within the authority are separable from
his authority the acts done beyond authority,
❖ If yes – The principal is not bound for excess acts done by the
agent.
❖ If no – The principal is not bound by the transaction and the
principal can repudiate the whole transaction.
P, being owner of the ship and cargo, authorizes A to procure
insurance on the ship. A procured a policy on the ship and
another policy on the cargo. P is bound to pay the premium for
the policy on ship, but not for cargo. If A had taken only one
policy on the ship and cargo, P would not be bound
3. Principal is bound by • The principal is bound by the notice given to the agent in the
notice given to agent course of the business.
• Knowledge of the agent is the knowledge of the principal.

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4. Liability of principal A principal is liable where he has, by words or conduct induced a

by estoppels belief in the third party that the act of agent was within the scope
of his authority
5. Liability for The principal is liable for misrepresentation or fraud of his agent,
misrepresentation or acting within the scope of his authority, during the course of
fraud by agent agency business.

J, the owner of a car handovers the car with key to P (the mercantile agent) to sell the
car at a price not below INR 100000. P sold at INR 90000 to A, who buys in good
faith and without notice of reserve price/or any fraud. P misappropriated the money
also. J filed a suit against A to recover the car. Advice with reasons whether J can
succeed?

B. UNNAMED PRINCIPAL (Where the principal’s existence is disclosed but not his name)

⮚ Principal is liable for the contract of the agent.

⮚ However if the agent declines to disclose the identity of the principal he will become
personally liable to the contract.

C. UNDISCLOSED PRINCIP (Where both the existence and name of the principal is
disclosed)
The agent in such case gives an impression to the third party as if he is contracting in an
independent capacity.
When an undisclosed principal is subsequently discovered, the third-party may sue either the
principal or the agent or both. The principal may also if he likes require the performance of
the contract from the third party and in such case the third-party is also entitled to get the
benefit of anything he may have paid to the agent.

T enters into a contract with A to sell him 100 bales of cotton and afterwards discover that A
was acting as agent for P. T may sue either A or P or both for the price of the cotton
If the principal discloses him before the contract is completed, the other contracting party
may refuse to fulfill the contract if he can show that, if he had known who the principal in
the contract was, or if he had known that the agent was not the principal, he would not
have entered into the contract.
TERMINATION OF AGENCY

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