MS EDUCONZ PVT. LTD.

LAW& AUDIT

SPECIAL CONTRACT

Contract of Indemnity
1. INTRODUCTION TO CONTRACT OF INDEMNITY

Indemnity Meaning –
• To make good the loss incurred by another person
• To compensate the party who has suffered some loss
• To protect a party from incurring a loss

‘Contract of indemnity Definition

A contract is called as a ‘contract of indemnity’ if –
One party promises to save the other from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person.

Modes of contract of indemnity

Expressed:
When a person expressly promises to compensate the other from loss.
Implied :
When the contract is to be inferred from the conduct of the parties or from the
circumstances of the case.

Essential elements of a contract of indemnity

Contract :
All the essentials of a valid contract must also be present in the contract of indemnity
Example:- X asks Y to beat Z and promises to indemnify Y against the consequences. Y
beats Z and is fined Rs.1,000. Y cannot claim this amount from X because the object of
the agreement was unlawful.
Loss to one party
A person can indemnify another person only if such other person incurs some loss or it
has become certain that he will incur some loss.
Indemnity by the promisor
The purpose of contract of indemnity is to protect the indemnity holder from any loss
that may be caused to the indemnity holder.
Reason for loss
The contract of indemnity must specify that indemnity holder shall be protected from the
loss caused due to –
• Action of the promisor himself; or
• Action of any other person; or
• Any act, event or accident which is not in the control of the parties.

2. RIGHTS OF INDEMNITY HOLDER (Sec. 125)

Right to recover damages

The indemnity holder has the right to recover all the damages which he is compelled to
pay in any suit in respect of any matter covered by the contract of indemnity.

Right to recover costs

SUJEET JHA 61 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

The indemnity holder has the right to recover all the costs which he is compelled to pay
in bringing or defending such suit.
Condition:
(a) The indemnifier authorised him to bring or defend the suit; or
(b) The indemnity holder did not contravene the orders of the indemnifier; and The
indemnity holder acted as it would have been prudent for him to act in the absence of
any contract of indemnity.

Right to recover sums paid

The indemnity holder has the right to recover all the sums which he has paid under the
terms of a compromise of such suit.
(a) The indemnifier authorised him to compromise the suit; or
(b) The indemnifier holder did not contravene the orders of the indemnifier; and the
indemnity holder acted as it would have been prudent for him to act in the absence of
any contract of indemnity.

Contract of guarantee
3. MEANING OF CERAIN TERMS (Sec. 126)

Meaning of ‘contract of guarantee’

A ‘contract of guarantee’ is a contract to –
• Perform the promise; or
• Discharge the liability, of a third person in case of his default.

Meaning of ‘surety’
The person who gives the guarantee is called as ‘surety’

Meaning of ‘principal debtor’

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

Meaning of ‘creditor’
The person to whom the guarantee is given is called as ‘creditor’.
GUARANTEE

ON MONEY
ON PERSON
Nature of payment Effective time of payment

Specific/Simple Continuing Retrospective Prospective Fidelity

Guarantee Guarantee Guarantee Guarantee Guarantee
Guarantee is for Guarantee is for Guarantee is for Guarantee is for Guarantee is on
a single a series of an existing debt a future debt or the good conduct
transaction. It transactions. or obligation. obligation. or honesty of a
ends when debt Liability extends person employed
is discharged or till the in a particular
promise is revocation of organizations.
performed. guarantee.

SUJEET JHA 62 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

4. ESSENTIALS AND LEGAL RULES FOR A VALID CONTRACT OF GUARANTEE.

Must have all the essentials of a valid contract

• All the essentials of a valid contract must be present in the contract of guarantee.
• Exceptions:
(a) Consideration received by the principal debtor is a sufficient consideration to the
surety for giving the guarantee.
(b) Even if principal debtor is incompetent to contract, the guarantee is valid. But, if
surety is incompetent to contract, the guarantee is void.

Primary liability of some person

• The principal debtor must be primarily liable. However, even if the principal debtor
is incompetent to contract the guarantee is valid.
• The debt must be legally enforceable.
• The debt must not be a time barred debt.

The contract must be conditional

• The liability of surety is secondary and conditional.
• The liability of surety arises only if the principal debtor makes a default.

No misrepresentation
• The creditor should disclose all the facts which are likely to affect the surety’s
liability.
• There must not be any concealment of facts.

Form of contract
A contract of guarantee may be either oral or written.

Joining of other co-sureties

The guarantee by a surety is not valid if –
• A condition is imposed by a surety that some other person must also join as a co-
surety; but
• Such other person does not join as a co-surety.

5. NATURE AND EXTENT OF SURETY’S LIABILITY

Surety’s liability is coextensive with liability of principal debtor

General rule –
• Surety is liable for all the debts payable by the principal debtor to the creditor.
• Accordingly, interest, damages, costs etc. may also be recovered from the surety.
Exception:-
The contract of guarantee may provide otherwise.

Commencement of surety’s liability

• The liability of surety arises immediately on default by the principal debtor.
• The creditor is not required to –
(a) first sue the principal debtor; or
(b) first give a notice to the principal debtor.

Surety’s liability may be limited

SUJEET JHA 63 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

The surety may fix a limit on his liability up to which the guarantee shall remain
effective.

