Unit II

Special Contracts-
a) Contract of Indemnity and Guarantee
b) Contract of Bailment
c) Contract of Agency

Contract of Indemnity- (sec 124)

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

Indemnity Meaning –
• To make good the loss incurred by another person
• To compensate the party who has suffered some loss
• To protect a party from incurring a loss.
The person who promises to make good the loss is called the “indemnifier” and the person whose
loss is made good is called as “indemnified”.

Essential elements of a contract of indemnity

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

RIGHTS OF INDEMNITY HOLDER (Sec. 125)

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

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

 Right to recover sums paid

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

Contract of guarantee (126)

“A ‘contract of guarantee’ is a contract to perform the promise; or discharge the liability, of a third
person in case of his default.” The person who gives the guarantee is called as ‘surety’. The person
in respect of whose default the guarantee is given is called as ‘principal debtor’.

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

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

2. Primary liability of some person

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

3. The contract must be conditional

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

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

5. Form of contract
A contract of guarantee may be either oral or written.
6. Joining of other co-sureties
The guarantee by a surety is not valid if –
• A condition is imposed by a surety that some other person must also join as a co-surety;
but
 Such other person does not join as a co-surety. Guarantee is given is called as ‘creditor’.

NATURE AND EXTENT OF SURETY’S LIABILITY

Surety’s liability is coextensive with liability of principal debtor

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

Commencement of surety’s liability

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

Surety’s liability may be limited

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

Surety’s liability may be continuous

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

Surety’s liability may be conditional

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

TYPES OF GUARANTEE
 Guarntee

On Money On person

Nature of Effective Time Fidelity

Payment of Payment Guarantee

Nature of Payment Effective Time of Payment On person

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

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

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

Death of surety (sec. 131)

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

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

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

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

II. Rights against the creditor

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

 Right of set off

Any amount recoverable by the principal debtor may be claimed as deduction.
Any amount recoverable by the surety may be claimed as deduction.

 Rights to share reduction

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

III. Rights against co-sureties

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

 Right to share benefit of securities

If one co-surety receives any security, all the other co-sureties are entitled to share the benefit of
such security.

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

 1. Notice of revocation by surety
a. Specific guarantee- A specific guarantee can be revoked only if liability of principal
debtor has not arisen.
b. Continuing guarantee- continuing guarantee can be revoked only in respect of future
transactions.

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

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

4. Release or discharge of principal debtor If –

The creditor makes a fresh contract with the principal debtor whereby the principal debtor is
relieved from his liability; or –
The creditor does any act or omission resulting in discharge of the principal debtor;
Then –
The surety is discharged.

5. Composition with principal debtor

The surety is discharged if the creditor makes a composition with the principal debtor
without obtaining the consent of surety.

6. Giving extension of time to principal debtor

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

7. Loss of security by a creditor

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

DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

Indemnity is when one party promises to compensate the loss occurred to the other party, due to the
act of the promisor or any other party.
The guarantee is when a person assures the other party that he will fulfill the obligation in case of
default by the third party.

BASIS FOR INDEMNITY GUARANTEE

COMPARISON
 Meaning A contract in which one party A contract in which a party promises to
promises to another that he will another party that he will perform the
compensate him for any loss suffered contract or compensate the loss, in case of
by him by the act of the promisor or the default of a their person, it is the
the third party. contract of guarantee.

Defined in Section 124 of Indian Contract Act, Section 126 of Indian Contract Act, 1872
1872

Parties Two, i.e. indemnifier and Three, i.e. creditor, principal debtor and
indemnified surety

Number of One Three

Contracts

Degree of liability Primary Secondary

of the promisor

Purpose To compensate for the loss To give assurance to the promisee

Maturity of When the contingency occurs. Liability already exists.

