Q. 1.

Define the Contract of Indemnity and discuss the rights of an indemnity-holder

against promisor. P1 Or
What do you understand by "Indemnity"? What are the rights of an indemnity-holder
against his promisor, on being sued within the scope of his authority ?
Ans. Definition of Indemnity [Section 124]. The term "Contract of Indemnity" has been
defined under Section 124 of the Indian Contract Act, 1872. Section 124 of the Act
provides- A contract by which 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, is
called "Contract of Indemnity".
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 Rs. 2,000. This is a contract
of indemnity.
An indemnity is a contract express or implied to keep a person, who has entered into or
who is about to enter, into, a contract or incur any other liability, indemnified against
loss, independently of the question whether a third person makes a default." [Halsbury's
Laws of England Vol. 15, Para 870].
A contract of indemnity is a direct engagement between two parties whereby one
promises to save another harmless from the result of the conduct of the promisor
himself or of any third person. In Section 124 of the Indian Contract Act expression
"Contract of Indemnity" has a narrow connotation. Section 124 includes only-
(a) express promises to indemnify;
(b) those cases where the loss arises from the conduct of the promisor or of any other
person.
Leading Cases. Gajanan Mareshwar v. Madan Mantri, AIR 1942 Bom. 302 at p.304.-Held,
this section is concerned only with a particular kind of indemnity which arises from a
promise by the indemnifier to save the indemnified from the loss caused to him by the
conduct of the indemnifier himself or by the conduct of any other person. It does not
deal with those classes of cases where the indemnity arises from loss caused by
events or accidents which do not or may not depend upon the conduct of the
indemnifier or any other person, or by reason of liability incurred by something done by
the indemnified at the request of the indemnifier are no covered by it.
Taxman Co. Ltd. v. The State Bank of India, AIR 1979 Cal. 44-Held the guarantee was
given by the Bank to repay the amount on 'first demand and without contest and protest,
it must be deemed that the moment a demand was made without protest and contest,
the Bank is bound to pay irrespective of disputes between the parties.
Sumitomo Heavy Industries Ltd. v. ONGC Lad., AIR 2010 SC 3400-Held. An agreement to
compensate loss due to change of law is not a contract of indemnity as defined in
Section 124 of the Contract Act since such loss is neither due to conduct of promisor
nor to the conduct of any third party.
Under English law, the indemnity has been defined as a promise to save a person
without any harm from the consequences of an act. This promise may be express or
implied from the circumstances of the case.
Leading Case. Dudgale v. Lovering, (1975) 10 L. R. C. P. 196
Trucks were in possession of the plaintiff. The defendant as well as a company claimed
them. The plaintiffs demanded an indemnity bond, but no reply was received. Yet they
delivered the truck to the defendant, it was held that the defendant was liable to
indemnify the plaintiff as the indemnity bond led to the creation of an implied
promise.
Rights of the indemnity-holder [Section 125]. The indemnity-holder, i.e., the promisee
acting within the scope of his authority has the following rights against the promisor :-
(1) An indemnity-holder can claim all damages which he may have been complied to
pay.
(2) An indemnity-holder has right to recover all costs reasonably incurred in resisting or
reducing or ascertaining the claim.
(3) An indemnity-holder is entitled to compromise as claim on the best term he can and
then bring an action on the contract of indemnity.
Commencement of liability of indemnifier. There is a divergence of opinion amongst the
High Courts as to when the liability of indemnifier commences. According to some High
Court, the indemnifier can be compelled to indemnify. The indemnity holder without
waiting for actual loss but some High Courts have held that indemnifier cannot be
compelled to indemnify the indemnity-holder until the actual loss arises. In Gajanan
Moreshwar v. Moreshwar Madan, AIR 1942 Bom 302, Bombay High Court took the view
that the indemnifier would be liable to pay the indemnity holder without waiting for
actual loss. Justice Chagla of the Bombay High Court held-It is true that under the P2
English common law, no action could be maintained until the actual loss had been
incurred. It was very soon realised that an indemnity might be worth very little indeed if
the indemnified could not enforce his indemnity till he had actually paid the loss......... It
is clear that this might under certain circumstances throw an intolerable burden upon
the indemnity-holder. He might not be in a position to satisfy the judgment and yet he
could not avail himself of his indemnity till he had done so. Therefore, the Court of
Equity stepped in and mitigated the rigour of the Common law. The Court of Equity held
that if his liability had become absolute then he was entitled to get the indemnifier to
pay off the claim or to pay into Court sufficient money which would constitute a fund for
paying off the claim whenever it was made...... Sections 124 and 125, Contract Act are
exhaustive of the law of indemnity and the Courts here would apply the same principles
that the courts. in England do."
The Law Commission of India in its 13th Report (1958) has supported this view.
Contract of Guarantee
Q. 2. What do you understand by Contract of Guarantee? How does it differ from
Contract of Indemnity?
Ans. Definition of "Contract of Guarantee" [Section 126].-Section 126 of the Indian
Contract Act, 1872 defines the term "Contract of Guarantee". Section 126 of the Act
provides-
"A "Contract of guarantee" is a contract to perform the promise, or discharge the liability,
of third person in case of his default". This section again provides "The person who
gives the guarantee is called the "surety", the person in respect of whose default the
guarantee is given is called the "principal debtor", and the person to whom the
guarantee is given is called the "creditor". A guarantee may be either oral or written.
Therefore, a "contract of guarantee" is a contract by which one person (the surety)
agrees to answer for some liability of another (the principal debtor) to a third person
(the creditor). It involves three parties, the creditor, the principal debtor and the surety.
Essentials of a valid "contract of guarantee".-Essentials of a valid guarantee are as
follows:
(1) There must be a principal debt. A contract of guarantee pre-supposes the existence
of a validly enforceable liability or debt. There can be no contract of guarantee unless
and until there is a principal debt.
In Swan v. Bank of Scotland, (1836) 10 Bigh N. S. 627, the overdraft from the bank was
prohibited. The contract of guarantee for the repayment of overdraft taken by a
customer was held to be void as there was no principal debt since the overdraft could
not be taken and therefore nothing could be done due to the Bank.The liability of an
ordinary debtor is only to pay his debt and after he fulfils his liability, he gets no right.
The position of surety is different after he pays off the principal debt, he acquires
certain rights under Contract Act.
(2) There must be consideration. A contract of guarantee must be supported by
consideration. Benefit to principal debtor is sufficient consideration. Section 127
provides "Anything done or any promise made, for the benefit of the principal debtor
may be a sufficient consideration to the surety for giving the guarantee".
Illustrations. (a) 'B' requests 'A' to sell and deliver to him goods on credit. 'A' agrees to
do so provided 'C' will guarantee the payment of the price of the goods, "C" promises to
guarantee the payment in consideration of 'A's promise to deliver the goods. This is a
sufficient consideration for C's promise.
(b) 'A' sells and delivers goods to 'B', 'C' afterwards requests 'A' to forbear to sue B for
the debt for a year and promises that, if he does so, 'C will pay for them in the default of
payment by 'B'. 'A' agrees to forbear as requested. This is sufficient consideration for
C's promise.
(c). 'A' sell and delivers goods to 'B'. 'C' afterwards without consideration agrees to pay
for them in default of B. The agreement is void.
Leading Cases. Ram Narayan v. Lt. Col. Hari Singh, AIR 1964 Raj. 76.-Held past benefit
to the principal debtor will not be a good consideration within the meaning of Section
127.
Transcone v. Union of India, AIR 2007 SC 712.-Held, the security in the form of a right of
action against a third party (i.e. guarantor) is known as guarantee.
(3) Consent of Surety must not be obtained by misrepresentation or concealment
(Sections 142 and 143). According to Section 142, "Any guarantee which has been
obtained by means of misrepresentation made by the creditor, or with his knowledge
and assent concerning a material part of the transaction is invalid. . P3
Similarly, according to Section 143, "Any guarantee to which the creditor has obtained
by means of keeping silence as to material circumstances is invalid.
Illustrations. (a) A engages B as clerk to collect money for him. B fails to account for
some of his receipts, and A, in consequence, calls upon him to furnish security for his
duly accounting. C gives guarantee for B's duly accounting. A does not acquaint C with
B's previous conduct. B afterwards makes default. The guarantee is invalid
(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2000
tons. B and C have privately agreed that B should pay five rupees per ton beyond market
price, such excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety.
Leading Case. Union Bank of India v. Monin Enterprises, AIR 2002 Kant 270, 271.-Held, a
guarantee obtained by misrepresentation or concealment will be invalid.
Difference between a contract of guarantee and that of indemnity
There are following main points of difference between contract of guarantee and
contract of indemnity.
1. In a case of a contract of guarantee there are three parties, but in case of contract of
indemnity there are two, one, who is indemnified and the other, the indemnifier.
2. A contract of guarantee presupposes a principal debtor, a contract of indemnity is an
original and direct engagement and may be made independently of the existence of a
third party.
3. A contract of guarantee exists for security of the creditor whereas a contract of
indemnity is brought about for reimbursement of loss.
4. As regards a contract of guarantee, where a surety discharges a debt payable by the
principal debtor to the creditor, he on such payment, becomes entitled in law to proceed
against the principal debtor in his own right. But in the case of contract of indemnity the
indemnifier cannot bring a suit against third parties in his own name, unless there be an
assignment, but must sue in the name of indemnifier.
5. A guarantor's liability is secondary, therefore, if principal debtor is not liable, the
surety will also be not liable. A contract of indemnity creates a primary liability for
indemnifier.
6. Request by third party is essential in the case of guarantee whereas in the case of
indemnity request or knowledge is not necessary.
7. Under English law guarantee must be in writing but indemnity may be in writing as
well as oral also.
Q. 3. What is Continuing Guarantee? Under what circumstances continuing guarantee
can be revoked?
Or
What do you know by Continuing Guarantee ? Explain when can it be revoked.
Or
Compare the continuing guarantee with special guarantee. Discuss the circumstances
in which continuing guarantee can be revoked.
Ans. Continuing Guarantee [Section 129]. Section 129 of the Indian Contract Act defines
"continuing guarantee". It provides-
A guarantee, which extends to a series of transactions is called a "continuing
guarantee".
A guarantee may be an ordinary guarantee or a continuing guarantee. A continuing
guarantee is different from an ordinary guarantee.
Leading Case Syndicate Bank v. Channaveerappa Belari, AIR 2006 SC 1874.-Held, in
case of ordinary guarantee the surety is liable only in respect of a single transaction
whereas in case of continuing guarantee the liability of the surety extends to any
successive transactions which comes within its scope.
Illustration. A, in consideration that B will employ Cin collecting the rent of B's zamindari,
promises B to be responsible, to the amount of 5,000 rupees for the due collection and
payment by C of those rents. This is a continuing guarantee.
A guarantees payment to B of the price of five sacks or flour to be delivered by B to C
and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards C
delivers four sacks to C, which A does not pay for. The guarantee given by A was not a
continuing guarantee, and accordingly he is not liable for the price of the four sacks.
But it is sometimes difficult to determine whether a guarantee is concerned to one
particular transaction only or it extends to a series of transactions. In difficult cases the
proper course always is to ascertain the intention of the parties and the intention is best
ascertained by looking at the relative position of the parties at the time of the P4
instrument.
