CONTRACT OF INDEMNITY

The word indemnity has been derived from the Latin term “indemnis” which
means unhurt or free from loss.
SECTION 124 OF THE INDIAN CONTRACT ACT,1872 DEFINES A
CONTRACT OF INDEMNITY AS, A CONTRACT BY WHICH ONE PARTY
PROMISES TO SAVE THE OTHER FROM LOSS CAUSED TO HIM BY
THE CONDUCT OF ANY OTHER PERSON, OR BY THE CONDUCT OF
ANY OTHER PERSON.
ILLUSTRATION – “A” CONTRACTS TO INDEMNIFY “B” AGAINST THE
CONSEQUENCES OF ANY PROCEEDINGS WHICH “C” MAY TAKE
AGAINST “B” IN RESPECT OF A CERTAIN SUM OF 200 RUPEES.
One party to the contract, referred to as the “indemnifier” or “indemnifying
party”, promises to protect another party, referred to as the “indemnity holder”
or “indemnified party”, from not only loss, cost, expense, and damage but also
from any legal consequences resulting from an act or omission by either the
indemnifier or a third party or any other event.
TYPES OF CONTRACT OF INDEMNITY: -
I. BROAD INDEMNIFICATION
THE INDEMNIFIER MAKES A PROMISE TO COVER ALL PARTIES'
DAMAGES INCLUDING THOSE OF THE THIRD PARTY. EVEN
THOUGH THE THIRD PARTY IS COMPLETELY AT FAULT.
II. INTERMEDIATE INDEMNIFICATION
THE INDEMIFIER AGREES TO COVER ONLY DAMAGES CAUSED
BY THE PROMISOR’S AND PROMISEE’S ACTIONS. EXCEPT IN
CASES WHERE THAT PARTY IS COMPLETELY AT FAULT, THE
INTERMEDIATE FORM INDEMNIFIES A PARTY FOR ITS OWN
NEGLIGENCE.
III. LIMITED INDEMNIFICATION
THE INDEMNIFIER PROMISES TO COVER ONLY LOSS
BROUGHT ON BY HIS ACTION UNDER THE LIMIT OF
INDEMNIFICATION.
RIGHTS OF INDEMNITY-HOLDER WHEN SUED (SECTION 125): -
THE PROMISEE IN A CONTRACT OF INDEMNITY, ACTING WITHIN
THE SCOPE OF HIS AUTHORITY, IS ENTITLED TO RECOVER FROM
THE PROMISOR –
 1) ALL DAMAGES WHICH HE MAY BE COMPELLED TO PAY IN
ANY SUIT IN RESPECT OF ANY MATTER TO WHICH THE
PROMISE TO INDEMNIFY APPLIES;
2) ALL COSTS WHICH HE MAY BE COMPELLED TO PAY IN ANY
SUIT IF, IN BRINGING OR DEFENDING IT, HE DID NOT
CONTRAVENE THE ORDERS OF THE PROMISOR, AND ACTED
AS IT WOULD HAVE BEEN PRUDENT FOR HIM TO ACT IN THE
ABSENCE OF ANY CONTRACT OF INDEMNITY, OR IF THE
PROMISOR.
3) all sums which he may have paid under the terms of any compromise of
any such suit, if the compromise was not contrary to the orders of the
promisor, and was one which it would have been prudent for the promisee
to make in the absence of any contract of indemnity, or if the promisor
authorized him to compromise the suit.

RIGHTS OF AN INDEMNIFIER
In Jaswant Singh v. the State, it was concluded that the reimburse advantages
are like those of a guarantee under Section 141, where the person who
indemnifies gains the advantage of all protections held by the loan boss
against the vital borrower, regardless of whether the foremost account holder
was worried about them.
On the off chance that an individual chooses to reimburse, he will be named
as having prevailed to the entirety of the structures and means which the
individual who was initially reimbursed may have ensured himself against
any misfortune or harms; or haggled for pay for his misfortune or harms.
When the indemnifier pays for the misfortunes or harms, he at that point
moves into the shoes of the reimburse, giving him the entirety of the
advantages that the first indemnifier needed to shield himself from
misfortune or mischief.
DUTIES AND LIABILITY OF INDEMNIFIER
1) INDEMNIFY ALL DAMAGES
2) INDEMNIFY ALL COSTS
3) INDEMNIFY AMOUNT PAYABLE IN CASE OF COMPROMISE
DUTIES AND LIABILITIES OF INDEMNITY HOLDER
1) MUST ABIDE BY ALL THE CONDITIONS OF CONTRACT OF
INDMENITY.
 2) HE SHOULD NOT VIOLATE THE CONTRACT.
3) FORSEE AND TRY TO AVOID LOSS (IF POSSIBLE).
TYPES OF INDEMNITY
1) EXPRESS INDEMNITY.
Written indemnity is another term for an express indemnity. The
obligations of both parties should be specified in an express indemnity
clause. Where there is an express indemnity, the terms and conditions
defining the indemnification clause are provided in writing. The contract
should explicitly state and explain the terms and conditions of the
contract. An indemnity attorney may be required to assist with drafting
the indemnification agreement.
Insurance indemnity contracts are among the indemnity contracts that are
most frequently used. Also, such contracts are widely included in
construction contracts by businesses that operate in the construction
sector. Another sector that calls for well-written indemnity contracts is
agency contracts
2) IMPLIED INDEMNITY.
The only distinction between an express indemnity contract and an
implied indemnity contract is that the latter is not in writing. Instead,
implied indemnity contracts are those that are made as a result of the
conduct of the concerned parties. In an implied indemnity contract, the
extent of the obligation is determined by the circumstances, conduct, and
actions of the parties.
CONTRACT OF GUARANTEE
SECTION 125 OF THE INDIAN CONTRACT ACT DEFINES A CONTRACT
OF GUARANTEE AS A CONTRACT TO PERFORM THE PROMISE OF
DISCHARGE OF THE LIABILITY OF THE DEFAULTING PARTY IN CASE
HE FAILS TO FULFILL HIS PROMISE.
HERE WE CAN INFER THAT THERE ARE THREE PARTIES TO THE
CONTRACT –
1) Principal Debtor – The one who borrows or is liable to pay and on
whose default the guarantee is given
2) Creditor – The party who has given something of value to borrow and
stands to receive the payment for such a thing and to whom the guarantee
is given
3) Surety/Guarantor – The person who gives the guarantee to pay in case
of default of the principal debtor
ESSENTIALS OF A CONTRACT OF GUARANTEE –
1) Must be made with the agreement of all three parties
2) Consideration
3) Liability
4) Presupposes the existence of debt
5) Must contain all the Essentials of a valid contract
6) No Concealment of Facts
7) No Misrepresentation
Consideration of Guarantee (Section 127)–
Anything done, or any promise made, for the benefit of the principal debtor,
may be a sufficient consideration to the surety for giving the guarantee.
KINDS OF GUARANTEE –
Contracts of guarantees may be classified into two types:
1) Specific 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.
2) Continuing Guarantee (Section 129) –
A continuing guarantee is a type of guarantee which applies to a series of
transactions. It applies to all the transactions entered into by the principal
debtor until it is revoked by the surety. Therefore Bankers always prefer to
have a continuing guarantee so that the guarantor’s liability is not limited
to the original advances and would also extend to all subsequent debts.
The most important feature of a continuing guarantee is that it applies to a
series of separable, distinct transactions. Therefore, when a guarantee is
given for an entire consideration, it cannot be termed as a continuing
guarantee.

