UNIT I

LAW OF CONTRACT: DESCRIPTIVE NOTES

QUES.1- Define a contract of indemnity .how does a contract of indemnity differ from a
contract of guarantee?
Ans. Contract of indemnity—Contract of indemnity has been defined under section 124 of the
contract act as follows: A contract by which one party promises to save the other from loss
caused to him:

(i)By the conduct of the promisor himself or

(ii)By the conduct of any other person, is called a contract of indemnity.

contract of indemnity mean—The term ‘indemnity ‘means making somebody safe or paying
somebody back .Thus indemnity is an act to compensate or protect somebody against loss or to
make good the loss suffered .The contingency upon which the whole contract of indemnity
depends is the event of suffering loss by the other party .

1-The party who gives indemnity i.e. who promises to compensate for the loss is called
indemnifier.

2-The party for whose protection or safety the indemnity is given is called indemnified or
indemnity holder.

Promisor is known as indemnifier and

The promisee is known as indemnity holder or indemnified

For example—‘P’ contract to indemnify ‘Q’against the consequences of any proceeding which
‘Y’may take against ‘Q’ in respect of a certain sum of [Link] is a contract of indemnity.

Example 2—P went to the cinema in golcha theatre and kept his scooter at the golcha vehicle
stand .When the show was over .P came out and found that he had lost the token given by the
gate keeper of the stand. The gate keeper refused to release P’s scooter without receiving the
token back P contracted with R, the contractor of the stand, to indemnify R against any loss
which R will suffer in case any other person claims that scooter in future .This contract is a
contract of indemnity .

IN ENGLISH LAW-Indemnity means a promise, express or implied to save a person harmless

from the consequences of an act. In Adamson [Link] (1827) The plaintiff ,an auctioneer sold
certain cattle on the instruction of the defendant which later turned out not belonging to the
defendant but to another person. That another person made the auctioneer liable and auctioneer
in return sued the defendant for indemnity for the loss suffered by the plaintiff. The court laid
down that the plaintiff having acted on the request of the defendant was entitled to assume that if,
what he did turn out to be wrongful, he would be indemnified by the defendant.
SCOPE OF DEFINITION IN INDIAN LAW:-The scope of definition of ‘indemnity’ is
restricted in India as compared to English law. Under Indian law the promise to indemnify is
limited to cases where loss is caused by the promisor himself and by any other person .The
definition does not cover cases of loss arising from accidents like fire ,natural consequences
[Link] Indian law ,loss must be caused by human intervention . Therefore in India, contract of
insurance are covered under contingent contract and not under contract of indemnity.

IMPORTANT FEATURE OF AN INDEMNITY

-A contract of indemnity may be express or implied:-When a person expressly promises to

compensate the other from loss, it is termed as express indemnity. The contract of indemnity is
said to be implied when it is to be inferred from the conduct of the parties or from the
circumstances of the cases.

For example-The relation between the principal and the agent.

RIGHTS OF INDEMNITY-HOLDER SEC-125

Rights of indemnity-holder when he is compelled to pay:

-According to section 125 of the Indian contract Act, when the indemnity -holder is held liable to
pay damages, then he becomes entitled to recover the compensation from the indemnifier. The
indemnity –holder has the right to recover the following from the indemnifier by way of
compensation, if he has acted within the scope of his authority.

1-All damages which he may be compelled to pay:-The indemnity –holder is entitled to

recover from the indemnifier all damages which he has paid in any suit in respect of any matter
to which the promise to indemnifies applies.

2-All costs which he may be compelled to pay:-The indemnity –holder is entitled to recover
from the indemnifier all costs which he has paid in bringing or defending any suit in respect of
the contract of indemnity .for availing this right he has to satisfy:

(i) That he has not acted contrary to the orders of the indemnifier and

(ii) That he has acted like a prudent man would have acted under similar circumstances in his
own case had there been contract of indemnity or

(iii) That he was authority by the indemnifier to bring or defend the suit

3-All sums which he may have paid in compromise of any such suit:-The indemnity-holder is
entitled to recover from the indemnifier all the amount which he has paid under the terms of any
compromise of any such suit for availing this right he has to satisfy:

(i) That the compromise was not contrary to the orders of the indemnifier and
 (ii) That in compromising the suit he has acted like a prudent man would have acted under
similar circumstances in his own case had there been no contract of indemnity or

(iii)That he was authorized by the indemnifier to compromise the suit.

COMMENCEMENT OF INDEMNIFIER’S LIABILITY

The Indian contract act does not state the time of commencement of the liability of indemnifier
under the contract of indemnity. Moreover, different high court have been observing different
rules on this question .however a view which is based on the principle of equity has now become
a settled law in this connection .The view is that “if the indemnity-holder had incurred a liability
and that liability is absolute, he is entitled to call upon the indemnifier to save him from that
liability and pay it off .Gajanan moreshwar vs moreshwar madan [Link] other words the
liability of indemnifier commences as soon as the liability of indemnity-holder becomes
absolute.

CONTRACT OF GUARANTEE

Section 126 defines contract of guarantee:-guarantee can be defined as an agreement by which

one person undertakes to discharge the liability in case another person makes default .section 126
defines contract of guarantee, surety ,principal debtor ,creditor. According to section 126 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 surety.

The person in respect of whose default the guarantee is given is called the principal debtor.

The person to whom the guarantee is given is called the creditor.

For example:-A asks B to lend Rs 1 lakh to C and undertake a guarantee that if C fails to pay the
amount A will pay. This is a contract of guarantee in which A is the surety B is the creditor and
C is the principal debtor.

DIFFERENCE BETWEEN INDEMNITY AND GUARANTEE

Contract of indemnity Contract of guarantee

1-There are two parties i.e. indemnifier 1-There are three parties [Link], principal,
and indemnity-holder or indemnified debtor and surety
2-There is only one contract, between 2-There are three contracts .one between creditor
indemnifier and indemnified. and principal debtor, one between creditor and
surety and one between surety and principal debtor.
3-The nature of contract is for 3-The nature of contract is for security of the
reimbursement of loss. creditor.
4-An indemnifier cannot sue a third party 4-surety can proceed against principal debtor after
for loss in his own name .he can bring discharging the debt due.
such suit in the name of indemnified only
5-The liability in case of indemnity is 5-The liability is subsisting .the liability Arises
contingent. when the guarantee is acted upon ,though it remains
suspended until the principal debtor makes default .
6-The liability of the indemnifier is 6-The liability of the surety is secondary and arises
primary i.e. he undertakes to be liable only when the principal debtor makes a default.
when the contemplated situation is there .

CONTRACT OF GUARANTEE

QUES-2. Define the contract of guarantee .state its object and main essential features of
contract of guarantee.

ANS-Guarantee can be defined as an agreement by which one person undertakes to discharge the
liability. In case another person makes default. Section 126, define contract of guarantee, surety,
principal, debtor, creditor. According to the section 126. 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 surety . the person in respect of whose default the guarantee is
given is called the principal debtor. The person to whom the guarantee is given is called creditor.

For example –A asks B to lend ₹1,00,00 to C and undertake a guarantee that if C fails to pay the
amount A will pay, this is a contract of guarantee in which A is the surety B is the creditor
and C is the principal debtor

Object:- The object of the contract of the guarantee is to provide additional security to the
creditor in the form of promise by the Surety to fulfill a certain obligation. In case the principal
debtor fails to do so, the function of guarantee is to enable a person to get a loan, good on credit,
etc.

Main essential features of contract of guarantee:-

1-Three parties and three agreements:-Every contract of guarantee has three parties known as
creditor, Principal debtor and surety. Moreover, such a contract involves three agreements as
follows:-

(I) Agreement between the creditor and the principal debtor which gives rise to the debt
guaranteed.

(II) Agreement between the surety and the creditor in which the surety guarantee to pay the debt
in case of default in payment by the principal debtor and

(III) agreement between the surety and the principal debtor which is either express or implied by
which principal debtor undertakes to indemnify the surety in case the principal debtor default in
payment of the debt.
2-Concurrence of the three parties: - the contract of guarantee requires concurrence of all the
three parties, namely the creditor, the principal debtor and the surety.

For example- X and Y enter into a shop of ready –made garments owned by Z .X requests Z to
deliver five shirt to Y on credit. Z says I can give the shirts on credit if you(X) give guarantee for
the payment” then X agrees to guarantee the payment. This is a contract of guarantee where Z
(creditor) Y (principal debtor) and X(surety). All agree in opinion for the credit sale on the
ground of guarantee.

3- Existence of primary liability—-there must be an existing primary liability which is

enforceable by law. In other words, there must be someone other than the surety, who is
primarily liable (i.e. who is liable as principal debtor). If there is no primary liability, there
cannot be a contract of guarantee. However, a guarantee given for the debt owed by a minor is an
exception to this rule of existence of a primary liability. as the minor cannot be made primarily
liable to pay the debt. Therefore, in such cases, the surety himself is primarily liable.

Case –kashiba vs shripal (1985) in such a case ,the surety is regarded as principal debtor &is
personally liable to pay the debt ,although the principal debtor (minor etc.)is not liable to pay.

For example- X gives guarantee to Y for the payment of a time- barred that due from Z. this is
not a valid contract of guarantee because the primary liability between Y and Z is not
enforceable by law. (The debt is Time barred). In case X pays the amount he cannot recover it
from Z.

4-All these of a valid contract must be fulfilled:- being a contract, The contract of guarantee
must fulfill all the essential requirements of a valid contract such as lawful constitution and
object, competent party, free, consent etc. However the two exceptions to this rule are to be
noted as follows.

(I)-then capacity of the principal debtor does not affect the validity of a contract of guarantee-
although the creditor and the surety must be competent to enter into a contract, yet the principal
debtor may be incompetent to contract, For example, he may be a minor. in such a case the
contract of guarantee does not become invalid, and the surety is regarded as the principal debtor
and is personally liable to pay the debt Even though the principal debtor( minor etc) is not liable.
Case –kashiba vs shripal (1985) in such a case ,the surety is regarded as principal debtor &is
personally liable to pay the debt ,although the principal debtor (minor etc.)is not liable to pay.

for example-X and Y are the director of a company. They guarantee the loan of 50,000 taken by
the company from Z. taking loan of such AN amount is ultra virus (i.e. beyond the powers of )
company. Though the company (the principal debtor) is incompetent to take the loan yet X and
Y shall be held responsible to repay the amount to Z as a principal.
(II) It is not necessary that there should be a direct consideration between the surety and the
creditor:-although the contract of guarantee must be supported by consideration, yet it is not
necessary that there should be direct consideration between surety and creditor. Section 127 of
the contract Act lays down that “anything done or any promise made for the benefit of the
principal debtor, may be sufficient consideration to the surety for giving guarantee”. Thus, the
law presumes that the consideration received by the principal debtor is the sufficient
consideration for the surety and the surety, and the surety need not be benefited himself.

For example, J sells and delivers a colored television of ₹25,000 to K on credit on the ground of
guarantee given for by it by P. and P guarantee The payment is consideration of J’s promise to
deliver the television. This is the sufficient consideration for the guarantee given by P.

However, a guarantee which is given without any consideration after the money had already
been advance as loan or some goods are service had already been given on credit is treated as
void due to want of consideration. For example M sells and delivers certain goods to P on credit.
R afterwards without consideration agrees to pay for them. In case P default in payment. The
guarantee given by R is void for want of consideration.

5-surety’s liability is secondary i.e. dependent on principal debtor’s default:-There are two
type of liability (I) primary and (II) secondary. The primary liability is on the principal debtor.
The surety has secondary liability that is surety becomes liable only when the principal debtor
fails to perform his promise. Secondary liability is an undertaking to perform the promise of the
other on his failure to do so.

6-guarantee must not be obtained by means of misrepresentation:-

Though the contract of guarantee is not a contract of uberrima fidei(i.e. of absolute good faith)
and therefore, it is not necessary for the principal debtor, or the creditor, to disclose all the
material facts to the surety before he enters into the contract yet all the material facts which are
likely to affect the Degree of surety’s responsibility, and his decision for giving guarantee must
be disclosed to the surety before he enter into the contract.

Section 142 of contract act; provide that 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 a transaction is invalid. In such a case the surety can avoid the contract. For example, R is
invited to give guarantee of the fidelity(i.e. loyalty or faithfulness)of S who is P’s servant .P had
earlier dismissed him for dishonestly but he does not disclose this fact to R after employment
on R’s guarantee, S commits embezzlement involving 5000. P claims the amount for R. here R
is not liable because the earlier dismissal of S for dishonesty is a material fact which was not
disclosed to R by P.

7-guarantee must not be obtained by means of keeping silence to material circumstances:-

guarantee must not be obtained by concealing some facts or by keeping silence to some material
circumstances. Section 143 of contract act, lays down that” any guarantee which the creditor has
obtained by means of keeping silence to material circumstances is invalid”. In such a case. The
surety can avoid the contract. For example X employees Y as clerk to collect money from his
debtors’ collect money but fails to amount for some of the collection made. As a result of this X
asks Y to furnish a guarantee for his collection Y’S friend Z gives the guarantee for Y’S
collection. At the time of guarantee Kept silence about Y’S previous conduct. After guarantee y
again failed to account for a few collections. Here the guarantee given by Z is invalid as it was
obtained by keeping silence to material fact by X. as such Z is not liable for Y’s default.

8-the contract of guarantee may be oral or in writing-

The contract of guarantee may be either oral or in writing it maybe tacit or implied and maybe
inferred from the course of conduct of the parties concerned.

KINDS OF GUARANTEE

[Link] is a continuing guarantee? How can it be revoked?

Contracts of guarantee may be classified mainly into two types:-

1-specific or simple guarantee.

2-continuing guarantee.

1-spcific or simple guarantee:-When a guarantee is given in respect of a single debt or specific

transaction and is to come to an end when the guaranteed debt is paid or the promise is duly
performed, it is called a specific or simple guarantee. For example-X supplies 10 chairs coasting
Rs.2500 to Y on credit and is to be paid within a month on the guarantee given by Z. This is
contract of specific guarantee and Z’s liability comes to an end the moment the price of the
chairs is paid by Y.

2-Continuing guarantee: - Continue guarantee. Section 129 of the contract act defines it as
follows: A guarantee which extend to a series of transaction is called continue guarantee. Thus a
continue guarantee is not confined to a single transaction but keeps on moving to several
transaction continuously. The surety’s liability in this case will continue till all the transactions
are completed or till the guarantee is revoked by him for further future transactions. For
example:-A guarantees the payment to B ,a general merchant ,to the amount of Rs.2000 for any
articles supplied by him to C from time to time .This is a contract of continuing guarantee as it
extends to any articles that may be supplied from time to time to the extent of Rs.2000.

Important points regarding continuing guarantee`

The following important points should be remembered in connection with the continue guarantee
1-fragmentary consideration supply from time to time that is divisible consideration: - a
continuing guarantee applies to a series of separable or distinct transactions. And therefore the
consideration is fragmentary and divisible because it is supplied time to time. Thus when a
guarantee is given for an enter or complete consideration. It cannot be termed as a continuing
guarantee for example; P gives his house to R on a lease for 10 years on a lease rent ₹15,000 per
year. G guarantees that R will fulfill his obligations. After seven years. G. Revoke his guarantee.
But G will not be able to revoke it because the lease for 10 years is an entire or indivisible
consideration and not fragmentary or divisible consideration. And hence, it cannot be classified
as a series of transactions. Therefore, this contract cannot be classified as a contract of continue
guarantee. On the other hand it is a specific guarantee contract in respect of a single or specific
transaction.

2-Whether a particular guarantee is continuing or not, is a question of the intention of the

parties:- The intention of the parties is the basis of deciding the nature of the guarantee and such
intention is expressed by the language and the parties have used. Thus it is best ascertained by
looking into the terms of the contract, into the relative position of the parties at the time of
contract formation and other prevailing circumstances of the each case.

For example:- G guarantees in this form, I shall be answerable for Rs. 5000 that B a food- grains
retailer, may buy from our food grains wholesaler. It is a continuing guarantee to the extent of
Rs. 5000 when it appears from the circumstances that the parties contemplated (i.e. had in view
as an intention or purpose)a continuing Supply of stock to B in the way of his trade.

For example :-G guarantees payment to J of the price of 5 bags of rice to be sold and delivered
to K.J delivers 5 bags to K and K pays for them in time. Afterwords, J delivers 4 bags to K for
which he does not pay. Here, G cannot be held liable for the price of 4 bags because it is clear
from the terms of the contract that G intended to guarantee only for the payment of price of the
first five bags.

