THE INDIAN CONTRACT ACT, 1872
Table of content
Unit 1 : Contract of Indemnity and Guarantee
UNIT 1 : CONTRACT OF INDEMNITY AND GUARANTEE
1. INTRODUCTION
Contract of Indemnity and Guarantee are the specific types of contracts provided under sections 124 to 147 of the Indian Contract Act, 1872. In addition to the specific provisions (i.e. Section 124 to Section 147 of the Indian Contract Act, 1872), the general principles of contracts are also applicable to such contracts. Even though both the contracts are modes of compensation based on similar principles, they differ considerably in several aspects.
In this unit, the law relating to indemnity and guarantee are discussed in detail.
2. CONTRACT OF INDEMNITY
The term “Indemnity” literally means “Security against loss” or “to make good the loss” or “to compensate the party who has suffered some loss”.
The term “Contract of Indemnity” is defined under Section 124 of the Indian Contract Act, 1872. It is “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.”
Example 1: Mr. X contracts with the Government to return to India after completing his studies at University of Cambridge and serve the Government for a period of 5 years. If Mr. X fails to return to India, he will have to reimburse the Government. It is a contract of indemnity.
There are two parties in this form of contract.
- The party who promises to indemnify/ save the other party from loss- ‘indemnifier’,
- The party who is promised to be saved against the loss- “indemnified” or “indemnity holder”.
Example 2: A may contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a sum of ` 5000/- advanced by C to B. In consequence, when B who is called upon to pay the sum of money to C fails to do so, C would be able to recover the amount from A as provided in Section 124.
Example 3: X, a shareholder of a company lost his share certificate. He applied for the duplicate. The company agreed to issue the same on the term that X will compensate the company against the loss where any holder produces the original certificate. Here, there is contract of indemnity between X and the company.
Example 4: X may agree to indemnify Y for any loss or damage that may occur if a tree on Y’s neighboring property blows over. If the tree then blows over and damages Y’s fence, X will be liable for the cost of fixing the fence.
Analysis
To indemnify means to compensate or make good the loss. Thus, under a contract of indemnity the “existence of loss” is essential. Unless the promisee has suffered a loss, he cannot hold the promisor liable on the contract of indemnity.
However, the above definition of indemnity restricts the scope of contracts of indemnity in as much as it covers only the loss caused by:
- the conduct of the promisor himself, or
- the conduct of any other person.
Thus, loss occasioned by an accident not caused by any person, or an act of God/ natural event, is not covered.
Mode of contract of indemnity: A contract of indemnity like any other contract may be express or implied.
- A contract of indemnity is said to be express when a person expressly promises to compensate the other from loss.
- A contract of indemnity is said to be implied when it is to be inferred from the conduct of the parties or from the circumstances of the case
A contract of indemnity is like any other contract and must fulfil all the essentials of a valid contract which includes:
- Offer and acceptance
- Intention to create legal obligation
- Consideration
- Competency to contract
- Free consent
- Lawful object
- The agreement must not be expressly declared to be void- eg: an agreement in restraint of trade/ marriage etc.
- The terms of the agreement must not be vague or uncertain
- The agreement must be capable of performance- An agreement to do an impossible act is void.
- Legal formalities
Example 5: A asks B to beat C promising to indemnify him against the consequences. The promise of A cannot be enforced. Suppose, B beats C and is fined `1000, B cannot claim this amount from A because the object of the agreement is unlawful.
A contract of Fire Insurance or Marine Insurance is always a contract of indemnity. But there is no contract of indemnity in case of contract of Life Insurance.
Rights of Indemnity—holder when sued (Section 125): The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor/indemnifier—
- all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;
- all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit;
- all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.
Analysis:
We can understand from the above provisions that, in a contract of indemnity, the promisee i.e., indemnity- holder acting within the scope of his authority is entitled to recover from the promisor i.e., indemnifier the following rights:
- all damages which he may be compelled to pay in any suit
- all costs which he may have been compelled to pay in bringing/ defending the suit and
- all sums which he may have paid under the terms of any compromise of suit.
It may be understood that the rights contemplated under section 125 are not exhaustive. The indemnity holder/ indemnified has other rights besides those mentioned above. If he has incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier to save him from the liability and to pay it off.
Please note that the Indian Contract Act is silent about the rights which the Indemnifier has on carrying out his promise to indemnify. But they are similar to the rights of a surety under section 141 of the Indian Contract Act.
When does the liability of an indemnifier commence?
Although the Indian Contract Act, 1872, is silent on the time of commencement of liability of indemnifier, however, on the basis of judicial pronouncements it can be stated that the liability of an indemnifier commences as soon as the liability of the indemnity-holder becomes absolute and certain. This principle has been followed by the courts in several cases.
Example 6: A promises to compensate X for any loss that he may suffer by filling a suit against Y. The court orders X to pay Y damages of Rs. 10000. As the loss has become certain, X may claim the amount of loss from A and pass it to Y.
3. CONTRACT OF GUARANTEE
“Contract of guarantee”, “surety”, “principal debtor” and “creditor” [Section 126]
Contract of guarantee: A contract of guarantee is a contract to perform the promise made or discharge the liability, of a third person in case of his default.
Three parties are involved in a contract of guarantee
- Surety- person who gives the guarantee
- Principal debtor- person in respect of whose default the guarantee is given
- Creditor- person to whom the gurantee is given
Example 7: When A requests B to lend ` 10,000 to C and guarantees that C will repay the amount within the agreed time and that on C falling to do so, he (A) will himself pay to B, there is a contract of guarantee.
Here, B is the creditor, C the principal debtor and A the surety.
Example 8: Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC Housing in the event of ‘A’ failing to repay, it is a contract of guarantee.
Example 9: X and Y go into a car showroom where X says to the dealer to supply latest model of Wagon R to Y, and agrees that if Y fails to pay he will. In case of Y’s failure to pay, the car showroom will recover its money from X.
This is a contract of guarantee because X promises to discharge the liability of Y in case of his defaults.
Analysis
From the definition, it can be analysed that, Guarantee is a promise to pay a debt owed by a third person in case the latter does not pay.
Any guarantee given may be oral or written.
From the above definition, it is clear that a contract of guarantee is a tripartite agreement between principal debtor, creditor and surety. There are, in effect three contracts
- A principal contract between the principal debtor and the creditor.
- A secondary contract between the creditor and the surety.
- An implied contract between the surety and the principal debtor whereby principal debtor is under an obligation to indemnify the surety; if the surety is made to pay or perform.
The right of surety is not affected by the fact that the creditor has refused to sue the principal debtor or that he has not demanded the sum due from him.
ESSENTIAL FEATURES OF A GUARANTEE
The following are the requisites of a valid guarantee:-
- Principal Debt: The purpose of a guarantee being to secure the payment of a debt, the existence of recoverable debt is necessary. It is of the essence of a guarantee that there should be someone liable as a principal debtor and the surety undertakes to be liable on his default. If there is no principal debt, there can be no valid guarantee.
- Consideration: Like every other contract, a contract of guarantee should also be supported by some consideration. A guarantee without consideration is void, but there is no need for a direct consideration between the surety and the creditor.
As per Section 127 consideration received by the principal debtor is sufficient consideration to the surety for giving the guarantee, but past consideration is no consideration for the contract of guarantee. Even if the principal debtor is incompetent to contract, the guarantee is valid. But, if surety is incompetent to contract, the guarantee is void.
Example 10: 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. As per Section 127, there is a sufficient consideration for C’s promise. Therefore, the guarantee is valid.
Example 11: A sell and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise.
Example 12: A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.
- Existence of a liability: There must be an existing liability or a promise whose performance is guaranteed. Such liability or promise must be enforceable by law. The liability must be legally enforceable and not time barred.
- No misrepresentation or concealment (section 142 and 143): Any guarantee which has been obtained by the means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid (section 142)
Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances, is invalid (section 143).
Example 13: 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 his guarantee for B’s duly accounting. A does not acquaint C, with his previous conduct. B afterwards make default. The guarantee is invalid.
Example 14: A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay ` five per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety
- Writing not necessary: Section 126 expressly declares that a guarantee may be either oral or written.
- Joining of the other co-sureties (Section 144): Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join. That implies, the guarantee by a surety is not valid if a condition is imposed by a surety that some other person must also join as a co-surety, but such other person does not join as a co-surety.
4. TYPES OF GUARANTEE
Guarantee may be classified under two categories:
- Specific Guarantee- A guarantee which extends to a single debt/ specific transaction is called a specific guarantee. The surety’s liability comes to an end when the guaranteed debt is duly discharged or the promise is duly performed.
Example 15: A guarantees payment to B of the price of the five bags of rice to be delivered by B to C and to be paid for in a month. B delivers five bags to C, C pays for them. This is a contract for specific guarantee because A intended to guarantee only for the payment of price of the first five bags of rice to be delivered one time [Kay v Groves]
- Continuing Guarantee [Section 129] - A guarantee which extends to a series of transaction is called a continuing guarantee. A surety’s liability continues until the revocation of the guarantee.
The essence of continuing guarantee is that it applies not to a specific number of transactions but to any number of transactions and makes the surety liable for the unpaid balance at the end of the guarantee.
Example 16: On A’s recommendation B, a wealthy landlord employs C as his estate manager. It was the duty of C to collect rent on 1st of every month from the tenant of B and remit the same to B before 5th of every month. A, guarantee this arrangement and promises to make good any default made by C. This is a contract of continuing guarantee.