REVOCATION OF CONTINUING GUARANTEE –

So far as a guarantee given for an existing debt is concerned, it cannot be

revoked, as once an offer is accepted it becomes final. However, a continuing
guarantee can be revoked for future transactions. In that case, the surety shall
be liable for those transactions which have already taken place.

A contract of guarantee can be revoked in the following two ways-

1) By Giving Notice (Section 130)–

 Continuing guarantees can be revoked by giving notice to the Creditor
but this applies only to future transactions. Just by giving a notice the
surety cannot waive off his responsibility and still remains liable for all
the transactions that have been placed before the notice was given by
him. If the contract of guarantee includes a clause that a notice of a
certain period of time is required before the contract can be revoked,
then the surety must comply with the same as stated in Offord v Davies
(1862).
2) By Death of Surety (Section 131)–
Unless there is a contract to the contrary, the death of surety operates
as a revocation of the continuing guarantee in respect to the
transactions taking place after the death of surety due to the absence of
a contract. However, his legal representatives will continue to be liable
for transactions entered into before his death. The estate of the
deceased surety is, however, liable for those transactions which had
already taken place during the lifetime of the deceased. Surety’s estate
will not be liable for the transactions taken after the death of Surety
even if the creditor had no knowledge of Surety’s death.

Period of Limitation –
The period of limitation of enforcing a guarantee is 3 years from the date on
which the letter of guarantee was executed. In State Bank Of India vs Nagesh
Hariyappa Nayak And Ors, against the advancement of a loan to a company, the
guarantee deed was executed by its directors and subsequently a letter
acknowledging the load was issued by same directors on behalf of the company.
It was held that the letter did not have the effect of extending the period of
limitation. Recovery proceedings instituted after three years from the date of the
deed of guarantee were liable to be quashed.
Rights of Surety –
After making a payment and discharging the liability of the principal debtor, the
surety gets various rights. These rights can be studied under three heads:

(i) rights against the principal debtors.

(ii) rights against the creditor.
(iii) rights against the co-sureties.

i. Rights against the principal debtors.

 The right of surety on payment of debt or the Right of subrogation
(Section 140)
 The right of subrogation means that since the surety had given a
guarantee to the creditor and the creditor after getting the payment is out
of the scene, the surety will now deal with the debtor as if he is a creditor.
Hence the surety has the right to recover the amount which he has paid to
the creditor which may include the principal amount, costs and the
interest.
 The right of Indemnity (Section 145)
In every contract of guarantee, there is an implied promise by the
principal debtor to indemnify the surety, and the surety is entitled to
recover from the principal debtor whatever sum he has rightfully paid
under the guarantee. This is because the surety has suffered a loss due to
the non-fullfillment of promise by the principal debtor and therefore the
surety has a right to be compensated by the debtor.

ii. Right Against the Creditor

 Right to securities given by the principal debtor (section 141)
On the default of payment by the principal debtor, when the surety pays
off the debt of the principal debtor he becomes entitled to claim all the
securities which were given by the principal debtor to the creditor. The
Surety has the right to all securities whether received before or after the
creation of the guarantee and it is also immaterial whether the surety has
knowledge of those securities or not.
 Right to set off
When the creditor sues the surety for the payment of principal debtor’s
liabilities, the surety can claim set off, or counterclaim if any, which the
principal debtor had against the creditor.

iii. Right Against the Co-Sureties

 Release of one co-surety does not discharge others (Section 138)
When the repayment of debt of the principal debtor is guaranteed by more
than one person they are called Co-sureties and they are liable to contribute
as agreed towards the payment of guaranteed debt. The release by the
creditor of one of the co-sureties does not discharge the others, nor does it
free the released surety from his responsibility to the other sureties. Thus
when the payment of a debt or performance of duty is guaranteed by co-
sureties and the principal debtor has defaulted in fulfilling his obligation
and thus the creditor compels only one or more of the co-sureties to
perform the whole contract, the co-surety sureties performing the contract
are entitled to claim contribution from the remaining co-sureties.
  Co-sureties to contribute equally (Section 146)
According to Section 146, in the absence of any contract to the contrary, the
co-sureties are liable to contribute equally. This principle will apply even
when the liability of co-sureties is joint or several, and whether under the
same or different contracts, and whether with or without the knowledge of
each other.

 Liability of co-sureties bound in different sums(Section 147)

When the co-sureties have agreed to guarantee different sums, they have to
contribute equally subject to the maximum of the amount guaranteed by
each one.

Discharge of Surety from Liability –

Under any of the following circumstances, a surety is discharged from his

liability:
i) by the revocation of the contract of guarantee.
ii) by the conduct of the creditor.
iii) by the invalidation of the contract of guarantee.

We have already discussed above the first circumstance in which how a

surety can be discharged i.e by Revocation of the Contract of Guarantee.
This includes by giving notice or death or the surety.

ii. Conduct of the Creditor

1) Variance in terms of the contract(Section 133)
When a contract of guarantee has been materially altered through an
agreement between the creditor and principal debtor, the surety is
discharged from his liability. This is because a surety is liable only for what
he has undertaken in the guarantee and any alteration made without the
surety’s consent will discharge the surety as to transactions subsequent to
the variation.

Illustration

A becomes surety to C for B’s conduct as a manager in C’s bank.

Afterward, B and C contract, without A’ s consent, that B’ s salary shall be
raised, and that he shall become liable for one-fourth of the losses on
overdrafts. B allows a customer to over-draw, and the bank loses a sum of
money. A is discharged from his suretyship by the variance made without
his consent and is not liable to make good this loss.

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

A surety is discharged if the creditor makes a contract with the principal
debtor by which the principal debtor is released, or by any act or omission
of the creditor, which results in the discharge of the principal debtor.

Illustration
A supplies goods to B on the guarantee of C. Afterwards B becomes unable
to pay and contracts with A to assign some property to A in consideration of
his releasing him from his demands on the goods supplied. Here, B is
released from his debt, and C is also discharged
from his suretyship. But, where the principal debtor is discharged of his
debt by operation of law,
say, on insolvency, this will not operate as a discharge of the surety.

3) Arrangement between principal debtor and creditor

According to section 135 when the creditor, without the consent of the
surety, makes an arrangement with the principal debtor for composition, or
promise to give him time to, or not to sue him, the surety will be
discharged.
However, when the contract to allow more time to the principal debtor is
made between the creditor and a third party, and not with the principal
debtor, the
surety is not discharged (Section 136).