Surety’s liability may be continuous

• The surety may agree to become liable for a series of transactions of continuous
nature.
• However, the surety may fix –
- a limit on his liability upto which the guarantee shall remain effective;
- a time period during which the guarantee shall remain effective.

Surety’s liability may be conditional

The surety may impose certain conditions in the contract of guarantee. Until those
conditions are met, the surety shall not be liable.

6. CONTINUING GUARANTEE

Meaning
A guarantee which extends to a series of transactions is called as continuing guarantee.

Revocation (Sec.130)
Continuing guarantee may be revoked, at anytime, by the surety by giving a notice to the
creditor. However, revocations shall be effective only in respect of future transactions
(i.e. the liability of the surety with regard to previous transactions remains unaffected)

Death of surety (sec. 131)

Death of the surety operates as a revocation of a continuing guarantee as to future
transaction.

7. RIGHTS OF SURETY (Sec.140, 141, 145, 146 and 147)

I. Rights against principal debtor

Right of indemnity
• There is an implied promise by the principal debtor to indemnity the surety.
• The surety is entitled to claim from the principal debtor all the sums which he has
rightfully paid.
• The surety cannot recover such sums, which the he has paid wrongfully.

Right of subrogation
On payment of a debt, the surety shall be entitled to all the rights which the creditor
could claim against the principal debtor.

II. Rights against the creditor

Right of subrogation
• The surety can claim all the securities which the creditor had at the time of giving of
guarantee
• It is immaterial as to whether the surety had knowledge of such securities or not.
• If the securities are returned by the creditor to the principal debtor the surety is
discharged to the extent of value of the securities so returned.

Right of set off

• Any amount recoverable by the principal debtor may be claimed as deduction.
• Any amount recoverable by the surety may be claimed as deduction.
SUJEET JHA 64 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

Rights to share reduction

If the principal debtor becomes insolvent, the surety may claim proportionate reduction
in his liability.

III. Rights against co-sureties

Rights to contribution
General Rule
All the co-sureties shall contribute equally
Exceptions
• Under the contract of guarantee, the co-sureties may fix limits on their respective
liabilities. Even in such a case, the co-sureties shall contribute equally, subject to
maximum limit fixed by the co-sureties.
• The contract of guarantee may provide that the co-sureties shall contribute in some
other proportion.

Right to share benefit of securities

If one co-surety receives any security, all the other co-sureties are entitled to share the
benefit of such security.
8. DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

Basis Contract of indemnity Contract of guarantee

Meaning A contract by which one party A contract of guarantee is a
promises to save the other from contract to perform the promise,
loss caused to him is called as a or discharge the liability of a third
contract of indemnity. person in case of his default.
Parties There are only two parties, viz, the There are three parties, viz., the
indemnifier and the indemnity principal debtor, creditor and the
holder. surety.
Nature of liability The liability of the indemnifier is The liability of the surety is
primary and independent. secondary and conditional.
Number of contract In a contract of indemnity there is In the contract of guarantee, there
only one contract. are three contracts; first between
principal debtors and creditor,
second between creditor and
surety, and third between surety
and principal debtor.
Nature of contract The contract of indemnity is for the The contract of guarantee is for
reimbursement of the loss. the security of the creditor.

9. DISCHARGE OF SURETY FROM LIABILITY (Sec.130 to 144)

DISCHARGE OF SURETY

Revocation of contract of Invalidation of contract of Conduct of Creditor

guarantee guarantee

Notice of revocation by surety

• Specific guarantee
A specific guarantee can be revoked only if liability of principal debtor has not
arisen.
• Continuing guarantee
SUJEET JHA 65 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

A continuing guarantee can be revoked only in respect of future transactions.

Death of surety
In case of death of surety, a continuing guarantee is automatically revoked in respect of
future transactions.

Variance in terms
If –
• Any variation is made subsequent to formation of contact of guarantee; and
• Such variation is made without the consent of surety;
Then –
• The surety shall be released for such transactions as take place after such variation.

Release or discharge of principal debtor

If –
• The creditor makes a fresh contract with the principal debtor whereby the principal
debtor is relieved from his liability; or –
• The creditor does any act or omission resulting in discharge of the principal debtor;
Then –
The surety is discharged.
Composition with principal debtor
The surety is discharged if the creditor makes a composition with the principal debtor
without obtaining the consent of surety.

Giving extension of time to principal debtor

The surety is discharged if the creditor extends the time for repayment of the debt by the
principal debtor without obtaining the consent of the surety.

Loss of security by a creditor

The surety is discharged to the extent of security lost by the creditor.

SUJEET JHA 66 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

BAILMENT
10. MEANING OF CONTRACT OF BAILMENT (Sec. 148)

A ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them.

BAILMENT

Based on Benefit Based on Reward

Exclusive Exclusive Mutual Benefit Gratuitous Non gratuitous

benefit of Bailor benefit of Bailee of both Bailment Bailment
J, neighbour of Z lends a book to A hires furniture Neither Bailor Bailor or Bailee
K, agrees to look Y for reading. Y from B, by nor Bailee gets gets
after K’s per is benefited. payment of hire any remuneration e.g.
while he is out of charges, Both A remuneration, G gives his
station. K is and B are e.g. A lends his television set for
benefited. benefited. book to his are repair to H, a
friend. technician. H
gets paid for the
job.

