Unit - II : Law relating to Special Contracts : Salient features of Contract of Agency,

Bailment and Pledge, Indemnity and Guarantee. Sale of Goods Act Distinction
between Sale and agreement to sell - Conditions and Warranties. Negotiable
Instruments Act Definition and Characteristics of a Negotiable Instrument
Definitions, Essential elements and distinctions between Promissory Note, Bill of
Exchange, and Cheques - Types of crossing.

Contract of Agency
The complexities of modern business are such that it Is not possible , any.man to transact
all his business by himself. He canribt J^rsonally attend to all matters in which it is
necessary for him to be brought into legal relations with other people. Of necessity he has
to jepend on the services of otht;r persons m order to run his day-to-day business affairs.
Such other persons are called agents. (
At times all of us act as principals and as agents. If I ask my friend to buy a ticket for me
for a cricket match. I am acting as a principal and my friend is my agent. If your father
asks you to deposit a sum of money against an electricity bill, you are acting as his agent.
Similarly a businessman transacts most of his business through agents.
The law relating to agency is contained in Chapter X (Sees. 182 to 238) of the Indian
Contract Act, 1872.
DEFINITION OF AGENT AND PRINCIPAL
A person who has capacity to contract may enter into a contract with another (0 either by
himself, or (iQ through another person. When he adopts the latter course, he/is said to be
acting through an 'agent'. An 'agent' is a person employed to do any act for another, or to
represent another in dealings with third persons (Sec. 182). The person for whom such
act is done, or who is so represented, is called the 'principal. The function of an agent is
to bring his principal Into contractual relations with third persons.* This means that an
agent is merely a connecting link between the principal and third parties.
Essentials of relationship of agency
There are two essentials of the relationship of agency-:.
1. Agreement between the principal and the agent. .Agency depends on agreement but not
necessarily on contract. As between the principal and third persons any person may
become an agent (Sec. 184). As such, even a, minor or a person of unsound mind may be
an agent. The principal is, however, liable for the acts of such an agent.
Again,, no consideration is necessary to create an agency (Sec. 185). The fact that the
principal has agreed to be represented by *he agent is sufficient 'detriment' to the
principal to support the contract U~ agency.
2. Intention of th& agent to act on behalf of the principal. Whether a person does intend
to act on behalf of another is a question of fact. Where a person does intend to act on
behalf of another, agency may arise although the contract between the parties provides
that there is no such
relationship.
P. A and T. Unless otherwise indicated, P stands for principal, A foagent and T for third patty, in this Chapter.

R5

des of agency
There are two important rules of agency:
1. Whatever a person can do personally, he can do through an agen>. nls rule is of course
subject to certain well-known exceptions' as wh -n
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the act to be performed is personal in character (e.g., marriage) or is annexed to a public
office (e.g., that of a magistrate).
2. He wht>does an act through another does it by himself (quifacit per altumfacit per se).
This, in other words, means.that the acts of an agent, J subject to certain conditions', are
acts of the principal. Sec. 226 clearly; / provides that an agent's acts and contracts will
have the same legal' consequences as if the contracts had been entered into and the acts
done' by the principal in person.
Examples, (a) Tbuys goods from A, knowing that he is an agent for1 their sale, but not
knowing who the principal is. As principal is the-person entitled to claim from T the price
of goods. T cannot in a suit1 by the principal set off against that claim a debt to himself
from A 1
(b) A being Fs agent, with authority to receive money on his '?
behalf,
receives from Ta sujti of money due to P. T is discharged of his
obligation to pay thejsuiti in question to P.1 Who can employ an agent ?
Any person who iis of the age of majority According to the law to which he is subject,
and who is of sound mind, may employ an agent (Sec. 183). As such a lunatic or a minor
or a drunken person cannot employ an agent Who may be an agent ?
Any person who is authorised to act as such may be an agent. As the agent does not make
contracts on his own behalf, it is not necessary that he,should have contractual capacity.
Even a minor may be an agent. If a person who is not,competent to contract is appointed
an agent; the-: principal is liable to the third party for the acts of the agent. Thus as*
between the principal and a third person any person may become an4! ftgent. But no
person who is not of the age of majority and of sound mind is responsible to his principal
(Sec. 184). It is therefore in the interest pf the principal that the agent should have
contractual capacity. Agent aruj servant
.'
1. An agent is employed to bring the principal into legal relations with third persons or to
represent him in dealings with third persons. JA-servant does not ordinarily create legal
relations between the employei;, and third persons [Lafcshminorayan. Ram. Gopal &
Sons v. Hyderab Government, A.I.R (1954J S.C. 364].
N
~~
2. An agent is bound to follow all the lawful instructions of the principal but he is not
subject to the direct control and supervision of the principal. He has often a' large
discretion. A Servant acts under the direct control and supervision of -his employer and is
bound to follow all
\reasonable orders given to his in the coWse of his employment [Ram
^etshadv. Commr. of Income-tax, A.I.R (1973) S.C. 637].
3. An agent may work for several principal? at the .same time ; but a servant usualty
se'rves only one master.^
4. A principal is liable for the wrongs of hisf agent done within the scbpe cif his authority.
A master is liable for the wrongs of the servant if they are cbmmitted in the course of his
employment
.Agent and independent contractor

An independent contractor is employed to act for another but he does the work
independently of the employer's control or interference. . An contract of on the other
hand, is bound to act within the scope of his express or authority.
An independent contractor is personally liable for all acts done by an agent only
represents his principal in dealings with third persons d is not personality liable for acts
done by him within the scope of his authority.
The test for determining whether a person is or is not an agent is this : Has that person the
capacity to bind the principal arid make him answerable to a third person by bringing him
(the principal) into kgal relations with the third person and thus establish a privity of
contract between that person and the principal ? If yes, he is an agent, otherwise not This
relationship of agency may be created either by express agreement or by implication.
CREATION OF AGENCY
The relationship of principal and agent may arise
1. by express agreement, or
2. by implied agreement, or
3. by ratification, or
4. by operation of law. 1. Agency by express agreement
The authority of an agent may be expressed or implied (Sec. 186).
Normally, the authority given by 3 principal to his, agent is an express authority which
enables the agent to bind the principal by acts done within the scope of his authority. The
agent may, in such a case, be appointed either by woroy of mouth or by an agreement In
writing (Sec: 187). The usual form of a written contract of agency is the power of
attorney (a formal Instrument by which one person empowers another to represent him,
or act in his stead, for certain purposes) on a stamped paper.
2. Agency by implied agreement
Implied agency arises from the conduct, situation or relationship of parties. It may be
inferred from the circumstances of the casei and things spoken or written or the ordinary
course of dealing, may be accounted as circumstances of the case (Sec. 187).
Examples, (a) A and P are brothers. A lives in Delhi while Plives in Meerut. A with the
knowledge of P leases Fs lands in Delhi. He realises the rent and remits it to P. A is the
agent of P, though ftot expressly appointed as such.
(b) P owns a shop in Serampur being himself in Calcutta, and visiting the shop
occasionally. The shop is managed by A and he IS in the habit of ordering goods from T
in the name of P for the purposes of the shop, and for paying for them out of Ps funds
with Fs knowledge. A has an {implied authority from Pto order goods/from Tin th nrime
fP for the purposes of the shop.

(c) A woman allowed her son to drive a car for her, she paying at the expenses of
maintenance and operation. The son caused an accident injuring his wife. Held, the wife
could sue the mother as the son was an implied agent of the mother [Smith v. Moss].
Implied agency arises when the principal conducts himself the person alleged to be the
agent or the third parties in such a if the; principal had conceded to the appointment of
that person as jit includes :
(1) Agency by estoppel The doctrine of estoppel may be stated Vtfiere a person by his
conduct, or by words spoken or written, wilfully another person to believe that a certain
state of affairs exist, induces him to act on that belief so as to alter his previous position,1
precluded from denying subsequently the fact of that state of [Picfcaniv. Sears, (1837) 6
A. &E. 474]. '
\ Example. A tells T within the hearing of P that he (A) is Ps \ P does
not object to this statement of A . Later T supplies certain ' to A who pretends to act as an
agent of P. P is liable to pay the T. By keeping quiet, he (P) had led T to believe that A is
agent
Sec. 237 deals with agency by estoppel. According to it, when an 1 has, without authority,
done acts or incurred obligations to third oft behalf of his principal, the principal is bound
by such acts' obligations, if he has by his *words or conduct induced such third to*
believe that such acts and obligations were within the scope pf agent's authority. x
Examples, (a) P consigns goods to A for sale, and gives,'! instruction not to sell under a
fixed price. T, being ignorant of j instruction to A, enters into a contract with A to buy the
goods lower than the reserved price. P is bound by the contract.
(b) P entrusts A with negotiable instruments indorsed in bi sells them to Tin violation of
private orders from P. The sale is ( Agency by estoppel arises when a person is held out as
an agent -;
(0 even though he is actually not ah agent, or ((0 after he ceased to be an agent
'
Example. The services of A who was Ps -agent were ter No notice to this effect was given
by P. A subsequently purcl the name of P some goods on credit from T. Held, P was liable
the price [THimonv. Loder, (1840) 9 L.J. Q.B. 165].
(2) Agency by holding out. Agency by holding out is a branch & agency by estoppel. In
this case, a prior positive or affirmative act.ojjj paift of the principal is, required to
establish agency subsequently.
Example. P'allows his servant habitually to purchase him on credit from T, and pays for
them. On one occasion, he servant cash to purchase the goods. The servant
misappropriate^ money and purchases goods on credit from T. T can recover the^ from P
as he had held out his servant as his agent on prior i
(3) Agency by necessity. In certain urgent circumstances the confers an authority on a
person to act as ah agent for the beneflf another, there being no opportunity of
communicating with that ot Such agency is called an 'agency of necessity'. It arises in the
fol
(0 Agent exceeding his authority in an emergency (Sec. 189). ?.f*ent exceeds his
authority in an emergency, there arises agen necessity provided the agent (0 was not in a
position to communicate the onncioal. (b) had taken all reasonable and necessary steps to
pr
interests of the principal, and (c) had acted bonajide. In such a case *kC principal is liable
for the acts of the agent.