Illustration
C, the holder of an overdue bill of exchange drawn by A as surety for B,
and accepted by B, contracts with M to give time to B, A is not discharged.

4) Loss of security(Section 141)

If the creditor parts with or loses any security given to him at the time of
the guarantee, without the consent of the surety, the surety is discharged
from liability to the extent of the value of the security.

Illustration
A, as surety for B, makes a bond jointly with 3 to C to secure a loan from C
to B. Later on, C obtains from B further security for the same debt.
Subsequently, C gives up further security. A is not discharged.
iii. By Invalidation of the Contract
A contract of guarantee, like any other contract, may be avoided if it
becomes void or voidable at the option of the surety. A surety may be
discharged from liability in the following cases:

1) Guarantee obtained by misrepresentation(Section 142)

When a misrepresentation is made by the creditor or with his knowledge or
consent, relating to a material fact in the contract of guarantee, the contract
is invalid

2) Guarantee obtained by concealment(Section 143)

When a guarantee is obtained by the creditor by means of keeping silence
regarding some material part of circumstances relating to the contracts, the
contract is invalid

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

When a contract of guarantee provides that a creditor shall not act on it
until another person has joined in it as a co-surety, the guarantee is not valid
if that other person does not join.E

Extent of a surety’s liability

In the absence of a contract to the contrary, the liability of a surety is co-
extensive with that of the liability of the principal debtor. It means that the
surety is liable to the same extent to which the principal debtor is liable.

Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. On
the due date, the bill is dishonored by C. A is liable, not only for the amount
of the bill but also for any interest and charges which may have become due
on it.

For reference –
https://blog.ipleaders.in/contract-indemnity-
insurance/#Rights_incurred_by_an_indemnity_holder
 Agency (Chapter 10)

When one party delegates some authority to another party whereby the
latter performs his actions in a more or less independent fashion, on behalf
of the first party, the relationship between them is called an agency.

Section 182 –
Agent-
An “agent” is a person employed to do any act for another, or to represent
another in dealings with third persons.
Principal –
The person for whom such an act is done, or who is so represented, is
called the “principal”.

Section 183. Who may employ an agent —

Any person who is of the age of majority according to the law to which he
is subject, and who is of sound mind, may employ an agent.

Section 184. Who may be an agent —

As between the principal and third persons, any person may become an
agent, but no person who is not of the age of majority and of sound mind
can become an agent, so as to be responsible to his principal according to
the provisions in that behalf herein contained.

Creation of Agency
An agency can be created by:
Direct (express) appointment– The standard form of creating an agency is
by direct appointment. When a person, in writing or speech appoints
another person as his agent, an agency is created between the two.
Implication– When an agent is not directly appointed but his appointment
can be inferred from the circumstances, an agency by implication is
created.
Necessity– In a situation of necessity, one person can act on behalf of
another to save the person from any loss or damage, without expressly
being appointed as an agent. This creates an agency out of necessity.
Estoppel– An agency can also be created by estoppel. In a situation where
one person behaves in such a manner in front of a third person, as to make
someone believe he is an authorized agent on behalf of someone, an agency
by estoppel is created.
 Ratification– When an act of a person, who acted as another person’s
agent (on his behalf) without his knowledge is later ratified by that person,
this creates an agency by ratification between the two.
Types of Agents
1. Special Agent- Agent appointed to do a singular specific act.
2. General Agent- Agent appointed to do all acts relating to a specific job.
3. Sub-Agent-An agent appointed by an agent.
4. Co-Agent- Agents together appointed to do an act jointly.
5. Factor- An agent who is remunerated by a commission (one who looks
like the apparent owner of the things concerned)
6. Broker- An agent whose job is to create a contractual relationship
between two parties.
7. Auctioneer- An agent who acts a seller for the Principal in an auction.
8. Commission Agent- An appointed to buy and sell goods (make the best
purchase) for his Principal
9. Del Credere- An agent who acts as a salesperson, broker and guarantor
for the Principal. He guarantees the credit extended to the buyer.

Section 185. Consideration not necessary —

No consideration is necessary to create an agency

Section 186. Authority of an Agent –

The authority of an agent can be both express or implied.

i. Express authority
According to Section 187, authority is said to be expressed when it is given
by words spoken or written.

ii. Implied authority

According to Section 187, authority is said to be implied when it is to be
inferred from the facts and circumstances of the case. In carrying out the
work of the Principal, the agent can take any legal action. That is, the agent
can do any lawful thing necessary to carry out the work of the Principal.
Implied authority is of four main types
1. Incidental authority- doing something that is incidental to the due
performance of express authority
2. Usual authority- doing that which is usually done by persons occupying
the same position
3. Customary authority- doing something according to the pre-established
customs of a place where the agent acts
4. Circumstantial authority- doing something according to the circumstances
of the case

Illustration
 Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by a
person named John. John takes care of the deals regarding the shop and
buys goods from a person named Ram, with Ali’s knowledge. In this
case, John has implied authority from Ali to buy these goods.
 Soham employed Abhay, who is a shipbuilder to build ships for him. In
doing so, Abhay may legally buy all the material necessary to build the
ships.

Case
Chairman L.I.C v. Rajiv Kumar Bhaskar
In this case, as per the salary saving scheme of L.I.C, the employer was
supposed to deduct the premium from the employee’s salary and deposit it
with L.I.C. Upon the death of the employee, it was found by his heirs that
the employer has defaulted in doing so, causing the policy to lapse. A
clause in the acceptance letter was referred to, in which the employer had
said that he would act as the agent of the employee and not as that of L.I.C.
It was held that the employer was acting as the agent of the company,
thereby making the company (L.I.C) responsible as a Principal due to the
fault of the Agent (the employer).

Section 188. Extent of agent’s authority —

An agent, having 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 the purpose, or usually done in the course, of conducting such
business

Section 189.Agent’s authority in an emergency —

An agent has authority, in an emergency, to do all such acts for the purpose
of protecting his principal from loss as would be done by a person of
ordinary prudence, in his own case, under similar circumstances.
Illustrations (a) An agent for sale may have goods repaired if it be
necessary. (b) A consigns provisions to B at Calcutta, with directions to
send them immediately to C, at Cuttack. B may sell the provisions at
Calcutta, if they will not bear the journey to Cuttack without spoiling.
Agency between Husband and Wife
Generally, there exists no agency between a husband and wife, except in
cases where it has expressly or impliedly been sanctioned that either of
them would do certain acts or transactions as the agent of the other. That is,
a relationship of agency can come into existence between the two through
contract, appointment, or ratification. A husband is responsible for
necessaries to his wife when they are living apart due to the husband’s
fault. This results in an agency of necessity where the wife can use her
husband’s credit for what is necessary for her to live. But in cases where
they are separated because of the wife’s own whims or faults, for no just
reason, the husband is not liable for the wife’s necessaries.

