Unit 1: Indemnity

1. Meaning:

• Indemnity:
A contract where one person (the indemnifier) agrees to protect another person (the
indemnified) from financial loss caused by their actions or those of a third party.

2. Nature:

• Contingent Contract:
The indemnifier’s obligation arises only when a specified loss occurs.
• Protection:
The main aim is to shield the indemnified from losses.

3. Types of Parties:

• Indemnifier:
The party promising to compensate for the loss.
• Indemnified:
The party who is protected from the loss.

4. Essentials of a Contract of Indemnity:

• Agreement:
There must be a clear agreement outlining the indemnity.
• Promise to Compensate:
The indemnifier promises to cover specific losses.
• Loss Must Occur:
The contract is triggered by the actual occurrence of loss.
• Causation:
The loss can be due to the actions of the indemnifier or a third party.
• Written or Oral:
The contract can be formalized in writing or spoken.

5. Rights and Duties of Indemnifier:

• Rights:
o Right to Subrogation (Section 125):
After compensating the indemnified, the indemnifier can step into their shoes
to claim damages from the third party responsible for the loss.
• Duties:
o Compensation:
The indemnifier must cover the loss as agreed.
o Acting in Good Faith:
The indemnifier should act honestly and fairly in handling claims.

6. Rights and Duties of Indemnified:

• Rights:
 o Right to Recovery:
The indemnified can claim compensation for all costs, damages, and expenses
incurred.
• Duties:
o Duty to Mitigate Loss:
The indemnified should take reasonable steps to minimize the loss.

7. Extent of Liability:

• Extent:
The indemnifier is liable up to the amount of the loss suffered by the indemnified.
• Limits:
The indemnifier can specify a maximum amount or extent of liability in the contract.

8. Types of Indemnity:

• Express Indemnity:
Clearly defined terms specifying what losses will be covered.
• Implied Indemnity:
Arises from the conduct of the parties or the nature of their relationship, even without
a formal agreement.

Sections from the Indian Contract Act:

• Section 124:
Defines indemnity and outlines the nature of indemnity contracts.
• Section 125:
Discusses the right of the indemnifier to recover from the third party.

Illustrations:

1. Legal Proceedings:
If A agrees to indemnify B against any legal claims by C, and C sues B, A must cover
B’s legal costs.
2. Business Losses:
If A promises to cover B’s losses from a failed business transaction with C, A must
compensate B for the financial losses.
3. Property Damage:
If A agrees to indemnify B for damages caused to B’s property by A’s actions, A
must pay for repairs.
4. Insurance Claim:
An insurance policy where the insurer agrees to indemnify the insured for losses due
to theft or damage.
5. Contract Breach:
If A indemnifies B for losses caused by A’s breach of contract, A must pay B for any
damages resulting from the breach.
6. Employment Disputes:
If A agrees to indemnify B against claims made by B’s employees, A must cover B’s
legal expenses and any settlements.
 7. Travel Insurance:
A travel insurance policy where the insurer covers medical expenses and trip
cancellations.
8. Loan Defaults:
A lender agrees to indemnify a borrower for losses arising from default on a third-
party loan.
9. Professional Negligence:
A consultant agrees to indemnify their client against any claims of professional
negligence.
10. Vehicle Damages:
If A agrees to indemnify B for damages to B’s vehicle caused by A’s negligence, A
must cover the repair costs.

Case Laws:

1. Gajanan Moreshwar v. Moreshwar Madan (1942):

Facts: The case dealt with a contract of indemnity where the indemnity holder sought
indemnity before the actual loss occurred.
Issue: Whether the indemnity holder can claim indemnity before suffering the loss.
Conclusion: The court held that an indemnity holder could claim indemnity even
before the loss was actually suffered, provided there was a possibility of loss.
2. Adamson v. Jarvis (1827):
Facts: An auctioneer sold cattle based on instructions from a seller. When the true
owner of the cattle sued, the auctioneer sought indemnity from the seller.
Issue: Whether the auctioneer was entitled to indemnity from the seller.
Conclusion: The court held that the auctioneer was entitled to indemnity from the
seller.
3. Kusum Ingots & Alloys Ltd. v. Union of India (2004):
Facts: The case involved a dispute over indemnity related to losses suffered due to
the breach of a contract.
Issue: Whether the indemnity clause covered the losses incurred.
Conclusion: The court decided in favor of the indemnified party, confirming that the
indemnity clause was enforceable.
4. Indian Oil Corporation Ltd. v. Amritsar Gas Service (1991):
Facts: The case involved a dispute over indemnity for losses due to non-performance
of a contract.
Issue: Whether the indemnifier was liable to compensate for the losses.
Conclusion: The court held that the indemnifier was liable to compensate for the
losses incurred.
5. Smt. Gita Hariharan v. Reserve Bank of India (1999):
Facts: The case dealt with a contract of indemnity related to financial losses due to
administrative actions.
Issue: Whether the indemnity was applicable in the case of administrative actions.
Conclusion: The court confirmed that the indemnity was applicable and enforceable.
Contract of Guarantee: Indian Contract Act, 1872

1. Definition

A contract of guarantee is an agreement where one party (the surety) agrees to perform the
obligation of a third party (the principal debtor) if the principal debtor fails to do so. The
surety provides assurance to the creditor that the principal debtor will meet their obligation.

• Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee.

2. Essentials of a Contract of Guarantee

1. Three Parties: Involves the creditor, the principal debtor, and the surety.
2. A Valid Contract: The principal debtor must have a legal liability towards the
creditor.
3. Consideration: There must be consideration for the surety's promise, though it may
be different from the consideration for the principal debtor.
4. Consent: The surety must give their consent voluntarily.

3. Difference Between Contract of Indemnity and Contract of Guarantee

Aspect Contract of Indemnity Contract of Guarantee
Number of Two (Indemnifier and Indemnity- Three (Creditor, Principal Debtor,
Parties holder) Surety)
Nature of
Primary liability of indemnifier Secondary liability of surety
Liability
To guarantee the performance of an
Purpose To indemnify against loss
obligation
Covers indemnity for a loss Covers performance or payment of
Scope
suffered debt
4. Liability of Surety

• Primary Liability: The surety is liable to the creditor if the principal debtor defaults.
• Extent: The liability is co-extensive with that of the principal debtor, unless limited
by the terms of the guarantee.
• Section 128 discusses the liability of the surety.

5. Co-Surety: Nature, Extent, and Liability

Nature and Extent:

• Co-sureties are individuals who, along with the primary surety, guarantee the same
obligation. Their liability is joint and several unless otherwise agreed.

Liability:

• Section 146: Co-sureties are liable to contribute equally unless specified otherwise.
 • Illustration: If there are three co-sureties for a debt of ₹90,000, each is liable to
contribute ₹30,000, unless a different arrangement is specified.

6. Types of Guarantee

1. Specific Guarantee: Covers a particular transaction or debt.

2. Continuing Guarantee: Covers a series of transactions or future debts.

• Section 129 elaborates on continuing guarantees.

7. Rights of Surety

1. Right of Subrogation: Surety can step into the creditor's shoes and enforce rights
against the principal debtor.
2. Right to Contribution: If multiple sureties are involved, each has a right to contribute
towards the liability.
3. Right to Indemnity: Surety can claim indemnity from the principal debtor after
paying the debt.

• Section 140 and Section 141 deal with the rights of surety.

8. Revocation of Guarantee

1. Revocation by Notice: Surety can revoke the guarantee for future transactions by
giving notice to the creditor.
2. Revocation by Release: If the principal debtor is released from liability, the surety's
obligation ceases.

• Section 130 and Section 131 address revocation.

