Indian Contract Act 1872

1. Contract of INDEMNITY

The term ‘Indemnity’ means to make good the loss suffered by a party.

According to provisions of sec.124 of Indian Contract Act 1872 “A contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself or by
the conduct of any other person, is called a contract of indemnity. The person who promises to
compensate for the loss is called the “indemnifier” and the person to whom this promise is made
or whose loss is to be made good is known as “indemnity-holder” or “indemnified”.
Example:’ A’ contracts to indemnify ‘B’ against the consequences of any proceedings which
‘C’ may take against ‘B’ in respect of a certain sum of money. This is a contract of
indemnity.
In a contract of indemnity, all the essentials of a valid contract must be present. Thus, if the
object or consideration of an indemnity agreement is unlawful, it cannot be enforced.
Example
‘A’ asks ‘B’ to beat ‘C’ promising to indemnify him against the
consequences. The promise of ‘A’ cannot be enforced. Suppose
‘B’ beats ‘C’ and is fined Rs.1000, ‘B’ cannot claim this amount
from ‘A’ because the object of the agreement is unlawful.

Rights of Indemnity-holder
As per Section 125 of the Indian Contract Act 1872, the
indemnity-holder is entitled to recover from the Promisor the following amounts:
1. All damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.
2. Right to recover costs of suit: The indemnity holder is entitled to recover from the indemnifier
all the costs which he is compelled to pay, in bringing or defending such suit, provided -
 the indemnifier authorised him to bring or defend the suit; or
 he did not contravene the orders of the indemnifier,
 and acted as a man of ordinary prudence would have acted in his own case.
3. All sums, which he may have paid under the terms of any compromise of any, such suit
provided-
 the indemnifier authorised him to bring or defend the suit; or
 he did not contravene the orders of the indemnifier,
 and acted as a man of ordinary prudence would have acted in his own case.
 2. Contract of Guarantee
Meaning and Definition
According to Section 126 of the Indian Contract Act, ‘A
contract of guarantee is 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’; the
person in respect of whose default the guarantee is given is
called ‘the principal debtor’; and the person to whom the
guarantee is given is called ‘the creditor’.
Example
When ‘A’ requests ‘B’ to lend Rs.10,000 to ‘C’ and
guarantees that ‘C’ will repay the amount within the agreed
time and that on ‘C’ failing to do so, he will himself pay to
‘B’, there is a contract of guarantee.
It will be noticed that in a contract of guarantee there are three separate contracts giving
rise to a triangular relationship. These are:
 A principal contract between the creditor and the debtor, creating the debt;
 between the surety and the creditor, creating a liability of surety in case of debtor's default
that results in subrogation, and
 an implied contract between the surety and the debtor that the debtor will indemnify the
surety after the latter has paid the creditor on the debtor's default.

Essential Features of Guarantee

1. Existence of a debt
The purpose of a guarantee being to secure a debt, the existence of a recoverable debt is necessary.
It is of the essence of a guarantee that there should be someone liable as a principal debtor and the
surety undertakes to be liable on his default. If there is no valid existing debt, there can be no valid
guarantee.
Example
‘A’ gives the guarantee to ‘B’ for the payment of a time-barred debt due from ‘C’. This is not a
valid contract of guarantee because the primary liability between ‘B’ and ‘C’ is not enforceable by
law. In case ‘A’ pays the amount, he cannot recover it from ‘C’.
2. Consideration [Section 127]
Like every other contract, a contract of guarantee should also be supported by some
consideration. But there need not be direct consideration between the surety and the creditor.
Section 127 clearly says that anything done, or any promise made, for the benefit of a principal
debtor, may be sufficient consideration to the surety for giving the guarantee.
Examples
‘B’ requests ‘A’ to sell and deliver to him goods on credit. ‘A’ agrees to do so provided ‘C’ will
guarantee the payment of the price of the goods. ‘C’ guarantees the payment in consideration of
‘A’ s promises to delicate goods. This is a sufficient consideration for ‘C’s promise.