Example 17: A guarantees payment to B, a tea-dealer, to the amount of 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of 100, and C pays B for it. Afterwards B supplies C with tea to the value of 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of 100.
Example 18: A guarantees payment to B of the price of five sacks of 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 B delivers four sacks to C, which C 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.
In the continuing guarantee, the liability of surety continues till the performance or the discharge of all the transactions entered into or the guarantee is withdrawn.
5. DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEE
| Point of distinction |
Contract of Indemnity |
Contract of Guarantee |
| Number of party/parties to the contract |
There are only two parties namely the indemnifier [promisor] and the indemnified [promisee] |
There are three parties creditor, principal debtor and surety |
| Nature of liability |
The liabilty of the indemnifier is primary and unconditional |
The liabilty of the surety is econdary and conditional as the primary liability is that of the principal debtor |
| Time of liability |
The liability of the indemifier arises only on the happening of a contigency |
The liability arises only on the non-performance of an existing promise or non-payment of an existing debt |
| Time to Act |
The indemnifier need not act at the request of indemnity holder |
The suret acts at the request of principal debtor |
| Right to sue third party |
Indemnifier cannot sue a third party for loss in his own anme as there is no pivity of contract. Such a right would arise only if there is an assignment in his favour |
Surety can proceed against principal debtor in his own right because he gets all the right of a creditor after discharging the debts |
| Purpose |
Reimbursement of loss |
For the security of the creditor |
| Competency to contract |
All parties must be competent to contract |
In the case of a contract of guarantee, where a minor is principal debtor, the contract is still valid |
6. NATURE AND EXTENT OF SURETY’S LIABILITY [SECTION 128]
The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. [Section 128]
Analysis:
- The term “co-extensive with that of principal debtor” means that the surety is liable for what the principal debtor is liable. However, the liability of the surety may be made less than that of the principal debtor by an express contract to that effect.
- The liability of a surety arises only on default by the principal debtor. But as soon as the principal debtor defaults, the liability of the surety begins and runs co-extensive with the liability of the principal debtor, in the sense that the surety will be liable for all those sums for which the principal debtor is liable. If there is a condition precedent for surety’s liability, the surety would be liable only when such condition is fulfilled. A partial recognition of this principal is found in Section 144 (Joining of co surety)
- Where a debtor cannot be held liable on account of any defect in the document, the liability of the surety also ceases.
- Surety’s liability continues even if the principal debtor has not been sued or is omitted from being sued. In other words, a creditor may choose to proceed against a surety first, unless there is an agreement to the contrary.
Example 19: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.
Nature of Surety’s liability can be summed up as:
- Liability of surety is of secondary nature as he is liable only on default of principal debtor.
- His liability arises immediately on the default by the principal debtor.
- The creditor has a right to sue the surety directly without first proceeding against principal debtor.
7. LIABILITY OF TWO PERSONS, PRIMARILY LIABLE, NOT AFFECTED BY ARRANGEMENT BETWEEN THEM THAT ONE SHALL BE SURETY ON OTHER’S DEFAULT.
Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence. (Section 132)
Example 20: A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note.
8. DISCHARGE OF A SURETY
A surety is said to be discharged when his liability as surety comes to an end. The various modes of discharge of surety are discussed below:
- By revocation of the contract of guarantee.
- By the conduct of the creditor, or
- By the invalidation of the contract of guarantee.
By revocation of the Contract of Guarantee
- Revocation of continuing guarantee by Notice (Section 130): The continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditors. Once the guarantee is revoked, the surety is not liable for any future transaction however he is liable for all the transactions that happened before the notice was given.
A specific guarantee can be revoked only if liability to principal debtor has not accrued.
Example 21: Arun promises to pay Rama for all groceries bought by Carol for a period of 12 months if Carol fails to pay. In the next three months, Carol buys ` 2000/- worth of groceries. After 3 months, Arun revokes the guarantee by giving a notice to Rama. Carol further purchases ` 1000 of groceries. Carol fails to pay. Arun is not liable for ` 1000/- of purchase that was made after the notice but he is liable for ` 2000/- of purchase made before the notice.
Example 22: A guarantees to B, to the extent of 100,000, that C shall pay all the bills that B shall draw upon him. B draws the bill upon C. C accepts the bill. A gives notice of revocation after the bill is drawn and accepted. C dishonors the bill at maturity. A is liable upon his guarantee.
Example 23: X gives guarantee to the extent of 50,000 for the loans given from time to time by A to B. A gave a loan of 10,000 to B. Afterwards, X gives notice of revocation. X is discharged from all liability to A for any loan granted after the revocation of guarantee but he is liable to A for ` 10,000 on default of B.
- Revocation of continuing guarantee by surety’s death (Section 131): In the absence of any contract to the contrary, the death of surety operates as a revocation of a continuing guarantee as to the future transactions taking place after the death of surety. However, the surety’s estate remains liable for the past transactions which have already taken place before the death of the surety.
- By novation [Section 62]: The surety under original contract is discharged if a fresh contract is entered into either between the same parties or between the other parties, the consideration being the mutual discharge of the old contract.
By conduct of the creditor
- By variance in terms of contract (Section 133): Where there is any variance in the terms of contract between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect of all transactions taking place subsequent to such variance.
Example 24: A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.
Example 25: A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.
Example 26: C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for B’s duly accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B.
Example 27: A gives to C a continuing guarantee to the extent of 3,00,000 for any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payments shall be applied to the then existing debts between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement.
Example 28: C contracts to lend B 5,00,000 on the 1st March. A guarantees repayment. C pays the 5,00,000 to B on the 1st January. A is discharged from his liability, as the contract has been varied, in as much as C might sue B for the money before the 1st March.
Variation which is not substantial or material or which is beneficial to the surety will not discharge him of his liability. In M.S Anirudhan v Thomco’s Bank Ltd. AIR 1963 SC 746, the surety guaranteed the repayment of loan provided by the bank to the principal debtor of only upto 25,000. Subsequently, since the bank was willing to provide loan only upto 20,000, the principal debtor reduced the amount to 20,000 in the guarantee form and without intimation to the surety gave it to the bank which was then accepted. On default by the principal debtor, the court held that the surety’s liability was not discharged as the alteration was beneficial to him and not substantial.
- By release or discharge of principal debtor (Section 134): The surety is discharged if the creditor:
i. enters into a fresh/ new contract with principal debtor; by which the principal debtor is released, or
ii. does any act or omission, the legal consequence of which is the discharge of the principal debtor.
Example 29: A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his suretyship.
Example 30: A gives a guarantee to C for goods to be delivered to B. Later on, B contracts with C to assign his property to C in lieu of the debt. B is discharged of his liability and A is discharged of his liability.
- Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor [Sector 135]: A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or promises not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.
i. Composition: If the creditor makes a composition with the principal debtor, without consulting the surety, the latter is discharged. Composition inevitably involves variation of the original contract, and, therefore, the surety is discharged.
ii. Promise to give time: When the time for the payment of the guaranteed debt comes, the surety has the right to require the principal debtor to pay off the debt. Accordingly, it is one of the duties of the creditor towards the surety not to allow the principal debtor more time for payment.
iii. Promise not to sue: If the creditor under an agreement with the principal debtor promises not to sue him, the surety is discharged. The main reason is that the surety is entitled at any time to require the creditor to call upon the principal debtor to pay off the debt when it is due and this right is positively violated when the creditor promises not to sue the principal debtor.
Cases where surety not discharged
i. Surety not discharged when agreement made with third person to give time to principal debtor [Section 136]: Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged.
Example 31: C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B. A is not discharged.
ii. Creditor’s forbearance to sue does not discharge surety [Section 137]: Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not in the absence of any provision in the guarantee to the contrary, discharge the surety.
Example 32: B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship.
- Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy [Section 139]: If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged. It is the plain duty of the creditor not to do anything inconsistent with the rights of the surety. A surety is entitled after paying off the creditor, to his indemnity from the principal debtor. If the creditors act or omission deprives the surety of the benefit of this remedy, the surety is discharged.
In a case before the Supreme Court of India, “A bank granted a loan on the security of the stock in the godown. The loan was also guaranteed by the surety. The goods were lost from the godown on account of the negligence of the bank officials. The surety was discharged to the extent of the value of the stock so lost.” [State bank of Saurashtra V Chitranjan Rangnath Raja (1980) 4 SCC 516]
Example 33: C contracts with B to build a ship the payment of which is to be made in installments at various stages of completion. A guarantee's C's performance. B prepays last two installments. A is discharged of his liability.. A is discharged by this prepayment.
Example 34: A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part that he will, at least once a month, see that M make up the cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee.
By the invalidation of the contract of guarantee
- Guarantee obtained by misrepresentation invalid [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.
- Guarantee obtained by concealment invalid [Section 143]: Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
Example 35: A engages B as a 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 his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
Example 36: A guarantees to C payment for iron to be supplied by him to B for the amount of ` 2,00,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.
- Guarantee on contract that creditor shall not act on it until co-surety joins (Section 144): Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co- surety, the guarantee is not valid if that other person does not join.
9. RIGHTS OF A SURETY
The surety enjoys the following rights against the creditor:
- Rights against the creditor,
- Rights against the principal debtor,
- Rights against co-sureties.
Right against the principal debtor
- Rights of subrogation [Section 140]: Where, a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
This right is known as right of subrogation. It means that on payment of the guaranteed debt, or performance of the guaranteed duty, the surety steps into the shoes of the creditor.
- Implied promise to indemnify surety [Section 145]: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but not sums which he paid wrongfully.