Example. P consigns provisions to A* at Calcutta, with directions to send them

immediately to T at Cuttack. A may sell the provisions at Calcutta, if they-will not bear
the journey to Cuttack without spoiling.
((0 -A person entrusted with another's property. An agency of cessity also' arises when a
person is entrusted with some property of pother which he has to protect or preserve. In
such a case, although th<* Person who is entrused with the property has no express
authority to do the act necessary to preserve it, yet because of the necessity such a.n
authority is implied. Thus the master of a ship or the carrier of goods becomes the agent
of necessity of the shipowner or cargo owners if -it is necessary for him to take steps for
the safety or protection of the ship or the cargo.
Examples, (a) A horse was sent by a train. When it arrived at the station of destination,
nobody took its delivery. The railway company, therefore, had to feed the horse, ffeld, the
railway company was an agenct of necessity and could recover the amount spent dta
feeding the horse [Great Northern Rail v.( Swaflleld, (1874) L.R 9 Ex. 132].
(b) P consigned a quantity of butter through a railway company. Owing to a strike some
delay took place in transit. The railway company sold, the butter. Held, the sale was
binding on P as goods were perishable [Sfrns & Co. v. Midland Raft. Co., (1913) 1 K.B.
103].
(c) A master of a ship found that the cargo of the ship was perishing rapidly. Held, he was
entitled to put into the nearest port and sell the goods for the best price obtainable
[Couturier v. Hastje, (1856) 5 H.L.C. 675]. Where it is necessary for the further
prosecution of the voyage, the master of a ship has authority to borrow o^ the shipowner's
credit, to hypothecate the ship, cargo and freight, of the cargo alone, and to sell a part of
the cargo.
(ttfl Husband and wife. A husband is bound to maintain (Le., to supply necessaries of life)
his wife ; and if he makes no adequate provision for her maintenance, she is entitled to
pledge his credit for necessaries. Necessaries' do not mean bare necessaries but such
goods and services as are commensurate with the couple's joint style of living. W4jere the
nusband and wife are living together, the wife is presumed ta have jrnpUed authority to
pledge the husband's credit for necessaries. But the nusband may escape liability if he can
prove that (0 he has expressly, rorbidden his wife to pledge his credit, or (ti) the goods
purchased are not necessaries, or (0 he has allowed sufficient funds for purchasing the
she needed to the knowledge of the tradesman, or (to) the has been expressly told not to
give credit to the wife.
wtfe Hbes apart A wife, who is deserted by her husband for f her, has authority to pledge
her husband's credit :fort 3* Tne husband cannot escape liability by telling his wife not
his credit nor even by telling the tradesman not to supply n crcdlt rtie wifc enjoys this
right only if her husband dbes for her maintenance. But where she lives apart of her own
f and without any Justification, she is not the agent of her husband
no cannot pledge his credit even for necessaries. The husband to |X)und toj maintain her
under such circumstances. ,3. Agency by ratification
A person may act on behalf of another without his knowledge1 consent. For example, A
may act as Pa agent though he has no t* authority from P. In such a case P may
subsequently either accept the of A or reject it. If he accepts the act of A, done without his
consent, *! said to have ratified that act and it places the parties in exactly the i position
in which they would have been if A had Fs authority at the he made the contract

Likewise, when an agent exceeds the autc bestowed upon him by the principal, the
principal may ratify unauthorised act
Examples. (a> A Insures Fs goods without his authority, ratifies A's act, the policy will
be as valid as if A had been authc to Insure the goods [Williams v. North China Insurance
Co., (1871 C.P.D.757).
(b}A, acting for and on behalf of P, effected an assurance/ had no authority to do. P
without demur (hesitation, obj< protest) accepted the money received under the policy.
Held,* this; ratification of-the, contract by P [Hukurnchand Insurance Co. v. ofBaroda,
A.I.R. (1977) Kant 204].
Ratification may be expressed or may be implied in the conduct of j person on whose
behalf the acts are done (Sec. 197).
Examples, (a) A, without authority, buys goods for P. P sells them to T on his own
account. Fs conduct implte ratification of the purchase made for him by A
(b) A, without Fs authority, lends Fs mon/y to T. Aftei accepts interest from T. Fs conduct
implies a ratification of the,;
(c) A let Fs property without the latter's consent. A received for many years and P sued
him for an account of the rents. Held, action constituted ratification of such receipts
[Lyell v. Kei (1889) 14 App. Gas. 437).
(d) A bought some goods on behalf of P in excess of the authorised by P. P objected to the
purchase but sold some of the, Held, he had ratified the purchase by selling goods
[Comwalv. (1750) 1 Ves. Sen 509].
Effect of ratification. The effect of ratification is to render the done by one person
(agent) on behalf of another (principal), wit (principal's) knowledge or authority, as
binding on the other (principal) as if they had been, performed by his authority (Sec.
196). Ratification is tantamount to prior authority. It relates back date when the act was
done by the ageni. This means the agency/1 into existence from the moment the agent
first acted and not frontf 1 time when the principal ratified the act
Example. A, the managing director of a company, act as agent on company's behalf, but
without its authority, an offer by T. T subsequently withdrew the offer, but the ratified A's
acceptance. Held, Twas bound. The ratification back to the time of A's acceptance and so
prevented the subi revocation by T [Bolton Partners v. Lambert (1888) 41 Ch. D. 295].
183
tiirite* of valid ratification
1, The agent must purport to act as agent for a principal who (s in ^Jnplotton and Is
identifiable at the time of contract.
Example. R was-adthorised by K to buy wheat at a certain price. Acting in excess of his
authority, R purchased ^rheat from D at# higher price in his own name. He did not
profesp to buy wheat on behalf of K. Subsequently K ratified the act of JR but later
refused to take delivery of the wheat. D brought on action against K. Held, the contract
could not be ratified because R did not purport to act as an agent for K [KeighJey,
Maxsted & Co. v. Durant (1901)XC. 240).
2. The principal must be in existence at the time of contract. A. company, for example,
cannot ratify the contracts entered into by the promoters on its behalf before its
incorporation.
Example. B entered into a contract with K on behalf of a hotel company intended to be
formed, uhe company, when duly formed; ratified the contract. After some time it went

into liquidation. K sued B upon the contract. B pleaded that the liability had passed to me
company by ratification. Held, the company was not liable by a mere ratification.
"Ratification can only be by a person ascertained at the time of the act done and by a
person in existence either actually or in contemplation of law...." As such B was held M>
be personally liable [Kelnerv. Baxter, (1866) L.Ifc' 2 C.P. 174].
3. The principal must have contractual capacity both at the time of the contract and at the
time of ratt/katton. If the principal was not competent to enter into contract at the time
when the contract was entered into, he cannot validate it by subsequently ratifying it at
the time when he is competent to contract. ,
4. Ratt/lcatton must be with full knowledge of facts. No valid ratification can be made by
a person whose knowledge of facts of the case is materially defective (Sec. 198).
Example. A has an authority from P to buy certain goods at the
market rate. Hrbuys at a higher rate but P accepts the purchase.
Afterwards P,comes to know that the goods purchased by A for P
belonged to A himself. The ratification Is not binding on P.
If however the alleged principal 1^ prepared to take7 the risk of what the purported agent
has done, he can choose to ratify without full knowledge of facts.
Example, A, an agent entered into an unauthorised contract for the purchase of a property
from T for P. P wrote to T assuring him that he would stand by the acts of A whatever
they were, even if he did not know what theyiwere.' Held, P was liable as he had agree'd
to bear the risk of being bound by the unauthorised acts of A [Fttzmcurtce v. BoyJey,
(1856) 6 E. & B. 868]
5. Rattficatipn must be done within a reasonable time of the act Purported to be ratified.
If it is made after the expiry of the reasonable it will not be valid.
6. The act to be ratified must be lawjul and not void or illegal or ultra s in case of a
company. An agreement which is void ab inttio cannot ** ratified iMutamchondv. Stole
of M.P.. A.I.R (1968) SrCT. 1218],
7. The whole transaction can be ratified (Sec. 199). There can be ratification of an act in
toto (entirety, wholly) or its rejection in toto. The principal, cannot ratify a part of the
transaction which is beneficial him and'reject the rest.
8. Ratification must be communicated to the party who is sought to bi bound by the act
done by the agent
-$
9. Ratification can be of the acts which the principal had the power to1 do. The acts
which the principal is incapable of doing cannot be ratified.* A company^ for example,
cannot ratify the acts of the directors which ultra vires the powers of the company.
\0. Ratification should not put a third party to damages. Ratification, which has the1
effect of subjecting a third person to damages or of terminating any right or interest of a
third person, canpot be made ' (Sec. 200).
Examples, (a) A, not being authorised thereto by P, demands oj
behalf of,P the delivery of a chattel, the property of P, from Twhb is 1
possession of it. The demand'cannot be ratified by P, so as to make
liable for damages for his refusal to deliver.
(b) T holds a lease from P, terminable on three months' notice. A,!f
an unauthorised person, gives notice of termination to 7 The notice^
cannot be ratified by P, so as to be binding on T.
I!1. Ratification relates back to the date of the act of the agent

Example. A who purports to act as agent 6n behalf of P but r

without Fs authority accepts an offer by T. T withdraws the offer
before P comes to know of sit. P subsequently ratifies A's acceptance.
The ratification results in a contract and as such T is bound by the*
contract.
Limitation* to the doctrine of ratification. There can be no; ratification
(1) Where an agent purports to act as agent for a principal not in contemplation or
existence.
(2) Where the principal is incapable of contracting.
(3) Where the principal does not have full knowledge of facts.
(4) Where the act to be ratified is void or illegal.
(5) Where the whole of the transaction is not ratified.
(6) Where the ratification is not communicated to the person sought to be bound by the
act done by the agent
(7) Where th^ ratification is of the acts which the principal has ncj power to do.
(8) Where the ratification puts a third party to damages. 4. Agency by operation of law
Sometimes an agency arises by operation of law. When a company i*| formed, its
promoters are its agents by operation of law. A partner is the, agent of the firm for the
purposes of the business of the firm, and the act of a'partner, which is done to carry on,Jij
the usual way, business kind carried on by the firm, binds the firm (Sees. 18 and 19 of the
Indian^ Partnership Act, 1932). In all these cases, agency is implied by operation of law.
CLASSIFICATION OF AGENTS
A general classification of agents from the point of view of the extent of their authority is
as follows :
con-mACT OF AGENCY
185
1. Special agent A special agent is one who^is appointed to perform a
articular act or to represent his principal in some particular
transaction-as, for example, an agent employed to sell a house or an agent
mployed to bid at an auction. Such an agent has a limited authority and
as soon as the act is performed, his authority comes to an end. He cannot
bind his principal in any matter other than that for which he is
einployed The persons who deal ivith him are bound to ascertain the
extent of his authority.
2. General agent. A general agent is one who has authority to do all acts connected with a
particular trade, business or employment. For example, the manager (general agent) of a
firm has an implied authority to bind his principal by doing anything necessary for
carrying on the business of the firm or which falls within the ordinary scope of the
business. Such authority of the agent is continuous until it is put to an end. If the
principal, by secret instructions, limits the authority of the general agent, and the agent
exceeds <the authority, the principal is bound by the agent's acts done within the scope of
his authority, unless the third parties dealing with the agent have a notice of the
curtailment of the authority of the agent
3. Universal agent A universal agent is one whose authority to act for the principal is
unlimited. He has authority to bind his principal by any act which he does, provided that
act (0 is legal, and (iO is agreeable to the law of the land.