3-A continuing guarantee may be given for a party of the entire debt or for the entire debt
subject to a limit:-A continuing guarantee may be given only for a part of the whole debt .for
example:-A owes Rs. 5000 to B in total for the goods purchased from him from time to time may
guarantee the payment of Rs. 2000 only. Similarly, a continuing guarantee may be given for the
payment of entre debt subject.

For example:-in the above example C may guarantee the payment of any debts of A due to B
subject to a limit of Rs.3000.

4- A fidelity guarantee in not a continuing guarantee:-When the guarantee is given for the
good conduct or honesty of a person employed or to be employed in a particular office on a
particular post, it is called a fidelity guarantee. In such a guarantee there is no series of
transactions but it is all one transaction. It has therefore been held in a case that a fidelity
guarantee, which is a guarantee of an appointment, is not a continuing guarantee. So long as the
person continues in that place the guarantee remains and will not be revoked by the death of the
guarantor. Any other view will have consequences very injurious to business.

5-A guarantee of a debt to be paid by installment is not a continuing guarantee:-When a

guarantee is given for the payment of a certain amount to be paid by installments within a
definite time, it is not a continuing guarantee .it is in fact a guarantee of a loan and therefore
cannot be revoked after payment of some installment.

REVOCATION OF CONTINUING GUARANTEE

Revocation of guarantee means cancellation of guarantee already given .it may be noted that the
specific guarantee cannot be revoked if the liability has already occurred. However a continuing
guarantees can be revoked, and on the revocation of such a guarantee, the liability of the surety
or guarantor comes to an end for the future transactions. However, the surety continues to be
liable for the transactions which have taken place up to the time of revocation .a continuing
guarantee may be revoked in any of the following ways.

1-BY NOTICE OF REVOCATION:- section 130 of the Indian contract act lays down that a
continuing guarantee may be revoked at any time by the surety in relation to future transactions
by giving notice to this effect to the creditor .Thus ,the revocation discharges the surety for any
transaction made subsequent to the notice or revocation .however the surety remains liable for
the previous transactions which have already been made .

For example-A guarantee to B to the extent of Rs.5000, that C will pay all the bills that B will
draw upon him. B draws upon C, C accepts the bill. A gives notice of revocation. C dishonors
the bill at maturity. A is liable upon his guarantee.

2-By `death of surety:- According to section 131 in the absence of any contract to the contrary
,the death of the surety operates as a revocation of a continuing guarantee so far as regards
future transactions. Thus the guarantee is automatically revoked on the death of the surety and it
is not necessary that the notice of the death should be given to the creditor. It may be noted that
the revocation by death of surety is effective for future transactions only, and the surety’s legal
heirs remain liable for those transactions which had already been made before the death of the
surety.

3-By discharge of surety in various circumstances:-A continuing guarantee is also revoked

under all circumstances under which a surety is discharged his liability from his liability such
as:-

a. By novation section 62
b. By variance in terms of contract section 133
c. By release or discharge of principal debtor section 134
d. When the creditor enters into an agreement with the principal debtor section 135
 e. By creditor’s act or omission impairing surety’s eventual remedy section 139
f. By loss of security section 141
g. By invalidation of contract section 142, 143, 144.

NATURE AND EXTENT OF SURETY’S LIABILITY

QUES.-Liability of surety is co-extensive with that of principal debtor unless. it is otherwise

provided by the contract .in the light of this statement discuss the nature and extent of
surety’s liability.

The nature and extend of surety’s liability may be understood from the following ways:

1-The liability of surety is co-extensive:-Section 128 of Indian contract act lays down that
unless there is contract to the contrary, the liability of the surety is co-extensive with that of the
principal debtor, it means that surety will be liable to the same extend as the principal debtor is
towards the creditor. Whatever amount the creditor can legally realize from the principal debtor,
including interest, damages, and cost of litigation [Link] same amount the creditor can recover
from the surety. thus, the liability of surety can neither be more nor less than principal debtor’s
liability.

The expression co-extensive with that of principal debtor ‘denotes extent of the surety’s liability.
It means surety is liable for the whole amount for which principal debtor is liable and he is liable
for no more. However the extent of liability can be regulated by the contract between the parties.

2-The liability of surety arise the same moment when default is made by the principal
debtor:-The liability of surety arises immediately when the principal debtor defaults in making
the payment .it is not necessary that notice of default should be given to the surety .moreover
surety has no right to ask the creditor first to exhaust all the remedies open to him against the
principal debtor ,before taking action against him (surety).it means that the creditor is not bound
to proceed first against the principal debtor before suing the surety.

3-The surety is free to restrict limit his liability:-At the time of giving guarantee it is open to
the surety that he may restrict or limit his liability to a fixed amount which is expressly declared
by him . Moreover, his liability may also depend upon other terms in this regard in the contract.

Right of surety- to limit his liability by the contract in two ways

I-By giving guarantee for the entire debt subject to a limit of a fixes sum

II-By giving guarantee for part of the entire debt.

4- Sometimes the surety is liable, though the principal debtor is not liable:-As already
explained, liability of surety is co-extensive with that of the principal debtor. However, there
may be certain circumstances in which due to some legal provisions the principal debtor cannot
be held liable, even then the surety will be liable.

Surety will be liable though the principal debtor is not liable in following situations when
principal debtors-

I. Incompetent to contract.
II. Adjudged insolvent.
III. Debtors debt becomes time barred debt.
IV. Acts or debts are ultra-virus.

5-If there is a condition precedent for the surety’s liability ,the surety will be liable only
when that condition is fulfilled first:-Section 144 of the contract act lays down for such
situations that where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co-surety the guarantee is not valid if that person
does not join .For example :-X requires a loan of Rs. 20,000 from the central bank .Y and Z
agree to guarantee the repayment for loan .Z does not sign the necessary documents but Y had
already signed them. Here, Y is also not liable on his guarantee because it is a condition
precedent that the repayment of loan will be guaranteed by both Y and Z.

QUES. Enumerate the circumstances when surety is discharge from his liability.

ANS-Discharge of surety

The Indian Contract Act, 1872 provides for the discharge of the liability of surety, in case of
certain given circumstances. A surety is said to discharge from his liability if his liability to
perform the promise, in case of a default by the principal debtor, comes to an end.

The situation under which a surety is discharged from his liability is listed as follows:

I-Discharge by Revocation

Revocation of guarantee by giving notice (Section 130);

Revocation by death (Section 131).

Discharge by novation (section 62)

II-Discharge by the conduct of the parties

Variance in terms of the contract (Section 133);

Release or discharge of the principal debtor (Section 134);

Compounding by Creditor with the principal debtor (Section 135);

Creditors act/omission impairing surety’s eventual remedy (Section 139);

Loss of security (Section 141).

III-Discharge by the invalidation of the contract

Guarantee obtained by misrepresentation (Section 142);

Guarantee obtained by concealment (Section 143);

Failure of a co-surety to join a surety (Section 144).

I-By revocation of the contract of guarantee

Revocation means cancellation. The surety is discharged from liability when the contract of
guarantee is revoked in any one of the following modes.

1-Notice by surety- On analysis of Section 130 of the Indian Contract Act, 1872, it can be
inferred that a continuing guarantee can be revoked by serving a notice only for any future
transactions. The surety is liable for the transactions which are already entered into. This is the
reason, why the section does not include revocation of specific guarantee, as there are no future
transactions which have not yet been entered into in case of a specific guarantee. It can also be
inferred that the notice should be given to the creditor at any time. This notice should be clear
and specific and it should state that the surety is intending to terminate his liability as to the
future transactions. Also, there should not be any existence of the contract stating the contrary.

2-Death of surety:-Section 131, it can be inferred that the death of the surety will lead to a
discharge of the surety. The surety will be discharged from the future transactions which are
entered into. However, the legal heirs of the deceased surety have the obligation towards the
transactions, for which the surety has given the guarantee, in case the transactions have already
been entered into. They are liable only to the extent of the property that they have inherited [3]
and they cannot be made personally liable for the obligations of the surety. Also, there should be
no separate provision in the contract which states that the contrary to this provision.

3-By notation:-section 62 of contract act .the contract of guarantee may be discharged by

[Link] means that a new contract is made in place of the old one, either between the
same parties or between different (i.e. some other)parties. Thus the original contract comes to an
end, and therefore the surety stands discharged in relation to the old contracts. In such cases, the
discharge of old contract forms consideration for the new contract.

II-By conduct of the creditor:- The surety may be discharged from his liability because of some
specific conduct of the creditor in relation to the contract of guarantee in any of the following
circumstances:
1- Section 133. Discharge of surety by variance in terms of contract:-Any variance made
without the surety’s consent in the terms of the contract between the principal debtor and the
creditor, discharges the surety in relation to the transactions subsequent to the variance.

The basic principal is that cannot be held responsible for something for which he has not
contracted. It is for the surety to judge whether he will continue to remain liable on the changed
contract or not .However, it may be noted that an attempted variance which remains inoperative
will not discharge the surety.

Illustration:- A guarantees C against the misconduct of B in an office to which B is appointed

by C, and of which the duties are defined by an Act of the legislature. By a subsequent Act, the
nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by
the change from future under his guarantee, though the misconduct of B is in respect of a duty
not affected by the later Act.

C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A's becoming surety to C
for B's duty accounting for monies received by him as such clerk. Afterwards, without A's
knowledge or consent, C and B agree that B should be paid by a commission on the goods sold
by him and not by a fixed salary. A is not liable for subsequent misconduct of B.

Section134. Discharge of surety by release or discharge of principal-debtor:-Section 134

lays down two circumstances when the surety is discharged

(I)If the creditor makes a fresh contract with the principal debtor by which the letter the principal
debtor is released from his liability.

(II)If the creditor does any act or omission which has the legal effect of discharging the principal
debtor from his liability.

A Contract with B for a fixed price to build a house for B within a stipulated time. B supplying
the necessary timber. C guarantees A's performance of the contract. B omits to supply the timber.
C is discharged from his guarantee.

Since Surety's liability is co-extensive with that of the principal-debtor if principal-debtor is

discharged he is also discharged from his liability. Section 134 provides two modes-(i) a contract
between the creditor and the principal- debtor in which the principal-debtor is discharged, or (2)
by any act or omission of the creditor, which has the legal effect of discharge of the principal-
debtor.

Section 135 certain arrangements made by the creditor with the principal debtor without
the consent of surety:-According to section 135 of the contract act where the creditor enters into
a contract with the principal debtor without the consent of the surety by which the creditor

(I) makes a composition (settlement of debt by mutual concession)with or

(ii) Promises to give time to or

(iii) Promises not to sue, the principal debtor, then the surety is discharged from his liability due
to such arrangements .the composition involves the change of original contract. To give time to
the principal debtor means to extend the period at which the principal debtor was originally
bound to pay .the idea underlying the section 135 is that where the creditor does something
behind the back of surety and does it to his prejudice by advancing facilities to the principal
debtor, which is likely to harm the surety. The surety is no more to be bound by his undertaking.

However where the 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 (section 136 of the
contract).

Similarly mere forbearance on the part of the creditor to sue the principal debtor or enforce any
other remedy against him does not discharge the surety, if there is no provision to the contrary in
the contract of guarantee (section 137 of the act)

Section139. Discharge of surety by creditor's act or omission impairing surety's eventual

remedy.- any act which is inconsistent with the right of the surety, or omits to do any act which
his duty to the surety requires him to do, and the eventual remedy of the surety himself against
the principal-debtor is thereby If the creditor does impaired, the surety is discharged.

For example:-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 due performance of the contract. C,
without the knowledge of A, prepays to B the last two installments. A is discharged by this pre-
payment.

C lends money to B on the security of a joint and several promissory notes made in C's favour by
B, and by A as surety for B, together with a bill of sale of B's furniture, which gives power to C
to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the
furniture, but, owing to his misconduct and wilful negligence, only a small price is realized. A is
discharged from liability on the note.

III-By invalidation of contract of guarantee:

A contract of guarantee may be avoided if it becomes void or voidable at the option of the surety.
A surety may be discharged from his liability In the following cases:

1-Guarantee obtained by misrepresentation:- section 142 of the contract act provide that
when a mis- representation is made by the creditor relating to a material fact in the contract of
guarantee, the contract is invalid.
 2-Guarantee obtained by concealment:- Section 143 of the contract lays down that when a
contract of guarantee is obtained by the creditor by means of keeping silence regarding some
material part of circumstances relating to a contract, The contract is invalid.

3-failure of co-surety to join a surety:- section 144 to the contract act lays down that when a
contract of guarantee provides that a creditor shall not act on it until another person join in it as
co-surety, the guarantee is not valid if that person does not join.

QUES. What are right of the surety on the performance of his obligations?

ANS:- Right of surety:-After making the payment and discharging the liability of the principal
debtor, surety gets various rights. Such rights are of three types as follows:

(I)Rights against the principal debtor

(II) Rights against the creditor

(III) Rights against the co-sureties.

1-Rights against principal debtor:- The surety has following right against the principal debtor.

(I)Right of subrogation,:- subrogation means substitution of one party for another as creditor,
so that the new creditor succeeded to for former right section 140 of the contract, lays down that
when the principal debtor has defaulted in making the payment or in performing the guaranteed
duty, and the surety has paid the debt or performed the duty, when the surety is Invested with all
the rights which the creditor and again had against the principal debtor. This right of surety is
called the rule of subrogation. It means that the surety steps into the shoes of the creditor. The
Supreme Court has observed about these rights as follows:”the surety will be entitled to every
remedy, which the creditor has against the principal debtor to enforce every security, and all
means of payment; to stand in the place of the character. Even the securities entered into without
the knowledge of the Surety shall be transferred to him.

(II)Right of indemnity:- section 145 of the contract lays down that in every contract of
guarantee, there is an implied promise by the principal debtor to indemnity (to pay back) the
surety, and this surety is entitled to recover from the principal debtor whatever amount he has
right fully paid under the guarantee but no amount which he has paid wrongfully.

iii) Securities received by the creditor after the contract of guarantee

Section 141 of the Indian Contract Act, 1872 has mentioned the right of surety in the security
which is mentioned in the contract of guarantee. If the principal debtor makes a default in
payment of the loan amount and the payment is made by surety then in this case the surety can
avail the benefit of security. If the amount is being deducted from security then in this case the
surety can be discharged.
2-Rights against the creditor

i) Right to securities with the creditor

Section 141 of the Indian Contract Act,1872 has mentioned the right of surety to get a share in
the security which has been kept while entering into the contract of guarantee. The place of
surety is the same as the place of the creditor in terms of security. It is a compulsion on a creditor
to share the security with the surety; it is irrelevant whether the surety was aware of the security
or not. If the principal debtor defaults in the payment and the surety has cleared the dues, it
makes the surety entitled for a share.

ii) Loss of securities without creditor’s negligence

Under this circumstance the creditor takes the security of the principal debtor in case of default
of payment. The surety has the right to set-off the claim in respect to the value of security from
the debt of the principal debtor.

3-Surety’s rights against the co-sureties

i) Co-sureties right to get release from the contract

Section 138 of the Indian Contract Act, 1872 has stated that if one surety is discharged from his
liability it will not mean that all the sureties are also discharged from his obligation. Co-sureties
here means that when more than one surety gives the guarantee or takes the obligation to pay the
debt of the principal debtor. As per Section 138 when the principal debtor fails to pay the debt
and if the creditor asks only one surety to fulfil his duty. In this case that surety can ask the other
co-sureties to fulfil their responsibility.

[Link]-sureties are entitled to contribute equally

Section 146 of the Indian Contract Act, 1872 has mentioned that the liabilities of co-securities
are joint. If the contract does not mention the liability of co-securities as joint, it must be implied
that all the co-securities will share equally the debt not paid by the principal debtor.

[Link]-sureties entitled to pay the amount as promised

As per Section 147 if the co-securities have promised a particular amount to pay in the sum of
debt then they are obligated to pay that sum if the principal debtor causes default in payment of
the loan.
 UNIT II
BAILMENT AND PLEDGE

BAILMENT AND PLEDGE

Contract of bailment and pledge are also examples of special contracts. It may be noted that the
Indian Contract Act, 1872 deals only with the general principles relating to the contracts of
bailment and pledge. There are some other separate Acts which deal with the special types of
bailment, for example, the Carriers Act, 1865, the Railways Act, 1890, the Carriage of Goods by
Sea Act, 1925, etc.