Example 37: B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt.
Example 38: B is indebted to C and A is surety for the debt. Upon default, C sues A. A defends the suit on reasonable grounds but is compelled to pay the amount. A is entitled to recover from B the cost as well as the principal debt.
In the same case above, if A did not have reasonable grounds for defence, A would still be entitled to recover principal debt from B but not any other costs.
Example 39: A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2,00,000 rupees, but obtains from A payment of the sum of 2,00,000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.
Right against the Creditor
Surety’s right to benefit of creditor’s securities [Section 141]: A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
Example 40: C advances to B, his tenant, 2,00,000 rupees on the guarantee of A. C has also a further security for the 2,00,000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.
Example 41: C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged.
Example 42: A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives the up the further security, A is not discharged.
Right to set off: If the creditor sues the surety, for payment of principal debtor’s liability, the surety may have the benefit of the set off, if any, that the principal debtor had against the creditor.
Right to share reduction: The surety has right to claim proportionate reduction in his liability if the principal debtor becomes insolvent.
Rights against co-sureties
“Co-sureties (meaning)- When the same debt or duty is guaranteed by two or more persons, such persons are called co-sureties”
- Co-sureties liable to contribute equally (Section 146): Equality of burden is the basis of Co-suretyship. This is contained in section 146 which states that “when two or more persons are co-sureties for the same debt, or duty, either jointly, or severally and whether under the same or different contracts and whether with or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor”.
Example 43: A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E makes default in payment. A, B and C are liable, as between themselves, to pay 1,00,000 rupees each.
Example 44: A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the extent of one- half. E makes default in payment. As between the sureties, A is liable to pay 25,000 rupees, B 25,000 rupees, and C 50,000 rupees.
- Liability of co-sureties bound in different sums (Section 147): The principal of equal contribution is, however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.
Example 45: A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 3,00,000 rupees. A, B and C are each liable to pay 1,00,000 rupees.
Example 46: A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 4,00,000 rupees; A is liable to pay 1,00,000 rupees, and B and C 1,50,000 rupees each.
Example 47: A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 7,00,000 rupees. A, B and C have to pay each the full penalty of his bond.
UNIT 2 : BAILMENT AND PLEDGE
1. WHAT IS BAILMENT?
The word “Bailment” has been derived from the French word “ballier” which means “to deliver”. Bailment etymologically means ‘handing over’ or ‘change of possession’.
As per Section 148 of the Act, bailment is the delivery of goods by one person to another for some purpose, upon a contract, that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.
Parties to bailment:
- Bailor: The person delivering the goods.
- Bailee: The person to whom the goods are delivered.
Example 1: Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the bailee.
Example 2: X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. It is contract for bailment.
Example 3: Goods given to a friend for his own use, without any charge.
Example 4: X delivers goods to blue dart for carriage.
Analysis:
The essential elements of a contract of bailment are—
- Contract: Bailment is based upon a contract. The contract may be express or implied. No consideration is necessary to create a valid contract of bailment.
- Delivery of goods: It involves the delivery of goods from one person to another for some purposes. Bailment is only for moveable goods and never for immovable goods or money. The delivery of the possession of goods is of the following kinds:
i. Actual Delivery: When goods are physically handed over to the bailee by the bailor. Eg: delivery of a car for repair to workshop
ii. Constructive Delivery: Where delivery is made by doing anything that has the effect of putting goods in the possession of the bailee or of any person authorized to hold them on his behalf. Eg: Delivery of the key of a car to a workshop dealer for repair of the car.
- Purpose: The goods are delivered for some purpose. The purpose may be express or implied.
- Possession: In bailment, possession of goods changes. Change of possession can happen by physical delivery or by any action which has the effect of placing the goods in the possession of bailee. The change of possession does not lead to change of ownership. In bailment, bailor continues to be the owner of goods. Where a person is in custody without possession he does not become a bailee.
For example, servant of a master who is in custody of goods of the master does not become a bailee.
Similarly, depositing ornaments in a bank locker is not bailment, because ornaments are kept in a locker whose key are still with the owner and not with the bank. The ornaments are in possession of the owner though kept in a locker at the bank.
- Return of goods: Bailee is obliged to return the goods physically to the bailor. The goods should be returned in the same form as given or may be altered as per bailor’s direction. It should be noted that exchange of goods should not be allowed. The bailee cannot deliver some other goods, even not those of higher value.
Deposit of money in a bank is not bailment since the money returned by the bank would not be identical currency notes.
Different forms of Bailment: Following are the popular forms of bailment:
- Delivery of goods by one person to another to be held for the bailor’s use.
- Goods given to a friend for his own use without any charge.
- Hiring of goods.
- Delivering goods to a creditor to serve as security for a loan.
- Delivering goods for repair with or without remuneration.
- Delivering goods for carriage.
Note: On the basis of reward, bailment can be classified into two types:
- Gratuitous Bailment: The word gratuitous means free of charge. So a gratuitous bailment is one when the provider of service does it gratuitously i.e. free of charge. Such bailment would be either for the exclusive benefits of bailor or bailee.
- Non-Gratuitous Bailment: Non gratuitous bailment means where both the parties get some benefit i.e. bailment for the benefit of both bailor & bailee
2. DUTIES OF A BAILOR
Duties of Bailor: The duties of bailor are spelt out in a number of Sections [Section 150, 158, 159, 164]. These are categorized under the following headings:
These are enumerated hereunder:
(i) Bailor’s duty to disclose faults in goods bailed [Section 150]:
- In case of gratuitous bailment: The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults.
Example 5: A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained.
- In case of non- gratuitous bailment: If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed
Example 6: A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is injured. B is responsible to A for the injury.
In Hyman & Wife v. Nye & Sons (1881), A hired from B a carriage along with a pair of horses and a driver for a specific journey. During the journey a bolt in the under-part of the carriage broke away. As a result of this, the carriage became upset and A was injured. It was held that B was liable to pay damages to A for the injury sustained by him. The court observed that it was the bailor’s duty to supply a carriage fit for the purpose for which it was hired.
Sometimes, the goods bailed are of dangerous nature (e.g., explosives). In such cases it is the duty of the bailor to disclose the nature of goods. [Great Northern Ry’ case (1932)]
(ii) Duty to pay necessary expenses [Section 158]:
- In case of Gratuitous bailment: Where, by the conditions of the bailment, the goods are to be kept or to be carried, or to have work done upon them by the bailee for the bailor, and the bailee is to receive no remuneration (gratuitous bailment), the bailor shall repay to the bailee the necessary expenses incurred by him and any extraordinary expenses incurred by him for the purpose of the bailment.
- In case of non-gratuitous bailment the bailor is liable to pay the extraordinary expenses incurred by the bailee.
Example 7: A hired a taxi from B for the purpose of going to Gurgaon from Noida, during the journey, a major defect occurred in the engine. A had to pay ` 5000 as repair charges. These are the extraordinary expenses and it is the bailor’s duty to bear such expenses. However, the usual and ordinary expenses for petrol, toll tax etc. are to be borne by the bailee itself.
(iii) Duty to indemnify the Bailee for premature termination [Section 159]: The bailor must compensate the bailee for the loss or damage suffered by the bailee that is in excess of the benefit received, where he had lent the goods gratuitously and decides to terminate the bailment before the expiry of the period of bailment.
(iv) Bailor’s responsibility to bailee [Section 164]: The bailor is responsible to the bailee for the following:
- Indemnify for any loss which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods or to give directions, respecting them (defective title in goods).
- It is the duty of the bailor to receive back the goods when the bailee returns them after the time of bailment has expired or the purpose of bailment has been accomplished. If the bailor refuses to take delivery of goods when it is offered at the proper time the bailee can claim compensation for all necessary expenses incurred for the safe custody.
Example 8: X delivered his car to S for five days for safe keeping. However, X did not take back the car for one month. In this case, S can claim the necessary expenses incurred by him for the custody of the car.
3. DUTIES OF A BAILEE
- Take reasonable care of the goods (Section 151 & 152): In all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take care of his own goods of the same bulk, quality and value, as the goods bailed.
Example 9: If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own locker at his house along with his own ornaments and if all the ornaments are lost/stolen in a riot ‘Y’ will not be responsible for the loss to ‘X’. If on the other hand ‘X’ specifically instructs ‘Y’ to keep them in a bank, but ‘Y’ keeps them at his residence, then ‘Y’ would be responsible for the loss [caused on account of riot].
Example 10: A deposited his goods in B’s warehouse. On account of unprecedented floods, a part of the goods were damaged. It was held that, B is not liable for the loss (Shanti Lal V. Takechand).
Exception: Bailee when not liable for loss, etc., of thing bailed [Section 152]: The bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken reasonable care as required under section 151.
- Not to make inconsistent use of goods (section 153 & 154): As per Section 154, if the bailee makes any use of the goods bailed, which is not according to the terms and conditions of the bailment, he is liable to compensate the bailor for any loss or destruction of goods.
Example 11: A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury done to the horse.
Example 12: ‘A’ hires a horse in Kolkata from B expressly to march to Varanasi. ‘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.
As per Section 153, a contract of bailment is voidable at the option of the bailor, if the bailee does not use the goods according to the terms and conditions of bailment.
Example 13: A lends to B, a horse for his own riding. B gives the horse to C for riding. This contract is voidable at the option of A, bailor.