11. ESSENTIALS OF A VALID CONTRACT OF BAILEMENT (Sec.148)

Contract
• There must be a contract.
• The contract may be expressed or implied.

Goods
Bailment can be made of goods only.

Delivery
There must be delivery of goods by one person to another person.

Purpose of delivery
• The goods must be delivered for some purpose.
• The purpose may be expressed or implied.

Return or disposal of goods

• The delivery of goods must be conditional
• The condition shall be that the goods shall be –
- returned (either in original form or in any altered from); or
- disposed of according to the directions of the bailor, when the purpose is
accomplished.

12. MODES OF DELIVERY (Sec.149)

SUJEET JHA 67 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

Actual delivery
Transfer of physical possession of goods from one person to another .

Symbolic delivery
• Physical possession of goods is not actually transferred.
• A person does some act resulting in transfer of possession to any other person.
Examples:
(a) Delivery of keys of a car to a friend
(b) Delivery of a railway receipt.

Constructive delivery
If –
• A person is already in possession of goods of owner.
• Such person contracts to hold the goods as a bailee for a third person.
Then –
Such person becomes the bailee, and the third person becomes the bailor.

13. CLASSIFICATION OF BAILMENT

Gratuitous bailment
Bailment without any charges or reward, i.e. –
• No hire charges are paid by bailee; and
• No custody charges are paid by bailor.

Non – gratuitous bailment

Bailment for some charges or reward, i.e.-
• Hire charges are paid by bailee; or
• Custody charges are paid by bailor.

14. DUTIES OF A BAILOR (Sec. 150, 158, 159 and 164)

Disclose faults in goods [Sec. 150]:

Bailor is bound to disclose to Bailee, faults in the goods bailed, of which he has
knowledge. He should also disclose such information which – (a) materially interferes
with the use of goods, or (b) expose the Bailee to extraordinary risk.
Liability for Defects in Goods

In case of Gratuitous bailment In case of Non – Gratuitous Bailment

Bailor is liable only for those losses Bailor is liable for damages whether or not
which arise due to non – disclosed risks. he was aware of the existence of faults.

Example: A owning a motorcycle, allows B, his friend, to take it for a joy ride. A knows
that its brakes were not proper but does not disclose it to B. B meets with an accident. A
is liable to compensate B for damages. But when A had lent the motorcycle on hire, he is
liable to B even if he did not know of the failure of his brakes.

Bear expenses [Sec.158]

Expenses of Bailment

In case of Gratuitous bailment In case of Non – Gratuitous Bailment

Bailor shall repay to Bailee, all Bailor is liable to repay only extra –
necessary expenses incurred by him for ordinary expenses, and not the ordinary
SUJEET JHA 68 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

the purpose of Bailment. expenses.

Example: M lends his car to N and it runs out of petrol. N can recover the amount paid
for refueling (ordinary expenses). If in case, the car suffers a breakdown, N can recover
such charges as are paid by him in bringing it back to condition (extra – ordinary
expenses). He M hired the car to N, he shall be liable only for the repair charges, being
extra ordinary expenses.

Indemnify the bailee for defective title

The bailor shall indemnify the bailee for any loss caused to bailee due to defective title of
bailor.

Indemnify the bailee for premature termination

If –
- the bailment is gratuitous ; and
- for a specific period.
Then –
(a) the bailor may compel the bailee to return the goods before expiry of the peiod of
bailment; but
(b) the bailor shall indemnify the bailee for any loss incurred by the bailee.

Receive back the goods

• It is the duty of the bailor to receive back the goods, when returned by bailee.
• If the bailor wrongfully refuses to receive back the goods, he shall be liable to pay
ordinary expenses of custody of goods incurred by the bailee.

15. DUTIES OF A BAILEE (Sec.151 to 157)

Take reasonable care

• The bailee must take such case of goods as a man of ordinary prudence would take
care of his own goods.
• The bailee shall not be liable for any loss or destruction of goods, if –
(a) he is not negligent; or
(b) the loss was caused due to an act of God or other unavoidable reasons.

Not to make unauthorized use of goods

• The bailee must not make any unauthorized use of the goods.
• If the bailee makes any unauthorized use of goods, then –
(a) the bailment becomes voidable at the option of the bailor; and
(b) the bailee shall be liable for any loss or damage even if such loss is caused due to
an act of God or other unavoidable reasons.

Not to mix goods

Goods are mixed with bailor’s consent
The parties shall have a proportionate interest in such mixture.

Goods are mixed without bailor’s consent, but the goods are separable
• The bailee shall pay the expenses of separation.
• The bailee shall pay damage incurred by the bailor.

SUJEET JHA 69 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

Goods are mixed without bailor’s consent, and goods are not separable
The bailee shall compensate the bailor for any loss caused to him.

Return the goods

• The bailee must return the goods, without waiting for demand from bailor, if –
(a) the time specified in the contract has expired ; or
(b) the purpose specified in the contract is accomplished.
• If the goods are not so returned, then –
(a) the goods shall be at the risk of the bailee;
(b) the bailee shall be liable for any loss or damage, even if such loss is caused
without any fault or negligence of the bailee or due to an act of God or other
unavoidable reasons.

