UNIT- II

BUSINESS LAW

CONTRACT OF INDEMNITY
Contract of indemnity meaning is a special kind of contract. The term
‘indemnity’ literally means “security or protection against a loss” or
compensation.

DEFINITION
According to Section 124 of the Indian Contract Act, 1872 “A contract by which
one party promises to save the other from loss caused to him by the conduct of
the promisor himself, or by the conduct of any other person, is called a contract
of indemnity.”
For Example,
P contracts to indemnify Q against the consequences of any proceedings which
R may take against Q in respect of a certain sum of money.

OBJECTIVE OF CONTRACT OF INDEMNITY

The objective of entering into a contract of indemnity is to protect the promisee
against unanticipated losses.

PARTIES TO THE CONTRACT OF INDEMNITY

A contract of indemnity has two parties.
1. The promisor or indemnifier- He is the person who promises to bear the
loss.
2. The promisee or the indemnified or indemnity-holder- He is the person
whose loss is covered or who are compensated.
In the above-stated example,
• P is the indemnifier or promisor as he promises to bear the loss of Q.
• Q is the promisee or the indemnified or indemnity-holder as his loss is
covered by P.

ESSENTIALS OF CONTRACT OF INDEMNITY

• Parties to a contract-
There must be two parties, namely, promisor or indemnifier and the promisee or
indemnified or indemnity-holder.
• Protection of loss-
A contract of indemnity is entered into for the purpose of protecting the
promisee from the loss. The loss may be caused due to the conduct of the
promisor or any other person.
• Express or implied-
The contract of indemnity may be express (i.e. made by words spoken or
written) or implied (i.e. inferred from the conduct of the parties or
circumstances of the particular case).
• Essentials of a valid contract-
A contract of indemnity is a special kind of contract. The principles of the
general law of contract contained in Section 1 to 75 of the Indian Contract Act,
1872 are applicable to them. Therefore, it must possess all the essentials of a
valid contract.
• Number of contracts-
In a contract of Indemnity, there is only one contract that is between the
Indemnifier and the Indemnified.

RIGHTS OF PROMISEE/ INDEMNITY HOLDER

• Right to recover damages paid in a suit [section 125(1)]-
An indemnity-holder has the right to recover from the indemnifier all damages
which he may be compelled to pay in any suit in respect of any matter to which
the contract of indemnity applies.
• Right to recover costs incurred in defending a suit [section 125(2)]-
An indemnity-holder has the right to recover from the indemnifier all costs
which he may be compelled to pay in any such suit if, in bringing or defending
it, he did not contravene the orders of the promisor, and acted as it would have
been prudent for him to act in the absence of any contract of indemnity, or if the
promisor authorized him to bring or defend the suit.
• Right to recover sums paid under compromise [section 125(3)]-
An indemnity-holder also has the right to recover from the indemnifier all sums
which he may have paid under the terms of any compromise of any such suit, if
the compromise was not contrary to the orders of the promisor, and was one
which it would have been prudent for the promisee to make in the absence of
any contract of indemnity, or if the promisor authorized him to compromise the
suit.
• Right to sue for specific performance-
The indemnity holder is entitled to sue for specific performance if he has
incurred absolute liability and the contract covers such liability.

COMMENCEMENT OF LIABILITY OF PROMISOR/

INDEMNIFIER
Indian Contract Act, 1872 does not provide the time of the commencement of
the indemnifier’s liability under the contract of indemnity. But different High
Courts in India have held the following rules in this regard-
• Indemnifier is not liable until the indemnified has suffered the loss.
• Indemnified can compel the indemnifier to make good his loss although he
has not discharged his liability.
In the leading case of Gajanan Moreshwar vs. Moreshwar Madan (1942), an
observation was made by the judge that “If the indemnified has incurred a
liability and the liability is absolute, he is entitled to call upon the indemnifier to
save him from the liability and pay it off”.
Thus, Contract of Indemnity is a special contract in which one party to a
contract (i.e. the indemnifier) promises to save the other (i.e. the indemnified)
from loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person. Section 124 and 125 of the Indian Contract Act,
1872 are applicable to these types of contracts.
CONTRACT OF GUARANTEE
Contract of Guarantee means a contract to perform the promises made or
discharge the liabilities of the third person in case of his failure to discharge
such liabilities.
As per section 126 of Indian Contract Act, 1872, a contract of guarantee
has three parties-
1. Surety-
A surety is a person giving a guarantee in a contract of guarantee. A person who
takes responsibility to pay a sum of money, perform any duty for another person
in case that person fails to perform such work.
2. Principal Debtor-
A principal debtor is a person for whom the guarantee is given in a contract of
guarantee.
3. Creditor-
The person to whom the guarantee is given is known as the creditor.
For example,
Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promise that in case Mr. Y
fails to repay the loan, then he will repay the same. In this case of a contract of
guarantee, Mr. X is a Creditor, Mr. Y is a principal debtor and Mr. Z is a Surety.