Sub-Agent
Who is a sub-agent?
An agent may sometimes delegate the duty that has been delegated to him
by the Principal to somebody else. Ordinarily, an agent cannot delegate the
duty he is supposed to perform himself to another person (delegatus non
potest delegare- discussed below), except in particular circumstances where
he must, out of necessity, do so. Section 191 of the Indian Contract Act,
1872 defines a sub-agent to be a person employed by and acting under the
control of the original agent in the business of the agency.

Delegatus non potest delegare (Section 190 when an agent cannot

delgegate)
An agent cannot in ordinary circumstances delegate the duty that was
delegated to him. The principle is based upon the idea that when a Principal
appoints an agent, he does so by placing his confidence and trust in the
agent and might not have similar trust in the work of another person.

Section 192. Representation of principal by sub-agent properly

appointed –
Where a sub-agent is properly appointed, the principal is, so far as regards
third persons, represented by the sub-agent, and is bound by and
responsible for his acts, as if he were an agent originally appointed by the
principal.
Agent’s responsibility for sub-agent.—The agent is responsible to the
principal for the acts of the sub-agent.
Sub-agent’s responsibility.—The sub-agent is responsible for his acts to
the agent, but not tothe principal, except in cases of fraud or wilful wrong.

Section 193. Agent’s responsibility for sub-agent appointed without

authority —
Where an agent, without having authority to do so, has appointed a person
to act as a sub-agent, the agent stands towards such person in the relation of
a principal to an agent, and is responsible for his acts both to the principal
and to third persons; the principal is not represented, by or responsible for
the acts of the person so employed, nor is that person responsible to the
principal.
Section 194.Relation between principal and person duly appointed by
agent to act in business of agency —
Where an agent, holding an express or implied authority to name another
person to act for the principal in the business of the agency, has named
another person accordingly, such person is not a sub-agent, but an agent of
the principal for such part of the business of the agency as is entrusted to
him.
Illustrations
(a)A directs B, his solicitor, to sell his estate by auction, and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C
is not a sub-agent, but is A’s agent for the conduct of the sale.
(b)A authorizes B, a merchant in Calcutta, to recover the moneys due to A
from C & Co. B instructs D, a solicitor, to take legal proceedings against C
& Co. for the recovery of the money. D is not a sub-agent, but is solicitor
for A.

Section 195. Agent’s duty in naming such person —

In selecting such agent for his principal, an agent is bound to exercise the
same amount of discretion as a man of ordinary prudence would exercise in
his own case; and, if he does this, he is not responsible to the principal for
the acts or negligence of the agent so selected.

Difference between sub-agent and substituted agent

The difference between sub-agent and the substituted agent is very
fundamental. When a person, in the capacity of an agent, is asked
to name someone for a certain task, the person who is named does not
become a sub-agent to the Principal, but a substituted agent.
 Illustration
Sarah asks her solicitor to appoint an auctioneer to sell her antique
merchandise. Her solicitor appoints Naaz as an auctioneer. In this case,
Naaz is not a sub-agent but is, in fact, a substituted agent for this sale.

Section 196. Right of person as to acts done for him without his
authority. Effect of ratification —
Where acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to disown such acts. If he
ratify them, the same effects will follow as if they had been performed by
his authority.

Ratification is not allowed in the following cases

1. When the person’s knowledge of the facts of the case is defective. That
is, he only half knows things that he is ratifying to.
2. An act done on behalf of another person which would have the effect of
injuring or harming the person or violating any of his rights if the act was
done with his authority.

Section 197. Ratification may be expressed or implied —

Ratification may be expressed or may be implied in the conduct of the
person on whose behalf the acts are done.
Illustrations
(a)A, without authority, buys goods for B. Afterwards B sells them to C on
his own account; B’s conduct implies a ratification of the purchase made
for him by A.
(b)A, without B’s authority, lends B’s money to C. Afterwards B accepts
interest on the money from C. B’s conduct implies a ratification of the loan.

Section 198.Knowledge requisite for valid ratification —

No valid ratification can be made by a person whose knowledge of the facts
of the case is materially defective.

Section 199.Effect of ratifying unauthorized act forming part of a

transaction —
A person ratifying any unauthorized act done on his behalf ratifies the
whole of the transaction of which such act formed a part.

Section 200.Ratification of unauthorized act cannot injure third person

— An act done by one person on behalf of another, without such other
 person’s authority, which, if done with authority, would have the effect of
subjecting a third person to damages, or of terminating any right or interest
of a third person, cannot, by ratification, be made to have such effect.

Illustrations
(a)A, not being authorized thereto by B, demands, on behalf of B, the
delivery of a chattel, the property of B, from C, who is in possession of it.
This demand cannot be ratified by B, so as to make C liable for damages
for his refusal to deliver.
(b)A holds a lease from B, terminable on three months’ notice. C, an
unauthorized person, gives notice of termination to A. The notice cannot be
ratified by B, so as to be binding on A.

Section 201 Termination of Agency

An agency can be terminated or is terminated in 5 different ways:
1. When the agent’s authority is revoked by the Principal
2. When the agent renounces the business of the agency
3. When the business of the agency is completed
4. When either of the parties dies or becomes mentally disabled
5. When the Principal is adjudicated an insolvent

Section 202. Termination of agency, where agent has an interest in

subject-matter —
Where the agent has himself an interest in the property which forms the
subject-matter of the agency, the agency cannot, in the absence of an
express contract, be terminated to the prejudice of such interest.
Illustrations
(a) A gives authority to B to sell A’s land, and to pay himself, out of the
proceeds, the debts due to him from A. A cannot revoke this authority, nor
can it be terminated by his insanity or death.
(b) A consigns 1,000 bales of cotton to B, who has made advances to him
on such cotton, and desires B to sell the cotton, and to repay himself out of
the price, the amount of his own advances. A cannot revoke this authority,
nor is it terminated by his insanity or death.

Revocation of Agent’s authority

There are certain rules regarding the revocation of an agent’s authority.
1. It can be revoked any time before the authority has been exercised.
(Section 203)
2. If according to the terms of the contract between the two, the agency has
to continue upto a certain time, any prior revocation by the Principal shall
be compensated for, to the agent. (Section 204)
3. The termination does not take effect before it has been communicated to
the agent.
4. Termination of the authority of an agent terminates the authority of all the
sub-agents under him.

Section 205.Compensation for revocation by principal, or renunciation

by agent —
Where there is an express or implied contract that the agency should be
continued for any period of time, the principal must make compensation to
the agent, or the agent to the principal, as the case may be, for any previous
revocation or renunciation of the agency without sufficient cause.

Section 206. Notice of revocation or renunciation —

Reasonable notice must be given of such revocation or renunciation,
otherwise the damage thereby resulting to the principal or the agent, as the
case may be, must be made good to the one by the other.

Section 207 Revocation and renunciation may be expressed or implied

Revocation and renunciation may be expressed or may be implied in the
conduct of the principal or agent respectively.