[Link] is the essentials of a valid bailment? Explain with suitable examples.

Definition of Bailment
In law the term bailment is used in its technical sense whereby it means delivery of goods of a
person to whom permission is given to have the goods of another. For example, delivery of
clothes to a laundryman for washing and pressing is a bailment, Section 148 of the Contract Act
lays down that a bailment is the delivery of goods by one person to another for a definite purpose
and upon the agreement that they shall be returned or disposed of according to the directions of
the deliverer when the purpose is accomplished. The person delivering the goods is called the
bailer' and the person to whom they are delivered is called the 'bailee'.
Essential Features of Bailment
After analysing the above definition, we come across with the following characteristics or
essential requirements of bailment:
1. Agreement: The bailment is always created by an agreement between the bailer and the
bailee. Such agreement may be either express (i.e., oral or in writing) or implied (i.e., inferred
from the circumstances of a particular case). However, the finder of goods is an exception to the
rule (this point has been discussed later in this Chapter). For example, in a case, tobacco
packages were lying in the godown of PH firm which were pledged with a bank as security. The
Income-tax Officer ordered the seizer of the goods and therefore the keys of the godown were
handed over to the police. Owing to heavy rains, the roof of the godown leaked and tobacco
stock was damaged. The bank claimed damages from the Government. It was held that the
Government stood in a position of bailee and therefore was liable to pay damages. Here, the
bailment arises without any agreement to this effect between the bailer and the bailee
(Merchants Coop. Bank Ltd. vs. Prabhudas Hathibhai, AIR 1966 Bom 134).
2. Delivery of Goods: For bailment, it is necessary that the goods should be delivered to the
bailee. Thus, bailment involves change of possession. The possession means right to keep control
over the delivered goods and right to exclude control of others over them except the bailer (i.e.,
owner).(Hence, one who has 'custody' of goods without 'possession', is not a bailee and such
custody does not constitute bailment (For example, a servant using his master's goods or a guest
using his host's goods is not a bailee. Therefore, delivery of physical possession is essential to
establish a bailment. However, the ownership of goods is retained by the bailer with himself.
The delivery of possession may be of two kinds (i) actual delivery it is that state when one
person hands over the physical possession of goods, i.e., physically transfers the goods to
another, for example, when a person gives his wrist watch for repair to the watch-mechanic, it is
an actual delivery, and (ii) constructive delivery-it is the state when some act is taken to mean
handing over of the physical possession of goods, though in fact no physical transfer of goods is
made at that time. Constructive delivery arises in two circumstances((a) When a person becomes
the bailee and the owner becomes the bailer of such goods, although the goods may not who is
already in possession of the goods of another, contracts to hold them as a bailee, he thereby
becomes the bailee and the owner becomes the bailor although the goods may not have been
delivered by way of bailment (Explanation to Section 148 of the Contract Act), and ((b) when a
person does anything which has the effect of putting the goods in the possession of the intended
bailee or his authorised agent, it is taken to be bailment (Section 149 of the Contract Act). For
example, handing over of a key of the room or godown where goods are transfer of a railway
receipt [which is a document of title (ownership) to goods] amounts to a constructive delivery of
the goods.
Proper attention must be paid to a situation where an act may be confused for constructive
delivery. For example, a lady employed a goldsmith for the propose of melting old jewellery
and making new jewels. Every evening she used to receive the half-made jewels from the
goldsmith and put them into a box which was left in a room in the goldsmith's house. She
retained the key of the room with her. It was held that there was a redelivery of jewels to the lady
and they were not in the possession of the goldsmith when during one night they were stolen, and
there was no bailment (Kaliaperumal vs. Visalakshmi, AIR 1938 Mad 32).
3. Movable property: Goods referred to under the definition of bailment are the goods as
defined by Section 2(7) of the Sale of Goods Act, 1930, according to which 'goods' means every
kind of movable property other than actionable claims (i.e., claims to be settled by the Court) ng
cannot be made. and money. Hence, bailment of immovable property like land and
4. Definite purpose: In bailment, the goods are delivered to the bailee for some specific purpose
which is generally in view of both the bailor and the bailee. The purpose may include. repair of
goods; or changing their forms, such as by tailoring, by carpentry, etc., or transporting of goods;
or security of the goods; or deposit of security for a debt; etc.
5. Return or disposal of the specific goods: It is important in bailment that there is a condition
or agreement between the bailor and the bailee that when the definite purpose is achieved, the
specific goods will be returned or otherwise disposed or (i.e., dealt with) according to the
instructions of the bailor. The goods returned should be the same as were bailed i.e., delivered.
However, in some cases they may be returned after some alteration, repairs, or change of form,
etc. Such cases also constitute bailment For example) a diamond is given to a goldsmith for
being set in a golden ring. When the ring is returned, it amounts to return of the specific goods.
Similarly, when a tailor returns shirts and pants after making them from the given cloths, it
amounts to return of the specific goods.
6. Essentials of a valid contract: The contract of bailment must fulfil all other essential
conditions of a valid contract, such as capacity of parties, lawful object and consideration, etc.
7. Ownership not transferred: As indicated earlier, in bailment the ownership remains with the
person who delivers the goods, i.e., with the bailor. The title of goods is not transferred to the
bailee. (Where the title, i.e., ownership is also transferred with the delivery of goods, such
contracts are called contracts of sales).
Certain Bank Transactions and Bailment
It may be noted that deposit of money made into the credit of an account opened with the bank
does not constitute bailment because of two reasons:
(i) A bailment can be of movable property only. Movable property does not include money (see
point (3) on p. 193). It means a bailment cannot be made about money, and (ii) the return of the
'specific goods' after achieving the directed purpose is necessary. But the bank is not bound to
return the identical currency notes or coins which were deposited, and moreover the customer
cannot question or object against the purpose to which his deposits are used by the bank. The
bank is free to invest such deposits according to its own considerations. The only liability of
bank is to return an amount equal to the sums deposited by the customer. In such, cases,
therefore, relationship between the bank and the customer is that of debtor and creditor, and not
that of bailee and bailor.
However, the deposits of certain articles, such as jewellery, legal documents, credit instruments,
etc., made with the bank for the purpose of safe custody amount to bailment. In safe-custody in a
locker in a bank. In that case also, there is a contract of bailment. It may be addition to valuable
and important papers, even coins or notes in a box may be deposited for noted that in all these
cases, the bank is to return these things as they are, and not their equal monetary value. But if the
credit instruments, such as cheques, promissory notes, etc., are sent for collection, it is not
bailment.
Important Examples of Bailment
All transactions of safe-custody; deposit of goods with another person; goods lent to a friend;
goods given on hire; pledging of goods; carriage of goods; repair of goods; work or skill done on
goods; placement of goods as security for the repayment of a debtor or for performance of some
promise; etc., are in the nature of contracts of bailment. Purchaser of any article (for example,
television, refrigerator, car, furniture, etc.) or hire-purchase agreement, is a bailee till such time
he pays out all the instalments. Seizure of goods by custom or other authorities is a bailment and
such authorities after seizure are in a position of the bailee. Acceptance of articles by Post-office
under V.P.P. (Value Payable Parcel) or Speed Post is a bailment. The legal relation between a
guest and the owner of a hotel in regard to furniture and equipment used by the guest is that of a
bailee and bailor because the guest takes on hire not only the room but also all its furnishings.
Kinds or Classification of Bailment
Contracts of bailment may be classified on two bases: (i) reward basis, and (ii) benefit basis. I.
On the Basis of Reward
There are two kinds of bailment on the basis of reward or charges as follows:
1. Gratuitous bailment (A gratuitous bailment is that in which neither the bailor nor the bailee
is entitled to any remuneration. It is a bailment without any charges or reward or consideration.
For example, lending of a scooter to a friend, or borrowing some books from a friend, or lending
of V.C.R. (Video Cassette Recorder) by a person to his neighbour are the cases of gratuitous
bailment because no exchange of money or any other consideration is involved in these cases.
None of the parties, i.e., friends or neighbours will be entitled to any charges. In such contract,
parting with the possession of goods amounts to sufficient consideration to support the promise
of the bailee to return them.
2. Non-gratuitous bailment : A non-gratuitous bailment is that in which either the bailee or the
bailor is entitled to some remuneration. It is a bailment which involves reward or payment of
charges or consideration. For example, giving of scooter etc. for repairs, or handing over of cloth
for stitching, or taking a cycle on hire (here bailor is entitled to agreed charges), etc.
II. On the Basis of Benefit
On the basis of benefit accruing to parties, the contract of bailment may be divided into three
following types:
1. Bailment for the exclusive benefit of the bailor: It is a bailment where the goods are
delivered by the bailor to the bailee only for the benefit of the bailer himself, and the bailee does
not derive any benefit from it. For example, David is going out of station. He leaves his valuable
goods with his neighbour for safety. Here, David alone is being benefited by this bailment.
2. Bailment for the exclusive benefit of the bailee : It is a bailment where the goods are
delivered by the bailor to the bailee only for the exclusive benefit of the bailee. For example,
lending of a scooter to a friend for some time without any charges.
3. Bailment for the mutual benefit of bailor and bailee: It is a bailment where goods are
delivered by the bailor for the mutual benefit of both of them. For example, giving cloth to a
tailor for stitching shirt (bailor gets shirt and bailee gets stitching charges); hiring a cycle; or
giving a television for repairs; etc.
DUTIES AND RIGHTS OF BAILOR AND BAILEE
QUES. State the rights and duties of bailor.
The following are the duties of a bailor in a contract of bailment :
1. To disclose known material faults: Section 150 of the Contract Act lays down that the bailor
is bound to disclose to the bailee those faults in the goods (i) of which he is aware, and (ii) which
shall materially interfere with, i.e., prevent the use of such goods, or (iii) expose the bailee to
some extraordinary risks. If the bailor does not make such disclosure, he is responsible for
damage arising to the bailee directly from such faults. It may be noted that if the goods are bailed
for hire, the duty of the bailor is still greater because in such a case he is responsible for such
damage whether he was aware of the existence of such faults in the goods or not. Ignorance of
defects is no excuse for a non-gratuitous bailor, However, in a gratuitous (i.e., without reward)
bailment, the bailor is responsible only for those faults which are known to him but are not
disclosed to the bailee.
Examples: (a) B takes a cycle on hire from C. The brakes of the cycle are not working well. This
fact is not known to C and therefore he could not disclose it to B. Later on, B met an accident.
Here, C is liable to compensate B for the damages. (In such cases, it is supposed that the bailor
must keep the goods in a fit condition, and the goods must be fit to be used for the purpose for
which they are meant.)
(b) P lends his scooter to R for some time. P knows that the brakes of the scooter are out of
order, but he does not disclose this fact to R. As a result. R meets an accident. P is liable for
damages. (But in case P does not know about the unfit condition of the brakes, then he will not
be liable for damages because it is a case of gratuitous bailment.)
2. To repay necessary expenses: According to Section 158 of the Contract Act, in gratuitous
bailment where the conditions are such that the goods are to be kept, or are to be carried, or to
have work done upon them by the bailee for the bailor, the bailor shall repay to the bailee all the
necessary expenses incurred by him for the purpose of bailment. On the other hand, in case of
non-gratuitous (i.e., with reward) bailment, it is the duty of the bailor to bear extraordinary
expenses only, if any, incurred by the bailee in relation to the goods bailed. In such a bailment
the bailor is not to bear ordinary or usual expenses. For example, X lends a cow to Y for safe
custody. Later on, the cow falls ill and Y has to incur certain medical expenses on it. If the
bailment is gratuitous (without reward), then X must reimburse Y for usual feeding expenses as
well as medical expenses. On the other hand, if the bailment is non-gratuitous (with reward), X
must repay Y the medical expenses only because these are extraordinary expenses.
3. To indemnify bailee for excess loss: Section 159 of the Contract Act lays down that if the
bailment is gratuitous (without reward) and is made for a specified time or purpose but the bailor
compels the return of goods before such time or purpose, then the bailor must indemnify the
bailee for any loss which exceeds the benefit actually derived by the bailee. For example, X
lends a scooter to Y for one month without taking any charges for it. Y incurs 300rs on its repairs
to bring it into working order. He uses it for fifteen days and derives a benefit of 200rs. Then, X
takes the scooter back on sixteenth day. Here, X must indemnify (i.e., pay back) Y for 100rs, the
amount of loss in excess of the benefit derived by Y.
4. To pay back the loss due to lack of title to goods bailed: According to Section 164 of the
Contract Act, if the title of the bailor is found defective, i.e., if the bailor was not entitled to make
the bailment, or he was not entitled to receive back the goods, or to give directions in relation the
goods, and the bailee suffers any loss due to that reason, it is the responsibility of the bailor to
pay back such loss. For example, X found a motor-cycle and delivered it to Y for safe custody. 2,
the actual owner, came to know this fact and recovered the motor-cycle and certain amount of
compensation from Y through the Court. Here, X is bound to repay the amount of compensation
paid by Y.
5. To bear normal risks: It is the duty of the bailor to bear the risk of normal loss, deterioration
and destruction of the things bailed if the bailee has taken reasonable care as a of ordinary
prudence (i.e., careful forethought) would take to protect from loss his own goods of similar
nature and value under similar circumstances.
6. To receive back the goods bailed: It is the duty of the bailor to receive back the goods when
they are returned by the bailee after the expiry of the specified time of bailment, or after the
fulfilment of the purpose of bailment. If the bailor, without any reasonable cause, refuses to
receive back the goods, then he becomes liable to pay compensation for necessary expenses
incurred by the bailee on the custody of the goods.
RIGHTS OF BAILOR
The following are the rights of a bailor in a contract of bailment :
1. Right to claim damages: By implication of Section 151 of the Contract Act, it is any inherent
(i.e., natural and permanent) right of the bailor to claim damages for a loss that might have been
caused to the goods bailed, due to the negligence of the bailee.
2. Right to terminate the contract: Section 153 of the Contract Act lays down that if the bailee
does any act with regard to the goods bailed, which is inconsistent with the terms and conditions
of the bailment, then the contract of bailment becomes voidable at the option of the bailor. Thus,
if the bailee acts contrary to the terms and conditions of the bailment, i.e., he disobeys the
instruction of the bailor, then the bailor is entitled to terminate (avoid) the contract. For example,
X lends his car to Y for his personal use only, for a period of one month for certain fixed
charges. Y starts using the car as a taxi. X can terminate the bailment.
3. Right to claim compensation: The bailor has a right to claim compensation from the bailee in
the following cases: (i) if any damage is done to the goods, because of its unauthorised use by
the bailee, or (ii) if some losses or expenses are incurred with regard to the goods bailed, because
of unauthorised mixing of the goods of bailor with his (bailee's) own goods (By implications of
Sections 154, 156 & 157 of the Contract Act).
4. Right to demand back at any time the goods lent without charges: According to Section
159 of the Contract Act, if the bailment is gratuitous (without reward), the bailor has a right to
demand return of goods at any time he so likes, even though the goods were bailed for a
specified time or purpose. However, he will have to compensate the bailee for the loss, if any,
due to such premature return of goods.
5. Bailor entitled to any increase or profit accrued from the goods bailed: Section 163 of the
Contract Act lays down that in the absence of any contract to the contrary, the bailor is entitled to
any increase or profit which may have accrued to the bailee from the goods bailed. For example,
X hands over his car to Y for safe custody for a week. Y uses it as a taxi and earns, 2,000 from
such services. X is entitled to the profit of 2,000.
6. Right to file a suit for the enforcement of the duties imposed upon a bailee: There are
certain duties of the bailee (see the next sub-heading for this purpose). If he neglects them, the
bailor can enforce these duties or liabilities as his rights by filing a suit against the bailee.

QUES. Define bailment. Explain the rights and duties of bailee.