3. ‘There should be no misrepresentation or concealment [Section 142-143]

A contract of guarantee is not a contract “uberrimae fidei” (requiring utmost good faith).
Nevertheless, the suretyship relation is one of trust and confidence, and the validity of the contract
depends upon good faith on the part of the creditor. A creditor must disclose all those facts, which,
under the circumstances, the surety would expect not to exist. So where guarantee is given for
good conduct of an employee, will discharge the surety if facts are not disclosed properly.

Example
‘A’ employs ‘B’ as clerk to collect money for him. ‘B’ fails to account for some of his receipts, and
‘A’ in consequence, calls upon him (‘B’) to furnish security for his duly accounting. ‘C’ gives the
guarantee for ‘B’ s duly accounting. ‘A’ did not inform ‘c’ about ‘B’ s previous conduct. ‘B’,
afterwards, makes default. Here the guarantee given by ‘C’ is invalid because it was obtained by
concealment of facts by ‘A’

4. Writing not necessary [Section 126]

Section 126 expressly declares that a guarantee may be either oral or written. However, in England
under the provisions of Section 4 of the Statute of frauds, a guarantee is not enforceable unless it is
“in writing and signed by the party to be charged”.

5. Extent of Surety’s Liability [Section 128]

Unless the contract provides otherwise, liability of the surety is co-extensive with that of the
principal debtor. In other words, the surety is liable for all those amounts; the principal debtor is
liable for.
Example
‘A’ guarantees to ‘B’ the payment of a bill of exchange by ‘C’, the acceptor. ‘C’ dishonours the
bill. ‘A’ is liable not only for the amount of the bill but also for any interest and charges which may
have become due thereon.
The liability of a surety is called as secondary or contingent, as his liability arises only on default
by the principal debtor. But as soon as the principal debtor defaults, the liability of the surety will
be liable for all those sums for which the principal debtor is liable. The creditor may file a suit
against the surety without suing the principal debtor. Further, where the creditor holds securities
from the principal debtor for his debt, the creditor need to first exhaust his remedies against the
securities before suing the surety, unless the contract specifically so provides.
Rights of Surety
Right against principal debtor
Right of indemnity  There is an implied promise by the principal debtor to indemnify
(sec. 145) the surety.
 The surety is entitled to claim from the principal debtor all the
sums which he has rightfully paid.
 The surety cannot recover such sums, which he has paid
wrongfully.

Right of subrogation  On payment of a debt, the surety shall be entitled to all the right
(sec.140) which the creditor could claim against the principal debtor.

Right against the creditor

Right to claim  The surety can claim all the securities which the creditor had at
securities the time of giving of guarantee
(sec. 141)  It is immaterial as to whether the surety had knowledge of such
securities or not.
 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

Right of set off  Any amount recoverable by the principal debtor may be claimed
as deduction.

Right against co-sureties

Right to contribution General Rule Exceptions Under the contract of guarantee, the
(Sec. 145 and 147) co-sureties may fox 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.
The contract of guarantee may provide that the co-sureties shall
contribute in proportion

Right to share benefit If one co-surety receives any security, a l the other co-sureties are
of securities entitled to share the benefit of such security.
Kinds of Guarantee
Contract of guarantee may be classified into two types:
 Specific guarantee;
 Continuing guarantee.

Specific Guarantee
When a guarantee is given in respect or a single debt or specific transaction and is to come to an
end when the guaranteed debt is paid or the promise is duly performed, it is called a specific
guarantee. A specific guarantee, once given, cannot be revoked. Even the death of the surety will
not result in revocation of specific guarantee and the legal successor shall continue to remain liable
up to the net value of the assets inherited by him.

Continuing Guarantee
A Guarantee which extends to a series of transactions is called a continuing guarantee. In other
words, a guarantee relating to a series of transactions to be performed by the principal debtor is a
continuing guarantee.
A contract of guarantee may, at any time, be revoked by the surety as to future transactions, by
notice to the creditor.

