Unit 2

CONTRACTS OF INDEMNITY
A contract of indemnity is "a contract by which one party promises to save the other from the
loss caused to him by the conduct of the promisor himself, or by the conduct of a third party"
(Sec. 123).
Example : A contracts to indemnify B against consequences of any proceedings which C may
take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. A
will be termed as "indemnifier" and B as the "indemnity-holder".
Definition is not very exhaustive:
According to the definition given by Sec. 124 of the Contract Act, contract of indemnity
includes (i) only express promise to indemnify and (ii) cases where loss is caused by the
conduct of the promisor himself or by the conduct of any other person. It does not include
(a) implied promise to indemnify and
(b) Cases where the loss is caused by accident or by the conduct of the promises.
According to English law, a contract of indemnity is "a promise to save another harmless from loss
caused as a result of a transaction entered into at the instance of the promisor". It thus, includes the
loss caused by events or accidents also. The definition of a contract of indemnity as per Indian Law is
thus very restrictive. If it is strictly applied, even the contracts of insurance would fall outside the
purview of contract of indemnity. But Indian Courts apply the English definition to contracts of
indemnity. As was observed by Justice Chagla, "Sections 124 and 125 of the Contract Act are not
exhaustive of the law of indemnity and the courts here would apply the same principles that the courts
in England do". (Gajanan Moreshwar V. Moreshwar Madras, 1942
Indian courts, in a large number of cases, have also observed that contracts of indemnity also
include implied promise to indemnify.
Example: A is the owner of an article. It is lost and found by B. B sends it to an auctioner for
selling it. The auctioneer sells the article. A recovers damages from the auctioneer for selling
away his article. The auctioneer can recover the loss from B. There is an implied promise by
B to save the auctioneer from any loss that may be caused to him on account of any defect in
B's authority to let the article sold.
Commencement of Indemnifier's Liability
High Courts have differed in their judgments regarding commencement of indemnifier's
liability. According to High Courts of Calcutta, Madras, Allahabad and Patna indemnity
holders when asked to meet a liability, can compel the indemnifiers to put him (indemnity-
holder) in a position to meet the liability without waiting until he (indemnity-holder) has
actually discharged it. High Courts of Bombay, Lahore and Nagpur have, however, held that
indemnifier can be made liable only when indemnity-holder has incurred an actual loss, i.e.,
discharged the liability. The former view seems to be more correct and is also in consonance
with the English view "to indemnity does not merely mean to reimburse in respect of moneys
paid, but to save from loss in respect of liability against which the indemnity has been
given...if it be held that payment is a condition precedent to recovery, the contract may be of
little value to the person to be indemnified, who may be unable to meet the claim in the first
instance." (Kennedy L.J.) in Liverpool Insurance Co. case.
Thus, we can conclude that if the indemnity holder had incurred an absolute liability, he has the right
to call upon the indemnifier to save him from that liability and pay it off
Rights of the indemnity-holder when sued
The indemnify holder is entitled to the following rights:
Indemnity-holder is entitled to recover all damages which he might have compelled to pay in any suit
in respect of a matter covered by the contract
Indemnity holder is entitled to recover all costs incidental to the institution or defending of the suit.
But the party indemnified can not recover costs when he has not acted as a prudent man in defending
the action against him or has not been authorized by the indemnifier to defend the suit or where the
costs incurred have been unreasonable in amount.
1. Indemnity holder is entitled to recover all sums paid under any compromise of any
such suit, provided the compromise was not contrary to the directions of the promisor
and it has been made on the best available terms. Promise must have acted prudently
in making such a promise. (Sec. 125).
It is to be noted that a contract of indemnity being a specie of the general contract and
therefore, must satisfy all essentials of a valid contract such as competent parties, free
consent, lawful object etc., otherwise it will not be valid.
Example: A agrees to indemnity B for all consequences which may arise as a result of his (B) giving a
good beating to C. The object being unlawful the agreement is also void

CONTRACTS OF GUARANTEE
Meaning
A 'Contract of Guarantee" is a contract to perform the promise or discharge the liability, of a third
person in case of his default. The person who gives the guarantee is called the 'surety'; the person in
respect of whose default the guarantee is given is called 'the principal debtor 'and the person to
whom the guarantee is given is called the 'creditor'. The contract of guarantee may be either written
or oral (Sec. 126)

Purpose: Contracts of guarantee are usually entered into

(a) to secure the performance of something which may be immediately related to a mercantile
agent, or
(b) to secure the honesty and fidelity of someone who is to be appointed to some office, or
(c) to secure someone from injury arising out of some wrong committed by another.
Essentials of a valid contract must be present
A contract of guarantee like other ordinary contrary must satisfy all the essentials of a contract but it
has two distinctive features.
(a) Something done or any promise made for the benefit of the principal debtor is presumed by
law to be a sufficient consideration for the contract of guarantee. It is not necessary that the surety
himself must be benefited.
Example: 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.
(b) In a contract of guarantee, the creditor and surety must be competent to enter into a contract
but principal debtor may be a minor or a person incapable of entering into a contract. In such a case
the surety will be taken as the principal debtor and will be liable to pay.
(c) In a contract of guarantee, the liability of the surety is condition. It arises only when the
principal debtor makes a default. A liability which arises independently of a 'default' is not within the
definition of guarantee. (Punjab National Bank V. Sri Vikram Cotton Mills, (1970) I
Invalid Guarantee
Following are a few of those cases when the guarantee given by the surety will be invalid and
cannot be enforced against him:
(i) Guarantee obtained by misrepresentation (Sec. 142): Any guarantee which has been
obtained by means of misrepresentation made by the creditor, or with his knowledge
and assent, concerning a material part of the transaction, is invalid.
(ii) Guarantee obtained by concealment (Sec. 143): Any guarantee which the creditor has
obtained by means of keeping silence as to material circumstances is invalid.
(iii) In case co-surety does not join (Sec. 144): Where a person gives a guarantee upon a
contract that the creditor shall not act upon until another person has joined in it as co-
surety, the guarantee will be invalid if that other person does not join.
Example (i) A agrees with B to stand as a surety for C for a loan of Rs. 1000 provided D also
joins him as surety. D refuses to join. A is not liable as a surety.
(ii) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000
tons. B and C have privately agreed that B should pay five rupees per ton beyond the market
price, such excess to be applied in liquidation of an old debt. This agreement is concealed
from A. A is not liable as a surety.
4.4.1 Distinction between a Contract of indemnity and a contract of guarantee:

BASIS CONTRACT OF IDEMNITY CONTRACT OF GUARANTEE

Parties Only two parties- 'indemnifier & There are three parties--
indemnified. 'Creditor' 'principal debtor' and
'surety'.
Liability The liability of the indemnifier is The liability of the surety is
'primary' secondary, i.e., the surety's is liable
only if the principal debtor fails.
The liability of the principal
debtor is
primary.
Contingency The liability of the indemnifier There is an existing debt or duty the
arises only on the happening of a performance of which is guaranteed
contingency. by the surety.
Contract There is only one contract Three contracts; one between the
between the indemnifier and the creditor and principal debtor; second,
indemnified. between the surety and the creditor,
and third, between the surety and the
principal debtor.
Object The indemnity contract is for The contract of guarantee provides
reimbursement of loss. It 'surety' to the creditor.
provides 'security'.
Right to sue Indemnifier cannot sue a Surety can sue the principal debtor.
third party for the loss suffered.