The following are the duties or liabilities or obligations of a bailee in the contract of bailment.
1. To take reasonable care of the goods bailed: Section 151 of the Contract Act lays down that
in all cases of bailment (i.e., whether gratuitous or non-gratuitous without reward or with
reward), the bailee is bound to take as much care of the goods bailed) to him as a man of
ordinary prudence (i.e., careful forethought) would take of his own goods of the same bulk,
quality and value as the goods bailed, under similar circumstances. Thus, a bailee is liable for all
losses which arise due to his negligence. However, Section 152 of the Act provides that if there
is no contract to the contrary, the bailee is not responsible for the loss, destruction or
deterioration of the things bailed if he has taken required degree of care. The bailee is also not
liable for damages if the goods are damaged or destroyed due to events beyond the control of the
bailee, for example, riots, war, heavy floods, fire, other natural calamities, etc) If the bailed
goods are stolen from the custody of the bailee even after the bailee has taken reasonable care,
then the bailee I will not be liable for this loss. However, in such cases, th balee must take
reasonable steps for tracing the goods, if he does not do so he may be held label for damages.
Where the loss to the goods bailed is caused due to the negligence of the bailee's servant, the
bailee will be liable for such loss if the servant's act, due to which the loss is caused, is within the
scope of his employment.
Example: (a) X is to travel by a luxury coach of Y. He puts his suit-case in the boot (i.e., the
place for the luggage) of the coach from where it is lost. Here, Y is liable for damages because it
is the duty of Y to take reasonable care for the safety of customer's luggage.
(b) P delivers to R certain gold ornaments for safe custody without reward. R keeps the
ornaments in a locked safe and places the keys of the safe in a cash box in the same room which
is locked from outside. The room is situated on the ground floor and easily accessible to burglars
(thieves). The ornaments are stolen from the safe by using the keys from the cash box. Here, R is
liable for the loss because he failed to take the care which the nature of the articles required, no
matter that the bailment is without reward.
2. Not to make unauthorised use of goods bailed: Bailee must use the goods bailed according
to the conditions of the bailment or the directions of the bailor. He must not use it in a manner
inconsistent with the terms of bailment. According to Section 154 of the Contract Act, if the
bailee makes any use of the goods which is not according to the conditions of the bailment, he is
liable to make compensation to the bailor for any damage arising to the goods from or during
such use of them. It is to be noted that the bailee will be liable for such damage even if he was
not negligent in making such unauthorised. use. For example, J lends his car to K with the
direction that only J can use it personally and nobody else should drive it. K allows P, his friend,
to use and drive the car which was damaged by P. Here, K is liable to compensate J for the
damages.
3. Not to mix bailor's goods with his own goods: It is the duty of the bailee not to mix bailor's
goods with his own goods. He should maintain its separate entity. This duty of the bailee may be
discussed in the following three ways:
(i) Mixture with bailor's consent: Section 155 of the Contract Act provides that if the bailee
mixes the goods of the bailor with his own goods with the consent of the bailor, the bailor and
the bailee shall have an interest in proportion to their respective shares in the mixture thus
produced.
(ii) Mixture without bailor's consent: when goods can be separated: Section 156 of the Act lays
down that if the bailee mixes the goods of the bailor with his own goods without the consent of
the bailor and the goods can be separated or divided, then the bailor and the bailee remain
owners of their respective goods. But the bailee is bound to bear the expenses of separation or
division and any damage arising from the mixture. For example, P bails 200 bags of A.C.C
cement of R. Without P's consent, R mixes these bags with his own bags of Trishule cement.
Here, P is entitled to have his 200 bags returned, and R is bound to bear all the expenses in the
separation of the bags and any other incidental damage.
(iii) Mixture without bailor's consent, when the goods cannot be separated: According to without
the consent of the bailor in such a manner that it is impossible to separate the goods Section 157
of the Contract Act, if the bailce mixes the goods of the bailor with his own goods bailed from
the other goods and deliver them back to the bailor, then the bailee is bound to Without P's
consent, R mixes them with his own rice of lower quality. Here, R is liable to compensate the
bailor for the loss of the goods. For example, P bails 50 kg. of Basmati rice to R. compensate P
for the loss of his 50 kg. of Basmati rice because these cannot be separated from the other rice.
4. To return the goods: Section 160 of the Contract Act provides that it is the duty of the bailee
to return or deliver, without demand, according to the bailor's directions the goods bailed as soon
as the time for which they were bailed has expired, or the purpose for which they were bailed has
been accomplished. Section 161 of the Act lays down that if by the fault of the bailee the goods
are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any
loss, destruction or deterioration of the goods from that time.
Where there are several joint bailors, the bailee may return the goods to any one of them, if there
is no agreement to the contrary (Section 165 of the Contract Act).
For example, P delivered certain books to R, a binder, who promised to bind and return them to
P within a week, R could not complete his job within the specified time. Subsequently, the books
were burnt by an accidental fire in R's premises. Here, R is liable for the loss and the plea that
the fire was accidental or an act of God is useless.
5. To return any accretion (i.e., increase or something added) to the goods bailed: Section
163 of the Contract Act provides that in the absence of any contract to the contrary, the bailee is
bound to deliver to the bailor or according to his directions any increase or profit which may
have accrued from the goods bailed. For example, J leaves a cow in the custody of K to be taken
care of. Subsequently, the cow gave birth to a calf. K is bound to deliver the calf as well as the
cow to J.
6. Must not set up an adverse title: To set up an adverse title means to deny the title Bailee
must not set up a title adverse to that of bailor. He must hold the goods on behalf of and for the
bailor. He cannot deny the title of the bailor. It is the duty of the bailee to return the goods only
to the bailor even though any third person is claiming the title over them. However, the goods
may be taken away from bailee's possession by some person exercising the authority of law
under regular and valid proceedings.
It may be noted that if the bailor has no title to the goods and the bailee delivers them back to the
bailor in good faith, then, the bailee is not responsible to the owner in respect of such delivery
(Section 166 of the Contract Act).
RIGHTS OF BAILEE
The duties of bailor are the rights of the bailee, and the bailee can enforce his rights against the
bailor by suing him in case of default. The rights of bailee are as follows:
1. To claim damages: If the bailor has bailed the goods without disclosing the defects therein
and the bailee has suffered some loss due to such defects, the bailee has a right to claim damages
for that (Section 150 of the Contract Act).)
2. To claim necessary expenses: Where the bailee is not to receive any remuneration for the
work done by him as per the terms of the bailment (i.e., the bailment is gratuitous), the bailee is
entitled to recover from the bailor all necessary expenses incurred by him for the purpose of the
bailment (Section 158 of the Contract Act).
3. Right to be indemnified: If the bailor demands return of goods before the specified time -
and-the loss of the bailee in such a situation is greater than the benefit actually derived by him
from the use of the goods, then the bailee has a right to be indemnified by the bailor for the
excess loss (Section 159 of the Contract Act).
4. To recover loss due to defective title of the bailor: It is a right of the bailee to recover from
the bailor any loss suffered by him because of the fact that the bailor was not entitled to make the
bailment of the goods, or receive back the goods, or to give directions with regard to them
(Section 164 of the Contract Act).
5. To deliver the goods to any one of the joint bailors? If the goods are owned and bailed by
more than one person, then in the absence of any contract to the contrary, the bailee has right to
deliver back the goods to any one of the joint bailors without the consent of all. Section 165 of
the Contract Act).
6. To file a suit to decide the title of goods bailed: If a person other than the bailor claims the
goods from the bailee, the bailee may apply to the Court to stop the delivery of the goods to the
bailor and decide the title to the goods. (Section 167 of the Act).
7. Right of particular lien : Lien means a right to retain possession of the goods till the promise
made by its owner is fulfilled. Where the bailee has rendered any service in accordance with the
purpose of the bailment, involving the exercise of labour or skill, he has a right to retain such
goods until he receives the due remuneration for the services he has rendered in respect of them,
if there is no contract to the contrary (Section 170 of the Act). For example, P gives cloth to T, a
tailor, to make it into a safari suit; which is accordingly done. T is entitled to retain the safari suit
till he is paid for the services he has rendered.
However, if the bailee agrees to render his services on credit, he is not entitled to retain the goods
till payment of remuneration. For example, P gives his watch for repairs to R who agrees to
deliver back the watch to P as soon as the repair is done and also to give two months' credit for
the charges. Here, R is not entitled to retain the watch until he is paid.
8. Right of general lien : Bankers, factors (i.e., agents entrusted with possession of goods for the
purpose of selling them for his principal), wharfingers (owners of the platform near the sea-shore
where loading and unloading are done), attorneys of a High Court and policy brokers shall be
entitled to retain as a security for a general balance of account any goods bailed to them (Section
171 of the Contract Act)

RIGHT OF BAILOR AND BAILEE AGAINST THIRD PARTIES

1. Suit by bailor or bailee against a wrong-door: It a third person wrongfully deprives the bailee
of the use or possession of the goods bailed or does them any injury, the bailee is entitled to such
remedies as the owner might have used in the 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. For
example, a transport company is persuaded to deliver goods to a cheat on the basis of receipt.
The cheat pledged
for the recovery of the goods from the pledgee (goods. Here, the transport company can sue of
the Contract Act). 2. Apportionment of relief or compensation obtained by such suits : Whatever
is obtained divided between the bailor and by way of relief or compensation in any such suit, that
will be the bailee according to their respective interests (Section 181 of the Act). Liability of
Hotel-keepers, Inn-keepers, Common Carriers, etc.
The liabilities of hotel-keepers and inn-keepers towards their guests are governed by Sections
151 and 152 of the Contract Act. Thus, the liability of an hotel-keeper is that of an ordinary
bailee and he is bound to take reasonable care of the property of his guests which is lying in the
hotel (Section 151). However, the hotel-keeper is not responsible for the loss, destruction or
deterioration of the property of his guests if he has taken reasonable care. But if there is any
special contract between the hotel-keeper and his guest with regard to loss etc. of the property,
things shall be governed by the terms and conditions of such a contract. (Section 152). For
example, X stayed in a room of a hotel. The hotel-keeper knew that the room occupied by X was
in an unsecure condition. While X was dining in another part of the hotel building, some articles
were stolen from his room. Here, the hotel-keeper is liable as he should have taken reasonable
steps to rectify the insecure condition of the room.
A common carrier (i.e., an individual, firm, etc.) is one who undertakes to carry from one place
to another the goods of any one without discrimination, who thinks fit to employ him for hire and
who is willing to pay his usual or reasonable charges. In India, the duties and liabilities of a
common carrier are governed by separate Acts which deal with the carriage by Sea, Rail or Air
respectively. In general, the duties and liabilities of a common carrier of goods in India are is
liable laid down in the Common Carriers Act, 1865 and the Railways Act, 1890. The carrier for
any loss of damage caused to the goods by his or by his servant's negligence or criminal acts.
However, the carrier can limit his liability by a special agreement with the consignor of goods.
But in that case also, he has to prove his genuine efforts made to avoid the damage.
LIEN AND ITS KINDS:
Lien means a right to retain or detain the possession of the goods till the promise made by its
owner is fulfilled. Thus, if the goods of X is in possession of Y, then Y's lien means his right to
retain such goods till the claims of Y are satisfied by X. Possession of goods is essential to create
a right of lien. One major advantage of the right of lien is that it can be exercised for the
realisation of a debt, the recovery of which has become time-barred. A lien is of two kinds : (i)
particular lien, and (ii) general lien.
1. Particular Lien: A right to retain possession of only those particular goods in respect of
which the charges are due or the debt arose, is known as particular lien. Thus, particular lien is
attached to some specific goods only. It is restricted to those goods which are the subject-matter
of the contract and are liable for certain demands of the person in whose possession the goods.
are lying. Persons entitled to a particular lien are carriers, mechanics, repairers, unpaid seller of
goods, finder of goods, pawnee, agent, etc. The bailee is also entitled to particular lien only.
2. General Lien: A right to retain the possession of the 800ds of another for the general balance
of accounts is known as a general lien. Such lien entitles a person in possession of goods to
retain them until all his claims or accounts against the owner are settled. It is not necessary
that the demands should arise only out of the articles detained under possession; these demands
may relate to any claims against the owner. General lien is a kind of specified privilege which
the law (i.e., Section 171 of the Contract Act) has granted only to five categories of person: (i)
bankers, (ii) factors-agents entrusted with the possession of goods for the purpose of sale, (iii)
wharfingers-the owners or occupiers of wharf or warehouse near port who keep goods of others
imported into the port, (iv) attorneys-solictors of High Courts, and (v) policy-brokers- persons
who effect marine insurance policies Section 171 of the Act provides that the right of general
lien can be given to other persons (i.e., bailees) by an express agreement to that effect.
DIFFERENCE BETWEEN PARTICULAR LIEN AND GENERAL LIEN
The right to retain the goods or property expenses of another person, which is in possession of
one person, until the labour charges and expenses incurred in connection with the same goods are
paid, or loan given is redeemed, is called a particular lien; whereas, the right to retain goods or
property of another person, lying under one's possession, as security for a 'general balance of
account' (i.e., for any dues whether related to those goods or any other goods), is called general
lien. Particular lien is available to all bailees who exercise some labour or skill in respect of the
goods bailed to them; whereas, general lien is available to a limited number of bailees, Particular
lien can be exercised only against those goods in respect of which labour or skill has been
exercised by the bailee; whereas, general lien can be exercised against all goods lying under the
possession of the bailee. Particular lien can be exercised for the payment of bailee's charges for
his labour or skill; whereas, general lien can be exercised for the payment on any amount from
the bailor to the bailee. However, it may be noted that both the concerned parties can make
agreement against both types of the lien, i.e., the right of any kind of lien can be eliminated by
contract between the parties to this effect.
FINDER OF GOODS
A finder of goods is a person who finds the goods belonging to some other person and takes
them in his possession. Once a person takes in his possession the goods found, he becomes the
bailee of such goods. (Section 71 of the Contract Act).
DUTIES OF A FINDER OF GOODS
As the finder of goods becomes the bailee of the goods, therefore his duties are the same as those
of a bailee. In brief, they are as follows:
1. The finder of goods must take reasonable care of the goods found.
2. It is the duty of the finder of goods to find out the real owner of the goods and then to entrust
the goods to him.
3. He should not use the goods for personal ends.
4. He should not mix the found goods with his own goods.
5. He should also return any accretion or profit occurred to the found goods.
RIGHTS OF A FINDER OF GOODS
The finder of goods is entitled to possession of the goods against every one except the true
owner. His other rights are as follows:
1. Right of lien : The finder of goods has a right of particular lien and thus he has the right to
keep the goods in his possession till his expenses are paid. He might have incurred such expenses
in preserving the found goods and in finding out the true owner. It may be noted that he has no
right to file a suit against the true owner for compensation for such expenses. (Section 168 of the
Contract Act).
2. Right to file a suit for reward: If the true owner has offered a specific reward for the return of
the lost goods, then the finder may sue the true owner for such reward. He exercise particular
lien, i.e., may retain the goods until he receives the reward (Section 168 of ay also may the
Contract Act).
3. Right of sale of goods: A finder of goods has a right to sell the goods found by him under the
following circumstances:
(i) When the found goods are such as are commonly the subject of sale, or
(ii) When the finder has taken reasonable care and made reasonable steady efforts but the owner
has not been found out, or in case has found out the owner but he refuses upon demand to pay
the lawful charges of the finder, or
(iii) When the thing is in danger of perishing (i.e., destruction) or losing the greater part of its
value, or(iv) When the lawful charges of the finder in respect of the thing found amount to two-
thirds of its value. (Section 169 of the Contract Act).helle
 PLEDGE OR PAWN
QUES. What do you understand pledge? Discuss the rights and duties of pawnor and
pawnee.
Section 172 of the Contract Act defines pledge or pawn as follows: "The bailment of goods as
security for payment of a debt, or performance of a promise is called pledge. The bailor in this
case is called the 'pawnor' or 'pledger. The bailee is called the 'pawnee' or 'pledgee'. Thus, pledge
is a special kind of bailment where a movable thing is bailed as security for the repayment of a
debt or for the performance of a promise. For example, if X borrows 5,000rs from Y and keeps
his scooter with Y as security for repayment, it is a contract of pledge or pawn. The person
taking the loan is called pledger and the person with whom goods are pledged is called pledgee.
In a pledge, the he ownership of the pledged goods does not pass to the pledgee. The general
property (i.e., ownership) remains with the pledger but the special property in the goods passes to
the pledgee. Delivery of goods is a necessary element of pledge. The delivery should be for the
purpose of security and with the condition that the goods will be returned to the pledger after
repayment of loan or fulfillment of his promise. It may be noted that the pledged property must
be delivered to the Pawnee. For example, X, a producer of a film, borrows * 50,000 from Y, a
financier-distributor. X agrees to deliver the final prints of the film when ready. Here, the
agreement does not amount to a pledge because there is no transfer of possession.
Delivery of possession may be actual or constructive. For example, delivery of the key of the
godown where the goods are stored, is a constructive delivery. Similarly, where the goods are in
the possession of a third person, who on the directions of the pledger's, consents to hold them on
behalf of the pledgee, that amounts to proper delivery. Further, a railway receipt is a document of
title of the goods and a pledge of the receipt operates as a pledge of the goods.
WHO MAY PLEDGE?
The following persons may make a valid pledge or pawn
(A) Owners of the goods : The general rule is that it is the owner of the goods who can
ordinarily create pledge. An authorised agent of the owner also comes in this category. It may be
noted that if there are several co-owners (i.e., joint owners) and the goods are in possession of
one of them, then that one co-owner who is in possession of the goods can create a valid pledge
of such goods with the consent of the other co-owners."
(B) Pledge by non-owners: Under certain circumstances, even non-owners can make a valid
pledge as follows:
1. A mercantile agent who is in possession of the goods or the 'documents of title' can create a
valid pledge with the consent of the real owner.
2. A person who is in possession of goods under a voidable contract can create a valid pledge
before such contract is rescinded.
3. A seller who is in possession of the goods even after sale can make a valid pledge of them. 4.
A buyer who has obtained possession of goods before sale can create a valid pledge.
5. A person who has a limited interest in the goods can create a valid pledge of such goods but
only to the extent of his own interest.
It should be noted that in cases of pledge by non-owners, a valid pledge is created provided the
pledgee or Pawnee acts and takes the goods in good faith and without the notice of any reverse
fact against the non-owner pledger or the goods itself.
PLEDGE AND BAILMENT
Similarities: 1. Both are created by contract between the parties.
2. Both involve transfer of possession of goods from one person to another.
3. In both the cases, only movable property can be the subject-matter of the contract.
4. In both the cases, the same goods are to be returned after the fulfillment of the purpose of the
contract or after the expiry of specified time.
Differences
1. Purpose
Bailment may be for any kind of purpose, for example, repair, reward, safe-custody, conversion
of form, etc. While, pledge is made for a specific purpose of providing security against a loan or
against the performance of a promise.
1 The 'special property is a right to the possession of the articles along with the power of their
sale in case of default by the pledger.