Discharge of Surety
A surety gets discharged from liability on a guarantee under the following circumstances:

1. Notice by Surety (section 130)

The liability of a surety under a contract of guarantee may at any time be revoked by the
surety, as to the future transactions, by notice to the creditor.

2. Death of Surety (Section 131): In the absence of a contract to the contrary, a continuing
guarantee is revoked by the death of the surety as to the future transactions. The estate of
deceased surety is, however, liable for those transactions which had already taken place
during the lifetime of the deceased. Surety’s estate will not be liable for the transactions
taking place after the death of surety even if the creditor had no knowledge of surety’s
death.

3. Novation: contract of guarantee is discharged by novation i.e., when a fresh contract is

entered into, either between the same parties or between other parties, the consideration
being the mutual discharge of the old contract. The original contract of guarantee comes to
an end and the surety stands discharged with regard to the old contract.

4. By Variance in terms of Contract (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.
 5. Release or discharge of the Principal debtor (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 consequence of which is the
discharge of the principal debtor.

6. Guarantee obtained by misrepresentation: When a misrepresentation is made by the

creditor or with his knowledge or consent, relating to a material fact in the contract of
guarantee, the contract is invalid (Section 142).

7. Guarantee obtained by concealment: when a guarantee is obtained by the creditor by

means of keeping silence regarding some material part of circumstances relating to the
contracts, the contract is invalid (Section 143)

8. Compounding by creditor with principal debtor:

Any contract between the creditor and the principal debtor by which the creditor makes a
composition or promise to give time to the debtor, discharges the surety unless he gives his
consent.

DISTINCATION BETWEEN INDEMNITY AND GUARANTEE

Basis Contract of indemnity Contract guarantee
1. Meaning A contract by which one party A contract of guarantee is a
promises to save the other from contract to perform the
loss caused to him is called as a promise or discharge the
contract of contract of liability, of a third person in
indemnity. case of his default.

2. Parties There are only two parties, viz., There are three parties, viz
the indemnifier and the principal debtor, creditor and
indemnity holder. guarantor.

3. Nature of liability of The liability of the indemnifier The liability of the surety is
indemnifier or surety is primary and independent secondary and conditional.
4. Number of contract (s) In a contract of indemnity, In the contract of guarantee,
there is only one contract. there are three contracts; first
between principal debtor and
creditor, second between
creditor and surety, and third
between surety and principal
debtor.

5. Nature of contract The contract of indemnity is The contract of guarantee is for

for the reimbursement of the the security of the creditor.
loss or save a party from
incurring loss.

6. Right The indemnifier has no sue any When surety discharges the
party for recovery of any loss. liability of the principal debtor,
he becomes entitled to recover
from the principal debtor all
sums rightfully paid by him.
 3. Contract of Bailment
Definition of Bailment
According to sec 148 Bailment refers to “The delivery
of goods by one person to another person for some
purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person
delivering them.” The person delivering the goods
is called the ‘Bailor’, and the person to whom goods
are delivered is called the ‘Bailee’.

Modes of Delivery
 Actual Delivery Transfer of physical possession of goods from one person to another.
 Symbolic Delivery Physical possession of goods is not actually transferred. A person does
some act resulting in transfer of possession to any other person.
Examples- Delivery of keys of a car to a friend, Delivery of a railway receipt.
 Constructive Delivery It means doing of any act which has the effect of putting the goods
in the possession of a person who agrees to hold them as a bailee for some other person,
although transfer of possession of goods does not actually take place.
In other words we can that constructive delivery is a delivery that takes place without
change in actual possession.