Liability

BAILMENT

According to Section 148 of the Contract Act — “A bailment is the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when the purpose is accomplished, by
 returned or otherwise disposed of according to the directions of the person delivering them.”The person
delivering the goods is called the ‘bailor,’ the person to whom they are delivered is called the ‘bailee’.
A ‘bailment’ is the delivery of goods by one person to another for some purpose upon a contract that
they shall, when the purpose is accomplished, be returned or disposed of according to the directions of
the person delivering them. The person delivering the goods is called the ‘bailor’ and the person to
whom the goods are delivered is called the ‘bailee’.
The examples of a contract of bailment are: delivering a watch or radio for repair; leaving a car or
scooter at a parking stand; leaving luggage in a cloak room; delivering gold to a goldsmith for making
ornaments; leaving garments with a dry cleaner and so on.
The essence of bailment is the transfer of possession. The ownership remains with the owner. There
cannot be a bailment of immovable property.

Essential features of contract of bailment

From the definition given by Section 148 it follows that a bailment has the following characteristic
features:

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

2. Goods
 Bailment can be made of goods only.
 It is to be emphasized that bailment is concerned with only movable goods. Money is not
included in the category of movable goods.
 Thus a deposit of money with a banker is not a bailment because there is no obligation to
return the identical money.

3. Delivery
 There must be delivery of goods by one person to another person.
 Section 149 explains the mode of delivery to the bailee and states that the delivery of goods
may be either ‘actual’ or ‘constructive’.
 When the bailor hands over to the bailee physical possession of the goods that is called ‘actual
delivery.’
 ‘Constructive delivery,’ on the other hand, does not involve handing over the physical
possession, but something is done which has the effect of putting the goods in the possession of
the bailee.
For example, goods stored in a godown can be delivered by handing over the key of the godown, or
goods in transit, e.g., when they are at sea or on a railway, can be delivered by handing over the bill
of lading or the railway receipt representing the goods.

4. Purpose of delivery
 The goods must be delivered for some purpose.
 The purpose may be expressed or implied.
 When goods are delivered by mistake without any purpose, there is no bailment within the
meaning of its definition in Section 148.
5. Return or disposal of goods
 The goods are delivered subject to the condition that when the purpose is accomplished the
goods are to be returned in specie or disposed of according to the directions of the bailor,
either in their original form or in an altered form.

Kinds of Bailment

Bailment may be classified from the point of view of

I. benefit, and
II. Reward to the parties.

Kinds from ‘benefit’ point of view.

From ‘benefit’ point of view, bailments can be grouped into three classes;

1. Bailment for the exclusive benefit of the bailor, e.g., bailor leaves goods in the safe custody of the
bailee without any compensation to be paid.
2. Bailment for the exclusive benefit of the bailee, e.g., a loan of some article. Thus where A borrows
B’s fountain pen to use in the examination hall, the bailment is for the sole benefit of A, the
bailee.
3. Bailment for the mutual benefit of the bailor and the bailee. It is the most common type of
bailment.
Examples- Contracts for repair, hire, etc., fall within this class, wherein the bailor receives the benefit of
service and the bailee benefits by the receipt of the agreed charges.

Kinds from ‘reward’ point of view. Bailments may also be classified on the basis of
‘Reward’ into:

1. Gratuitous bailment. It is one in which neither the bailor nor the bailee is entitled to any remuneration,
e.g., loan of a book to a friend, depositing of goods for safe custody without any charge.

2. Non-gratuitous bailment. It is also called as a ‘bailment for reward.’ Here, either the bailor or the
bailee is entitled to remuneration, e.g., motor car let out for hire, cloth given for tailoring for
charges.

Consideration in Relation to Gratuitous Bailments

There arises a necessity of discovering a consideration to support a contract of bailment where it is ‘for the
exclusive benefit of the bailor’ or ‘for the exclusive benefit of the bailee,’ that is, where it is a gratuitous
bailment. Perhaps viewing such a transaction as a whole very carefully shall enable us to see how the
doctrine of consideration is satisfied.
“The detriment suffered by the bailor in parting with the possession of the goods is sufficient
consideration to support the promise on the part of the bailee to return the goods.”