Another classification of agents from the point of view of the nature of work performed
by them is as follows :
1. Commercial or mercantile agents. A 'mercantile agent', according to Sec. 2 (9) of the
Sale of Goods Act, 1930, means "a mercantile agent haying in the customary coure of
business as such agent, authority either to sell goods, or to consign goods for the purposes
of sale, or to buy goods, *pr to raise money on the security of goods." This definition
does not cover all kinds of mercantile agents which are as follows :
(1) Factor. A factor is a mercantile agent entrusted with the possession of goods for the
purpose of selling them. He has ostensible authority to do such things as are usual in the
conduct of business [Plckertng v. Busfc (1812) 15 East 38). He sells the goods in hte own
name as an apparent owner upon such terms as he thinks fit. He can sell them on credit as
well. He has also the authority to receive the price and give a good discharge to the
purchaser.
A factor has a general lien on the goods of his principal for a general balance of account
between him and the principal (Sec. 171). If he is in Possession of goods, or of the
documents of title to goods, with the consent Pjr the oumer, any sale, pledge or other
disposition of them made by him, m the ordinary course of business, is binding on the
owner, whether or not the owner authorised it
Example. P owned a motor car and delivered it to A a mercantile agent for sale at not less
than 575. Asold the car for 340 to T, who ^ught it in good faith and without notice of
any fraud. A misappropriated the 340 and Fsued to recover the car from T. Held, as A
was in possession of the car with Fs consent for the purposes of safe. Tgot a good titfc
[FoJkes v. King, (1923) 1 K.B. 282]. ^ > -Aucifcreer. An acutioneer Is an agent
appointed by a seller to sell coods by public auction for a reward generally in the form
o-.commission. He is primarily the agent of the seller, but after the sale taken place, he
becomes the agent of the purchaser also. He resembles factor in all respects except that he
has only a particular lien on the _ for his charges. He has authority to receive the price of
the goods sold, can also sue for the price in.his own name. The principal is liable to third
parties for the acts of the auctioneer if the auctioneer acts wit the scope of his apparent
authority even though he disobeys instruc'' privately given to him.
Example. P instructed A to sell a pony by auction, subject to _ reserve price of 25. A at
the time of sale inadvertently stated that there was no reserve price and knocked the pony
down to Tat Held, the sale was binding on P [Rainbow v. Hawkins, (1904) 2 K 322].
If the auctioneer states that the sale is subject to a reserve price, but mistake knocks the
article down at a price below the reserve price, sale is not binding on the owner. In such
a case, the buyer knows there is a limitation on the auctioneer's authority, and therefore
bids only be accepted provided the reserve price is reached [McManus Fortescue. (1907)
2 KB. 1].
(3) Broker. A broker is an agent who is employed to buy or sell gc on behalf of another.
He is employed primarily to bring about contractual relation between the principal and
the third parties. He not entrusted with the possession of the goods in which he deals. F.
cannot act or sue in his own name. And as he has no possession, he no right of lien.
The usual mode of dealing by a broker is to put the terms of th contract in writing in a
book, sign it and then send the particulars ofi contract to both the parties. The document
sent to the buyer is called "bought note", and that sent to the seller the "sold note". If th<

documents agree, the terms of the contract are defined. If they do nc agree, there is no
binding contract. A reference is then made to si| entry in the broker's book.
(4) Commission agent. A commission agent belongs to a somewhat indefinite class of
agents. He is employed to buy and sell goods, of transact business generally for other
persons receiving for his labour anq trouble a money payment, called commission.
](5) Del credere agent A del credere agent is one who, in consideration, of an extra
commission, guarantees his principal that the persons with whom he enters into contract
on behalf of the principal, shall perform their obligations. He occupies the position of
both a guarantor and agent
(b) Banker. The relationship between a banker and his customer really that of debtor and
creditor. But there is a super-added obligatk on the part of the banker to pay when called
upon to do so by the draft' order (in the form of a cheque) of the customer. To this extent
a banker Mj the agent of his customer.
2. Non-mercantile agents.
These include attorneys, .solicitor*! insurance agents,
clearing and forwarding agents and wife, etc.
RELATIONS OF PRINCIPAL AND AGENT Duties and rights of agent
^
^
'
: ' |:~
Duties of agent. An agent owes a number of duties to his priricip**
CONTRACT OF AGENCY 187
which vary in degree according to the nature of agency. These duties are as follows:
1. To carry out the work undertaken according to the directions given bv the principal. In
the absence of any such directions, he must act according to the custom which prevails in
doing business of the same kind at the place where he conducts such business. When he
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 (Sec. 211). If the agent's disobedience is material,
the principal may_even terminate the agency.
Examples, (a) A, an agent engaged in carrying on for Pa business, in which it is the
custom to invest from time to time, at interest, the moneys which may be in hand, omits
to make such investments. A\ must make good to P the interest usually obtained by such4
investment.
(b) A, a broker, in whose business it is not the custom-to sell on credit, sells goods of P on
credit to T whose credit at the time was very high. T, before payment, becomes insolvent
A must make good the loss to P.
;
(c) A, an agent, was instructed to warehouse some drapery goods for P, at a particular
place. He warehoused a portion of them at another place where they were destroyed by
fire, without any negligence on the part of A Held, A was liable to P for the value of the
goods destroyed [IMeyv. Doubleday. (1881) 1 Q.B.D. 510].
(d) An agent Instructed to insure goods, neglects to do so. He is liable to the principal fortheir value in the event of their loss [PannalalJankidasv. Mohanlal, A.I.R (1951) S.C.
144].
An agent may disobey his principal's directions where his authority is coupled with
interest te., where he is privileged to protect his interest.

Example. A, a factor, has a lien on Pa goods in his possession to the extent of moneys
advanced by A to P. P directs A to return the goods or sell them on credit. A is not bound
to comply with Fs orders until P has repaid all advances made by A.
2. To cony out the work with reasonable care, skill and diligence. An agent is bound to
conduct the business of the agency with as much skill as is generally possessed by
persons engaged in similar business, unless the principal has notice of his want of skill.
He is always bound to act with reasonable diligence, to use skill as he possesses, and to
make compensation to his principal in respect of the direct consequence of his neglect,
want of skill or misconduct. But he is not liable to his principal in respect of loss or
damage which is indirectly or remotely caused by such neglect want of skill or
misconduct (Sec. 212).
Examples, (a) P, a merchant in Calcutta, has an agent, A, in London to whom a sum of
money is paid on Fs account with orders to remit. A retains the money for a considerable
time. P, in consequence of not receving the money, becomes insolvent A is Uabte to P 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 T, on credit
without making the proper and usual Inquiries as to the solvency of T. T, at the time of
such sale, is insolvent A must make compensation to his principal in respect of any loss
thereby sustained.
,
(c) A, an insurance broker, employed by P to effect an Insurance on a ship, omits to see
that the usual clauses are inserted in the policy. The ship is afterwards lost. In
consequence of the omission of the clauses, nothing can be recovered from the
underwriters. A is bound to make good the loss to P.
3. To render proper accounts to his principal. An agent is bound to render proper accounts
to his principal on demand (Sec. 213).
4. To communicate with the principal 1n case of difficulty. It is the duty of an agent, in
cases of difficulty, to use all reasonable diligence in communicating with his principal,
and in seeking to obtain his instructions (Sec. 214).
5. Not to deal on his own account. An agent must not deal on his own account in the
business of the agency without first obtaining the consent of the principal and acquainting
him with all the material circumstances which have come to his knowledge.
If an agent, without the knowledge of his principal, deals in the business of the agency on
his own account, the principal may
(1) repudiate the transaction, if the case shows either that any material fact has been
dishonestly concealed from him by the agent or that the dealings of the agent have been
disadvantageous to him (Sec. 215), and
Examples, (a) P directs A to sells his (Fs) estate. A buys-the. estate for himself in the
name of T. P, on discovering that A has bought the estate for himself, may repudiate the
sale, if he can show that A has dishonestly concealed any material fact, or that the sale
has been disadvantageous to him.
(b) P directs A to sell his (Fs) estate. A on looking over the estate before selling it, finds a
mine on the estate which is unknown to P. A informs P that he wishes to buy the estate for
himself, but conceals the discovery of the mine. P allows A to buy in ignorance of the

existence of the mine. P, on discovering that A knew of the mine at the time he bought the
estate, may either repudiate or adopt, the sale at his option.
(2) claim from the agent any benefit which may have resulted to him from the transaction
(Sec.1216).
Example. P directs A his agent to buy a certain house for him. A tells P it cannot be
bought and buys the house for himself. Pmay, on discovering that A has bought the house,
compel him to sell it to him (P) at the price he (A) gave for It
6. To pay sums received fcr the principal An agent is bound to pay to his principal all
sums received on his account (Sec. 218). He may deduct therefrom all moneys due to
himself in respect of advances made or expenses properly Incurred by him in conducting
such business and also such remuneration as may be payable to him for acting as agent
(Sec. 217).
7. To protect and preserve the interests of the principal In case of his death or Insolvency.
When an agency is terminated bpr the principal dying or becoming of unsound mind, the
agent is bound to take, on behalf
CONTRACT OF AGENCY 189
of the representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him (Seq. 209).
8. Not to use Information obtained In the course of the agency against the principal. It is
the duty of the agent to pass on any information which he receives in the course of the
agency to his principal. Where he uses any such information against the interest of
principal and the principal suffers a loss, he is bound to compensate the principal. The
principal may also restrain the agent from using such information by an injunction.
9. Not to make sercet profit from agency. An agent occupies fiduciary position. He must
not, except with the knowledge and assent of the principal, make any profit beyond the
agreed commission or remuneration.
^Examples, (a) An auctioneer received from the buyer commission in addition to what his
principal paid him as commission. Held, he was bound to hand over the total commission
to the principal [Andrews v. Ramsay & Co., (1903) 2 K.B. 635]. /(b)
An agent sold his own stock to his principal without disclosing this fact at the
prevailing market price. Held, he was bound to account for any profit he made in the
transaction [Kimber v. Barber, (1873) L.R 8 Ch. 5).
(c) P employed A to buy a house for him. A bought a house for 2,000 in the name of a
nominee. He then entered into a contract with the nominee to purchase the house for
4,500 which he resold to P for 5,000. Held, A was liable to account to P not only for
the immediate profit of 500 but also for 2,500 profit on the previous transaction [Regler
v. CampbeU Stuart, (1939) Ch. 766]. If the agent makes a secret profit or takes a bribe
from the other party with whom he contracts on behalf of his principal, the principal may

(a) recover the amount of the secret profit from the agent;
(b) refuse to pay the agent his commission or remuneration ;
(c) dismiss the agent without notice ;
(d) repudiate the contract with the other party.
10. Not to set up an adverse title. An agent must not set up his own title or the title of a
third person (unless Jie proves a better title in that person) to the goods which he receives
from the principal as an agent. If 'he does so, he will be liable for conversion (any act in

relation to goods of another person whjch constitutes an unjustifiable denial of his title to
them).
11. Not to put himself 1n a position where Interest and, duty conflict. An agent is under a
duty, in all cases, to act in the/ interest of the principal. He must not put himself in a
position where his duty to the' principal and his personal interest conflict unless he
has,made full disclosure of his interest to his principal, specifying Its exact nature and
obtained his assent . ' ^ '
Example. P employed A, a stockbroker, to buy some shares for him. A sold his own
shares to P without disclosing lihat the shares belonged to him. Held, P could rescind the
contract [Armstrong v. Jdcfcson, (1977) K.B. 822].
12. Not to delegate authority. An agent must not, as d general rule, depute another person
to do what he has himself undertaken to do. This is, however, subject to certain
exceptions (Sec. 190).
Rights of agent. An agent has the following rights against the principal:
1. Right of retainer. The agent may retain, out of any sums received on account of the
principal in the business of the agency, all moneys due to himself in respect of his
remuneration and advances made or expenses property incurred by him in conducting
such business (Sec. 217).
3. Right to receive remuneration. The agent is entitled to his agreed remuneration, or if
there is no agreement, to a reasonable remuneration. But in the absence of any special
contract, payment for the performance of any act is not due to the agent until the
completion of such act (Sec1. 219). Now the question is : when is the act complete ? This
depends on the terms of the contract.
Examples, (a) A was appointed an agent to secure orders for advertisements in a
newspaper. The commission was agreed to be paid when an advertisement was published.
After A had obtained, orders for certain advertisements, the agency was terminated. Held,
he was entitled to commission on orders obtained by him although! the advertisements
were not published [Sellers v. London County Newspapers, (1951) 1 All E.R 544].
(b) A was employed an agent to sell a property on the terms that he would be paid
commission on the completion of sale. He produced^ person ready and willing to buy but
the owners refuse^ to sell. Held, the agent was not entitled to commission as sale had not
been completed [Luxor (Eastbourne) Ltd. v. Cooper, (1941) A.C. L08].
(c) An agent was appointed to introduce a customer to purchase^ the principal's property.
He did introduce one cutomer : the sale was settled and earnest money paid. The sale fell
through because of the customer's inability to find money. Held, the agent was entitled
to his agreed commission [Sheikh Farid BaJeshv. Hartfulal Singh, A.I.R (1937) All. 46].
If a transaction for which the agent claims remuneration is the direct
or indirect result of his services or efforts, he is entitled to remuneration.
Example An agent was appointed to sell a house. He held an
auction but could not find a purchaser. One of the persons attending
the auction obtained |from him the address of the principal and
finalised with him the purchase without the agent's intervention.
Held, the agent was entitled to his commission as the transaction
was the result of his efforts [Green v. Borlett, (1863) 14 C.B. N.S. 681].,
An agent who is guilty of misconduct in the business of the agency is
not entitled to any remuneration in respect of that part of the business

which he/has misconducted (Sec. 220).