Illustrations

1. Illustration 1: A guarantees the repayment of a loan taken by B from C. If B defaults,

A is liable to repay C.
2. Illustration 2: X guarantees a loan for Y. If Y dies, X’s liability continues if the
guarantee was continuing.
3. Illustration 3: Z guarantees payment for a series of transactions. Z is liable for the
entire amount of such transactions unless limited.
4. Illustration 4: A, B, and C are co-sureties. If A pays the entire debt, A can claim one-
third from B and C.
5. Illustration 5: A guarantees a loan for B for a specific amount. If B defaults, A must
pay up to the guaranteed amount.

Case Laws

1. Chatterton v. Farquharson (1888): The case discusses the liability of a surety in case
of default by the principal debtor.
 2. State Bank of India v. K.K. Verma (2001): Examines the extent of a surety's liability
and rights in the context of a continuing guarantee.
3. National Bank of India Ltd. v. S.K. Bhattacharjee (1960): Discusses the nature of a
continuing guarantee and its revocation.
4. S.K. Awasthi v. Union of India (1997): Deals with the rights of co-sureties and the
principle of contribution.
5. Union of India v. Dhanwanti (2002): Focuses on the effect of the principal debtor's
release on the surety's liability.

Bailment: Indian Contract Act, 1872

1. Meaning

Bailment refers to a legal relationship where the owner of a property (the bailor) temporarily
transfers possession of that property to another person (the bailee) for a specific purpose, with
the understanding that the property will be returned once the purpose is accomplished.

• Section 148 of the Indian Contract Act, 1872 defines bailment.

2. Essentials of Bailment

1. Transfer of Possession: The bailor transfers possession of the property to the bailee.
2. Specific Purpose: The property is transferred for a specific purpose.
3. Return of Property: The property must be returned to the bailor after the purpose is
fulfilled.
4. No Transfer of Ownership: Ownership of the property does not change.

3. Types of Bailment

1. Gratuitous Bailment: No consideration is provided (e.g., lending a book to a friend).

2. Contractual Bailment: Consideration is involved (e.g., depositing goods with a
warehouse).
3. Bailment for Hire: Property is given for compensation (e.g., renting a car).

4. Rights of Bailor and Bailee

Rights of Bailor:

1. Right to Return: To get back the property once the purpose is fulfilled.
2. Right to Demand Compensation: If the bailee causes damage to the property.
3. Right to Inspection: To inspect the condition of the property.

Rights of Bailee:
 1. Right to Retain: Right to retain the property until payment or compensation is
received.
2. Right to Compensation: For the care and expenses incurred during bailment.
3. Right to Lien: To retain the property until the bailor’s obligations are fulfilled.

• Section 160 deals with the right to lien.

5. Duties of Bailor and Bailee

Duties of Bailor:

1. Duty to Disclose: To disclose any defects in the property that may affect its use.
2. Duty to Compensate: To pay for any charges or expenses incurred by the bailee.
3. Duty to Return: To return the property at the agreed time.

Duties of Bailee:

1. Duty of Care: To take reasonable care of the property.

2. Duty to Return: To return the property after the purpose is fulfilled.
3. Duty to Follow Instructions: To follow the bailor's instructions regarding the
property.

• Sections 151 to 159 outline the duties and rights of bailor and bailee.

6. Concept of Lien

A lien is the right of the bailee to retain possession of the property until the bailor meets the
obligations, such as payment of charges.

• Section 170 discusses the lien of a bailee.

7. Difference Between Bail and Pledge

Aspect Bail Pledge
Transfer of possession for a
Definition Transfer of possession as security for a debt
specific purpose
Purpose Temporary transfer of possession Security for repayment of a debt
Ownership is retained by the pledgor until
Ownership Ownership remains with the bailor
debt is repaid
8. Finder of Lost Goods

A finder of lost goods has the right to retain possession until the true owner comes forward
and compensates the finder for reasonable expenses.

• Section 169 deals with the rights and duties of the finder of lost goods.
9. Termination of Bailment

Bailment terminates when:

1. The purpose of bailment is fulfilled.

2. The bailor or bailee gives notice to terminate.
3. The property is destroyed or lost.

• Section 160 and Section 161 address termination and the return of goods.