4.4.2 Kinds of Guarantee

Contracts of guarantee may be
(1) Specific, or
(2) Continuing.
1. Specific guarantee: Specific guarantee means a guarantee given for one specific
transaction. In this case the liability of the surely extends only to a single transaction.
 Example: A guarantee payment to B of the price of 5 sacks of flour to be delivered by
B to C and to be paid in a month. B delivers sacks to C. C pays for them. Afterwards
B delivers four sacks to C, which C does not pay. The guarantee given by A was only
a specific guarantee and accordingly he is not liable for the price of the four sacks.
2. Continuing guarantee (Sec. 129): A continuing guarantee is that which extends to a
series of transactions (Sec. 129). It is not confined to a single transaction. Surety can
fix up a limit on this liability as to time or amount of guarantee, when the guarantee is
a continuing one. The fact that the guarantee is continuing can also be ascertained
from the intentions of the parties and the surrounding circumstances.
Example: (i) A, in consideration that B will employ C in collecting the rents of B,s
zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due
collection any payment by C of those rents. This is continuing guarantee.
(ii) A guarantees payment to B, a tea/dealer to the amount of£ 100, for tea he may
from time to time supply to C.B supplies C with tea to the extent of the agreed
value i.e.,£ 100 and C pays B for it. Afterwards B supplies C with tea to the
value of£ 200. C fails to pay. The guarantee given by A was a continuing
guarantee, and he is accordingly liable to B to he extent of£ 100
Revocation of continuing guarantee
A continuing guarantee is revoked by any of the following ways.
l. By notice (Sec. 130). A continuing guarantee may at any time be revoked by the surety
as to future transactions, by giving a distinct notice to the creditor.
Example: A in consideration of B's discounting at Ns request, bills of exchange, for C
guarantees to B, for twelve months, the due payment of all such bills to the extent of
5,000 rupees, B discounts bills for C to be extent of 2,000 rupees. Afterwards at the
end of three months, A revokes the guarantee. This revocation discharges A from all
liability to B for any subsequent discount. But A is liable to B for 3,000 rupees, on the
default of C.
2. By Death (Sec. 131): Death of the surety will operate as a revocation of the continuing
guarantee with regard to the future transactions unless the contract provides
otherwise. No notice of death need be given to the creditor. Heirs of the surety will
not be liable for any fresh transactions entered into by the creditor with the principal
debtor after the death of the surety without knowledge of such death.
Nature of surety's liability
Where the parties do not specifically agree as to the extent of the liability or the surety does
not put up any limit on his ability at the time of entering into the contract, the liability of the
surety will be co-extensive with that of the principal debtor. In other words, whatever amount
of money a creditor can legally realise from the principal debtor including interest, cost of
litigation, damages etc., the same amount he can recover from the surety.
Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonored by C. A will be liable not only for the amount of the bill also for any interest and
charges which have become due on it.
The liability of the surety arises immediately on the default of the principal debtor but the
creditor is not bound to give any notice of the default of the principal debtor to the surety or it
exhaust all the remedies open to him as against the debtor before proceeding against the
surety. Besides that, creditor is free to release the debt when it becomes due to either from the
debtor or the surety. It is not necessary for him to proceed against the debtor first. He may
sue the
surety without suing the principal debtor. It is surety's duty to see that the principal debtor
pays or performs his obligation.
Rights of the Surety
Rights of the surety can be classified under three heads:
(i) Against the principal debtor.
(ii) Against the creditor.
(iii) Against the co-sureties
1. Rights of the surety against the principal debtor
(a) Rights to be subrogated: When the principal debtor had committed the default and the
surety pays the debt to the creditor, surety will stand in the shoes of the creditor and
will be invested with all the rights which the creditor had against the debtor (Sec.
140).
(b) Right to claim indemnity: In every contract of guarantee, there is an implied promise
by the principal debtor to indemnify the surety and the surety is to recover from the
principal debtor whatever sum he has rightfully paid under the guarantee but no sums
which he has paid wrongfully, e.g., cost of fruitless litigation (Sec. 145).
Examples : (i) B is indebted to C, and A is surety for the debt. C demands payments
from A, and on his refusal sues him for the amount. A defends the suit, having
reasonable grounds for doing so, but is compelled to pay the amount of the debt with
costs. He can recover from B the amount paid by him for costs, as well as the
principal debt.
(ii) A guarantees to C, to the extent of 2000 rupees, payment for rice to be supplied by
C to B. C supplies rice to a less amount than 2000 rupees, but obtains from A
payment of the sum of 2,000 rupees in respect of the rice supplied. A cannot recover
from B more than the price of the rice actually supplied.
2. Rights of the surety against the creditor
A surety is entitled to the benefit of every security which the creditor has against the debtor at
the time when the contract of surety ship is entered into, whether the surety knows of 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
(Sec. 141). But a surety, however, cannot claim the benefit of the securities only on the
payment of a part of the debt.

3. Right against co-sureties

When two or more persons stand as sureties for the same debt or obligation they are termed
as co-sureties. The position of co-sureties is as follows.
Co-sureties liable to contribute equally (Sec. 146): Where two or more persons are co-
sureties for the same debt or duty, either jointly or severally, and whether under the same or
different contract, and whether with or without the knowledge of each other, the co-sureties
in the absence of any contract to the contrary, are liable, as between themselves, to pay each
an equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor.
Example: A, B and C are sureties to D for the sum of 3,000 rupees lent to E.E makes default
in payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each.
Liability of co-sureties bound in different sums (Sec. 147)
Co-sureties who are bound in different sums are liable to pay equally as far as the limits to
their respective obligations permit.
Example: (i) A, Band C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of
40,000 rupees, conditioned for D's duly accounting to E. D makes default to the extent of
30,000 rupees. A, B and care each liable to pay 10,000 rupees.
(ii) A, Band C, as sureties for D, enter into three several bonds, each in a different penalty,
namely, A in the penalty of 10,000 rupees, B in that 20,000 rupees and C in that of 40,000
rupees, conditioned for D's duly accounting to E, D makes default to the extent of 40,000
rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupees each.
Discharge of surety
Surety will be discharged from his liability in the following cases:
1. By notice or death (Secs. 130 & 131): A contract of continuing guarantee may be
terminated at any time by notice to the creditor. The death of the surety brings an end
to continuing guarantee. No notice of death need to given to the creditor. The surety
will not be responsible for acts done after his death.
2. Variations in terms of the original contract between the principal debtor and the
creditor (Sec. 133): If the contract between the creditor and the principal debtor is
materially altered without the consent of the surety, the surety is discharged as to
transactions subsequent for the alteration.

Example (i): A becomes surety to C for B's conduct as a manager in C's bank.
Afterwards, B and C contract, without A's consent that B's salary shall be raised, and
that he shall become liable for one-fourth of the losses on overdrafts B. allows a
customer to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without the consent, and is not liable to make good
this loss.
(ii) C contracts to lend B Rs. 5,000 on first March. A guarantees repayment. C pays
the amount to B on first January. A is discharged from the liability, as the contract has
been varied in as much as C might sue B for the money before the 1st March.
3. By release or discharge of the principal debtor (Sec. 134). The surety is discharged by
any contract between in creditor and the principal debtor, by which the principal
debtor is released or by any act or omission of the creditor, the legal consequence of
which is the discharge of a surety on one agreement will not release the other surety
bound for the same debtor by a separate agreement from his engagement, unless the
effect of such release is to adversely affect the others right to contribution.
Example (i) : A gives a guarantee to C for goods to be supplied by C to B. C supplies
goods to B, and afterwards B becomes embarrassed and contracts with his creditors
(including C) to assign to them his property in consideration of their releasing him
from their demands. Here B is released from his debt by the contract with C, and A is
discharged from his suretyship.
(ii) A contracts with B to grow crop of indigo on his (A's) land and to deliver it to Bat
a fixed rate. C guarantees Ns performance of his contract. B diverts a stream of water
which is necessary for irrigation of A's land and thereby prevents him from raising the
indigo. C is no longer liable on his guarantee.