2. Right to use the goods: In bailment, a bailee may have the right to use the goods if the terms of
the bailment so provide. However, in pledge, a pledgee does not have a pledgee does not have
any right to use the goods.
3. Right to sell the goods: In pledge, the pledgee has a right to sell the goods in case of default
committed by the pledger in making repayment of the debt However, before selling the goods,
the pledgee has to give a reasonable notice of sale to the pledger On the other hand, in bailment,
a bailee has no such right to sell the goods But he may retain the goods or may file a suit against
the bailor for his charges.
RIGHTS AND DUTIES OF PAWNOR OR PLEDGER
Rights of Pawnor-The rights of pawnor or pledger are almost similar to those of a bailor as
already discussed in earlier pages. However, the following rights of pawnor need special
mention:
1. Right to redeem the pledged goods: To redeem means to get something back by making
payment. Section 177 of the Contract Act lays down that if a time is fixed for the payment of
debt or for the performance of a promise for which the pledge is made and the pawnor makes
default in payment of the debt or performance of the promise at the fixed time, then he may get
the goods back by making payment at any subsequent time before they are actually sold by the
Pawnee. However, he can do so only when he pays any expenses which have been incurred by
the Pawnee due to the default in payment at the fixed time.
2. Right to receive any increase or profit from pledged goods: If there is any increase in the
pledged goods during the period of pledge, the pledger is entitled to such increase. For example,
X took a loan of 5,000 from Y and pledged his 100 shares of Laxmi Steels Ltd. During the
period of pledge, the company issued some bonus shares. Here, such bonus shares also belong to
X and he will be entitled to them after making the payment of 5,000.
 DUTIES OF PAWNOR
The duties of the pledger are almost similar to those of the bailor as already discussed earlier,
However, the following are some additional duties of the pledger:
1. Duty to repay the loan: It is the duty of the pledger to comply with the terms of pledge and
repay the debt on the fixed date or to perform the promise at the fixed time.
2. To pay extraordinary expenses incurred by the Pawnee: If the Pawnee has incurred
extraordinary expenses for the preservation of the pledged goods, then it is the duty of the
pawnor to pay such expenses to the Pawnee.
RIGHTS AND DUTIES OF PAWNEE
Rights of Pawnee-The rights of the pawnee are almost similar to those of the bailee as already
discussed earlier. However, the following rights of pawnee have specifically been mentioned in
the Contract Act:
1. Right to retain the pledged goods: Section 173 of the Contract Act provides that the Pawnee
may retain the goods for the following payments: (i) for the payment of debt or for the
performance of promise, and (ii) for the interests of the debt, and (iii) for all necessary expenses
incurred by Pawnee in respect of the possession or for the preservation of the pledged goods.
This right of the Pawnee is in the nature of a particular lien. Section 174 of the Contract Act
provides that the pawnee cannot retain the pledged goods for any debt for promise other than the
debt or promise for which they are pledged, but the parties may contract that the Pawnee can
retain the goods for the payment of other debts also. It may be noted that if after the date of
pledge the Pawnee lends money to the same pawnor without any other security, then it is
presumed that the right to retain the goods extends to subsequent advances also. It means that the
pawnee in such cases can retain the goods for the subsequent advances made to the pawnor after
the first debt.
2. Right to extraordinary expenses: Section 175 of the Contract Act lays down that the Pawnee
is entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the pledged goods. However, for such expenses, he has no right to retain the
goods but he can only sue the pawnor to recover them.
3. Right in case of default of the pawnor: Section 176 of the Contract Act provides that if the
pawnor makes default in payment of the debt or performance of the promise at the fixed time, the
Pawnee (i) may bring a suit against the pawnor for the recovery of debt or performance of
promise, and at the same time retain the pledged goods as a collateral security, or (ii) he may sell
the pledged goods but only after giving to the pawnor a reasonable notice of intended sale If the
proceeds of such sale are less than the amount due in respect of the debt, the pawnee has a right
to claim the balance. If the proceeds of sale are greater than amount due, the pawnee shall pay
over the surplus to the pawnor.
[Link] against the true owner of the goods: Section 178A of the Contract Act lays down that
if the pawnor has obtained possession of the goods pledged by him under a voidable contract
(i.e., by fraud, undue influence, coercion, etc.) but the contract has not been rescinded at the time
of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor's defect of title.
 DUTIES OF THE PAWNEE:
The duties of the Pawnee are almost similar to those of a bailee which have already been
discussed earlier. However, the following are some additional duties of the Pawnee :
1. Duty not to use the pledged goods: The Pawnee must not use the goods pledged by the
pawnor. If the Pawnee uses such goods, he may be held liable for damages for any loss caused to
the goods by such use.
2. Duty to return the pledged goods: It is the duty of the Pawnee to return the goods to pawnor
when the amount of debt has been paid by the pawnor.
 UNIT III
AGENCY
QUES. What is Agency? Explain its essential elements of agency.
The size and complexities of modern business have increased in such huge proportions that it is
now not possible for a person to carry out all the related transactions himself. In such a situation,
he appoints another person to act on his behalf with other parties. The contract which creates this
type of relationship between two persons is known as agency. Thus, agency may be defined as
the relationship. created by a contract or inferred from the circumstances, under which one
person is employed by another in order to bring the appointing person into legal relations with a
third party It may be noted that the term agency has not been defined anywhere in the Contract
Act. However, the agent and principal have been defined as follows:
Agent and Principal: Section 182 of the Contract Act defines an 'Agent' as '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. Thus, apparently it
appears from this definition that a servant, a casual worker and even a cobbler, (i.e., mender of
shoes) are agents. However, legally speaking, this is not so. Then, what is the test of agency? The
test to determine whether there is the relationship of principle and agent or not, is as follows:
1. If 'a person' has the capacity to bind 'another person' by his acts and to make him answerable
to third parties, and
2. If ‘a person' is representing 'another person' to a third party, i.e., if he can create legal
relationship between such ‘another person' and such third party.
Then such a person' is of course an agent and the 'another person' is principal, and the
relationship between them is that of agency. In the words of Justice Ramaswamy (1955),
"Representative character and derivative authority may briefly be said to be the distinguishing
features of an agent."
Thus, if a person merely gives advice to another in matters of business, he does not become an
agent of such another person. A company promoter's status is not that of an agent because he acts
for such a company that is yet to come into existence. However, a person employed by another to
invest money on his behalf and to represent him with the debtors is an agent. Essential Features
of Agency
The essential elements of agency are as follows:
1. The principal: There must be a principal for creating agency, i.e., to appoint an agent. Who
may be a principal? Section 183 of the Contract Act provides an answer to it as follows: "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?" Co-principals may jointly appoint an agent to act for them
and in such a case they jointly become liable to him and may jointly sue him.
2. The agent : An agent is necessary for the establishment of the relationship of agency. Who
may be an agent? Section 184 of the Contract Act lays down that "As between the principal and
third persons, any person may become an agent.” Thus, even a minor or a person of
unsound mind may be appointed as an agent, but such incompetent agent shall not be liable to
the principal. Hence, if the principal intends to make the agent responsible or liable to him, he
should appoint only that person as agent who is competent to contract. This will be in the interest
of the principal because in such a case he will be in a position to recover compensation of loss,
from his agent.
3. An agreement: Agency should be created by an agreement between the principal and the
agent. Such agreement may be either express or implied
4. Consideration not necessary: According to Section 185 of the Contract Act, "No
consideration is necessary to create an agency." Thus, when R appoints P as his agent, R's affairs
placed in the hands of P, then R suffers a detriment which is sufficient consideration, and
therefore no further consideration in the form of remuneration needs to be present. It means that
there can be a gratuitous (without reward) contact of agency, and a gratuitous agent will be as
much bound by his contract as a paid agent.
5. Representative capacity : It is the most important element of agency. The agent must act in
the representative capacity. In other words, he must have derivative authority to represent his
principal with third parties action on his behalf, so as to bring the principal into contractual
relationship with such third parties. In this capacity, he always binds, for his acts, his principal
and makes him answerable to third parties.
6. Good faith: A contract of agency is of good faith. It means the agent must disclose to his
principal every information coming to his knowledge which may influence the principal in the
making of the contract with the third parties.
7. The competence of the principal: Though an agent need not be competent to contact, yet the
principal must be competent to contract. It means he must be of sound mind and of age of
majority (completed 18 years of age).
MODES OR METHODS OR CREATION OF AGENCY
QUES. Define an agency. how is it created?
Creation of agency means creation of the relationship of principal and agent Agency may be
created in any of the following ways:
1. Agency by express agreement: A contract of agency may be made by express words,
whether written or oral. Usually an agent is appointed by written document such as a formal
power of attorney duly stamped according to the Stamp Act, 1899. Section (187 of the Contract
Act lays down that "An authority is said to be express when it is given by words spoken or
written. For example, P resides in Mumbai and he has a plot (piece of land) in Delhi, on which
he wants to construct a house. He appoints R by affecting a power of attorney as caretaker of the
plot and building in progress and also authorizes him to perform all jobs and formalities arising
during the construction. Here, the relationship of principal and agent has been created between P
and R by an express agreement (power of attorney, a written legal document).
2. Agency by implied agreement: The relationship of principal and agent need not be expressly
constituted and can be brought about by implication of a case. According to Section 187 of the
Contract Act, "An authority is said to be implied when it is to be inferred from the circumstances
of the case. The circumstances of the case include those things which are spoken or written, or
things done in the ordinary course of dealing For example, J and K are brothers. J lives in Delhi
and K in Chennai. J has a house in Chennai. K with the knowledge of J lets out the house. K
usually realises the rent and remits it to J who has been accepting the same. Here, Kis an agent of
J and the agency has been created impliedly Partners, servants and wives are usually regarded as
implied agents of other partners, employers and husbands respectively, It may be noted that in an
implied agency, the principal is not entitled to limit or put special restrictions on the implied
authority of the agent without giving proper notice to the third parties. For example, a servant
usually brings general-use-articles from a general merchant on credit and his employer has been
making payment for them. Now if employer wants that only particular items be given on credit
and none else, then he will have to give notice in this regards to the general merchant, otherwise
he will be held responsible for payment of all the items supplied in future on credit.
Implied agency includes the following: (A) Agency by estoppel, and (B) agency by necessity.
These may be described as follows:
(A) Agency by estoppel : The rule of estoppel says that where a person by his words has
wilfully led another person to believe that a certain set of circumstances or of facts exists, and
that another person has acted on that belief, then such a person (who had led) is conduct estopped
or prevented from denying the truth of that statement, although that state of thing did not exist in
fact. Thus, where a person permits or represents another to act on his behalf so that a reasonable
man would infer that the relationship of principal and agent is created, he will be held
responsible to a third party if that third party acts on the assumption of agency and to his (third
party's) detriment. In such a case, the principal will be estopped or prevented from denying his
agent's authority. Such agency is called agency by estoppel or by holding out. This is also known
as 'ostensible authority (i.e., apparent authority) derived from the circumstances of the case. The
following three are the possible circumstances in which agency may be established by estoppel
or by holding out :
(1) A person may become an agent by estoppel, who has never been an agent of the principal.
For example, B presents himself as an agent of C and offers for sale to D certain goods
belonging to C. Then, D purchases the goods on the assumption of agency between B and C.
Here, B is bound by sale.
(ii) There may be an appointed agent but he has some restricted authority to deal on behalf of his
principal. If he leads another person to believe that he is authorised to do what he is doing. Then
he cannot later on deny agency for such acts no matter that he did not possess authority to
perform such acts.
(iii) Sometimes, there may be positive or affirmative act on the part of the principal. Thus, when
a person by his words or conduct holds out another person as his agent, he is bound by the acts of
such another person. Section 237 of the Contract Act lays down that "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 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."
Example: (i) B tells C' in the presence and within the hearing of D that he (B) is the agent of D.
Then, D keeps quiet and does not contradict this statement of B. Later on, C enters into a
contract with B honestly believing that B is D's agent. D is bound by the contract and in suit
between C and D. D cannot be permitted to say that B was not his agent, even though B was not
in fact his agent.
(ii) J consigns goods to K to sale and give him instructions not to sell under a fixed price. M
being ignorant of J's instructions enters into a contact with K to buy the goods at a price lower
than the reserved price. J is bound by the contract.
(B) Agency by necessity: In some cases, the law agency upon a person to act as an agent of
another person without waiting or requiring for the consent or authorisation of that gers another
person, due to the emergency of certain extraordinary circumstances. Such an agency is called
agency by necessity. Thus, this type of agency is created by the emergencies of the
circumstances and not by the sweet will of parties. However, for the creation of valid ‘agency by
necessity, the following conditions must be satisfied:
(i) There should be an actual and definite necessity for action on behalf of the principal.
(ii) The agent is not in a position to communicate with the principal and it is not possible to
obtain principal's instruction to deal with the situation which has by chance arisen.
(iii) The person acting as agent must have acted bonafide in the interest of the principal and must
have taken all reasonable and necessary steps to protect principal's interests.
For example, P has left for Mumbai with the members of his family after locking his house
altogether. Later on, his house catches fire. R, his neighbour, may take all necessary steps to save
P's house, such as he can call out the fire brigade, break open the doors and do all necessary.
things to extinguish the fire and preserve the articles lying in the house. (For another example,
some milk is consigned by J from Kanpur to Delhi through K, a transporter. The tanker carrying
the milk, met with an accident on the way. As the milk is a perishable item, K sold the milk at a
reasonable price to save J from unnecessary loss. The sale is binding upon K because there was
an emergency to sell the milk, otherwise it would have perished.
3. Agency by ratification: Ratification means confirmation of an act which has alread been
done. Sometimes, an act is done by a person on behalf of another person but without another
person's knowledge and authority. The another person has two options in such a case. He either
accept or disown such already performed act. If he accepts and confirms the act, he is said to
have ratified it. Ratification tantamounts to prior authority. Then, the ratification has the same
effects as if the act has been done by his authority (Section 196 of the Contract Act). According
to Section 197 of the Act, ratification may be expressed or may be implied in the conduct of the
person on whose behalf the act is done. On ratification, the principal is bound by the act already
done on his behalf. Such agency is also known as 'ex post-facto agency', i.e., agency arising after
event. For example, B entered into a contract of sale with C for the goods which actually belong
to D, without D's knowledge and authority. Subsequently, D confirmed B's act of selling the
goods and accepted the sale price from C. Here, the contract of sale by B is valid one as if B has
been authorised by D to sell the goods.
Important rules regarding ratification:
(i) Knowledge is essential For valid ratification: the person who ratifies the already performed
act must have clear knowledge of the facts of the case. If his knowledge is materially defective,
the ratification will not be valued (Section 198 of the Contract Act).
(ii) Effect of ratification: A person ratifying any unauthorized act done on his behalf ratifies the
whole of the transaction of which such act formed a part (Section 199 of the Act), The effect of
ratification is to make the agent's acts done without prior authority as binding and valid upon the
principal as if they had the prior sanction of the principal. Ratification in fact relates back to the
date when the act was done by the agent and not to the date when the principal ratified the act.
(iii) Ratification cannot injure a third party: If a ratification causes some damage to a third
person or terminates any right or interest of a third person, it will not be valued. Thus, the acts
which shall become injurious to others by ratification, cannot be ratified (Section 200 of the
Contract Act).
4. Agency by operations of law: In certain circumstances the law treats a person as an agent of
another person. For example, (a) when a partnership is formed, every partner automatically
becomes agent of another partner due to operation of law, and (b) when a company is formed its
promoters are treated as its agents by operation of law.
EXTENT OF AGENT'S AUTHORITY
According to Section 188 of the Contract Act, an agent who has an authority to do an act has
authority to 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 carrying on
such business, or usually done in the course of conducting such business. For example) P is
engaged to look after a cinema (picture-hall). He may hire films for different shows; may hire
temporary workmen to do casual jobs; may auction the vehicle stand; and may do other jobs
incidental to the service of the cinema.
Section 189 of the Act lays down that in an emergency, an agent has authority to do all such acts
for the purpose of protecting his principal from loss as would be done by a person of ordinary
prudence (i.e., careful forethought) in his own case under similar circumstances.
[Link] is the agent or agent’s authority? Can an agent delegate his authority?
Delegation of Authority by Agent
Ordinarily an agent is supposed to perform his duties personally. A general rule is that "delegatus
non-potest delegare." i.e., a delegate cannot further delegate. Thus, since agent himself is a
delegate of his principal, he cannot further delegate his powers to somebody else, Section 190 of
the Contract Act provides that "An agent cannot lawfully employ another to perform acts which
he has expressly or impliedly undertaken to perform personally." However, agent. These
conditions are: under certain circumstances a sub-agent may be appointed by an (i) if it is an
ordinary custom of a trade to appoint a sub-agent, or (ii) if the nature of the agency is such that it