Examples^ (a) P employs A to recover Rs. 1,00,000 from T, and to lay it out on good
security. A recovers Rs. 1,00,000 and lays out Rs. 90.000 on good security, but lays out
Rs. 10,000 on security which he, ought to have known to be bad whereby P loses Rs.
2,000. A is, entitled to remuneration for recovering Rs. 1,00,000 and investing Rs.
90,000. He is not en'titled to an^ remuneration for inves^ingTRs. 10,000 and he must
make good Rs. 2,000 to P.
(b) P- employs A to recover Rs. ^000 from T. Through A's misconduct the money is not
recovered. A is entitled to no remuneration for his services, but must make good the
loss to P.
OONTRACT OF AGENCY 191
{c) P engaged A, an auctioneer, to sell some property on the terms that he should receive
50 as commission. A sold the property and received in addition 20 as commission
from the purchaser. P, upon discovering this fact, sued to recover this 20 and also 50
he had paid to A. Held, he was entitled to recover both sums {Andrews v. Ramsay &Co.,
(1903) 2 K.B. 635].
3. Right of lien. In the absence of any contract to the contrary, an agent fs entitled to
retain goods, papers nd other property, whether inovable or immovable, of the
principal'received by him, until the amount due to himself for commission,
disbursements, and services in respect of the same has been paid or accounted for to him
(Sec. 221). This lien of the agent is a particular lien. It is \conflned to claims arising in
connection with the gobds or property in respect of which the right is claimed. But by a
special contract, an agent may have a general lien extendingla all claims arising out of the
agency.
4. Right of^ndemnifaation.^ The agent has a right to be indemnified against the
consequences o/ all lawful acts done by him ii} exercise of the authority conferred upon
him (Sec. 222),
Examples, (a) A, at Singapore, under instructions from P of C^alcutta, contracts with T to
deliver certain goods to him. P does not send the goods to A and T sues A for breach of
contract A defends the suit and is compelled to pay damages and costs, and incurs
expenses. P is liable to A for such 'damages, costs and expenses.
(b) A, an agent, seized goods of T, a third party, at the command of P, the principal.
Although the'goods had been seized improperly, it was shown that A had acted bonajide.
Held, A was entiled to be indemnified [Toplis v. Crane, (1938) 5 Bing. N.C. 636]. The
right of agent to be indemnified does not extend to acts which are known to the agent to
be unlawful. Sec. 224 provides in this regard that where, any person employs another to
dp an act which Is criminal, the employer is not liable to the agent, either upon Jan
express or an implied promise, to indemnify him against the consequences of that act.
Examples, (a) P employs A to beat T, and agrees to indemnify him against all
consequences of the act. A thereupon beats Tand has to pay damages to T for so dotyg. P
is not liable to indemnify A for, those damages.
(b) A, the proprietor'of a newspaper, publishes at Fs request, a libel upon T in the paper.
P agrees to indemnify A against the consequences of the publication, and all costs and
damages of ahy action in respect thereof. A is sued by Tand has to pay damages, and also
incurs expenses. P is not liable to A Upon the indemnity. But, where one person employs
another to do an act, and the agent does the act in good faith, the-agent has.a right to be

indemnified against Uje consequences of that act, even though It causes an injury to the
rights of a third person (Sec. 223).
Examples; (a) P, a decree-holder, entitled to execution (carrying into effect the judgment
of the Court for recovery of debt) of Ts goods requires the offlqer ofthe Court to seize
certain goods, representing them to be the goods of T. The officer seizes the goods and is
sued by O, the true owner of the goods. P is liable to indemnify the officer for the sum
which he is compelled to pay to/O in consequence of obeying Fs instructions.
(b) A, at the request of P, sells goods in the possession of P, which Phas no right to
dispose of. A does not know this, and hai over the proceeds of the sale to P. Afterwards T,
the true owner of goods, sues A and recovers the value of the goods and costs. P is Ifc to
indemnify A for what he has been compelled to pay to Tand for own expenses.
5. Right of compensation. The agent has a right to be compensated injuries .sustained by
him by neglect or want of skill on the part of principal (Sec; 225).
Example. P employs A as a bricklayer in building a house, ; puts up the scaffolding
himself. The scaffolding is unskillfully j up and A is in consequence injured. P must
make compensation to
6. Right of stoppage in transit. This right is available to the agent the following two
cases :
(1) Where he has bought goods for his principal by incurring personal liability, he has a
right of stoppage in transit against principal, in respect of the money which he has paid or
is liable to This right of the agent is similar to that of the unpaid seller.
(21 Where he is personalty liable to the principal for the price of i goods sold, he stands
in the position of an unpaid seller towards the bu; and can stop the goods in transit on the
insolvency of the buyer. Duties and rights of principal
Duties of principal. The duties of a principal towards his agent the rights of the agent
against the principal. The rights of an agent" already been discussed.
The principal owes the following duties to an agent:
1. To indemnify the agent against the consequences of all lawful u The principal is bound
to indemnify the agent against the consequen of air lawful acts done by such agent in
exercise of the authority conf< upon him (Sec. 222).
2. To indemnify the agent against the consequences of acts u* good faith. Where one
person employs another to do an act, and the does the act in good faith, the employer is
liable tp indemnify the against the consequences of that act, though it causes an injury iu
rights of a third person (Sec. 223). Where, however, any person emp another to do an act
which is criminal, the employer is not liable t< agent, either upon an express or an
implied promise, to indemnify against the consequences of that act (Sec. 224f^
3. To indemnify agent for injury caused by principal's neglect.1 principal must make
compensation to his agent in respect of in caused to such agent by the principal's neglect
or want of skill (Sec. 22 ?4. To pay the agent the commission or other remuneration
agreed^ i Rights of principal. The principal can enforce all the duties o agent which are
indirectly the rights of the principal. When an agent in his duty towards the principal, the
principal has the folio1 remedies against the agent:
1. To recover damages. If the principal/ suffers any los$ due disregard by the agent of
the directions by- the principal, or. by ' following the custom f trade in the absence >of
directions by principal, or where the principal suffers due to lack of requisite s
CONTRACT OF AGENCY , 1 93

^e br diligence on the part of the agent, he can recover damages Accruing as a result
from the agent.
2. To obtain an account of secret profits and recover them and resist a lalnifor
remuneration. If the agent* without the knowledge and assent { the principal, makes any
secret profits out of the agency, the principal has the right to recover them from the agent.
Not only this, the agent also forfeits his right to any commission In respect of the
transaction. Where the agent makes a secret prdfit, the contract with the third party is not
rendered void.
3. To resist agent's claim for indemnity against liability incurred. Where the principal
can show that the agent has acted as principal himself and not merely as agent, he can
resist the agent's claim for indemnity against liability incurred by him in such a
transaction. DELEGATION OF AUTHORITY
The general rule is that an agent is not entitled to delegate his authority to another person
without the consent of his principal. 'Detegatus nonpotest delegare' is the maxim which
means that a peifeon to whom authority has been given,* cannot delegate that authority to
another. Sec. 190 also prohibits delegation of such authority. This is because when the
principal appoints a particular 'agent to act on his behalf, he relies upon the agent's skill,
integrity and competence. Sub-agent
A 'sub-agent' is a person employed by. and acting under the control of, the original agent
in the business of the agency (Sec. 191). This means he is the agent of the original agent.
The relation of the sub-agent* to the original agent is, as between themselves, that of the
agent and prificipaK
Exceptions. Sec. 190 provides that an agent may appoint a su^b-ageAt and delegate the
work to him if
(a) there is a custom of trade to that effect, or
(b) the nature of work is such that a sub-agent is necessary.
Examples, (a) A banker authorised to let out a house arid coiled rent may entrust the
wor^k to an estate agent [Mahinder vj. Mohar-A.I.R (1939) All. 188].
(b) A banker instructed to make payment To a particular person
at a particular place may appoint a banker who has an office at that
place [Summan Singhv. National City Bank', A.I.R. (1952) Finn). 172}.
. There are some more exceptions" recognised by the English Law.
, These exceptions are also recognised in India and are as follows :
(c) Where the 'principal is aware of the intention of thje agent to appoint a sub-agent but
does not object to it
W) Where unforeseen emergencies arise rendering appointment of a sub-agent
necessary:
'te) Where the act to be done is purely ministerial ndt involving confidence or use of
discretion.
_ (/) Where power of the agent to delegate can be inferred from thr conduct pf, both
the principal and the agent.
Where the principal permits appointment of a sub-agent
between principal and sub-agent. As fc general rule,
JH ^ cannot delegate his authority to a sub-agent. But in certair PUonal cases, he is
permitted to do so. la such cases,

authority to a sub-agent is proper. In all other cases, the appointment sub-agent is

improper. The legal relation between the principal and sub-agent depends upon the
crucial question, as to whether ' appointment otthe^ sub-agent is< proper or iihproper.
1. Where a sub-agent is properly appointed, (a) The principal' bound by the acts of the
sub-agent as if the sub-agent were an ag< originally appointed by the principal (Sec. 192,
para 1).
(b) The agent ^s responsible to the principal for the acts pf the si agent (Sec. 192, para 2).
Example. A, a carrier, agreed to carry 70 bags of cotton from Morvi to Bhavnagar by a
truck, A asked A\t another carrier,' carry the goods. The goods were damaged in transit.
Held, A liable even though it was proved that AI was the carrier [Jugaldas^
farUal A.I.R (1956) Guj. 88].
The sub-agent is responsible for his acts to the agent, but not to principal* except in case
of fraud or Wilful wrong (Sec. 192, para 3).
2. Where a sub-agent is not properly appointed. Where an age without having authority
to do so, has appointed a sub-agent, the agent responsible for the acts of the sub-agent to
the principal and to the parties. The principal, in such a case, is not represented by or
respoi I for the acts of the sub-agent, nor is the \sub-agentYesponsible to pftocipa' {Sec.
19,3). ^Co-agent or substituted agent <
A co-agent or a substituted agent is a person who is named by agcfrit, on an express or
implied authority from the principal, to act the principal. He is not a sub-agent but an
agent of the principal for part of the business of the agency as is entrusted to him. He is
the the principal, though he is named, at the request of the principal, by agent (Sec. 194).
'
Examples, (a) P directs A, his solicitor, to sell his estate
auction and to employ an auctioneer for the purpose. A names^Aj,!
auctioneer, to conduct the sale. AI is not a sub-agent, but is Fs
for the conduct of the sale.
(b) P authorises A, a merchant in Calcutta, to recover moneys i
to P from T. A instructs Alt a solicitor, to take legal pi
against TMbr the recovery of the money. AI is not a sub-agent,
solicitor for P.
In selecting a co-agent for his principal an agent is bound to exei the same amount of
discretion as a man of ordinary prudence wo| exercise in his own Case; and if he does this
he is not responsible to'11 principal for the acts or negligence of the co-agent (Sec. 195). \
Difference between sub-agent and substituted agent
1. A sub-agerit does his work under the control of ihe whereas a substituted agent works
under the instructions of principal. /
2. There is no'privity of contract between a sub-agent and principal. The principal cannot
sue the sub-agent directly for amounts or money. Similarly, a sub-gent cannot sue the
principal f< remuneration. He is also not directly answerable to the principal, the
principal and the sub-agent can sue the agent. In the casc substituted agent, there is a
privity of contract between him and principal and both can sue each other.
CTOF AGENCY
195
3 The agent is responsible to the principal for the acts of the sub-t But he is not
responsible to the principal for any act or negligence *he substituted agent.

