CA Intermediate Other Laws Indian Contract Act

THE INDIAN CONTRACT ACT, 1872
1
Introduction
Indian Contract Act came in to being in
September 1872. All of us enter into a
number of contracts everyday knowingly
or unknowingly. Each contract creates
some rights and duties on the contracting
parties. The act is extended to the whole
of India except the state of Jammu and
Kashmir.
Special Contracts
 Indemnity & Guarantee
 Bailment & Pledge
 Agency
Contract of Indemnity (Section 124)
Indemnity means to make good the loss suffered by a party.

A contract by which one party promises to save the other from loss
caused to him by-
a) the conduct of the promisor himself
b) or the conduct of any person
is called a “contract of indemnity”.
This is also known as typical form of contingent contract.
Indemnifier- The party who promises to save the other party from loss.
Parties
Indemnified- The party who is promised to be saved against the loss.
Example 1:
Akbar contracts to indemnify Anthony against the consequences of any proceedings which Amar
may take against Anthony in respect of a sum of `10000 advanced by Amar to Anthony.
Suppose, Anthony fails to make payment to Amar-

 Akbar is indemnifier
 Anthony is Indemnified
 Amar will be able to recover the amount from Akbar u/s 124.
THE INDIAN CONTRACT ACT, 1872 1.2
Example 2:
Rekha, a shareholder of a company lost her share certificate. She applied for the duplicate certificate
when Company agreed to issue the same on the term that Rekha will compensate the company
against the loss where any holder produces the original certificate.
Suppose, someone produces the original certificate-

 Rekha is indemnifier
 Company is Indemnified
 Company will be able to recover the amount from Rekha u/s 124.
Other Features
 A contract of Indemnity may be express or implied. The contract can also be inferred from
the conduct of parties or from circumstances of case.
 All essentials of a valid contract must be present.
 Loss of promisee is essential. The contract of indemnity must specify that holder shall be
protected from loss caused due to what. i.e. Reason
 The Indemnity holder is entitled to recover damages, costs of suit.
 Indemnified is also known as Indemnity Holder
Rights of Indemnity Holder (Section 125)
 Right to Recover Damages- In a contract of indemnity the indemnity holder is entitled to

recover from the promise and indemnifier all damages for which he may be compelled to
pay in any suit as of any matter to which the promise the indemnity applies while acting
within the scope of his authority.
 Right to Recover costs of suit- Any person with indemnity holder and indemnified or
promise is entitled to recover from promisor all costs which he may be compelled to pay in
any suit in bringing or defending it if he does not go against the order of the promisor and if
he has acted in absence of any contract as would have been prudent for him to do.
 Right to recover sums paid as a compromise- An indemnity holder is entitled to recover

from indemnified all sums which he has paid under the term of compromise of any suit and
compromise was not against the order of the promisor and the compromiser was not
against the order of the promisor and the compromise was such that it was to be done
(prudent) in absence of any contract of indemnity.
Indemnifier may be called upon to compensate if any other absolute liability is incurred.
Indemnifier’s rights are not given in the Indian Contract Act, 1872. However, it can be said that
Indemnifier’s rights are same as those of surety.
Contract of Guarantee (Section 126)

A contract of guarantee is a contract to perform
the promise made or discharge liability incurred
by a third person in case of his default.
Surety- Person who gives the guarantee

Parties Principal Debtor-Person in respect of whose default the guarantee is given
Creditor- Person to whom the guarantee is given
Example 1:
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 failing to do so, he will himself pay to B, there is a Contract of Guarantee
 B is Creditor
 A is Surety
 C is Principal Debtor
Example 2:
When A obtains loan from LIC Housing and if B promises to pay LIC Housing in the event of A failing
to repay, there is a Contract of Guarantee
 LIC Housing is Creditor

 B is Surety
 A is Principal Debtor
Features of a Valid Contract of Guarantee

 The contract must be conditional
 The principal debtor must be primarily liable.
 The debt must be legally enforceable
 The debt must not be a time barred debt
 Must have all the essentials of a valid contract
 No misrepresentation
 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.
 A contract of guarantee may be either oral or written.
 The liability of surety is secondary and conditional and arises only if principal debtor makes a
default.
Consideration for guarantee [Section 127]
Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will
guarantee the payment of the price of the goods. C promises to guarantee the payment in
consideration of A's promise to deliver the goods. This is a sufficient consideration for C's promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a
year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to
forbear as requested. This is a sufficient consideration for C's promise.
(c) A sells and delivers goods to B.A afterwards, without consideration, agrees to pay for them in
default of B. The agreement is void.
Guarantee obtained by misrepresentation, invalid
 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
 Any guarantee which the creditor has obtained by means of keeping silence as to material
circumstances, is invalid.
Illustrations
(a) A engages B as clerk to collect money for him. B fails to account for some of his receipts and A in
consequence call 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.
(b) 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 rupees per tone 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.
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.
 The liability of surety arises immediately on default by the Principal Debtor.
 The surety may fix a limit on his liability upto which guarantee shall remain effective or a
time period during which guarantee shall remain effective
 The surety may impose conditions in the contract of guarantee. Until those conditions are
met, the surety shall not be liable.
 The creditor is not required to-
a) First sue the Principal Debtor

b) First give a notice to Principal Debtor
Example
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A
is liable not only for the amount of the bills but also for any interest and charges which may have
become due on it.
Illustration
Mr D was in urgent need of money amounting Rs. 5,00,000. He asked Mr. K for the money. Mr. K
lent the money on the sureties of A, B and N without any contract between them in case of default
in repayment of money by D to K, D makes default in payment. B refused to contribute. Examine
whether B can escape liability
Continuing Guarantee (Section 129)
A guarantee which extends to a series of transaction is called a ‘continuing guarantee’

Example: Where ‘A’ promises ‘B’ to be responsible, so long ‘B’ employs only ‘C’ to collect his rentals
from tenants for an amount of ` 5000/-, there is a continuing guarantee by A to B so long ‘C’ is
employed as rent collector. In other words A stands a guarantor to ‘B’ for rent collected by ‘C’.
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.
Important aspects regarding the revocation of continuing guarantee:

 The continuing guarantee may at any time be revoked by surety as to future transactions by
notice to creditors. However no revocation is possible where a continuing relationship is
established.
 Upon the death of surety, the continuing guarantee is revoked for all future transactions in
the absence of any contract to the country.
Illustration
Ramesh and Suresh are engaged in business having same nature. Ramesh stands surety for Suresh
for any amount which Kamlesh may lend Suresh from time to time during next 6 months subject to a
maximum of 85000. 3 months later, Ramesh revokes the guarantee , when Kamlesh had lent to
Suresh Rs. 35,000. Decide whether Ramesh is discharged from all the liabilities to kamlesh for any
subsequent loan under the provisions of the Indian Contract Act, 1872. Would your answer differ in
case Suresh makes a default in paying back to Kamlesh the money already borrowed i.e. Rs 35000?
Liability of two persons, primarily liable, not affected by arrangement between them that one
shall be surety on other's default [Section 132]
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.
Illustration
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.
Rights of Surety
I. Against the principal debtor
 Right of subrogation: 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 he that he is liable for, is vested with all the rights which the creditor had
against the principal debtor.
 Right to recover the amount paid/right to indemnity: Implied promise to indemnify surety.
In every contract of guarantee there is an implied promise by the principal debtor to
indemnify the surety, and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but no sums which he has paid
wrongfully.
Illustrations
a) 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 he 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.
b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange
drawn by B upon A to secure the amount. C, the holder of the bill, demands payment
of it from A, and on A's refusal to pay, sues him upon the bill. A, not having
reasonable grounds for so doing, defends the suit, and has to pay the amount of the
bill and costs. He can recover from B the amount of the bill, but not the sum paid for
costs, as there was no real ground for defending the action.
II. Against the creditor:
 Right to securities: Surety is entitled for all securities which the debtor has provided to
creditor whether surety is aware of it or not. Where a creditor loses any of the security
by default or negligence the liability of the surety abates proportionately. If a creditor
does not hand over the securities to surety he can be compelled to do so. It is
immaterial as to whether the surety had knowledge of such securities or not.
Illustrations
a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also

further security for the 2,000 rupees by a mortgage of B's furniture. C, cancels
the mortgaged. B becomes insolvent and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture.
b) 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 up the further security. A is not discharged.
 Right to claim set-off: Any amount recoverable by Principal debtor may be claimed as
deduction. Any amount recoverable by surety may be claimed as deduction.
III. Against the Co-sureties
 Right to Contribution: Where 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.
Illustrations
(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in
payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each.
(b) A, B and C are sureties to D for the sum of 1,000 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 250 rupees, B 250 rupees and C
500 rupees.
 Right to share benefit of securities: If one co-surety receives any security, all other co-
sureties are entitled to share the benefit of such security.
Distinction between Indemnity and Guarantee

Basis Contract of Indemnity Contract of Guarantee
Meaning Contract to save another party from Contract to perform promise or
loss caused to him discharge liability in case of default
of third person
Parties There are two Parties There are three parties
Number of There is only one contract There are 3 contracts b/w Debtor &
Contracts creditor, debtor and surety, creditor
and surety
Nature of liability Liability of Indemnifier is primary Liability of surety is secondary
Rights of Parties Indemnity holder is entitled to recover Surety is entitled to recover sums
damages, cost of suit and compromise rightfully paid by him
paid from indemnifier
Existing liability There is no existing liability, if no loss is The liability is already in existence
incurred, indemnifier is not liable at all
Discharge of a Surety
Revocation of Contract Invalidation of Contract of Conduct of Creditor

of Guarantee Guarantee
a) By Revocation of Contract of Guarantee:
 Notice by Surety (Section 130) - Surety may anytime revoke a continuing guarantee
by giving a notice to the Creditor. However, a specific guarantee can be revoked only
if liability of principal debtor has not accrued and continuing guarantee can only be
revoked in case of future transactions.
 Death of Surety (Section 131) - Estate of Surety shall be liable for all transactions
entered into between creditor and principal debtor prior to death but not after his
death. A continuing guarantee is automatically revoked in respect of future
transactions.
b) By Invalidation of Contract of Guarantee:

 Misrepresentation
 Concealment
 Failure of co-surety to join a surety
 Failure of consideration
c) By Conduct of Creditor:
 Variance in terms of Contract (Section 133)- Any variance made in terms of contract
without consent of surety will discharge surety and he shall be released for such
transactions which take place after such variation.
Illustration:
(a) A becomes surety to C for B's conduct as 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 over-draw, and the bank loses a sum of money. A is discharged
from his suretyship by the variance made without his consent, and is not
liable to make good this loss.
(b) 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
(c) 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.
(d) A gives to C a continuing guarantee to the extent of 3,000 rupees 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.
(e) C contracts to lend B 5,000 rupees on the lst March. A guarantees
repayment. C pays the 5,000 rupees to B on the lst January, A is discharged
from his liability, as the contract has been varied, inasmuch as C might sue B
for the money before the first of March
 Discharge of principal debtor-
By a contract Any act By any omission, the result of which

discharges principal debtor
By a Contract- The surety is discharged by any contract between the creditor and the principal
debtor, by which the principal debtor is released, or by any act or omission of the creditor, the
legal consequence of which is the discharge of the principal debtor.
Illustration
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 contracts. B omits to supply the
timber. C is discharged from his' suretyship.
 Compounding with Principal Debtor- Surety is discharged if

i) Creditor makes composition with Principal debtor without consent of surety.
ii) Creditor agrees to give time to Principal debtor without consent of surety.
However surety is not discharged if a contract to give time to principal
debtor is made by creditor with a third person and not with the principal
debtor.
iii) Creditor agrees not to sue the Principal debtor without consent of surety.
iv) Surety is discharged to the extent of security lost by the Creditor (section
141)
 Impairment of Surety’s eventual remedy (section 139)- The surety would be

discharged if the creditor does anything or acts in a manner which-
a) Is inconsistent with the rights of surety or omits to do any act and
b) Impairs the eventual remedy of the surety.
Illustration
B contracts to build a ship for C for a given sum, to be paid by installments as the
work reaches certain stages. A becomes surety to C for B's due performance of the
contract. C, without the knowledge of A, prepays to B the last two installments. A is
discharged by the prepayment.
A puts M as apprentice to B, and gives a guarantee to B for M's fidelity B promises to

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 be on his guarantee.
Exceptions (Where Surety not discharged)

A mere forbearance on the part of a creditor to sue the debtor or to enforce any other remedy
would not discharge the surety in the absence of any specific provision.
Bailment and Pledge
Bailment:
As per Section 148 of the Act, Bailment is an act-
 whereby goods are delivered
 by one person to another for some purpose,
 on a contract, that the goods shall,
 when the purpose is accomplished, be returned or otherwise disposed off
 according to the directions of the person delivering them.
Bailor- The person who delivers the goods.