ESSENTIALS FOR CONTRACT OF GUARANTEE

• Agreement by all Parties-
All three parties who are the creditor, principal debtor and surety must agree to
the terms of the contract.
• Liability-
In all contracts of guarantee, the creditor can only ask the surety to discharge the
liability after the principal debtor has not discharged his promise i.e. the
liability.
• Existence of debt-
No contract of guarantee can exist without a debt for consideration which is
accepted by the law. Additionally, if the debt is barred by a time limit or has
become void, the surety will not be liable.
• Consideration-
This means that any benefit received by the principal debtor can be considered
as a suitable consideration.
• Two forms of a guarantee contract-
Contracts of guarantee can be of two forms, either verbal or written
• Essentials of a Valid Contract-
This means that just like any other contract, a contract of guarantees requires
certain common essentials of a contract such as acceptance, intention to
contract, acceptance, ability to contract, the legality of the contract, creation of a
legal relationship, lawful object if any, legal consideration, free and fair consent,
performance standards, legal formalities etc.
• All facts must be brought to light-
The creditor must inform the surety of all the facts that affect his liability.
Concealment of any facts will invalidate the contract. This is highlighted in
section 143 of the Indian Contracts Act, 1872
• No misrepresentation of facts-
The guarantee should not be obtained through misrepresenting facts to the
surety. Though not all facts need to be mentioned to him, any facts that affect
the surety’s extent in the liability must be brought to his notice accurately. This
can be seen in Section 142 of The Indian Contracts Act.

KINDS OF GUARANTEE
1. Specific or Simple Guarantee-
When a guarantee is given in respect to a single debt or specific transaction is to
come to an end when the guarantee debt is paid or the promise is duly
performed. It is called a specific or simple guarantee.
2. Continuing guarantee-
Section 129, of the contract Act defines a guarantee which towards to a series of
transaction, is called a continuing guarantee, thus, a continuing guarantee is not
confined to a single transaction but keeps on moving to several transaction
continuously.

NATURE AND EXTENT OF SURETY’S LIABILITY

1. The liability of surety is co- extensive.
2. The liability of surety arises the same moment when default is made by the
principal debtor.
3. The surety is free to restrict limit his liability.
4. Sometimes the surely is liable though the principal debtors is not liable.
5. If there is a condition precedent for the surety’s liability; the surety will be
liable, only when that condition is fulfilled first.
6. In a continuing guarantee liability of surety extends to a series of transaction
over a period of time.
7. The surely will not be liable if the creditor has obtained guarantee either by
misrepresenting a material fact regarding the transaction or by keeping silence
to material circumstances.
8. A discharge of principal debtor by operation of law does not discharge the
surely from liability.

RIGHTS OF A SURETY

• RIGHTS AGAINST THE CREDITOR

1. Right to securities with the creditor-

Section 141 of the Indian Contract Act,1872 has mentioned the right of surety to
get a share in the security which has been kept while entering into the contract
of guarantee. The place of surety is the same as the place of the creditor in terms
of security. It is a compulsion on a creditor to share the security with the surety;
it is irrelevant whether the surety was aware of the security or not. If the
principal debtor defaults in the payment and the surety had cleared the dues, it
makes the surety entitled for a share.
2. Loss of securities without creditor’s negligence-
Under this circumstance the creditor takes the security of the principal debtor in
case of default of payment. The surety has the right to set-off the claim in
respect to the value of security from the debt of the principal debtor.
For Example,
A being the creditor gave a loan to B of Rs 2,00,000 on the surety of C. While B
has kept his house on security in respect to the loan borrowed from A. B was in
default to pay the loan of A. If A files a case against C for the repayment of the
due amount, then C can claim discharge of the amount from the security which
was recovered.