Return accretion to goods

The bailee must return to the bailor any accretion (i.e., addition) to the goods bailed.

Not to set up an adverse title

The bailee has no right to allege that the bailor had no authority to bail the goods.

16. RIGHTS OF A BAILOR (Sec. 153, 159, 163, 180, 181)

Terminate the bailment

If –
The bailee does any act inconsistent with the terms and conditions of the contract of
bailment.
Then –
The bailment becomes voidable at the option of the bailor.

Demand back the goods

If –
The bailment is gratuitous; and
For a specific period.
Then –
(a) the bailor may compel the bailee to return the goods before expiry of the period of
bailment; and
(b) the bailor shall indemnify the bailee for any loss incurred by the bailee.

File suit against wrongdoer

The bailor has the right to sue –
• A third party who does any damages to the goods; or
• A third party who deprives the bailee from using the goods

Sue the bailee

The bailor may sue the bailee to enforce his duties.

17. RIGHTS OF A BAILEE (Sec. 165, 166, 167, 170, 180)

Right to compensation
The bailee has the right to be indemnified by the bailor, if –
• The bailor has no title to the goods; and
• As a consequence, the bailee suffers some loss.

SUJEET JHA 70 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

Return the goods

• It is the duty as well as the right of the bailee to return the goods to the bailor.
• In case of joint bailor, the goods may be returned to any of joint bailors.

Recover charges incurred

Extra ordinary expenses
• The bailor is liable to pay the extraordinary expenses.
• The bailee may recover the extraordinary expenses paid by him.
Ordinary expenses
If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary expenses,
i.e., the bailee has the right to recover the ordinary necessary expenses incurred by him.

Suit for deciding the title

The bailee may apply to the Court for deciding the title to goods, if a person other than
the bailor claims that the goods belong to him.

File suit against wrongdoer

The bailee has the right to sue –
• A third party who does any damages to the goods; or
• A third party who deprives the bailee from using the goods.

Right of lien
The bailee has the right to retain the goods delivered to him until the charges due to him
are paid by the bailor.

18. DISTINCTION BETWEEN BAILEE’S PARTICULAR AND GENERAL LIEN

Basis of distinction Bailee’s particular lien Bailee’s general lien

1. Natural of right Particular lien gives right to General lien gives right to
retain only such goods in retain any goods belonging to
respect of which charges due another person for any amount
remain unpaid. due from him.
2. Condition for Particular lien can be General lien may be exercised
exercising lien exercised only when some even though no labour or skill
labour or skill has been has been expended on the
expended on the goods, goods.
resulting in an increase in
value of goods.
3. Right to whom? Every bailee is entitled to General lien can be exercised
particular lien. by only such persons as are
specified u/s 171. e.g.,
bankers, factors, wharfingers,
Attomeys of High Court,
policy brokers. Any other
bailee may exercise general
lien if there is an agreement to
this effect.

19. TERMINATION OF BAILMENT (Sec.153, 159 and 162)

Situation Explanation Example

1. Expiry of specified When bailment is for specific Z lends a moped to Y for a
SUJEET JHA 71 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

period period, it terminates on the period of 3 months April –

expiry of the specified period. June. The Bailment terminates
by the end of June.
2. Accomplishment Where bailment is for a G hires tables and chairs,
of specified purpose specified purpose, it utensils, etc. from H for
terminates when such purpose organizing his son’s
is accomplished. engagement. G shall return
them once the engagement
functions are over.
3. Bailee’s act When bailee does some act J gives his car to K keeping it
inconsistent with which is inconsistent with the in K’s garage. K gives it to his
conditions terms and conditions of son for racing. J can terminate
bailment, the Bailor may the bailment.
terminate the bailment.
4. Destruction of When goods bailed are K hires a cycle from L. When
subject matter destroyed, Bailment comes to the cycle is damaged beyond
an end. repair in an accident, bailment
ends.
5. Gratuitous • Gratuitous Bailment can Note: Where premature
Bailment be terminated at any time. termination of bailment by the
• Also, a Gratuitous Bailor, causes loss to the
Bailment ends by the Bailee exceeding the benefits
death of either Bailor or derived by him, the Bailor
Bailee. (Sec162) shall indemnify the Bailee.

20. FINDER OF GOODS (Sec. 71, 168 and 169)

Finder of lost goods [Sec 71]

A person, who finds goods belonging to another and takes them into his custody, is
subject to the same responsibility as a Bailee.

Implied Agreement
There is an agreement, implied by law between finder and owner of goods.

Duties of Finder
A finder of lost goods is treated as Bailee of goods found. His duties are –
(a) To take initiative to find the real owner of the goods,
(b) To take reasonable care of the goods found,
(c) Not to put the goods found for his personal use, and
(d) Not to mix the goods found with his own goods.

Rights of Finder:
Suit for specific reward [Sec.168] Right of Sale [Sec.169]
Finder of goods is not entitled to sue If a thing which is commonly the subject of
that owner for compensation for sale is lost, and
trouble and expenses voluntarily • Owner cannot be found with reasonable
incurred in – (a) preserving the goods, diligence, [or]
or (b) finding out the owner. • Owner, if found, does not pay the lawful
However, he is entitled to – charges of the Finder.
SUJEET JHA 72 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

(a) Lien: Retain the goods against the Then, Finder of Goods is entitled to sell the
owner till he receives such same when –
compensation (a) the thing is in danger of perishing, or
(b) Suit: Sue the owner for payment (b) the thing is in danger of losing the
of any specific reward offered by greater part of its value, or
the owner for the return of goods (c) The lawful charges of finder, amount to
lost, and retains the goods till 2/3rd of the value of the thing lost and
payment of such reward. found.