01
RELATIONS OF PRINCIPAL WITH THIRD PARTIES extent of agent's
authority
The authority of an agent means his right or capacity to bind the rincipal- According to
Sec. 226, the acts of an agent within the scope of h"s authority bind the principal. The
authority of the agent to bind the principal may be1 Actual or real authority, or
2 Ostensible of apparent authority.
1. Actual authority. Actual authority of an agent is the authority conferred on him by the
principal. It may be expressed or implied (Sec.
186).
Express authority. An authority is said to be express when it is given bywords spoken or
written (Sec. 187).
Implied authority. An authority is said to be implied when it is to be inferred from the
circumstances of the case ; and things spoken or written or the ordinary course of dealing
may be accounted circumstances of the case (Sec, 187) An agent, having an authority to
do an act, has authority to do every lawful thing which is necessary in order to do such
act (Sec. 188, para 1). An agent, having an^authority to carry on a business, has authority
to do every lawful thing necessary for the purpose, or usually done in the course of
conducing such business (Sec. 188, para 2).
Examples, (a) A is employed by P, residing in London, to recover
at Mumbai a debt due to P. A may adopt any legal process necessary
for the purpose of recovering the debt, and may give a valid discharge
for the same.
(b) P appoints A as his agent to carry on his business of a shipbuilder. A may purchase
timber and other materials and hire workmen for the purpose of carrying on the business.
(c) A solicitor was authorised to conduct legal preceedings. He however presented an
insolvency petition against a debtor of his principal. Held, this was within his authority
{Wallace, Re, exparte Wallace, (1884) 14 Q.B.D. 22].
^ 2. Ostensible authority. When an agent is employed for a particular
business, persons dealing with him can presume that he has authority to
010 all such acts as are necessary or incidental to such business. Such
authority of the agent is called ostensible or apparent authority as
istinguished from actual or real authority. The scope of an agent's
authority is determined by his ostensible authority. If the act of an agent
Q in excess of his actual authority, but is within the scope of his
lensible authority, the principal will be bound by the act of the agent.
Examples, (a) P writes to T that A is authorised to sell his car. P privately instructs A not
to sell the car but merely to obtain Ts best oiler. A sells the car to Tfor Rs. 50,000. The
sale is binding on T.
(b) An estate agent was instructed by owners to find a purchaser
a j3 Property. He did so and accepted from the prospective purchaser
deposit as aaent of the owners. Held, although the estate agent was
given authority to accept deposit, he had acted within the scope the scope of his
ostensible authority [Ryan v. Pilklngton, (1959) W.LR403].
(c) P employed A as a ^manager ot his business, and it WE incidental to the business that
the bills should be drawn an< accepted from time to time by the manager, P, however,

forbade A draw and accept bills. A accepted some bills in breach of thi probihition, and
Pwas sued upon them. Held, P was liable [1 v. BusheH&fJones, (1965) 2 L.R 1 Q.B.
97]. , It is a well-established principle that if a person employs another
an agent in a character which involves a particular authority, he cannot
by secret reservation divest him of that authority. But if the third
knows of the limitation of the agent's ostensible authority, the principal|
will not be liable for such act of the agent.
Examples, (a) P leaves certain articles with A, an auctioneer, asking him not to sell them
below a stated price. A sells the, articles to T below the stated price. T knows of Fs
instructions to A Pcan set aside the contract with T. But if Tis ignorant of Fs instructions
to A,| P cannot set aside the contract with T. \
(b) O, the owner of a restaurant, sold the restaurant to P. p employed P as manager. T,
who knew nothing of this transaction oi P, sold cigars to A for use of the restaurant. A had
been expressly told^ by P not to purch'ase cigars on credit. Being unable to obtain
payment from A, T sued P. Held, (1) as the cigars were such as. would usually be dealt in
at such a restaurant, A was acting within the sco] of his implied authority as manager in
ordering them ; (2) P coul< not, as against T, set up any secret limitation of that
authority! [Watteauv. Fenwtok. (1893) 1 Q.B. 146]. Agent's authority in an emergency.
An agent has authority 4n an
emergency, to do all such acts for the purpose of protecting his principal:
from loss as would be done by a person of ordinary prudence, in his own
case, under similar circumstances (Sec. 189).
Position of principal and agent in relation to third parties
Hie position of a principal and his agent as regards contracts made
by the agent with third parties may be discussed under the following three
heads:
1. Where the principal's existence and name are disclosed by the agent, Le., where the
principals named.
2. Where the principal's existence is disclosed but not his name.'Le. where the principal is
unnamed.
3. Where both the existence and the name of the principal are not ^disclosed, Le., where
the principal is undisclosed.
1. Named principal. The position of the named principal for the acts of his agent is as
follows :
(1) Acts of the agent are the acts of the principal. The principal is liable for the acts of
the agent with third persons provided his acts are done (a) within the scope of his
authority, and (b) in the course of his employment as an agent He is also liable for such
acts of the agent which are necessary for the proper execution of his (agent's) authority.
Sec. 226> farther providaaJthat contracts entered into through an agent, a^ f b'ljMtlons
arising from acts done by an agent, may be enforced in the
COlsrreACT OF AGENCY 197
same manner, and will have the same legal consequences, as if the contracts had been
entered into and the acts done by the principal.
Example. A is Fs,agent with authority to receive money on his
behalf. He receives from T a sum of money due to P. T(S discharged of
his obligation to pay the sum in question to P.

(2) When the agent exceeds his authority. When an agent exceeds his authority to do
work of they principal, the principal is, bound by that part of the work which is within his
authority and which can be separated from the part which is beyond his authority (Sec.
227).
Example. P, being owner of a ship and cargo, authorised A to procure an insurance on
the ship. A procured a policy on uie ship, and another for the like sum on the cargo. P is
bound to pay the premium for the policy on the ship, but not the premium for th^ policy
on the Cargo [Bains v. Ewing, (1866) 1 Ex. 343]. If A had^ken only one policy on the
ship and the cargo. P would not'be bound. Where an agent exceeds his authority, the
principal may repudiate the whole of the transaction if what he (the agent) doe>"beyond
the scops of his authority cannot be separated from the rest (Sec. 228).
Example. P authorises A to buy 10 sheep for him. A buys 10 sheep and 20 lambs for one
sum of Rs. 6,000. P may repudiate the whole transaction.
(3) Notice given to agent as notice to principal The principal is bound by the notice given
to or information obtained, by the agent in course of the business of the principal (Sec.
229). The principal is also bound by the admissions made by the agent.
Example. T took out a policy with P, an insurance company, against accidental injury. The
proposal form contained a declaration that the proposer did not suffer from any'physical
infirmity. T was blind in one eye. This fact was known to the agent. Twas illiterate and
the agent filled in the form without disclosing T*s infirmity. Held, the' policy was good,
as P was bound by the knowledge of the agent [Bawden v. The London etc. Insurance Co.
(1892) 2 Q.B. 534].
But where the agent has committed a fraud on his principal, any information obtained by
him or notice given to him is not regj&rded as having been obtained by the principal. In
such cases the knowledge of the agent is not imputed to the principal because of the
extreme improbability of the agent communicating his fraud to the principal [Cavev.
Cave. (1880) 15 Ch. D. 630].
(4) Principal inducing belief that agents unauthorised acts were authorised. Refer to Sec.
237 discussed under the heading "Agency by Estoppe!".
(5) Misrepresentation or fraud of agent. The principal is liable for the misrepresentations
made or frauds committed by the agent in the course of his business for the principal.
Such misrepresentations or frauds have the same effect on agreements made by such
agent as if these had been made or committed by the principal. However,
misrepresentations made or frauds committed by the agent in matters, which do not fall
within his . authority, do not affect his principal (Sec. 238)'. *
Examples, (a) A, being Fs agent for the sale of goods, induces Tto
buy them by a misrepresentation, which he was not authorised by P to make. ^The
contract is voidable, between P and T, at the option T.
(b) A, the captain of Fs ship, signs bills of lading without havini received on board the
gobds mentioned therein. The bills of ladii are void as between P and the pretended
consignor.'
(c) P instructed his agent, A, to reinsure an overdue ship at certain porfc A heard that the
ship had actually been lost. He did m disclose this fact to the insurer. Held, P could not
recover upon thl| policy [Blackburn, Lowe Co. v. Haslam, (1888) 21 Q.B.D. 144].
2. Unnamed principal. When an agent contracts as an agent for principal but does not
disclose his name, the principal is liable for th< contract pf the agent, unless there is a

trade custom or a term, express implied, to the effeo|; which makes the agent personally
liable. If th third party contracts knowing that there is a principal although hia identity is
not disclosed, he cannot sue the agent. If, however, the agent declines to disclose the
identity of the principal, he will becomej personalty liable on the conu ict.
3. Undisclosed principal. Sometimes, an agent not only conceals the] name of
thejprincipal but also the fact that he is an agent. This gives ris to the doctrine of
undisclosed principal. The agent in such a case gives an| impression to the third party as
if he is contracting in an independent capacity.
Sec. 231 deals with rights of parties to a conract made by an agent fo the undisclosed
principle. The'position jof parties to such a contract maj be discussed under the following
heads :
(a) The position of principal. When an undisclosed principal is subsequently discovered
or he himself intervenes, the other contracting parly (if he has not already obtained
judgment against the agent) may suel either the principal or the agent or both. The
principal may also if he! likes require the performance of the contract from the other
contracting! party (Sec. 231, para 1). But in such a" case he must allow to .the third pz
the benefit of all payments made by the third party to the agent.
(b) The position of agent. As between the principal and the agent, the agent has all the
rights of an agent as against the principal; but as regards j the third party, he is personally
liable on the contract. He may be sued on] the contract and he has the right to sue the
third party.
(c) The positj0n of third parties. (0 In a contract with an agent for anj undisclosed
principal, the third party may elect to sue either thaj principal or the agent or both.
Example. Tenters into a contract with A to sell hlHrTO"& bales cotton and afterwards
discovers that A was acting as agent for P. T| may sue either A ovP, or both, for the price
of the cotton. (<) If the principal discloses himself before the contract is cqmpletedr1 the
other contracting party jnay refuse to fulfil the contract, if he a shofr that, if he had
known who the principal was or that the agent was not the principal, he would not have
entered into the contract (Sec. 231*] para 2). ,.
(U0 The third party can also claim a right of set-off against the agent. Where the principal
requires the performance of the contract, he can only' obtain such performance yas is
subject to the rights and obligations subsisting between the agent and the other party to
the contract (Sec. 232).
199
Examples. ($ A, who owes Rs. 500 to T, sells 1,000 rupees worth of rice to T. A is acting
as agent ffar P in the transaction^ but T has no knowledge nor reasonable ground of
suspicion that such is the case. P cannot compel Tto take the rice without allowing him to
set off A's;
debt
(b) A sold to T goods of P, an undisclosed principal When P sued T.
T claimed to set off a debt by A to T. The set-off was allowed (Rabone v.
Williams. (1875) 71.T.R. 3601. The set-off will not be allowed JfT was
aware that A was an agent although he was not aware of the identity
of the principal. Liability of pretended agent
A person may sometimes untruly represent himself to be the authorised agent of another,
and thereby induce a third person, to deal with him as such agent. He is. in such aUase,