4. Compounding by creditor with the principal debtor (Sec. 135). A contract between the
 creditor and the principal debtor by which the creditor makes a composition with, or
promise to give time to, or not sue to the principal debtor discharges the surety unless
the surety assents to such contract.
But where a contract to give time to the principal debtor is made by the creditor with a third
person, and not with the principal debtor, the surety is not discharged (Sec. 136).
Example: C, the holder of an overdue bill of exchange drawn by as surety for & and accepted
by B, contracts with A to give time to B, is not discharged.
Similarly, mere forbearance on the part of the creditor to sue the principal debtor within the
limitation period or to enforce any other remedy against him does not in the absence of any
provision in the guarantee to the contrary discharge the surety (Sec. 137).
Example: B, owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B
for a year after the debt has become payable. A is not discharged from the surety ship.
Where there are co-sureties a release by the creditor of one of them does not discharge the
other; neither does it free the surety so released from his responsibility to other sureties (Sec.
138).
5. Creditor's act or omission impairing surety's eventual remedy (Sec. 139). If the
creditor does any act which is inconsistent with the rights of the surety, or omits to do
any act which his duty to the surety requires him to do, any the eventual remedy of
the surety himself against the principal debtor is thereby impaired, the security is
discharged.
Example: (i) B contracts to build a ship for C for a given sum to be paid by
installments as the work reaches certain stages. A becomes surety to C for B's
performance of the contract. C without the knowledge of A, prepays to B the last two
installments. A is discharged by his pre-payments.
(ii) A puts Mas apprentice to B, and gives a guarantee to B for M's fidelity. B
promises on his part that he will, at least once a month, see M to make up the cash. B
omits to see M as promised, and M embezzles. A is not liable to B on his guarantee.
6. Loss of security (Sec. 141). If the creditor losses on, without the consent of the surety,
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.
Example: C advances to B, his tenant Rs. 2,000 on the guarantee of A. C has also
further a security of Rs. 2,000 by a mortgage of B's furniture. C cancels the mortgage.
B becomes insolvent, and C sues A on his guarantee. A is discharged from his
liability to the amount of the value of the furniture.
7. By invalidation of the contract of guarantee (Secs. 142, 143 and 144). A contract of
guarantee becomes invalid if guarantee was obtained by fraud or concealment etc.
about material facts as discussed before. Surety in such a case will be discharged from
his liability.

Bailment Contract
Definition
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'.
Examples:-
(i) A lends his motor cycle to B for his use.
 (ii) A gives a piece of cloth to a tailor to make it into a coat.
(iii) A gives his radio set to a mechanic for repairs.

Essential characteristics
The essential elements of the definition of bailment can be summed up as under:-
(a) Bailment is always based upon a contract. In exceptional cases it can also be implied by law,
e.g., finder of goods.

(b) There can be a bailment of movable properties only but money is not included in the category
of movable goods.
(c) In Bailment the possession of goods must change. It thus requires temporary delivery of
goods. Mere custody of goods without possession will not be sufficient to constitute bailment.
A servant or a guest using his master's or host's goods will not be a bailee.
In bailment the delivery of goods may be actual or constructive

Example:
(i) A delivers his radio set to B for repair. This s a case of actual delivery of goods by A to
B. A is the bailor and B is the bailee.
(ii) A employed a goldsmith to melt old jewelry and prepare new jewels. Everyday she used
to receive half-made jewels from the goldsmith and put them in a box and leave the box
in the goldsmith's room. She kept the key of the room with her. On one night-the jewels
were stolen. It was held that there was redelivery of jewels to the lady and the goldsmith
could not be regarded as bailee. The lady herself must bear the loss (Kaliapurimal v.
Visalakshmi).
(d) In bailment, ownership is not transferred. The bailor continues to be the owner of the goods.
(e) Goods are delivered upon a condition that they are to be returned in specie.
Deposit of money in a bank is not a case of bailment since the return of money will not be of the
identical coins deposited. Moreover the money handed over to the bank is not for safe custody but to
be credited to some kind of account. The relation between the bank and the depositor of money is that
of a borrower and the lender and not that of a bailor and bailee.
Rights And Duties Of The Bailor
Rights of the bailor
(1) Right of termination. Bailor has the right to terminate the bailment and claim damages, if any,
if the conditions of bailment are disobeyed by the bailee, e.g., bailee uses the goods bailed in
a manner inconsistent with the conditions of bailment.
Example:-
A lets, B for hire, a horse for his own riding, B drives the horse in his carriage. A can
terminate the contract of bailment

(2) Rights to demand return of goods any time in case of gratuitous bailment. In the case of a
gratuitous bailment, the bailor can demand back the goods bailed at any time he chooses in
spite of the fact that he had lent them for a fixed period or for a specified purpose. But if the
bailee had, in this case, acted in such a manner that the return of the goods before the
stipulated time would cause loss greater than the benefit which he has derived, the bailor shall
be asked to indemnify him for the loss if he compels immediate return of the specified object.
(3) Enforcement of rights: The duties of the bailee are the rights of the bailor and he can sue
bailee for their enforcement.
Duties of the bailor
1. To disclose faults in the goods bailed (Sec. 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.
Example:-
(i) A hires 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.
(ii) R hired a motor launch from B for a holiday on River Thames. The launch caught fire
and R could not extinguish the fire as the fire-fighting equipment was out of order. R
was injured Held D was liable to pay him damages (Reed V. Dean, 1949).
2. Responsibility for title to the goods (Sec. 164). The bailor is responsible to the bailee 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.
To bear necessary expenses of bailment (Sec. 158). When 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 (bailment is
gratuitous), the bailor shall repay the bailee the necessary expenses incurred by him
for the purpose of the bailment

