Special Contracts

Indemnity, Bailment,
Pledge, Guarantee and
Agency
Anupam Kulshreshtha - (email : [email protected]; Mobile : 9968281160)
M.Sc. (Physics), MBA, LL.B., CISA (Certified Information Systems Auditor), CISM (Certified Information Security
Manager), CRISC (Certified in Risk and Information Systems Control).

• Recipient of the “Visionary leader Award” from ET now. Currently working as a consultant with
the World Bank. Retired as the Dy. Comptroller and Auditor General of India in March 2012.
Earlier worked as Assistant Auditor General with the Government of Botswana (1998-2004). A
Consultant to the Auditor General, Nepal for over a year (2013-14).
• President, Institute of Public Auditors of India for three years (April 2015 to March 2018).
• On the Board of Directors, GAIL (India) Ltd as an Independent Director (2015-19),
• Chaired the Audit Committee and the Sustainability Development Committee.
• Member of the CSR Committee, HR Committee and the Finance Committee
• Visiting faculty in various institutions including the Faculty of Management Studies, FMS, DU
• Resource person with the Department of Public Enterprises, Government of India.
• Faculty (Dy. Director Sr.) at the LBSNAA, Mussoorie (June 1985 – June 1990)
• Director, National Academy of Audit and Accounts, Shimla (Feb. 1994 – June 1996),
• Director General, iCISA (International Centre for Information Systems and Audit, NOIDA – an
International Training Center of the CAG of India) (2006-08)
• Director, National Institute of Financial Management, Faridabad. (2012-13)
The spread
• Contract of indemnity – (Section 124,125)
• (Definitions and essentials, Rights of indemnity holder, Time of commencement to
indemnifier’s liability)
• Contract of guarantee - (Section 126-147)
• (Definitions and essentials, Distinction between indemnity and guarantee, Kinds of
guarantee, Nature and extent of surety’s liability)
• Contract of bailment - (Section 148-171)
• (Definitions and essentials, Kinds, Rights and duties of Bailor and Bailee)
• Contract of pledge - (Section 172-181)
• (Definitions and essentials, Difference with bailment)
• Contracts of agency – (Section 182-238)
• (Definitions and essentials, Principal agent relationship, Creation of agency, Extent of
agents authority, Liability of principal, Personal liability of agent towards third party)
Contract of Indemnity
• First introduced in the case of Adamson v. Jarvis (1827)
• Indemnity Meaning –
• To make good the loss incurred by another person
• To compensate the party who has suffered some loss
• To protect a party from incurring a loss

‘Contract of indemnity’ Definition

• A ‘contract of indemnity’ is made when 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.
• It could be expressed or implied
Essentials
• Contract of indemnity is a special contract. Principles of contract law
apply.
• Two parties - promisor (indemnifier) and promisee (indemnified or
indemnity-holder).
• Contract made to protect the promisee from loss caused due to the
conduct of the promisor or any other person.
• Contingent Contract – Trigger event
• Expressed or implied
• Only one contract - between the Indemnifier and the Indemnified.
Conditions for validity

• The consideration for the contract must be lawful.

• The object of the contract must be lawful.
• Loss to the indemnity holder is an essential requirement.
• It is dependent on a particular event.
• The indemnity may be expressed or implied as per the situation.
• All the other essentials of a valid contract.
Essential elements of a contract of
indemnity
• X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and is
fined Rs.1,000. Y cannot claim this amount from X because the object of the agreement
was unlawful.
• Loss to one party
• A person can indemnify another person only if such other person incurs some loss or it has
become certain that he will incur some loss.
• Indemnity by the promisor
• The purpose of contract of indemnity is to protect the indemnity holder from any loss that
may be caused to the indemnity holder.
• Reason for loss
• The contract of indemnity must specify that indemnity holder shall be protected from the
loss caused due to –
• Action of the promisor himself; or
• Action of any other person; or
• Any act, event or accident which is not in the control of the parties.
125. Rights of indemnity-holder when sued.
The promisee in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor—
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. 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;
3. 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
Rights of indemnity holder
• Right to recover damages
• All damages which he is compelled to pay in any suit in respect of any matter covered by
the contract of indemnity.
• Right to recover costs
• All costs which he is compelled to pay in bringing or defending such suit. If the
indemnifier had authorised him to bring or defend the suit; or the indemnity holder did
not contravene the orders of the indemnifier; and acted as it would have been prudent
for him to act in the absence of any contract of indemnity.
• Right to recover from the indemnifier all sums which he may have paid under
the terms of any compromise of any such suit,
• not contrary to the orders of the promisor, and would have been prudent to make in the
absence of any contract of indemnity, or if it was pre-authorized
• Right to sue for specific performance if he has incurred some covered under
the contract.
Commencement of Liability of Promisor/Indemnifier