Essentials of valid Contract of Bailment

For creating a relationship of bailment, the following features must be present

1. Contract: Contract between the bailor and bailee, may be either express or implied.
2. Delivery of Goods: The essence of bailment is delivery of goods by one person to another
Delivery of goods may, however, be actual of constructive. Handing over goods to the bailee
results in actual delivery. Constructive delivery may be made by doing something, which has the
effect of putting the goods in the possession of the intended bailee or any person authorized to hold
them on his behalf.
3. Purpose: In a bailment, the goods are delivered for some purpose. The purpose for which the
goods are delivered is usually for the benefit of both t bailor and the bailee.
4.Return or disposal of goods: It is important that the goods, which form the subject matter of the
bailment, should be returned to the bailor or disposed of according to the directions of bailor, after
the accomplishment of purpose or after the expiry of period of bailment.
Gratuitous and Non-Gratuitous Bailment
 'Gratuitous bailment' means bailment without re-ward or consideration. So, where a friend
lends a book to another for reading, the bailment is gratuitous.
 'Non-gratuitous bailment' means bailment against consideration.

Basis Gratuitous bailment Non gratuitous bailment

Meaning Bailment without any charge of reward If some charges are paid either by the
is called as gratuitous bailment. bailor or by the bailee in consideration
of bailment of goods, it is called as
non-gratuitous bailment.

Consideration No consideration is present in case of Consideration is always present in case

gratuitous bailment. of non-gratuitous bailment.

Liability for The bailor is liable to disclose only The bailor must disclose to the bailee
non such faults as are known to him. all the faults whether known or not
disclosure of known to him.
unknown
faults

Duty to pay The bailor is liable to reimburse to In case of non-gratuitous bailment

ordinary bailee all the necessary expenses bailee is not entitled to recover any
necessary incurred by bailee. expenses incurred by him.
expenses

Right of pre Bailor had the right to terminate the Bailor has no right to terminate the
mature gratuitous bailment at any time even non-gratuitous bailment before the
termination though the bailment was for a expiry of period of bailment.
of bailment particular period.

Effect of Death of bailor or bailee operates as In case of non-gratuitous bailment, the

death of automatic termination of gratuitous bailment is not terminated by death of
bailor or bailment. bailor or bailee.
bailee

Duties of Bailee
(a) To take reasonable care of goods bailed:
In all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a
man of ordinary prudence would, under similar circumstances, take of his own goods of the same
bulk, quality and values as the goods bailed.
(b) Not to make any unauthorized use of goods:
The bailee is under a duty not to use the goods in a manner inconsistent with the terms of the
bailment. If he does so, the bailor can terminate the bailment; and if any loss or damage results
from the use of goods for a purpose other than the one agreed upon, or in a manner opposed to the
one stated, the bailee becomes responsible for such a loss, unless such a use is necessary for its
preservation.
(c) Not to mix bailor's goods with his own goods:

Situation Consequence

Goods are mixed with bailer’s consent The parties should have a proportionate interest
in such mixture.

Goods are mixed without the bailor’s consent The bailee shall pay the expenses of separation.
but the goods are separable The bailee shall pay damages incurred by
bailor.

Goods are mixed without the bailer’s consent The bailee shall compensate bailor for any loss
and goods are not separable caused to him.

(d) Not to set up adverse title

The bailee is under a duty not to do any act which is inconsistent with the title of the bailor. He
should not setup his own title. He has no right to deny the bailor's title or set up against the bailor
his own title or the right of a third party. He will, however, refuse to deliver goods to the bailor if
there is an effective pressure of an adverse claim amounting to an actual eviction by a paramount
title.
(e) To return the Goods
It is the duty of the bailee to return or deliver the goods without demand, on the expiry of the time
fixed or when the purpose is accomplished. If he does not return or deliver as directed by the
bailor, or tender the goods at the proper time, he becomes liable for any loss, destruction or
deterioration of the goods even without negligence during the period it is detained.
(f) To return any accretion to the goods:
In the absence of any contract to the contrary, the bailee must return to the bailor any increase or
profits which have accrued from the goods bailed. This usually happens in the case of animals.
Duties of Bailor
(a) To disclose known faults:

Gratuitous bailment The bailor is liable to disclose all the faults known to him which are
material and may put the bailee to extraordinary risks.
In case of non-disclosure, the bailor shall be liable for damages for
any loss caused to bailee.