Parties
Bailee- The person to whom the goods are delivered.
Essentials of Bailment:
 Bailment is based upon a contract. Sometimes it could be implied by law as it happens in the
case of finder of lost goods.
 Bailment is only for moveable goods and never for immovable goods or money.
 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. In bailment, bailor continues to be the owner of goods as there is no change of
ownership.
 The goods must be delivered for some purpose which can be express or implied.
 Bailee is obliged to return the goods physically to the bailor in original or altered form. The
bailee cannot deliver some goods, even not those of higher value.
Other Relevant Points

 Possession and custody do not however mean physical delivery of goods.
 Delivery could be Actual, symbolic or constructive according to section 149.
 Deposit of money in a bank is not bailment since the money returned by the bank would not
be identical currency notes.
 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 through kept in a locker at the bank.
Illustration
Ram, the bailor, pledges a cinema projector and other accessories with Movie Association co-
operative bank limited, the bailee for a loan. Ram requests the bank to allow the pledged goods to
remain in his possession and promises to hold the same in trust for the bailee and also further
promises to handover the possession of the same to the bank whenever demanded. Examining the
provisions of the Indian Contract Act, 1872, decide, whether a valid contract of pledge has been
between Ram, the bailor and Bank, the bailee?
Bailment
Based on Benefit Based on Reward
Exclusive Exclusive Mutual Gratuitous Non-

benefit of benefit of Benefit of Bailment Gratuitous
Bailor Bailee Both Bailment
Bailor’s Rights and Duties
Rights of Bailor
 Bailor has a right to terminate the contract if the bailee does anything which is inconsistent
with the conditions of bailment and it becomes voidable at Bailor’s option.
Example ‘A’ lets on hire his horse to ‘B’ for his own riding but ‘B’ uses the horse for driving
his carriage. ‘A’ has a right to terminate the contract of bailment.
 Right to demand goods back: if the loan was gratuitous, even through he lent it for a
specified time or purpose. But if, on the face of such loan made for a specified time or
purpose, the borrower has acted in such a manner that the return of the thing lent before
the time agreed upon would cause him losses exceeding the benefit actually derived by him
from the loan, the lender must, if he compels the return, indemnify the borrower for the
amount in which the loss so occasioned exceeds the benefits so derived.
 Bailor has a right to claim the increase or profit from the goods bailed which may have
occurred from the goods value.
For example where ‘A’ bails his cow to ‘B’ and if the cow gives birth to a calf, ‘B’ is bound to
return the cow and the calf to ‘A’.
 File suit- If a third person wrongfully deprives the bailee of the use of possession of 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.
 Bailor may sue the bailee to enforce his duties.
 Right to claim damages for loss caused by an unauthorized use of the goods bailed.
 Right to claim compensation for loss caused by an unauthorized use of the goods bailed
 Right to claim damages arising out of mixing the goods of the bailor with his own goods.
Duties of Bailor
 Disclose faults in goods(Section 150)- 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 risk; and if he does not make such disclosure, he
is responsible for damage arising to the bailee directly from such faults. If such 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.
Illustrations
(a) 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.
(B) 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
 Bear Expenses (Section 158)- 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, the bailors shall repay to the bailee the necessary
expenses incurred by him for the purpose of the bailment.
 Indemnify Bailee -If the loan was gratuitous, the borrower has acted in such a manner that
the return of the thing lent before the time agreed upon would cause him losses exceeding
the benefit actually derived by him from the loan, the lender must, if he compels the return,
indemnify the borrower for the amount in which the loss so occasioned exceeds the benefits
so derived. Also bailor shall indemnify bailee for defective title.
 Receipt of goods back on termination of bailment. He shall be liable to pay ordinary
expenses for custody of goods incurred by the bailee.
Rights of Bailee
 To claim indemnification for any loss or damage as a result of defective title if bailee suffers
some loss because of it.
 To deliver back the goods according to directions. If there are joint bailers, bailee may
deliver to any of the joint owners.
 To deliver the goods back to the bailor whether or not the bailor has the right to the goods.
As long as bailee delivers in good faith, bailee is not responsible.
 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, the bailors shall repay to the bailee the necessary expenses incurred by him
for the purpose of the bailment.
 If a person, other than the bailor, claims goods bailed he may apply to the court to stop
delivery of the goods to the bailor, and to decide the title to the goods.
 To take action against third parties if that party wrongfully denies the bailee of his right to
use the goods.
 To exercise his ‘right of lien’. This right of lien is a right to retain the goods and is exercisable
where charges due in respect of goods retained have not been paid. The right of lien is a
particular lien for the reason that the bailee can retain only these goods for which the bailee
has to receive his fees/remuneration.
Duties of a Bailee
 To take care of goods- 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
of his own goods of the same bulk, quantity and value as the goods bailed.
 Not to make unauthorized use of goods- A contract of bailment is voidable at the option of
the bailor, if the bailee does any act with regard to the foods bailed, inconsistent with the
conditions of the bailment. If the bailee makes any use of the goods bailed which is not
according to the conditions of the bailment, he is liable to make compensation to the bailor
for any damage arising to the goods from or during such use of them.
Illustrations
(a) A lends a horse to B for his own riding only. B allows C, a 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.
(b) A hires a horse in Calcutta from B expressly to march to Banaras. 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.
 Not to mix goods

 If the bailee, with the consent of the bailor, mixes the goods of the bailor with his
own goods, the bailor and the bailee shall have an interest, in proportion to their
respective shares, in the mixture thus produced.
 If the bailee, without the consent of the bailor, mixes the goods of the bailor 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 be bear the expense of
separation or division, and any damage arising from the mixture.
Illustration
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 damages.
 If the bailee, without the consent of the bailor, mixes the foods 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 deliver them back, the bailor is entitled to be compensated by
the bailee for the loss of the goods.
Illustration
A bails a barrel of Cape flour worth Rs. 45 to B. B, without A's consent, mixes the
flour with country flour of his own, worth Rs. 25 a barrel. B must compensate A for
the loss of his flour.
 It is the duty of the 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.Compensation for failure to
return
 Return any accretion to goods
Rights of Lien of Bailee

Lien means to withhold the property of another until lawful charges are paid.
Two types of lien are:
a) General Lien
b) Particular Lien
General Lien
A general lien is the right to retain the property of another for a general of Balance of Account. In
contract the particular lien is the right to retain the particular goods bailed for non-payment of
charges/remuneration.
For instance a banker enjoys the right of general lien on cash, cheques, bills of exchange and
securities deposited with him for any amounts due to him.
Particular lien
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 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.
Difference between general lien and particular lien