10. Types of Delivery

1. Actual Delivery: Physical transfer of possession (e.g., handing over a car to a friend).
2. Constructive Delivery: Transfer of possession without physical handover (e.g.,
handing over keys or documents).

Illustrations

1. Illustration 1: A lends a book to B for a week. A has transferred possession to B, and

B must return the book after a week.
2. Illustration 2: C deposits goods with a warehouse for storage. C has transferred
possession but retains ownership.
3. Illustration 3: D borrows a laptop from E for a month. E can reclaim the laptop after
a month.
4. Illustration 4: F pledges jewelry to G as security for a loan. G retains possession until
the loan is repaid.
5. Illustration 5: H finds a lost wallet and keeps it until the owner claims it.
6. Illustration 6: J deposits his car with a garage for repairs. The garage is responsible
for taking care of the car.
7. Illustration 7: K delivers a painting to L for exhibition. L must return the painting
after the exhibition.
8. Illustration 8: M gives his car to N for maintenance. N has a lien on the car until M
pays for the maintenance.
9. Illustration 9: O finds a ring in a park and takes it to the police. O has the right to
retain the ring until claimed by the owner.
10. Illustration 10: P delivers a document to Q for safekeeping. Q must return the
document once the purpose is fulfilled.

Case Laws

1. Gurbachan Singh v. Union of India (1955): Discusses the rights of the bailee and the
concept of lien.
2. Sarat Chandra v. Keshab Chandra (1938): Focuses on the duties of the bailee
regarding the care of the property.
3. M/s. T. V. Sundaram Iyengar & Sons Ltd. v. Union of India (1960): Addresses the
difference between bailment and pledge.
4. Sardar Bhopal Singh v. State of Punjab (1952): Examines the rights of the finder of
lost goods.
 5. K. K. Verma v. State Bank of India (2001): Discusses the termination of bailment and
the return of property.

Pledge: Indian Contract Act, 1872

1. Meaning

Pledge is a type of bailment where the bailor (pawnor) transfers possession of goods to the
bailee (pawnee) as security for a debt or obligation. The pawnee retains possession until the
debt is repaid or the obligation is fulfilled.

• Section 172 of the Indian Contract Act, 1872 defines pledge.

2. Essentials of Pledge

1. Transfer of Possession: The pawnor must transfer possession of the goods to the
pawnee.
2. Purpose: The pledge is made as security for a debt or obligation.
3. Return of Goods: The pawnee must return the goods to the pawnor upon
repayment of the debt or fulfillment of the obligation.
4. No Transfer of Ownership: Ownership of the goods remains with the pawnor.

3. Rights and Duties of Pawnor (Pledger)

Rights of Pawnor:

1. Right to Redemption: To redeem the pledged goods upon repayment of the debt.
2. Right to Notice: To receive notice before the pawnee sells the pledged goods (if
defaulted).
3. Right to Claim Surplus: To claim any surplus from the sale of the pledged goods after
settling the debt.

Duties of Pawnor:

1. Duty to Repay: To repay the debt or fulfill the obligation.

2. Duty to Disclose: To disclose any defects in the pledged goods.

• Sections 174 and 175 discuss the rights and duties of the pawnor.

4. Rights and Duties of Pawnee (Pledgee)

Rights of Pawnee:

1. Right to Retain Possession: To retain possession of the pledged goods until the debt
is repaid.
 2. Right to Sell: To sell the pledged goods if the pawnor defaults, after giving notice.
3. Right to Claim Expenses: To claim reasonable expenses incurred in preserving the
pledged goods.

Duties of Pawnee:

1. Duty of Care: To take reasonable care of the pledged goods.

2. Duty to Return: To return the pledged goods upon repayment of the debt.
3. Duty to Give Notice: To give notice before selling the pledged goods.

• Sections 176 to 179 outline the rights and duties of the pawnee.