Non gratuitous bailment The bailor is liable to disclose all the faults whether known to him
or not.
In case of non-disclosure, the bailor shall be liable for any loss
caused to the bailee whether or not he was aware of the faults.

(b) To reimburse expenses:

Extraordinary expenses The bailor is liable to pay extraordinary expenses. The bailee may
recover the extraordinary expenses paid by him.
It is immaterial as to whether the bailment is gratuitous or
non-gratuitous.

Ordinary expenses The bailee is liable to pay ordinary expenses in case of

non-gratuitous bailment.
However, in case of gratuitous bailment for the benefit of bailor, the
bailor is liable to pay the ordinary necessary expenses.

(c) To indemnify bailee:

The bailor is bound to indemnify the bailee for any cost or loss, which the bailee may incur
because of the defective title of the bailor to the goods bailed.
(d) To indemnify the bailee for premature termination:
If the bailment is gratuitous and for specific period, then the bailor may compel the bailee to return
the goods before expiry of the period of bailment but the bailor shall indemnify the bailee for any
loss incurred by the bailee
Kinds of Lien
BASIS PARTICULAR LIEN GENERAL LIEN

Nature of right Particular lien gives right to retain only General lien gives right to
such goods in respect of which charges retain any goods belonging to
due remain unpaid. another person for any amount
due from him.

Conditions for Particular lien can be exercised only General lien may be exercised
exercising lien when some labour or skill has been even though no labour or skill
expended on goods, resulting in an has been expended on the
increase in value of goods. goods.

Right to whom? Every bailee is entitled to particular lien. General lien can be exercised
by only such persons as are
specified u/s171, e.g., bankers,
factors, wharfingers. Attorneys
of High Court, policy brokers,
any other bailee may exercise
general lien if there is an
agreement to this effect.

A contract of bailment shall terminate in the following circumstances:

1. On expiry of stipulated period: If the goods were given for a stipulated period, the
contract of bailment shall terminate after the expiry of such period.
2. On fulfilment of the purpose: If the goods were delivered for a specific purpose, a
bailment shall terminate on the fulfilment of that purpose.
3. By Notice:
(a) Where the bailee acts in a manner which is inconsistent with the terms of the bailment, the
bailor can always terminate the contract of bailment by giving a notice to the bailee.
(b) A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the
bailee. However, the termination should not cause loss to the bailee in excess of the benefit
derived by him. In case the loss exceeds the benefit derived by the bailee, the bailor must
compensate the bailee for such a loss (Sec. 159)
 4. By death: A gratuitous bailment terminates upon the
death of either the bailor or the bailee.

5. Destruction of the subject matter: If the original

condition of the bailed goods does not exist or is
destroyed, the contract of bailment is
automatically terminated, because the purpose will not be
fulfilled or the performance of the contract is
impossible.
Pledge vs. Bailment

BASIS PLEDGE BAILMENT

Purpose A pledge is made for a specific purpose, A bailment can be for any purpose.
i.e., security for payment of debt or
performance of a promise.

Use of goods A pawnee does not have a right to use the The bailee may use the goods
goods. bailed as per the terms of the
contract.

Lien Lien can be exercised even for A bailee can exercise lien on goods
non-payment of interest. bailed only for his labour and
skilled employed

Sale of goods The pawnee can sell the goods after due The bailee has no right of sale.
notice to the pawnor.

