THE CONTRACT ACT, 1872

Session 4

LAW OF INDEMNITY AND GUARANTEE,
BAILMENT AND PLEDGE AND
LAW OF AGENCY
CS Shashikala Rao
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LAW OF INDEMNITY AND
GUARANTEE
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Contract of Indemnity (Sec. 124)
A contract by which one party promises to save the other from
loss caused to him by the conduct of the promisor himself, or
by the conduct of any other person, is called a contract of
indemnity.
A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of Rs. 20000. This is
a contract of indemnity.
The person who promises to make good the loss is called the
indemnifier and the person whose loss is to be made good is
called the Indemnity holder
Contract of indemnity may be express or implied
Essentials
Contract of indemnity must contain all the essentials of a
valid contract.
The promisee or the indemnity holder must have suffered
loss.


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1. X asks Y to beat Z and proposes to indemnify Y against the consequences. Y
beats Z and is fined Rs. 1000. Y cannot claim this amount from X because the
object of the agreement was unlawful. This is not a valid contract.
2. X an auctioneer, sold certain goods at the instruction of Y. Later on, it is
discovered that the goods belonged to Z and not Y. Z recovered damages from
X for selling his goods. Here, X is entitled to recover the compensation from Y
because there was an implied promise to compensate the auctioneer for any
loss which he may suffer on the defective title of goods sold by auction.
.3. All insurance policies except life insurance are contracts of indemnity.
Duty to indemnify may be by operation of law.
Companies Act issue of duplicate shares
Rights of indemnity holder (Sec. 125)
Damages entitled to recover all the damages
Costs All costs which he may be compelled to pay in any such suit
in instituting or defending it
All sums all the sums which he may have paid under the terms of
any compromise of any suit.
Suit for specific performance
Rights of indemnifier same as rights of surety

Contract of Guarantee (sec. 126)

A contract of Guarantee is a contract to perform the promise, or discharge the
liability of a third person in case of his default.
A lends money to B and C promises A that in case B fails to pay the money he
will pay the money. This is a contract of guarantee.
Surety - The person who gives the guarantee ,
Principal debtor - the person in respect of whose default the guarantee is given
Creditor - the person to whom the guarantee is given.
A guarantee may be either oral or written.
Consideration in a Contract of Guarantee
Anything done, or any promise made, for the benefit of principal debtor may be
sufficient consideration to the surety for giving the guarantee. Surety need not
be benefited.
1. B requests A to sell and deliver to him goods on credit. A agrees to do so
provided C will guarantee the payment of the price of the goods. C promises
to guarantee the payment in consideration of As promise to deliver the
goods. This is sufficient consideration for Cs promise.
2. A sells and delivers goods to B. C afterwards, without consideration, agrees
to pay for them in default of B. the agreement is void.

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Essentials
Tripartite Agreement implied is sufficient
Consent of Three parties
Existence of a liability or promise of performance enforceable by law
Essentials of a Valid Contract principal debtor need not be competent to contract.
Guarantee not be obtained by Misrepresentation
Guarantee not to be obtained by concealment
There should be some consideration past consideration is also ok.
1. B requests A to sell and deliver to him on credit. A agrees to do so, provided C
guarantees the payment of the price of the goods. C promises to guarantee the
payment in consideration of As promise to deliver the goods. This is a sufficient
consideration for Cs promise.
2. A sells and delivers goods to B. C, afterwards, requests A to forbear to sue B for the
debt for the year, and promises that if he does so, C will pay for them in default of
payment by B. A agrees to forbear as requested. This is a sufficient consideration for Cs
promise.
3. A sells and delivers goods B. C, afterwards, without consideration, agrees to pay for
them in default of B. The agreement is void.
4. A guarantees to C payment for iron to be supplied by him to B to the amount of 2000
tons. B and C have privately agreed that B should pay Rs. 500 per ton beyond the
market price, such excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety.


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Contract of Indemnity and Contract of Guarantee
Basis of
Distinction
Contract of Indemnity Contract of Guarantee
No. of parties There are two parties indemnifier and
the indemnity - holder
There are three parties debtor,
creditor and surety
No. of contracts There is only one contract between
indemnifier and the indemnity - holder

There are three contracts, one between
creditor and principal debtor, second
between surety and principal debtor
and third between surety and the
creditor.
Undertaking The indemnifier undertakes to save the
indemnity holder from any loss
The surety undertakes for the payment
of debts of principal debtor.
Nature of liability The liability of indemnifier is primary
and unconditional
The liability of surety is secondary and
conditional.
Nature of event The liability arises only on the
happening of a contingency.
The liability arises only on the non
performance of an existing promise or
non payment of an existing debt by
principal debtor.
Right to sue The indemnifier cannot sue third party
in his own name because of absence of
privacy of contract between him and a
third party.
A surety, on discharging the debt of
principal debtor, can sue the principal
debtor in his own name.
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Extent of Suretys Liability Liability of a surety is equal to that of the principal
debtor unless otherwise agreed.
Liability of principal debtor is primary and that of surety is secondary. In case
principal debtor is not liable surety will not be liable.
Kinds of Guarantee
Specific guarantee- A guarantee which extends to a single debt or specific
transaction. Suretys liability comes to an end when the guaranteed debt is
duly discharged or the promise is duly performed.
X gave his godown to Y on lease for 10 years on a lease rent of Rs. 12000 p.a. Z
guaranteed that Y would fulfill his obligations. This is a contract of specific
guarantee because the lease for 10 years is entirely an indivisible transaction
and cannot be classified as a series of distinct transactions.
Continuing guarantee A guarantee which extends to a series of
transactions. A suretys liability continues until the revocation of guarantee.
On Ss recommendation, C employed P for the collection of rent from his
tenants. S promised to make good any default made by P. This is a contract of
continuing guarantee.
Continuing guarantee may be given for a part of the entire debt or for the
entire benefit debt subject to a limit.