- Not to mix the goods (Section 155, 156 and 157):
i. If the Bailee, mixes the goods bailed with his own goods, with the consent of the bailor, both the parties shall have an interest in proportion to their respective shares in the mixture thus produced (Section 155).
ii. If the bailee, without the consent of the bailor, mixes the goods bailed with his own goods and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expense of separation or division and any damage arising from the mixture (Section 156).
Example 14: 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 expenses incurred in the separation of the bales, and any other incidental damage.
iii. If the bailee, without the consent of the bailor mixes the goods of the bailor with his own goods in such a manner that it is impossible to separate the goods bailed from the other goods and to deliver them back, the bailor is entitled to be compensated by the bailee for loss of the goods (Section 157).
Example 15: A bails a barrel of Cape flour worth ` 4500 to B. B, without A’s consent, mixes the flour with country flour of his own, worth only ` 2500 a barrel. B must compensate A for the loss of his flour.
- Return the goods (Section 160 & 161): It is the duty of bailee to return, or deliver according to the bailor’s directions, the goods bailed without demand, as soon as the time for which they were bailed, has expired, or the purpose for which they were bailed has been accomplished. [Section 160]
If, by the default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. [Section 161]
Example 16: X delivered books to Y to be bound. Y promised to return the books within a reasonable time. X pressed for the return of the book. But Y, failed to deliver them back even after the expiry of reasonable time. Subsequently the books were burnt in an accidental fire at the premises of Y. In this case Y was held liable for the loss.
- Return an accretion from the Goods [Section 163]: In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed.
Example 17: A leaves a cow in the custody of B. The cow gives birth to a calf. B is bound to deliver the calf along with the cow to A.
- Not to setup Adverse Title: Bailee must not set up a title adverse to that of the bailor. He must hold the goods on behalf of and for the bailor. He cannot deny the title of the bailor.
4. RIGHTS OF A BAILOR
Rights of Bailor: The following are the rights of bailor:-
- Right to terminate the bailment [Section 153]: A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.
Termination of bailment may take place in the following circumstances:
- Right to demand back the goods (Section 159): When the goods are lent gratuitously, the bailor can demand back the goods at any time even before the expiry of the time fixed or the achievement of the object.
Example 18: A, while going out of station delivered his ornaments to B for safe custody for one month. But A returned to station after one week. He may demand the return of his ornaments even though the time of one month has not expired.
However, due to the premature return of the goods, if the bailee suffers any loss, which is more than the benefit actually obtained by him from the use of the goods bailed, the bailor has to compensate the bailee.
- Right to file a suit against a wrong doer [Section 180 and section 181]
- Right to sue the bailee: The bailor has a right to sue the bailee for enforcing all the liabilities and duties of him.
- Right to compensation: If any damage is caused to the goods bailed because of the unauthorized use of the goods or unauthorized mixing of the goods, the bailor has a right to claim compensation for the same.
5. RIGHTS OF A BAILEE
Rights of bailee: The following are the rights of the bailee:-
- Right to Deliver the Goods to any one of the joint bailors [Section 165]
If several joint owners bailed the goods, the bailee has a right to deliver them to any one of the joint owners unless there was a contract to the contrary.
Example 19: A, B and C are the joint owners of a harvesting combine. They delivered it on hire to D for one month. After the expiry of one month, D may return the “combine” to any one of the joint owners namely, A, B or C.
- Right to indemnity (Section 166): Bailee is entitled to be indemnified by the bailor for any loss arising to him by reasons that the bailor was not entitled to make the bailment or to receive back the goods or to give directions in respect to them. 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 shall not be responsible to the owner in respect of such delivery. Bailee can also claim all the necessary expenses incurred by him for the purpose of gratuitous bailment.
- Right to claim compensation in case of faulty goods (Section 150): A bailee is entitled to receive compensation from the bailor or any loss caused to him due to the failure of the bailor to disclose any faults in the goods known to him. If the bailment is for hire, the bailor will be liable to compensate even though he was not aware of the existence of such faults.
- Right to claim necessary expenses (Section 158): In case of gratuitous bailment, the bailor shall repay to the bailee the necessary expenses incurred by him and any extraordinary expenses incurred by him for the purpose of the bailment.
- Right to Apply to Court to Decide the Title to the Goods [Section 167]: If the goods bailed are claimed by the person other than the bailor, the bailee may apply to the court to stop its delivery and to decide the title to the goods.
Example 20: A, a dealer in T.V. delivered a T.V. to B for using in summer vacation. Subsequently, C claimed that the T.V. belonged to him as it was delivered only for repairs, to A and thus, B should deliver it to him. In this case, B may apply to the Court to decide the question of ownership of the T.V. so that he may deliver it to the right owner.
- Right of particular lien for payment of services [Section 170]:
- Right of general lien (Sec. 171):
6. RIGHTS OF BAILOR AND BAILEE AGAINST ANY WRONG DOER (THIRD PARTY)
Suit by bailor & bailee against wrong doers [Section 180]: If a third person wrongfully deprives the bailee of the use or possession of the goods bailed, or does them any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made; and either the bailor or the bailee may bring a suit against a third person for such deprivation or injury.
Apportionment of relief or compensation obtained by such suits [Section 181]: Whatever is obtained by way of relief or compensation in any such suit shall, as between the bailor and the bailee, be dealt with according to their respective interests
7. TERMINATION OF BAILMENT
A contract of bailment shall terminate in the following circumstances:
- On expiry of stipulated period: If the goods were given for a stipulated period, the contract of bailment shall terminate after the expiry of such period.
- On fulfillment of the purpose: If the goods were delivered for a specific purpose, a bailment shall terminate on the fulfillment of that purpose.
- By Notice:
(a) Where the bailee acts in a manner which is inconsistent with the terms of the bailment, the bailor can always terminate the contract of bailment by giving a notice to the bailee.
(b) A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the bailee. However, the termination should not cause loss to the bailee in excess of the benefit derived by him. In case the loss exceeds the benefit derived by the bailee, the bailor must compensate the bailee for such a loss (Sec. 159).
- By death: A gratuitous bailment terminates upon the death of either the bailor or the bailee.
- Destruction of the subject matter: A bailment is terminated if the subject matter of the bailment is destroyed or there is a change is in the nature of goods which makes it impossible to be used for the purpose of bailment.
8. FINDER OF LOST GOODS
Right of finder of lost goods; may sue for specific reward offered [Section 168]: A person who finds some goods which do not belong to him, is called the finder of the goods. It is the duty of the finder of goods to find the true owner and surrender the goods to him. However, the finder of goods has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him in finding the owner and preserving the goods found. But he has a right to retain the goods against the owner until he receives such compensation; and, where the owner has offered a specific reward on the lost goods, the finder may sue the owner for such reward, and may retain the goods until then.
Analysis: The ‘finder of lost goods’ can ask for reimbursement of expenditure incurred for preserving the goods and searching the true owner. If the real owner refuses to pay compensation, the ‘finder’ cannot sue but retain the goods so found.
Further where the real owner has announced any reward, the finder is entitled to receive the reward. The right to collect the reward is a primary and a superior right even more than the right to seek reimbursement of expenditure.
When finder of thing commonly on sale may sell it [Section 169]: When a thing which is commonly the subject of sale if lost, if the owner cannot with reasonable diligence be found, or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it—
- when the thing is in danger of perishing or of losing the greater part of its value, or
- when the lawful charges of the finder in respect of the thing found amount to two-thirds of its value.
Analysis: The finder though has no right to sell the goods found in the normal course, however, he may sell the goods if the real owner cannot be found with reasonable efforts or if the owner refuses to pay the lawful charges subject to the following conditions:
- when the article is in danger of perishing and losing the greater part of the value or
- when the lawful charges of the finder amounts to two-third or more of the value of the article found.
9. GENERAL LIEN AND PARTICULAR LIEN
Bailee’s particular lien [Section 170]: 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 remuneration for the services he has rendered in respect of them.
Example 21: A delivers a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is entitled to retain the stone till he is paid for the services he has rendered.
Example 22: A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished, and to give a three months’ credit for the price. B is not entitled to retain the coat until he is paid.
Analysis: In accordance with the purpose of bailment if the bailee by his skill or labour improves the goods bailed, he is entitled for remuneration for such services. Towards such remuneration, the bailee can retain the goods bailed if the bailor refuses to pay the remuneration. Such a right to retain the goods bailed is the right of particular lien. He however does not have the right to sue.
Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the bailor. In such a case the particular lien may be waived. The particular lien is also lost if the bailee does not complete the work within the time agreed.
General lien of bankers, factors, wharfingers, attorneys and policy brokers [Section 171]: 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 the effect.
Analysis: Bankers, factors, wharfingers, policy brokers and attorneys of law have a general lien in respect of goods which come into their possession during the course of their profession.
For instance, a banker enjoys the right of a general lien on cash, cheques, bills of exchange and securities deposited with him for any amounts due to him.
Example 23: ‘A’ borrows 500/- from the bank without security and subsequently again borrows another 1000/- but with security of say certain jewellery. In this illustration, even where ‘A’ has returned 1000/- being the second loan, the banker can retain the jewellery given as security to the second loan towards the first loan which is yet to be repaid.
Under the right of general lien the goods cannot be sold but can only be retained for dues. The right of lien can be waived through a contract.