• RIGHTS AGAINST THE PRINCIPAL DEBTOR

1. Rights of subrogation-
Section 140 of the Indian Contract Act, 1872 has stated the right of subrogation.
The right of subrogation means forming a new contract to recover the debt from
the parties. As the surety has paid the amount due in respect to default made by
the principal debtor.
Now the surety takes the place of the creditor and the principal debtor is entitled
to pay the repaid loan amount which was paid on behalf of him to the creditor in
the original contract of guarantee.
2. Rights of indemnity against the principal debtor-
Under Section 145 of the Indian Contract Act, 1872 it is mentioned to
indemnify the surety. ‘To indemnify’ means that a party will pay the damages
which are caused to the party in respect of fulfilment of the act of the promisor.
Under the Contract of Guarantee the principal debtor is obliged to indemnify the
surety in respect to the default of payment at the time of discharging the loan
amount. It is not compulsory that the indemnity clauses should be mentioned in
the contract; it is an implied duty of the principal debtor in respect to default of
payment.
3. Securities received by the creditor after the contract of guarantee-
Section 141 of the Indian Contract Act, 1872 has mentioned the right of surety
in the security which is mentioned in the contract of guarantee. If the principal
debtor makes a default in payment of the loan amount and the payment is made
by surety then in this case the surety can avail the benefit of security. If the
amount is being deducted from security then in this case the surety can be
discharged.

• RIGHTS AGAINST THE CO-SURETIES

1. Co-sureties right to get release from the contract-

Section 138 of the Indian Contract Act, 1872 has stated that if one surety is
discharged from his liability it will not mean that all the sureties are also
discharged from his obligation. Co-sureties here means that when more than one
surety gives the guarantee or takes the obligation to pay the debt of the principal
debtor. As per Section 138 when the principal debtor fails to pay the debt and if
the creditor asks only one surety to fulfil his duty. In this case that surety can
ask the other co-sureties to fulfil their responsibility.
2. Co-sureties are entitled to contribute equally-
Section 146 of the Indian Contract Act, 1872 has mentioned that the liabilities
of co-securities are joint. If the contract does not mention the liability of co-
securities as joint, it must be implied that all the co-securities will share equally
the debt not paid by the principal debtor.
3. Co-sureties entitled to pay the amount as promised-
As per Section 147 if the co-securities have promised a particular amount to pay
in the sum of debt then they are obligated to pay that sum if the principal debtor
causes default in payment of the loan.
For Example,
Ram, Shyam and Mohan are co-securities to Ramesh. Ramesh took a loan of Rs
9,000. If three of them have decided to pay Rs 3,000 each in case of default of
payment of the loan by Ramesh. Then they are entitled to pay Rs 3,000 only.
DISCHARGE OF SURETY (i.e. end of surety's liability)
• Notice of revocation-
A continuing guarantee can be revoked, at any time, by the surety as to future
transactions by giving notice to the creditor. The surety will, however, continue
to remain liable for transactions entered prior to the notice. But a specific
guarantee cannot be revoked once it is acted upon.
• Death of surety-
In case of a continuing guarantee, the death of surety discharges him from
liability as regards transactions after his death. However, the estate of surety
remains liable for the transactions undertaken prior to his death.
• Variance in terms of contract-
A surety is discharged from liability when, without his consent, the creditor
makes any change in the terms of his contract with the principal debtor (no
matter whether variation is beneficial to the surety). The surety is discharged in
respect of transactions subsequent to the variance.
• Loss of security-
If due to his negligence, the creditor loses, or parts with any security given to
him, at the time of the contract of guarantee, the surety is discharged from
liability to the extent of the value of security. But if the security is lost due to an
act of God or unavoidable accident, the surety would not be discharged.
• Release of principal debtor-
The surety is discharged by any contract between the creditor and 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.
• Composition between creditor and principal debtor-
Any contract by which the creditor makes a composition with the principal
debtor, or promises not to sue the principal debtor, discharges the surety.
For Example,
if the creditor makes a composition with the principal debtor and accepts a
lesser amount in full satisfaction of his claim, the surety is discharged. But mere
forbearance on part of the creditor to sue the principal debtor does not discharge
the surety.
 • Invalidation of the contract of guarantee-
A surety is discharged from liability where the creditor had obtained guarantee
from surety by means of fraud/ misrepresentation/ nondisclosure as to material
part of the transaction or when the object if the contract is illegal or when any of
the essential elements of a valid contract is missing.
• Creditor's act/omission impairing surety's eventual remedy-
If a creditor does anything which is inconsistent with the rights of the surety, or
omits to do to do something which his duty to the surety requires him to do, and
so the eventual remedy of the surety against the principal debtor is impaired, the
surety is discharged.
For Example,
B contracts to build a ship for C for a given sum, to be paid by instalments as
the work reaches certain stages. A becomes surety to C for B's due performance
of the contract. C, without the knowledge of A, prepays to B the last two
instalments. A is discharged by this prepayment.