• Courts in India have held that the Indemnifier is not liable until the
indemnified has suffered the loss and the Indemnified can compel the
indemnifier to make good his loss although he has not discharged his
liability.
• Gajanan Moreshwar vs. Moreshwar Madan(1942), it was observed 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”.
• What about life insurance – is it a contract of indemnity
• In the case of New India Assurance Company Ltd. v. Kusumanchi
Kameshwara Rao and Ors.(1996), SC pronounced that the statute regarding
the contracts of indemnity does not deal with cases where the happening of
events does not depend on any acts of the indemnifier or some third party.
Contract of Guarantee
• A guarantee implies holding themselves responsible for another person.
• Contract of Guarantee performs the promises made or discharges the liabilities of
the third person in case of his failure to discharge such liabilities.
• Such contract has three parties: –
• 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.
• Principal Debtor: A principal debtor is a person for whom the guarantee is given in a
contract of guarantee.
• Creditor: The person to whom the guarantee is given is known as the creditor.
• X advances a loan of 25000 to Y and Z promise that in case Y fails to repay the loan, then he
will repay the same. In this case of a contract of guarantee, X is a Creditor, Y is a principal
debtor and Z is a Surety.
• A guarantee may be either oral or written.
Essentials
• Contract of Guarantee is a species of a contract, general principles governing contracts are
applicable.
• Free consent, a legal objective etc.
• Though all the parties must be capable of entering into a contract, the principal debtor may be a
party incompetent to contract, i.e.., a minor.
• A principal debt must pre-exist: A contact of guarantee seeks to secure payment of a debt,
necessary that there is a recoverable debt.
• There can be no contract to guarantee a time barred debt.
• Consideration received by the principal debtor is sufficient for the surety. Anything done, or any
promise made for the benefit of the principal debtor can be taken as sufficient consideration to the
surety for giving guarantee.
• No misrepresentation or concealment of facts
• In the case of Birkmyr vs Darnell 1704, where the court held that when two persons come to a
shop, one person buys, and to give him credit, the other person promises, "If he does not pay, I
will", this type of a collateral undertaking to be liable for the default of another is called a contract
of guarantee”
Essentials
Swan vs Bank of Scotland 1836 - held that a contract of guarantee is a tripartite
agreement between the creditor, the principal debtor, and the surety
• Distinct promise of surety - There must be a distinct promise by the surety to
be answerable for the liability of the Principal Debtor.
• Liability must be legally enforceable - Only if the liability of the principal debtor
is legally enforceable, the surety can be made liable. For example, a surety
cannot be made liable for a debt barred by statute of limitation.
• Consideration - As with any valid contract, the contract of guarantee also must
have a consideration. The consideration in such contract is nothing but anything
done or the promise to do something for the benefit of the principal debtor.
• Section 127 clarifies - "Anything done or any promise made for the benefit of the
principal debtor may be sufficient consideration to the surety for giving the guarantee.“
• Section 142 specifies that a guarantee obtained by misrepresenting facts that are
material to the agreement is invalid, and section 143 specifies that a guarantee obtained
by concealing a material fact is invalid as well.
Types of Guarantee
• On the basis of transaction
• On the basis of time
• Specific guarantee
• Continuing guarantee extending to a series of transactions
• Retrospective guarantee
• Prospective guarantee
• Entire or partial debt

• Revocation of continuing guarantee could be by notice (S.130)