SUJEET JHA 73 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

PLEDGE
21. MEANING OF ‘PLEDGE’, ‘PAWNOR’, ‘PAWNEE’ (Sec.172)

‘Pledge’
The bailment of goods as security for payment of a debt or performance of promise is
called ‘pledge’.

‘Pawnor’
The bailor in case of a pledge is called as ‘pawnor’.

‘Pawnee’
The bailee in case of pledge is called as ‘pawnee’.

22. ESSENTIALS A VALID CONTRACT OF PLEDGE (Sec.172)

Contract
• There must be a contract
• The contract may be expressed or implied.

Goods
Pledge can be made of goods only.

Delivery
There must be delivery of goods by one person to another person.

Purpose of delivery
• The goods must be delivered for some purpose.
• The purpose must be to deliver the goods as security for
(a) payment of a debt; or
(b) performance of a promise.

Return of goods
• The delivery of goods must be conditional
• The condition shall be that the goods shall be –
- returned (either in original form or in altered form); or
- Disposed of according to the directions of the pawnor when the purpose is
accomplished.

23. RIGHTS OF PAWNEE (Sec.173 and 176)

Right of Retainer [Sec.173]

Pawnee may retain the goods pledged for –
(a) payment of the debt or the performance of promise,
(b) any interest due on the debt; and
(c) all necessary expenses incurred by him with respect to possession or for preservation
of goods pledged.

Retainer for subsequent advances [Sec.174]

SUJEET JHA 74 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

(a) Where the Pawnee lends money to the Pawnor subsequently, after the date of pledge,
it shall be presumed that the he has a right of retainer over the goods already pledged
in respect of the subsequent lending also.
(b) This presumption can be made invalid only by an expenses provision to that effect.

Reimbursement of Expenses [Sec.175]

Where the Pawnee incurs extraordinary expenses to preserve the goods pledged with
him, he is entitled to receive such amount from the Pawnor.

Rights in case of default by Pawnor [Sec.176]

(a) Suit: Pawnee may institute a suit against Pawnor when there is a default in payment
of debt or performance of promise at the stipulated time.
(b) Retention / Sale of goods: Pawnee may – (a) retain the goods pledged as collateral
security, or (b) sell the goods pledged by giving a reasonable notice to the Pawnor.
(c) Surplus / Deficit on Sale : When there is a surplus on sale, Pawnee shall pay the
excess to the Pawnor. In case of deficit, Pawnor shall be liable for the balance
amount.
(d) No Notice: Where the Pawnee does not give a reasonable notice to the Pawnor, the
sale is valid, but Pawnee is liable to pay damages to Pawnor.

Right against true owner of goods [Sec.178A]

(a) Where the Pawnor has acquired possession of pledged goods, under a voidable
contract u/s 19 or 19A but contract has not been rescinded at the time of pledge, the
Pawnee acquires a good title to the goods, against the true owner.
(b) The title of Pawnee is good only where – (a) he had no notice of the Pawnor’s defect
in title and (b) he acts in good faith.

Reasonable notice u/s 176 means that a notice of intended sale of the Prabhat
security by the Creditor within a certain date, so as to afford an Bank Ltd.
opportunity to the Debtor to pay the amount within the time mentioned in vs Babu
the notice. Notice of sale is essential and a clause in the agreement Ram
excluding the requirement of Notice is inconsistent with the Act & is void
and unenforceable.

24. DUTIES OF A PAWNOR (Sec.175)

Pay the debt

The pawnor is liable to pay the debt or perform his promise as the case may be.

Pay deficit on sale

If the pawnee sells the goods due to default by the pawnor, the pawnor must pay the
deficit.

Pay extra – ordinary expenses

The pawnor is liable to pay to the pawnee any extraordinary expenses incurred by the
pawnee for preservation of goods.

Disclose faults in goods

The pawnor is liable to disclose all the faults which –
SUJEET JHA 75 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

(a) are material for use of the goods; or

(b) may put the pawnee to extraordinary risks.

Indemnify the pawnee

If loss is caused to the pawnee due to defect in pawnor’s title to the goods, the pawnor
must indemnify the pawnee.

25. DUTIES OF PAWNEE

Not to use the goods

• The pawnee has no right to use the goods
• However, he may use the goods, if he has been so authorised by the pawnor.

Return the goods

The pawnee must return the goods if the pawnor pays the debt or performs his promise.

Take reasonable care

The pawnee must take such care of goods pledged as a man of ordinary prudence would
take care of his own goods.

Not to mix goods

The pawnee must not mix his own goods with the goods pledged.

Return increase in goods

The pawnee must return to the pawnor any accretion to the goods pledged with him.

26. RIGHTS OF A PAWNOR (Sec.177)

Redeem the goods pledged

Meaning of redemption
Right to recover back the goods by making payment of the debt or performance of
promise.
Time for redemption
Where time of redemption is fixed, the pawnor may exercise redemption –
(a) within the time so fixed; or
(b) even after expiry of time so fixed, provided –
• the pawnee has not sold the good; and
• the pawnee pays the pawnee all expenses arising on account of his default.