DIFFERENCE BETWEEN INDEMNITY AND GUARANTEE

Basis Indemnity Guarantee

Indemnity is a contractual A guarantee is a legal promise

obligation where one party made by a third party to cover a
Definition promises to compensate for the debt or obligation of another party
potential loss or damage incurred if they fail to fulfil their
by another party. obligation.

Guarantee is a secondary
Indemnity is a primary obligation
Nature of obligation that comes into play if
that is independent of any other
Obligation the primary obligation (the debt)
obligations.
is not fulfilled.

Number of Indemnity typically involves two Guarantee usually involves three

Parties parties – the indemnifier and the parties – the creditor, the principal
Involved indemnified party. debtor, and the guarantor.
 The indemnifier is liable for the The guarantor is liable for the
Risk loss suffered by the indemnified principal debtor’s default, which is
party. generally considered riskier.

The purpose of a guarantee is to

The purpose of indemnity is to
Purpose ensure the performance of an
compensate for a loss.
obligation.

An example of indemnity is an An example of a guarantee is a

Example
insurance contract. bank guarantee.

CONTRACT OF BAILMENT
The word “Bailment” has been derived from the French word “baillier” which
means “to deliver”. Bailment etymologically means ‘handing over’ or ‘change
of possession’.

DEFINITION OF BAILMENT
Sec. 184 defines Bailment as the delivery of goods by one person to another for
some purpose, upon a contract, that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions
of the person delivering them.
The person delivering the goods is called the ‘bailor’ and the person the person
to whom they are delivered is called the ‘bailee’.
For Example,
• A delivers a piece of cloth to B, a bailor, to be stitched into a suit. There is a
contract or bailment between A and B.
• A sells certain goods to B who leaves them in the possession of A. The
relationship between B and A is that of bailor and bailee.
ESSENTIAL ELEMENTS OF CONTRACT OF BAILMENT
• Contract-
Bailment is based upon a contract. The contract may be express or implied. No
consideration is necessary to create a valid contract of bailment.
• Delivery of goods-
It involves the delivery of goods from one person to another for some purposes.
Bailment is only for moveable goods and never for immovable goods or money.
The delivery of the possession of goods is of the following kinds:
Actual Delivery-
When goods are physically handed over to the Bailee by the bailor.
Example- Delivery of a car for repair to workshop
Constructive Delivery-
Where delivery is made by doing anything that has the effect of putting goods in
the possession of the Bailee or of any person authorized to hold them on his
behalf.
Example- Delivery of the key of a car to a workshop dealer for repair of the car.
• Purpose-
The goods are delivered for some purpose. The purpose may be express or
implied.
• Possession-
In bailment, possession of goods changes. Change of possession can happen by
physical delivery or by any action which has the effect of placing the goods in
the possession of Bailee.
The change of possession does not lead to change of ownership. In bailment,
bailor continues to be the owner of goods as there is no change of ownership.
Where a person is in custody without possession, he does not became a Bailee.
For example, servants of a master who are in custody of goods of the master do
not become bailees Similarly, depositing ornaments in a bank locker is not
bailment, because ornaments are kept in a locker whose key are still with the
owner and not with the bank. The ornaments are in possession of the owner
though kept in a locker at the bank.
• Bailee is obliged to return the goods physically to the bailor-
The goods should be returned in the same form as given or may be altered as
per bailor’s direction. It should be noted that exchange of goods should not be
allowed. The Bailee cannot deliver some other goods, even not those of higher
value. Deposit of money in a bank is not bailment since the money returned by
the bank would not be identical currency notes.

KINDS OF BAILMENT
On the basis of benefit derived, bailment can be classified into two types:
• Exclusive benefit of bailor
• Exclusive benefit of bailee
On the basis of reward, bailment can be classified into two types:
• Gratuitous Bailment-
The word gratuitous means free of charge. So, a gratuitous bailment is one when
the provider of service does it gratuitously i.e. free of charge such bailment
would be either for the exclusive benefits of bailor or bailee.
• Non-Gratuitous Bailment-
Non gratuitous bailment means where both the parties get some benefit i.e.
bailment for the benefit of both bailor & bailee.