becomes necessary to appoint a sub-agent. The agent may thus delegate his power to another
person who may either be a sub-agent or a substituted (co-agent).
Sub-agent and His Relationship
Section 191 of the Contract Act defines 'sub-agent' as a person who is employed by, and acting
under the control of the original agent in the business of the agency.
Sub-agent appointed with authority: Section 192 of the Contact Act lays down that where a
sub-agent is properly appointed, the principal is represented by the sub-agent with the third
parties and he is bound by and responsible for his (sub-agent's) acts as if he were an agent
originally appointed by the principal. The agent is responsible to the principal for the acts of the
sub-agent. The sub-agent is responsible for his acts to the agent but not to the principal except in
cases of fraud or wilful wrong.
Sub-agent appointed without authority: According to Section 193 where an agent without having
authority to do so, has appointed a person to act as a sub-agent, such appointment is improper
and invalid. The principal is not represented by such sub-agent and he is not bound by his acts.
Moreover, the principal is not liable to third parties for the acts of unauthorised sub-agent. The
original agent stands as a principal towards such sub-agent and therefore he is responsible for his
acts both to the principal and to the third parties. The unauthorised sub-agent is not responsible
to the principal.
Substituted Agent or Co-agent
According to Section 194 of the Contract Act, where an agent having authority to do so has
named another person to act for the principal in the business of agency, such another person is
called substituted agent or co-agent because he is an agent of the principal for such part of
business of the agency as is entrusted to him. The original agent has authority substituted agent
for his principal. For example, B engaged C as his agent for looking after the execution of an
export consignment B directs C to employ a forwarding agent for the purpose. C names D, a
forwarding agent to ship goods to Sri Lanka from Mumbai. D is not a sub-agent, but he is B's
agent for forwarding the goods.
Section 195 lays down that in selecting substituted agent for his principal, an agent is bound to
exercise the same amount of discretion as a man of ordinary prudence (i.e., careful forethought)
would exercise in his own case. If an agent appoints the substituted agent with reasonable care,
then he is not responsible to the then he is not responsible to the principal for the acts or
negligence of the so selected substituted agent.
For example, X instructs Y, a merchant, to buy a ship for him. Y employs Z, a ship-surveyor of
good reputation, to choose a ship for X. The surveyor makes the choice negligently and the ship
turns out to be unseaworthy and is sunk in the sea. Y is not responsible to X, but Z is responsible
to X.
Difference between Sub-agent and Substituted Agent
1. Mode of Appointment: A sub-agent is appointed by an agent and he also works under his
control, whereas though the substituted agent is also appointed or named by an agent but he
works under the control of the principal.
2. Nature of relationship: A sub-agent is an agent of the original agent, while a substituted
agent is a co-agent to the original agent.
3. Responsibility: A sub-agent is responsible to the original agent only and not to the principal
except in cases of fraud or willful wrong, whereas a substituted agent is responsible to the
principal alone and not to the original agent.
4. Liability of original agent: The original agent is responsible to the principal for the acts of
the sub-agent, while the original agent is not responsible to the principal for the acts of the
substituted agent if he has taken reasonable care in appointing him.
5. Privity of contract: There is no direct contract between the principal and the sub-agent.
Neither the principal can sue the sub-agent for damages directly, nor the sub-agent can sue the
principal for remuneration. On the other hand, there is a direct contract between the principal and
the substituted agent and both can sue each other.
RIGHTS AND DUTIES OF AGENT
QUES. Explain the rights and duties of agent.
1. Right to retain money received on principal's account: According to Section 217 of the
Contract Act, an agent has a right to retain his principal's money until his claims in respect of
conducting the business of his remuneration and other expenses properly incurred by him in
conducting the business of agency are satisfied.
2. Right to receive remuneration: An agent is entitled to receive such remuneration as may be
fixed by the terms of agency. In case, the remuneration has not been fixed, he is entitled to
receive a reasonable remuneration.) In the absence of a contract to the contrary, agent's right to
receive remuneration would accrue only on the completion of the work or service for which he
has been employed. An agent is entitled for his remuneration when he has done what he had
undertaken to do, even though the contract is not completed. For example, P was employed as an
agent by R, an export organization, to secure export orders. A secured some desired orders for R
but R, the firm, was dissolved. P is entitled to his commission, though the orders secured by him
have not been executed. An agent may detain money received by him on account of goods sold
although the whole of the goods consigned to him (i.e., received by him) for sale may not have
been sold, or although the sale may not be actually complete (Section 219 of the Contract Act).
The question as to when the act of an agent is complete depends upon the facts and
circumstances of each case. However, it is necessary that the transaction (act) should be the
direct or indirect result of the efforts of the agent. It may be noted that under Section 220 of the
Contract Act, an agent who is guilty of misconduct in the business of agency, is not entitled to
any remuneration in respect of that part of business which he has misconduct. For example, J
employs K to recover 15,000 from M. Owing to K's misbehavior with M, only 10,000 could be
recovered from M. Here, K is entitled to commission on 10,000. He is not entitled to any
commission on 5,000 but on the other hand he has to pay damages for non-recovery of 5,000rs.
3. Right of lien on principal's property: In addition to the right of retaining principal's money
until his proper payments have been made, an agent has another right to retain goods, and other
movable or immovable property of the principal received by him until the amount due to himself
for commission, disbursements and service in respect of the same has been paid or accounted for
to him. However, there should be no contrary contract to this provision (Section 221 of the
Contract Act).
4. Right to be indemnified: An agent can recover compensation for losses and expenses
incurred by him in the course of the agency business in the following two cases:
(i) Where the losses and expenses have resulted as a consequence of any lawful act done by the
agent in exercise of the authority conferred upon him (Section 222 of the Contract Act). For
example, P, having authority from R, contracts with M to supply 50 sets of BPL-Sanyo
televisions. R does not send the sets to P and therefore he is unable to supply them to M. Then,
M sues P for damages. P informs R about the suit and R authorises him to defend the suit.
Subsequently, P is compelled to pay damages and costs in the suit. Here, R is liable to P for such
damages, cost and related expenses.
(ii) Where one person employs another to do an act, and the agent does the act in good faith, the
employer is liable to indemnify the agent against the consequences of that act, though it causes
an injury to the rights of third persons (Section 223 of the Contract Act). For example, P at the
request of R. sells o in the possession of R but R had no right to dispose off the goods. P does not
know this fact, and hands over the proceeds of the sale to R. Later on, M who is the true owner
of the goods, sues P and recovers the value of the goods and costs. R is liable to indemnify P for
what he has been compelled to pay to M and for P's own expenses.
However, the right to be indemnified is not available against those acts which are criminal, even
if there is an express or an implied promise to indemnify the agent by his employer against the
consequences of such acts (Section 224 of the Contract Act). For example, J employs K to beat P
and agrees to indemnify him against all consequences of the act. K thereupon beats P and has to
pay damages to P for so doing. Here, J is not liable to indemnify K for those damages, because K
is employed to do an act which is criminal.
5. Right to compensation for injury caused by principal's neglect: According to Section 225
of the Contract Act, an agent has a right to be compensated by the principal for any injury caused
to him by the principal's neglect or want of skill. But where the injury results from the
negligence of the agent, he cannot claim compensation from the principal. For example, X
employs Y, an agent, to sell certain petroleum products from a show-room which is built by X
him. Owing to some defects in the construction of show-room its roof falls down and Y is
injured. It is found that X was careless in the inspection of the show-room during its
construction. Here, X must make compensation to Y
DUTIES OF AN AGENT
The following are the statutory duties of an agent:
1-To follow the directions of the principal: According to Section 211, an agent is bound to
conduct the business of his principal according to the directions given by the principal. If there
are no directions from the principal, he must follow the custom which prevails in doing business
of the same kind at the place where the agent conducts such business. In case, the agent fails to
conduct the business according to such directions or such a custom, he shall principal for any
loss sustained by him due to the agent's acting otherwise. However, if any profit compensate his
accrues by agent's acting otherwise, he shall account for it to the principal.
Example: (a) An agent is instructed by the principal to store the goods in a particular godown at a
particular place. He stores a portion of the goods in another godown at a different place where
they are destroyed by fire without negligence. Here, he is liable to the principal for the value of
the goods destroyed.
(b) A stock broker who has been instructed to sell or purchase shares is required to do so in
accordance with the rules or the customs of the Stock Exchange.
(c) In an auction sale the usual custom is not to accept a bill of exchange in payment. An agent
who performs an auction sale takes a bill of exchange in payment of the price of the goods sold.
He is liable to the principal for the amount of the bill in the event of its being dishonored.
2. To conduct the business of agency with reasonable skill and diligence: Section 212 of the
Contract Act lays down that an agent is bound to carry on the business of agency with as much
skill as is possessed by persons engaged in similar business. He is also bound to act with
reasonable diligence, i.e., care and effort. If the principal suffers any loss which is the direct
consequence of agent's own neglect, want of skill, or misconduct, then the agent must
compensate his principal for such loss) However, he is not liable to his principal in respect of any
loss or damage which is indirectly or remotely caused by such neglect, want of skill, or
misconduct. For example, P is an agent of R for that sale of furniture, having authority to sell on
credit. P sells furniture worth 5,000 to S on credit without making any proper and usual enquiries
regarding the financial capacity or status of S. Later on, it is found that S was insolvent at the
time of sale of furniture and also that he was not an average honest man. Here P is responsible to
R for non-recovery of the amount of 5,000.
It may be noted that 'reasonable skill and diligence' shall depend upon the facts and
circumstances of each case and hence shall differ from case to case.
3. To render accounts on demand: Section 213 of the Contract Act provides that an agent is
bound to render (to present or send) proper accounts to his principal on demand. In a is held that
it is the duty of an agent, though there may not be any contract to this effect, that case, it he must
produce vouchers by which items of disbursement (i.e., expenses) are supported as part of the
obligation to render accounts to the principal on demand (S. Paul & Co. vs. State of Tripura AIR
1984 Cal 378).
4. To communicate with the principal: Section 214 of the Contract Act reads that it is the duty
of an agent that in cases of difficulty he must use all reasonable diligence (care and effort) in
communicating with the principal and obtain his instructions. However, in case of an emergency
where it is not possible to communicate with the principal, then as per Section 189 of the Act, he
should do all such acts for the purpose of protecting his principal from loss as would be done by
a person of ordinary prudence (careful forethought) in his own case under similar circumstances.
5. Not to deal on his own account: By implications of Section 215 of the Contract Act, an agent
should not deal on his Not to deal on his own account in the business of agency. For example, an
agent appointed to sell the property should not buy it for himself, or similarly an agent appointed
to buy certain goods should not deliver (sell) his own goods. Thus, as an agent owes fiduciary
duties (duties arising out of trust) to his principal, therefore no agent is permitted to put himself
in the position where his personal interest conflicts with his duty. Complete loyalty is required on
the part of the agent and hence he cannot be allowed to deal on his own account in the business
of the agency. However, if an agent desires to deal on his own account, he must make a full and
frank disclosure of all material facts and circumstances which have come to his knowledge on
the concerned subject, to the principal and must obtain the principal's consent. In case, he fails to
obtain such consent, and carries on the business of agency on his own account, the principal has
two options: (i) he may repudiate (cancel) the transaction, if the case shows either that any
material fact has been dishonestly concealed from him by the agent, or that the dealings of the
agent have been disadvantageous to him, or (ii) he may affirm the transaction, and as per Section
216 of the Act, can claim from the agent the benefits resulting from the transaction. Besides
these two options, the principal may also claim damages for any loss caused to him by such
transaction. The agent would not be entitled to claim his remuneration. For example, B directs C
to sell B's agricultural farm, C. before selling it, finds a mine under the farm which fact is
unknown to B. Then, C informs B that he wishes to buy the farm for himself but conceals the
'discovery of the mine. B, on discovering that C knew of the mine at the time he bought the farm,
may either repudiate or adopt the sale at his option.
6. To pay the amounts received for the principal: According to Section 218 of the Contract
Act, the agent is bound to pay to his principal all sums received on his account. However, he
may deduct from them his lawful remuneration and all expenses properly incurred by him for the
business of the agency.
7. Not to delegate his authority: Section 190 of the Contract Act lays down that an agent must
perform acts personally which he has expressly or impliedly undertaken to perform personally.
Thus, in such cases, an agent must not delegate the authority given to him by the principal.
However, under certain circumstances, this authority can be delegated.
8. Not to act in excess of authority: An agent should not act in excess of what he is authorised
to do. According to Section 228 of the Contract Act, where an agent does something more than
what he is authorised to do and the act which is done beyond the scope of his authority cannot be
separated from what is within his authority, the principal is not bound to recognise the
transaction. In other words, the principal may or may not accept such transaction.
9. Duty on termination of agency by principal's death or insanity: Section 209 of the
Contract Act provides that when an agency is terminated on account of the death of the principal
or of his becoming of unsound mind, then the agent is bound on behalf of the representatives of
his lated principal, to take all reasonable steps for the protection and reservation of the interests
entrusted to him.
RIGHTS AND DUTIES OF THE PRINCIPAL
The agent's rights are the principal's duties and the agent's duties are the principal's rights. The
agent's rights and duties have been discussed as above.
PERSONAL LIABILITY OF AGENT TO THIRD PARTY
Section 230 of the Contract Act clearly lays down that an agent cannot personally enforce
contracts made by him on behalf of his principal, nor is he personally bound by them. However,
if there is any contract under the terms of which the agent has taken upon himself any
responsibility to enforce such contracts personally or to be bound by them personally, only then
he can be held liable personally to the third party. Such a contract shall be presumed to exist in
the following cases: (i) Where the contract is made by an agent for the sale or purchase of goods.
for a merchant resident abroad; (ii) Where the agent does not disclose the name of his principal,
and (ii) Where the principal though disclosed, cannot be sued.
Thus, the rule is that the agent enjoys an immunity from being personally liable and the principal
is the right person to enforce to contracts entered into by the agent on his behalf and the principal
is to be held liable for them. However, there are certain exceptions to this rule, and an agent
incurs personal liability and he will be presumed to be personally liable in the following cases,
unless there is a contact to the contrary:
1. Personal liability by express agreement: Sometimes third party when entering into a
contract with agent may specifically provide in it that the agent will be personally liable if the
contract is not performed, in such a case the agent will be personally liable.
2. When acting for a foreign principal: Where a contract is made by an agent for sale or
purchase of goods for a merchant residing abroad, the agent is presumed to be personally liable.
In case of foreign principals, the presumption of law is that the third party does not know the
standing and credit of foreign principal and the credit is given to the agent and not to the
foreigner. However, the agent can exclude his personal liability by an express provision in this
regard in the contract (Section 230 of the Act).
3. When acting for an undisclosed principal: Where the agent does not disclose the name of
his principal, then he is personally liable if the undisclosed principal remains undisclosed But
principal or has the to where the third party knows the existence of t party entering into the
contract is an agent, then the agent cannot be made personally liable although at the time of the
contract the agent did not disclose the principal's name. Knowledge in such a case is equivalent
to disclosure. On the other hand, where the third party comes to know the existence of the
principal after the formation of the contract, he gets an option to sue either the principal or the
agent.
4. Where the agent acts for a principal who cannot be sued : Where the principal, though
disclosed, cannot be sued, the agent is personally liable to the third party. The principal cannot
be sued in the following cases: if he is an ambassador, or foreign sovereign, or if he is
disqualified from contracting, for example, he is a minor or a person of unsound mind, or an
insolvent.
5. Where the agent exceeds his authority: Where an agent has no authority or acts beyond his
authority, he commits a breach of warranty of authority and can be held personally liable. If the
agent knows that he is acting without authority or in excess of his authority, the breach of
warranty will amount to deceit. The measure of damages for breach of warranty of authority is
the actual loss sustained by the third party.
6. Where the agency is 'coupled with interest': Where an agent has a special interest in the
subject-matter of the contract, his authority is said to be 'coupled with interest. In such a case, the
agent shall be personally liable to the third party to the extent of his interest because he is really a
principal to the extent of his interest and therefore may sue and be sued in his own name but only
for that interest in the subject-matter. For example, P consigns 20 water coolers to R and R has
made an advance of 10,000 to P on such coolers. P desires that R should sell the coolers and
should repay himself for 10,000 out of the sale proceeds. Here, the authority of R is coupled with
interest.
7. When there is a custom or usage: An agent may be held personally liable if there is some
trade usage or custom, provided there is no contract to the contrary.
8. Where the agent signs the contract in his own name: Where an agent signs the contract in
his own name without disclosing that he is signing on behalf of the principal, he is personally
liable on such a contract. For example, if X signs a bill of exchange, or a promissory note, or a
'hundi' in his own name without mentioning that he is signing it as an agent, he shall be held
personally liable.
9. When the principal is non-existent: Where an agent acts for a principal who is not in