Difference between Bailee’s General and Particular Lien
| General lien |
Particular lien |
| Section 171 of the Indian Contract Act, 1872 confer on Bailee the rights of General Liean |
Section 170 of the Indian Contract Act, 1872 confers on the bailee, the right of paricular lien |
| General liean alludes to therights to keep possessions of goods belonging to other against general balance of account |
Particular lien implies a right of the bailee to retain specific goods bailed for non-payment of amount |
| A general lien is not automatic but is recognized through on agreement. It is exercised by the bailee only by name |
It is automatic |
| It can be exercised against goods even without involvement of labor or skill |
It comes into play only when some labor or skill is involved has been expended on the goods, resulting in an increase in value of good |
| Only such persons as are specified under section 171. e.g., Bankers, factors, wharfinfers, policy brokers etc. are entitled to general lien |
Bailee, finder of goods, pledgee, unpaid seller, agent, partner etc. are entitled to particular lien |
10. PLEDGE
“Pledge”, “pawnor” and “pawnee” defined [Section 172]: The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”.
Analysis: Pledge is a variety or species of bailment. It is bailment of goods as a security for payment of debt or performance of a promise. The person who pledges [or bails] is known as pledger or pawnor. The person to whom the goods are delivered is known as pledgee or pawnee. In pledge, there is no change in ownership of the property. Under exceptional circumstances, the pledgee has a right to sell the property pledged.
Section 172 to 182 of the Indian Contract Act, 1872 deal with the contract of pledge.
Example 24: A lends money to B against the security of jewellery deposited by B with him. This bailment of jewellery is a pledge as security for lending the money. B is a pawnor/ pledger and A is a pawnee/ pledgee.
ESSENTIALS OF CONTRACT OF PLEDGE: Since pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the pledge. Apart from that, the other essentials of the pledge are:
- There shall be a bailment for security against payment or performance of the promise
- The subject matter of pledge is goods
- Goods pledged for shall be in existence
- There shall be the delivery of goods from pledger to pledgee
RIGHTS OF A PAWNEE/ PLEDGEE: Rights of Pawnee can be classified as under the following headings:
- Right to retain the pledged goods [Section 173]: The pawnee may retain the goods pledged, not only for 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 the goods pledged.
Example 25: Where ‘M’ pledges stock of goods for certain loan from a bank, the bank has a right to retain the stock not only for adjustment of the loan but also for payment of interest.
- Right to retention of subsequent debts [Section 174]: The Pawnee can retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged. But he can exercise this right only when there is a contract to this effect. i.e. a right to retain goods for subsequent debts can be exercised only when it has been provided for in a contract to this effect.
- Pawnee’s right to extraordinary expenses incurred [Section 175]: The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have the right to retain the goods, but he can sue the pawnor for such expenses.
- Pawnee’s right where pawnor makes default [Section 176]: If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee has the following rights:
i. the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or
ii. he may sell the thing pledged on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.
Rights of a pawnor
As the bailor of goods pawnor has all the rights of the bailor. Along with that he also has the right of redemption to the pledged goods which is enumerated under section 177 of the Act.
Right to redeem [Section 177]: If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.
Duties of the Pawnee
Pawnee has the following duties:
- Duty to take reasonable care of the pledged goods.
- Duty not to make unauthorized use of pledged goods.
- Duty to return the goods when the debt has been repaid or the promise has been performed.
- Duty not to mix his own goods with goods pledged.
- Duty not to do any act which is inconsistent with the terms of the pledge.
- Duty to return accretion to the goods, if any.
Duties of a Pawnor
Pawnor has the following duties:
- The pawnor is liable to pay the debt or perform the promise as the case may be.
- It is the duty of the pawnor to compensate the pawnee for any extraordinary expenses incurred by him for preserving the goods pawned.
- It is the duty of the pawnor to disclose all the faults which may put the pawnee under extraordinary risks.
- If loss occurs to the pawnee due to defect in pawnor’s title to the goods, the pawnor must indemnify the pawnee.
- If the pawnee sells the good due to default by the pawnor, the pawnor must pay the deficit.
11. PLEDGE BY NON-OWNERS
Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf, who can pledge the goods. But in order to facilitate mercantile transactions, the law has recognised certain exceptions. These exceptions are for bonafide pledges made by those persons who are not the actual owners of the goods, but in whose possession the goods have been left.
- Pledge by mercantile agent [Section 178]: Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the Pawnor has no authority to pledge.
Explanation: In this section, the expressions ‘mercantile agent and documents of title’ shall have the meanings assigned to them in the Sale of Goods Act, 1930.
Analysis: Though generally only a owner of goods can pledge, the Act recognizes the right of certain mercantile agents to pledge provided that the mercantile agent should be in custody of goods with the consent of the owner. Such a pledge done in the ordinary course of business is valid. Pledge in this case can be effected through pledge of documents like a bill of lading or a railway receipt etc.
The necessary conditions of validity under the section 178 are as follows:
(i) The person pledging the goods must be a mercantile agent,
(ii) Mercantile agent must be in possession either of the goods or the documents of title to goods,
(iii) Such possession must be with the consent of the owner. If possession has been obtained dishonestly or by a trick, a valid pledge cannot be effected,
(iv) Pledge must have been made by the mercantile agent, when acting in the ordinary course of business of a mercantile agent,
(v) The pledgee must act in good faith;
(vi) The pledgee should have no notice of the pledger's defect of title. If the pledgee knows that the pledger has a defective title, the pledge will not be valid.
- Pledge by person in possession under voidable contract [Section 178A]: When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A (contracts where consent has been obtained by fraud, coercion, misrepresentation, undue influence), but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.
- Pledge where pawnor has only a limited interest [Section 179]: Where a person pledges goods in which he has only a limited interest i.e. pawnor is not the absolute owner of goods, the pledge is valid to the extent of that interest.
Example 26: Mr. X finds a defective mobile phone lying on the road. He picks it up, gets it repaired for Rs. 5000. He later pledges the mobile phone for Rs. 2000. The true owner can recover the mobile phone only on paying Rs. 5000
- Pledge by a co-owner in possession: Where the goods are owned by many person and with the consent of other owners, the goods are left in the possession of one of the co-owners. Such a co-owner may make a valid pledge of the goods in his possession.
- Pledge by seller or buyer in possession: A seller, in whose possession, the goods have been left after sale or a buyer who with the consent of the seller, obtains possession of the goods, before sale, can make a valid pledge, provided the pawnee acts in good faith and he has no knowledge of the defect in title of the pawnor.
Example 27: A buys a cycle from B. But leaves the cycle with the seller. B then pledges the cycle with C, who does not know of sale to A, and acted in good faith. This is valid pledge.
12. DISTINCTION BETWEEN BAILMENT AND PLEDGE
| Basis of Distinction |
Bailment |
Pledge |
| Meaning |
Transfer of goods by one person to another for some specific purpose is known as bailment |
Transfer of goods from one person to another as security for repayment of debt is known as the pledge |
| Terms applicable |
The person delivering the goods under a contract of bailment is called as "Bailor"
The person to whom the goods are delivered under a contract of bailment is called as "Bailee" |
The person who delivers the good as security is called the "Pawnor"
The person to whom the goods are delivered as security is caled the "Pawnee" |
| Purpose |
Bailment may be made for any purpose (as specified in the contract of bailment, e.g.: for safe custody, for repairs, for processing of goods) |
Pledge is made for the purpose of delivering the goods as security for payment of a debt, or performance |
| Consideration |
The bailment may be made for consideration or without consideration |
Pledge is always made for a consideration |
| Right to sell the goods |
The bailee has no right to sell the goods even if the charges of bailment are not paid to him. The bailee's rights are limited to suing the bailor for his dues or to exercise lien on the goods bailed |
The pawnee has rights to sell the goods if the pawnor fails to redeem the goods |
| Right to use of goods |
Bailee can use the goods only for a purpose specified in the contract of bailment and not otherwise |
Pledgee or pawnee cannot use the goods pledged |
UNIT 3 : AGENCY
1. WHAT IS AGENCY?
The Indian Contract Act, 1872 does not define the word ‘Agency’. However, section 182 of the Indian Contract Act, 1872 defines Agent and Principal as:
Agent: means a person employed to do any act for another or to represent another in dealing with the third persons and
The principal: means a person for whom such act is done or who is so represented.
Test of Agency
- Whether the person has the capacity to bind the principal and make him answerable to the third party.
- Whether he can establish privity of contract between the principal and third parties.
If the answer to these questions is in affirmative (Yes), then there is a relationship of agency.
Thus, ‘Agency’ is a comprehensive word used to describe the relationship between one person and another, where the first mentioned person brings the second mentioned person into legal relation with others.
The Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e., he who acts through an agent is himself acting.
2. APPOINTMENT AND AUTHORITY OF AGENTS
Who may employ an agent: According to Section 183, “any person who has attained majority according to the law to which he is subject, and who is of sound mind, may employ an agent.” Thus, a minor or a person of unsound mind cannot appoint an agent.
Who may be an agent: Section 184 provides that “as between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained”.
Thus, according to Section 184 of the Act any person may become an agent i.e. even a minor or a person of unsound mind may become an agent and the principal shall be bound by his acts. But as a rule of caution, a minor or a person of unsound mind should not be appointed as an agent because he is incompetent to contract and in case of his misconduct or negligence, the principal shall not be able to proceed against him.
Example 1:
P appoints Q, a minor, to sell his car for not less than 2,50,000. Q sells it for 2,00,000. P will be held bound by the transaction and further shall have no right against Q for claiming the compensation for having not obeyed the instructions, since Q is a minor and a contract with a minor is ‘void-ab-initio’.
Consideration not necessary: According to Section 185, no consideration is necessary to create an agency. The acceptance of the office of an agent is regarded as a sufficient consideration for the appointment.