Leading Case. Wali Mohd. v. Ganpat [Vol. XXIX A. L. J. 74]. It was laid down that in the
cases of general guarantees the liability of the surety is confined to one transaction but
contrary to it in the cases of continuing guarantee the surety is liable for successive
transactions. In this case, security for the presentation of judgment debtor in future
when required by the court was taken to be a continuing guarantee.
Mrs. Margaret Lalita Samuel v. Indo Commercial Bank Ltd., AIR 1979 SC 102. Held, If the
surety bond is a continuing guarantee, the question of limitation does not crop at all.
Continuing "guarantee" and special guarantee.-"Continuing guarantee" is a guarantee
that extends to a series of Transactions. (Section 129) This guarantee is not limited to
any particular transaction. When the guarantee is limited to fixed transactions or it is for
a fixed period for fixed. transactions it is called as a 'continuing guarantee'. When the
guarantee is specific or it is for a specific transaction, it is called as specific or special"
guarantee." The Calcutta High Court has held that where guarantee is given for a fixed
period relating to continuing transactions, the guarantee will not extent after that
period.
Revocation of Continuing Guarantee
A continuing guarantee is revoked under the following circumstances:
(1) By notice of revocation [Section 130]. According to Section 130, a continuing
guarantee may at any time be revoked by the surety as to future transactions, by notice
to the creditor.
But he will remain liable for past transactions entered into by him.
Illustration.-'A' in consideration of B's discounting at A's request, bill of exchange for C,
guarantees to 'B' for twelve months, the payment of all such bills to the extent of 5,000
rupees. 'B' discounts bills for 'C' to the extent of 2,000 rupees. Afterwards, at the end of
three months, 'A' renvokes the guarantee. This revocation discharges 'A' from all
liabilities to 'B' for any subsequent discount. But 'A' is liable to 'B' for the 2,000 rupees on
the default of 'C'.
In an English case, Oxford v. Davies, (1962) 12 CBN 748, the defendants had guaranteed
for 12 months the payment of bills for Davies & Co. which the plaintiffs would discount.
Before any bill was discounted, the guarantee was revoked by the defendants. The
defendants were held entitled to revoke the guarantee.
(2) By surety's death [Section 131]. According to Section 131, the death of the surety
operates, in the absence of any contract to the contrary. as revocation of continuing
guarantee, so far as regards future transactions.
In this case, it is not necessary to give notice of death of surety to the creditor. The rule
is, however, different to England where for any valid revocation of continuing guarantee,
the death of surety must come to the notice of the creditor.
The representative of a surety is liable for all transactions guaranteed by the surety
before his death.
In English law, for revocation of contract of guarantee on a surety's death, it is
necessary that the death of surety must be in the knowledge of the creditor. In India,
there is no such rule.
Leading Case.-Hasan Ali v. Wali Ullah, (1930) A.L.J. 1771, Held, when the consideration
for continuing guarantee is indivisible, it can not be revoked even by the death of the
surety and his estate continues to be liable to future obligations.
Under this section, the liability of the surety is revoked with his death but if there is a
contract to the contrary, the liability will not be revoked with the death of surety. Such
contract may be express or implied. If it is so, the contract continues after the death of
surety. [Durga Priya v. Durga Pada, AIR 1928 Cal 204, 206]. (3) By variation in terms of
contract [Section 133]. If any variation has been made in the terms of contract between
the principal debtor and creditor without surety's consent, the contract of guarantees is
revoked.
(4) By release or discharge of principal debtor [Section 134].-According to Section 134,
when creditor discharges principal debtor from the liability, the surety also gets
discharged.
(5) Novation of Contract. When the parties agree to substitute a new contract for the old
contract or rescind or alter the old contract of guarantee the old contract is revoked.
(6) By Composition, Extention of time and Agreement not to sue [Section 135].- P5
According to Section 135, a contract between the creditor and principal debtor, by which
the creditor makes a composition with, or promises to give time to or not to sue, the
prinicipal debtor, discharges the surety, unless the surety assents to such contract.
(7) By Creditor's act or omission inpairing surety's eventual remedy [Section 139]. Any
act or omission by the creditor which impairs the eventual remedy of the surety against
the principal debtor amounts to revocation of the contract of guarantee.
(8) Loss of security under the contract [Section 141].-when a creditor loses security
under the contract, the surety gets discharged to the extent of the value of that
security.
Q. 6. What is bailment? Explain its essential ingredients.
Or
Explain and illustrate the nature of bailment clearly.
Ans. Definition [Section 148]. Section 148 of the Indian Contract Act, 1872 defines the
word "Bailment". It provides
A "bailment" is the delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the direction of the person delivering them. The person
delivering the goods is called the "bailor". The person to whom they are delivered is
called the "bailee"
Explanation to Section 148 provides:
"If a person, already in possession of goods of another, contracts to them as a bailee,
he thereby becomes the bailee, and the owner becomes the bailor of such goods,
although they may not have been delivered by way of bailment."
Leading Case.-A. T. Trust Ltd. v. Trippunthura Devaswami, 1954 IC 305.-Held, "Bailment"
is a technical term of the common law. Though etymologically it might mean any kind of
handing over, it involves change of possession. A person having custody without
possession, like a servant or guest using his host's goods, is not a bailee. On the whole,
a bailment might be described as a delivery on condition to which the law usually
attaches an obligation to re-deliver the goods or otherwise deal with them as directed,
when the condition is satisfied. The delivery of the goods by the bailor to the bailee is
the essence of the bailment. Unless there is actual delivery there is no contract of
bailment, e.g., if A forgets a box containing jewellery in the shop of a goldsmith, there is
no contract of bailment and the goldsmith is not responsible for the safety, custody of
A's jewellery. He does not become the bailee of the jewellery.
Similarly if B forgets a mobile in C's room, this is not a bailment and C does not become
responsible for the safety of the mobile as a bailee. The moment C picks it up, he
becomes a bailee under Sec. 71 of Indian Contract Act, 1872 the liability of finder of the
lost article is similar to the bailee.
The main characteristics of bailment
According to Section 148, there are following essential characteristics of a valid
bailment:
1. Bailor must deliver goods to the bailee.
2. Bailee must return goods bailed or dispose them according to the directions of
bailor.
3. The delivery of possession must be upon a contract.
4. Only the movable properties can be bailed.
1. Delivery of goods by the bailor to the bailee.-Bailment consists in the delivery of
goods. Delivery of possession is one of the essential characteristics of bailment.
According to Section 148 of the Indian Contract Act, one of the essential elements of
bailment is the delivery of goods by one person to another for some purpose. Where
there is a transfer of ownership, the transaction may be a sale or exchange but it would
not be a bailment.
Leading Case. Kaliaperumal v. Visalakshmi Adri, AIR 1932 Mad.
42. In this case, a lady gave her old ornaments to a goldsmith for being converted into
new ones. Every evening she used to take the half made ornaments, put the same in a
box under lock and key. She allowed the locked- box to remain in the shop of the
goldsmith. One night the box containing the half made ornaments were stolen. It was
held that there was no bailment as she had not handed over the possession of the
ornaments to the goldsmith therefore, the goldsmith cannot be held liable as a bailee. It
was held that when a person keeps his goods in the premises of another person but
himself continues to be in control over them, such delivery does not constitute
bailment.
The delivery of goods may either be actual or constructive. A constructive delivery may
take place when a person who is already in possession of certain goods agrees to held
them as a bailee. P6
According to Section 149, the delivery to the bailee may be made by doing any thing
which has the effect of putting the goods in the possession of the intended bailee or of
any person authorised to hold them on his behalf.
2. Bailee is bound to return goods or to dispose of according to the direction of the
Bailor. The goods are delivered to be returned in species or disposed of according to the
direction of the bailor when the purpose is accomplished.
Where the person, to whom goods are given is not obliged to return identical subject-
matter, either in its original or in an altered form there can be no bailment.
3. The delivery of possession must be upon a contract. According to Secton 148,
another main requirement of a valid bailment is that the delivery of goods must be upon
a contract. If the goods are delivered by one person to another person, without a
contract there is no bailment.
But there were no unanimous view-regarding this point. Allahabad High Court took
above view in Ram Gulam v. Govt. of U.P., AIR 1950 All. 206, but Bombay High Court in
Jubilee Mills Ltd. v. Governor-General of India in Council, AIR 1953 Bom. 46 held that the
term "contract in Section 148 does not mean that there should always be a formal and
complete contract. It may also be implied from the circumstance.
In this case, the Railway had permitted the plaintiff -to keep certain bale of cotton on the
platform as no wagons were available. The bales were damaged by a spark emanating
from a passing engine. The Railway was held liable for by allowing the plaintiff to keep
goods at platform, the Railway assumed the responcibility of a bailee.
State of Gujarat v. Memon Mohammad, AIR 1967 SC.-Certain goods seized by custom
officials were sold as unclaimed property. Subsequently, the seizure having been found
unsustainable, the Government was held liable for the loss of the goods although the
goods were not delivered to them on a contract. The Supreme Court held that they were
in the position of a bailee.
4. The property bailed must be movable property. Only the movable properties can be
bailed.
Illustration. When A lends some ornaments to B be used in a marriage the transaction is
one of bailment. In such a case there is an implied contract for the return of the
ornaments in a reasonable time.
Q. 7. Discuss the Duties of a Bailee.
Ans. Duties of a Bailee. Under the Contract Act, 1872, a bailee is subject to following
duties:
1. Duty to take reasonable care [Section 151].-A bailee is bound to take reasonable care
of the goods bailed to him. He is required to take as much care of the goods bailed to
him as a man of ordinary prudence could take of his goods.
Section 151 of Indian Contract Act provides "In all cases of bailcent the bailee is bound
to take as much care of goods bailed to him as a man of ordinary prudence would,
under similar circumstances, take of his own goods of the same bulk, quality and value
as the goods bailed.
For example: Silver was entrusted to a goldsmith for making
ornaments. He kept it locked in an almirah and employed watchman for the night.
Despite all these precautions the silver was stolen. It was held by the court that the
goldsmith had taken reasonable care of the goods and therefore, he was not liable for
the loss.
The bailee is bound to take reasonable care of the goods. However, the position or
liability of the bailee is not that of an insurer. If inspite of his care the goods are lost or
destroyed by accident or by an act of God or by the enemy of the state the bailee would
not be liable for the loss.
Consequence of failure to take proper care-Where the bailee fails to take proper care of
the thing bailed and such failure results into damage, loss or destruction of the thing
bailed, the bailee would be liable to compensate the loss caused by the lack of proper
care to the thing bailed. If the bailee has taken the amount of care expected of him
under Section 151 of the Indian Contract Act, he will not be liable for the loss,
destruction, or deterioration of the thing bailed.
But where there is a special contract fixing the responsibility of the bailee for such loss,
destruction or deterioration of the thing bailed then according to Section 152, he may be
held liable for the same.
Illustrative Cases. The New India Assurance Co. Ltd. v. The Delhi P7
Development Authority, AIR 1991 Del. 198. A vehicle was parked in the parking centre
and a receipt was issued for its safe keeping. It was held that it amounted to bailment.
Loss of vehicle, and the authenticity as bailee failed to show reasonable care, bailee
was liable for loss.