existence, he is presumed to incur personal liability in the same manner as if he had contracted
on his own account. For example, the promoters, who enter into any contract on behalf of a
company which is not yet incorporated, are personally liable on such contracts.
10. When he receives or pays money by mistake or fraud: Where the agent receives money
from or pays money to a third party by mistake or fraud, he is personally liable to the third party.
Right of person dealing with an agent who is personally liable: Section 233 of the Contract Act
lies down that in cases where the agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them, liable.
LIABILITY OF THE PRINCIPAL AND HIS AGENT TO THIRD PARTIES
There is a statutory effect of agency on contracts with third party. As the agent enters into a
contract with third party on behalf of the principal, he binds the principal if he acts within the
scope of his authority. The position of a principal and his agent in relation to third parties may be
discussed under the following three heads: (i) Named principal, (ii) Unnamed principal, and (iii)
Undisclosed principal.
I. Liability of Named Principal
Named principal means where both the existence and the name of the principal are disclosed by
the agent, and thus the agent expressly contracts as agent for a named principal.
The position of the named principal for the acts of the agent is as follows:
1. Acts of agent are to be taken as acts of principal: The principal is bound by the acts of his
agent which are done within the scope of agent's actual or apparent authority during the period of
agency. Section 226 of the Contract Act lays down that the contracts entered into by an agent and
obligations arising out of the acts done by an agent may be enforced in the same manner and will
have the same legal consequences as if the contract had been made and acts had been done by the
principal himself. For example, X authorises his agent Y to purchase 50 washing machines on
his behalf on credit. Y purchases the machines on credit from Z. Here, X is bound by the
obligations created by Y through the credit purchase transaction and he is liable to pay the price
of the machines.
2. Liability of principal when the agent exceeds his authority: If the agent acts beyond his
authority, then in such a case there may be the following two situations:
(a) Where the act is separable : According to Section 227 of the Contract Act when an agent does
more than what he is authorised to do and if the part of the excess act can be separated from the
part which is within his authority, then the principal is bound by the part only which is within the
authority of the agent. For example, X authorises his agent Y to procure an insurance for 5,000rs
on Delhi godown. Y procures a policy for 5,000 on Delhi godown and another policy of 3,000rs
on Ghaziabad godown. X is bound to pay the premium for the policy on Delhi godown, but he is
not bound to pay the premium for the policy on Ghaziabad godown.
(b) Where the act is not separable: Section 228 of the Contract Act provides that where an agent
does more than what he is authorised to do and the part of the excess act account be separated
from the part that is within his authority, then the principal is not bound even by the authorised
part of the act or the transaction and he may repudiate the whole act or transaction. For example,
X authorises Y to purchase 5 tons of rice for him. Y purchases 5 tons of rice and 2 tons of wheat
for one sum of 20,000. X may repudiate (cancel) the whole transaction.
3. Notice to the agent is notice to the principal: Section 229 of the Contract Act lays down that
any notice given to or information obtained by the agent during the course of the business of
agency, shall have the same legal consequences as if it had been given to or obtained by the
principal. For example, if some goods are rejected by a buyer and he intimates about the fact of
rejection of the goods to the agent of the seller, then it is a due intimation given to the principal.
However, if the agent does not possess authority to receive notice and this fact is known to the
person giving notice, the notice given to the agent cannot be taken as to be served on the
principal (State of Orissa vs. Goenka Investment, AIR 1983 Cal 438).
4. Liability of principal inducing belief that agent's unauthorised acts were authorised:
According to Section 237, if a principal by his words or conduct induces (causes) a third person
to believe that the unauthorised acts done or the unauthorised obligations incurred by the agent
were within the scope of the agent's authority, then the principal is bound by such acts done or
obligations incurred to such a third [Link]
5. Liability of principal for misrepresentation or fraud by the agent : Section 238 of the
Contract Act lays down that, if during the course of the business of agency, the agent makes any
misrepresentation or commits any fraud, it will have the same effect on agreements made by
such agent as if such misrepresentation or fraud had been made or committed by the principal.
The effect in both the cases in that the contract between the agent and third party becomes
voidable at the option of the third party and the third party may rescind it and recover any benefit
which has passed thereunder to the principal. However, misrepresentation made or fraud
committed by an agent in matters which do not fall within his authority, does not affect the
principal, i.e., the principal is not liable in such cases.
6. Principal bound by admissions made by the agent: The acknowledgements or acceptance
made by the agent during the course of the business of agency shall be regarded to have been
made by the principal and the principal will be bound by them.
II. Liability of Unnamed Principal
'Unnamed Principal' means a principal whose existence has been disclosed by the agent while
contracting with third parties discloses but his name has not been disclosed. If the agent the fact
that he is entering into contract on behalf of his principal but does not disclose the name of the
principal, the principal is bound by that contract. However, such acts must be within the scope of
the authority of the agent and the unnamed principal must be in existence at the time of making
the contract. For such contracts, the agent is not personally liable unless there is something
which shows that the agent is personally liable, for example, there is some trade custom, or an
express or implied agreement to hold the agent personally liable. But if the agent refuses to
disclose the identity of his principal when asked by the third parties to disclose it, then the agent
becomes personally liable on the contract.
III. Liability of Undisclosed Principal
Undisclosed principal' means a principal whose existence and name both have not been disclosed
by the agent. Thus, when the principal is undisclosed, it means that the agent conceals the fact
that he is an agent. He gives an impression that he is independently making the contract.
However, the third party neither knows nor has reason to suspect that the person with whom he is
dealing is an agent. The position of different parties when the principal is undisclosed is as
follows:
1. Position of the principal: Section 231 of the Contract Act lays down that if an agent makes a
contract with a person who neither knows, nor has reason to suspect that he is an agent, his
principal may require performance of the contract from the contracting party. But in such a case
the principal must allow to the third party the benefit of all payments made by such third party to
the agent.
2. Position of the agent : As between the principal and the agent, the agent has all the rights of
an agent against the undisclosed principal. So far as the third party is concerned, the agent is
personally liable to the third party on the contract. The agent can be sued by the third party and
he can sue the third party as well.
3. Position of the third party: The position of the third party may be discussed as follows: (a)
Section 231 of the Contract Act lays down that if the principal discloses himself before the
contract is completed, the third party may refuse to fulfil the contract if he can show any one of
the following two conditions:
(i) That if he had known who the principal was in the contract, he would not have entered into
the contract, or
(ii) That if he had known that the agent was not a principal, he would not have entered into the
contract.
(b) According to Section 231 of the Contract Act, where the principal requires performance of
the contract, the third party will have the same rights against the principal as he would have had
against the agent if the agent had been the principal.
(c) Section 232 of the Contract Act provides that where one man makes a contract with another
person without knowing and without having reasonable ground to suspect that such another
person is an agent, the principal if he requires performance of the contract, can only obtain such
performance subject to the rights and obligations existing between the agent and the third party
to the contract. Thus, the third party has a right to set-off against the principal any claim which
he may have against the agent. For example, X owes 1,000 to Y. Then, X sells certain goods to Y
for 5,000. In this transaction X is acting as agent for Z but Y has no knowledge nor any
reasonable ground for suspicion that X is an agent. Here, Z is a undisclosed principal, and he
cannot compel Y to pay 5,000rs without allowing him to set-off the debt to X for 1,000. In
other words, a set-off for Rs. 1,000 will be allowed to Y and Z claims only the difference i.e.
4000rs. But the set-off will not be allowed if Y had been aware that X was an agent.
CHOICE OF REMEDY TO THIRD PARTY
Section 234 of the Contract Act provides that the third party has to make a choice to sue either
the agent or the principal in the following manner:
1. If the third party has made a contract with an agent by influencing or persuading him to act
upon the belief that the principal only will be held liable, then he (the third party) cannot
afterwards hold the agent liable, 2. If the third party has made contract with an agent by
influencing or persuading the principal to act upon the belief that the agent only will be held
liable, then he (the third party) cannot afterwards hold the principal liable.
Thus, to enable the principal or the agent to claim exemption from liability two essential
conditions must be satisfied. First, the third party should have induced (persuaded or influenced)
a belief in one of them that he (the third party) is going to hold the other alone liable. Secondly,
this belief should have resulted in a course of action on the part of one of them (either the agent
or the principal as the case may be) which would not have happened otherwise.
LIABILITY OF PRETENDED AGENT
A person, who untruly represent himself to be the authorised agent of another, is called
'pretended agent.' In fact he has no authority whatever, but represents that he has a certain
authority from another. Section 235 of the Contract Act lays down that if a pretended agent
induces (persuades or influences) a third person to deal with him as authorised agent, then he is
liable to make compensation to the third person in respect of any loss or damage which he (the
third person) has incurred by so dealing. If his alleged employer (principal) does not ratify his
acts. However, if the alleged employer ratifies his acts, then the pretended agent will not be
liable. In that case, the alleged employer will be liable.
Section 236 of the Contract Act lays down that a pretended agent is not entitled to claim
performance of the contract on a subsequent plea that he was acting on his own account (i.e., as a
principal).
TERMINATION OF AGENCY
Termination of agency means revocation (cancellation) of authority of the agent. The agency
may be terminated either (i) by the act of the parties, or (ii) by operation of law.
I. TERMINATION OF AGENCY BY THE ACT OF THE PARTIES
A contract of agency may come to an end either by an act of the principal, or an act of the agent,
or both. Thus, agency may be terminated in any of the following ways:
1. By revocation of authority by the principal: Section 201 of the Contract Act provides that
an agency is terminated when the principal revokes (cancels) the authority of the agent, and
according to Section 203 of the Act he may revoke authority at any time before the authority has
been exercised by the agent so as to bind the principal unless the agency is irrevocable (see for
'irrevocable agency' later in this Chapter) Further, as per Section 207 of the Act, revocation may
be express or implied in the conduct of the principal, Where the agent has partly exercised his
authority, the principal may revoke agency for future acts only. Where the agency has been
created for a fixed period, the principal may revoke the agency before the expiry of the fixed
period, only if there is some sufficient cause for the same. If he revokes such agency without any
sufficient cause, he must make compensation to the agent. Where the agency is continuous, i.e.,
for a number of acts, or for a fixed period, the principal must give the agent a reasonable notice
of revocation of agency. If such a notice is not given, the principal will be liable to compensate
the agent for any loss suffered by him.
2. By renunciation (giving up) of business of agency by the agent: The agent may renounce
the business of agency in the dame manner in which the principal has the right of revocation. The
agent himself may renounce the agency after giving a reasonable notice to the principal. If the
contract of agency is to continue for a fixed period, the agent cannot renounce it before that
period without any sufficient cause for the same. If he renounces without any sufficient cause, he
must make compensation to the principal. Reasonable notice of such renunciation must be given,
otherwise the agent will be liable to compensate the principal for any loss suffered by him.
It may be noted from above mentioned two points that similar rules apply both in case of
revocation of authority and renunciation of business of agency. The principal and the agent have
mutually similar rights and liabilities in these two cases.
3. By mutual agreement: Like any other agreement, the agency may be terminated at time by
mutual agreement between the principal and the agent.
II. TERMINATION OF AGENCY BY OPERATION OF LAW
The agency automatically terminates in any of the following cases:
1. Completion of business of agency: An agency comes to an end as soon as the business of
agency is completed. For example, X employs Y to sell certain law books. The agency will
automatically be terminated when all the books are sold out (Section 201 of the Contract Act).
2. Death or insanity of principal or agent: The agency is terminated when the principal or
agent dies or becomes of unsound mind. (Section 201 of the Act). Section 209 of the Contract
Act imposes a duty upon the agent by providing that even after the death or the insanity of the
principal and the consequent termination of agency, the agent is bound to take on behalf of the
representatives of his late or insane principal, all reasonable steps for the protection and
reservation of the interest entrusted to him.
Sometimes, the principal is a company or a partnership firm. In such cases, the agency is
terminated on the winding up of the company or on the dissolution of partnership firm, as the
case may be. M
3. Insolvency of the principal: When the principal is adjudicated (declared by the Court) as an
insolvent, the agency is automatically terminated, because the insolvent person is disqualified
from entering into contract in respect of his property (Section 201 of the Contract Act). Nothing
is given in the Contract Act about the insolvency of the agent. The opinion on this point seems to
be divided still. Some argue that agency of agent does not terminate the agency because he is
merely a connecting link between the principal and the third party. However, some others are of
the opinion that insolvency of the agent also terminates the agency expect in the cases where the
act assigned to the agent is merely formal.
4. Destruction of Subject-matter: When the subject-matter of the agency contract eases to
exist, the agency comes to an end. For example, if an agency is created for the sale of a house or
a car and the house burns down by fire or the car is destroyed in an accident and becomes
unsaleable, the agency terminates after the involved happening in each case.
5. Expiry of time: If an agent is appointed for a fixed period, the agency comes to an end after
the expiry of the stipulated time, whether the work of agency has been completed or not.
However, in such cases, the period of agency may be extended.
6. Agency subsequently becoming unlawful: Sometimes, an agency is valid when it is created.
But subsequently, it may become unlawful by the happening of some unknown event. In such
case, the agency is automatically terminated when such subsequent event happens. Examples: (i)
Where the agent and principal reside in different and a war is declared between these two
countries, the agency is terminated at the same time because the principal and the agent are
regarded as alien enemies and the contract between them becomes unlawful.
(ii) Where the contract of agency is made for the sale of imported weapons and later on the
government bans the import of such weapons and also their sale and purchase, then the agency
comes to an end as soon as ban is declared by the Government.
7. Termination of sub-agent's authority: Section 210 of the Contract Act provides that the
termination of the authority of an agent causes the termination of the authority of all sub-agents
appointed by him. It means sub-agency comes to an end as soon as the original or main agent's
authority is terminated. But in case of substituted agent, termination of original agent's authority
does not terminate the authority of the substituted agent.
EFFECTIVE TIME OF TERMINATION OF AGENCY
When the termination of agency becomes effective? Section 208 of the Contract Act provides an
answer to this question as follows:
1. As far as the authority of the agent is concerned, it is terminated only when the agent comes to
know the fact that his authority has been terminated.
2. As far as the third parties are concerned, the authority of the agent will be terminated for them
only when they come to know the fact that the authority of the agent has been revoked.
Thus, the termination is effective from the time when it comes to the knowledge of the agent or
the third parties as the case may be. Therefore, termination may be effective at a different time as
regards the agent and as regards the third parties. Hence, third parties may deal with the agent till
they come to know the fact of termination of the agent's authority. For example, B directs C to
sell goods for him, and agrees to give C 5% commission on the price fetched by the goods.
Afterwards, B by means of a letter revokes C's authority. C, after the letter is sent but before he
receives it, sells the goods for 5,000rs. The sale is binding on B and C is entitled to 5% of 5,000
i.e. 250 as his commission.
IRREVOCABLE AGENCY
When the authority of agent cannot be revoked by the principal, it is said to be an irrevocable
agency. An agency is irrevocable in the following cases:
1. If the agency is coupled with interest: When an agent himself has a special interest in the
property which forms the subject-matter of the agency, such agency is said to be 'coupled with
interest'. According to Section 202 of the Contract Act, such agency is irrevocable and it cannot
be terminated during the existence of such interest. However, the parties are free to enter into an
agreement for the termination of such agency. It may be noted that an agency coupled with
interest is not terminated even on the death or insanity of the principal. For example, X owes ₹
5,000 to Y, and X authorises to sell Y's car and to pay himself out of the proceeds of sale. This is
an agency coupled with interest and therefore it cannot be revoked once X has authorised Y. It
will not be revoked even on the death or insanity of Y.
2. Where the agent has partly exercised his authority: Section 204 of the Contract Act lays
down that the principal cannot revoke the authority given to his agent after the authority has been
partly exercised regarding such acts and obligations as arise from the acts already done in the
agency. It means that the principal cannot revoke the agent's authority for the acts already done
and the principal shall be liable for such acts. For example, B authorises C to buy 10 tonnes. of
iron bars on B's account and to make the payment out of B's money remaining in C's hands. C
buys the iron bars in the name of B. Then, B cannot revoke C's authority so far as regards the
payment for the iron bars.
3. When the agent has incurred a personal liability: If in pursuance of (carrying out of) the
contract of agency, the agent has entered into any contract and has incurred some personal
liability, the principal cannot revoke the agency because if he is allowed to revoke the agency, it
would expose the agent to risk and liability which he has already incurred on behalf of the
principal. For example, if in the above-mentioned example (see example given under point no.
(2) above), C buys the iron bars in his own name instead of the name of B, then C makes himself
personally liable. Hence, the agency becomes irrevocable and B cannot unilaterally terminate it.
 UNIT-IV