208.When termination of agent’s authority takes effect as to agent, and

as to third persons —
The termination of the authority of an agent does not, so far as regards the
agent, take effect before it becomes known to him, or, so far as regards
third persons, before it becomes known to them.
Illustrations
(a) A directs B to sell goods for him, and agrees to give B five per cent.
commission on the price fetched by the goods. A afterwards, by letter,
revoke B’s authority. B, after the letter is sent, but before he receives it,
sells the goods for 100 rupees. The sale is binding on A, and B is entitled to
five rupees as his commission.
(b) A, at Madras, by letter, directs B to sell for him some cotton lying in a
warehouse in Bombay, and afterwards, by letter, revokes his authority to
sell, and directs B to send the cotton to Madras. B, after receiving the
second letter, enters into a contract with C, who knows of the first letter, but
not of the second, for the sale to him of the cotton. C pays B the money,
with which B absconds. C’s payment is good as against A.
(c) A directs B, his agent, to pay certain money to C. A dies, and D takes
out probate to his will. B, after A’s death, but before hearing of it, pays the
money to C. The payment is good as against D, the executor.

Section 209 Agent’s duty on termination of agency by principal’s death

or insanity —
When an agency is terminated by the principal dying or becoming of
unsound mind, the agent is bound to take, on behalf of the representatives
of his late principal, all reasonable steps for the protection and preservation
of the interests entrusted to him.

Section 210 Termination of sub-agents authority —

The termination of the authority of an agent causes the termination (subject
to the rules herein contained regarding the termination of an agent’s
authority) of the authority of all sub-agents appointed by him. Agent’s duty
to the principal.

Section 211 Agent’s duty in conducting principal’s business —

An agent is bound to conduct the business of his principal according to the
directions given by the principal, or, in the absence of any such directions,
according to the custom which prevails in doing business of the same kind
at the place where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his principal,
and if any profit accrues, he must account for it.
Illustrations
(a) A, an agent engaged in carrying on for B a business, in which it is the
custom to invest from time to time, at interest, the moneys which may be in
hand, omits to make such investment. A must make good to B the interest
usually obtained by such investments.
(b) B, a broker, in whose business it is not the custom to sell on credit, sells
goods of A on credit to C, whose credit at the time was very high. C, before
payment, becomes insolvent. B must make good the loss to A.

Section 212 Skill and diligence required from agent —

An agent is bound to conduct the business of the agency with as much skill
as is generally possessed by persons engaged in similar business, unless the
principal has notice of his want of skill. The agent is always bound to act
with reasonable diligence, and to use such skill as he possesses; and to
make compensation to his principal in respect of the direct consequences of
his own neglect, want of skill, or misconduct, but not in respect of loss or
damage which are indirectly or remotely caused by such neglect, want of
skill, or misconduct.
Illustrations
(a)A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of
money is paid on A’s account, with orders to remit. B retains the money for
a considerable time. A, in consequence of not receiving the money,
becomes insolvent. B is liable for the money and interest from the day on
which it ought to have been paid, according to the usual rate, and for any
further direct loss-as, e.g., by variation of rate of exchange-but not further.
(b)A, an agent for the sale of goods, having authority to sell on credit, sells
to B on credit, without making the proper and usual enquiries as to the
solvency of B. B, at the time of such sale, is insolvent. A must make
compensation to his principal in respect of any loss thereby sustained.
(c)A, an insurance-broker employed by B to effect an insurance on a ship,
omits to see that the usual clauses are inserted in the policy. The ship is
after wards lost. In consequence of the omission of the clauses nothing can
be recovered from the underwriters. A is bound to make good the loss to B.
(d)A, a merchant in England, directs B, his agent at Bombay, who accepts
the agency, to send him 100 bales of cotton by a certain ship. B, having it in
his power to send the cotton, omits to do so. The ship arrives safely in
England. Soon after her arrival the price of cotton rises. B is bound to make
good to A the profit which he might have made by the 100 bales of cotton at
the time the ship arrived, but not any profit he might have made by the
subsequent rise.

Section 213 Agent’s accounts — An agent is bound to render proper

accounts to his principal on demand.

Section 214 Agent’s duty to communicate with principal — It is the duty

of an agent, in cases of difficulty, to use all reasonable diligence in
communicating with his principal, and in seeking to obtain his instructions.

Section 215 Right of principal when agent deals, on his own account, in
business of agency without principal’s consent —
If an agent deals on his own account in the business of the agency, without
first obtaining the consent of his principal and acquainting him with all
material circumstances which have come to his own knowledge on the
subject, the principal may repudiate 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.
Illustrations
(a)A directs B to sell A’s estate. B buys the estate for himself in the name of
C. A, on discovering that B has bought the estate for himself, may repudiate
the sale, if he can show that B has dishonestly concealed any material fact,
or that the sale has been disadvantageous to him.
(b)A directs B to sell A’s estate B, on looking over the estate before selling
it, finds a mine on the estate which is unknown to A. B informs A that he
wishes to buy the estate for himself, but conceals the discovery of the mine.
A allows B to buy, in ignorance of the existence of the mine. A, on
discovering that B knew of the mine at the time he bought the estate, may
either repudiate or adopt the sale at his option.

Section 216 Principal’s right to benefit gained by agent dealing on his own
account in business of agency — If an agent, without the knowledge of his
principal, deals in the business of the agency on his own account instead of
on account of his principal, the principal is entitled to claim from the agent
any benefit which may have resulted to him from the transaction.
Illustration
A directs B, his agent, to buy a certain house for him. B tells A it cannot be
bought, and buys the house for himself. A may, on discovering that B has
bought the house, compel him to sell it to A at the price he gave for it.

Section 217 Agent’s right of retainer out of sums received on principal’s

account —
An agent may retain, out of any sums received on account of the principal
in the business of the agency, all moneys due to himself in respect of
advances made or expenses properly incurred by him in conducting such
business, and also such remuneration as may be payable to him for acting
as agent.

Section 218 Agent’s duty to pay sums received for principal —

Subject to such deductions, the agent is bound to pay to his principal all
sums received on his account.

Section 219 When agent’s remuneration becomes due —

In the absence of any special contract, payment for the performance of any
act is not due to the agent until the completion of such act; but an agent
may detain moneys received by him on account of goods sold, although the
whole of the goods consigned to him for sale may not have been sold, or
although the sale may not be actually complete.

Section 220 Agent not entitled to remuneration for business misconduct

An agent who is guilty of misconduct in the business of the agency, is not
entitled to any remuneration in respect of that part of the business which he
has misconducted.
Illustrations
(a) A employs B to recover, 1,00,000 rupees from C, and to lay it out on
good security. B recovers the 1,00,000 rupees; and lays out 90,000 rupees
on good security, but lays out 10,000 rupees on security which he ought to
have known to be bad, whereby A loses 2,000 rupees. B is entitled to
remuneration for recovering the 1,00,000 rupees and for investing the
90,000 rupees. He is not entitled to any remuneration for investing the
10,000 rupees, and he must make good the 2,000 rupees to B.
(b)A employs B to recover 1,000 rupees from C. Through B’s misconduct
the money is not recovered. B is entitled to no remuneration for his
services, and must make good the loss.