Nature of The pledge gets a special interest in the A bailee obtains rights of
interest in goods, the general property remains in possession of the goods bailed.
property the pawnor

Contract of Agency
Contract of Agency According to Section 182 of the Contract Act “An ‘agent’ is a person
employed to do any act for another or to represent another in dealings with third persons. The
person for whom such act is done, or who is so represented, is called the ‘principal’.” Thus, an
agent is a connecting link between his principal and third parties.
Modes of Creation of Agency
 Express agreement,
 Implied agreement,
  Ratification

Express Agreement (Section 186 and 187). As per Section 186, a contract of agency may be
express or implied. As per section 187, an authority is express when it is given by words, spoken or
written. A person may be appointed agent, either by words of mouth or by writing. No particulars
form is required for appointing an agent. The usual form of a written contract of agency is the
power of attorney on a stamped paper.
Example
‘A’ is residing in Delhi and he has a house in Kolkata. ‘A’ appoints ‘B’, by a deed called the power
of attorney, as caretaker of his house. Agency is created by express agreement.
Implied Agency (Section 187). An authority is said to be implied when it is to be inferred from
the circumstances of the case; and, or the ordinary course of dealings.
Implied agency includes the following:
 Agency by estoppel
 Agency by holding out, and
 Agency by necessity

a. Agency by Estoppel (Section 237). When a person has, by his conduct or statement,
induced others to believe that a certain person is his agent, he is estopped from
subsequently denying it, Lord Halsbury says, “Estoppel arises when you precluded from
denying the truth of anything which you have represented as fact, although it is not a fact.”
Example
‘P’ allows ‘A’ telling ‘C’ that ‘A’ is ‘P’s agent. Later on, ‘C’ supplies certain goods to ‘A’
thinking him to be ‘P’ agent. ‘P’ shall be held liable to pay the price to ‘C’ By allowing ‘A’
to represent himself as his agent, ‘P’ leads ‘C’ to believe that ‘A’ is really his agent.
b. Agency by Holding Out. Though part of the law of estoppel, some affirmative conduct by
the principal is necessary in creation of agency by holding out.
Example
‘P’ allows his servant ‘A’ to buy goods for him on credit from ‘C’ and pays for them
regularly. On one occasion, ‘P’ pays his servant cash to purchase the goods on credit
pocketing the money, ‘C’ can recover the price from ‘P’ since through previous dealings
‘P’ has held out his servant ‘A’ as his agent.

c. Agency by Necessity (Section 189). An agent has authority, in an emergency, to do all

such acts, for the purpose of protecting the principal from loss, that would be done by a
person of ordinary prudence, in his own case, under similar circumstances.
Example
A horse was sent by rail and at the destination it was not taken delivery of by the owner.
The station master had to feed the horse. Held, the station master became the agent by
necessity and hence the owner must compensate him.

To constitute a valid agency of necessity, following condition must be satisfied:

  Agent should not be in a position or have any opportunity to communicate with his
principal within the time available.
 There should have been actual and definite commercial necessity for the agent to act
promptly.
 The agent should have acted bonafide and for the benefit of the principal.
 The agent should have adopted the most reasonable and practicable course under the
circumstances, and
 The agent must have been in possession of the goods belonging to his principal and which
are the subject of contract.

Agency by Ratification (Section 196 – 200). Section 196 recognizes the creation of agency by
subsequent ratification by the principal of the contracts entered into by the agent on his behalf but
without his authority. Where a person acts for someone but without his knowledge or authority and
the other person subsequently accepts or ratifies the act, agency by ratification arises and the
ratifier is bound by the act on his behalf. Thus, agency by ratification tantamount to prior authority.