5. Pledge vs. Hypothecation

Aspect Pledge Hypothecation
Transfer of possession as security for a No transfer of possession; security
Definition
debt interest
Possession of goods is transferred to Possession remains with the
Possession
pawnee borrower
Pawnee has a right to possess and sell Lender has no right to possess the
Rights
the goods goods
Hypothecation of stock or
Examples Pledging jewelry for a loan
receivables
6. Pledge vs. Mortgage
Aspect Pledge Mortgage
Transfer of possession as security for a Transfer of interest in immovable
Definition
debt property
Possession remains with the
Possession Possession of goods is transferred
mortgagor
Registration Not required for pledge Required for mortgage
Types Movable property only Immovable property
7. Illustrations

1. Illustration 1: A pledges his gold jewelry to B as security for a loan. B retains

possession of the jewelry until the loan is repaid.
2. Illustration 2: C pledges a car to D for a loan. D must return the car once C repays
the loan.
3. Illustration 3: E pledges a painting to F for a short-term loan. If E defaults, F can sell
the painting to recover the loan amount.
4. Illustration 4: G pledges stocks to H as security. H has the right to retain the stocks
until G repays the debt.
5. Illustration 5: I pledges a watch to J for a debt. J must take reasonable care of the
watch and return it upon repayment.
6. Illustration 6: K pledges a diamond ring to L. If K fails to repay the debt, L must
give notice before selling the ring.
7. Illustration 7: M pledges a bicycle to N for a loan. N can only sell the bicycle after M
defaults and proper notice is given.
 8. Illustration 8: O pledges furniture to P for a loan. P must return the furniture upon
repayment or maintain it in good condition.
9. Illustration 9: Q pledges a rare coin collection to R. R can only retain the collection
until Q settles the debt.
10. Illustration 10: S pledges a vintage car to T for a business loan. T must follow the
legal process if S defaults and intends to sell the car.

8. Case Laws

1. Bank of India v. O.P. Swarnkar (2002): Discusses the rights of the pawnee and the
process of selling pledged goods.
2. Indian Bank v. Shankar Ghosh (2006): Examines the duties of the pawnee in relation
to care of the pledged goods.
3. State Bank of India v. R. K. Jain (1999): Focuses on the difference between pledge
and hypothecation.
4. Lal Chand v. Kishore Kumar (1961): Addresses the rights of the pawnor to redeem
pledged goods.
5. National Bank of Pakistan v. Muhammad Zaman (2011): Deals with the process and
notice required before the sale of pledged goods.

Agency: Indian Contract Act, 1872

Agency: Indian Contract Act, 1872

1. Meaning

Agency is a relationship where one person (the agent) is authorized to act on behalf of
another (the principal) to create legal relations with a third party.

• Section 182 of the Indian Contract Act, 1872 defines agency.

2. Essentials of Agency

1. Principal and Agent: There must be a principal and an agent.

2. Consent: Both parties must consent to the relationship.
3. Authority: The agent must have the authority to act on behalf of the principal.
4. Legal Purpose: The agent’s actions must be for a lawful purpose.

3. Parties to an Agency

1. Principal: The person who appoints another to act on their behalf.

2. Agent: The person appointed to act on behalf of the principal.
3. Third Party: The person with whom the agent deals on behalf of the principal.
4. Who Can Be Appointed as an Agent?

• Any person who is capable of contracting can be an agent.

• Individuals who are of sound mind and not disqualified by law.
• Section 184 discusses who can be an agent.

5. How is Agency Created?

1. By Agreement: Through an express or implied contract.

2. By Ratification: When the principal approves an act done by someone who was not
initially an agent.
3. By Operation of Law: Such as in cases of necessity or agency by estoppel.
4. By Estoppel: When a person represents themselves as an agent and the principal
accepts that representation.

• Sections 186 to 188 cover various methods of creating agency.

6. Types of Agents

1. General Agent: Authorized to perform all acts of a particular kind (e.g., a manager).
2. Special Agent: Authorized to perform a specific act or transaction (e.g., a real estate
agent).
3. Agent of Necessity: Appointed in an emergency where immediate action is required.
4. Sub-Agent: Appointed by an agent with the principal’s consent.