liable, if his alleged employer does not ratify his acts, to make compensation to the third
person in respect of any loss or damage which he has incurred by so dealing (Sec.7 235).
*
While the third person has the right to claim compensation from tiie pretended agent, the
agent has no right to proceed against that person for the contract Thus, a person with
whom a contract has been entered into in the character of agent is not entitled to require
the performance of it. ii he was in reality acting, not as agent, but orchis own account
(Sec. 236). PERSONAL LIABILITY^ OF AGENT
The general rule is that only the principal can enforce, andpan be held liable on. a
contract entered into by the agent except wherTtKereis a contract to the contrary. Sec.
230 of the Contract Act clearty lays down this rule : Tn the absence of any contract to that
effect an agent cannot personally enforce /contracts entered into by him on behalf oi his
principal, nor is he personally bound by them."
An agent is, however, personalty liable in the following cases :
1. When the contract expressly provides. A person while entering into a contract with an
agent may expressly stipulate that he would hold the agent personally liable in case of
breach of contract, and if the agent agrees to it he is personally liable.
2. When the agent acts for a foreign principal (Sec. 230, para 2). When the contract is
made by an agent for the sale or purchase of goods for a merchant residing abroad, the
agent is personalty liable. He can exclude his personal liability by express provision, to
this effect in the contract. If he does so, he cannot be sued on the contract
3. When he acts for an undisposed principal (Sec. 230. para 2). Where an agent acts for
an undisclosed principal, he is personalty liable though the principal, on being discovered
by the third party, is also liable,
4. When he acts for a principal who cannot be sued (Sec. 230, para 2). Where the
principal is incompetent to enter into a contract e.g.. whe*e he i* a minor or an idiot, the
agent is personally liable as the credit is pit-sumed to have been given to the agent and
not to the principal.
5 Where he signs a contract tn his owninamc. An agent who signs a contract in his own
name without qualification (te.. without disclosing that he is acting as an agent), though
known to be an agent, is understood to have contracted personally, unless a contrary
Intention appears from the body of the instrument Example. A executed a hundi in favour
of T for a loan taken by him from T. The hundi purported to be drawn by a firm. A did not
sign the hundi as agent of the firm and did not disclose to T the name of the principal who
was the proprietor of the firm. Held, A was personally liable [THlofc Chand v.
Rameshwqr Lal A.I.R. (1975) Pat. 196J.
6. Where he acts for a principal not in existence. This is a rather peculiar case. The
promoters of a company, yet to be incorporated, sometimes enter Into'contracts on behalf
of the company, though in such a &ase the alleged principal (Le., the company) has
no.legal existence till the time of incorporation. In such a case the promoters are held to
have contracted on their own account and are personally liable.
7. Where he is liable for breach of warranty of authority. Where a person professes to act
as' an agent but has ho authority from the alleged principal or exceeds his authority^ he is
personally liable for breach of warranty of authority in a suit by the third party with
whom he professed to make the contract [totien v. Wright, (1857) 7 E. & B. 301].

8. Where he receives or pays money by mistake or fraud. Where an agent receives money
from a third party by mistake or fraud, he Is personally liable to the-thlrd party. Likewise,
he has the right to sue the third party for the recovery of the money where he has paid it
by mistake or under fraud of the third party.
9. Where his authority is coupled with Interest. When an agent has an interest in the
subject-matter of the contract entered into by him with a third party, his authority is
coupled with interest. He has, in such a case, the right to sue, or be sued, but only to the
extent of his interest in the subject-matter.
10. Where the trade usage or custom makes him personally liable. Where there is a trade
usage or a custom making the agent personally liable, he is liable Unless there is a
contract to the contrary.
Right of person dealing with agent personally liable. In cases where the agent is
personally liable, a person dealing with him may hold either him or his principal, or both
of them, liable (Sec. 233).
Example. Tenters into a contract with A to sell him 100 bales of cotton and afterwards
discovers that A was acting as agent for P. T may sue either A or P, or both, for the price
of the cotton.
But when a person who has made a contract with an agent induces the agent to act upon*
the belief that the principal only will be held liable, he cannot afterwards hold the agent
liable. Likewise if he . induces the principal to act upon the belief that the agent only will
be held liable, he cannot afterwards hold the principal liable (Sec. 234). TERMINATION
OF AGENCY N
J^ec. 201 describes the modes of termination of agency. The Section is not
comprehensive. The various modes of termination of agency as mentioned in Sec. 201
and other modes are Indicated in the chart on the next page! In certain cases, the agency
is irrevocable. 1. Termination of agency by act of the parties
(1) Agreement. The relation of principal and agent like any other agreement may be
terminated at any time and at any stage by the mutual agreement between the prir ipal and
the agent
Termlnationof agency
By act of the parties
By operation of law
|
|
j " i
i
i
|
.

Death Insanit Insol- Destru Priny

c-

ance of piry of
the
of
ract

of
either

con- either party

time party

venc tion of cipal

y
of

the

Disso Termilutio nation

n
of

becom of a
-

sub-

either subject ing an com- agent's

-

party mater

alien

pany authorit
y

enemy
(2) Revocation by the principal. The principal may revoke the authority of the agent (Sec.
201) at any time before the agefot has exercised his authority so as to bind the principal
unless the agency is irrevocable (Sec 203). But if the act is begun, the authority can only
be revoked subject to any claim which the agent may have for breach of contract (Sec.
204). Where the agency is a continuous one, notice of its termination to the agent and
also to the third parties is essential.
(3) Revocation by the agent. An agency may also be terminated by an express
renunciation by the agent after giving a reasonable notice to the principal (Sec. 201).
Where there is an express or implied contract that the agency should be continued for a
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 (Sec. 205). 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 (Sec. 206). Revocation and
renunciation may be expressed or may be implied In the conduct of the principal or agent
respectively (Sec. 207).
Examples, (a) P employs A to let Phis house. Afterwards P lets it himself. This is an
implied revocation of A's authority.
(b) A was appointed agent to do all acts and carry on business on behalf of P, the
principal, in his absence from India: Held, applying Sec. 207, the power should be treated
as implledly revoked when P returned to India [AzamKhan v. S. Sattar, A.I.R (1978) A.P.
422]. 2. Termination of agency by operation of law
(1) Performance of the contract The most obvious mode of putting an end to the agency is
to do what the agent has undertaken to do (Sec. 201). Where the agency is for a particular
object, it is terminated when the object is accomplished or when the accomplishment of
the object becomes impossible.
(2) Expiry of time. When the agent is appointed for a fixed period of time, the agency
comes to an end after the expiry of that time even if the work is not completed.
(3) Death and insanity. When the agent or the principal dies or becomes of unsound mind,
the agency is terminated (Sec. 201). When the termination thus takes places the agent
must take, on behalf of the representatives of his late principal, all reasonable steps for _
protection and preservation of/the interests entrusted to him (Sec. 209).
(4) Insolvency. The insolvency of the principal puts an end to agency (Sec. 201) though
nothing is mentioned in Sec. 201 as reg insolvency of the agent. The insolvency of the
agent, it is accepted terminates the agency unless the acts to be done by the gent are ~
formal acts.
(5) Destruction of subject-matter. An agency which 10 created to <Jea|J with a certain
subject-matter comes to an end by the destruction of th|J subject-matter. Where, for
example, afi agent is employed to effect a* insurance on a particular house, the agency
.terminates if, before thj|J insurance is effected, the house is destroyed by fire.
" j'

(6) Principal becoming an alien enemy. When the agent and the principal are aliens, the
contract of agency is valid so long as thf countries of the principal and the agent are at
peace. If war breaks out between the two countries, the contract of agency is terminated.
(7) Dissolution of a company. When a company, whether principal of| agent, is dissolved,
the contract of agency with or by the company automatically comes to and end.
(8) Termination of sub-agent's authority. The termination of an agent's authority puts an
end to the sub-agent's authority (Sec. 210). ; When termination of agent's authority
tak effect. The terminatJdn of the authority of an agent takes effect, so far as regards
the agent, wheifc| it becomes known to the agent, and so far as regards the third persons,!
when it becomes known to them (Sec. 208).
Examples, (a) P directs A to sell goods for him, and agrees to give A 5 per cent
commission on the price fetched by the goods. B afterwards, by a letter, revokes A's
authority. After the letter is sen| but befbre A receives it, he sells the goods for Rs. 1,000.
The sale la binding on P, and A is entitled to Rs. 50 as his commission.
(fa) P, at Madras, by a letter, directs A to sell for him some cotton lying in a warehouse in
Bombay, and afterwards, ty a letter revoke* his authority to sell, and directs A to send the
cotton to Madras. A, after receiving the second letter, enters into a contract with T who
knows of the first letter , but not of the second, for the sale to him of-the cotton. Tpays A
the money, with which A absconds. Ts payment is good as against P.
The revocation of agency as regards the agent and as reg&rds the third parties may take
effect at different points of time.
If an agent knowingly enters into a contract with a third party aftef termination of Ms
agency and if the third parly deals with him bonafde. Le., without knowing that his
authority as agent has been terminated, th* agent will bind the principal by his act.
Termination of sub-agency. The sub-agency will be terminated a* soon as the main
agency is terminated.
Termination of substituted agency. The authority of the substituted agent will not
automatically bfi terminated If the authority of the agent i terminated. Irrevocable
agency
When an agency cannot be terminated or put an end'to, it is said to bf an irrevocable
agency.
203
An agency is irrevocable in the following cases :
1. Where the agency is coupled with Interest. An agency is said to be coupled with
interest when it is created for securing some benefit to the agent over and above his
remuneration as agent. Where, for example, a creditor is employed as an agent to collect
rents due to the principal for adjusting the amount towards his debt, the authority of the
agent is coupled with interest and it is irrevocable during the subsistence of the interest.
Sec. 202 of the Contract Act provides to this effect as follows : Where the agent has
himself arrinterest 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.
Examples, (a) P gives authority to A to sell Ps land, and to pay himself, out of the
proceeds, the debt due to him from P. P ciannot revoke this authority, nor can it be
terminated by his insanity or death.

(fa) P consigns 1,000 bales of cotton to A who has made advances to him on such cotton,
and desires A to sell the cotton and to repay himself, out of the price, the amount of his
own advances. F cannot revoke this authority, nor is it terminated by his insanity or death.
The above rule applies only if the agency is created for the protection of the interest of
the agent. It does not apply where the interest arises after the creation of the agency. It is
important that the agency is created with the object of securing a benefit to the agent, and
it is not sufficent that the agency secures a benefit to the agent incidentally.
Example. A was entrusted by P with certain wheat to be sold on his (Ps) behalf.
Subsequently A advanced a certain sum of money to P which P failed to pay. P gave
orders that the wheat was not to be sold. A nevertheless sold it to secure his advance. In
an action against A, A pleaded that the agency, being coupled with interest, was '
irrevocable. The Court, however held that this was an improper application of the rule,
and A could not sell the wheat. This is because the agency is not coupled with interest
[Smart v. Sandars, (1848) 5 C.B.895J
2. Where the agent has incurred a personal liability. Where an agent incurs a personal
liability, the agency becomes irrevocable. The principal cannot, in such a case, revoke the
agency leaving the agent exposed to the risk or liability he has already incurred.
3. Where the agent has partly exercised ihe authority. The principal cannot revoke the
authority given to his agent after the authority has been partly exercised, so far as regards
such acts and obligations'as arise from acts already done in the agency (Sec. 204)
Example. P authorises A to buy 1,000 bales of cotton on account
of P and to pay for it out of Fs money remaining in A's hands. A buys
1,000 bales of cotton in his own name, so as to make himself
personally liable for the price. P cannot revoke A's authority so far as
regards payment for the cotton.