3. To indemnity gratuitous bailee (Sec. 159). Where the bailor has lent the goods gratuitously
for a specified time or purpose and if he requires the return of the goods before the time
agreed upon or before the purpose is accomplished, he shall indemnify the bailee if he puts
the bailee to any loss caused by earlier demand.
4. To bear risk for loss etc. Bailor is to bear the risk of loss, destruction or deterioration of the
thing bailed if the bailee has taken as much care as a man of ordinary would under similar
circumstances, take of his own goods of the same bulk, quality and value as the goods bailed.
Rights And Duties Of The Bailee
l. Rights to interplead (Sec. 165). If a person, other than the bailor, claims the goods bailed, bailee
may apply to the court to stop the delivery of the goods to the bailor and to decide the title to
the goods.
2. Rights against third person (Sec. 180). If a third person wrongfully deprives the bailee of the
use or possession of the goods bailed, or causes them any injury, the bailee is entitled to use
such remedies as the owner might have used in a like case if no bailment has been made.
Bailee can thus bring a suit against a third person for such deprivation or injury.
3. Right of particular lien for payment for services (Sec. 170). Where the bailee has (a) in
accordance with the purpose of bailment, (b) rendered any service involving the exercise of
labour of skill, (c) in respect of the goods, he shall have (d) in the absence of a contract to the
contrary, right to retain such goods, until he receives due remuneration for the services, he
has rendered in respect of them. Bailee has, however, only a right to retain the article and not
to sell it. The service must have entirely been formed within the time agreed or a reasonable
time and the remuneration must have become due.
This right of particular lien shall be available only against the property in respect of which skill and
labour has been used.
Examples
A delivers a rough diamond to jeweller, to be cut and polished, which is accordingly done. B
is entitled to retain the stone till he is paid for the services he has rendered
(i) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as
soon as it is finished, to give A three month's credit for the price. B is not entitled to
retain the coat until he is paid.
4. Right of general lien (Sec. 171). Bankers, factors, wharfingers, attorneys of a High Court and
policy brokers will be entitled to retain, as a security for a general balance of amount, any
 goods bailed to them in the absence of a contract to the contrary. By agreement other types of
bailees excepting the above given five may also be given five may also be given this right of
general lien.
5. Right to indemnity (Sec. 166). Bailee is entitled to be indemnified by the bailor for any loss
arising to him by reasons that the bailor was not entitled to make the bailment or to receive
back the goods or to give a direction respecting them. If the bailor has not title to the goods,
and the bailee in good faith, delivers them back to, or according to the directions of the bailor,
the bailee shall not be responsible to the owner in respect of such delivery. Bailee can also
claim all the necessary expenses incurred by him for the purpose of gratuitous bailment.
6. Right to claim compensation in case of faulty goods (Sec. 150): A bailee is entitled to receive
compensation from the bailor or any loss caused to him due to the failure of the bailor to
disclose any faults in the goods known to him. If the bailment is for hire, the bailor will be
liable to compensate even though he was not aware of the existence of such faults.
7. Right to claim extraordinary expenses (Sec. 158) : A bailee is expected to take reasonable
care of the gods bailed. In case he is required to incur any extraordinary expenses, he can hold
the bailor liable for such expenses.
8. Right of delivery of goods to any one of the several joint bailor of goods. Delivery of goods
to any one of the several joint bailors of goods will amount to delivery of goods to all of them
in the absence of any contract to the contrary.
Duties of the bailee
l. To take reasonable care (Sec. 151 & 152): 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 good
bailed. It will not make any difference whether the bailment is gratuitous for reward.
If any loss is caused
to the goods, in spite of such reasonable care by the bailee, he shall not be liable for the loss.
Bailee shall be held liable for losses arising due to his negligence.
Example
(i) A delivered to B certain gold ornaments for safe custody. B kept the ornaments in a
locked safe and kept the key in the case box in the same room. The room was on the
ground and was locked from outside, and therefore, was easily accessible to burglars.
The ornaments were stolen. It was held that the bailee did not take reasonable care,
and therefore, was liable for the loss (Rampal V. Gauri Shanker, 1952).
(ii) A deposited his goods in B's godown. On account of unprecedented floods, a part of
the goods were damaged. Held, B is not liable for the loss (Shanti Lal V. Takechand).
A bailee is liable to compensate the bailor for any damages done to the thing bailed by the negligence
of his servants acting in the course of the employment.
2. To return the goods. Bailee must return or deliver the goods bailed according to the direction
of the bailor, on the expiry of the time of bailment or on the accomplishment of the purpose
of bailment (Sec. 160).
Bailee shall be responsible to the bailor for any loss, destruction or deterioration of the goods from of
the date of the expiry of the contract of bailment, if he fails to return deliver or tender the goods at the
proper time (Sec. 161).
3. To return any increase or profit from the goods (Sec. 163). Bailee is bound to deliver to the
bailor any increase or profit which might have came from the goods bailed, provided the
contract does not provide otherwise.
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.
4. To use goods according the conditions of bailment (Sec. 154). Bailee must use the goods
according to the conditions of the contract of bailment or the directions of the bailor. He shall
be held liable for compensation to the bailor if any damage is caused to the goods because of
 his unauthorised use. Bailee must not do any act with regard to the goods bailed which is
inconsistent with the terms of the bailment, otherwise the

contract shall become voidable at the option of the bailor and bailee shall be held liable to
compensate and damages caused to the goods.
Example: A lends his 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 accidently falls and is injured. What remedy
has A against B?
A can claim damages from B for the injury caused to the horse from an unauthorised use. B in this
case has failed to use the horse according to the conditions of bailment, and therefore, he shall be
liable to pay compensation to the bailor for the damages caused to the horse because of his
unauthorised use.
5. Must not mix up the goods with his own goods (Sec. 155 & 156-157). Bailee is not entitled to
mix up the goods bailed with his own goods except with the consent of the bailor. 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).
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).
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).
Examples : (i) A bails two bales of cotton marked with a particular mark to B. B, without A's
consent, mixes the 100 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 in the separation of the bales and
any other incidental damages.
(ii) A bails a barrel of cape flour worth Rs. 45 to B. B without A's consent, mixed the flour
with country flour with country flour of his own, worth only Rs. 25 a barrel. B must
compensate A for his flour.
Must not set up an 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 and Bailee against Third Parties
1. Suit by bailor or bailee against a wrong-doer (Sec. 180). If a third person wrongfully deprives
the bailee of the use of possession of the goods bailed, or does them any injury, the bailee is
entitled to use such remedies as the owner might have in a like case if no bailment had been
made; and either the bailor or the bailee may bring a suit against a third person for such
deprivation or injury.
2. Appointment of compensation obtained by such suits (Sec. 181). Whatever is obtained by
way of relief or compensation in any such suit shall as between the bailor and bailee, be dealt
with according to their respective interests.
Rights and liabilities of the finder of goods
One who finds goods belonging to another and takes them in his possession is called the finder of the
goods. He rights and liabilities have been discussed in Secs. 168 and 169 of the Contract Act as
follows:
(i) A finder of the goods is free to take or not to take the goods found out under his
custody. A person who finds goods belonging to another and takes them into his
custody is subject to the same responsibility as a bailee.
(ii) Finder of goods is not entitled to bring a suit for the realisation of compensation for
 the trouble and expenses voluntarily incurred by him in preserving the goods and in
finding out the real owner. However, he can exercise his right of particular lien on the
goods found out and may refuse to deliver them to the real owner until he receives
the compensation for his trouble and expenses.
(iii) In case where the real owner of the goods has offered a specific reward for their
return of goods lost, the finder of the goods may sue for the realization of such
rewards and may also retain his possession ever the goods until he received the
reward with all other necessary costs.
(iv) Finder of the goods has no right to sell the goods found out except when all the
following conditions are satisfied.
(a) When the thing found out is commonly the subject of sale.
(b) When the owner cannot be found out with reasonable diligence or when the owner refuses to
pay the lawful charges of the finder.
(c) When the thing is in danger of perishing or losing the greater part of its value or when the
lawful charges of the finder in respect of thing found out exceed two-thirds of the value of the
goods.
Lien
Lien is a right of person to retain that which is in his possession and which belongs to another, until
the demands of the person in possession are satisfied.
Kinds of Lien
There are two kinds of liens: (a) particular lien, (b) general lien.
(A) Particular Lien:
It is a right to retain possession over those particular goods in connection with which the debt arose. It
is restricted to those goods which are subject matter of the contract and are liable for certain demands
of the person in possession of those goods.
According to Section 170 where the bailee has, in accordance with the purpose of the contract of
bailment, rendered any service involving the exercise of labour and skill in respect of the goods
bailed, he has, in the absence of a contract to contrary, a right to retain such goods in his possession
until he receives due remuneration for the services he had rendered in respect of them.
Besides the bailee, other persons who are entitled to exercise particular lien are unpaid seller of
goods, finder of goods, pawnee, agents, etc.
(B) General Lien:
It entitles a person in possession of the goods to retain them until all claims of the person in
possession against the owner of the goods are satisfied. It is not necessary that the
demands should arise only out of the articles detained under possession. General lien
is a kind of a special privilege which the law has granted only to few persons (i)
bankers, (ii) factors (iii) wharfingers, (iv) attorney of the High Courts, (v) policy
brokers, and (vi) others by agreement. These parties, can exercise general lien against
any goods under their possession and for any sum legally due on a general balance of
account. But where the goods are deposited for some special purposes, e.g., safe
custody, they will not come under the spell of general lien. This is because
acceptance of goods for, special purpose implied by excludes general lien