The difference between the two can be summarized as follows:
General lien Particular lien
It is right to detain/retain any goods of the bailor It is right exercisable only on such goods in
for general balance of account outstanding respect of which charges are due.
A general lien is not automatic but is recognized It is automatic
through on agreement. It is exercised by the
bailee only by name
It can be exercised against goods even without It comes into play only when some labour or skill
involvement of labour or skill. is involved
Bankers, factors, wharfingers, policy brokers etc. Bailee, finder of goods, pledgee, unpaid seller,
are entitled to general lien agent, partner etc are entitled to particular lien
Termination of Bailment
 If the period is fixed by the parties and it expires.
 If bailment is made for a particular purpose and that object is accomplished
 In case of gratuitous bailment, compelled by bailor to return goods
 If bailee makes inconsistent use of goods and bailor avoids the contract.
 Bailment terminates in case of death of either parties in gratuitous bailment
 If goods bailed are destroyed.
Finder of goods
Right of finder of goods may sue for specified reward offered
The finder of goods has no right to sue the owner for compensation for trouble and expense
voluntary incurred by him to preserve the goods and to find out the owner; but he may retain the
goods again the owner until he receives such compensation; and where the owner has offered a
specific reward for the return of goods lost, the finder may sue for such reward, and may retain the
goods until he receives it.
When finder of thing commonly on sale may sell it
When a thing which is commonly the subject of sale is lost, if the owner cannot with reasonable
diligence be found, or if he refuses upon demand, to pay the charges of the finder, the finder my sell
it-
(1) when the thing is in danger of perishing or of losing the greater part of its value, or
(2) when the lawful charges of the finder, in respect of the thing found, amount to two-thirds of its
value.
Pledge
Pledge is a variety or specie of bailment. It is bailment of goods as security for payment of debt or
performance of a promise. There is no change in ownership of the property pledged.
Pledgor/Pawner- The person who pledges the goods.

Parties
Pledgee/Pawnee- The person to whom the goods are
pledged.
Essentials of a Valid Contract of Pledge

 There must be a contract which may be expressed or implied.
 Pledge can be made of goods only
 There must be delivery of goods
 The purpose must be to deliver the goods as security for payment of debt or performance of
promise.
 The goods must be returned or disposed off according to the directions of pawnor when
purpose is accomplished.
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 authorized 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.
Rights of Pawnee
(a) Right of retainer: Pawnee has right to retain the goods pledged not only for payment of
debt or performance of a promise but also for recovery of debts and all expenses incurred
for preservation of goods pledged.
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.
(b) Right to retention to subsequent debts: Pawnee has a right to retain the goods pledged
towards subsequent advances as well, however subject to such right being specifically
contemplated in the contract.
(c) Right to seek reimbursement of extraordinary expenses: Pawnee has a right to seek
reimbursement of extraordinary expenses incurred. However his right to retain the goods
shall not extend to such extraordinary expenses but is restricted to ordinary expenses.
(d) Pawnee's right where pawnor makes default- 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 may bring a suit against the pawnor upon the debt or
promise, and retain the goods pledged as a collateral security; or 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.
(e) Right to sue: In the event of pawnor failing to redeem the debt or perform the promise, the
pawnee has a right to sue the goods which he has retained. Under certain circumstances,
sell the goods after giving a reasonable notice, to the pledgor the two rights namely the right
to sue and the right to sell are alternative rights and not cumulative rights.
Rights of Pawnor
(a) Right to redeem: 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, on that case,
pay, in addition, any expenses which have arisen from his default.
(b) Right to enforce duties: The pawnor has right to enforce duties of pawnee, if the pawnee
fails to fulfill his duties.
(c) Right to take care of goods: Pawnor has a right to demand a pawnee to take all reasonable
care and preservation of the goods pledged.
(d) Right to receive increase or profit from the goods: Pawnor is entitled to receive the increase
or profit from the goods if there is any increase/profit relating to it during the pledged
period.
(e) Right to receive Notice of sale
Distinction between Bailment and Pledge

Following are broad distinctions between bailment and pledge:
(a) As to purpose: Pledge is a variety of bailment. Under pledge goods are bailed as a security
for a loan or a performance of a promise. In regular bailment the goods are bailed for other
purpose than the two referred above. The bailee takes them for repairs, safe custody.
(b) As to right of sale: The pledge enjoys the right to sell only on default by the pledgor to repay
the debt or perform his promise, that too only after giving due notice. In bailment the bailee,
generally, cannot sell the goods. He can either retain or sue for non-payment of dues.
(c) As to right of using goods: Pledgee has a right to use goods. A bailee can, if the terms so
provide, use the goods.
(d) Consideration: In pledge there is always a consideration whereas in a bailment there may or
may not be consideration.
(e) Discharge of contract: Pledge is discharged on the payment of debt or performance of

promise.
Agency
The Indian Contract Act, 1872 does not define the word ‘Agency’.
However the word ‘Agent’ is defined as “a person employed to do
any act for another or to represent another in dealings with third
persons”. The third person for whom the act is done or is so
represented is called “Principal”.
(Section 182)
Salient features of Agency

Following are the four salient features of agency
 Basis: The basic essence of ‘agency’ is that the principal is bound by the acts of the agent
and is answerable to third parties.
 Capacity to employ an agent: A person who is competent to Contract alone can employ an
agent. In other words, a person in order to act as principal must be a major and of sound
mind.
 Capacity to be an agent: A person in order to be an agent must also be competent to

contract. In other words, he must also be a person who has attained majority and is of sound
mind
 Liability of agent: An agent is liable to the principal. An agent is not liable to principal if he is
minor or of unsound mind.
 Consideration not necessary: Unlike other regular contracts, a contract of agency does not
need consideration. In other words the relationship between the ‘principal’ and ‘agent’ need
not be supported by consideration.
Modes of Creation of Agency