• Nottingham Hide Co vs Bottrill 1873 - Held that facts, circumstances and intention of
each case has to be looked into for determining if it is a case of continuing
guarantee or not.
Rights of the Surety
• All rights that are available to the parties of a contract are available to a surety.
• A guaranteed debt becoming due (or default of principal debtor), the surety
upon payment or performance of all that he is liable for, is invested with all the
rights which the creditor had against the principal debtor.-
• S 141 - surety entitled to benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is
entered into whether the surety knows about the existence of such security or
not; and if the creditor loses or without the consent of the surety parts with
such security, the surety is discharged to the extent of the value of the security
• Rights against co-sureties
• Effect of releasing a surety (138)
• Right to contribution (146)
Discharge of Surety from Liability
130 - By a notice of revocation
131 - By death of surety
133 - By variance in terms of
134 - By discharge of principal debtor
135 - By composition, extension of time, or promise not to sue

Extent of Surety's Liability

• Liability of a surety is co-extensive with that of the principal debtor,
unless it is otherwise provided in the contract (128)
Nature of liability
• Nature of liability in the contract of indemnity is of the indemnifier;
primary liability in a contract of guarantee is of the principal debtor
and secondary liability is of surety.
• Surety carries a joint liability along with the principal debtor. The
creditor has a choice to make recovery from either of them after a
default occurs.
• Bank of Bihar v Damodar Prasad - held that the creditor do not have
to exhaust all the remedies against principal debtor before suing the
surety. It is the duty of the surety to pay the debt if the principal
debtor does not pay. The purpose of contract of guarantee is defeated
if the creditor is asked to postpone his remedies against the surety.
The liability of surety is immediate.
127. Consideration for guarantee.
Anything done, or any promise made, for the benefit of the principal debtor, may be a
sufficient consideration to the surety for giving the guarantee.

Illustrations
(a) 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 promises to guarantee the
payment in consideration of A’s promise to deliver the goods. This is a sufficient
consideration for C’s promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the
debt for a year, and promises that, if he does so, C will pay for them in default of
payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s
promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay
for them in default of B. The agreement is void
Contract of Indemnity and Contract of Guarantee
• Parties - Two parties in a contract of indemnity (indemnifier and indemnity holder). Three parties
in a contract of guarantee (principal debtor, the creditor, and the surety)
• No. of contracts - Only one between the indemnifier and the indemnity holder. Three contracts in
G-principal debtor and creditor, surety and creditor, and an implied contract between the surety
and the principal debtor.
• Nature of liability – Primary in a contract of indemnity, contingent in the sense that it may or may
not arise. Liability of the surety is a secondary one, i.e., his obligation to pay arises only when the
principal debtor defaults. Liability in a contract of guarantee is continuing in the sense that once
the guarantee has been acted upon, the liability of the surety automatically arises. However, the
said liability remains in suspended animation until the debtor makes default.
• Default of third person - Liability of an indemnifier is not conditional on the default of somebody
else. Liability of surety is conditional on the default of the principal debtor.
• Principal debt - No requirement of the principal debt in I. Principal debt is necessary in G
• Whether subsequent recovery is possible - Once the indemnifier indemnifies the indemnity
holder, he cannot recover that amount from anybody else. After the surety has made the
payment, he steps into the shoes of the creditor and can recover the sums paid by him from the
principal debtor.
• Whether a contract has to be in writing or can be oral as well - same
Contract of Bailment
• “Bailment” is derived from the French word “ballier” which means “to
deliver”. It etymologically means ‘handing over’ or ‘change of
possession’.