N. R. S. lyer v. New India Assurance Co. Ltd., Madras, AIR 1983 SC 899. A vehicle was
taken to the repairer by the insurer after an accident. This was done on behalf of the
insurer who entered into negotiations with the repairer about repairing charges. It was
held that the insurer would be the bailee and the repairer would be the sub-bailee in
such a case,
2. Duty not to make an unauthorised use of the goods [Section 154]. Where the bailee
makes an unauthorised use, his responsibility for the goods becomes that of an insurer.
Here, he becomes responsible for any loss or damage resulting from the unauthorised
use, even if the loss was not due to his negligence. Section 154 of the Indian Contract
Act provides:
"If the bailee makes any use of the goods bailed, which is not according to the
conditions of the bailment, he is liable to make compensation to the bailor for any
damage arising to the goods from or during such use of them."
Illustrations. (a) 'A' lends a horse to 'B' for his own riding only. 'B' allows 'C', a family
member, to ride the horse. 'C' rides with care, but the horse accidentally falls and is
injured. 'B' is liable to make compensation to 'A' for the injury done to the horse.
(b) 'A' hires a horse in Calcutta from 'B' expressely to march to Benaras. 'A' rides with
due care, but marches to Cuttack instead. The horse accidentally falls and is injured. 'A'
is liable to make compensation to 'B' for the injury to the horse.
If, however, the loss or destruction was due to some inherent defects in the goods
themselves, and would have occurred in any case, this will not be regarded a loss
resulting from the unauthorised use of the goods and the bailee shall not be liaible for
the loss.
Where the bailee make unauthorised use to the goods the bailor, under Section 153 has
the right to terminate the contract of bailment forthwith.
3. Duty not to mix the goods with his own goods. Where the goods of the bailor and
bailee becomes mixed such mixing may be (i) with the consent of the bailor; or (ii) it
may be the result of an accident, mistake or inadvertence, or (iii) it may be wilful or
intentional.
Effects of such mixing:
(i) According to Section 155, where the bailee, with the consent of the bailor, mixes the
goods bailed the bailor and the bailee shall have interest in the proportion of their
respective shares, in the mixture thus produced.
(ii) Where goods are mixed by accident, inadvertence or by the act of God, and the
mixture is composed of similar kind and quality, it belongs to the bailor and the bailee
as "tenants-in-common": any attendant cost of separating them is to be borne by the
bailee. (Lupton v. White).
(iii) According to Section 156, where goods are wilfully and intentionally mixed and the
bailor does not give his consent to such mixing, if they can be separated, the bailee is
liable to bear expenses of division. But, according to Section 157, if they are impossible
to be separated, the bailor is entitled to be compensated by the bailee for the loss of
goods.
Illustrations. (a) 'A' bails, 100 bales of cotton marked with a particular mark to B. B,
without A's consent mixes the 100 bales with other bales of his own, bearing a different
mark. A is entitled to have his 100 bales returned and B is bound to bear all the expense
incurred in the separation of the bales, and any other incidental damage.
(b) A bails a barrel of cape flour worth Rs. 45 to B. B without A's consent, mixes the flour
with country flour of his own, worth only Rs. 25 a barrel. B must compensate A for the
loss of his flour.
4. Not to set up a title [Section 166]. The bailee cannot set up a title to the goods
adverse to the title of the bailor. Section 117 of the Evidence Act provides "nor shall any
bailee or licensee be permitted to deny that his bailor or licensor had, at the time when
the bailment or license commenced, authority to make such bailment or grant such
license.
Section 166 of the Contract Act provides. "If the bailor has no title to the goods and the
bailee, in good faith delivers them back to, or according to the directions of the bailor,
the bailee is not responsible to the owner in respect of such delivery. P8
5. To return the goods [Sections 160, 161].-After the purpose or the
period of bailment is over, and if the bailment is gratuitous, the thing bailed may be
asked to be returned any time. If he does not return, he will be liable for the loss.
6. Duty to return any increase [Section 163]. In the absence of any contract to the
contrary, the bailee is bound to deliver to the bailor or according to his direction, any
increase or profit which may have accrued from the goods bailed.
Illustration.-A leaves cow in the custody of B to be taken care of. The cow has a calf. B
is bound to deliver the calf as well as the cow to A.
Illustrative Case. Standard Chartered Bank v. Custodian, AIR 2000
SC 1488. The Supreme Court observed what Section 163 of the Contract Act really
means is that accretions in respect of the goods bailed cannot be a property of the
bailee but must be returned when the goods themselves bailed are returned. A
necessary corollary to this would be that as the pledge extends to such accretions then
when the goods are returned these accretions must also be given back.
Q. 8. Discuss the Rights of Bailee.
Ans. Rights of Bailee. Under the Indian Contract Act, 1872 following rights are available
to bailee:
1. Right to get compensation [Section 164]. When a thing has been bailed to the bailor
and bailee has neither any right in that thing nor any right to get back that thing and as a
result thereof the bailee sustains certain loss the bailee can get compensation for that
loss from the bailor.
2. Compensation for the loss caused by non-disclosure of faults in goods bailed [Para I
of Section 150]. When a goods is bailed gratuitously and that contains a fault which is
known to the bailor but bailor does not convey it to the bailee and as a result thereof
bailee sustains some injury the bailee can ask for the compensation.
3. Compensation for the loss caused by the defects of thing bailed [Para II of Section
150). When the thing has been bailed for hire or rent the bailee can ask for the
compensation for the loss or injury caused by both latent or patent defects of the thing
bailed irrespective of awareness of bailor about those defects.
4. Right to be reimbursed for the expenses incurred as necessary expenses [Section
158].-The bailee has the right to be reimbursed for the necessary expenses he has
incurred.
5. Right of lien for the payment or reimbursement of necessary expenses [Sections 170,
171]. The bailee is entitled to lien for the payment or reimbursement of necessary
expenses.
6. Right to sue [Section 180]. The bailee has the right to sue the wrong-doer, who
wrongfully deprives the bailee of the use or possession of the goods bailed or does
them any injury.
Q. 9. Discuss the Duties of Bailor.
Ans. Duties of Bailor. Under the Indian Contract Act, 1872, a bailor is subject to
following duties:
(1) Duty to disclose defects in the goods bailed [Section 150].-If the bailment is
gratuitous, the bailor's duty is to disclose such defects as are known to him. If the
bailment is for hire, the bailor is liable for all defects, irrespective of his knowledge of
defact.
Where the bailment is for hire the bailor is equally liable for latent as well as patent
defects in the goods bailed.
(2) Duty to bear extraordinary expenses [Section 158].-Where, by the conditions of the
bailment, the goods are to be kept or to be carried, to have work done upon them by the
bailee for the bailor and the bailee is to receive no remuneration, the bailor shall repay to
the bailee the necessary expenses incurred by him for the purpose of the bailment.
Illustrative Case.-F.F.C. Co. Ltd. v. Board of Trustees of the Port of Bombay, AIR 2006
Bom 162.-Held, under Section 158 of the Indian Contract Act, the bailor is bound to
repay to the bailee the necessary expenses incurred by him for the purpose of bailment.
Therefore, in respect of port charges of uncleared goods where the consignee fails to
turn up and no delivery order has been issued by the steamer agent, port trust would be
entitled to recover demurrage charges and other charges from steamer agent.
Illustration. If a horse is lent for journey, the expenses for feeding the horse are normal
expenses and fall on the bailee. But if the horse is stolen and expenses are incurred for
its recovery or if the horse becomes sick and expenses are incurred on its treatment
these are extraordinary expenses. These fall on the bailor. . P9
(3) Duty to Compensate or indemnify the bailee. [Section 164]. The bailor is duty bound
to compensate or indemnify the bailee for any loss which the bailee may suffer by
reason that the bailor was not entitled to make the bailment or to receive back the
goods or to give direction respecting them.
Q. 10. Discuss the Rights of Bailor.
Ans. Rights of Bailor. Under the Indian Contract Act following rights are available to a
Bailor:
1. Right to get back the thing bailed [Section 160]. The bailor has right to get back the
thing bailed when the purpose is accomplished or the period for which the thing was
bailed has elapsed.
2. Right to get rent. He has right to get rent of the thing bailed where bailment is for
price.
3. Bailor entitled to increase or profit from goods bailed [Section 163]. If there is no
contract to the contrary, the bailee is bound to deliver to the bailor, or according to his
directions, any increase or profit which may have accrued from the goods bailed.
'A' leaves a cow in the custody of 'B' to be taken care of. The cow has a calf. 'B' is bound
to deliver the calf as well as the cow to 'A'.
4. Right to terminate the Contract of bailment in certain circumstances [Section 153].
The bailor has right to terminate the contract of bailment when the bailee does any act
with regard to the goods bailed, inconsistent with the conditions of the bailment.
Illustration. A' lets to 'B', for hire, a horse for his own riding. 'B' drives the horse in his
carriage. 'A' can terminate the bailment.
5. Right to sue against the wrong-doer [Section 180]. The bailor is entitled to bring a suit
against the wrongdoer in respect of the thing bailed.
Q. 10-A. Explain the meaning of bailee's right of lien.
Ans. Bailee's right of lien.-Bailee's right to lien means to retain the goods till the payment
of charges due on it.
Bailee's right to lien is provided in Section 170 and 171 of the Contract Act. Section 170
is regarding particular lien whereas Section 171 is regarding general lien.
Section 170 provides:
"Where the bailee has, in accordance with the purpose of the bailment, rendered any
service involving the exercise of labour or skill in respect of the goods bailed, he has, in
the absence of a contract to the contrary, a right to retain such goods until he receives
due remuneratice for the services he has rendered in respect of them."
Under Section 170 for the exercise of particular lien:
(1) The bailee should have rendered any service exercising the labour or skill in respect
of goods bailed.
(2) There must not be any contract to the contrary, and
(3) The goods bailed must be in the possession of the bailee. If he surrenders the goods,
his right to lien ends.
In Hutton v. Car Maintenance Co. (1915) 1 Ch 621, the defendant's car was maintained
by the plaintiffs. The car was taken into possession by the plaintiffs for some
maintenance expenses having become due and the lien was claimed. The Court held
that the plaintiffs had not improved the car but only maintained it and therefore were
not entitled to it.
Section 171 provides:
"Bankers, factors, wharfingers, attorneys of a High Court, and policy-brokers may, in the
absence of a contract to the contrary, retain as a security for a general balance of
account, any goods bailed to them; but no other persons have a right to retain, as a
security for such balance, goods bailed to them, unless there is an express contract to
that effect."
Thus, the general lien is different from particular lien. In general lien, the bailee may
retain the goods bailed to him as a security for general balance of account for which
there must be an express contract. However, the bankers, factors, wharfingers,
attorneys of High Court and policy brokers have general lien unless there is a contract
to the contrary.
In Syndicate Bank v. Vijay Kumar, AIR 1992 SC 1066, the Supreme Court held that the
bank could adjust the dues to it from the F.D.Rs of the depositor and the balance left
after adjustment of the dues would belong to the depositor.
In Mercantile Bank of India Ltd. v. Rochaldes, AIR 1926 Sindh. the High Court of Sindh
held that the bank could not retain the money when it was entrusted with it by the
customer for being transmitted to his own firm. . P10
Distinction between Particular lien and General lien.-Particular and General Lien can be
distinguished as follows:
Particular Lien
1. Provisions relating to Bailee's particular lien is provided under Section 170 of the
Contract Act.