Rights and duties of bailee

Duties of Bailee
A bailee is the person to whom the goods are delivered. His duties are as follows:
1. Duty to take reasonable care of goods delivered to him. Section 151 lays down this duty, thus,
“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,
quality and value as the goods bailed.” In other words the bailee must take reasonable care of goods
namely the care which an average prudent man can be expected to take care of his own goods in
similar circumstances.
Thus, where some goods were stolen from the bailee’s custody without his fault, but he made no
efforts whether by informing the owner or the police to recover them, he was held liable.

2. Duty not to make unauthorized use of goods entrusted to him (Sec. 154). It is the duty of the
bailee to use the goods strictly in accordance with the terms of the bailment. If he makes an
unauthorized use of the goods, he is liable to make compensation to the bailor for any damage
arising to the goods from or during such use of them. This liability is absolute. It arises even if the
bailee is not guilty of any negligence, or the damage is the result of an act of God or inevitable
accident. In addition, as per Section 153, the bailor can also terminate the bailment if the bailee
makes an unauthorized use of goods.
Illustrations. (a) A hired a horse for the purpose of riding to the Exhibition ground. On the
Exhibition ground the horse was frightened by the crowd and ran into a ditch and injured itself.
The bailee (i.e., A) of the horse was not to be blamed for accident. He is not liable for the injury to
the horse.
(c) A goldsmith accompanied by his wife went from his village to another village to attend a
marriage. The goldsmith took with him some ornaments entrusted to his care by customers. The
object was to enable his wife to wear the ornaments at the marriage. On the way a gang of robbers
attacked them and took away all their goods including the ornaments. The goldsmith was held liable
to the customers for the price of ornaments because he had made an unauthorized use of the goods
entrusted to his care.

3. Duty not to mix goods bailed with his own goods. It is also the duty of a bailee that he should
not mix his own goods with those of the bailor, without bailor’s consent. If the goods are mixed with
the consent of the bailor, there is no breach of duty and the bailor and the bailee shall have an
interest, in proportion to their respective shares, in the mixture thus produced (Sec. 155). But if the
bailee, without the consent of the bailor, mixes up his own goods with those of the bailor, whether
intentionally or accidentally, the following rules apply:
(a) Where 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 expenses of separation as well as any damage arising
from the mixture (Sec. 156).
Illustration
A bail 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.

4. Duty to return the goods. Section 160 lays down this duty in the following terms: “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.” Where there are several joint bailors, the bailee may return the
goods to any one of the joint owners (Sec. 165).
When the bailee fails to return the goods at the proper time, he becomes responsible to the bailor for
any loss, destruction or deterioration of the goods from that time (Sec. 161).
Illustration.
A hires a horse from B for one week. But A defaults in returning the horse on the due date. The horse
dies one day after the expiry of the period of bailment without any fault on A’s part. A is liable for
the price of the horse to B, along with damages for the delay. (If the horse dies within one week, i.e.,
before the expiry of the period of bailment without A’s negligence, A is not liable for the price.)

5. Duty to deliver any accretion to the goods (Sec. 163). It is the duty of the bailee to
deliver to the bailor any natural increase or profit accruing from the goods bailed, unless
there is a contract to the contrary.
Illustration (appended to Sec. 163). A leaves a cow in the custody of B to be taken care of. The cow
has a calf. B is bound to deliver the calf as well as the cow to A.

Rights of Bailee-

1. Enforcement of bailor’s duties. The duties of the bailor are the rights of the
bailee. As such, the bailee can, by suit, enforce the duties of the bailor enumerated above. To
recapitulate, the bailee has the following rights against the bailor (based on the bailor’s duties
discussed above):
(i) Right to claim damages for loss arising from the undisclosed faults in the goods bailed (Sec. 150).
(ii) Right to claim reimbursement for extraordinary expenses incurred in relation to the thing bailed
(Sec. 158).
(iii) Right to indemnity for any loss suffered by him by reason of defective title of the bailor to the
goods bailed (Sec. 164).
(iv) Right to claim compensation for expenses incurred for the safe custody of the goods if the bailor
has wrongfully refused to take delivery of them after the term of bailment is over.