• A "bailment" is the delivery of goods by one person to another for

some purpose, upon a contract, that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them. The person delivering the
goods is called the "bailor". The person to whom they are delivered is
called the "bailee".
• Giving car for service or cloths for stiching
Essentials of a valid Contract of Bailment
(Sec.148)
• Essentials of a Contract
• There must be a contract.
• The contract may be expressed or implied.
• Bailment of goods only.
• Only the goods that are of movable nature can be bailed. Money or legal tender cannot be bailed.
Deposition of money will not be counted as bailment as money is not a good and the same money will
not be delivered back to the client.
• What about ornaments put in a locker?
• There must be delivery of goods by one person to another person.
• The goods must be delivered for some purpose.
• The purpose may be expressed or implied.
• The delivery of goods must be conditional
• The condition shall be that the goods shall be returned (either in original form or in any
altered from); or
• Disposed of according to the directions of the bailor, when the purpose is accomplished.
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.
• Eg: 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.
• Delivery of the key of a car to a workshop dealer for repair of the car.
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.
• 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.
• 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.
Classification of bailment
• On the basis of benefit derived, bailment can be classified into
• Exclusive benefit of bailor
• Exclusive benefit of bailee
• Or benefit of both
• On the basis of reward, bailment can be classified into Gratuitous and non
Gratuitous bailment
• Gratuitous bailment
• Bailment without any charges or reward, i.e. – No hire charges are paid by bailee; and
no custody charges are paid by bailor.
• Free of charge such bailment would be either for the exclusive benefits of bailor or
bailee.
• Non gratuitous bailment
• Bailment for some charges or reward, i.e.- Hire charges are paid by bailee; or Custody
charges are paid by bailor
• bailment for the benefit of both bailor & bailee
Duties of a bailor
• Disclose faults in goods to Bailee, of which he has knowledge.
• Also disclose such information which materially interferes with the use of goods, or
exposes the Bailee to extraordinary risk.
• Liability for Defects in Goods
• In case of Gratuitous bailment - Bailor is liable only for those losses which arise due to non –
disclosed risks.
• In case of Non Gratuitous Bailment - Bailor is liable for damages whether or not he was aware of
the existence of faults.
• Bear expenses (Sec.158)
• In case of Gratuitous bailment, Bailor to repay to Bailee, all necessary expenses incurred by him
for the purpose of Bailment
• In case of Non Gratuitous bailment, Bailor is liable to repay only extraordinary expenses, and not
the ordinary expenses
• 158. Repayment, by bailor, of necessary expenses.—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, the bailor shall repay to the bailee the
necessary expenses incurred by him for the purpose of the bailment
Duties of a bailee
• Take reasonable care
• The bailee must take such case of goods as a man of ordinary prudence would
take care of his own goods.
• The bailee shall not be liable for any loss or destruction of goods, if he is not
negligent; or the loss was caused due to an act of God or other unavoidable
reasons.
• Not to make unauthorized use of goods
• The bailee must not make any unauthorized use of the goods. If he does, then
the bailment becomes voidable at the option of the bailor; and the bailee
shall be liable for any loss or damage even if such loss is caused due to an act
of God or other unavoidable reasons.
Duties of a bailee
• Not to mix goods
• If goods are mixed with bailor’s consent The parties shall have a proportionate
interest in such mixture.
• Goods are mixed without bailor’s consent, but the goods are separable. The bailee
shall pay the expenses of separation. The bailee shall pay damage incurred by the
bailor.
• Goods are mixed without bailor’s consent, and goods are not separable The bailee
shall compensate the bailor for any loss caused to him
• Return the goods
• The bailee must return the goods, without waiting for demand from bailor, if the
time specified in the contract has expired; or the purpose specified in the contract is
accomplished. If the goods are not so returned, then the goods shall be at the risk of
the bailee; the bailee shall be liable for any loss or damage, even if such loss is
caused without any fault or negligence of the bailee or due to an act of God or other
unavoidable reasons.
Rights of a bailor
• Terminate the bailment if the bailee does any act inconsistent with
the terms and conditions of the contract of bailment. Bailment
becomes voidable at the option of the bailor.
• Demand back the goods
• if the bailment is gratuitous and for a specific period then the bailor may
compel the bailee to return the goods before expiry of the period of bailment.
• File suit against wrongdoer
• Bailor has the right to sue a third party who does any damages to the goods;
or a third party who deprives the bailee from using the goods
• Sue the bailee to enforce his duties.
Rights of a bailee
• Right to compensation
• The bailee has the right to be indemnified by the bailor, if the bailor has no
title to the goods; and as a consequence, the bailee suffers some loss
• Return the goods
• It is the duty as well as the right of the bailee to return the goods to the
bailor.
• Recover charges incurred
• The bailor is liable to pay the extraordinary expenses
• If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary
expenses,
 Contract of Pledge
• The bailment of goods as security for payment of a debt or performance of
a promise is called “pledge”. The bailor is in this case called the “pawnor”.
The bailee is called 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.
• Under exceptional circumstances, the pledgee has a right to sell the
property pledged.
• 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.
Contract of Bailment and Pledge
• The contract of bailment is the delivery of goods from one person to another
for a specific purpose. The contract of the pledge is the delivery of goods as
security. Every contract of the pledge is a bailment, but every contract of
bailment is not a pledge.
• The sole purpose for bailing the goods is for the safe custody of the goods or
repairs, at most times. The sole purpose to enter into a contract of pledge is
for security against a debt.
• The goods cannot be sold by the bailee in such contracts. The goods may be
sold by the pawnee or the pledgee.
• The goods can be used by the bailee only for specific purposes known to both
the parties or not otherwise. The goods cannot be used by the pawnee or the
pledgee.
• Consideration must in both
 Contract of Agency (S.182)
• When one party delegates some authority to another party whereby the latter
performs his actions in a more or less independent fashion, on behalf of the first
party, the relationship between them is called an agency.
• Agency can be express or implied.
• 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.
• Contracts of agency are based on two important principles, namely:
• Whatever a person can do personally shall also be allowed to be done through an agent
except in case of contracts involving personal services such as painting, marriage, singing, etc.
• Acts of the agent are considered the acts of the principal
• Relationships relating to principal and agent involve three main parties:
• The Principal, the Agent, and a Third Party.
Essential features of contract of
agency
An agency agreement is a legal contract creating a fiduciary relationship whereby
the first party (the principal) agrees that the actions of a second party (the agent)
binds the principal to later agreements made by the agent as if the principal had
himself personally made the later agreements.