Enforce pawnee’s duties

The pawnor has the right to enforce the duties of pawnee, if the pawnee fails to fulfill his
duties.

Receive increase in goods

The pawnor has the right to recover from pawnee any increase in goods pledged.

Right to receive notice of sale

In case of default by the pawnor to pay the debt or perform his promise, the pawnee has
the right to sell the goods, after giving a reasonable notice to the pawnor. If the pawnee
fails to give notice, the pawnor has the right to recover the loss incurred by him.

Basis Pledge Bailment

SUJEET JHA 76 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

1. Purpose Pledge is bailment of goods Bailment may be for purpose

for a specific purpose, i.e. to other than by way of
provide a security for a loan or providing security for a loan
fulfillment of an obligation. or fulfillment of an obligation.
It may be for purpose like
repairs, safe custody, etc.
2. Sale of Goods Pawnee, i.e. Pledgee has a There is no right of sale to the
right of sale of goods pledged Bailee. Bailee may either – (a)
on default of Pawnor. He can retain goods, or (b) sue the
do so by giving a notice to the Bailor for non – payment of
pawnor. his dues.
3. Use of Goods Pledgee has no right of using Bailee can use the goods
goods pledged. bailed as per terms of contract.

SUJEET JHA 77 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

AGENCY
27. INTRODUCTION TO CONTRACT OF AGENCY (Sec.182)

Meaning of ‘agent’
An ‘agent’ is a person employed to –
• Do any act for another; or
• Represent another in dealings with third persons.

Meaning of ‘principal’
‘Principal’ is the person –
• For whom an act is done by the agent; or
• Who is represented by the agent in respect of dealing with third persons.

Test of agency
Where a person has the capacity to –
• Create contractual relations between the principal and a third party;
• Bind the principal by his own acts, there exists a relationship of agency.

CREATION OF AGENCY

By Operation By Express By Implied Agreement By Ratification of acts

of Law Agreement (a) Estoppel, (b) Holding Out,
(c) Necessity

28. SALIENT FEATURES OF AGENCY (Sec. 183, 184, 185 and 226)

Principal is liable for the acts of agent

• The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the same legal
consequences as if these contracts were made by the principal himself.

Who may employ an agent?

Any person may employ an agent if –
• He is of the age of majority; and
• He is of sound mind.

Who can be an agent?

• Any person may become an agent.
• Even a minor or a person of unsound mind can become an agent

Liability of agent
• Generally an agent is liable to the principal
• An agent is not liable to the principal if he is a minor or is of unsound mind.

Requirement of consideration
No consideration is necessary for creating an agency.

SUJEET JHA 78 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

29. MODES OF CREATION OF AGANCY (Sec.187, 189, 196, 214 and 237)

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

Implied agreement
Agency by estoppel
If –
- a person makes a representation (by his words or conduct) to a third
person that a certain person is his agent; and
- the third party believing such representation to be true, enters into a
contract with the pretended agent.
Then –
- the person making the representation is prevented from denying the truth
of agency. He may be held liable as a principal by such third party.
Agency of holding out
Such an agency comes into existence when a person by his affirmative or positive
conduct leads third persons to believe that person doing some act on his behalf is doing
with authority.

Agency by necessity – Conditions

(i) There was an actual and definite necessity for acting on behalf of the principal.
(ii) The agent was not in a position to communicate with the principal.
(iii) The act was done for the purpose of protecting the interest of his principal.
(iv) The agent has exercised such reasonable care as a man of ordinary prudence
would have exercised in his own case.
(v) The act was done bonafide.
Agency by operation of law
Agency by operation of law arises where the law treats one person as an agent of
another.

Agency by ratification
Meaning
If –
- a person (viz., pretended agent) acts on behalf of another person (viz, the
principal)
- the pretended agent acts without the knowledge or consent of the
principal; and
- Afterwards, the principal accepts such act.
Then –
- Agency by ratification comes into existence.

Effects of ratification
• The principal is bound by the acts ratified by him as if such acts had been performed
by his authority.
• Ratification relates back to the actual date of the act that is ratified and not from the
date when the act ratified.

SUJEET JHA 79 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

30. ESSENTIALS OF A VALID RATIFICATION (Sec. 197 to 200)

Full knowledge
No valid ratification can be made by a person whose knowledge of the facts of the case is
materially defective. In other words, the principal must have full knowledge of all the
material facts.

Whole transaction
It must be done for whole transaction in fact; ratification of the part of a transaction
operates as a ratification of the whole transaction.

Act on behalf of another person

The acts done by a person (i.e. pretended agent) on behalf of another person (i.e.
pretended principal) can only be ratified.

By the principal
Ratification can be made by only such person for whom the act was done.

Existence of principal
The principal must be in existence at the time when the act was done in his name

Contractual capacity
The principal must have contractual capacity both at the time of entering into the contract
and at the time of ratification.

Lawful acts.
Only those acts which are lawful can be ratified. Void, illegal, or ultra vires acts cannot
be ratified.

Acts within principal’s power

Ratification can be made only for such acts which principal had the power to do.