2. Right to deliver goods to one of several joint bailors (Sec. 165). Where goods have been bailed
by several joint owners, the bailee has a right to deliver them to, or according to the directions
of, one joint owner without the consent of all, in the absence of any agreement to the contrary.
3. Right to deliver goods, in good faith, to bailor without title (Sec. 166). The bailee
has a right to deliver the goods, in good faith, to the bailor without title, without incurring any
liability towards the true owner.

4. Right of lien. The right to retain possession of the property or goods belonging to another until
some debt or claim is paid, is called the right of lien. The right depends on possession and is
lost as soon as possession of the goods is lost. As such it is also called a ‘possessory lien.’
Liens may be of two types—‘particular’ and ‘general.’
‘Particular lien’ means the right to retain only that particular property in respect of which the
charge is due.
‘General lien’ means the right to retain all the goods of the other party until all the claims of the
holder against the party are satisfied. In other words, this is a right to retain the goods of
another as a security for a general balance of account.
 Bailee’s particular lien. (Section 170) confers the right of particular lien upon a bailee and provides
that “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”.
Thus a bailee has a particular lien when the following conditions are fulfilled:
(i) The bailee must have rendered some service in relation to the thing bailed and must be entitled to
some remuneration for it, which must not have been paid.
(ii) The service rendered by the bailee must be one involving the exercise of labour or skill in respect
of the goods bailed, so as to confer an additional value on the article.
(iii) The services must have been performed in full in accordance with the directions of the bailor,
within the agreed time or a reasonable time.
(iv) The goods must be in possession of the bailee. If possession is lost, the lien is also lost.
(v) There must not be a contract to the contrary. If all the above mentioned conditions are satisfied,
the bailee can exercise his right of particular lien until he is paid for his services.

The following points must also be noted in connection with the bailee’s particular lien:
(a) The bailee retaining the article to enforce his lien cannot charge for keeping it.
(b) The bailee cannot exercise his lien for the non-payment of extraordinary expenses incurred in
relation to the thing bailed. He should sue for them.

Rights and Duties of Bailor

Duties of Bailor
A bailor is the person who delivers the goods. His duties are as follows:
1. Duty to disclose faults in goods bailed (Section 150) lays down this duty. The Section makes a
distinction between a gratuitous bailor and a bailor for reward and provides as follows:
(a) A gratuitous bailor is bound to disclose to the bailee all those faults in the goods bailed, of which
he is aware and which materially interfere with the use of them, or expose the bailee to
extraordinary risks, and if he fails to do so, he will be liable to pay such damages to the bailee
as may have resulted directly from the faults. A gratuitous bailor will not be liable for
damages arising to the bailee from defects of which he was ignorant.
Illustration 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 bailor for reward is responsible for all defects in the goods bailed whether he is aware of the
defects or not, if he does not disclose them to the bailee. Unlike a gratuitous bailor, ignorance
of the defects is no defence for him.
2. Duty to repay necessary expenses in case of gratuitous bailment (Sec. 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, it is the duty of
the bailor to repay all the necessary expenses incurred by the bailee for the purpose of the
bailment. Thus where a horse is bailed without reward for safe custody, it is the duty of the
bailor to reimburse the bailee for usual feeding expenses of the horse as well as for the
medical expenses, if any.
 3. Duty to repay any ‘extraordinary’ expenses in case of non-gratuitous bailment.
Where under the terms of the bailment, the bailee is to receive remuneration for hi services, it is the
duty of the bailor to bear extraordinary expenses, if any, incurred by the bailee in relation to
the thing bailed. In such a bailment the bailor is not to bear the ordinary or usual expenses.
Thus where a horse is bailed for safe custody and the bailee is to receive Rs 80 per day as
custody charges; the bailor is not liable to repay the bailee the ordinary expenses of feeding
the horse. But if during the bailee’s custody the horse falls ill without any negligence on his
part, the bailor must repay the bailee the medical expenses incurred in connection with the
treatment of the horse, these being extraordinary expenses.