• Agreement between agency and principal

• Competency of principal
• Competency not required for an agent
• Contractual relationship
• Creation of legal relations
• Consideration not required
• Intention of the person to act
Agency, Appointment and authority
of agents
182. "Agent" and "principal" defined -
An "agent" is a person employed to do any act for another, or to represent another in
dealing with third persons. The person for whom such act is done, or who is so
represented, is called the "principal".
183. Who may employ agent -
Any person who is of the age of majority according to the law to which he is subject, and
who is of sound mind, may employ an agent.
184. Who may be an agent -
As between the principal and third persons, any person may become an agent, but no
person who is not of the age of majority and sound mind can become an agent, so as to
be responsible to the principal according to the provisions in that behalf herein contained.
185. Consideration not necessary -
No consideration is necessary to create an agency;
Agency, Appointment and authority
of agents
186. Agent's authority may be expressed or implied -
187. Definitions of express and implied -
An authority is said to be express when it is given by words spoken or
written. An authority is said to be implied when it is to be inferred from the
circumstances of the case; and things spoken or written, or the ordinary
course of dealing, may be accounted circumstances of the case.
188. Extent of agent's authority -
An agent, having an authority to do an act, has authority do every lawful
thing which is necessary in order to do such act. An agent having an authority
to carry on a business, has authority to do every lawful thing necessary for
the purpose, or usually done in the course, of conducting such business.
Agency, Appointment and authority
of agents
189. Agent's authority in an emergency -
An agent has authority, in an emergency, to do all such acts for the
purpose of protecting his principal from loss and would be done by a
person or ordinary prudence, in his own case, under similar
circumstances.