DUTIES OF BAILOR
• Bailor’s duty to disclose faults in goods bailed [Section 150]-
The bailor is bound to disclose to the bailee faults in the goods bailed, of which
the bailor is aware, and which materially interfere with the use of them, or
expose the bailee to extraordinary risks; and if he does not make such
disclosure, he is responsible for damage arising to the bailee directly from such
faults.
If the goods are bailed for hire, the bailor is responsible for such damage,
whether he was or was not aware of the existence of such faults in the goods
bailed.
For Example,
1. A lends a horse, which he knows to be vicious, to B. He does not disclose the
fact that the horse is vicious. The horse runs away. B is thrown and injured.
A is responsible to B for damage sustained.
2. A hire a carriage of B. The carriage is unsafe, though B is not aware of it,
and A is injured. B is responsible to A for the injury.
The condition for the liability of the bailor-
a. The bailor should have the knowledge of the defect and the bailee should not
be aware
b. The defect in the goods must be such as exposes the bailee to extraordinary
risks or materially interferes with the use of goods.

• Duty to pay necessary expenses [Section 158]-

Where, by the conditions of the bailment, the goods are to be kept or to be
carried, or to have work done upon them by the bailee for the bailor, and the
bailee is to receive no remuneration (gratuitous bailment), the bailor shall repay
to the bailee the necessary expenses incurred by him and any extraordinary
expenses incurred by him for the purpose of the bailment.
However, in case of non-gratuitous bailment the bailor is liable to pay the
extraordinary expenses.
For Example,
A hired a taxi from B for the purpose of going to Gurgaon from Noida, during
the journey, a major defect occurred in the engine. A had to pay ` 5000 as repair
charges. These are the extraordinary expenses and it is the bailor’s duty to bear
such expenses. However, the usual and ordinary expenses for petrol, toll tax etc
are to be borne by the bailee itself.

• Duty to indemnify the Bailee for premature termination [Section 159]-

The bailor must compensate the bailee for the loss or damage suffered by the
bailee that is in excess of the benefit received, where he had lent the goods
gratuitously and decides to terminate the bailment before the expiry of the
period of bailment.
• Bailor’s responsibility to bailee [Section 164]-
The bailor is responsible to the bailee for the following:
a. Indemnify for any loss-
Which the bailee may sustain by reason that the bailor was not entitled to make
the bailment, or to receive back the goods or to give directions, respecting them
(defective title in goods).
b. It is the duty of the bailor to receive back the goods-
When the bailee returns them after the time of bailment has expired or the
purpose of bailment has been accomplished. If the bailor refuses to take
delivery of goods when it is offered at the proper time the bailee can claim
compensation for all necessary expenses incurred for the safe custody.
For Example,
X delivered his car to S for five days for safe keeping. However, X did not take
back the car for one month. In this case, S can claim the necessary expenses
incurred by him for the custody of the car.

DUTIES OF BAILEE
• Take reasonable Care of the goods (Section 151 & 152)-
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 value as the
goods bailed.
For Example,
1. If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own
locker at his house along with his own ornaments and if all the ornaments are
lost/stolen in a riot ‘Y’ will not be responsible for the loss to ‘X’. If on the
other hand ‘X’ specifically instructs ‘Y’ to keep them in a bank, but ‘Y’
keeps them at his residence, then ‘Y’ would be responsible for the loss
[caused on account of riot].
2. A deposited his goods in B’s godown. On account of unprecedented floods, a
part of the goods were damaged. It was held that, B is not liable for the loss
(Shanti Lal V. Takechand).
Exceptions-
Bailee when not liable for loss, etc., of thing bailed [Section 152]-
The bailee, in the absence of any special contract, is not responsible for the loss,
destruction or deterioration of the thing bailed, if he has taken the amount of
care of it described in section 151.

• Not to make inconsistent use of goods (section 153 & 154)-

As per Section 154, if the bailee makes any use of the goods bailed, which is not
according to the conditions of the bailment, he is liable to make compensation
to the bailor for any damage arising to the goods from or during such use of
them.
For Example,
1. A lends a horse to B for his own riding only. B allows C, a member of his
family, to ride the horse. C rides with care, but the horse accidentally falls
and is injured. B is liable to make compensation to A for the injury done to
the horse.
2. ‘A’ hires a horse in Kolkata from B expressly to march to Varanasi. ‘A’ rides
with due care, but marches to Cuttack instead. The horse accidentally falls
and is injured. ‘A’ is liable to make compensation to B for the injury to the
horse.