Example (i) K deposited certain jewels with the Madras Bank to secure certain debt. after
payment of this debt he demanded the return of these jewels from the bank. He was still
indebted to the bank for certain other debts. On the bank's refusal to return, it was held that he
was not entitled to recover unless he proved that the bank had agreed to give up its general
lien (Kunhan V. Bank of Madras, 1895).
(iii) A solicitor has a general lien on all the papers of the client in his possession in his
professional capacity as solicitor. He can claim a lien for all costs due to him from
the client but not for money loans (Re. Taylor).
 Pledge Contract.
Definition
Pledge is the bailment of goods as security for payment of a debt or performance of promise. Bailor
in this case is called the 'pawnor' and the bailee is called the 'pawnee' (Sec. 172).
Pledge by non-owners
Ordinarily only a person who is the real owner of the goods can make a valid pledge, but in the following
cases pledge made by non-owners will also be valid.
Pledge by a mercantile agent (Sec. 178). Where a mercantile agent is, with the consent of the owner, a
possession of goods or the documents of title to goods, any pledge made by him, when acting
in the ordinary course of business of a mercantile agent, shall be as valid as if he were
expressly authorised by the owner of the goods to make the same, provided that the pawnee
act in good faith and has not at the time of the pledge notice that the pawnor has no authority
to pledge.
2. Pledge by person in possession under voidable contract (Sec. 178 A). When the pawnor has
obtained possession of the goods pledged by him under a contract voidable under Section 19
or Section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee
acquired a good title to the goods, provided he acts in good faith and without notice of the
pawnor's defect of title.
3. Pledge where pawnor has only a limited interest (Sec. 179). Where a person pledges goods in
which he had only a limited interest, the pledge is valid to the extent of that interest.
Example: A finds a watch on the road and spends Rs. 25 on its repairs. He pledges it with B
for Rs. 50/-. The real owner can get the watch by paying Rs. 25 to the pledge.
4. Pledge by a co-owner in possession. If there are several joint owners of goods and goods are
in the sole possession of one of the co-owners with the consent of other co-owners, such a co-
owner can make a valid pledge of goods.
5. Pledge by seller or buyer in possession after sale: A seller who has got possession of goods
even after sale, can make a valid-pledge, provided the pawnees act in good faith.
Example: X buys goods from Y, pays for them, but leaves them in the possession of Y, and Y
then pledges the goods with Z who does not know of sale to X, the pledge is valid.
Similarly, if the buyer obtains possession of goods with the consent of the seller before payment of
price and pledges them, the pawnee will get a good title provided he does not have the notice of
seller's right of lien or any other right.
Rights and duties of the pawner

Right to receive goods till sole (Sec. 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 the
payment of the debt or the performance of the promise at the stipulated time he may redeem
the goods pledged at any subsequent time, before their actual sale of them, but he must in that case
pay, in addition, any expenses which might have arisen from his default.
Rights and duties of the pawnee

l. Right to receive payment of the debt or to obtain the performance of promise with interest and
expense (Sec. 173). Pawnee has a right to retain possession on the goods pledged till he
obtains payment of his debt interest on that debt and all other necessary expenses which he
might have incurred for the preservation of the goods pledged or in respect, of his possession.
2. Right of Particular lien (Sec. 174). Pawnee has no right to retain his possession over the
goods pledged for any debt or promise other than the debt or promise for which they were
pledged unless otherwise provided for, by a contract.
3. Right to receive extraordinary expenses (Sec. 175). Pawnee is also entitled to receive from
the pawnor any extraordinary expenses which he might have incurred for the preservation of
 the goods pledged.
4. Pawnees right in case of default of the pawnor (Sec. 176). In the case of default by the
pawnor in the payment of debt or the performance of promise at the stipulated time or on
demand or within reasonable time, the pawnee can exercise the following two rights:
(a) He has a right to bring a suit on the debt or promise and can retain the goods pledged
as a collateral security.
(b) He has also a right to sell the goods pledged after giving reasonable notice of sale to
the pawnor.
He has a right to claim any deficit arising from the sale of the goods pledged from the pawnor. He
will have to return to the pawnor any excess obtained by the sale of goods pledged beyond the amount
necessary to pay the debt and other expenses due.
5. Pawnee must not use the goods pledged. He must not use goods pledge unless they are such
as will not deteriorate by wear.

Besides the above rights and duties, all other rights and duties of the bailor and bailee apply equally to
pawnor and the pawnee

Contract Of The Agency

Definition
When a person employs another person to do any act for himself or to represent him in dealing with third
persons, it is called a 'Contract of Agency'. The person who is so represented is called
the 'principal' and the representative so employed is called the 'agent (Sec. 182). The duty of the agent is to
enter into legal relations on behalf of the principal with third parties. But, by doing so he himself does not
become a party to the contract to the contract not does he incur any liability under that contract. Principal shall
be responsible for all the acts of his agent provided they are not outside the scope of his authority

Competence of the parties to enter into a contract of agency

The person employing the agent must himself have the legal capacity or be competent to do the act
for which he employ the agent. A minor or a person with unsound mind cannot appoint an agent so as
to be legally represented by him (Sec. 183). But an agent so appointed need not necessarily be
competent to contact (Sec: 184) and hence minor or an insane can be appointed as an agent he can
bring about legal relations between the principal and the third party but such an incompetent agent
cannot personally be held liable to the principal.
Consideration not required: Contract of agency requires no consideration. It comes under the category
of those contracts which law has declared to be valid without consideration (Sec. 185).
Creation of Agency

Agency may be created by any of the following ways:

1. Expressly (Sec. 187)

When an agent is appointed by words spoken or written, his authority is said to be express.
2. Impliedly (Sec. 187)

When agency arises from the conduct of the parties or inferred from the circumstances of the case, it
is called implied agency.
Example: A of Calcutta has a shop in Delhi. B, the manager of the shop, has been ordering and
purchasing goods from C for the purpose of the shop. The goods purchased were being regularly paid
for but of the funds provided by A. B shall be considered to be an agent of A by his conduct.
Partners, servants and wives are usually regarded as agents by implications because of their
relationship.
Wife as an implied agent to her husband
Where the husband and wife are living together in a domestic establishment of their own, the wife shall have
an implied authority to pledge the credit of her husband for

necessaries. The implied authority can be challenged by the husband only in the following
circumstances.
(1) The husband has expressly forbidden the wife from borrowing money or buying goods on
credit (Debenham V. Mellon (1880) 6 A.C. 24).
(2) The articles purchased did not constitute necessities.

(3) Husband had given sufficient funds to the wife for purchasing the articles she needed to the
knowledge of the seller (Miss Gray Ltd. V. Cathcort (1922) 38 T.L.R. 562).
(4) The creditor had been expressly told not to give credit to the wife (Etheringtion V. Parrot
(1703) Salia 118).
(a) Where the wife lives apart from husband without any of her fault, she shall have an
implied authority to bind the husband for necessaries, if he does not provide for her
maintenance.
3. Agency by necessity

Under certain circumstances, a person may be compelled to act as an agent to the other,
e.g. master of the ship can borrow money at a port where the owner of the ship has not agent,
to carry out necessary repairs to the ship in order to complete the voyage. In such a case of
necessity, person acting as an agent need not necessarily have the authority of the principal.
However, the agent must act under pressing conditions and for the benefit of the principal.
Example: The master of the ship on finding that the cargo is rapidly perishing is entitled to
dispose it of at the best price available so as to bind the consignor as an agent by necessity.
4. Agency by estoppel (Sec. 237)