Bailment and Pledge

Contracts of bailment and pledge are a special class of contracts. These are dealt
with in Chapter IX (Sees. 148 to 181) of the Indian Contract Act, 1872. The Contract Act,
however, does not deal with all types of bailments. There are separate Acts, e.g., the
Carriers Act, 1865, the Railways Act, 1989, the Carriage of Goods by Sea Act, 1925,
which deal with special types of bailments. The Contract Act deals with the general
principles underlying contracts of bailment.

BAILMENT
The word 'bailment' is derived from the French word 'ballier which means 'to
deliver' which means any kind of 'handing over'. In legal sense, it involves change of
possession of goods from one person to another for some specific purpose.
Sec. 148 defines 'bailment' as the delivery of goods by one person to another for
some purpose, upon a contract, that they shall, when the purpose is accomplished, be

returned or otherwise disposed of according to the 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'.
Ex: (a) A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a
contract of bailment between A and B.
(b) A lends a book to B to be returned after the exams. There is a contract of bailment
between A& B.
(c) A sells certain goods to B who leaves them in the possession of A. The relationship
between B and A is that of bailor and bailee.
Sometimes there may be bailment even without a contract. For example, when a
person finds goods belonging to another, a relationship of bailee and bailor is
automatically created between the finder and the owner.
Ex: E"s ornaments having been stolen and recovered by the police disappeared from
police custody. Held, the State was liable, the contract of bailment having been implied
[Basavva K.D. Patil v. State of Mysore,].
Essentials of bailment:
1. Contract. A bailment is usually created by agreement between the bailor and the
bailee. The agreement may be express or implied. In certain exceptional cases, bailment
is implied by law as between a finder of goods and the owner.
2. Delivery of possession. A bailment necessarily involves delivery of possession of
goods by bailor to bailee. The basic features of possession are control and an intention to
exclude others. As such, mere custody of goods does not create relationship of bailor and
bailee. A servant who receives certain goods from his master to take to a third party has
custody of the goods; possession remains with the master and the he does not become a
bailee.
Ex: A lady employed a goldsmith for melting her old jewellery and making new one out
of it. Every evening she received the unfinished jewellery and put it into a box kept at the
goldsmith premises. She kept the key of that box with herself. One night the jewellery
was stolen from the box. Held, there was no bailment as the goldsmith had re-delivered to
the lady (the bailor) the jewellery bailed with him by her. [Kaliperumal v. Visalakasmi].
Delivery of possession may be actual or constructive.
Actual delivery may be made by physically handing over the goods bailed to the bailee.

Constructive or symbolic delivery may be made by doing something which has the effect
of putting the goods in the possession of the intended bailee or any person authorised to
hold them on his behalf. Ex: The delivery of a railway re amounts to delivery of the
goods.
3. For some purpose. The delivery of goods from bailor to bailee must be for some
purpose. If goods are delivered by mistake to a person, there is no bailment.
4. Return of specific goods. It is agreed between the bailor am bailee that as soon the
purpose Is achieved, the goods shall be return disposed of according to the directions of
the bailor. If the goods ar to be specifically returned, there is no bailment. But there is a
bail even if the goods bailed are, in the meantime, altered in form, e.g., a piece of cloth is
stitched into a suit.
5. Bailment is concerned only with goods. Goods, as defined In Sec. of the Sale Goods
Act, 1930, mean every kind of movable property other than money and actionable claims.
Moreover, in a contract of bailment it is only possession that passes from the bailor to the
bailee not ownership. Thus if the property in goods is transferred for money
consideration, it is a sale and not a bailment.
Other examples of bailment:
(a) A hire-purchase contract not merely a contract of bailment. It has two aspects: a
bailment plus an element of sale.
(b) Seizure of goods by custom authorities, who after seizure are in the position of a
bailee
(c) Acceptance of goods by a transport company or railway carriage
(d) Acceptance of articles by Post-Office as Value Payable Parcel.
CLASSIFICATION OF BAILMENTS
Bailments may be classified according to the benefit derived by the parties. Thus a
bailment may be
(1) For the exclusive benefit of the bailor, as the delivery of some valuables to a
neighbour for safe custody, without charge.
(2) For the exclusive benefit of the bailee, as the lending of a bicycle to a friend for his
use, without charge.
(3) For the mutual benefit of the bailor and the bailee, as the hiring of a bicycle or giving
of a watch for repair. In these cases, consideration passes between the bailor and the
bailee.
Bailments may also be classified into:

(1) Gratuitous bailment. It is a bailment where no consideration passes between the

bailor and the bailee, e.g., where A lends a book to his friend B.
(2) Non-gratuitous bailment or bailment for reward. It is a bailment where consideration
passes between the bailor and the bailee, e.g., where certain goods are kept in a godown
for hire, or where A hires a bicycle from B.
DUTIES AND RIGHTS OF BAILOR AND BAILEE

Duties of bailor
1. To disclose known faults: It is the first and foremost duty of the bailor to disclose the
known faults about the goods bailed to the bailee. If he does not make such disclosure, he
is responsible for any damage caused to the bailee directly from such faults (Sec. 150,
para 1).
Ex: A lends a horse, which he knows to be vicious, to B. He does not disclose that the
horse is vicious. The horse runs away and B is thrown arid injured. A is responsible to B
for damage sustained. In case the goods are bailed for hire, the duty of the bailor is still
greater. He is responsible even for those faults which are not known to him (Sec. 150,
para 2).
Ex: (a) A hires a motor launch from B for holiday on the river Thames. The launch caught
fire and A was unable to extinguish it as the fire-fighting equipment was out of order. As
such he was injured and suffered loss. Held, B was liable [Read v. Dean].
2. To bear extraordinary expenses of bailment: The bailee is bound to bear ordinary and
reasonable expenses of the bailment but for any extraordinary expenses the bailor is
responsible.
Example, A lends his horse to B, a friend for two days. The feeding charges are to be paid
by B. But if the horse meets with an accident, A will have to repay B medical expense,
incurred by B.
3. To indemnify bailee for loss in case of premature termination of gratuitous
bailment: A gratuitous bailment can be terminated by the bailor at any time even though
the bailment was for a specified time or purpose. But in such a case, the loss accruing to
the bailee from such premature termination should not exceed the benefit he has derived
out of the bailment. If the loss exceeds the benefit, the bailor shall have to indemnify the
bailee (Sec. 159).
Ex: A lends an old discarded bicycle to B gratuitously for three months. B incurs Rs. 120
on its repairs. If A asks for the return of the bicycle after one month, he will have to
compensate B for expenses incurred by B in excess of the benefit derived by him.

4. To receive back the goods: It is the duty of the bailor to receive back the goods when
the bailee returns them after the expiry of the term of the bailment or when the purpose
for which bailment was created has been accomplished. If the bailor refuses to receive
back the goods, the bailee is entitled to receive compensation from the bailor for the
necessary expenses of custody.
5. To indemnify the bailee. Where the title of the bailor to the goods is defective and the
bailee suffers as a consequence, the bailor is responsible to the bailee for any loss which
the bailee may sustain by reason that the bailor was not entitled to make bailment, or to
receive back the goods, or to give directions respecting them (Sec. 164).

Duties of bailee
1. To take reasonable care of the goods bailed. 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 (Sec. 151). The onus of proof is on the bailee to show that there
has been no negligence, when he fails to return the goods or returns them in a damaged
condition, and that the loss or damage occurred in spite of the fact that he took reasonable
care of them. If, in spite of the bailee's reasonable care, goods are damaged or destroyed
in any way, the bailee is not liable for the loss, destruction or deterioration of the thing
bailed (Sec. 152).
Ex: A entered a restaurant for dining. His coat was taken by a waiter who hung it on a
hook behind A. When A rose to leave, the coat was gone. Held, the proprietor of the
restaurant was liable for the loss [Ultzen v. Nicols].
2. Not to make any unauthorised use of goods. If the bailee uses the goods balled in a
manner which is inconsistent with the terms of the contract, he shall be liable for any loss
even though he is not guilty of negligence, and even if the damage is the result of an
accident (Sec. 154).
Ex: (a) A lends a horse to B for his riding only. B allows C, a member of his family to
ride the rose. C rides with care, but the horse accidentally falls and is injured. B is liable
to make compensation to A for the injury caused to the horse.
3. Not to mix the goods bailed with his own goods. The bailee must not mix the goods of
the bailor with his own goods, but must keep them separate from his own goods. If he
mixes the bailor's goods with his own goods (a) With the bailor's consent, both shall have a proportionate interest in the
mixture; thus produced (Sec. 155);
(b) Without the bailor's consent, and if the goods can be separated/divided, the
bailee is bound to bear the expenses of separation/division, as well as damage
arising from the mixture (Sec. 156);

Ex: 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 charges.
(c) Without the bailor's consent, so that the mixture is beyond separation, the
bailor is entitled to be compensated by the bailee for the loss of-the goods (Sec.
157).
Ex: A bails a bag of Farm wheat worth Rs. 550 to B. B, without A's consent, mixes the
wheat with imported wheat of his own, worth only Rs. 250 a bag. B must compensate A
for the loss of his wheat if the goods of the bailor get mixed up with the like goods of the
bailee, by inadvertence of the bailee or accident or by an act of God or by the act of an
unauthorised third party, the mixture belongs to the bailor and the bailee in proportion to
their shares but the cost of separation will have to be borne by the bailee.
4. Not to set up an adverse title (Sec. 117 of the Indian Evidence Act, 1872). The bailee
must hold the goods on behalf of and for the bailor. He cannot deny the right of the bailor
to bail the goods and receive them back. If he delivers the goods bailed to a person other
than the bailor, he may prove that such person had a right to them as against the bailor.
5. To return any accretion to the goods. In the absence of any contract to the contrary,
the bailee is bound to deliver to the bailor, or according to his directions, any increase or
profit which may have accrued from the goods bailed (Sec. 163).
Ex: 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.
6. To return the goods. 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 (Sec. 160). If he fails to do so, he is responsible to the bailor for any loss
(Sec. 161) notwithstanding the exercise of reasonable care on his part.
Ex: A delivered some books to B to be bound. He pressed for their return, but B neglected
to return them although more than a reasonable time had elapsed. A fire accidentally
broke out on B's premises, and the books were burnt. Held, B was liable for the loss,
although he was not negligent, because of his failure to deliver the books within a
reasonable time [Shaw & Co. v. Symmons & Sons].

Rights of bailor:
1. Enforcement of rights. The bailor can enforce by suit all the liabilities or duties of tjfie
bailee, as his rights.

2. Avoidance of contract. The bailor can terminate the bailment if the bailee does, with
regard to the goods bailed, any act which is inconsistent with the terms of the bailment
(Sec. 153).
Ex: A lets a horse to B for his own riding only. B uses the horse with a carriage. A can
terminate the bailment.
3. Return of goods lent gratuitously. When the goods are lent gratuitously, the bailor can
demand their return whenever he pleases even though he lent them for a specified time or
purpose. But if the bailee suffers any loss exceeding the benefit actually derived by him
from the use of such goods because of premature return of goods, the bailor shall have to
indemnify the bailee (Sec. 159).
4. Compensation from a wrong-doer. If a third person wrongfully deprives the bailee of
the use or possession of the goods bailed, or does them any injury, the bailor or the bailee
may bring a suit against the third person for such deprivation or injury (Sec. 180).