Section 221 Agent’s lien on principal’s property —

In the absence of any contract to the contrary, an agent is entitled to retain
goods, papers and other property, whether movable or immovable of the
principal received by him, until the amount due to himself for commission,
disbursements and services in respect of the same has been paid or
accounted for to him.

Section 222 Agent to be indemnified against consequences of lawful

acts —
The employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by such agent in exercise of the
authority conferred upon him.
Illustrations
(a)B, at Singapur, under instructions from A of Calcutta, contracts with C to
deliver certain goods to him. A does not send the goods to B, and C sues B
for breach of contract. B informs A of the suit, and A authorizes him to
defend the suit. B defends the suit, and is compelled to pay damages and
costs, and incurs expenses. A is liable to B for such damages, costs and
expenses.
(b)B, a broker at Calcutta, by the orders of A, a merchant there, contracts
with C for the purchase of 10 casks of oil for A. Afterwards A refuses to
receive the oil, and C sues B. B informs A, who repudiates the contract
altogether. B defends, but unsuccessfully, and has to pay damages and costs
and incurs expenses. A is liable to B for such damages, costs and expenses.

Section 223 Agent to be indemnified against consequences of acts done

in good faith —
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 cause an injury to the rights of third
persons.
Illustrations
(a)A, a decree-holder and entitled to execution of B’s goods, requires the
officer of the Court to seize certain goods, representing them to be the
goods of B. The officer seizes the goods, and is sued by C, the true owner
of the goods. A is liable to indemnify the officer for the sum which he is
compelled to pay to C, in consequence of obeying A’s directions.
(b)B, at the request of A, sells goods in the possession of A, but which A
had no right to dispose of, B does not know this, and hands over the
proceeds of the sale to A. Afterwards C, the true owner of the goods, sues B
and recovers the value of the goods and costs. A is liable to indemnify B for
what he has been compelled to pay to C, and for B’s own expenses.

Section 224 Non-liability of employer of agent to do a criminal act —

Where one person employs another to do an act which is criminal, the
employer is not liable to the agent, either upon an express or an implied
promise, to indemnify him against the consequences of that Act1 .
Illustrations
(a) A employs B to beat C, and agrees to indemnify him against all
consequences of the act. B thereupon beats C, and has to pay damages to C
for so doing. A is not liable to indemnify B for those damages.
(b)B, the proprietor of a newspaper, publishes, at A’s request, a libel upon
C in the paper, and A agrees to indemnify B against the consequences of the
publication, and all costs and damages of any action in respect thereof. B is
sued by C and has to pay damages, and also incurs expenses. A is not liable
to B upon the indemnity.

Section 225 Compensation to agent for injury caused by principal’s

neglect —
The principal must make compensation to his agent in respect of injury2
caused to such agent by the principal’s neglect or want of skill.

Illustration
A employs B as a bricklayer in building a house, and puts up the
scaffolding himself. The scaffolding is unskilfully put up, and B is in
consequence hurt. A must make compensation to B. Effect of agency on
contracts with third persons

Section 226 Enforcement and consequences of agent’s contracts —

Contracts entered into through an agent, and obligations arising from acts
done by an agent, may be enforced in the same manner, and will have the
same legal consequences, as if the contracts had been entered into and the
acts done by the principal in person.
Illustrations
(a)A buys goods from B, knowing that he is an agent for their sale, but not
knowing who is the principal. B’s principal is the person entitled to claim
from A the price of the goods, and A cannot, in a suit by the principal, set-
off against that claim a debt due to himself from B. 1. See s. 24, supra. 2.
Cf. the Indian Fatal Accidents Act, 1855 (13 of 1855).
(b)A, being B’s agent, with authority to receive money on his behalf,
receives from C a sum of money due to B. C is discharged of his obligation
to pay the sum in question to B.

Section 227 Principal how far bound, when agent exceeds authority —
When an agent does more than he is authorized to do, and when the part of
what he does, which is within his authority, can be separated from the part
which is beyond his authority, so much only of what he does as is within his
authority is binding as between him and his principal.
Illustration
A, being owner of a ship and cargo, authorizes B to procure an insurance
for 4,000 rupees on the ship. B procures a policy for 4,000 rupees on the
ship, and another for the like sum on the cargo. A is bound to pay the
premium for the policy on the ship, but not the premium for the policy on
the cargo.

Section 228 Principal not bound when excess of agent’s authority is not
separable —
Where an agent does more than he is authorized to do, and what he does
beyond the scope of his authority cannot be separated from what is within
it, the principal is not bound to recognize the transaction.
Illustration
A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs
for one sum of 6,000 rupees. A may repudiate the whole transaction.

Section 229 Consequences of notice given to agent —

Any notice given to or information obtained by the agent, provided it be
given or obtained in the course of the business transacted by him for the
principal, shall, as between the principal and third parties, have the same
legal consequences as if it had been given to or obtained by the principal.
Illustrations
(a)A is employed by B to buy from C certain goods, of which C is the
apparent owner, and buys them accordingly. In the course of the treaty for
the sale, A learns that the goods really belonged to D, but B is ignorant of
that fact. B is not entitled to set-off a debt owing to him from C against the
price of the goods.
(b)A is employed by B to buy from C goods of which C is the apparent
owner. A was, before he was so employed, a servant of C, and then learnt
that the goods really belonged to D, but B is ignorant of that fact. In spite of
the knowledge of his agent, B may set-off against the price of the goods a
debt owing to him from C.

Section 230 Agent cannot personally enforce, nor be bound by,

contracts on behalf of principal —
In the absence of any contract to that effect, an agent cannot personally
enforce contracts entered into by him on behalf of his principal, nor is he
personally bound by them. Presumption of contract to contrary—Such a
contract shall be presumed to exist in the following cases:—
1) where the contract is made by an agent for the sale or purchase of goods
for a merchant resident abroad;
(2) where the agent does not disclose the name of his principal;
(3) where the principal, though disclosed, cannot be sued.

Section 231 Rights of parties to a contract made by agent not disclosed

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 the
performance of the contract; but the other contracting party has, as against
the principal, the same rights as he would have had as against the agent if
the agent had been principal. If the principal discloses himself before the
contract is completed, the other contracting party may refuse to fulfil the
contract, if he can show that, if he had known who was the principal in the
contract, or if he had known that the agent was not a principal, he would
not have entered into the contract.

Section 232 Performance of contract with agent supposed to be

principal—
Where one man makes a contract with another, neither knowing nor having
reasonable ground to suspect that the other is an agent, the principal, if he
requires the performance of the contract, can only obtain such performance
subject to the rights and obligations subsisting between the agent and the
other party to the contract.
Illustration
A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B. A is
acting as agent for C in the transaction, but B has no knowledge nor
reasonable ground of suspicion that such is the case. C cannot compel B to
take the rice without allowing him to set-off A’s debt.