• Not to mix the goods (Section 155, 156 and 157)-

Bailee is not entitled to mix up the goods bailed with his own goods except with
the consent of the bailor.
1. If he, with the consent of the bailor, mixes the goods bailed with his own
goods, both the parties shall have an interest in proportion to their respective
shares in the mixture thus produced (Sec. 155).
2. If the bailee, without the consent of the bailor, mixes the goods bailed with
his own goods and the goods can be separated or divided, the property in the
goods remains in the parties respectively bailee is bound to bear the expenses
of separation and division and any damage arising from the mixture (Sec.
156).
For Example,
A bails 100 bales of cotton marked with a particular mark to B. B, without A’s
consent, mixes the 100 bales with other bales of his own, bearing a different
mark; A is entitled to have his 100 bales returned, and B is bound to bear all the
expenses incurred in the separation of the bales, and any other incidental
damage.
3. If the bailee, without the consent of the bailor mixes the goods of the bailor
with his own goods in such a manner that it is impossible to separate the
goods bailed from the other goods and to deliver them back, the bailor is
entitled to compensation by the bailee for loss of the goods (Sec. 157).
For Example,
A bails a barrel of Cape flour worth ` 4500 to B. B, without A’s consent, mixes
the flour with country flour of his own, worth only ` 2500 a barrel. B must
compensate A for the loss of his flour.

• Return the goods (Section 160 & 161)-

It is the duty of bailee to return, or deliver according to the bailor’s directions,
the goods bailed without demand, as soon as the time for which they were
bailed, has expired, or the purpose for which they were bailed has been
accomplished. [Section 160]
If, by the default of the bailee, the goods are not returned, delivered or tendered
at the proper time, he is responsible to the bailor for any loss, destruction or
deterioration of the goods from that time. [Section 161]
For Example,
X delivered books to Y to be bound. Y promised to return the books within a
reasonable time. X pressed for the return of the book. But Y, failed to deliver
them back even after the expiry of reasonable time. Subsequently the books
were burnt in an accidental fire at the premises of Y. In this case Y was held
liable for the loss.

• Return an accretion from the Goods [Section 163]-

In the absence of any contract to the contrary, the bailee is bound to deliver to
the bailor, or according to his directions, any increase or profit which may have
accrued from the goods bailed.
For Example,
A leaves a cow in the custody of B. The cow gives birth a calf. B is bound to
deliver the calf as well as the cow to A.

• Not to setup Adverse Title-

Bailee must not set up a title adverse to that of the bailor. He must hold the
goods on behalf of and for the bailor. He cannot deny the title of the bailor.

RIGHTS OF BAILOR
Rights of Bailor: Broadly rights of bailor are also the duty of the bailee (under
Sec. 151,154,155 and 157) In addition to that, the bailor has the following other
rights also.
• Right of termination of bailment – Sec 153
• Right to demand the goods back – Sec 159
• Right to demand the return of goods on completion of bailment – Sec 160
• Right to claim any increase or profit – Sec 163
• Right to file a suit against the wrong doer – Sec 180

RIGHTS OF BAILEE
Rights of bailee: As a matter of fact, all the duties of the bailor are the rights of
the bailee. In addition to that, the bailee has the following other rights also.
• Right to claim compensation in case of faulty goods (Sec. 150)
• Right to claim extraordinary expenses (Sec. 158)
• Right of indemnification in case of gratuitous bailment [Section 159]
• Right of indemnification in case of defective title [Section 164]
• Right to Deliver the Goods to any one of the Joint Bailors [Section 165]
• Right to deliver the goods to the bailor in good faith (Sec. 166)
• Right to Apply to Court to Decide the Title to the Goods/Interplead [Section
167]
• Right to claim damages in case of bailor’s refusal to receive back the goods
• Right of lien for payment of services [Section 170]
• Suit by bailor & bailee against wrong doers [Section 180]
 • Apportionment of relief or compensation obtained by such suits
[Section181]

TERMINATION OF BAILMENT
I. Termination of every Contract of Bailment (whether Gratuitous or not)-
Every contract of bailment comes to end under the following circumstances:
• On the Expiry of Fixed Period
• On fulfilment of the Purpose
• Inconsistent Use of Goods
• Destruction of the subject Matter of Bailment

II. Termination of Gratuitous Bailment-

A contract of gratuitous bailment is terminated in the following circumstances
also.
• Before the Expiry of fixed Period
• On Death of Bailor/Bailee

CONTRACT OF PLEDGE

MEANING OF PLEDGE (or pawn) [Section 172]

The bailment of goods as security for payment of a debt or performance of a
premise is called pledge (or pawn).
For Example,
X borrows of Rs. 1,00,000 from Citi Bank and keeps his shares as security for
payment of a debt. It is a contract of pledge.