When an agent has without authority, done acts or incurred obligations to third persons on
behalf of his principal, the principal is bound by such acts and obligations if he has by his
words or conduct induced such third person to believe that such acts and obligations were
within the scope of the agent's authority.
Example: A says to B in the presence of and within the hearing of C that he is C's agent. C remains mum.
B supplies goods of Rs. 10,000/- to A taking him as C's agent. C's responsible for the payment of price of
these goods

5. Agency by ratification (Sec. 196 to 200)

Ratification means subsequent acceptance and adoption of an act by the principal originally
done by the agent without authority. According to section 196. "Where acts are done by one
person on behalf of another but without his knowledge or authority, he may check to ratify or
to disown such act. If he ratifies them, the same effects will follow as if they had been
performed by his previous authority."
Example: The manager of a company purporting to act as an agent on the company’s behalf
but without its authority, accepted an offer by L, the defendant L subsequently withdrew the
offer, but the company ratified the manager's acceptance. L was held to be bound by the
acceptance. His revocation of the offer was held to be invalid. Ratification relates back to the
due when the agent had first acted and, therefore, subsequent revocation shall have no effect.
*
In order that ratification may be legal and valid, it must satisfy the following essentials.
(1) The act must be done in the name of the principal.
(2) Principal must have been in existence and competent to contract at the time when agent acted
 on his behalf as well as on the date of ratification.
(3) The act must be legal which the principal must be competent to do.
(4) Ratification must be with full knowledge of all the material facts (Sec. 198).
(5) Ratification must relate to the whole act and not to a part of it. Ratification of a part of the act
will not be valid (Sec. 199).
(6) There can be no valid ratification of an act which is to the prejudice of a third person (Sec.
200).
Example: A holds a lease from B, terminable on three months’ notice, C, an unauthorised person
gives notice to termination to A. The notice cannot be ratified by B, so as to be binding on A.
(7) Ratification of an act must be made, either within the time fixed for this purpose or within a
reasonable time after the contract was entered into by the agent.
Extent of agent's authority (Sec. 186 to 189)
Principal is responsible for the acts of the agent done by him within the scope of his authority. The
authority of an agent may be express or 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 (Sec. 186 to 187)
Example: A owns a shop in Serampur, living himself in Calcutta, and visiting the shop occasionally.
The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the
purpose of the shop end of paying for them out of A's funds with A's knowledge. B had an implied
authority from A to order goods from C in the name of A for the purposes of the shop.
The authority of an agent extends to the performance of every lawful thing necessary to do an act for
which he is appointed. When he is appointed to carry on business, he can do every lawful thing
necessary for the purpose or as is usually done in the course of conducting such business (Sec. 188).
An agent has authority in an emergency to do all such acts for the purpose of protecting the principal
from loss as would be done by a person of ordinary prudence, in his own case, under similar
circumstances, the emergency must be real not permitting the agent of communicate with the
principal (Sec. 189).
Example: A consigns provisions to B at Calcutta, with directions to send them immediately to C at
Cuttack. B may sell the provisions at Calcutta, if they will not bear journey to Cuttack without
spoiling.
Delegation of agent's authority (Secs. 191 to 195)

The general principal is "A delegate cannot further delegate". (Delegatus non-protest delegate). An
agent, himself being the delegate of his principal, cannot further delegate his powers. However, under
certain circumstances the agent may delegate some or all of his powers to another person. Such
person may be either a sub-agent or a substituted agent.

Sub-agent

A 'sub-agent" is a person employed by and acting under the control of the original agent in the
business of agency (Sec. 191). In the following cases an agent can appoint a sub-agent unless he is
expressly forbidden to do so:-
(i) When the ordinary custom of trade permits the appointment of a sub-agent.
(ii) When the nature of the agency business requires the appointment to a sub-agent.
(iii) When the act to be done is purely ministerial and involves no exercise of discretion or
confidence, e.g. routine clerks and assistants.
When the principal agrees to the appointment of such a sub-agent expressly or impliedly

(iv) When some unforeseen emergency has arisen.

The relations of the sub-agent to the principal depend on the question whether the agent had an
 authority to appoint the sub-agent and whether sub-agent is properly appointed.
Where the sub-agent is properly employed the principal is, so far as regard third persons, represented
by the sub-agent and is bound by and is responsible for his acts as if he was an agent originally
appointed by the principal, therefore, will be responsible for the acts of a properly appointed sub-
agent.
Where an agent, without having authority to do so, has appointed a person to act as a sub-agent, i.e., a
sub-agent is improperly appointed, the principal is not represented by or responsible for the acts of the
sub-agent as between himself and the third parties. The sub-agent is also not responsible to the
principal for anything. The agent is responsible for the acts of the sub-agent both to the principal and
to the third persons (Sec. 193).
Substituted agent

Where an agent holding an express or implied authority to name another person to act in the business
of the agency, has accordingly, named another person such person is not a sub-agent but a substituted
agent. The substituted agent shall be taken as the agent of principal for such part of the work as is
entrusted to him (Sec. 194).
Example: A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the
purpose. B names C, an auctioneer to conduct the sale. C is not a sub-agent, but is A's agent for the
conduct of the sale.
In selecting substituted agent for his principal an agent is bound to exercise the same amount of
discretion as a man of ordinary prudence would exercise in his own case, and if he does this, he is not
responsible to the principal for acts or negligence of the substituted agent.
Example: A instructs B, a merchant, to buy a ship for him. B employed a ship surveyor of good
reputation to choose a ship for A. The surveyor makes the choice negligence and the ship turns to be
unseaworthy and is lost. B is not, but the surveyor is responsible to A.
Effect of agency on contracts made with third persons

The consequences of agents' acts, done in the course of his employment, in relation to third parties
can be studied under the following three heads:
When the agent expressly contracts as an agent for a named principal

1. When the agent expressly contracts as an agent for an unnamed principal.

2. When the agent acts for an undisclosed principal.

1. When the agent contracts for a named principal

(i) Acts within authority of agent. The principal is bound by the acts done by the agent
within his actual authority. He will also be liable to the third parties for the acts of the
agent which may be beyond his actual authority but which come within his ostensible
or apparent authority unless the third party knows of the limitations of the agent's
apparent authority.
Example: A leaves a watch with B, an auctioneer, with the instruction that it is not to
be sold below Rs. 100. B sells the watch to C for Rs. 80, who does not know about
the special instruction. A cannot set aside the contract.
(ii) Acts beyond agent's authority (Sec. 27) "When an agent does more than he is
authorised to do and when the part of what he does, which is within his authority, can
be separated from the part which is beyond his authority, so much only of what he
does as is within his authority, is binding as between him and his principal."
Example: A being an owner of a ship and cargo, authorises B to procure an insurance
for 4,000 rupees on the ship. B procures a policy of Rs. 4,000 on the ship and another
for the like sum on the cargo. A is bound to pay the premium for the policy on the
ship, but not the premium for the policy on the cargo.
 Where an agent does more than he is authorised to do, and what he does beyond the
scope of his authority cannot be separated from what is within it, the principal is not
bound to recognise the transaction (Sec. 228).
Example: A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs
for one sum of Rs. 6,000. A may repudiate the whole transaction.
(iii) Liability of principal inducing belief that agents unauthorised acts were authorised.
When agent has, without authority, done acts or incurred obligations to a third person
on behalf of his principal, the principal is bound by such acts or obligations if he has
by his words or conduct induced such third persons to believe that such acts and
obligations were within the scope of the agent's authority (Sec. 37).
Example: A consigns goods to B for sale, and give him instruction, not to sell under a fixed
price. C, being ignorant of B's instructions, enters into a contract with B to buy the
goods at a price lower than the reserved price. A is bound by the contract.