3. CREATION OF AGENCY
In the words of Desai J, of the Supreme Court of India “The relation of agency arises whenever one person called the agent has the authority to act on behalf of another called the principal and consents to act. The relationship has genesis in a contract”
The relationship of the principal and the agent may be created in any of the following ways —
The authority may be express or implied: According to Section 186, the authority of an agent may be express or implied.
Definitions of express and implied authority [Section 187]
- Express Authority: An authority is said to be express when it is given by words, spoken or written.
Example 2: A is residing in Delhi and he has a house in Kolkata. A authorizes B under a power of attorney, as caretaker of his house. Agency is created by express agreement.
Example 3: If a customer of a bank wishes to transact his banking business through an agent, the bank will require written evidence of the appointment of the agent and will normally ask to see the registered power of attorney appointing the agent.
- Implied Authority: An authority is said to be implied when it is to be inferred from the circumstances of the case, conduct of the parties and things spoken or written, or in the ordinary course of dealing, may be accounted from the circumstances of the case.
Example 4: If a person realises rent and gives it to the landlord, he impliedly acts for the landlord as an agent.
Example 5: A owns a shop in Selampur, living himself in Kolkata 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 of 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.
- Agency by Estoppel [Section 237]: An agency by estoppel is based on the principle of estoppel. The principle of estoppel lays down that “when one person by declaration (representation), act or omission has intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, he shall not be allowed to deny his previous statement or he shall be stopped to deny his previous statement or conduct”.
The agency by Estoppel is provided under section 237 of the Indian Contract Act. Section 237 states: “When an agent has without authority done acts or incurred obligations to third persons on behalf of his principal the principal is bound by such acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent's authority”.
According to section 237 of the Contract Act, an agency by estoppel may be created when following essentials are fulfilled:
1. the principal must have made a representation;
2. the representation may be express or implied;
3. The representation must state that the agent has an authority to do certain act although really he has no authority;
4. The principal must have induced the third person by such representation; and
5. The third person must have believed the representation and made the contract on the belief of such representation.
Example 6: A consigns goods to B for sale and gives him instructions not to sell below a fixed price. C being ignorant of B's instruction enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract. A cannot plead that he had given instructions to B to not sell the goods below certain price. An agency by estoppel is, consequently, deemed between A and B.
Example 7: If Piyal (the principal) has for several months permitted Sunil to buy goods on credit from Prasad and has paid for the goods bought by Sunil, Piyal cannot later refuse to pay Prasad who had supplied goods on credit to Sunil in the belief that he was Piyal’s agent and was buying the goods on behalf of Piyal. Piyal is estopped from now asserting that Sunil is not his agent because on earlier occasions he permitted Prasad to believe that Sunil was his agent and Prasad had acted in that belief.
- Necessity: An agency of necessity arises due to some emergent circumstances. In emergency a person is authorised to do what he cannot do in ordinary circumstances. Thus, where an agent is authorised to do certain act, and while doing such an act, an emergency arises, he acquires an extra-ordinary or special authority to prevent his principal from loss.
Example 8: Raja has a large farm on which Shyam is the caretaker. When Raja is in Canada, there is a huge fire on the farm. Shyam becomes an agent of necessity for Raja so as to save the property from being destroyed by fire. Raja (the principal) will be liable for any expenses, Shyam (his agent of necessity) incurred to put out the fire and save the farm from destruction during Raja’s absence from the country.
- Ratification: Rights of person as to acts done for him without his authority, Effect of ratification [Section 196]: 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 ratifies them, the same effects will follow as if they had been performed by his authority. In simple words, “Ratification” means approving a previous act or transaction. Ratification may be express or implied by the conduct of the person on whose behalf the act was done.
Example 9: X who is Y’s agent has on 10th January 2020 purchases goods from Z on credit without Y’s permission. After the purchase, on 20th January 2020, Y tells X that he will accept responsibility to pay for the purchases although at the time of purchase the agent had no authority to buy on credit. Y’s subsequent statement on 20th January 2020 amounts to a ratification of the agent’s (X’s) purchase of goods on 10th January 2020.
Essentials of a valid Ratification
- Ratification may be expressed or Implied [Section 197]: Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.
Example 10: 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.
Example 11: A, without B’s authority, lends B’s money to C. Afterwards B accepts interests on the money from C. B’s conduct implies a ratification of the loan.
- Knowledge requisite for valid ratification [Section 198]: No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective.
Example 12: A has an authority from P to buy certain goods at the market rate. He buys at a higher rate but P accepts the purchase. Afterwards P comes to know that the goods purchased by A for P belonged to A himself. The ratification is not binding on P.
If, however the alleged principal is prepared to take the risk of what the purported agent has done, he can choose to ratify without full knowledge of facts.
- Effect of ratifying unauthorized act forming part of a transaction [Section 199]: A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part. There can be ratification of an act in entirely or its rejection in entirely. The principal cannot ratify a part of the transaction which is beneficial to him and reject the rest.
- Ratification of unauthorized act cannot injure third person [Section 200]: 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. In other words, when the interest of third parties is affected, the principle of ratification does not apply. Ratification cannot relate back to the date of contract if third party has in the intervening time acquired rights.
Example 13: A, not being authorized thereto by B, demands on behalf of B, the delivery of a chattel, the property of B, from C, who is in possession of it. This demand cannot be ratified by B, so as to make C liable for damages for his refusal to deliver.
Example 14: A holds a lease from B, terminable on three months’ notice. C, an unauthorized person, gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.
- Ratification within reasonable time: Ratification must be made within a reasonable period of time.
- Communication of Ratification: Ratification must be communicated to the other party.
- Act to be ratified must be valid: Act to be ratified should not be void or illegal, for e.g. payment of dividend out of capital, forgery of signatures, any other criminal offence, or anything which is not permitted under law.
4. EXTENT OF AGENT’S AUTHORITY
The authority of an agent means his capacity to bind the principal to third parties. The agent can bind the principal only if he acts within the scope of his authority. The extent of an agent’s authority, whether expressed or implied is determined by:
- the nature of the act or the business he is appointed to do
- things which are incidental to the business or are usually done in the course of such business,
- the usage of trade or business.
Whatever be the nature or extent of the agent’s authority, it will always include the authority to do:
- every lawful thing necessary for the purpose of carrying it out,
- every lawful thing justified by various customs of trades,
- in an emergency, all such acts for the purpose of protecting the principal from loss as will be done by a person of ordinary prudence in his own case under similar circumstances.
The agent’s authority is governed by two principles, namely (a) in normal circumstances and (b) in emergency.
- Agent’s authority in normal circumstances [Section 188]: An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act.
An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business.
Example 15: A is employed by B, residing in London, to recover at Mumbai a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same.
Example 16: A constitutes B as his agent to carry on his business of a shipbuilder. B may purchase timber and other materials, and hire workmen, for the purposes of 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 purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied.
(i) Agent should not be a in a position or have any opportunity to communicate with his principal within the time available.
(ii) There should have been actual and definite commercial necessity for the agent to act promptly.
(iii) the agent should have acted bonafide and for the benefit of the principal.
(iv) the agent should have adopted the most reasonable and practicable course under the circumstances, and
(v) the agent must have been in possession of the goods belonging to his principal and which are the subject of contract.
Example 17: An agent who has authority for sale of goods may repair it if necessary.
Example 18: A consigns perishable goods to B at Srinagar, with directions to send them immediately to C at Tamilnadu. B may sell the good if they begin to perish before reaching its destination.
5. SUB-AGENTS
When agent cannot delegate [Section 190]: An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or from the nature of the agency, a sub-agent must, be employed.
“Sub-agent” defined [Section 191]: A “Sub-agent” is a person employed by, and acting under the control of, the original agent in the business of the agency.
Analysis: Sub agency refers to case where an agent appoints another agent. The appointment of sub agent is not lawful, because the agent is a delegatee and a delegatee cannot further delegate. This is based on the Latin principle “delegatus non potest delegare”.
A contract of agency is of a fiduciary character. It is based on the confidence reposed by the principal in the agent and that is why a delegatee cannot further delegate.
Exception where an agent can appoint Sub-agent:
- The appointment of a sub agent would be valid if the terms of appointment originally contemplated it.
- Sometimes customs of the trade may provide for appointment of sub agents.
In both these cases the sub agent would be treated as the agent of the principal.
- Where in the course of the agent’s employment, unforeseen emergency arise making it necessary for him to delegate the authority that was given to him by the principal.
Representation of principal by sub-agent properly appointed [Section 192]:
Where a sub-agent is properly appointed,
- the principal is, so far as regards third persons, is bound and responsible for the acts of sub-agent as if he were an agent originally appointed by the principal.
- Agents responsibility for sub agents: The agent is responsible to the principal for the acts of the sub-agent.
- Sub-agents liability to principal: The sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud or willful wrong.
Agent’s responsibility for sub-agent appointed without authority [Section 193]: Where an agent, without having authority to do so, has appointed a person to act as a sub-agent,
- the agent stands towards such person in the relation of a principal to an agent, and is responsible for his acts both to the principal and to third persons;
- the principal is not represented by or responsible for the acts of the sub agent, the sub agent is not responsible to the principal at all. He is answerable only to the agent.
Analysis:
- Where the sub-agent is properly appointed: Where a sub agent is properly appointed, the principal is bound by his acts and is therefore responsible to third parties as if he were an agent originally appointed by the principal.
Example 19: A, a carrier, agreed to carry 60 bags of cotton waste from Morvi to Bhavnagar by a truck. A asked B, another carrier, to carry the goods. The goods were damaged in transit. Held, A was liable even though it was proved that B was the carrier.