MEANING OF A PAWNOR (or pledgor) [Section 172)

The person who delivers the goods as security for payment of a debt or
performance of promise is called the pawnor or pledgor. In aforesaid example X
is pawnor.
MEANING OF PAWNEE (or pledge) [Section 172)
The person to whom the goods are delivered as security for payment of a debt
or performance of promise is called the Pawnee or Pledgee. In the aforesaid
example. Citi Bank is the Pawnee.

Pledge is a variety or specie of bailment.

It is bailment of goods as security for payment of debt or performance of a
promise. The person who pledges [or bails] is known as pledgor or also as
pawnor, the bailee is known as pledgee or also as pawnee.
In pledge, there is no change in ownership of the property.
For Example,
• A lends money to B against the security of jewellery deposited by B with
him i.e. A. This bailment of jewellery is a pledge as security for lending the
money. B is a pawnor and A is a pawnee.

RIGHTS OF PAWNEE
1. Right to retain the pledged goods [Section 173]-
The pawnee may retain the goods pledged, not only for payment of the debt or
the performance of the promise, but for the interest, of the debt, and all
necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.
For Example,
Where ‘M’ pledges stock of goods for certain loan from a bank, the bank has a
right to retain the stock not only for adjustment of the loan but also for payment
of interest.

2. Right to retention of subsequent debts [Section 174]-

The Pawnee shall not, in the absence of a contract to that effect, retain the goods
pledged for any debt or promise other than the debt or promise for which they
are pledged; but such contract in the absence of anything to the contrary, shall
be presumed in regard to subsequent advances made by the Pawnee.
3. Pawnee’s right to extraordinary expenses Incurred [Section 175]-
The pawnee is entitled to receive from the pawnor extraordinary expenses
incurred by him for the preservation of the goods pledged. For such expenses,
however, he does not have the right to retain the goods.

4. Pawnee’s right where pawnor makes default [Section 176]-

If the pawnor makes default in payment of the debt, or performance, at the
stipulated time of the promise, in respect of which the goods were pledged, the
pawnee may bring a suit against the pawnor upon the debt or promise, and
retain the goods pledged as a collateral security; or he may sell the thing
pledged on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt
or promise, the pawnor is still liable to pay the balance. If the proceeds of the
sale are greater than the amount so due, the pawnee shall pay over the surplus to
the pawnor.

DUTIES OF THE PAWNEE

• Duty to take reasonable care of the pledged goods
• Duty not to make unauthorized use of pledged goods
• Duty to return the goods when the debt has been repaid or the promise has
been performed
• Duty not to mix his own goods with goods pledged
• Duty not to do any act which is inconsistent with the terms of the pledge
• Duty to return accretion to the goods, if any

RIGHTS OF PAWNOR
Enforcement of Pawnee’s duties
• Right to redeem [Section 177]-
If a time is stipulated for the payment of the debt, or performance of the
promise, for which the pledge is made, and the pawnor makes default in
payment of the debt or performance of the promise at the stipulated time, he
may redeem the goods pledged at any subsequent time before the actual sale of
 them; but he must, in that case, pay, in addition, any expenses which have arisen
from his default.

DUTIES OF PAWNOR
• The pawnor is liable to pay the debt or perform the promise as the case may
be.
• It is the duty of the pawnor to compensate the Pawnee for any extraordinary
expenses incurred by him for preserving the goods pawned.
• It is the duty of the pawnor to disclose all the faults which may put the
pawnee under extraordinary risks.
• If loss occurs to the pawnee due to defect in pawnors title to the goods, the
pawnor must indemnify the pawnee.
• If the Pawnee sells the good due to default by the pawnor, the pawnor must
pay the deficit.