CONSTITUTIONAL PROVISIONS RELATED TO GOVERNMENT CONTRACTS

QUES. What are government contracts? What are its requirements? Can it be oral?

Liability of State in Contract

Article 298 provides that the executive power of the Union and of each State shall extend to the
carrying on of any trade or business and to the acquisition holding and disposal property and the
making of contracts for any purpose. Article 299 (I) lays down the manner of formulation of
such contract. Article 299 provides that all contracts in the exercise of the executive power of the
union or of a State shall be expressed to be made by the President or by the Governor of the
State, as the case may be, and all such contracts and all assurances of property made in the
exercise of that power shall be executed on behalf of the President or the Governor by such
persons and in such manner as he may direct or authorize. Article 299 (2) makes it clear that
neither the President nor the Governor Shall be personally liable in respect of any contract or
assurance made or executed for the purposes of this Constitution or for the purposes of any
enactment relating or executing any such contract or assurance on behalf of any of them be
personally liable in respect thereof. Subject to the provisions of Article 299 (1), the other
provisions of the general law of contract apply even to the Government contract.
A contract with the Government of the Union or State will be valid and binding only if the
following conditions are followed: -

1) The contract with the Government will not be binding if it is not expressed to be made in the
name of the President or the Governor, as the case may be.
2) The contract must be executed on behalf of the President or the Governor of the State as the
case may be. The word executed indicates that a contract with the Government will be valid only
when it is in writing.
3) A person duly authorized by the President or the Governor of the State, as the case may be,
must execute the contract.
The above provisions of Article 299 are mandatory and the contract made in contravention
thereof is void and unenforceable.
The Supreme Court has made it clear that in the case grant of Government contract the Court
should not interfere unless substantial public interest is involved or grant is mala fide when a writ
petition is filed in the High Court challenging the award of a contract by a public authority or the
State, the Court must be satisfied that there is some element of public interest involved in
entertaining such a petition.

Effect of a Valid Contract With Government:- However, as Article 299 (2) provides neither
the President nor the Governor shall be personally liable in respect of any contract or assurance
made or executed for the purposes of this Constitution or for the purposes of any enactment
relating to the Government of India. As soon as a contract is executed with the Government in
accordance with Article 299, the whole law of contract as contained in the Indian Contract Act
comes into operations. Thus the applications of the private law of contract in the area of public
contracts may result in the cases of injustice.…………………………………………………
A contract of service with the Governments not covered by Article 299 of the Constitution. After
a person is taken in a service under the Government, his rights and obligations are governed by
the statutory rules framed by the Government and not by the contract of the parties.
Service contracts with the Government do not come within the scope of Article 299. They are
subject to “pleasure”. They are not contracts in usual sense of the term as they can be determined
at will despite an express condition to the contrary.
In India the remedy for the branch of a contract with Government is simply a suit for damages.
The writ of mandamus could not be issued for the enforcement of contractual obligations. But
the Supreme Court in its pronouncement in Gujarat State Financial Corporation v. Lotus
Hotels, has taken a new stand and held that the writ of mandamus can be issued against the
Government or its instrumentality for the enforcement of contractual obligations. The Court
ruled that it is too late to contend today the Government can commit branch of a solemn
undertaking on which other side has acted and then contend that the party suffering by the branch
of contract may sue for damages and cannot compel specific performance of the contract through
mandamus.
The doctrine of judicial review has extended to the contracts entered into by the State of its
instrumentality with any person. Before the case of Ramana Dayaram Shetty v. International
Airport Authority. The attitude of the Court was in favor of the view that the Government has
freedom to deal with anyone it chooses and if one person is chosen rather than another, the
aggrieved party cannot claim the protection of article 14 because the choice of the person to
fulfill a particular contract must be left to the Government, However, there has been significant
change in the Court’s attitude after the case of Ramana Dayaram Shetty. The attitude for the
Court appears to be in favor of the view that the Government does not enjoy absolute discretion
to enter into contract with anyone it likes. They are bound to act reasonably fairly and in non-
discriminatory manner.
In the case of Kasturi Lal v. State of J&K, in this case Justice Bhagwati has said “Every
activity of the Government has a public element in it and it must, therefore, be informed with
reason and guided by public interest. Every government cannot act arbitrarily without reason and
if it does, its action would be liable to be invalidated.” Non- arbitrariness, fairness in action and
due consideration of legitimate expectation of affected party are essential requisites for a valid
state action. In a recent case Tata Cellular v. Union of India, the Supreme Court has held that the
right to refuse the lowest or any other tender is always available to the Government but the
principles laid down in Article 14 of the Constitution have to be kept in view while accepting or
refusing a tender. There can be no question of infringement of Article 14 if the Government tries
to get the best person or the best quotation. The right to choose cannot be considered to be an
arbitrary power. Of course, if the said power is exercised fro any collateral purpose the exercise
of that power will be struck down.
Section 65 of the Indian Contract Act, 1872
If the agreement with the Government is void as the requirement of Article 299 (1) have not been
complied, the party receiving the advantage under such agreement is bound to restore it or to
make compensation for it to the person form whom he has received it. Thus if a contractor enters
into agreement with the Government for the construction of go down and received payment
therefore and the agreement is found to be void as the requirements of Article 299 (1) have not
been complied with, the Government can recover the amount advanced to the contractor under
Section 65 of the Indian Contract act. Action 65 provides that when an agreement is discovered
to be void or when a contract becomes void, any person who has received any advantage under
such agreement or contract is bound to restore it to make compensation for it to the person from
whom he received it.

Suit against State in Torts

Before discussing tortuous liability, it will be desirable to know the meaning of ‘tort’. A tort is a
civil wrong arising out of breach of a civil duty or breach of non-contractual obligation. The
word ‘tort’ has been defined in Chambers Dictionary in the following words:-
“Tort is any wrong or injury not arising out of contact for which there is remedy by
compensation or damages.”
Thus, tort is a civil wrong, which arises either out of breach of no contractual obligation or out of
a breach of civil duty. In other words, tort is a civil wrong the only remedy for which is damages.
The essential requirement for the arising of the tort is the beach of duty towards people in
general. Although tort is a civil wrong, yet it would be wrong to think that all civil wrongs are
torts. A civil wrong which arises out for the breach of contact cannot be put in the category of
tort as it is different from a civil wrong arising out of the breach of duty towards public in
general.

Liability for Torts

In India immunity of the Government for the tortious acts of its servants, based on the remnants
of old feudalistic notion that the king cannot be sued I his own courts without his consent ever
existed. The doctrine of sovereign immunity, a common law rule, which existed in England, also
found place in the United States before 1946 Mr. Justice Holmes in 1907 declared for a
unanimous Supreme Court:…………………………………………………………………………
“A sovereign is exempt from suit not because of any formal conception or obsolete theory, but
on the logical and practical ground that there can be no legal right as against the authority that
makes the law on which the right depends.”………………………………………………..
Today, hardly, anyone agrees that the stated ground for exempting the sovereign from suit is
either logical or practical.

Case Law on the tortious liability of the State:- The first important case involving the tortious
liability of the Secretary of State for India-in –Council was raised in P and O. Steam
Navigation v. Secretary of State for India.
The question referred to the Supreme Court was whether the Secretary of State for India is liable
for the damages caused by the negligence of the servants in the service of the Government. The
Supreme Court delivered a very learned judgment through Chief Justice Peacock, and answered
the question in the affirmative. The Court pointed out the principle of law that the Secretary of
State for India in Council is liable for the damages occasioned by the negligence of Government
servants, if the negligence is such as would render an ordinary employer liable. According to the
principle laid down in this case the Secretary of State can be liable only for acts of non sovereign
nature, liability will not accrue for sovereign acts Chief Justice peacock admitted the distinction
between the sovereign and non sovereign functions of the government and said:
“There is a great and clear distinction between acts done in exercise of what are termed
sovereign powers, and acts done in the conduct of undertakings which might be carried on by
private individuals without having such powers delegated to them.”
But the judgment of P. and O. Steam Navigation case, was differently interpreted in Secretary of
State v. Hari Bhanji, In this case it was held that if claims do not arise out of acts of State, the
civil Courts could entertain them.
The conflicting position before the commencement of the Constitution has been set at rest in the
well known judgment of the Supreme Court in State of Rajasthan v. Vidyawati, where the
driver of a jeep, owned and maintained by the State of Rajasthan for the official use of the
Collector of the district, drove it rashly and negligently while taking it back from the workshop
to the residence of the Collector after repairs, and knocked down a pedestrian and fatally injured
him. The State was sued for damages. The Supreme Court held that the State was vicariously
liable for damages caused by the negligence of the driver. In fact, the decision of the Supreme
Court in State of Rajasthan v. Vidyawati, Kesoram Poddar v. Secretary of State for India,
introduces an important qualification on the State immunity in tort based on the doctrines of
sovereign and non-sovereign functions. It decided that the immunity for State action can only be
claimed if the act in question was done in the course of the exercise of sovereign functions.
Then came the important case of Kasturi Lal v. State of U. P. where the Government was not
held liable for the tort committed by its servant because the tort was said to have been committed
by him in the course of the discharge of statutory duties. The statutory functions imposed on the
employee were referable to and ultimately based on the delegation of the sovereign powers of the
State.
The Court held that the Government was not liable as the activity involved was a sovereign
activity. The Court affirmed the distinction between sovereign and non-sovereign function drawn
in the P. and O. Steam Navigation’s case in the following terms.
The Supreme Court’s judgment unambiguously indicates that the Court itself on the question of
justice felt strongly that Kashturi lal should be compensated yet, as a matter of law they held that
he could not be.
There are, on the other hand, a good number of cases where the courts, although have maintained
the distinction between sovereign and non- sovereign functions yet in practice have transformed
their attitude holding most of the functions of the government as non-sovereign. Consequently
there has been an expansion in the area of governmental liability in torts.

Sovereign And Non-Sovereign Dichotomy Changed Judicial Attitude

It is redeeming to note that the sovereign and non-sovereign dichotomy in the State functions
which the Supreme Court has followed so far, is no being narrowed down by a new gloss over
the sovereign functions of the State The courts started holding most of the governmental
functions as non-sovereign with a result that the area of tortious liability of the government
expanded considerably.
The Madhya Pradesh High Court Has put up the entire legal position, which emerged from the
analysis of the cases, in the following words:
“These cases show that the traditional sovereign functions are the making of law, the
administration of justice, the maintenance of order, the repression of crime, carrying on for war,
the making of treaties of peace another consequential functions, Whether this list be exhaustive
or not, it is at least clear that the socio-economic and welfare activities undertaken by a modern
state are not included in the traditional sovereign functions.
Damages
It may happen that a public servant may be negligent in the exercise of his duty. It may,
however, be difficult to recover compensation from him. From the point of view of the aggrieved
person, compensation is more important than punishment. Therefore, like all other employers the
State must be made vicariously liable for the wrongful acts of its servants.
The Courts in India are now becoming conscious about increasing cases of excesses and
negligence on the part of the administration resulting in the negation of the personal liberty.
Hence they are coming forward with the pronouncements holding the Government liable for
damages even in those cases where the plea of sovereign function could have negative the
governmental liability. One such pronouncement came in the case of Rudal Shah v. State of
Bihar. Here the petitioner was detained illegally in the prison for over fourteen years after his
acquittal in a full dressed trail. The court awarded Rs. 30,000 as damages so the petitioner.
In Bhim Singh v. State of J&K, where the petitioner, a member of legislative Assembly was
arrested while he was on his way to Srinagar to attend Legislative Assembly in gross violation of
his constitutional rights under Articles 21 and 22 (2) of the Constitution, the court awarded
monetary compensation of Rs.50,000 by way of exemplary costs to the petitioner.
In Saheli a Women’s Resource Center v. Commissioner of Police, Delhi, where the death of
nine years old boy took place on account of unwarranted atrocious beating and assault by a
Police officer in New Delhi, the State Government was directed by the court to pay the
compensation to the victim.
In Lucknow Development Authority v. M.K. Gupta, the Supreme Court has observed that
where public servant by mal fide, oppressive and capricious acts in discharging official duty
causes in justice, harassment and agony to common man and renders the State or its
instrumentality liable to pay damages to the person aggrieved from public fund, the State or its
instrumentality is duly bound to recover the amount of compensation so paid from the public
servant concerned.
In N. Nagendra Rao & co. v. State of AP, 1994, SC The Supreme Court held that when due to
the negligent act of the officer of the state, a citizen suffers any damage, the State will be liable
to pay compensation and the principle of sovereign immunity of the state will not absolve him
from this liability. The court held that in the context of the modern concept of sovereignty, the
doctrine of sovereign immunity stands diluted and the distinction between sovereign and non-
sovereign functions, no longer exists.

In Common Cause, a Registered Society v. Union of India, 1999, SC the Supreme Court again
examined the whole doctrine and rejected the sovereign immunity rule. The court held that the
rule of sovereign immunity as laid down in P&O Navigation Co. v. Secretary of the State for
India is very outmoded. It was said that in modern times when the state activities have been
considerably increased, it is very difficult to draw a line between its sovereign and non-sovereign
functions. The increased activities of the state have made a deep impression on all facets of
citizens’ life and therefore the liability of the State must be made co-extensive with the modern
concept of the welfare state. The state must be liable for all tortious acts of its employees,
whether done in exercise of sovereign or non-sovereign power.