- In the case of appointment without authority: In case where the appointment of sub agent takes place without authority, the principal is not bound by the acts of sub agent and sub agent is not answerable to the principal. It is the agent who is the principal of sub agent. Where the sub- agent purportedly acts in the name of first principal, that first principal may ratify the act of sub agent. However if the sub agent acts in his own name or in the name of the agent who has without authority delegated to the sub agent the business which is in fact of the principal, the principal cannot ratify such acts of sub agent.
6. SUBSTITUTED AGENT
Substituted Agent is a person appointed by the agent to act for the principal, in the business of agency, with the knowledge and consent of the principal. Substituted agents are not sub agents. They are agents of the principal.
Relation between principal and person duly appointed by agent to act in business of agency [Section 194]: Where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub- agent, but an agent of the principal for such part of the business of the agency as is entrusted to him.
Example 20: A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A’s agent for the conduct of the sale.
Example 21: A authorizes B, a merchant in Kolkata, to recover the moneys due to A from C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co. for the recovery of the money. D is not a sub-agent, but is a solicitor for A.
Agent’s duty in naming such person [Section 195]: In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected.
Example 22: A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of good reputation to choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A.
Example 23: A consigns goods to B, a merchant, for sale. B in due course, employs an auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive the proceeds of the sale. The auctioneer afterwards becomes insolvent without having accounted for the proceeds. B is not responsible to A for the proceeds.
7. DIFFERENCE BETWEEN A SUB-AGENT AND A SUBSTITUTED AGENT
Both a sub-agent and a substituted agent are appointed by the agent. But, however, the following are the points of distinction between the two.
| S. no. |
Sub agent |
Substituted Agent |
| 1 |
A sub agent does his work under the control and directions of agent |
A substituted agent works under the instructions of the principal |
| 2 |
The agent not only appoints a sub agent but also delegates to him a part of his own duties |
The agent does not delegate any part of his task to a substituted agent |
| 3 |
There is no privity of contract betwwen the principal and the sub agent |
Privity of contract is established between a principal and a substituted agent |
| 4 |
The sub agent is responsible to the agent alone and is not generally responsible to the principal |
A substitutes\d agent is responsible to the principal and not to the original agent who appointed him |
| 5 |
The agent is responsible to the principal for the acts of the sub agent |
The agent is not responsible to the principal for the acts of the substituted agent |
| 6 |
The sub agent has no right of action against the principal for remuneration due to him |
The substituted agent can sue the principal for remuneration due to him |
| 7 |
Sub agents may be improperly appointed |
Substituted agents can never be improperly appointed |
| 8 |
The agent remains liable for the acts of the sub agent as long as the sub agency continues |
The agents duty ends once he has named the substitute agent |
8. DUTIES AND OBLIGATIONS OF AN AGENT
- Duty to execute mandate: The first and foremost duty of every agent is to carry out the mandate of his principal. He should perform the work for which he has been appointed. Any failure in this respect would make the agent absolutely responsible for the principal’s loss. In Pannalal Jankidas V Mohanlal, a commission agent purchased goods for his principal and stored them in a godown, pending their dispatch. The agent was under instruction to insure them. He actually charged the premium for insurance but failed to insure the goods. The goods were lost in an explosion on Bombay harbor. The agent was held liable to compensate the principal for his loss minus the amount received under the Bombay Explosion (Compensation) Ordinance, 1944.
- Duty to follow instructions or customs: According to Section 211 an agent is bound to conduct the business of his principal according to the direction given by the principal, or, in the absence of any such directions, according to the customs which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise and any loss is sustained by the Principal, he must indemnify him, and, if any profit accrues, he must account for it.
Example 24: A, an agent is engaged for managing the business of B, in which it is a custom to invest money at hand for interest. If A omits to make such investment he must indemnify B for the losses i.e. for the interest B would have obtained for such investment.
Example 25: B, a broker, in whose business it is not the custom to sell on credit, sells goods of A on credit to C. C, before payment, becomes insolvent. B will have to indemnify A for the losses.
- Duty of reasonable care and skill: According to section 212, an agent is bound to conduct the business of the principal with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill.
The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct, but not in respect of loss of damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.
Example 26: A, a merchant in Kolkata, has an agent, B, in London, to whom a sum of money is paid on A’s account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss- e.g. by variation of rate of exchange-but not further.
Example 27: A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual enquiries as to the solvency of B. B, at the time of such sale is insolvent. A must compensate his principal for the loss sustained by him.
Example 28: A, an insurance-broker, employed by B to effect an insurance on a ship, omits to see that the “usual clauses” are inserted in the policy. The ship is afterwards lost. In consequence of the omission nothing can be recovered from the underwriters. A is bound to make good the loss to B.
Example 29: A, a merchant in England, directs B, his agent at Mumbai, who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival the price of cotton rises. B is bound to make good to A the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise.
- Agent’s duty to communicate with principal [Section 214]: It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions.
- Duty to avoid conflict of interest (Duty not to deal on his own account):
Right of principal when agent deals, on his own account, in business of agency without principals consent: According to Section 215, if an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him.
Example 30: A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him.
Example 31: A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the discovery of the mine. A allow B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or accept the sale at his option.
Principals right to benefit gained by agent dealing on his account in business of agency- According to section 216, if an agent, without the knowledge of his principal deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.
Example 32: A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he gave for it.
- Duty not to make secret profits: It is the duty of an agent not to make any secret profit in the business of agency. His relationship with the principal is of fiduciary nature and this requires absolute good faith in the conduct of agency.
Secret Profit means any advantage obtained by the agent over and above his agreed remuneration and which he would not have been able to make but for his position as agent.
- Duty to render proper accounts [Section 213]: An agent is bound to render proper accounts to his principal on demand. Rendering accounts does not mean showing the accounts but the accounts supported by vouchers. (Anandprasad vs. Dwarkanath)
- Duty not to delegate: According to section 190, an agent cannot lawfully employ to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature of agency, a sub- agent, must be employed.
- Agent’s duty to pay sums received for principal [Section 218]: Subject to such deductions, the agent is bound to pay to his principal all sums received on his account.
- Duty not to use any confidential information received in the course of agency against the principal.
9. RIGHTS OF AN AGENT
(i) Right of retain out of sums received on principal’s account [Section 217]: This section empowers the agent to retain, out of any sums received on account of the principal in the business of the agency for the following payments:
- all moneys due to himself in respect of advances made
- in respect of expenses properly incurred by him in conducting such business
- such remuneration as may be payable to him for acting as agent.
The right can be exercised on any sums received on account of the principal in the business of agency.
(ii) Right to remuneration [Section 219]: The agent in the normal course is entitled for remuneration as per the contract. In the absence of any agreed amount of remuneration, he is entitled for usual remuneration which is customary in the business. However, an agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted [Section 220].
Example 33: A employs B to recover 1,00,000 from C, and invest it in securities that give good returns. B recovers the amount and lays out 90,000 on good securities, but lays out 10,000 on securities which he ought to provide poor returns, whereby A loses 2,000. B is entitled to remuneration for recovering the 1,00,000 and for investing the 90,000. He is not entitled to any remuneration for investing the 10,000, and he must indemnify A for 2000.
Example 34: A employs B to recover 1,00,000 from C. Because of B’s misconduct the money is not recovered. B is entitled to no remuneration for his services, and must make good the loss.
(iii) Agent’s lien on principal’s property [Section 221]: In the absence of any contract to the contrary, an agent is entitled to retain the 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 him.
The conditions of this right are:
- The agent should be lawfully entitled to receive from the principal a sum of money by way of commission earned or disbursement made or services rendered in the proper execution of the business of agency.
- The property over which the lien is to be exercised should belong to the principal and it should have been received by the agent in his capacity and during the course of his ordinary duties as an agent. If the agent obtains possession of the property by unlawful means, he cannot exercise particular lien.
The agent’s right to lien is lost in the following cases:
- When the possession of the property is lost.
- When the agent waives his right. Waiver may arise out of agreement express or implied.
- The agent’s lien is subject to a contract to the contrary.
(iv) Right to indemnity:
- Right of indemnification for lawful acts [Section 222]: The principal is bound to indemnify the agent against all consequences of lawful acts done in exercise of his authority.
Example 35: ‘A’ residing in Delhi appoints ‘B’ from Mumbai as an agent to sell his merchandise. As a result ‘B’ contracts to deliver the merchandise to various parties. But A fails to send the merchandise to B and B faces litigations for non- performance. Here, A is bound to protect B against the litigations and all costs, expenses arising of that.
The right to indemnity extends to all losses and expenses incurred by the agent in the conduct of the business. Where, for example, a stockbroker, on the instructions of a solicitor, contracted to sell certain shares and had to incur liability to the purchaser by reason of the owners refusal to complete the sale, the stockbroker was held to be entitled to recover indemnity from the principal.
- Right of indemnification against acts done in good faith [Section 223]: Where the agent acts in good faith on the instruction of principal, agent is entitled for indemnification of any loss or damage from the principal.
Example 36: Where P appoints A as his agent and directs him to sell certain goods which in fact turned out to be not those belonging to P and if third parties sue A for this act, A is entitled for reimbursement and indemnification for such act done in good faith.
However, the agent cannot claim any reimbursement or indemnification for any loss etc. arising out of acts done by him in violation of any penal laws of the country.
- Non-liability of employer of agent to do a criminal act: According to section 224, where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act.