DIFFERENCE BETWEEN BAILMENT AND PLEDGE

Basis Bailment Pledge

Goods are transferred for a

Nature of Goods are transferred as security
short period with a specific
Transfer for the payment of a debt
objective

Legal Defined under section 148 of Defined under section 172 of the
Definitions the Indian Contract Act, 1872 Indian Contract Act, 1872

Consideration may or may

Consideration Consideration is always present
not be present

Safekeeping or repair of
Purpose Security against debt
goods

Pawnee can sell the goods if the

Receiver (bailee) cannot sell
Sale of Goods pawnor fails to redeem them
the goods
within a reasonable time
 Bailee can use the goods for Pawnee has no right to use the
Use of Goods
the intended purpose goods

CONTRACT OF AGENCY

MEANING OF AGENCY
Agency is relation between an agent his principal created by an agreement.
Section 182 of the Contract Act defines an Agent as ‘‘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 whom is so represented is called the
principal”.

ESSENTIAL FEATURES OF AGENCY

• The principal
• The agent
• An agreement
• Consideration not necessary
• Representative capacity
• Good faith
• The competence of the principal

CLASSIFICATION OF AGENTS
• Special Agent-
A special agent is one who is appointed to perform a particular act or
to represent his principal in some particular transaction as, for example, an
agent employed to sell a house, or an agent employed to bid at an auction.
• General Agent-
A general agent is one who has authority to do all acts connected with
a particular trade, business or employment.
• Universal Agent-
A universal agent is one whose authority to act for the principal is unlimited.
• Commercial and Mercantile Agent:
According to Section 2(9) of the Sales of Goods Act, 1930, a
‘Mercantile agent’ means “a mercantile agent having in the customary course of
business as such agent, authority either to sell goods, or to consign goods for the
purpose of sale, or to buy goods, or to raise money on the security of goods”.
It includes factor mercantile agent, auctioneer, broker, commission agent, de
credere agent.
• Non-Mercantile Agent-
These include attorney, solicitors, insurance agents, clearing and forwarding
agents and wife, etc.

MODES/METHODS/CREATION OF AGENCY
1. Agency by express agreement-
A contract of agency may be made by express words, whether written or oral.

2. Agency by implied agreement-

‘‘An authority is said to be implied when it is to be inferred from the
circumstances of the case.

• Agency by estoppels-
When a principal by his conduct or act caused a third person to believe that a
certain person is his authorized agent the agency is aid to be an agency by
estoppels.
• Agency by necessity-
It means the agency which comes into existence when certain circumstances
compel a person to act as an agent for another without his express authority.
 • Agency by holding out-
When a principal by his active conduct or act and without any objection
permits another to act as his agent, the agency is the result of principal’s
conduct as to the agent.

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

4. Agency by operation of law-

In certain circumstances the law treats a person as an agent of another person.
For example,
• when a partnership is formed, every partner automatically becomes agent o
another partner.
• when a company is formed its promoters are treated as its agents by
operation of law.

RIGHTS OF AN AGENT
• Right to retain money received on principal’s account.
• Right to receive remuneration.
• Right of lien on principal’s property.
• Right to be indemnified.
• Right to compensation for injury caused by principal’s neglect.

DUTIES OF AN AGENT
• To follow the direction of the principal.
• To conduct the business of agency with reasonable skill and diligence.
• To render accounts on demand
• To communicate with the principal.
• Not to deal on his own account
• To pay the amounts received for the principal
• Not to delegate his authority
• Not to act in excess of authority
• Duty on termination of agency by principal’s death or insanity.

TERMINATION OF AGENCY
Termination of agency means revocation (cancellation) of authority of the agent
the modes of termination of agency may be classified are as-
• Termination of Agency by the act of the Parties.

1. By revocation of authority by the principal

2. By renunciation (giving up) of business of agency by the agency
3. By mutual agreement

• Termination of agency by Operation of Law

1. Completion of business of agency

2. Death or insanity of principal or agent
3. Insolvency of the principal
4. Destruction of subject matter
5. Expiry of time
6. Agency subsequently becoming unlawful.
7. Termination of sub agent’s authority

REVOCABLE AGENCY
When the authority of agent cannot be revoked by the principal it is said to be
an irrevocable agency.
An agency is irrevocable in the following cases-
1. If the agency is coupled with interest- when an agent himself has a special
interest in the property which forms the subject matter of the agency, such
agency is said to be coupled with interest.
2. Where the agent has partly exercised his authority
3. When the agent has incurred a personal liability.