2. The right of a particular lien can be claimed by every bailee.
3. The right of particular lien can be claimed only in respect of goods upon which some
labour or skill has been exercised by the Bailee..
General Lien
1. Provisions relating to general lien is provided under Section 171 of the Contract
Act.
2. The right of general lien is granted to Bankers, Factors, wharfingers, Attorneys of High
Courts and Policy-brokers generally. Though under Section 171 the parties to the
contract of bailment can, by mutual agreement confer right of general lien on a bailee.
3. The right of general lien can be claimed in respect of any goods for any charge due in
respect of other goods.
Q. 11. Define Pledge with its essential elements. Who is competent to Pledge.
Ans. Definition of Pledge. Section 172 of the Indian Contract Act, 1872 defines the term
"Pledge". According to Section 172 of the Contract Act, "Pledge is the bailment of goods
as security for payment of a debt or for the performance of a promise". In this case the
bailor is called "pawnor'. and the bailee the "pawnee".
The bailee in a contract of pledge does not become owner, but as having possession
and right to possess, he is said to have a special property. Delivery is required for the
completion of a pledge.
Delivery may be actual or constructive. The possession in a pledge must be judicial
possession. Mere physical possession is not sufficient.
Essentials of Pledge
There are following essential elements of pledge:-
1. Transfer of possession, i.e., delivery of possession to the pawnee. One of the
essential requirements of a pledge is that the thing pledged should be handed over to
the pawnee by the pawner. Such delivery of possession may either be real or
constructive.
Leading Case.-Bank of Chittor v. Narasimbah, AIR 1966 AP 163.-A Bank allowed the
property pledged to them (a cinema projector and accessories) to remain with the
pledgers. The pledgers sold it to a third person. It was held that this was a case of
constructive delivery and therefore the sale was held to be subject to pledge.
2. Delivery for securing a debt. The bailment of pledged goods in the form of surety for
the realisation of debt money is also necessary. The thing must be pledged for ensuring
the payment of debt or for the ascertainment of performance of promise undertaken.
3. Pledgee to retain pledged property until debt is fully discharged. Pledged goods can
be retained by the pawnee until the pawner does not pay the debt or performs the act
promised to do.
4. Special interest of the pawnee. The last essential element of a pledge is that the
pawnee has only a special interest in the property pledged, the pledged property
remains the property of the Pawnor subject to the pledge and reverts to him after the
discharge of the debt.
Who is competent to pledge? Generally, the pledge is made by the real owner. A person
who is in possession of goods of others cannot make a valid pledge of the same except
in the following cases:
(a) By mercantile agents [Section 178].-When mercantile agent is in possession of the
goods or documents of title with the consent of the owner and the pledge is made by
the mercantile agent while acting in the ordinary course of business of mercantile agent
P15 and the pawnee acts in good faith and without notice that the pawnor has no
authority to pledge the pledge is valid as if the mercantile agent were expressly
authorised by the owner of the goods to make the same. Section 178 authorises only
the mercantile agents and hence a pledge by a mere servant or wife is not valid even
though they are in possession of goods with the consent of the owner.
The following prerequisites must be satisfied for the validity of a pledge made by a
mercantile agent- . P11
(i) The pledger must be a mercantile agent.
(ii) Mercantile agent must have the possession of document of title as a mercantile
agent and not otherwise.
(iii) He must be in possession of document of title with the consent of master of the
goods.
(iv) Pledge must have been made by the mercantile agent during the course of
employment as a mercantile agent.
(v) The pawnee must have acted in good faith and without the notice that the mercantile
agent is not authorised to pledge.
(b) By a person in possession under voidable contract [Section
178-AJ.-Section 178-A of the Indian Contract Act provides. When the pawnor has
obtained possession of the goods pledged by him under a contract voidable under
Section 19 or Section 19A but the contract has not been rescinded at the time of the
pledge, the pawnee acquires title to the poods, provided he acts in good faith and
without notice of the pawnor's defect of title".
According to Section 178-A pledge made by a person who has obtained goods by fraud,
misrepresentation, undue influence or coercion would be binding on the true owner, if
the pledge is made before the contract is rescinded and the pawnee acts in good faith
without notice of the pawnor's defect of title. But if the goods are obtained by theft
there is no consent at all and hence a thief has no title whatsoever not even voidable
which he can give to purchaser or pawnee in good faith and without notice of the
theft.
Q. 12. Discuss the rights of Pawnor and Pawnee.
Ans. Pawnor's right to redeem [Section 177].-According to Section 177 of the Indian
Contract Act, "even after making the default in payment of the debt, within the stipulated
time or performance of the promise, pawnor may redeem the goods pledged at any
subsequent time before the actual sale of them but he may do so only after paying any
expenses which have arisen from his default.
In Dwarika v. Bhagwati, AIR 1939 Rangoon 113, there was an agreement to the effect
that if the goods pledged who not redeemed after reasonable time, it would he
irredeemable. it was held by the Rangoon High Court that this agreement is valid.
However, according to Pollock and Mulla (Indian Contract Act and Specific Relief Act)
this decision was wrongly decided.
It is submitted that such agreement should be held as invalid because according to
Section 177 pawnor has the right to "redeem the goods pledged at any subsequent time
before the actual sale of them."
Rights of Pawnee. The pawnee has the following rights over the goods pledged:
1. Pawnee's right to retain the goods [Section 173].-Section 173 of the Indian Contract
Act lays down: "The pawnee may retain the goods pledged, not only for the payment of
the debt, or the performance of the promise, but for the interest of the debt and all
necessary expenses incurred by him in respect of the possession or for the preservation
of goods pledged."
2. Right of the pawnee to recover from the pawner the extra-ordinary expenses incurred
by him [Section 175].-Section 175 of the Act provides: "The pawnee is entitled to receive
from the pawnor extraordinary expenses incurred by him for the preservation of the
goods pledged."
3. Pawnee's right to sue the pawner to retain the goods pledged or to sell the thing
pledged [Section 176]. Under Section 176 the pawnee possesses three rights:
(a) right to sue,
(b) right to retain the goods pledged as a collateral security, or
(c) right to sell after giving reasonable notice of sale.
Leading Case. Sunderlal Saraf v. Subhas Chand Jain, AIR 2006 MP 35. In this leading
case the Madhya Pradesh High Court affirmed the above rights of the pawnee
enumerated under Section 176 of the Contract Act.
Agency
(Definition, Creation, Rights and Duties of an Agent)
Q. 13. Define the Agency. Define Agent and Principal and discuss the various kinds of
agents.
Or
Define Agent and Principal. Is consideration necessary in contract of agency? P12
Or
Explain the terms "Agent" and "Principal". What are the different kinds of agent?
Ans. Agency. Chapter X (Sections 182 to 238) deals with different aspects of "Agency".
The term "Agency" is nowhere defined in the Indian Contract Act, 1872. However, it
denotes a relation between two parties created by an agreement, express or implied.
The relationship of agency arises whenever one person (called the agent) has authority
to act on behalf of another (called the principal).
The term "agency' has been described in Anson's Law of Contract in the following
words:
"Although as a general rule one man can not by contract with another confer rights to
impose liabilities upon a third party, yet he may represent another, as being employed by
him, for the purpose of bringing him into legal relation with a third party. Employment
for this purpose is called "Agency".
Agent and Principal [Section 182].-Section 182 of the Indian Contract Act, 1872 defines
the terms "Agent" and "Principal". According to this section:
An "agent" is a person employed to do any act for another or to represent another in
dealings with third person; the person for whom such act is done, or who is so
represented, is called the principal."
Thus, in effect an agent is the connecting link between the principal and third person-a
sort of conduit, pipe or intermediary. This intermediary has the power to create legal
relationship between the principal and third parties. Essentials of "contract of agency"-A
contract of agency has all the essential features of a contract with some special
characteristics of its own.
There are following essential features of a contract of agency:
(a) There must be an agent employed by the principal.
(b) The principal must confer authority on the agent to act for him.
(c) The authority conferred on agent must be such of nature which can make the
principal answerable to third parties.
(d) The aim of the employment of the agent must be to establish a legal relationship
between the principal and third parties.
(e) No consideration is necessary for creating a relationship of agency as it is based on
confidence between the principal and the agent.
The principle of 'Qui facit peralium facit per se' is basis of the relation of agency which
means "he who acts by another act by himself". This principle means that the act of an
agent is the act of the principal.
Leading Case. In Varsha Engineering Pvt. Ltd. v. M/s. Vijay Traders, Baroda, AIR 1983
Guj. 166, the Court observed that the test of agency would be-Whether the defendant
would be able to represent the plaintiff (principal) while dealing with the third party.
Whether he could create legal relationship between the plaintiff (the alleged principal)
and the third parties with whom he entered into the contract. Persons or the distributors
who purchase goods from the manufacturer for resale can never be considered as
agents as contemplated by Section 182 of the Indian Contract Act.
Krishna v. Ganpati, AIR 1955 Mad. 648.-Held, representative character and derivative
authority may briefly be said to be the distinguishing feature of an agent.
A contract of agency is, under the English Law, understood as "the employment of one
person by another in order to bring the latter into legal relation with a third person".
Consideration is not necessary [Section 185]. Although the relationship of agency has
its genesis in a contract, but unlike other contracts no consideration is required to
create an agency.
Agent's authority may be expressed or implied [Section 186].-According to Section 186
the authority of an agent may be expressed or implied.
According to Section 187, an authority is said to be express when it is given by words
spoken or written. An authority is said to be implied when it is to be inferred from the
circumstances of the case; and things spoken or written, or the ordinary course of
dealing, may be accounted circumstances of the case. Thus, we can say that an agent
is a person employed to do any act for another or to represent another in dealing with
third persons. Where one person gives mere advice to another in matter of business
agency does not arise because of such advice only does not create an agency. One of
essential characteristics of agency is that the agent makes the principal answerable to
third person.
Kinds of Agents P13
Main kinds of agents are as follows:
1. Del-credere agent;
2. Commission agent;
3. Factor,
4. Broker:
5. Co-agent; and
6. Sub-agent.
1. Del-credere agent.-A del-credere agent is one who for extra-remuneration, called a del
credere agent, undertakes the liability to guarantee the due performance of the contract
by the other party. Because he charges an extra commission, he is responsible for the
solvency and performance of their contracts by the other parties and thus indemnifies
his employer against loss. A del-credere agent is liable to pay the seller only if owing to
insolvency of the buyer or other similar cause the seller is unable to recover the price
from the buyer, but not if the buyer though solvent has refused to pay on the ground that
the seller has not duly performed the contract.
2. Commission agent. A commission agent is a person who purchases and sells goods
in the market on behalf of his employer on the best possible terms and who gets
commission for his labour.
3. Factor. A factor is an agent who is given the possession of goods for the purpose of
selling them. He is entitled to sell the goods in his own name. A factor has a right to
retain the goods for a general balance of accounts.
4. Broker. A broker is a mercantile agent employed for the purpose of sale and sale of
goods. The main duty of a broker is to establish privity between two parties for a
transaction and he gets commission for his labour. He is not entrusted with the
possession of the goods. He merely brings the two parties together and if the
transaction materialises he becomes entitled to the commission.