Section 233 Right of person dealing with agent personally liable —

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.
Illustration A enters into a contract with B to sell him 100 bales of cotton,
and afterwards discovers that B was acting as agent for C. A may sue either
B or C, or both, for the price of the cotton.

Section 234 Consequence of inducing agent or principal to act on belief

that principal or agent will be held exclusively liable—
When a person who has made a contract with an agent induces the agent to
act upon the belief that the principal only will be held liable, or induces the
principal to act upon the belief that the agent only will be held liable, he
cannot afterwards hold liable the agent or principal respectively.

Section 235 Liability of pretended agent—

A person untruly representing himself to be the authorized agent of another,
and thereby inducing a third person to deal with him as such agent, is liable,
if his alleged employer does not ratify his acts, to make compensation to the
other in respect of any loss or damage which he has incurred by so dealing.
 Section 236 Person falsely contracting as agent not entitled to
performance—
A person with whom a contract has been entered into in the character of
agent, is not entitled to require the performance of it, if he was in reality
acting, not as agent, but on his own account.

Section 237 Liability of principal inducing belief that agent’s

unauthorized acts were authorized —
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.
Illustrations
(a) A consigns goods to B for sale, and gives him instructions not to sell
under a fixed price. C, being ignorant of B’s instructions, enters into a
contract with B to buy the goods at a price lower than the reserved price. A
is bound by the contract.
(b) A entrusts B with negotiable instruments endorsed in blank. B sells
them to C in violation of private orders from A. The sale is good

Agent’s duties to Principal

An agent has 6 duties towards his Principal:
1. He has to conduct the business of the Principal according to the directions
of the Principal.
2. An agent is bound to conduct the business he is supposed to conduct with
as much skill as a person on his position ordinarily holds.
3. An agent is supposed to show the relevant accounts to the Principal as
and when the Principal demands.
4. An agent has the duty to communicate any difficulty whatsoever he may
come across while doing the Principal’s business. He is supposed to
perform due diligence in this regard.
5. If any material fact has been concealed or the business is not carried out
in the manner that the Principal directed, the Principal can repudiate the
contract between them.

6. If the agent carries out the business in the manner he wanted to perform
it, rather than on the directions of the Principal, the Principal may claim
from the agent any benefit he may have achieved through doing so.
Illustration
 Hala directs her agent Saima to buy a certain house for her. Saima does not
buy the house, and tells Hala that it cannot be bought due to certain reasons,
but ends up buying the house herself. In this case, Hala has the right to
claim the house from Saima at the price which Saima bought it for herself.

Principal’s duties to Agent

The Principal has 4 duties towards the Agent:
1. The Principal is bound to indemnify the agent against any lawful acts
done by him in the exercise of his authority as an agent.
2. The Principal is bound to indemnify the agent against any act done by
him in good faith, even if it ended up violating the rights of third parties.
3. The Principal is not liable to the agent if the act that is delegated is
criminal in nature. The agent will also in no circumstances be
indemnified against criminal acts.
4. The Principal must make compensation to his agent if he causes any
injury to him because of his own competence or lack of skill.

Liability of Principal for Agent’s Fraud or Misrepresentation

According to Section 238, The Principal is liable for any fraud or
misrepresentation made by his agent during the course of his business, as if
the fraud or misrepresentation was done by the Principal himself.

Rights of an Agent
An agent has the following 5 rights:
1. Right of retainer– An agent has the right to retain any remuneration or
expenses incurred by him while conducting the Principal’s business.
2. Right to remuneration– An agent, when he has wholly carried out the
business of the agency has the right to be remunerated of any expenses
suffered by him while conducting the business.
3. Right of Lien on Principal’s property- The agent has the right to hold
(keep with himself) any movable or immovable property of the Principal
until his due remuneration is paid to him by the Principal.
4. Right to be Indemnified– The agent has the right to be indemnified
against all the lawful acts done by him during the course of conducting
the Principal’s business.
5. Right to Compensation– The Agent has the right to be compensated for
any injury or loss suffered by him due to the lack of skill and competency
of the Principal.
 Chapter VI
Consequences of Breach of Contract

A contract is said to be breached when one of the parties fails, denies, or refuses
to perform his part as per the contract. Basically, when one of the parties to the
contract fails to do the work for which the contract was entered into, such
failure can be called a breach of contract.

Section 73 Compensation for loss or damage caused by breach of contract

It describes compensation for loss or damage caused by a breach of contract.
According to this Section, in a case where a contract is broken or breached by a
party (“breaching party”), the party who suffered loss or damage due to the
breach is entitled to receive compensation for loss or damage from the
breaching party.
The compensation shall be given in two circumstances:
1. where the loss or damage from such a breach naturally arises in the usual
course of things; or
2. the loss or damage that the parties knew at the time they entered into the
contract that such loss or damage was likely to cause from the breach of
the contract.
Section 73 further states the compensation for failure to discharge obligations
resembling those created by contract. It is stated that in cases where an
obligation resembling those created by contract has not been discharged, the
person who is injured because of this shall be entitled to receive damages from
the party who broke such a contract.
Compensation shall not be given where there is a remote or indirect loss or
damages suffered by the party because of a breach of contract.

Section 74 Compensation for breach of contract where penalty stipulated

for –
It describes the compensation for breach of contract where a penalty is
stipulated for. According to this Section, when a contract is breached, the party
who complains of such a breach is entitled to receive an amount mentioned in
the contract or any other stipulation as a penalty. This can happen even if the
actual damage or loss is not proven to have been caused. Therefore, under this
Section, a party who complains of the breach is entitled to receive some
compensation in any form, as mentioned earlier, from the breaching party.
However, if a person enters into a bail-bond or any such similar instrument
under the provisions of law or under the orders of the government and gives the
bond for the performance of a public duty or something that is in the interest of
the public, then in these cases the person shall be liable for breach of contract
and they have to pay the sum mentioned in the bond.

Section 75 Party rightfully rescinding contract, entitled to compensation

It states that the party who rightfully rescinded the contract is entitled to
compensation. According to this Section, a person who has rescinded or
revoked a contract is rightfully entitled to receive compensation from the
breaching party for the damage or loss that they have suffered due to the non-
fulfilment of the contract.