Communication
Ratification must be communicated to the third party so as to bind him

Within reasonable time

Ratification must be made within reasonable time of the act purported to be ratified.

31. KINDS OF AGENTS.

A. Based on Authority
1. Special Agent 2. General Agent 3. Universal Agent
(a) Appointed to perform a (a) Appointed to do all acts (a) Appointed to do all acts for
particular transaction, e.g. connected with a the Principal.
sale of a house property. particular trade, business (b) Authority is unlimited
(b) Agent has limited or employment. (c) All acts of Agent bind his
authority (b) Authority is wide and Principal provided that his
(c) Agent cannot bind continues till agency is acts are legal and agreeable
Principal for acts other terminated. as per law of land.
SUJEET JHA 80 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

than for which he is (c) Principal may limit his

employed. authority.
(d) Principal is bound by all
acts unless it is beyond
authority of Agent.

B. Based on Nature of work

1. Commercial or Mercantile Agents 2. Non – Mercantile Agents.
(a) One who is authorised to sell goods or (a) Not engaged in business of selling or
consign goods for the purpose of sale buying goods, but act in their
or to buy gods or to raise money on the respective professional capacities. i.e.
security of goods. render professional services for their
(b) Includes Banker, Factor, Auctioneer, Principal
Broker, Commission Agent, & Del (b) Includes Solicitors, Attorneys, C & F
Credere Agent. Agents, Insurance Agents, etc.

32. DUTIES OF AN AGENT (Sec. 209 to 218)

1. To conduct the business in accordance with the directions given by the principal
2. To work with reasonable diligence, care and skill.
3. To render proper accounts to the principal on demand.
4. To communicate with his principal in case of difficulty and seek his instructions.
5. Not to deal on his own account unless all the material facts have been disclosed to
the principal and consent of the principal has been obtained.
If the agent, without the knowledge of the principal, deals in the business of agency
on his own account, the principal has the following rights:
(a) He may repudiate the transaction, if the agent dishonestly conceals any material
facts or the dealings of the agent prove to be disadvantageous to him.
(b) He may claim from the agent the agency business other than the agreed
remuneration.
6. Not to make any secret profit out of the agency business other than the agreed
remuneration
7. To remit to the principal all the sums received in the principal’s accounts in
accordance with the terms and conditions of contract of agency.
8. Not to delegate authority or appoint sub – agent.
9. To protect and preserve the interest on behalf of the principal’s representative in case
of his death or insolvency of the principal.
10. Not to use information obtained in the course of the agency against the principal.

33. RIGHTS OF AN AGENT (Sec. 217 to 225)

1. To retain money out of the sums received in agency business for advances made or
expenses incurred and remuneration due to him.
2. To receive the agreed remuneration. If the remuneration is not fixed, then he has the
right to recover such remuneration as is usual and customary in such business.
3. Right of lien on principal’s goods, papers and other property until the amount due to
him in respect of the same is paid.
4. An agent has the right to be indemnified by the principal against the consequences of
all lawful acts done in exercise of the authority conferred on him.
5. An agent has the right to be indemnified by the principal against consequences of
acts done in good faith that caused an injury to third person.
SUJEET JHA 81 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

6. To claim compensation for injury caused because of principal’s neglect or want of

skill.

34. WHEN AN AGENT IS PERSONALLY LIABLE? (Sec. 230 and 231)

General Rule – No personal liability [ Sec.230]

In the absence of contract to contrary, an Agent cannot –
(a) personally enforce contracts entered into by him, on behalf of his Principal,
(b) be held personally liable for them.
This is because the Agent merely acts on behalf of his Principal. Thus, he enjoys
immunity from being personally sued.

Exceptions, i.e. Agent personally as well as Joint & Severally Liable

The Agent is personally liable in the following cases –
1. Foreign Principal [Sec.230] : Where the contract is made by an Agent for the sale
or purchase of goods for a merchant resident abroad.
2. Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name of his
Principal.
3. Principal cannot be sued [Sec.230]: Where the Principal, though disclosed, cannot
be sued, e.g. Principal becoming of unsound mind, subsequent to appointment of
agent.
4. Acting for a Principal not in existence: Where the Agent acts for a Principal who is
not in existence at the time of making contracts, he shall be personally held liable e.g.
contracts entered into by Promoters before incorporation of a Company are made in
their personal capacity and hence personally liable.
5. Agency coupled with interest [Sec.202] : Where the Agent has an interest in the
subject matter of agency.
6. Agent guilty of Fraud [Sec.238] : Where an Agent is guilty of fraud or
misrepresentation in matters that are outside the scope of his authority, he is
personally liable, and do not affect his Principal.
7. Agent exceeds authority & act not ratified: Where an Agent acts either without
any authority or exceeds his authority, he shall be held personally liable when the
principal does not ratify his acts.
8. Agent receives or pays money: Where an Agent receives or pays money by mistake
or fraud to a third party, he shall be personally liable to such third party. Also ha can
personally sue the third party if the fraud or mistake is accountable to such third
party.
9. Express Agreement for personal liability: Where an Agent expressly aggress to be
personally bound.
10. Execution of Contract in his own name: Where an Agent executes a contract in his
own name, without disclosing that he is acting as Agent for a Principal, he shall be
personally liable, e.g. An Agent signs a Negotiable Instrument without making it
clear that he is signing it as an Agent only, he shall be held personally liable on the
same. He would be personally liable as Maker of P/N, even though he may be
described as Agent.
11. Trade custom or usage: Where trade usage or custom makes an Agent personally
liable.
12. Agent with special interest: An Agent with special interest or with a beneficial
interest, e.g. a Factor or Auctioneer, can sue and be sued personally. [Subramanya vs
Narayana]