4. Duty to indemnify bailee (Sec. 164). A bailor is also bound to indemnify the bailee for any loss
suffered by the bailee, by reason of the fact that the bailor was not entitled to bail the goods
because of the defective title.

5. Duty to receive back the 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 of, and incidental to, the
safe custody.

Rights of Bailor
1. Enforcement of bailee’s duties. The duties of the bailee are the rights of the bailor. The bailor can
enforce by suit all the duties of the bailee (already discussed) as his rights. To recapitulate, the
bailor has the following rights against the bailee (based on the bailee’s duties discussed earlier):
(i) Right to claim damages for loss caused to the goods bailed by bailee’s negligence (Sec. 151).
(ii) Right to claim compensation for any damage arising from or during unauthorized use of the
goods bailed (Sec. 154).
(iii) Right to claim compensation for any loss caused by the unauthorised mixing of goods bailed
with his own goods (Secs. 155-156).
(iv) Right to demand return of goods as soon as the time for which they were bailed has expired, or
the purpose for which they were bailed has been accomplished (Sec. 160).
(v) Right to claim any natural accretion to the goods bailed (Sec. 163).
2. Right to terminate bailment if the bailee uses the goods wrongfully (Sec. 153).
The bailor has a right to terminate the bailment, if the bailee does, with regard to the goods bailed,
any act which is inconsistent with the terms of the bailment, although the term of bailment has not
expired or the purpose of bailment has not been accomplished.

2. Right to demand return of goods at any time in case of gratuitous bailment (Sec 159).
When the goods are lent without reward (i.e., gratuitously), the bailor can demand their
return whenever he pleases even though he lent them for a specifie purpose or time and the
bailee is not guilty of wrongful use. But if the premature return of goods causes the bailee
loss in excess of benefit actually derived by him from the use of such goods, the bailor must
indemnify the bailee for the amount in which the loss occasioned exceeds the benefit derived.

Termination of Bailment
A contract of bailment terminates under the following circumstances:
1. If the bailment is for a ‘specified period,’ the bailment terminates as soon as the stipulated
period expires.

2. If the bailment is for a ‘specific purpose,’ the bailment terminates as soon as the purpose is
fulfilled.

3. If the bailee does any act with regard to the goods bailed, which is inconsistent with the terms of
bailment, the bailment may be terminated by the bailor even though the term of bailment has not
expired or the purpose of bailment has not been accomplished (Sec. 153).

4. A gratuitous bailment can be terminated by the bailor at any time, even before the specified
time or before the purpose is achieved, subject to the limitation that where such termination
causes loss in excess of benefit actually derived by the bailee, the bailor must indemnify the
bailee for the amount in which the loss occasioned exceeds the benefit derived (Sec. 159)

5. A gratuitous bailment is terminated by the death either of the bailor or of the bailee (Sec. 162).

FINDER OF LOST GOODS

A finder of lost goods is under no obligation to take charge of the goods when he comes across. But
if he does take the charge of the goods, he becomes responsible for the goods like a bailee in a
gratuitous bailment. Section 71 clearly provides to this effect, thus, “a person who finds goods
belonging to another and takes them into his custody, is subject to the same responsibility as a
bailee.”

Duties of Finder
The more important duties of a finder of goods are as follows:

1. Duty to find the true owner. It is the duty of the finder to make reasonable efforts to find
the true owner of the goods. For example, if one finds goods of little value at a public place,
he should shout three times in search of the true owner, and if the goods found are valuable
proper advertisement in newspapers etc., should be given. If the finder fails in this duty, he
will be liable as a trespasser or a thief.

2. Duty to take reasonable care of the goods as a bailee. A finder must take as much care of
the goods as a man of ordinary prudence would, under similar circumstances, take of his own
goods of the same description. If in spite of reasonable care, the goods are lost or destroyed,
he is not liable for any loss.