Types of breach of contract

There are mainly four types of breach of contract:
1. Material breach
When a party to the contract gets less advantage or a different result than what
was stipulated in the contract, that is a material breach. Basically, a material
breach of contract happens when the obligation mentioned in the contract is not
carried out. This is a serious breach of contract.
In the case of National Power Plc v. United Gas Company Ltd (1998), the term
“material breach” was analysed by the judge, and he referred to it as “a serious
violation of any of the guilty party’s responsibilities”. The judge further held
that if the remedy for material breach of contract was not initiated within seven
days, then the contract would be terminated.
2. Minor breach
A minor breach or partial breach of contract happens when the party receives
the obligations as stipulated in the contract. However, the breaching party did
not complete or failed to fulfil some parts of the contract. A minor breach of
contract is also known as an ‘immaterial breach.’ This generally happens when a
major portion of the contract is fulfilled and only a minor portion has not been
fulfilled by the breaching party.
 3. Anticipatory breach
An anticipatory breach is basically an anticipated breach of contract, meaning
an expected breach. In this type of breach, one party anticipates that the other
party will not fulfil their part of the obligation. In such cases, an actual breach
has not happened yet. In anticipatory breach cases, the party’s intention to break
or breach the contract is indicated. The contract can be terminated if such a
breach happens. Under Section 39 of the Act, the party that suffered the loss can
claim damages.
One of the most important cases of anticipatory breach is Hochster v. De La
Tour (1853). It was held that “renunciation of a contract of future conduct by
one party immediately dissolves the obligation of the other party to perform the
contract. Thus, a breach of contract by renouncing the duty to perform the
future obligation immediately renders the party liable to a suit of action for
damages by the injured party.”
4. Actual breach
An actual breach of contract is a breach that has actually happened. In this case,
the breaching party has either left the obligations unfulfilled, refused to fulfil
them, or has not completed them on time. The party who suffered the loss shall
be eligible to claim damages.
In the case of Bishamber Nath Agarwal v. Kishan Chand (1989), it was held by
the Allahabad High Court that when a contract contains specific guidelines,
actions must be taken accordingly and the obligations must be fulfilled
accordingly. The party cannot do it according to their wishes or schedule.

Compensation for a breach of contract

Here, compensation means remedies available in case of a breach of contract.
As the Latin maxim “Ubi jus ibi remedium” states, “where there is a wrong,
there is a remedy.” Hence, when a contract is breached, it is considered wrong,
and the following are the remedies:
 Damages: Damages mean compensation in monetary terms. Damages are
paid to the party that has suffered a loss from the breaching party. The
provisions for the same are laid down in Section 73 and Section 74 of the
Indian Contract Act, 1872.
  Injunction: When someone is restricted from doing something. In cases
of breach of contract, the party who breached the contract restrains the
party who suffered the loss in the form of a court order.
 Specific performance: In specific performance, the courts direct a
specific act that needs to be done in order to compensate for the loss. This
condition arises when the compensation paid in monetary terms is not
adequate and the dispute is not resolved. This remedy is provided under
the Specific Relief Act, 1963.
 Quantum meruit: In quantum meruit cases, the party who is suffering
the loss has done a part of the contract and wants to recover the value of
the work done.

Reps and Warranties

What are Reps and Warranties?
Reps and warranties refer to statements of fact that a seller makes as part of
trying to persuade a buyer to purchase their business. Each of the parties in the
transaction relies on the other to provide true information about the transaction.
The seller provides assurance that the business is worth the investment that the
buyer plans to make.
The buyer must be provided with sufficient information to support the seller’s
asking price in the transaction. Some of this information includes financial
statements, lists of current contracts, customer listings, and proof of asset
ownership.
During the negotiations for the purchase of a business, it is the role of the buyer
to demand more information from the seller in regard to certain statements of
fact made by the seller. This is because the buyer bears more risks than the
seller and, therefore, must make sure that all questions are forwarded to the
seller for a response and that all information required for the transaction is
provided.
The buyer’s legal team is also tasked with ascertaining that the deal is within the
legal framework. If the buyer intends to use its stock as part of the consideration
for the transaction, it must make a statement to the seller that the stock provided
is free of any encumbrances and that the buyer is legally allowed to offer the
stock.
What Lawyers Look For in Reps and Warranties
The reps and warranties present an avenue for the buyer to conduct due
diligence for the transaction. The attorneys representing the parties must
scrutinize the deal to ensure it is fair to both the buyer and the seller.
Some of the information that the buyer’s attorneys check in the representations
and warranties include:
1. Legality of the business: This involves scrutinizing the legal formation of
the business, its authority to operate, and the seller’s rights to enter into a
binding contract with the buyer.
2. Tax audit queries: Tax scrutiny ensures that the business for sale has never
been on the radar of the IRS (or other appropriate tax authority) for breach of
income and deductions disclosures.
3. The accuracy of the financial instruments: A statement of fact that requires
the seller to fully disclose all financial statements of the business and provide
the assurance that they are clean, current, and accurate to the point of
verifiability.
4. Status of inventory: The seller can often disguise or fail to fully disclose its
inventory status. For example, a seller might make a simple statement of
amount of inventory but fail to disclose that some of the inventory is obsolete or
damaged. Therefore, attorneys should require a statement of fact attesting that
the inventory statement is accurate, complete, and up-to-date.
5. Employees’ benefits state of affairs: There should be a statement of
declaration of the settlement of employees’ contributions and benefits.
6. Environmental liability: An assurance that there are no pending obligations
relating to environmental issues.
7. State of the documents: A statement that any and all supplied trading
documents are accurate and complete.
Benefits of Reps and Warranties
In a buy and sell agreement, the seller is required to provide detailed
information to back up the statements of facts presented to the buyer, who may
have little or no other knowledge about the business. Here are some of the
benefits of reps and warranties for both parties:
1. Provide disclosure of the seller’s business
The seller has the full knowledge of the business while the buyer is interested in
getting the full disclosures about the business to facilitate the transaction.
2. Set grounds for closing the transaction
Since the detail document requires the seller to disclose the business’ position in
terms of the number of customers, past revenues, inventory, current contracts,
etc., it sets the stage for the closing of the sale transaction.
3. Mitigate financial loss
The reps and warranties contain an indemnification clause that mitigates the risk
of financial loss if either of the parties omits important representations that may
lead to a post-transaction financial loss.
4. Assurance of the proceeds
The buyer provides reps and warranties to the seller regarding their ability to
close the deal, such as proof of funds or financing.
Challenges Facing Reps and Warranties
In any business transaction, neither of the involved parties wants to lose. It is,
therefore, of mutual interest if both parties get a win-win deal. However, on
some occasions, the representations and warranties may face the following
challenges:
1. Cost relating to survival periods
During negotiations, the cost of doing business may vary depending on the
survival period. Mostly, the buyer prefers a longer survival period for more
scrutiny. However, that is not ideal for the seller who wants to close the deal
within the shortest time possible. Therefore, if there are poor negotiations of the
survival period, both parties may incur unnecessary expenses.
2. Confusion between the two terms
It is confusing when representations and warranties are used separately because
their legal interpretation shifts. Therefore, when using these terms
independently, both parties should be careful about their interpretation. Here is
why:
 A representation is used to entice the buyer to enter into the contract. If
the seller breaches the contract, besides seeking compensation for
damages, the buyer can terminate the contract.
 On the other hand, a warranty resides within the contract, and it comes
after the representation. If the seller breaches this part of the agreement,
the buyer can seek compensation for damages but cannot terminate the
contract.