SUJEET JHA 82 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

13. Action against Agent or Principal [Sec 233] : Where the Agent is personally liable,
a person dealing with him may hold - (a) either him or (b) his Principal or (c) both of
them liable. The liability of Principal and Agent is “joint and several”.
14. Exclusive liability [Sec. 234]
Where a person has made a contract with an Such Third person cannot later on, shift
Agent and – the liability on to –
• Induces such Agent to act upon it in the • The Agent, or
belief that only his principal would be • The principal, respectively.
held liable,
• Induces the principal to act upon it in the
belief that only his Agent would be held
liable.

35. AGENCY COUPLED WITH INTERST (Sec 202)

• When agency is created for securing some benefit to the agent over and above his
remuneration as an agent, it is called as agency coupled with interest.
• The interest should exist at the time of creation of agency. If the interest arises after the
creation of agency then it would not be called as agency coupled with interest.
• Agency coupled with interest cannot be terminated to the prejudice of such interest.
• Agency coupled with interest does not terminate even on the death or insanity of the
principal.
• Thus, such agency is irrevocable to the extent of such interest.

36. IRREVOCABLE AGENCY (Sec.202 and 204)

Agency coupled with interest

Such agency cannot be terminated to the extend of such interest

Part exercise of authority by the agent

Where the agent has partly exercised the authority, the principle cannot revoke the
authority so far as regard such acts and obligation as arise from already done in the
agency

Personal liability incurred by agent

Where the agent has incurred personal liability, the agency is irrevocable

37. DELEGATION OF AUTHORITY (Sec.190)

General rule
The general rule is that an agent cannot lawfully employ another act, which he has
expressly or impliedly undertaken to perform personally.

Exceptions
(a) There is a custom or usage of trade to that effect.
(b) Where power of the agent to delegate can be inferred from the conduct of the
both the principle and the agent.
(c) When the principal is aware of the intention of the agent to appoint sub agent by
the does not object to it.
(d) When principle permits appointment of a sub-agent.
(e) If the nature of the agency is such that the sub-agent is necessary.

SUJEET JHA 83 9213188188

MS EDUCONZ PVT. LTD. LAW& AUDIT

(f) Where the acts to be done is purely ministerial not involving confidence or use of
discretion.
(g) Where unforeseen emergencies arise rendering appointment of a sub-agent
necessary.

38. LEGAL RELATIONSHIP BETWEEN THE PRINCIPLE AND SUB-AGENT AND

AGENT (Sec.190, 192 and 193)

If sub-agent is properly appointment

(a) Principal is bound to the third parties for the acts of sub-agent.
(b) The agent is responsible to the principal for the acts of sub-agent.
(c) The sub-agent is responsible to the agent for the acts done by him.
(d) The sub – agent is not responsible to the principle, except in case of fraud or willful
wrong.

If sub – agent is not properly appointed.

(a) Principal is not bound to the third parties for the acts of sub – agent.
(b) The agent is responsible to the principle and third parties for the acts of sub – agent.
(c) The sub – agent is responsible to the agent for the acts done by him.
(d) The sub – agent is not responsible to the principle.

39. LIABILITY OF PRINCIPAL TO THIRD PARTIES FOR THE ACTS OF AGENT

(Sec. 226 to 228)

Principal is liable for the acts of agent

• The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the same legal
consequences as if these contracts were made by the principal himself.

When agent exceeds his authority

Whether the acts done within the authority are separable from the acts done beyond
authority.
If yes – The principal is not bound for excess acts done by the agent.
If no – The principal is not bound by the transaction and the principal can repudiate the
whole transaction.

40. TERMINATION OF AGENCY (Sec.201 to 210)

A. By the acts of parties

By agreement
The principal and the agent may mutually agree to terminate the agency, at anytime.

By revocation
• When the agency is coupled with interest, the principal cannot revoke the agency to
the prejudice of such interest.
• The principal can revoke the authority at anytime before, the authority has been
exercised so as to bind the principal.
• The principal cannot revoke the authority given to his agent after the authority has
been partly exercised.
SUJEET JHA 84 9213188188
MS EDUCONZ PVT. LTD. LAW& AUDIT

• When agency if for fixed period, the principal must make compensation to the agent
for premature revocation of agency without sufficient cause.
• Revocation may be expressed or implied from the conduct of the principal

By the agent renouncing the business of agency

• Renunciation may be expressed or implied from the conduct of the agent.
• When agency is for fixed period, the agent must make compensation to the principal
for premature renunciation of agency without sufficient cause.

B. By operation of law
1. Completion of business of agency
2. Death or insanity of the principal or agent
3. Where the principal or the agent, being a company is dissolved
4. Destruction of subject matter of agency
5. Principal becoming insolvent
6. Expiration of period where agency was for a fixed period.

SUJEET JHA 85 9213188188