Rights of Finder
The rights of a finder of goods are as follows:
1. Right to retain possession of the goods until the true owner is found. A finder has the
right to retain possession of the goods against the whole world, except the true owner. It is
important that the finder never becomes the owner of the goods. The ownership will always
remain with the true owner, and the finder only enjoys the right to retain possession against
 everybody except the true owner. If anybody deprives him of the possession of the goods, he
can maintain an action for trespass.

2. Right of lien over the goods for expenses (Sec. 168). A finder has a right to retain the goods
against the true owner until he receives reasonable compensation for trouble and expense
incurred by him to preserve the goods and to find out the true owner. But he has no right to
file a suit against the owner to recover expenses incurred by him because there is no contract
between him and the true owner. He incurred the expenses voluntarily and not at the request
of the true owner.

3. Right to sue for reward (Sec. 168). The finder can file a suit against the true owner to
recover any reward, which was offered by the true owner for the return of the goods lost,
provided he came to know of the offer before actually finding out the goods. He may also
retain the goods until he receives the reward.
4. Right of sale (Sec. 169). If the true owner cannot be found with reasonable diligence, or if he
refuses, upon demand, to pay the lawful charges of the finder, the finder may sell the goods in the
following cases:
(a) When the thing is in danger of perishing or of losing the greater part of its value, or
(b) When the lawful charges of the finder, in respect of the thing found, amount to two third of its
value.

The true owner, however, is entitled to get the balance of sale proceeds, if there is a surplus left after
meeting the lawful charges of the finder.

Illustration. A finds a lost horse. After a diligent search A discovers the true owner and offers to
return the horse to him, on condition that the true owner pays the lawful expenses amounting to Rs
150. The true owner refuses to pay. A cannot file a suit for the recovery of the expenses in the
absence of privity of contract. He cannot also sell the horse until his lawful charges amount to two-
third of the value of the horse.

AGENCY

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

Meaning of ‘principal’

‘Principal’ is the person –

 For whom an act is done by the agent; or
 Who is represented by the agent in respect of dealing with third persons.

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

CREATION OF AGENCY
1. By Operation of Law
2. By Express Agreement
3. By Implied Agreement
(a) Estoppel,
(b) Holding Out,
(c) Necessity
4. By Ratification of acts

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

1. Principal is liable for the acts of agent

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

2. Who may employ an agent?

Any person may employ an agent if –
 He is of the age of majority; and
 He is of sound mind.
3. Who can be an agent?
 Any person may become an agent.
 Even a minor or a person of unsound mind can become an agent

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

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

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

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

 Implied agreement
1. Agency by estoppel
If A person makes a representation (by his words or conduct) to a third person that a certain person
is his agent; and the third party believing such representation to be true, enters into a contract with
the pretended agent.
Then – The person making the representation is prevented from denying the truth of agency. He
may be held liable as a principal by such third party.

2. Agency of holding out

Such an agency comes into existence when a person by his affirmative or positive conduct leads
third persons to believe that person doing some act on his behalf is doing with authority.

3. Agency by necessity – Conditions

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

4. Agency by operation of law

Agency by operation of law arises where the law treats one person as an agent of another.

5. Agency by ratification
Meaning
If – A person (viz., pretended agent) acts on behalf of another person (viz, the principal) and the
pretended agent acts without the knowledge or consent of the principal; and afterwards, the principal
accepts such act.

Then , Agency by ratification comes into existence.

Effects of ratification

 The principal is bound by the acts ratified by him as if such acts had been performed by his
authority.
 Ratification relates back to the actual date of the act that is ratified and not from the date
when the act ratified.
ESSENTIALS OF A VALID RATIFICATION (Sec. 197 to 200)

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

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

3. Act on behalf of another person

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

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

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

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

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

8. Acts within principal’s power

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

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

10. Within reasonable time

Ratification must be made within reasonable time of the act purported to be ratified.
DUTIES OF AN AGENT (Sec. 209 to 218)

1. To conduct the business in accordance with the directions given by the principal

2. To work with reasonable diligence, care and skill.

3. To render proper accounts to the principal on demand.

4. To communicate with his principal in case of difficulty and seek his instructions.

5. Not to deal on his own account unless all the material facts have been disclosed to the principal
and consent of the principal has been obtained.