190. When agent cannot delegate -

An agent cannot lawful employ another to perform acts which he has
expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub-agent may, or, from the nature or
agency, a sub-agent must, be employed.
Who is a Principal
• According to Section 182, The person for whom such act is done, or who is so
represented, is called the “principal”. Therefore, the person who has delegated his
authority will be the principal.
• A, a businessman, delegates B to buy some goods on his behalf. Here, A is the principal and B is
the agent, and the person from whom the goods are bought is the ‘Third Person’.
• A appoints M to deal with his bank transactions. In this case, A is the Principal, M is the Agent and
the Bank is the Third Party.
• X lives in Mumbai, but owns a shop in Delhi. X appoints a person Y to take care of the dealings of
the shop. In this case, X has delegated authority to Y, and X becomes a Principal while Y becomes
an agent.
Who can appoint an Agent?
• According to Section 183, any person who has attained the age of majority and has a
sound mind can appoint an agent. In other words, any person capable of contracting can
legally appoint an agent. Minors and persons of unsound mind cannot appoint an agent.
Who may be an Agent?
• As between the principal and third persons, any person may become an agent. A sound
mind and a mature age is a necessity if an agent has to be answerable to the Principal.
Some definitions
Meaning of ‘agent’
• An ‘agent’ is a person employed to –
• Do any act for another; or
• Represent another in dealings with third persons.
Meaning of ‘principal’
• ‘Principal’ is the person –
• For whom an act is done by the agent; or
• Who is represented by the agent in respect of dealing with third persons.
Test of agency
• Where a person has the capacity to –
• Create contractual relations between the principal and a third party;
• Bind the principal by his own acts, there exists a relationship of agency.
Creation of Agency
An agency can be created by:

Direct (express) appointment– The standard form of creating an agency is by direct

appointment. When a person, in writing or speech appoints another person as his agent, an
agency is created between the two.
Implication– When an agent is not directly appointed but his appointment can be inferred
from the circumstances, an agency by implication is created.
Necessity– In a situation of necessity, one person can act on behalf of another to save the
person from any loss or damage, without expressly being appointed as an agent. This
creates an agency out of necessity.
Estoppel– An agency can also be created by estoppel. In a situation where one person
behaves in such a manner in front of a third person, as to make someone believe he is an
authorized agent on behalf of someone, an agency by estoppel is created.
Ratification– When an act of a person, who acted as another person’s agent (on his behalf)
without his knowledge is later ratified by that person, this creates an agency by ratification
between the two.
Modes of creation of agency (Sec.187, 189,
196, 214 and 237)

Express agreement
• A person may employ another person as his agent by entering into an express
agreement with him.
• The agreement may be either oral or written.

Implied agreement
• If a person makes a representation (by his words or conduct) to a third person
that a certain person is his agent; and
• the third party believing such representation to be true, enters into a contract
with the pretended agent.
• Then the person making the representation is prevented from denying the
truth of agency. He may be held liable as a principal by such third party.
Types of Agents
Special Agent- Agent appointed to do a singular specific act.
General Agent- Agent appointed to do all acts relating to a specific job.
Sub-Agent-An agent appointed by an agent.
Co-Agent- Agents together appointed to do an act jointly.
Broker- An agent whose job is to create a contractual relationship
between two parties.
Auctioneer- An agent who acts a seller for the Principal in an auction.
Commission Agent- An appointed to buy and sell goods (make the best
purchase) for his Principal
Salient features of agency
Principal is liable for the acts of agent
• The principal is liable for all the acts of an agent which are lawful and within the scope of
agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the same legal
consequences as if these contracts were made by the principal himself.
• Who may employ an agent?
• Any person may employ an agent if he is of the age of majority; and is of sound mind.
• Who can be an agent?
• Any person may become an agent.
• Even a minor or a person of unsound mind can become an agent
• Liability of agent
• Generally an agent is liable to the principal
• An agent is not liable to the principal if he is a minor or is of unsound mind.
• Requirement of consideration
• No consideration is necessary for creating an agency
Liability of principal to third parties
for the acts of agent
• Principal is liable for the acts of agent
• The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the
same legal consequences as if these contracts were made by the principal
himself.
• When agent exceeds his authority
• Whether the acts done within the authority are separable from the acts done
beyond authority.
• If yes – The principal is not bound for excess acts done by the agent.
• If no – The principal is not bound by the transaction and the principal can
repudiate the whole transaction.
Termination of Agency
• An agency can be terminated in the following ways:

• When the agent’s authority is revoked by the Principal

• When the agent renounces the business of the agency
• When the business of the agency is completed
• When either of the parties dies or becomes mentally disabled
• When the Principal is adjudicated an insolvent
Revocation of Agent’s authority
Rules regarding revocation of an agent’s authority.
• It can be revoked any time before the authority has been exercised.
• If according to the terms of the contract between the two, the agency
has to continue up to a certain time, any prior revocation by the
Principal shall be compensated for, to the agent.
• The termination does not take effect before it has been
communicated to the agent.
• Termination of the authority of an agent terminates the authority of
all the sub-agents under him.
Agent’s duties to Principal
• To conduct the business of the Principal according to the directions of the Principal.
• Bound to conduct the business he is supposed to conduct with as much skill as a
person on his position ordinarily holds.
• Supposed to show the relevant accounts to the Principal as and when the Principal
demands.
• Duty to communicate any difficulty whatsoever he may come across while doing
the Principal’s business. He is supposed to perform due diligence in this regard.
• If any material fact has been concealed or the business is not carried out in the
manner that the Principal directed, the Principal can repudiate the contract
between them.
• If the agent carries out the business in the manner he wanted to perform it, rather
than on the directions of the Principal, the Principal may claim from the agent any
benefit he may have achieved through doing so.
Principal’s duties to Agent
• The Principal is bound to indemnify the agent against any lawful acts done
by him in the exercise of his authority as an agent.
• The Principal is bound to indemnify the agent against any act done by him in
good faith, even if it ended up violating the rights of third parties.
• The Principal is not liable to the agent if the act that is delegated is criminal
in nature. The agent will also in no circumstances be indemnified against
criminal acts.
• The Principal must make compensation to his agent if he causes any injury
to him because of his own competence or lack of skill.
• The Principal is liable for any fraud or misrepresentation made by his agent
during the course of his business, as if the fraud or misrepresentation was
done by the Principal himself.
Rights of an Agent
• Right of retainer– An agent has the right to retain any remuneration or expenses
incurred by him while conducting the Principal’s business.
• Right to remuneration– An agent, when he has wholly carried out the business of
the agency has the right to be remunerated of any expenses suffered by him while
conducting the business.
• Right of Lien on Principal’s property- The agent has the right to hold (keep with
himself) any movable or immovable property of the Principal until his due
remuneration is paid to him by the Principal.
• Right to be Indemnified– The agent has the right to be indemnified against all the
lawful acts done by him during the course of conducting the Principal’s business.
• Right to Compensation– The Agent has the right to be compensated for any injury
or loss suffered by him due to the lack of skill and competency of the Principal.
Vicarious liability of an agent
• Liability of agent to third party
• If the agent has actual or apparent authority, the agent will not be liable for
acts performed within the scope of such authority, so long as the relationship
of the agency and the identity of the principal have been disclosed.
• Liability of agent to principal
• If the agent has acted without actual authority, but the principal is
nevertheless bound because the agent had apparent authority, the agent is
liable to indemnify the principal for any resulting loss or damage.
• Liability of principal to agent
• If the agent has acted within the scope of the actual authority given, the
principal must indemnify the agent for payments made during the course of
the relationship whether the expenditure was expressly authorized or merely
necessary in promoting the principal's business.
Agency by necessity – Conditions
• There was an actual and definite necessity for acting on behalf of the
principal.
• The agent was not in a position to communicate with the principal.
• The act was done for the purpose of protecting the interest of his
principal.
• The agent has exercised such reasonable care as a man of ordinary
prudence would have exercised in his own case.
• The act was done bonafide.
Agency by ratification
• If a person (pretended agent) acts on behalf of another person (the
principal)
• the pretended agent acts without the knowledge or consent of the
principal; and afterwards, the principal accepts such act.
• Then Agency by ratification comes into existence.

Effects of ratification
• The principal is bound by the acts ratified by him as if such acts had
been performed by his authority.
• Ratification relates back to the actual date of the act that is ratified and
not from the date when the act ratified.
Essentials of a valid ratification (Sec.
197 to 200)
• No valid ratification can be made by a person whose knowledge of the facts
of the case is materially defective. In other words, the principal must have
full knowledge of all the material facts.
• It must be done for whole transaction in fact; ratification of the part of a
transaction operates as a ratification of the whole transaction.
• The acts done by a person (i.e. pretended agent) on behalf of another person
(i.e. pretended principal) can only be ratified.
• Ratification can be made by only such person for whom the act was done.
• The principal must be in existence at the time when the act was done in his
name
• The principal must have contractual capacity both at the time of entering into
the contract and at the time of ratification.