Example 37: A employs B to beat C, and agrees to indemnify him against all consequences of the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.
Example 38: B, the proprietor of a newspaper, publishes, at A’s request, a libel upon C in the paper, and A agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to indemnify B.
(v) Right to compensation for injury caused by principal’s neglect [Section 225]: Section 225 provides that the principal must compensate his agent in respect of injury caused to such agent due to principal’s neglect or want of skill. Thus, every principal owes to his agent the duty of care, and not to expose him to unreasonable risks.
Example 39: A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must compensate B.
10. PRINCIPAL’S LIABILITY TO THIRD PARTIES
An agent does all acts on behalf of the principal but incurs no personal liability. The liability remains that of the principal unless there is a contract to the contrary. This is because there is no privity of contract and passing of consideration between the agent and third party. An agent also cannot personally enforce contracts entered into by him on behalf of the principal.
- Principal’s liability for the Acts of the Agent [Section 226]: Principal liable for the acts of agents which are within the scope of his authority. Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts had been entered into and the acts were done by the principal in person.
Example 40: A buys goods from B, knowing that he is an agent for their sale, but not knowing who is the principal. B’s principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal, set off against that claim a debt due to himself from B.
Example 41: A, being B’s agent with authority to receive money on his behalf, receives from C, a sum of money due to B. C is discharged of his• obligation to pay the sum in question to B.
- Principal’s liability when agent exceeds authority [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, so much only of what he does as is within his authority is binding as between him and his principal.
Example 42: A, being owner of a ship and cargo, authorizes B to procure an insurance for 4,00,000 on the ship. B procures a policy for 4,00,000 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.
Principal not bound when excess of agent’s authority is not separable [Section 228]: Where an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.
Example 43: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of ` 6,00,000. A may repudiate the whole transaction.
Example 44: A authorizes B to draw bills to the extent Rs. 200 each. B draws bills in the name of A for Rs 1,000 each. A may repudiate the whole transaction.
Exception: Liability of principal inducing belief that agent’s unauthorized acts were authorized [Section 237]: When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.
Example 45: A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract.
Example 46: A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private orders from A. The sale is good.
- Consequences of notice given to agent [Section 229]: Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequence as if it had been given to or obtained by the principal.
Example 47: A is employed by B to buy from C certain goods of which C is the apparent owner, and buys them accordingly. In the course of the treaty for the sale, A learns that the goods really belonged to D, but B is ignorant of that fact. B is not entitled to set off a debt owing to him from C against the price of the goods. Thus, the knowledge of the agent is treated as the knowledge of the principal.
- Principal’s liability for the agent’s fraud, misrepresentation or torts. [Section 238]: Misrepresentations made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made, or committed, by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals.
Example 48: A, being B’s agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorized by B to make. The contract is voidable, as between B and C, at the option of C.
Example 49: A, the captain of B’s ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.
11. PERSONAL LIABILITY OF AGENT TO THIRD PARTIES
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal [Section 230]: 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. He can neither sue nor be sued on contracts made by him on his principal’s behalf.
EXCEPTIONS: In the following exceptional cases, the agent is presumed to have agreed to be personally bound:
- Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad/foreign principal: – When an agent has entered into a contract for the sale or purchase of goods on behalf of a principal resident abroad, the presumption is that the agent undertakes to be personally liable for the performances of such contract
- Where the agent does not disclose the name of his principal or undisclosed principal; (Principal unnamed): when the agent does not disclose the name of the principal then there arises a presumption that he himself undertakes to be personally liable. When the principal is undisclosed, the liability under Section 230 is of the agent only, and the principal cannot be sued in such a case.
- Non-existent or incompetent principal: Where the principal, though disclosed, cannot be sued, the agent is presumed to be personally liable.
Example 50: An agent who contracts for a minor, the minor being not liable, the agent becomes personally liable. This result, may not, however, follow where the other party already knows that the principal is a minor.
- Pretended agent – if the agent pretends but is not an actual agent, and the principal does not rectify the act but disowns it, the pretended agent will be himself liable (Section 235).
- When agent exceeds authority- When the agent exceeds his authority, misleads the third person in believing that the agent he has the requisite authority in doing the act, then the agent can be made liable personally for the breach of warranty of authority.
RIGHTS OF THIRD PARTIES
i. Rights of parties to a contract made by undisclosed agent [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 right as he would have had as against the agent if the agent had been the principal.
If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfill the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract.
Example 51: SS bought for himself a ticket of IPL match at Wankahde Stadium through AB because on personal grounds Stadium management would not have issued the ticket to SS. Stadium management may repudiate the contract and refuse SS to enter the stadium.
ii. 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.
Example 52: A, who owes 50,000 rupees to B, sells 1,00,000 rupees worth of rice to B. A is acting as agent for C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set off A’s debt.
iii. The Option of The Third Person to Sue The Agent or The Principal:
- Right of person dealing with agent personally liable [Section 233]: In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them, liable.
Example 53: A enters into a contract with B to sell him 100 bales of cotton, and afterwards discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.
- Consequence of inducing agent or principal to act on belief that principal or agent will be held exclusively liable [Section 234]: When a person who has made a contract with an agent induces the agent to act upon the belief that the principal only will be held liable, or induces the principal to act upon the belief that the agent only will be held liable, he cannot afterwards hold liable the agent or principal respectively.
12. REVOCATION OF AUTHORITY
Termination of agency [Section 201]
Termination of agency means putting an end to the legal relationship between principal and agent. Section 201 provides for the following modes of termination:
- Revocation: An agency may be terminated by the principal revoking the authority of the agent. Principal may revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal [Section 203]. However, the principal cannot revoke the authority given to his agent after the authority has been partly exercised so far as regards such acts and obligations as arise for acts already done in the agency. [Section 204]
Example 54: A authorizes 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 hands. B buys 1,000 bales of cotton in his own name, so as to make himself personally liable for the price. A cannot revoke B’s authority so far as regards payment for the cotton.
Example 55: A authorizes 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 hands. B buys 1,000 bales of cotton in A’s name, and so as not to render himself personally liable for the price. A can revoke B’s authority to pay for the cotton.
Compensation for revocation by principal, [Section 205]: If there is premature revocation of agency without sufficient cause, the principal must compensate the agent, for such revocation
Notice of revocation [Section 206]: When the principal, having justification to do so, revokes the authority, he must give reasonable notice of such revocation to the agent, otherwise, he can be liable to pay compensation for any damage caused to the agent (Section 206).
Revocation and renunciation may be expressed or implied [Section 207]: Revocation of agency may be expressed or implied in the conduct of the principal.
Example 56: A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of B’s authority.
- Renunciation by agent [Section 206]: An agent may renounce the business of agency in the same manner in which the principal has the right of revocation. In the first place, if the agency is for a fixed period, the agent would have to compensate the principal for any premature renunciation without sufficient cause. [Section 205] Secondly, a reasonable notice of renunciation is necessary. Length of notice is to be determined by the same principles which apply to revocation by the principal. If the agent renounces without proper notice, he shall have to make good any damage thereby resulting to the principal. [Section 206]
- Completion of business: An agency is automatically and by operation of law terminated when its business is completed. Thus, for example, the authority of an agent appointed to sell goods ceases to be exercisable when the sale is completed.
- Death or insanity: An agency is determined automatically on the death or insanity of the principal or the agent. Winding up of a company or dissolution of partnership has the same effect. Act done by agent before death would remain binding.
- Principal’s insolvency: An agency ends on the principal being adjudicated insolvent.
- On expiry of time: Where an agent has been appointed for a fixed term, the expiration of the term puts an end to the agency, whether the purpose of agency has been accomplished or not. An agency comes to an automatic end on expiry of its term
When the agency is irrevocable?
When the agent is personally interested in the subject matter of agency the agency becomes irrevocable. Section 202 states that ”where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest.”
Example 57: A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.
Example 58: A consigns 1000 bales of cotton to B, who has made advances to him on such cotton, and desires B to sell the cotton, and to repay himself, out of the price, the amount of his own advances. A cannot revoke this authority, nor it is terminated by his insanity or death.
Effects of Termination [Section 208]
When termination of agent’s authority takes effect as to agent, and as to third persons [Section 208]: The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them.
Example 59: A directs B to sell goods for him, and agrees to give B five per cent commission on the price fetched by the goods. A afterwards, by letter, revokes B’s authority. B, after the letter is sent, but before he receives it sells the goods for 1,00,000. The sale is binding on A, and B is entitled to 5,000 as his commission.
Example 60: A, at Chennai, by letter directs B to sell for him some cotton lying in a warehouse in Mumbai, and afterwards, by letter, revokes his authority to sell, and directs B to send the cotton to Chennai. B, after receiving the second letter, enters into a contract with C, who knows of the first letter, but not of the second, for the sale to him of the cotton. C pays B the money, with which B absconds. C’s payment is good as against A.
Example 61: A directs B, his agent, to pay certain money to C. A dies, and D takes out probate to his will. B, after A’s death, but before hearing of it, pays the money to C. The payment is good as against D, the executor.
Agent’s duty on termination of agency by principal’s death or insanity [Section 209]: When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.
Termination of sub-agent’s authority [Section 210]
The termination of the authority of an agent causes the termination (subject to the rules herein contained regarding the termination of an agent’s authority) of the authority of all sub-agents appointed by him.
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
Yashvardhan Saboo
A Story teller, passionate for simplifying complexities, techie. Perfectionist by heart, he is the founder of - Konceptca.