Creation of
Agency
By operation By express By Implied By

of Law Agreement Agreement Ratification
Estoppel Holding Necessity

Out
(a) Agency by express agreement: A contract of agency can be express or implied. Whether it is
express or implied, it can be by words spoken or written. While the express contract is often
expressed in clear terms, implied contracts are created by circumstances.
(b) Agency by Implied Agreement: An agency which is to be understood from the conduct and
behavior of the parties is called implied agency. When an agent has, without authority, done
acts or incurred obligations to third person on behalf of his principal, the principal is bound
by such acts or obligations, if he has by his word or conduct induced such third person to
believe that such acts and obligations were within the scope of the agent's authority.
Illustration:
A consigns goods to B for sale, and gives him instructions not to sell under 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
 Agency by estoppel: If a person permits or represents another to act on his behalf, so that a
reasonable person would infer that the relationship of principal and agent had been created
then he will be stopped from denying his agent’s authority and getting himself relieved from
his obligations to a third party by proving that no such relationship infact existed.
‘A’ informs ‘B’ in the presence and within hearing of ‘P’ that ‘P’ is his agent, Later ‘B’ enters
into contract with ‘P’ thinking that ‘P’ is the agent of ‘A’. In a situation like this neither ‘P’ nor
‘A’ can refuse the obligations under the contract. ‘P’ had become the agent of ‘A’ by
estoppels. ‘P’ will be treated as agent of ‘A’ even if he was not an agent at all.
 Agency by Holding out: Under the principle of holding out, one who holds himself out as an
agent of another, then a relationship of agent and principal gets in place. The process of
holding out happens through willful conduct done to create a deliberate impression. In such
a case person concerned is stopped from denying that he is the agent of a principal. The
doctrine of holding out is also applicable in case of partnerships.
 Agency by necessity: Sometimes circumstances would compel and a relation of agency

would fall in place. This is often out of necessity.
Agent’s authority in emergency shall be valid if the following conditions are satisfied:
i) There was an actual and definite necessity for acting on behalf of the principal.
ii) The agent was not in a position to communicate with the principal.
iii) The act was done for purpose of protecting interest of his principal
iv) The agent has exercised such reasonable care as a man of ordinary prudence would
have exercised in his own case.
v) The act was done bonafide.
Example: A consigns provision to be at Calcutta, with direction to send them
immediately to C, at Cuttack. B may sell the provision at Calcutta, if they will not
bear the journey to Cuttack without spoiling.
(c) Agency by Operation of Law: When the relationship arises between the persons as per
provisions of the present applicable laws, it is said to be an agency by operation of law.
Example- Partners are considered as agents of each other and also of the firm.
(d) Agency by ratification: Agency is also created by subsequent ratification or approach.

Ratification means approving a previous act or transaction. It may be express or implied. The
principal is bound by the acts ratified and refers back to actual date of the act and not the
date when act was ratified.
Illustration
K is the wife of A. She purchased a saree on credit from B. B demanded the amount from A. A
refused to make the payment. B filed a suit against A for the same amount. Decide in the light of
provisions of the Indian Contract Act, 1872 whether B would succeed.
Extent of Agent’s Authority
a) Agent’s authority in normal circumstances: An agent has the power and authority to do all
acts lawful and necessary in the normal circumstances in discharge of his functions.
For instance, where ‘A’ who lives in Andaman employs ‘B’ as his agent to collect his debts in
kanyakumari, ‘B’ has all the authority including the authority to pursue legal proceedings.
Similarly ‘B’ can also give valid discharge.
b) Agent’s authority in emergency: An agent has the authority in an emergency to do all such
acts a man of ordinary prudence would, for protecting his principal from losses under similar
circumstances.
A typical case is where the ‘agent’ who handles perishable goods like ‘mangoes’ can decide
the time, date and place of sale, not necessarily as per instructions of the principal but with
the intention of protecting the principal from losses. Here the agent acts in an emergency
and acts as a man of ordinary prudence.
Essentials of a Valid Ratification

 Ratification can be made only by a person was in existence at the time of act.
 Ratification must be by a person for whom the act was done, professing him to be a
principal. This implies competency on the part of the person ratifying the act.
 Ratification would date back to the date of the act, and validate it.
 Ratification may either be express or even implied by the conduct of the person on
whose behalf the act was done.
 Ratification must be of the whole act and just for a part of the act.
 Ratification of the acts of an agent cannot be such as to create any liability to third
parties or cause any injury or damage to third parties.
 Ratification cannot be done if the person ratifying is in knowledge of facts which are
materially defective.
 Illegal acts cannot be ratified.
 Acts which are void ab initio cannot be ratified.
 Ratification would be restricted to certain limitations to which original acts are limited
and ratification can be to that portion of exceeded authority by the agent.
 It must be communicated to the third party so as to bind him.
 It must be made within reasonable time of the act purported to be ratified.
Kinds of Agents
Special Agent: A Special Agent is one who is employed to do some particular act or represent his
Principal in some particular transactions.
For example, An agent employed to sell a Bike. If the special agent does anything outside his
authority, the principal is not bound by it and third parties are not entitled to assume that the agent
has unlimited powers.
General Agent: An agent who is employed to do all acts connected with a particular business of the
principal. A general agent has the authority to bind his principal with all acts connected with
business for which he is employed.
Universal Agent: A Universal agent is one who is authorised to do all the acts which the Principal can
lawfully do and can delegate.
Mercantile Agent: It means an agent having the authority to sell goods, consign goods for the
purpose of sale, buy the goods, raise money on the security of the goods acting as a mercantile
agent in the ordinary course of business.
Non- mercantile agents- like attorneys, solicitors, promoters etc.
Del credre agent- who in consideration of an extra commission guarantee his Principal that the third
person with whom he enters into contracts on behalf of the principal shall perform their financial
obligations that is, if the buyer does not pay, he will pay. Thus he occupies the position of a surety it
as well as an Agent. He is not answerable to his principle for the failure of the third person to
perform the contract. A del credere agent constituted an exception to this rule.
Rights of an Agent
 The agent can retain, out of the sums received from the principal, such amounts towards
reimbursement of expenditure, remuneration and advances paid by him on account towards
the business and render accounts only for the balance.
 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 he is not entitled for any remuneration for acts done
through misconduct/negligence.
 An agent is entitled to retain the goods, properties and books for any remuneration,
commission etc due to him.
 The principal is bound to indemnify the agent against all consequences of lawful acts done in
exercise of his authority.
 Where the agent acts in good faith on the instruction of principal, agent is entitled fro
indemnification of any loss or damage from the principal.
 Where the principal employs an agent to do an act which is criminal, the principal is not
liable to the agent either upon an express or an implied promise to indemnify him against
the consequences of that act.
 To claim compensation for injury caused to the agent because of principal’s neglect or want
of skill.
Duties and Obligations of an Agent
 Agent's duty in conducting principal's business
An agent is bound to conduct the business of his principal according to the directions given
by the principal, or in the absence of any such directions according to the customs which
prevails in doing business of the same kind at the place where the agent conducts such
business. When the agent acts otherwise, if any loss be sustained, he must make it good to
his principal and if any profit accrues, he must account for it
Illustrations
a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest

from time to time, at interest, the moneys which may be in hand, on its to make such
investment. A must make good to B the interest usually obtained by such investments.
b) B, a broker in whose business it is not the custom to sell on credit, sells goods of A on
credit to C, whose credit at the time was very high. C, before payment, becomes
insolvent. B must make good the loss to A
 Skill and diligence required from agent (Section 212)
An agent is bound to conduct the business of the agency with as much skill as is generally
possessed by person engaged in similar business unless the principal has notice of his want
of skill. The agent is always bound to act with reasonable diligence, and to use such skill as
he possesses; and to make compensation to his principal in respect of the direct
consequences of his own neglect, want of skill, or misconduct, but not in respect of loss or
damage which are indirectly or remotely caused by such neglect, want of skill, or
misconduct.
Illustrations
(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on
A's account, with order to remit. B retains the money for considerable time. A, in
consequence of not receiving the money, becomes insolvent. B is liable for the money and
interest, from the day on which it ought to have been paid, according to the usual rate, and
for any further direct loss as, e.g., by variation of rate of exchange-but not further.
(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B in credit,
without making the proper and usual enquiries as to the solvency of B. B at the time of such
sale, is insolvent. A must make compensation to his principal in respect of any loss thereby
sustained.
 To render proper accounts to Principal

 To seek and follow instructions of Principal and communicate in case of difficulty
 Not to deal on his own account: 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
A direct 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 seals has been disadvantageous to him.
 Not to make any secret profit

 To remit the principal all sums received in the principal’s account in accordance with terms
and conditions of contract of agency.
 Not to delegate authority
 Not to use information obtained against principal
Illustration
ABC ltd sells its products through some agents and it is not the custom in their business to sell the
products on credit. Mr. Pintu, one of the agents sold goods of ABC ltd to M/S Parul pvt ltd on credit
which was insolvent at the time of such sale. ABC ltd sued Mr. Pintu for compensation towards the
loss caused due to sale of products to M/S Parul pvt ltd. Will ABC ltd succeed in its claim?
Personal Liability of the Agent

 Where the contract expressly provides for personal liability of the agent
 Where the agent signs the negotiable instrument without indicating that he is signing it for
the principal
 Where the agent works for a foreign principal
 Where the agent acts for a principal who cannot be sued viz Ambassador of a country etc.
 Where a principal was not in existence at the time of doing act
 Where according to usage in trade in certain kinds of business agents are personally liable.
 Where agent exceeds his authority
 When he receives or pays money by mistake or fraud
 In such situation, person dealing may hold agent or principal or both liable.
Agency coupled with Interest [Section 202]
Where the agent has himself an interest in the property which forms the subject-matter of the
agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of
such interest.
Illustrations
(a) A, gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to
him from A.A cannot revoke this authority, nor can it be terminated by his insanity or death.
(b) A consigns 1,000 bales of cotton to be, 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, not is it terminated by his insanity or death.
Other Relevant Points
 (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 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
 (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 right and
obligations subsisting between the agent and the other party of the contract.
Illustration
A, who owes 500 rupees to B, sells, 1,000 rupees worth of rice to B. A is acting as agent for C
in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is
the case. C cannot compel B to take the rice without allowing him to set-off A's debt.
 (Section 234) When a person who has made a contract with an agent induce 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 that agent
or principal respectively.
 (Section 235) A person untruly representing himself to be the authorized agent of another,
and thereby including a third person to deal with him as such agent, is liable, if his alleged
employer does not ratify his acts, to make compensation to the other in respect of any loss
or damage which he has incurred by so dealing.
 (Section 236) A person with whom a contract has been entered into in the character of
agent, is not entitled to require the performance of it, if he was in reality acting, not as
agent, but on his own account
Sub-Agent
A "sub-agent" is a person employed by, and acting under the control of,
the original agent in the business of the agencySub agency refers to case
where an agent appoints another agent. The appointment of sub agent is
not lawful. Because the agent is a delegate and a delegate cannot further
delegate.
Substituted Agent
Where an agent, holding authority to name another person, has named another person accordingly,
such person is known as substituted agent. Such agent works under the control and directions of
principal. Privity of contract exists between principal and substituted agent and he is directly liable
to principal for his acts. Such agent can directly claim remuneration from principal.
Relationship between Principal, sub agent and Agent
 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.
The agent is responsible to the principal for the acts of the sub-agent.
Sub-agent's responsibility: The sub-agent is responsible for his acts to the agent, but not to
the principal, except in case of fraud or willful wrong.
 Agent's responsibility for sub-agent appointed without authority
Where an agent, without having authority to do so, has appointed a person to act as a sub-
agent, the agent stands towards such person in the relation of a principal to an agent, and is
responsible for his acts both to the principal and to third person; the principal is not
represented, by or responsible for the acts of the person so employed, nor is that person
responsible to the principal
Principal’s Liability for Agent’s Act to Third parties