Example
The case of Bolton Partners v. Lambert is a good illustration on the point. In this case, ‘L’ made an
offer to ‘X’ managing director of a company. ‘X’ accepted the offer through he had no authority to
do so. ‘L’ subsequently withdrew the offer, but the company ratified ‘X’ s acceptance. Held, ‘L’
was bound. The ratification related back to the time ‘X’ accepted the offer, thus rendering the
revocation of the offer inoperative. An offer once accepted cannot be withdrawn.
Ratification may be expressed or implied (Section 197).
Requisites of a valid ratification
 The agent must be contract as agent; he must not allow the third party to believe that he is
the principal. A man cannot enter into a contract at his own and later shift it to another.
 The principal must have been in existence at the time the agent originally acted. This
condition is significant in case of joint stock companies.
 The principal must not only be in existence but must also have contractual capacity at the
time of the contract as well as at the time of ratification. Thus, a minor on whose behalf a
contract is made cannot ratify it on attaining majority.
 Ratification must be made within a reasonable. What is reasonable time shall very from
case to case?
 The act to be ratified must be a lawful one. There can be no ratification of an illegal act or
an act, which is void - ab- initio.
 The principal should have full knowledge of the facts. Section 198 states “No valid
ratification can be made by a person whose knowledge of the facts of the case is materially
defective”.
 Ratification, if made, shall be of the contract as a whole (Section 199). The principal cannot
reject the burdens and accept only the benefits.
 Ratification of a contract not within the principal’s authority is ineffective. This again
basically is relevant in case of companies. Acts of directors which are ultra-virus the power
of a company cannot be ratified by the company.
  Ratification cannot be made so as to subject a third party to damages or terminate any right
or interest of a third person (Section 200).

Agency coupled with Interest

Agency is said to be coupled with interest where the agent has himself an interest in the
subject-matter of the agency (Section 202).
Where an agent is appointed to sell properties of the principal and to pay himself out of such sale
proceeds the debt due to the agent.

Kinds of agent
Sub - Agent
 A 'sub-agent' is a person employed by, and acting under the control of, the original agent in
the business of the agency. Thus, sub-agent is an agent appointed by the agent. The
relationship between original agent and sub-agent is that of principal and agent. Simply
speaking, sub-agent is the person to whom the agent delegates a part of his authority.
 Where a sub-agent is properly appointed, the following consequences arise
 The principal is liable to third parties for the acts of the sub-agent.
 The agent is responsible to the principal for the acts of the sub-agent.
 The sub-agent is responsible for his acts to the agent and not to the principal except in
cases of fraud and willful wrong.
 The sub-agent cannot sue the principal for remuneration.
 Where a sub-agent is improperly appointed, the following consequence arise
 The principal is not liable to third parties for the acts of the sub-agent.
 The sub-agent is not responsible to the principal for anything. He is responsible only to
the agent.
 The agent is responsible to the principal as well as to third parties for the acts of the
sub-agent.
Substituted Agent
 Where an agent, holding an express or implied authority to name another person to act for
the principal in the business of the agency, has named another person accordingly, such
person is not a sub-agent, but an agent of the principal (termed as substituted agent) for
such part of the business as is entrusted to him.
 Thus, an agent simply names a substituted agent at the request of the principal, and
thereafter drops out altogether from the scene.
  In selecting such substituted agent, an agent is bound to exercise the same amount of
discretion as a man of ordinary prudence would exercise in his own case and if he does this,
he is not responsible to the principal for the acts or negligence of the agent so selected. If
the agent makes the selection of substituted agent carelessly, he becomes liable to the
principal for the negligence in selection of substituted agent. However, the original agent is
not required to guarantee the integrity or solvency of the substituted agent.
 There is privity of contract between the principal and the substituted agent. The substituted
agent is an agent of the principal. The substituted agent is responsible to the principal for
his acts.
 The substituted agent is not responsible for his acts to the agent. Similarly, the agent is not
responsible to the principal for the acts of substituted agent.

Example. P directs A, the selling agent of P, to suggest the name of an advocate for the
purpose of suing the debtors who have defaulted in making payments. A suggests the name
of S, who is an advocate of repute. S is not a sub-agent, but is P's agent. If due to negligence
of S, some loss is caused to P, A shall not be liable since A has exercised proper care in
selection of S.

An agent is deemed to be held personally liable in the following cases:

(a) Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad/foreign principal;
(b) Where the agent does not disclose the name of his principal or undisclosed
principal; and
(c) Where the principal, though disclosed, cannot be sued.