5. Co-agent. Where several persons are expressly authorised with no stipulation that
anyone or more of them shall be authorised to act in the name of the whole body, they
have a joint authority and they are called co-agents.
6. Sub-agent.-A sub-agent is a person employed and acting under the control of the
original agent in the business of the agency.
Q. 14. What are the rules for creating an Agency?
Or
What are the various ways in which relation of agency arises?
Or
No one can become the agent of another person except with the will of that other
person. Discuss.
Or
How the agency is created by ratification. What are the rules of ratification of an
agency.
Or
Explain the rules for creating an agency. Distinguish between an agent, servant and an
independent contractor.
Or
Mention the various ways in which a relationship of agency could be created.
Ans. Creation of Agency. A contract of agency may arise like any other contract,
expressly or impliedly. The essential elements of a valid contract are also necessary for
the contract of agency. The relation of the agency comes into existence whenever one
person called the agent has authority to act on behalf of another called the principal and
consents so to act. The relationship has its genesis in a contract. [Syed Abdul Khader v.
Rami Reddy, AIR 1979 SC 553].
Who may employ agent [Section 183]. No person can employ an agent if he does not
possess capacity to contract. So a minor or person of unsound mind cannot become
the principal.
Who may be an agent [Section 184].-According to Section 184 of the Indian Contract Act,
any person can be appointed as an agent. But a person who is not of the age of majority
and of sound mind, cannot be made personally liable for the acts done on behalf of the
principal. A contractual relation between the principal and third party may be brought
about by a minor agent but a minor agent cannot be made personally liable to the
principal for the misconduct, like an adult agent.
Illustration. A, a principal employed B, a minor to sell his (A's) watch worth Rs. 1,000 in
the market. A instructed B not to sell the watch for credit and not to sell it for less than
Rs. 900. B sold the watch for Rs. 500 on credit. The sale is binding on A he must sell the
watch to C according to the contract. But A cannot sue B for B's misconduct as agent,
as B is a minor. But if B was not a minor he would be liable to A for the damage suffered
by his principal as a result of his misconduct of not obeying the instructions.
Consideration (Section 185]. No consideration is required for the creation of an
agency.
Leading Case. Shree Digvijay Cement Co. Ltd. v. State Trading Corporation, AIR 2006
Delhi 276. It was held that the relationship of principal and agent can only be
established by the consent of principal and agent. For creating contract of agency in
view of Section 185 of the Contract Act even passing of consideration is not
necessary.
As regards 'the test to determine whether relationship is that of agent and principal or
that of master and servants, Halsbury has aptly remarked:
"If a person has only the right to direct another what work is to do, the relation is that of
principal and agent. But if he has the further right to direct how the work is to be done,
the relation is not that of principal and agent but master and servant."
Modes of constituting an agency. The contract of agency may be in writing under seal
and it is called power-of-attorney, or it may be a simple writing, or it may be by an oral
agreement or may be inferred from the conduct of the parties and the circumstances of
the case as in case of master and servant, or husband and wife or partners inter se.
Agency may be created in any one of the following ways:-
(a) By direct appointment, i e., a person may have been appointed a special agent to
carry on business and make contracts generally. (Express agency),
(b) By implication from the relation of the parties (Implied agency),
(c) By necessity,
(d) By Estoppel, i. e., by holding out, P14
(e) By ratification.
Distinction between Agent and Servant.-Agent and servant can be distinguished as
follows-
Agent
1. An agent does not act under the direct control and supervision of his principal.
However, he is bound to obey lawful instructions of his principal.
2. An agent as such is not a servant.
3. An agent gets commission on the basis of his work.
4. An agent may work for several principals at the same time.
Servant
1. A servant acts under the direct control and supervision of his master and is bound to
conform to all reasonable orders given to him in the course of his work.
2. A servant is generally, for some purposes, his master's implied agent.
3. A servant gets fixed salary or wages.
4. A servant usually serves only to one master.
Distinction between Agent and Independent Contractor-An agent and an Independent
Contractor can be distinguished as follows
Agent
1. Ar agent is liable to act in the matter of the agency.
2. An agent is subject to the lawful instructions and control of his principal.
Independent Contractor
1. An independent contractor merely undertakes to perform certain specified work.
2, An independent contractor is independent in the manner and means of performance
of the work.
Q. 14-A. What is an implied agency? Under what conditions, a husband is liable for
debts taken by his wife?
Ans. Meaning of Implied Agency. Under Section 186 of the Contract Act, "the authority
of an agent may be express or implied". Section 187 provides, "An authority is said to be
express when it is given by words, spoken or written. An authority is said to be implied
when it is to be inferred from the circumstances of the case; and things spoken or
written, or the ordinary course of dealing, may be accounted circumstances of the
case.
Leading Cases.-In Dingle v. Hare, (1859) 7 CBNS 145, the agent to sell the manure for
which he was authorised gave a warranty of 50% lime phosphate in it. It has a trade
practice to give such warranty in dealing manure. The Principal was held barred by the
warranty given by the agent even though he had not expressly authorised the agent for
it.
In Chairman, LIC v. Rajiv Kumar Baskar, AIR 2005 SC 3087, it was held that in Salary
Saving Scheme of LIC, that the terms and conditions of the policy are to be performed
through employer. In a contract of insurance, the Principal hold that no third party had
any role to play between the insurer and insured would not apply to the contract of
insurance.
Liability of husband for debts taken by his wife. It is a legal presumption that the wife is
agent of her husband if the husband and wife are living together as the wife will P15
normally do the household shopping for which the husband will pay. Since all domestic
matters are ordinarily entrusted to the wife, she should have reasonable supply of
goods and service sufficient in quantity and necessary in fact according to the condition
in which they live for the use by her husband, by herself and the children. The wife can
pledge the credit of her husband for domestic purpose. There are following conditions
necessary for the liability of the husband on pledging his credit or debt taken by his wife:
-
(1) Co-habitation in domestic establishment
(2) Liability for necessaries
(3) No reasonable allowance to the wife.
(1) Co-habitation in domestic establishment. When the wife and husband live together
in domestic establishment, the wife can pledge the credit of her husband and he
becomes liable for the debt taken by her for supplies of necessaries.
In Debenham v. Mellon, (1980) 6 App case 24, the wife and husband were the
manageress and manager of a hotel in which they were living and they had no separate
domestic establishment. The wife pledged the credit of her husband for clothes. The
husband was held not liable as the wife and husband were not living together in their
domestic establishment.
(2) Liability for necessaries. The wife can pledge the credit of her husband only for the
necessaries. The necessaries are those which are needed for domestic purposes. Thus,
if a wife in the absence of her husband purchases food-grains or clothes necessary to
wear, these are certainly necessary items for house hold purposes but if items of
luxurious such as gold necklace, a diamond ring etc. are purchased, these cannot be
said to be necessaries. The term 'necessaries' is a question of fact and the onus to
prove lies on the person who supplies goods to the wife. (Clifford v. Laton, (1827) 3. C &
P 15). In a case it was held that the husband was not liable for pledging his credit for
bills by then with an eye specialist. (Kaanhayalal v. Inderchandji, AIR 1947 Nag 84).
(3) No reasonable allowance to the wife. Where the husband gives reasonable
allowance to his wife by duly paying it, the wife cannot borrow the goods by pledging the
credit of her husband.
Anson in Law of Contract has summarised the law, when the husband is not bound for
pledging his credit by the wife, as follows:
(1) Express warning by the husband to trader not to supply goods on credit
(2) Expressly forbidding wife not to pledge his credit though not in the knowledge of the
trader.
(3) Supply of sufficient allowance to the wife to buy articles without pledging his
credit.
Q. 15. Discuss the rights of an agent against principal.
От
What are the rights of an agent against his principal?
Ans. Agent's Rights Against Principal. Under the Indian Contract Act, 1872, an agent has
following rights against his principal:
1. Right to retainer [Section 217]. An agent may retain out of sums received on
principal's account, 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.
2. Right to Remuneration [Sections 219 and 220)-An agent is entitled to his commission
in the absence of any special contract, after the completion of the business.
But he is not entitled to his remuneration in respect of that part of the business which
he has misconducted.
The remuneration is payable only in rupees when the work for which the agent was
appointed accomplishes. Before the accomplishment of work no remuneration is
payable to the agent. [Saraswati Devi v. Motilal, AIR 1982 Raj. 108). . P16
3. Right of Lien [Section 221].-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,
disbursement and services in respect of the same has been paid, or accounted for to
him.
Right of lien is meant to make good the expenses incurred by the agent during the
exercise of his power. The right is extinguished in following three circumstances-
(1) Immediately after the possession is lost, the right of lien comes to an end. Lien is a
possessory right.
(2) It can be extinguished by waiver. It may be waived by way of an agreement express
or implied.
(3) The agent's lien is subject to the contract to the contrary. If it has been excluded it
cannot operate.
4. Right to be indemnified [Section 222].-An agent is entitled to be indemnified by the
principal against the consequences of all lawful acts done by the agent in exercise of
the authority conferred upon him.
5. Agent to be indemnified against consequences of acts done in good faith [Section
223]. An agent is entitled to be indemnified by the principal against the consequences
of acts done in good faith though they cause an injury to the rights of third person.
Illustration.-A, a decree-holder is 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 of the sum which he is compelled to pay to C in consequence of obeying A's
direction.
But, according to Section 224, where any 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 act.
Illustration. A employs B to beat C, and agrees to indemnify him against all
consequences of the act. B, thereupon beats C, and had to pay damages to C for so
doing. A is not liable to indemnify B. for those damages
to do o some Leading Case. Firm Pratap Chandra Nepali v. Firm of Venkat Sethi & Sons,
AIR 1974 SC 1223.-Held, In agent who is employed criminal act is, however, not entitled
to be indemnified by the principal.
6. Right to get compensation [Section 225]. An agent is entitled to be compensated by
the principal for any injury caused to him by the principal's neglect or want of skill. But
he has no right to get compensation where the injury results from his own negligence or
acquiescence after knowledge of the risk of the agency, for the agent is presumed to
undertake ordinary consequences of the risk incidental to the agency.
Illustration. A employs B as a bricklayer in building a house, and puts up the scaffolding
himself. The scaffolding is unskillfully put up and 8 is consequently hurt. A must make
compensation to B.
7. Agent cannot personally enforce, nor be bound by contracts, on behalf of principal
(Section 230). Section 230 of the Contract Act provides:
"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.
Section 230 furuther provides that such a contract shall be presumed to exist in the
following cases:
(a) where the contract is made by an agent for sale or purchase of goods for a
merchant resident abroad;
(b) where the agent does not disclose the name of his principal;
(c) where the principal, though disclosed, can not be sued.
Leading Case. In S.P.L. Ltd. v. Solar Turbines International Co., AIR 2007 (NOC) 82 Cal.,
it was held that ordinarily an agent cannot personally enforce contracts entered into by
him on behalf of his principal, nor he is personally bound by the same. But if there is a
contract to that effect that an agent can enforce the contract entered into by him on
behalf of his principal he can do so. Similarly he will be bound by the said contract
entered into by him on behalf of the principal.
Q. 16. Describe in brief the various duties of an agent towards his principal. P17
Or
Mention the duties of an agent towards his principal ?