• Section 189 discusses the appointment of sub-agents.

7. Rights and Duties of Principal

Rights of Principal:

1. Right to Control: To control and direct the actions of the agent.

2. Right to Performance: To require performance according to the terms of the agency.
3. Right to Revocation: To revoke the agency if it is not binding or if the agent exceeds
authority.

Duties of Principal:

1. Duty to Compensate: To pay the agreed remuneration to the agent.

2. Duty to Indemnify: To compensate the agent for losses incurred while performing
the agency duties.
3. Duty to Provide Information: To provide necessary information and instructions to
the agent.

• Sections 211 to 214 cover the rights and duties of the principal.
8. Rights and Duties of Agent

Rights of Agent:

1. Right to Remuneration: To be paid as agreed or as per the customary rate.

2. Right to Reimbursement: To be reimbursed for expenses incurred in the course of
agency.
3. Right to Lien: To retain possession of property until payment is made.

Duties of Agent:

1. Duty of Care: To perform the agency with reasonable care and skill.
2. Duty to Follow Instructions: To follow the principal’s instructions.
3. Duty to Account: To account for all transactions and monies received or expended.

• Sections 211 to 215 deal with the rights and duties of the agent.

9. Authority of Agent

1. Actual Authority: Express or implied authority given by the principal.

2. Apparent Authority: Authority that a third party reasonably believes the agent has,
based on the principal’s conduct.
3. Authority by Necessity: Authority to perform acts necessary in emergencies.

• Sections 186 to 188 cover different types of authority.

10. Agency by Ratification

Agency by ratification occurs when the principal approves and adopts an act performed by an
agent without prior authority, making it as effective as if it had been authorized initially.

• Section 196 discusses agency by ratification.

11. Termination of Agency

1. By Mutual Agreement: When both the principal and agent agree to terminate the
agency.
2. By Fulfillment of Purpose: When the agency is terminated upon completion of the
task.
3. By Revocation: When the principal revokes the agent’s authority.
4. By Renunciation: When the agent renounces the agency.
5. By Operation of Law: In cases like death or insolvency of the principal or agent.

• Sections 201 to 210 cover the termination of agency.

Illustrations

1. Illustration 1: A appoints B as an agent to sell his car. B is authorized to negotiate

and finalize the sale on A's behalf.
2. Illustration 2: C is a general agent for D, handling all transactions related to D’s
business. C has broad authority to act.
3. Illustration 3: E appoints F as a special agent to buy a specific piece of property. F's
authority is limited to this transaction.
4. Illustration 4: G finds a lost child and takes them to a safe place, acting as an agent
of necessity.
5. Illustration 5: H, an agent, incurs expenses while carrying out tasks for I. I must
reimburse H for these expenses.
6. Illustration 6: J, an agent, is given apparent authority by K. L, a third party, deals
with J under the belief that J is authorized by K.
7. Illustration 7: M acts on behalf of N without prior authorization. N later ratifies M’s
actions, making them legally binding.
8. Illustration 8: O’s agency is terminated when P, the principal, decides to stop the
agency relationship after the completion of the assigned task.
9. Illustration 9: Q’s agency terminates by operation of law due to Q’s bankruptcy.
10. Illustration 10: R, an agent, acts beyond their authority, and S, the principal, revokes
the agency immediately.

Case Laws

1. H.B. Sethi v. R. S. Agrawal (1970): Discusses the authority of agents and the extent
of their powers.
2. R. K. Sinha v. Union of India (1960): Examines the rights and duties of agents in the
context of contractual relationships.
3. N. K. Sharma v. P. S. Hegde (1975): Focuses on the termination of agency and the
rights of the principal upon termination.
4. K.K. Verma v. State Bank of India (2001): Deals with the concept of agency by
ratification and its implications.
5. Lalchand v. Kishore Kumar (1961): Addresses the appointment of agents and their
authority to act on behalf of the principal.