Rights of bailee
The duties of the bailor are the rights of the bailee. As such, the bailee can, by suit,
enforce the duties of the bailor. The other rights of the bailee are as follows:
1. Delivery of goods to one of several joint bailors of goods: If several joint owners of
goods bail them, the bailee may deliver them back to, or according to the directions of
one joint owner without the consent of all in the absence of any agreement to the contrary
(Sec. 165).
2. Delivery of goods to bailor without title. If the bailor has no title to the goods, and the
bailee in good faith, delivers them back to, or according to the directions of, the bailor,
the bailee is not responsible to the owner in respect of such delivery (Sec. 166).
3. Right to apply to Court to stop delivery. If a person, other than the bailor, claims goods
bailed, the bailee may apply to the Court to stop the delivery of the goods to the bailor,
and to decide the title to the goods (Sec. 167).
4. Right of action against trespassers. If a third person wrongfully deprives the bailee of
the use or possession of the goods bailed to him, he has the right to bring an action
against that parry. The bailor can also bring a suit in respect of the goods bailed (Sec.
180).
5. Bailee's lien. Where the lawful charges of the bailee in respect of the goods bailed are
not paid, he may retain the goods. This right of the bailee to retain the goods is known as
'particular lien'.
'Lien' means the right of a person to retain possession of some goods belonging to another
until some debt or claim of the person in possession is satisfied. It appertains to the

person who has possession of the goods which belong to another, entitling him to retain
them until the debt due to him has been paid. Possession is essential for exercising the
right of lien, and in order to create a lien the possession must be (a) rightful, (b) not for a
particular purpose, and (c) continuous.
Ex: A company agreed to garage the motor-car of H for three years, for an annual charge.
H was entitled to take the car out of the company's garage as and. when she liked. The
annual payment being an arrear the company detained the car at the garage and claimed a
lien. Held, as H was entitled to take the car away as and when she pleased, the company
had no lien [Hatton v. Car Maintenance Co.Ltd.].
A lien may be
1. Particular lien. A particular lien is one which is available to the bailee against only
those goods in respect of which he has rendered some service involving the exercise of
labour or skill.
Ex: A gives a piece of cloth to B, a tailor, to make into a coat. B promises A to deliver the
coat as soon as it is finished. B is entitled to retain the coat till he is paid for.
Sec. 170 explains 'particular lien' as follows: "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 balled, he has 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."
2. General lien. A general lien is a right to retain all the goods or any property (which is
in possession of the holder) of another until all the claims of the holder are satisfied. This
is a right to retain the property of another for a general balance of account. For example,
if two securities are given to a banker but a loan is taken only against one of the
securities, the banker may retain both the securities until his claim is satisfied.
General lien, according to Sec. 171, is available to bankers, factors, wharfingers (those
who have the care of, or own, a structure built especially along the shore, for loading or
unloading vessels), attorneys of High Court and policy brokers. These persons are
entitled, in the absence of a contract to the contrary, to retain possession of the goods
bailed to them as security until their claims are fully satisfied.
Rights of bailor and bailee against wrong-doer
1. Suit against wrong-doer: Sometimes a third person may wrongfully deprive the bailee
of the use or possession of the goods bailed or may cause injury to the goods. In such a
case, the bailee may use such remedies as the owner might have used and either the bailor
or the bailee may bring a suit against the third person for such deprivation or injury (Sec.
180).

2. Apportionment of relief. Whatever is obtained by way of relief or compensation in any

such suit in the above case shall, as between the bailor and the bailee, be dealt with
according to their respective interests (Sec. 181).

FINDER OF GOODS
A person who comes by an article is not obliged to pick it up or take charge of it.
But if he does pick it up, he becomes a bailee. Sec. 71 clearly lays down that "a person,
who finds goods belonging to another and takes them into his custody Is subject to the
same responsibility as a bailee."
Rights of finder of goods
1. Right of lien. The finder of goods has a right of lien over the goods for his expenses.
As such he can retain the goods against the owner until he receives compensation for
trouble and expense incurred in preserving the goods and finding out the owner.
But he has no right to sue the owner for any such compensation as the trouble and
expense were incurred by him voluntarily (Sec. 168).
2. Right to sue for reward. The finder can sue for any specific reward which the owner
has offered for the return of the goods. He may also retain the goods until he receives the
reward (Sec. 168).
3. Right of sale. A finder of goods may sell the goods found
(a) If the owner cannot with reasonable diligence be found, or
(b) If found, he refuses to pay the lawful charges of the finder, or
(c) If the goods are in the danger of perishing or of losing the greater part of their value,
or
(d) If the lawful charges of the finder, in respect of the goods found, amount to two-thirds
of their value (Sec. 169).
Obligations of finder of goods
1. He must take reasonable care of the goods and if, in spite of this, the goods are
destroyed, he is not responsible for any loss.
2. He must not use the goods for his own purpose.
3. He must not mix the goods with his own goods.
4. He must try to find out the owner of the goods. If he does not do that, he will be liable
as a trespasser (one who interfere with another's property).
TERMINATION OF BAILMENT
A contract of bailment is terminated in the following cases :
1. On the expiry of the period. When the bailment is for a specific period, it terminates
on the expiry of that period.

2. On the achievement of the object. When the bailment is for a specific purpose, it
terminates as soon as the purpose is achieved.
3. Inconsistent use of goods. When the bailee uses the goods in a manner inconsistent
with the terms of the contract, the bailment terminates (Sec. 154).
4. Destruction of the subject-matter. A bailment is terminated when the subject-matter of
the bailment (a) is destroyed, or (b) by reason of a change in its nature becomes incapable
of use for the purpose of the bailment.
5. Gratuitous bailment. It can be terminated any time subject to condition laid down in
Sec. 159.
6. Death of the bailor or bailee. A gratuitous bailment is terminated by the death either of
the bailor or of the bailee (Sec. 162).

PLEDGE
The bailment of goods as security for payment of a debt or performance of a promise is
called 'pledge'. The bailor is, in this case, called the 'pledger or 'pawnor and the bailee is
called the 'pledgee' or 'pawnee (Sec. 172).
A pledge is a bailment for security. It is a special kind of bailment. If A borrows Rs. 200
from B and keeps his watch as security for payment of the debt, the bailment of watch is
a pledge. Any kind of movable property, i.e., goods, documents, or valuables may be
pledged. Even a Savings Bank pass Book may be pledged. But delivery is necessary to
complete a pledge. The delivery may be actual or constructive. If, because of the bulk of
the property or for some other reason, actual delivery is impracticable, a symbolic
delivery will suffice (example delivery of the keys to a safe deposit box).
Ex: The producer of a film borrowed a sum of money from a financier-distributor and
agreed to deliver the final prints of the film when ready. Held, the agreement was not a
pledge, there being no actual transfer of possession [Revenue Authority v. Sudarshan
Pictures].
Difference between pledge and bailment
1. Pledge is the bailment of goods as a security for the performance of a specific promise,
i.e., the payment of a debt/performance of a promise. Bailment, on the other hand, is for a
purpose of any kind.

2. In case of default by the pawnor to repay the debt, the pawnee may after giving notice
to the pawnor sell the goods pledged with him. The bailee may either retain the goods or
sue for his charges.
3. In case of pledge, the pawnee has no right to use the goods pledged with him. In case
of bailment, the bailee may do so if the terms of bailment so provide.
RIGHTS AND DUTIES OF PAWNOR AND PAWNEE
The rights and duties of pawnor and pawnee are almost similar to those of bailor and
bailee. But the rights of the pawnee and pawnor need a special mention.
Rights of pawnee
1. Right of retainer. The pawnee may retain the goods pledged until his dues are paid. He
may retain them not only for the payment of the debt or the performance of the promise,
but for
(a) The interest due on the debt, and
(b) all necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged (Sec. 173). He can however exercise only a particular
lien over the goods.
2. Right of retainer for subsequent advances. When the pawnee lends money to the
same pawnor after the date of the pledge. It is presumed that the right of retainer over the
pledged goods extends to subsequent advances also. This presumption can be rebutted
only by a contract to the contrary (Sec. 174).
3. Right to extraordinary expenses. The pawnee is entitled to receive from the pawnor
extraordinary expenses Incurred by him for the preservation of the goods pledged (Sec.
175). For such expenses, he has no right to retain the goods; he can only sue to recover
them.
4. Right against true owner, when the pawnor's title is defective. When the pawnor has
obtained possession of the goods pledged by him under a voidable contract (i.e., by fraud,
undue influence, coercion, etc.) but the contract has not been rescinded at the time of the
pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor's defect of title (Sec. 178-A).
5. Pawnee's rights where pawnor makes default (Sec. 176). Where the pawnor fails to
redeem his pledge, the pawnee can exercise the following rights:
(1) He may file a suit against the pawnor upon the debt or promise and may retain the
goods pledged as a collateral security.
(2) He may sell the goods pledged after giving the pawnor a reasonable notice of the sale.

(3) He can recover from the pawnor any deficiency arising on the sale of the goods by
him. But he shall have to hand over the surplus, if any, realised on the sale of the goods
to the pawner.
Rights of pawnor
1. Right to get back goods. On the performance of promise or repayment of loan and
interest, if any, the pawnor is entitled to get back the goods pledged.
2. Right to redeem debt. Quite often a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is made. In such a case if the pawnor
makes default in payment of the debt or performance of the promise at the stipulated
time, he may still redeem the goods pledged at any subsequent time before the actual sale
of them but he must, in that case, pay, in addition, any expenses which have arisen from
his default (Sec. 177).
3. Preservation and maintenance of the goods. The pawnor has a right to see that the
pawnee, like bailee, preserves the goods pledged and properly maintains them.
4. Rights of an ordinary debtor. The pawnor has, in addition to the above rights, the
rights of an ordinary debtor which are conferred on him by various Statutes meant for the
protection of debtors.
PLEDGE BY NON-OWNERS
The general rule is that it is the owner who can ordinarily create a valid pledge. But in the
following cases even a non-owner can create a valid pledge:
1. Pledge by mercantile agent: 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, is as valid as if
he were expressly authorised by the owner of the goods to make the same. But the pledge
is valid only if the pawnee acts in good faith and has not at the time of the pledge notice
that the pawnor has not the authority to pledge (Sec. 178).
2. Pledge by seller or buyer in possession after sale. A seller left in possession of goods
after sale and a buyer who obtains possession of goods with the consent of the seller
before sale, can create a valid pledge provided the pawnee acts in good faith and has no
notice of the previous sale of goods to the buyer or of the lien of the seller over the goods
(Sec. 30, of the Sale of Goods Act, 1930).
3. Pledge where pawnor has a limited interest. Where a person pledges goods in which
he has only a limited interest, the pledge is valid to the extent of that interest (Sec. 179).
A person having a lien over the goods or a finder of goods may pledge thennto the extent
of his interest.

4. Pledge by co-owner in possession. One of the several co-owners of goods in

possession thereof with the assent of the other co-owners may create a valid pledge of the
goods.
5. Pledge by person in possession under a voidable contract. Where a person obtains
possession of goods under a voidable contract, the pledge created by him is valid
provided
(1) The contract has not been rescinded before the contract of pledge, and
(2) The pawnee acts in good faith and without notice of the pawnor's defect of title (Sec.
178-A).