Ans. Agent's duties towards his principal. Under the Indian Contract Act, 1872, the agent
has the following duties towards his principal:
1. Duty to follow directions or customs [Section 2111-An agent is bound to carry out the
business entrusted to him according to the directions of principal. In the absence of his
directions the agent must follow the customs prevailing in the business of the same
kind at the place. If the agent makes any departure from the instructions of the principal
or the custom, he does so at his own risk.
The agent is, however, not bound to take any separate or special care Padam Parshad v.
The Punjab National Bank Ltd., AIR 1974 P & H 22).
Illustration.-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 investments. A must make good B, the interest usually obtained by such
investment.
2. Duty to take reasonable care and skill [Secton 212].-An agent must conduct the
business of the agency with as much skill as is generally possessed by persons
engaged in similar business unless the principal has a notice of his want of skill. The
agent is always bound to act with reasonable diligence. The agent will have to make
compensation to his principal for any direct loss or damage arising from his own
neglect, want of skill or misconduct.
3. Duty to keep accounts [Secton 213]. An agent is bound to render proper accounts to
his principal on demand.
4. Duty to behave like a man of ordinary prudence [Secton 214]. An agent is bound, in
cases of difficulty, to use all reasonable diligence in communicating with his principal,
and in seeking to obtain his instruction. In case there is no time to consult the principal,
he may act with the discretion of an ordinary prudent man.
5. Duty to avoid conflict of interests [Secton 215].-When an agent deals, on his own
account, in business of agency without principal's consent 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 agent have been
disadvantageous to him.
Illustration. 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 facts, or that the sale has been
disadvantageous to him.
6. Duty to hand over secret profits or duty not to earn secret profits [Secton 216]. If the
agent, without the knowledge of his principal, deals in the business of the agency on his
own account the principal is entitled to claim from him any profit which has resulted
from the transaction.
7. Duty to give all sums received under agency [Secton 218].-An agent is bound to pay to
his principal all sums received on his Account subject to deduction, such as, money due
to himself in respect of advance made or expenses properly incurred, and also the
remuneration due to him.
8. Duty not to delegate [Secton 1901-As a general rule an agen has no right to delegate
his authority to a third person without the consent of his principal except in cases where
the very nature of the business may require the delegation of authority.
9. Duty to protect the interest entrusted to him on death or insanity of principal
[Secton 209]. An agent is bound to take on behalf of the representatives of his late
principal all reasonable steps for the protec tion and preservation of the interest
entrusted to him when an agency is terminated by the death or insanity of the principal.
Authority of agent, Liability of Principal, Sub-agent and Termination of agency
Q. 17. Write an essay on the authority of an agent.
Оr
Explain and illustrate the nature of agent's authority in normal cases and in an
emergency. What is agency by estoppel?
Ans. Agent's Authority. The authority of an agent may be express or implied. An
authority is said to be express when it is given by words spoken or written. An authority
is said to be implied when it is to be inferred from the circumstances of the case and
things spoken or written in the course of dealing may be accounted for, from
circumstances of the case.
The power to sell will not authorise the agent to borrow money or to pledge the goods.
Timblo Imos Ltd. v. Jorge Anioal Mates Sequira, (1977) 3 SCC 474]. P18
Illustration. A owns a shop in Serampore, living himself in Calcutta and visiting the shop
occasionally. The shop is managed by B and he is in the habit of ordering goods from C
in the name of A for the purposes of the shop and paying for them out of A's funds with
A's knowledge. B has an implied authority from A to order goods from C in the name of
A for the purposes of the shop.
Illustrative Case.-In Ram Lakhan v. Mukhdeo, AIR 1982 Pat. 19. the parties agreed for
filing of the award in the court. The award which was registered one, was handed over
to one of the parties by the authorities. It was held that the party must be deemed to
have implied authority of the arbitrators for filing the award in the court on their behalf
under Section 186 of the Contract Act.
Extent of agent's authority [Section 188].-An agent who has an authority to do an act
has authority to do every lawful thing which is necessary in order to do such act. 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.
Illustration. A constitutes B his agent to carry on his business of a tip builder. B may
purchase timber and other materials, and hire workmen, for the purposes carrying on
the business.
Agent's authority in an emergency [Section 189]. An agent has authority, in an
emergency, to do all such acts for the purposes of pro-tecting his principal from loss as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances a
Leading Case.-Hari Kishan Singh v. National Bank of India Lad..
(1941) 191 I C 273. It was held that Section 189 was intended to protect the agent, if for
the purposes of safeguarding the interests of his principal he does certain acts without
any instruction from his principal. In such a case the agent is exempted from all liability
provided he acts like a man of an ordinary prudence and the acts are performed by him
at the time of emergency.
Illustration. 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 of Cuttack without spoiling.
Agency by estoppel
This arises when one person puts another in such a position as to lead other persons to
think that they are entitled to treat the second person as authorised to act as agent for
the first in respect of certain class of business. In such a case the first person is
estopped from denying to those who have acted on the belief which he has by his
conduct thus, induced, that the second person was in fact his agent. This is illustrated
by the relation of factor to their principals. If a principal entrusts goods to factor and
does not authorise him to sell, the principal is estopped from denying that the factor
had no authority, if the factor sells the same to someone who buys bona fide without
notice of the limitation of the factor's authority.
Partnership is based on the mutual agency between the partners. When anyone of the
partners retires he should give information of this effect to the persons who deal with
the partnership firm. Otherwise the rest of the partners as well as the outgoing partner
will be made liable on the basis of holding out or estoppel.
Illustration. If a master allows his servant to purchase goods for him of B habitually
upon credit. B becomes entitled to look to the master for the payment for such things
as are supplied in the ordinary course of dealing.
Q. 18. Explain the liability of Principal towards third person for the act of his agent.
When the principal is liable for the fraud committed by his agent?
Or
Can a principal be held bound by the obligation incurred on his behalf by his agent to
the third party?
Ans. Principal's obligation for acts of agents. A principal is held bound by the
obligations incurred on his behalf by his agent. Sections 226 to 228 deal with the law
regarding the obligations of the principal for the contract of his agent.
Enforcement and consequences of agent's contracts [Section 226].-Section 226 of the
Contract Act deals with enforcement and consequences of agent's contracts. It
provides:
Contract 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 contract has been entered into and the acts done by the principal in person.
This section is based on the principle embodied in the maxim-Qu facit per alium facit
per se' which means that the act of an agent is the ac of the principal. P19
Illustration.-A, being B's agent with the 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.
Obligation of principal when agent exceeds authority [Section 227]. Section 227 deals
with obligation of principal when agent exceeds his authority. According to Section 227,
when an agent does more than he is authorised to do and when the part of what he
does, which is within his authority, can be separated from the part which is beyond his
authority, the principal is liable only for so much part of what he does as is within
agent's authority.
Illustration.-A, being the owner of a ship and cargo, authorises B to procure an insurance
for rupees 4,000 on the ship. B procures a policy for rupees 4,000 on the ship, and
another for the like sum on the cargo. A is bound to pay the premium for the policy on
the ship but not the premium for the policy on the cargo.
Obligation of principal when excess of agent's authority is no separable [Section 228].
This section provides :-
An agent does more than he is authorized to do and what he doc beyond the scope of
his authority is not separable from what is within it the principal is not liable for the
transaction.
Illustration. Where A authorises B to buy 5,000 sheeps for him and 8 buys 5,000 sheeps
and 200 lambs for a sum of rupees 6,000. A may repudiate the whole transaction.
Ostensible authority [Section 237]. Section 237 of the Contract
Act embodies the principle of ostensible authority. This section lays down:"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 the words
or conduct induced such third persons to believe that such acts and obligations were
within the scope of the agents authority."
In Anson's Law of Contract it is pointed out "The principal may, by words or conduct,
create an inference that an authority has been conferred upon an agent even though no
authority were given in fact. In such a case, if the agent contracts within the limits of his
apparent authority, although without actual authority the principal will be bound to third
parties by his agent's acts. The doctrine of ostensible authority as apparent authority, or
it is usually called is really an application of the principle of estoppel which a reasonable
man would draw from his works or conduct."
Ostensible or apparent authority is the authority of an agent as it appears to others. It
often coincides with actual authority. But sometimes ostensible authority exceeds
actual authority. An apparent or ostensible y authority may arise from the course of
dealing adopted in a particular case. It of is the conduct of the principal which portrays
the apparent authority of the agent.
Principal's liability for agent's misrepresentation or fraud [Section 238]. Section 238 lays
down that misrepresentations made or e frauds committed by agents acting in the
course of their business for their 5 principals, have the same effect on agreements
made by such agents as if such misrepresentations or frauds had been made or
committed by the sprincipal; but misrepresentations made or frauds committed by
agents in matters which do not fall within their authority, do not affect their principals.
Illustration. A being B's agent for the sale of goods induces C to buy them by
misrepresentation, which he was not authorised by B to make. The contract is voidable,
as between B and C, at the opinion of C.
Under Section 238 of the Contract Act, misrepresentation or fraud committed by an
agent may be classified into two categories.-
(a) under his actual or ostensible authority, and
(b) not covered within his authority.
The principal is liable for the acts which fall under actual or ostensible authority of the
agent, but he is not liable if they fall outside his authority.
Leading Case. Lloyds v. Grace Smith & Co.. 1912 AC 716. Held, a principal is liable for
the fraud of the agent within the scope of his authority whether the fraud is committed
for the benefit of the principal for the benefit of the agent.
Rupram Kailash Nath v. Co-operative Union, AIR 1967 All. 382.
Held, It is a well settled law that the principal will be liable for the deceit of his agent if
he has either authorized him to make a statement knowing it falsity or if he has not
intervened although knowing that the agent made a false statement or will. P20
Q. 19. What do you understand by 'Sub-agent'? When may an agent validly appoint a
sub-agent? Discuss the liabilities of a Principal and an Agent for the acts of a sub-
agent.
Or
'Delegatus non potest delegare.' Discuss this statement and explain its exceptions
with the help of suitable examples.
Or
A person to whom authority has been delegated cannot delegate that authority to
another. Discuss the consequences of delegation of authority by an agent.
Or
"Delegatus non-potest delegare". Discuss the applicability of the maxim in the law of
agency and state the exceptions to the rule.
Ans. Delegation of agent's authority [Section 190]. -The general rule is "delegatus non-
potest delegare" the meaning of this maxim is that an agent to whom another has
delegated his own authority (has reposed confidence), cannot delegate that authority to
a third person. This rule is based on the principle that agency is a contract based on
trust and mutual confidence between the parties. A principal may have mutual
confidence in his agent but not in the subsequent sub-agent appointed by the agent.
Section 190 of the Contract Act deals with delegation of an authority by the agent. It
provides:
"An agent cannot lawfully employ another to perform acts which he has expressly or
impliedly undertaken to perform personally. unless by the ordinary custom or trade a
sub-agent may, or from the nature of the agency a sub-agent, must be employed."
The general principle is that the agent cannot delegate his authority to a third person,
but there are two exceptions to this general rule. They are:
(i) when the ordinary custom of trade permits employment of a sub-agent, or
(ii) when the nature of agency demands that employment of a sub-agent is necessary
by the agent.