(iv) Notice to the agent. "Any notice given to or information obtained by the agent,
provided it be given or obtained in the course of business transacted by him for the
principal shall be between the principal and the third parties, have the same legal
consequences as if it had been given to or obtained by the principal." (Sec. 29).
Example: A is employed by B to buy from C certain goods of which C is the apparent owner
and buys them accordingly. In the course of the treaty for the sale a learns that goods
really belonged to D, but B is ignorant of that fact. B is not entitled to set off a debt
owing to him from C against the price of the goods.
(v) Misrepresentation or fraud by an agent: The principal is liable for misrepresentation
or fraud of the agent committed in the course of the employment or within the scope
of employment or within the scope of agent's apparent authority (Sec. 38). It is
immaterial for whose benefits such fraud or misrepresentation has been done.
Of course, the principal is not liable for misrepresentation made or fraud committed by his
agent in matters which do not fall in agent's authority.
(vi) Admission made by an agent: The law considers the principal and agent as one
person and, therefore, any admission made by the agent in the course of agency
business will be taken to have been made by the principal and the principal will be
bound by that admission. In a case where the station master reported to the police that
one of the porters had run away with the parcel, it was held that admission made by
the station master was admission made by the railway company itself and, therefore,
it was responsible to compensate for the loss.
2. When the agent contracts for an unnamed principal
An agent is not personally liable to third parties when he has disclosed the fact that he is an
agent but has not disclosed the name of his principal to them. The third parties can
proceed only against the principal and not against the agent. However, if the agent
declines to disclose the identity of his principal then asked by the third parties, they
can sue him personally also.
2. When the agent contracts for an undisclosed principal

When an agent makes a contract with a person who neither knows, nor has reason to suspect that he is
an agent, his principal is termed as an undisclosed principal. The position of the third party, the
principal and the agent in such a case is as follows:
(i) If the, third party comes to know the existence of the principal before obtaining
judgement against the agent, he may sue either the principal or the agent or both. If
he decides to sue to the principal, he must allow the principal the benefit of all
payments received by him (third party) from the agent (Sec. 231).
Example: A enters into a contract with B to sell him 100 bales if cotton and receive
Rs. 500 in advance from B afterwards he (A) discovers that B was acting as agent for
C.A may sue but he must give credit to C for Rs. 500 paid by his agent, B to him.
(ii) The principal, if he likes, may intervene and sue the third party. In such a case he can
obtain such performance subject to the rights and obligations subsisting between the
 agent and the other party to the contract. (Sec. 232).
Example: A who owes 500 rupees, to B, sells 1000 Rupee's worth of rice to B. A is
acting as agent for C in the transaction. but B has no knowledge nor reasonable
ground of suspicion that such is the case. C cannot compel B to take the rice without
allowing him to set off A' debt.
(iii) Para 2 of Sec. 231 states that the principal discloses himself before the contract is
completed, the other contracting party may refuse to fulfil the contract if he can show
that, ifhe had known who was the principal in the contract, or if he had known that
agent was not a principal, he would not have entered into the contract.
(iv) When a person who has made a contract with an agent induces the agent to act upon
the belief that the principal only will be held liable, or induces the principal to act
upon the belief that the agent only will be held liable, she cannot afterwards, hold
liable the agent or principal respectively (Sec. 234).
G authorised L & Co. to buy goods for him from A. later on G himself approached A
for purchasing them. A knew that L & Co. were buying goods for G but preferred to
treat L & Co. as principal and debited their account L & Co. failed to pay the money
and A sued G for payments. It was held that A was not

entitled to recover payment from G because he (a) had shown a clear intention from
the beginning that he had given credit to the agent alone, and he also knew of the
principal (Addison v. Gandaseqni (812).
(v) A person untruly representing himself to be the authorised agent of another, and
thereby inducing a third person to deal with him as such agent, is liable, if his alleged
employer does not ratify his acts, to make compensation to the other in respect of any
loss or damage which he has incurred by so dealing (Sec. 235).
Example: A and B, directors of a company borrowed money from D on its behalf.
The company had no powere to borrow money under its memorandum of association.
D was unable to recover the amount of the loan from the company, and he therefore,
sued the directors. They were held liable (Collen V. Wright, 1857).
Personal Liability, Rights and Duties of an Agent Personal
liability of the agent
Generally an agent is not personally responsible for the contracts made by him on behalf of his principal.
But he incurs personal liability in the following cases:
l. Foreign principle: When the contract is made by the sale or purchase of goods for a merchant
resident abroad, in case of breach of contract the third party can make the agent personally
liable.
2. Undisclosed principal: When the agent does not disclose the name of the principal the third
party can make the agent personally liable if he has relied upon the responsibility of the
agent.
3. Principal cannot be sued: Where the principal though disclosed cannot be sued, e.g. foreign
sovereign, ambassador, etc., or the principal is disqualified from contracting though otherwise
competent to contrast and this inability of the principal was not communicated to the third
party at the time of contracting, he can hold the agent personally liable.
Personal liability by agreement: When the agent expressly by agreement or impliedly by
conduct undertakes personal liability of the contract
4. Agent's liability for breach of warranty: When the agent acts without or beyond his authority
and in this was commits a breach of warranty of authority, he can be hold personally liable.
If the agent knows that he is exceeding his authority, the breach of warranty will amount to
deceit (Polhill V. Walter (1832) 3 B & Ad. 114).
5. Agent signs the contract in his own name: An agent who signs a Negotiable Instrument
 e.g. Bills of Exchange, Promissory Notes etc., his own name without making it clear that he is
signing as an agent, will be held, personally liable.
6. Agency coupled with interest: Where the contract of agency relates to a subject matter in
which the agent has a special interest, agent shall be personally liable to the extent of his
interest since he shall be a principal for that interest.
7. Non-existent principal: If an agent acts for a non-existent principal, he shall be held
personally liable as if he had contracted on his own account, e.g., promoters entering into
contracts on behalf of a company yet to come into existence.

Rights of an Agent

l. Right to claim reimbursement for expenses: Agent has the right to retain, out of the money
received on behalf of the principal, money advanced or expenses properly incurred in
conducting the agency business (Sec. 217). The agent may have paid the money at the request
of the principal, or on account of the understanding implied by the terms of the agency or
through mercantile usage.
2. Right to receive remuneration: He has also a right to claim remuneration as may be payable to
him for acting as an agent. In the absence of any contract to the contrary, this right to claim
remuneration will arise only when he has carried out the object of the agency in full without
being guilty of misconduct (Sec. 219).
An agent who is guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of the part of that business which had been misconducted (Sec. 220).
Example: A employs B to recover 1,00,000 rupees from C, and to lay it out on good security.
B recovers, 1,00,000 rupees and lays out 90,000 rupees on good security, but lays out
10,000 rupees on security which he ought to have known to be had, whereby A losses
2,000 rupees. B is entitled to remuneration for recovering the 1,00,000 rupees
and for investing the 90,000 rupees. He is not entitled to any remuneration for investing the
10,000 rupees and the he must make good the 2,000 rupees to A.
3. Right to indemnification against consequences of all lawful acts : An agent has a right to be
indemnified by the principal against the consequences of all lawful acts done in exercise of
his authority. (Sec. 222).
Example: B, a broker at Calcutta, by the orders of A, merchant there, contracts with C for the
purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil and C sues B. B
informs A, who repudiates the contract altogether. B defends, but unsuccessfully, and has to
pay damages and incurs expenses. A is liable to B for such damages, costs and expenses.
4. Rights of indemnification against consequences of acts done in good faith: An agent has a
right to be indemnified by the principal for any compensation which he may be required to
pay to the third parties for injuries caused to them by his wrongful acts within the scope of his
actual authority done in his good faith, i.e., without any wrong or dishonest intentions (Sec.
223).
Example: B at the request of A, sells goods in the possession of A, but which A had no right
to dispose of B does not know his, and hands over the proceeds of the sale to A. Afterwards
C, the true owner of the goods sues B and recover the value of the goods and cost. A is liable
to indemnify B for what he has been compelled to pay to C and for B's own expenses.
But where one person employs another to do an act, which is criminal, the employer is not
liable to the agent either upon an express or an implied promise, to indemnify him against the
consequences of the act (Sec. 224).
Example: A employs to B to beat C, and agrees to indemnify him against all consequences of
the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to
indemnify B for those damages.,
Right of indemnification for injuries caused by Principals neglect: An agent has a right to
claim compensation from the principal for injuries caused to him by the negligence or
 want to skill on the part of the principal (Sec. 225)
Example: A employs Bas a bricklayer in building a house, and puts up the scaffolding
himself. The scaffolding is unskilfully put up, and B is in consequence hurt. A must make
compensation to B.
5. Right of particular lien: An agent is entitled to retain under the possession both movable and
immovable of the property of the principal received by him until the amount due to him for
commission, disbursements and services has been paid or accounted for him, provided the
contract does not provide otherwise (Sec. 221).