The liability of the principal to third parties would fall under following categories
 When agent acts within the scope of his authority: The principal is liable for the acts of the
agent done within the scope of his actual or apparent authority. Where there are specific
restrictions on the authority of the agent, then the principal is not bound by it.
Example : 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 how far bound, when agent exceeds authority: When an agent does more than he
is authorized to do, and when the part of what he does, which is within his authority, can be
separated from the part which is beyond his authority, so much only of what he does as is
within his authority is binding as between him and his principal.
 Consequences of notice given to agent: Any notice given to or information obtained by the
agent, provided it be given or obtained in the course of the business transacted by him for
the principal, shall, as between the principal and third parties, have the same legal
consequences as if it had been given to or obtained by the principal.
Illustrations
(a) A is employed by B to buy from C certain goods, of which C is the apparent owner, and
buys them accordingly. In the course of the treaty for the sale, A learns that the goods really
belonged to D, but B is ignorant of that fact B is not entitled to set-off a debt owing to him
from C against the price of goods.
(b) A is employed by B to buy from C goods of which C is the apparent owner. A was, before
he was so employed a servant of C, and then learnt that the goods really belonged to D, but
B is ignorant of that fact. In spite of the knowledge of his agent, B may set-off against the
price of the goods a debt owing to him from C
 Misrepresentation made or fraud committed, by agent acting in the course of their business
for their principals, have the same effect on agreements made by such agents as if such
misrepresentations of frauds had been made or committed by the principals; but
misrepresentations made, or frauds committed, by agents, in matters which do not affect
their authority, do not affect their principals
Illustrations
(a) 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.
Termination of Agency
 The principal and agent may mutually agree to terminate agency at anytime.
 Revocation of authority by the principal anytime before authority has been exercised so as
to bind the principal
 Where there is an express or implied contract that the agency should be continued for any
period of time, the principal must make compensation to the agent, or the agent to the
principal, as the case may be, for any previous revocation or renunciation of the agency
without sufficient cause.
 Reasonable notice must be given of such revocation or renunciation, otherwise the damage
thereby resulting to the principal or the agent, as the case may be, must be made good to
the one by the other.
 Revocation or renunciation may be expressed or may be implied in the conduct of that
principal or agent respectively.
Example: A empowers B to let A's house. Afterwards A lets it himself. This is an implied
revocation of B's authority.
 The termination of the authority of an agent does not, so far as regards the agent, take
effect before it becomes known to him, or, so far as regards third persons, before it
becomes known to them.
 Illustrations
 (a) A directs B to sell goods for him, and agrees to give B five per cent commission on the
price fetched by the goods. A afterwards by letter, revokes B's authority. B after the letter is
sent, but before he receives it, sells the goods for 100rupees. The sale is binding on A, and B
is entitled to five rupees as his commission.
 Renunciation of agency by the agent
 Completion of business of agency
 Death or insanity of principal or agent and
 Insolvency of the principal
 Destruction of subject matter of agency
 Where principal or agent being a company is dissolved
Irrevocable Agency
Where the agency cannot be terminated, it is called irrevocable agency.
 Where agency is coupled with interest then it is a case where the agent has interest in the
subject matter of agency. In this case, agency cannot be terminated except where there is an
express provision, to cause prejudice to the interest of the agent. For the agency coupled
with interest does not come to an end on the death, insanity, or the insolvency of the
principal.
 Where the agent has incurred personal liability, principal cannot revoke the agency leaving
the agent. Eg: ‘B’ purchases as per orders of ‘A’ some rice in his personal name. A cannot
revoke the authority.
 Where the agent has partly exercised the authority, the authority cannot be revoked, where
‘A’ appoints ‘B’ as his agent to procure 10 bags of rice and ‘B’ procures in the name of ‘A’
then ‘A’ cannot revoke his authority.
Multiple Choice Questions
1. Co-sureties bound in different sums are liable to pay------

a. Equally as far as the limits of their b. Proportionally according to their
respective obligation permit respective obligation
c. Lower of either (a) or (b) d. None of the above
2. The number of contracts in contract of guarantee are -----

a. 2 b. 3
c. 4 d. None of the above
3. The party who gives the indemnity is known as --------

a. Indemnity Holder b. Indemnifier
c. Surety d. Principal debtor
4. A contract in which a person promises to discharge liability of another person in case of

default by such person is known as------
a. Quasi-contract b. Contract of indemnity
c. Contract of guarantee d. None of the above
5. In a contract of guarantee, a person who promises to discharge another’s liability is known

as------
a. Principal debtor b. Creditor
c. Indemnified d. Surety
6. The liability of surety is -----

a. More than of Principal debtor b. Less than of Principal debtor
c. Same as of Principal debtor d. Dependent on court’s decision
7. A surety is discharged from liability by-----

a. Revocation notice by surety b. Material alteration in terms
c. Discharge of principal by creditor d. All of the above
8. Which of the following is correct with reference to Indian Contract Act?

a. A contract of indemnity is not a b. A contract of insurance is a contract of
contingent contract indemnity
c. Both of the above d. None of the above

a. A continuous guarantee can never be b. A continuing guarantee cannot be
revoked given for a part of the entire debt
a. In a contract of guarantee, the surety b. A guarantee for payment of a time
need not be benefited barred debt is valid
11. The transfer of ownership of goods by one person to another for some specific purpose is
known as-----
a. Bailment b. Pledge
c. Hypothecation d. None of the above
12. The delivery of goods by one person to another for some specific purpose is known as ------
a. Bailment b. Pledge
c. Hypothecation d. Mortgage
13. A lent his car to his friend B for two days without any charges. It is a
a. Non-gratuitous bailment b. Gratuitous bailment
c. Hypothecation d. Beneficial bailment
14. Which of the following person do not have a right of general lien?
a. Bankers b. Wharfingers
c. Finder of goods d. Factors and policy brokers
15. X delivers his car to Y for repair. Here X is------

a. Bailor b. Bailee
c. Pledgee d. Pawnor
16. Which of the following is not an example of bailment?

a. Immovable goods b. Money
c. Movable goods d. Both (a) and (b)
17. Under pledge the person who pledges is known as

a. Bailor b. Bailee
c. Pawnee d. Pawnor
18. Out of following which is right of Bailee?
a. To indemnity b. To claim necessary expenses
c. To delivery of goods to any one of joint d. All of the above
bailor of goods
19. Which of the following statement is not correct with reference to Indian Contract act?
a. Gold jewellery delivered to bank for b. Placing of ornaments in a bank locker
safe custody is not a contract of is a contract of bailment
bailment
20. A contract is called as a contract of indemnity if one party promises to save other from loss
caused to him by --------
a. The conduct of the promisor himself b. The conduct of any other person
c. Either (a) or (b) d. None of these
21. The party to whom indemnity is called as -----

a. Indemnifier b. Indemnity holder
c. Guarantor d. Principal debtor
22. The indemnity holder has the right to ------

a. Recover damages b. Recover costs of suit
c. Recover sums paid as a compromise of d. All of these
the suit
23. The guarantee is valid even if ----- is competent to contract

a. Principal debtor b. Surety
c. Both (a) and (b) d. None of these
24. Consideration received by ------- is a sufficient consideration for --------

a. The creditor; the surety b. The creditor; the principal debtor
c. The principal debtor; the creditor d. The principal debtor; the surety
25. The liability of surety is -------

a. Secondary b. Conditional
c. Coextensive with liability of principal d. All of these
debtor
26. The liability of surety arises -------

a. After the creditor files a suit against b. After the creditor gives a notice to the
the principal debtor principal debtor
c. Immediately on default by the principal d. None of these
debtor
27. A surety has the right of indemnity and right of subrogation against------
a. The principal debtor b. The creditor
c. The co-sureties d. All of these
28. A surety has the right to claim securities and right of set off against -------
a. The principal debtor b. The creditor
c. The co-sureties d. All of these
29. The surety is not discharged if a contract to give time to the principal debtor is made by the
creditor with -------
a. The principal debtor b. Any person other than the principal
debtor
30. Any guarantee which the creditor has obtained by means of ----- is invalid.
a. Keeping silence as to material b. Misrepresentation made by the
circumstances creditor
31. Gratuitous bailment means a bailment -------