Besides two exceptional conditions no agent is authorised to delegate his authority if
the nature of his act is purely managerial and he is supposed to use his personal skill in
discharge of his duty or where he is personally required to perform his duties.
Sub-agent [Section 191].-"Sub-agent" is a person employed by. and acting under the
control of the original agent in the business of the agency.
Legal position of sub-agent properly appointed [Section 192].-Sub-agent may be either
properly appointed or improperly appointed. If he is appointed by the agent with the
authority of the principal he is called a sub-agent properly appointed. If he is appointed
without authority of the principal, he is improperly appointed.
When the sub-agent has been appointed with the consent of the principal, the principal
is bound by his acts and is responsible for his action as if he was an agent appointed by
the principal.
The agent is responsible for acts of the sub-agent to the principal.
The sub-agent is not responsible for his acts to the principal. He is only responsible for
such acts to the agent.
But if the sub-agent is guilty of fraud or wilful wrong against the principal, he becomes
directly responsible to the principal.
Leading Case. In Nav Bharat Corporation Bombay v. M.P. Electricity Board,
AIR 2006 NOC 1518 (MP) it was held that the subagent should be clothed with precisely
the same rights and incur precisely the same obligation and are bound to be the same
duties, in regard to his immediate employer as if he was the sole and real principal. His
position is much superior than that of a servant in the matter of discretion to be taken
as and when needed.
Sub-agent improperly appointed [Section 193]. If the sub-agent is appointed without the
authority of the principal the principal is not bound by his acts. The principal is not
responsible for any transaction made by the sub-agent or for any act done by him.
Q. 20. Discuss the various circumstances in which an agency may be terminated.
Or
What are the different modes of termination of agency ? In what manner and
circumstances can agency be revoked ?
Or
When does a contract of agency comes to an end?
Ans. Termination of Agency. According to Section 201 of the Indian Contract
Act, 1872 an agency or authority of an agent may come to an end in any of the following
ways:
(1) by revocation of authority by the principal;
(2) by renunciation of the business of agency by the agent; P21
(3) by competition of the business of agency:
(4) by death or insanity of the principal or agent;
(5) by insolvency of principal.
Besides above ways, an agency may also come to an and in the following
circumstances:
(i) by the expiry of the term of the agent if he has been appointed for a fixed term;
(ii) by the destruction of the subject-matter of the agency.
(iii) by the happening of any event rendering the agency unlawful by declaration of war,
the principal and agent may become alien enemies.
(1) Termination of agency by revocation [Section 2011.-According to Section 201, an
agency is terminated by the principal revoking his authority.
Section 207 provides that such revocation or renunciation may be expressed or implied
in the conduct of the principal or agent respectively.
Illustration.-'A' empowers 'B' to let A's house. Afterwards 'A' lets it himself. This is an
implied revocation of B's authority.
According to Section 203, the principal may revoke the authority given to his agent at
any time before the authority has been exercised so as to bind the principal.
But, as provided by Section 202, where the agent has himself an interest in the property
which forms the subject-matter of the agency, the agency can not, in the absence of an
express contract, be terminated to the prejudice of such interest.
Illustration. (a) 'A' gives authority to 'B' to sell A's land, and to pay himself, out of the
proceeds the debt due to him from 'A'. 'A' can not revoke his 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' can not revoke his authority, nor it is terminated by his
insanity or death.
Leading Case. Corporation Bank, Bangalore v. Lalitha H. Holla, AIR 1994 Kant. 133, Held,
mere use of words "irrevocable" in a power of attorney will not make the power of
attorney "irrevocable" unless the terms thereof, disclose that it created or recognised an
agency coupled with interest in favour of the agent.
Manner and circumstances in which an agency may be revoked
The revocation of the agency is subject to the following conditions:
(a) Revocation to come into effect prospectively [Section 204].-According to
Section 204, the principal can not revoke the authority given to his agent after the
authority has been partly exercised, so far as regards such acts and obligations arise
from acts already done in the agency.
Illustration.-'A' authorised 'B' to buy 1,000 bales of cotton on account of 'A' and to pay
for it out of A's money remaining in B's hand. 'B' buys 1,000 bales of cotton in his own
name so as to make himself to personally liable for the price. 'A' can not revoke B's
authority so far as regards payment for the cotton.
(b) Compensation for revocation before expiry of time [Section 205].-According to 205,
if 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.
(c) Notice of revocation or renunciation [Section 206].-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.
(2) By the renunciation of the business of agency by the agent [Section 201].-
Section 201 further provides that an agency is terminated when the agent renounces
the business of the agency. Renunciation may be express or implied from the conduct
of the agent. Termination of agency by renunciation is also subject to the provisions
contained in Sections 205 and 206 of the Contract Act.
(3) By completion of the business of the agency [Section 201].-An agency comes to an
and when its business is complete.
(4) By the death or insanity of principal or agent [Section 201]. An agency is terminated
on the death or insanity of either the principal or agent.
(5) By insolvency of principal [Section 201].-An agency comes to an end when the
principal is adjudged on insolvent under the provisions of any act for the time being in
force for the relief of insolvent debtors.
Time of coming into effect of termination of agency [Section 208]. According to
Section 208 of the Act, the termination of the authority of an agent does not, so far as
regards the agent, takes effect before P22
it comes known to him or, so far as regards third person, before it becomes known to
them.
Illustration. A' directs 'B' to sell goods for him, and agrees to give B' 5 percent
commission on the price fetched by the goods 'A' afterwards, by letter, revokes B's
authority. 'B' after the letter is sent, but before he receives it, sells goods
for 1000 rupees. The sale is binding on 'A', and 'B' is entitled, to five rupees as his
commission.
Q. 20-A. What is ratification? Discuss the essential conditions
of a valid ratification and its effect. Refer to provisions of Contract Act, 1872 and also
relevant case land Law. Explain agency by ratification with examples.
Ans. Ratification. Ratification is the approval of unauthorised act of his agent by the
principal.
Section 197 provides that the ratification may be express or implied. It provides:
"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.
Essential conditions. These are following essential conditions for notification:
(1) Act done by a person on behalf of another without the knowledge or authority of the
former.
(2) The person must be in existence and competent to contract whom the act is done.
(3) The act to be lawful
(4) Ratification with full knowledge of facts
(5) Ratification within a reasonable time.
(1) An act done by a person on behalf of another.-It is necessary for ratification that the
person acting in that his knowledge or authority (agent) on behalf of another must
profess to act on his behalf or the person
for whom he acts i.e. in the Principal must be in contemplation. The act done should be
without knowledge or authority of the Principal It is not necessary to name the Principal
but it is necessary that the agent must be identifiable. If the agent does not disclose the
name of the Principal or the Principal is not identifiable, the act done by him cannot be
ratified.
In Keighly Masted & Co. v. Durant, (1901) A.C. 240, the Principal authorised the agent to
purchase wheat on a certain price jointly for himself and agent but he purchased on a
higher price in his own name. The Principal notified the transaction. On the refusal to
take delivery, the Principle was held not liable.
(2) The person must be in existence and competent to contract for whom the act is
done. For a ratification, it is necessary that the Principal must be in existence and
competent to contract. Competency of contract is created at the time of doing the act.
Boston Deep Seor Fishing & Ice Co. v. Faruham, [(1957) 1 W.R.R. 1051] and also at the
time of ratification [Firth v. statainers, (1897) 2 Q. B. 70].
A company cannot ratify the act when it was done for it prior to its formation. (Kelner v.
Baxter) (1866) LR 2 CP 174.
(3) The act to be lawful. The act to be ratified must be lawful. An unlawful act cannot be
ratified. Thus under Section 200 of Contract Act, the ratification cannot be done of an
act which is likely to cause damage to the third party.
Section 200 provides:
"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 authorised 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 unauthorised
person, gives notice of termination of A. The notice cannot be ratified by B, so as to be
binding on A.
(4) Ratification with full knowledge of facts. The person ratifying the act must have full
knowledge of all material facts of the act done. Section 198 provides:
"No valid ratification can be made by a person whose knowledge of the fact is materially
defective."
(5) Ratification within a reasonable time. It is necessary that the notification must be
made within a reasonable time. (Re. Portuguese Consolidated Copper Mines, (1890) 45
Ch D 16). If a time has been fixed for performance of contract, it must be ratified before
the commencement of such time. [Metropolitan Asylum Board v. Kingham (1890) 6
TLR 217).
A contract of insurance cannot be ratified after the loss to the Principal because the
contract cannot be formed by the Principal at such time. (Grover and Grover v. Mathew,
(1910) 2 KB 405) However, under Section 86 of Marine Insurance Act 1906, the marine
insurance can be ratified even after such time. Effect of ratification. The effect of
ratification is that the Principal becomes bound by the act which his agent has done on
his behalf without his knowledge. This Principle has been laid down in Section 196 of
the Contract Act which is as follows:
"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 of unauthorised act forming part of transaction.-When on the part of an act
is ratified, it amounts to ratification of the whole act. Section 199 of the Contract Act
provides:-
"A person ratifying an unauthorised act done on his behalf ratifies the whole of the
transaction of which such act formed a part."
Q. 21. Distinguish between the following:
1. Pledge and Bailment.
2. Pledge and Mortgage. P23
3. Pledge and Right to Lein.
4. Simple and Continuing Guarantee.
5. Agent and Servant.
6. Agent and Contractor.
7. Sub-agent and substituted Agent.
8. Particular and General Lien.
Ans. 1. Distinction between Pledge and Bailment.-Pledge and Bailment can be
distinguished as follows:-
Pledge
1. Pledge is a species of bailment.
2. Pledge is defined under Section 172 of the Contract Act.
3. A pledge is bailment of goods as security for payment of a debt or performance of a
promise.
Bailment
1. Bailment is a genus.
2. Bailment is defined under Section 148 of the Contract Act.
3. In bailment goods are delivered by the bailor to the bailee 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 bailor.
2. Distinction between Pledge and Mortgage. Pledge and Mortgage can be
distinguished as follows:-
Pledge
1. Pledge is defined under Section 172 of the Contract Act, 1872.
2. Movable property can only be the subject-matter of the pledge under the Contract Act.
3. Pledge is a kind of bailment and security.
4. The main purpose of the pledge is to put the goods pledged in the power of the
pawnee to reimburse himself for the money advanced by selling the goods after giving
due notice to the pawner. The pawnee at no time becomes the owner of the goods
pledged. He can only retain the goods until his claim for the money advanced thereon
has been satisfied.
Mortgage
1. Mortgage is defined under Section 58 of the Transfer of Property Act 1882.
2. Immovable property can only be the subject-matter of the mortgage under the
Transfer of Property Act.
3. A mortgage is not so.
4. In a mortgage, an interest in the mortgaged property is transferred in favour of the
mortgagee which is subject to the right of redemption of the mortgagor.
3. Distinction between Pledge and Right to Lien.-Pledge and Right to Lien can be
distinguished as follows :-
Pledge
Right to Lien
1. Pledge is a kind of bailment and security. P24
1. Right to Lien is not so.
2. In a pledge, pawnee acquires a special interest in the property pledged.
2. Right to lien gives only a right to detain the subject-matter of the lien until payment
and a lien is not transferable to a third person.