Duties of an Agent

l. To follow the instructions of his principal: The agent must conduct the business of the principal
according to the directions of the latter. In the absence of any such directions, he must follow
the custom of the business prevailing in the locality where the agent is conducting such
business. If the agent acts otherwise and the principal sustains a loss, the former must
compensate the latter for it. He will have to account for the profits to the principal if there are
any. He will also lose his remuneration (Sec. 211).
Example: A, an engaged in carrying on for B a business in which it is the custom to invest
from time to time, at interest, the money which may be in hand omits to make such
investment. A must take good to B the interest usually obtained by such investment.
2. Duty to act, with skills and diligence (Sec. 212): The agent must conduct the business of
agency with as much skill as is generally possessed by persons engaged in similar business
unless the principal has notice of his want of skill.
Example: A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit without, making the proper and usual enquires as to the solvency of B. B. at the time of
such sale is insolvent. A must make compensation to his principal in respect of any loss
thereby sustained.
3. Duty to render accounts: An agent is bound to render proper accounts to his principal on
demand. He must explain those accounts to the principal and produce the vouchers in support
of the entries (Sec. 213).
Duty to communicate with the principal: In cases of difficulty, it is the duty of the agent to
use all reasonable diligence in communicating with the principal and in seeking to
obtain the instructions. It is only in an emergency where there is no time to
communicate that he may act bonafide without consulting the principal (214

4. Duty not to deal on his own account: The relationship of principal and agent is of a fiduciary
character. An agent, therefore, should not deal on his own account and should not do anything
which may indicate a clash between his interest and duties. An agent shall have to pay all the
benefits to the principal, which may have resulted to him from his dealings on his own
account in the business of the agency without the knowledge of the principal (Secs. 215 &
216).
Example: A directs B, his agent, to buy a certain house for him. B tells A that it cannot be
bought, any buys the house for himself. A may, on discovering that B has bought the house,
compel him to sell it to A at the price he gave for it.
5. Duty not to delegate his authority: An agent cannot delegate his authority to another person
unless authorised or warranted by the usage of trade or nature of the agency. A work
entrusted to the agent must be done by him.
6. Duty to protect the interest of principal or his legal representative in the event of principals
unsoundness of mind or his death: When an agency is terminated by the principal dying or
becoming of unsound mind, the agent is bound to take on behalf of the representatives of his
late principal, all reasonable steps for the protection and preservation of the interests entrusted
to him (Sec. 209).
 7. Duty to pay sums received for principal: The agent is bound to pay to his principal all sums
received on his account after deducting for his own claim (Sec. 218).
Rights and Duties of the Principal

The agent's duties are principal's right and agent's rights are principal's duties.

Termination of Agency

Agency may be terminated by any of the following ways.

By Act of Parties
By agreement between the principal and agent: In some cases contract of agency itself may
contain provisions as regard the termination of agency. They may be express or
implied, which may be inferred from the circumstances of the case and terms of the
contract.
1. By revocation of agency by the principal: Principal may either expressly or impliedly, after
giving reasonable notice, revoke the authority of the agent before it has been exercised by the
latter so as to bind the former (Sec. 207).
Example: A empowers B to let A's house. Afterwards A lets it himself. This is an implied
revocation of B's authority.
Principal shall have to pay compensation to the agent for any earlier revocation of his authority
without sufficient cause before the period for which it was given to him.
Irrevocable agency: However, the principal will not be entitled to revoke the authority of the
agent in the following circumstances:
(i) Where the agency is coupled with interest: An agency where the agent himself has an
interest in the property which form the subject matter of agency is said to be agency
coupled with interest. Such an agency cannot be revoked.
Example: A gives authority to C to sell A's land and to pay himself out of the
proceeds the debt due to him from A. A cannot revoke this authority, nor can it be
terminated by his insanity or death.
(ii) Where authority has been partly exercised by the gent: If the authority has partly been
exercised by the agent, the principal cannot revoke the authority of the agent so far as
regards such acts and obligations as arise from acts already done in the agency (Sec.
204).
Example: A asks B, his agent, to pay out of A's funds a sum of Rs. 1,000 to C in two
equal instalments. By a subsequent letter A revokes B's authority. Before this
revocation B had already paid a sum of Rs. 500 to C. A is bound by this payment.
(iii) Where agent has incurred personal liability: Where the agent has purchased bounds in
his personal name for the principal has thereby made himself personally liable, the
principal cannot revoke agent's authority.
Example: A authorised B to buy 1,000 bales of cotton on account of A and to pay for it but of
A's money remaining in B's hands B buys, 1,000 bales of cotton in his own name, so
as to make himself personally liable for the price. A cannot revoke B's authority so
far as regards payment for the cotton
2. By renunciation of business by the agent: Agent, after giving reasonable notice to the
principal, may renounce the business of agency. In case the contract of agency is entered into
for a fixed period, agent shall have to pay compensation to the principal for his earlier
renunciation of the business of agency.
By Operation of Law

1. By insolvency of the principal: The contract of agency will come to an end when the principal
becomes insolvent and the fact of his insolvency comes to the knowledge of the agent. As
 against third persons, the agency will terminate when it comes to their knowledge. Insolvency
of an agent will not lead to the termination of the contract of agency.
2. Destruction of the subject matter of the contract of agency: The contract of agency will come
to an end when the subject matter of the agency will come to an end or when it ceases to exist
or when the principal is deprived of his powers on the subject matter of the contract of
agency.
3. By the completion of the agency - For which an agency is constituted may be terminated once
the agency's task has been completed.
4. Insanity or Death of principle or agent- Section 209 of the Indian Contract Act deals with
situations where the principal or agent is deceased or insane. The firm's business or agency
may be dissolved in the event of the death of the principle or agent.
5. Principal becoming an alien enemy: Breaking out of war between two countries in one of
which resides principal and in the other resides the agent, shall cause the termination of the
authority of an agent.
When termination of agents authority takes effect as to agent, and as to third person: The termination
of the authority of an agent does not, so far as regards the agent, take effect before it becomes known
to him, or so for as regards third persons, before it becomes known to them. (Sec. 208).
Agent's duty on termination of agency by principal's death or insanity when an agency is
terminated by the principal dying or becoming of unsound mind, the agent is bound
to take on behalf of the representatives of his late principal, all reasonable steps for
the protection and preservation of the interests entrusted to him (Sec. 209).
Termination of sub-agents authority: The termination of the authority of an agent causes the
termination (subject to the rules herein contained regarding the termination of an
agent's authority) of the authority of all sub-agents appointed by him (Sec. 210).