If the agent, without the knowledge of the principal, deals in the business of agency on his own
account, the principal has the following rights:

(a) He may repudiate the transaction, if the agent dishonestly conceals any material facts or the
dealings of the agent prove to be disadvantageous to him.

(b) He may claim from the agent the agency business other than the agreed remuneration.

6. Not to make any secret profit out of the agency business other than the agreed remuneration

7. To remit to the principal all the sums received in the principal’s accounts in accordance with the
terms and conditions of contract of agency.

8. Not to delegate authority or appoint sub – agent.

9. To protect and preserve the interest on behalf of the principal’s representative in case of his death
or insolvency of the principal.

10. Not to use information obtained in the course of the agency against the principal.

RIGHTS OF AN AGENT (Sec. 217 to 225)

1. To retain money out of the sums received in agency business for advances made or expenses
incurred and remuneration due to him.

2. To receive the agreed remuneration. If the remuneration is not fixed, then he has the right to
recover such remuneration as is usual and customary in such business.

3. Right of lien on principal’s goods, papers and other property until the amount due to him in
respect of the same is paid.

4. An agent has the right to be indemnified by the principal against the consequences of all lawful
acts done in exercise of the authority conferred on him.
5. An agent has the right to be indemnified by the principal against consequences of acts done in
good faith that caused an injury to third person.

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

General Rule – No personal liability [Sec.230]

In the absence of contract to contrary, an Agent cannot –

(a) Personally enforce contracts entered into by him, on behalf of his Principal,

(b) Be held personally liable for them.

This is because the Agent merely acts on behalf of his Principal. Thus, he enjoys immunity from
being personally sued.

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

The Agent is personally liable in the following cases –

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

13. Action against Agent or Principal [Sec 233] : Where the Agent is personally liable, a person
dealing with him may hold - (a) either him or (b) his Principal or (c) both of them liable. The
liability of Principal and Agent is “joint and several”.

LEGAL RELATIONSHIP BETWEEN THE PRINCIPLE AND SUB-AGENT AND AGENT

(Sec.190, 192 and 193)

 If sub-agent is properly appointment

(a) Principal is bound to the third parties for the acts of sub-agent.

(b) The agent is responsible to the principal for the acts of sub-agent.

(c) The sub-agent is responsible to the agent for the acts done by him.

(d) The sub – agent is not responsible to the principle, except in case of fraud or willful wrong.

 If sub – agent is not properly appointed.

(a) Principal is not bound to the third parties for the acts of sub – agent.

(b) The agent is responsible to the principle and third parties for the acts of sub – agent.

(c) The sub – agent is responsible to the agent for the acts done by him.

(d) The sub – agent is not responsible to the principle

TERMINATION OF AGENCY (Sec.201 to 210)

A. By the acts of parties

 By agreement

The principal and the agent may mutually agree to terminate the agency, at any time.
 By revocation
 When the agency is coupled with interest, the principal cannot revoke the agency to the
prejudice of such interest.
 The principal can revoke the authority at any time before, the authority has been exercised so
as to bind the principal.
 The principal cannot revoke the authority given to his agent after the authority has been
partly exercised.
 When agency if for fixed period, the principal must make compensation to the agent for
premature revocation of agency without sufficient cause.
 Revocation may be expressed or implied from the conduct of the principal

 By the agent renouncing the business of agency

Renunciation may be expressed or implied from the conduct of the agent.

When agency is for fixed period, the agent must make compensation to the principal for premature
renunciation of agency without sufficient cause.

B. By operation of law

1. Completion of business of agency

2. Death or insanity of the principal or agent

3. Where the principal or the agent, being a company is dissolved

4. Destruction of subject matter of agency

5. Principal becoming insolvent

6. Expiration of period where agency was for a fixed period.