3. Pledge is a delivery of goods to the creditor as security for his debt.
3. Lien is a right of a creditor to retain the goods until his debt (or dues) is paid or
satisfied.
4. Distinction between Simple and Continuing Guarantee.-Simple and Continuing
Guarantee can be distinguished as follows:-
Simple Guarantee
Continuing Guarantee
1. Simple guarantee is defined under Section 126 of the Contract Act.
1. Continuing guarantee is defined under Section 129 of the Contract Act.
2. It is a contract of guarantee to perform the promise or discharge the liability of third
person in case of his default for a single transaction.
2. It is such a contract of guarantee which extends to a series of transactions.
5. Distinction between Agent and servant. [Please refer to Q. 14]
6. Distinction between Agent and Independent Contractor.-[Please refer to Q. 14]
7. Distinction between Sub-agent and Substituted Agent.-A sub-agent and a substituted
agent can be distinguished as follows:-
Sub-agent
1. A sub-agent is defined under Section 191 of the Contract Act.
2. A sub-agent is a person employed by, and acting under the control of the original
agent in the business of the agency.
3. A sub-agent is not generally responsible to the principal, but he is immediately
responsible to the agent.
4. There is no privity of contract between sub-agent and principal.
Substituted Agent
1. Provisions regarding substitu-ted agent is given under Sec. 194 of the Contract Act.
2. According to Section 194 a substituted agent can be nominated by the original agent
to act for the principal for a certain part of the business of the agency. He is an agent of
the principal for such part of the business as is entrusted to him.
3. A substituted-agent, by his mere appointment becomes immediately responsible to
the principal.
4. A privity of contract is created between the principal and the substituted agent.
8. Distinction between Particular and General Lien.-Particular and General Lien can be
distinguished as follows:-
Particular Lien
General Lien
1. Provisions relating to Bailee's particular lien is provided under Section 170 of the
Contract Act.
1. Provisions relating to general lien is provided under Section 171 of the Contract Act.
2. The right of a particular lien can be claimed by every bailee. P35
2. The right of general lien is granted to Bankers, Factors, wharfingers, Attorneys of High
Courts and Policy-brokers generally. Though under Section 171 the parties to the
contract of bailment can, by mutual agreement confer right of general lien on a bailee.
3. The right of particular lien can be claimed only in respect of goods upon which some
labour or skill has been exercised by the Bailee.
3. The right of general lien can be claimed in respect of any goods for any charge due in
respect of other goods.
Short Notes
Q. 22. Write notes on the following:
1. Right to Lien.
2. Undisclosed Principal.
3. Agency by Necessity. P25
4. Ostensible Authority.
Ans.
1. Right of Lien
Section 221 of the Indian Contract Act, 1872 deals with agent's right of lien. This section
entitles the agent to have lien on principal's property.
Section 221 provides:
"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, disbursement and services in
respect of the same has been paid or accounted for to him."
Essential conditions for lien:
(1) The agent must be in lawful possession of the goods and property.
(ii) There must not be any right inconsistent with lien.
(iii) The goods or property should belong to the principal.
(iv) The goods or property should have been received by him in his capacity as an agent.
(v) The right of lien is subject to the rights of third parties and equities against the
principal.
Leading Case. Ram Prasad v. State of M.P., AIR 1970 SC 1818, Held, where the property
is handed over to the agent for some particular purpose which is inconsistent with his
right of lien, he can not claim the lien.
Sub-agent's right of lien. A properly appointed sub-agent has the same lien against the
principal as that of agent. But where a sub-agent is appointed without the authority of
the principal he will have no lien against the principal.
Loss of a lien. An agent is entitled to particular lien unless otherwise is provided by the
agreement. An agent has lien over goods and property of his principal so long as they
are in his possession. The lien is lost if he loses the possession. Lien is lost in the
following cases:
(1) Loss of possession:
(ii) Waiver of right of lien by agent; and
(iii) Agreement entered into by agent inconsistent with his right of lien.
Leading Case. Krishna Das v. Ganesh Ram, AIR 1950 Pat. 431, Held, the agents holds
the lien, but the principal owns the title. When the goods are lost the agent loses the lien
and the principal loses the goods.
2. Undisclosed Principal
Undisclosed principal is a person whose existence is not disclosed by the agent nor his
representative character is expressed. On such transactions the agent is personally
liable and being a party, he may be sued or may sue the third party.
First para of Section 230 of the Contract Act provides a general rule:
"In the absence of any contract to that effect, an agent can not personally enforce
contracts entered into by him on behalf of his principal, nor is he personally bound by
them."
But presumption regarding the "Contract to contrary" as contained in Section 230 lays
down an exception to the above general rule. Second presumption of
Section 230 provides:
"Where the agent, does not disclose the name of his principal, the presumption shall
exist that he can personally enforce contracts entered into by him and be personally
bound by them."
Rights of undisclosed principal. Certain rights of an undisclosed principal are provided
under Sections 231 and 232, which incorporates following rules:
(1) Rights of parties to a contract made by agent not disclosed [Section 231]. 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 principal.
But, 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 enterned into the contract.
Therefore, the undisclosed principal has no right to intervene when he is aware that the
other party would not have dealt with him.
(2) Performance of contract with agent supposed to be principal [Section 232].-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 of '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' can not compel 'B' to take the rice without
allowing him to set-off A's debt.
Obligations of undisclosed principal
The undisclosed principal has the following obligations or liabilities towards third
person-
(i) he can be sued by third person as a general or disclosed Principal.
(ii) he is subject to liabilities towards third persons are similar to that of disclosed
Principal. P26
3. Agency by Necessity
Agency of necessity is an agency which is acknowledged by law under Extraordinary
demanding circumstances. In such circumstances the principal, for whom an agent
usually works, is regarded to be bound by those acts of his agent an agent usually
works. et unforeseen conditions and to save the master from loss or detriment. During
normal conditions an agent is has authority to work in a limited sphere which is known
as express authority but under exceptional circumstances an agent is supposed to have
been vested with those rights which are not usually given to him. This authorisation is
based on a logic that shortage of time and pressing demands of the circumstance put a
pressure on the agent to take immediate decision. Therefore, to meet the pressing need
the acts beyond the authority are also taken to be within the authority of the agent and
the principal cannot deny his responsibility or liability for the same.
In old days such type of agency was recognised in the sphere of cargo shipping but,
now a days its utility and advancement in mercantile activities is accepted if as a
normal phenomenon of mercantile world.
Illustrative Cases. (i) Sims and Company v. Midland Rly. Co., (1913) 1 KB 103.-A Railway
Company (the defendant) was given a consignment of butter for carrying it to a distant
place. On account of strike in railway company there was a likelihood of decomposition
of butter. In order to avoid this butter was sold and the master of the Railway Company
justified his act under the agency of necessity. The court upheld the logic.
(ii) Northern Rly Co. v. Swafield, 1874 LRX 132. The defendant handed over a horse to
the Railway Company for carrying it to a distant place. When the horse arrived at the
destination there was none to receive the horse. There was no shade for keeping horses
etc. with the railway authorities, therefore, railway authorities have to engage the
services of a stable keeper for which they charged from the owner of the horse. Here
the act of hiring the services of stable keeper was accepted to be an act under the
agency of necessity.
Prerequisites of the agency of necessity
(i) The agent should not have any time to negotiate with the principal and decision is to
be taken immediately.
(ii) Where under agency of necessity a thing is to be sold it must be proved by the agent
that such sale was imminently necessary to save the interest of the Principal as well as
for the protection of the value of the goods sold. Such agency arises in the cases of
perishable goods.
(iii) The agent must establish that he worked honestly and in good faith to protect the
interest of the master and there was no malpractice behind the act.
(iv) Sometimes a wife can use the reputation and good will of hise husband for
purchasing necessary items when his husband fails to provide the same to her. In such
cases the wife is regarded to be an agent of necessity of her husband.
P1. Define the Contract of Indemnity and discuss the rights of an indemnity-holder
against promisor.
What do you understand by "Indemnity"? What are the rights of an indemnity-holder
against his promisor, on being sued within the scope of his authority ?
P2. What do you understand by Contract of Guarantee? How does it differ from
Contract of Indemnity?
P3. What is Continuing Guarantee? Under what circumstances continuing guarantee
can be revoked?
What do you know by Continuing Guarantee ? Explain when can it be revoked.
Compare the continuing guarantee with special guarantee. Discuss the circumstances
in which continuing guarantee can be revoked.
P5. What is bailment? Explain its essential ingredients.
Explain and illustrate the nature of bailment clearly.
P6. Discuss the Duties of a Bailee.
P8. Discuss the Rights of Bailee.
P8. Discuss the Duties of Bailor.
P9. Discuss the Rights of Bailor. P.
P10Define Pledge with its essential elements. Who is competent to Pledge.
P11. Discuss the rights of Pawnor and Pawnee.
P12. Define the Agency. Define Agent and Principal and discuss the various kinds of
agents.
Define Agent and Principal. Is consideration necessary in contract of agency?
Explain the terms "Agent" and "Principal". What are the different kinds of agent?
P13. What are the rules for creating an Agency?
What are the various ways in which relation of agency arises?
No one can become the agent of another person except with the will of that other
person. Discuss.
How the agency is created by ratification. What are the rules of ratification of an
agency.
Explain the rules for creating an agency. Distinguish between an agent, servant and an
independent contractor.
Mention the various ways in which a relationship of agency could be created.
P14= -A. What is an implied agency? Under what conditions, a husband is liable for
debts taken by his wife?
P15. Discuss the rights of an agent against principal.
What are the rights of an agent against his principal?
P17=. Describe in brief the various duties of an agent towards his principal.
Mention the duties of an agent towards his principal ?
P17= Write an essay on the authority of an agent.
Explain and illustrate the nature of agent's authority in normal cases and in an
emergency. What is agency by estoppel?
P18=. Explain the liability of Principal towards third person for the act of his agent.
When the principal is liable for the fraud committed by his agent?
Can a principal be held bound by the obligation incurred on his behalf by his agent to
the third party?
P20. What do you understand by 'Sub-agent'? When may an agent validly appoint a sub
-agent? Discuss the liabilities of a Principal and an Agent for the acts of a sub-agent.
'Delegatus non potest delegare.' Discuss this statement and explain its exceptions
with the help of suitable examples.
A person to whom authority has been delegated cannot delegate that authority to
another. Discuss the consequences of delegation of authority by an agent.
"Delegatus non-potest delegare". Discuss the applicability of the maxim in the law of
agency and state the exceptions to the rule.
P20=.Discuss the various circumstances in which an agency may be terminated.
What are the different modes of termination of agency ? In what manner and
circumstances can agency be revoked ?
When does a contract of agency comes to an end?
P22. What is ratification? Discuss the essential conditions
of a valid ratification and its effect. Refer to provisions of Contract Act, 1872 and also
relevant case land Law. Explain agency by ratification with examples.
P23=. Distinguish between the following:
1. Pledge and Bailment.
2. Pledge and Mortgage.
3. Pledge and Right to Lein.
4. Simple and Continuing Guarantee.
5. Agent and Servant.
6. Agent and Contractor.
7. Sub-agent and substituted Agent.
8. Particular and General Lien.
P25=Write notes on the following:
1. Right to Lien.
2. Undisclosed Principal.
3. Agency by Necessity.
4. Ostensible Authority.