a. For the exclusive benefit of bailor b. For the exclusive benefit of bailee
c. Either (a) or (b) d. For the mutual benefit of bailor and
bailee
32. Delivery of keys of a car to a friend is an example of --------

a. Physical delivery b. Symbolic delivery
c. Constructive delivery d. None of these
33. If the true owner does not pay to the finder of goods the reward declared by the true owner
for finding the goods, the finder of goods has the right to --------
a. Sue the true owner b. Exercise particular lien
c. Both (a) and (b) d. None of these
34. In case there are 2 or more joint owners of the goods, the bailee has to deliver them back to
--------in absence of any agreement to the contrary.
a. Any of the joint owners b. Such joint owner for which all the joint
owners have consented
c. All the joint owners acting collectively d. None of these
35. The bailment of goods as security for ------- is called pledge

a. Payment of a debt b. Performance of a promise
36. Where a person pledges the goods in which he has only a limited interest, the pledge is -----
a. Valid b. Voidable
c. Valid to the extent of that interest d. None of these
37. In case of default by the pawnor to pay the debt or perform his promise, the pawnee has the
right to sell the goods after giving ------- to the pawnor
a. A notice of not less than 7 days b. A notice of not less than 15 days
c. A notice of not less than 1 month d. A reasonable notice
38. A minor or a person of unsound mind------

a. Can become an agent or principal b. Cannot become an agent or principal
c. Cannot become an agent but cannot d. Can become a principal but cannot
become a principal become an agent
39. A substituted agent is appointed by ---- to act on behalf of ------

a. The agent; principal b. The agent; agent
c. The principal; agent d. The sub-agent; agent
40. In a contract of agency, -----

a. No consideration is required b. Consideration received by the principal
is sufficient for the agent
c. Consideration must be present d. None of these
41. An agent is a person employed to -------

a. Do any act for another b. Represent another in dealings with
third person
c. Either (a) or (b) or both d. None of these
42. Agency coupled with interest------

a. Cannot be terminated b. Cannot be terminated to the prejudice
of such interest
c. Can be terminated d. Can be terminated if CG so directs
43. If an agent acts for sale or purchase of goods for a principal resident abroad,-------
a. He shall not be personally liable b. He shall be personally liable
c. He shall be liable towards principal d. Both (b) and (c)
44. Which of the following is incorrect with reference to Indian Contract Act?
a. Gratuitous bailment is terminated by b. In a pledge, a general property passes
death of either bailor or bailee to the pawnee
45. A person appointed by the original agent to act in the business of agency but under the
control of original agent is known as-----
a. Agent b. Sub-agent
c. Substituted agent d. Del credere agent
46. A person appointed by the original agent to act for and under control of principal is known
as------
a. Agent b. Sub-agent
c. Substituted agent d. Del credere agent
47. Where the agent contracts for a principal who is not competent to contract in such a case
the agent is ------
a. Personally liable b. Not personally liable
c. Exceeding authority d. None of the above
48. Which of the following agency is irrevocable?

a. Agency for fixed period b. Agency for single transaction
c. Agency coupled with interest d. Continuing agency
49. What is the name given to agency which can’t be terminated?

a. Revocable agency b. Agency for one transaction
c. Irrevocable agency d. Agency by necessity
a. An agent is a servant b. An agent is an independent contractor

CA Intermediate Other Laws Indian Contract Act

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

CA Intermediate Other Laws Indian Contract Act

Загружено:

Авторское право:

Доступные форматы

THE INDIAN CONTRACT ACT, 1872

Contract of Indemnity (Section 124)

Indemnity means to make good the loss suffered by a party.

Suppose, Anthony fails to make payment to Amar-

Suppose, someone produces the original certificate-

Rights of Indemnity Holder (Section 125)

 Right to Recover Damages- In a contract of indemnity the indemnity holder is entitled to

 Right to recover sums paid as a compromise- An indemnity holder is entitled to recover

Contract of Guarantee (Section 126)

Surety- Person who gives the guarantee

 LIC Housing is Creditor

Features of a Valid Contract of Guarantee

Guarantee obtained by misrepresentation, invalid

Nature and Extent of Surety’s Liability [Section 128]

a) First sue the Principal Debtor

Continuing Guarantee (Section 129)

A guarantee which extends to a series of transaction is called a ‘continuing guarantee’

Important aspects regarding the revocation of continuing guarantee:

II. Against the creditor:

a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also

III. Against the Co-sureties

Distinction between Indemnity and Guarantee

Revocation of Contract Invalidation of Contract of Conduct of Creditor

a) By Revocation of Contract of Guarantee:

b) By Invalidation of Contract of Guarantee:

 Discharge of principal debtor-

By a contract Any act By any omission, the result of which

 Compounding with Principal Debtor- Surety is discharged if

 Impairment of Surety’s eventual remedy (section 139)- The surety would be

A puts M as apprentice to B, and gives a guarantee to B for M's fidelity B promises to

Exceptions (Where Surety not discharged)

Bailment and Pledge

Bailor- The person who delivers the goods.

Other Relevant Points

Based on Benefit Based on Reward

Exclusive Exclusive Mutual Gratuitous Non-

Bailor’s Rights and Duties

 Not to mix goods

Rights of Lien of Bailee

Difference between general lien and particular lien

Right of finder of goods may sue for specified reward offered

Pledgor/Pawner- The person who pledges the goods.

Essentials of a Valid Contract of Pledge

Pledge by Mercantile Agent [Section 178]

(e) Right to receive Notice of sale

Distinction between Bailment and Pledge

(e) Discharge of contract: Pledge is discharged on the payment of debt or performance of

Salient features of Agency

 Capacity to be an agent: A person in order to be an agent must also be competent to

Modes of Creation of Agency

By operation By express By Implied By

Estoppel Holding Necessity

 Agency by necessity: Sometimes circumstances would compel and a relation of agency

(d) Agency by ratification: Agency is also created by subsequent ratification or approach.

Essentials of a Valid Ratification

Non- mercantile agents- like attorneys, solicitors, promoters etc.

a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest

 Skill and diligence required from agent (Section 212)

 To render proper accounts to Principal

 Not to make any secret profit

Personal Liability of the Agent

Agency coupled with Interest [Section 202]

 Agent's responsibility for sub-agent appointed without authority

Principal’s Liability for Agent’s Act to Third parties