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Revocation of continuing guarantee : A continuing guarantee as to future
transactions may be revoked in any of the following ways -
1. By notice to creditor X gives guarantee to the extent of Rs. 60,000 for the
loans given from time to time by Y to Z. Y gave a loan of Rs. 20,000 to Z.
Afterwards, X gives notice of revocation. X is discharged from all liability to Y for
any loan granted after the revocation of guarantee but he is liable to Y for Rs.
20,000 on default of Z.
2. By death of surety - suretys estates remains liable for past transactions
3. By modes of discharging the surety
Novation
Variance in terms of contract.
C contracts to lend B Rs. 5000 on 1st March. A guarantees payment. C pays Rs.
5000 to B on 1st January. A is discharged from his liability as the contract is
varied in as much as C might sue B for the money before 1st March.
Release or discharge of principal debtor.
A contracts with B for a fixed price to build a house for B within a stipulated
time, B supplying the necessary timber. C guarantees As performance of the
contract. B omits to supply the timber. C is discharged from his surety ship.


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When the creditor enters into an arrangement with the principal debtor
Creditors act or omission impairing suretys eventual remedy
B contracts to build a ship for C for a given sum, to be paid by instalments as the work
reaches certain stage. A becomes surety to C for Bs due performance of the contract. C,
without knowledge of A, pre-pays to B the last two instalments . A is discharged by this
pre- payment.
Loss of security
C advances to B, his tenant Rs. 2000 on guarantee of A. C has also a further security of
Rs. 2000 by mortgage of Bs furniture. C cancels the mortgage. B becomes insolvent
and C sues A on his guarantee. A is discharged from liability to the amount of the value
of the furniture.

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Rights of surety against the principal debtor
1. Right to subrogation surety steps into the shoes of creditor.
Upon payment of guaranteed debt or performance of all that he is liable for, surety
is vested with all the rights which the creditor had against the principal debtor.
2. Right to indemnity surety has right to recover from principal debtor sums
rightfully paid.
1. B is indebted to C and A is surety for the debt. C demands payment from A and
on his refusal sues him for the amount. A defends the suit, having reasonable
grounds for doing so, but is compelled to pay the amount with costs. He can
recover from B the amount paid by him for costs, as well as the principal debtor.
2. A guarantees to C, to the extent of Rs. 2,000, payment for rice to be supplied by
C to B. C supplies to B rice for a lesser amount than Rs. 2000 but obtains from A
payment of the sum of Rs. 2000 in respect of the rice supplied. A cannot recover
from B more than the price of the rice actually supplied.
Rights of surety against creditor
Right to securities held by creditor
A gave a loan to B on the guarantee of C as well as on the mortgage of Bs furniture.
Afterwards, A cancels the mortgage, B becomes insolvent and A sues C on this
guarantee. C is discharged from liability to the value of furniture.


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Rights of surety against co-sureties
Right to be contributed equally in case where two or more persons are co-
sureties and share security.
A, B and C are sureties to D for the sums of Rs. 3000 lent to E. E makes
default in payment. A, B and C are liable, as between themselves, to pay Rs.
1000 each.
Co sureties bound in different sums
A, B and C, as sureties for D, enter into three several bonds, each for different
value, namely A for Rs. 10,000, B for Rs. 20,000, C for Rs. 40,000, conditioned
for Ds duly accounting to E.
1. D makes default to the extent of Rs. 30,000. A, B and C are each liable to
pay Rs. 10,000.
2. D makes default to the extent of Rs. 40,000. A is liable to pay Rs. 10,000
and B and C Rs. 15,000 each.
3. D makes default to the extent of Rs. 70,000. A, B and C will bear the entire
amount which they have taken up.
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Discharge of Surety
By Revocation of Contract of Guarantee
1. By notice
2. By the death of Surety
3. By Novation
By Conduct of Creditor-
1. By variance in terms of contract
C contracts to lend B Rs. 5000 on 1st March. A guarantees payment. C pays Rs.
5000 to B on 1st January. A is discharged from his liability as the contract is varied
in as much as C might sue B for the money before 1st March.
2. By release or discharge of Principal debtor
A contracts with B for a fixed price to build a house for B within a stipulated time, B
supplying the necessary timber. C guarantees As performance of the contract. B
omits to supply the timber. C is discharged from his surety ship.
3. By arrangement - arrangement between creditor and principal debtor for
composition or giving further time.





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4. By creditors act or omission impairing Surety s Eventual Remedy
B contracts to build a ship for C for a given sum, to be paid by instalments as the
work reaches certain stage. A becomes surety to C for Bs due performance of the
contract. C, without knowledge of A, pre-pays to B the last two instalments . A is
discharged by this pre- payment.
By invalidation of contract
1. Guarantee obtained by Misrepresentation
2. Guarantee obtained by concealment of material circumstances
3. Failure of a person to join as co-surety



BAILMENT AND PLEDGE
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BAILMENT (Sec.148)
Delivery of goods by one person to another for some purpose, upon a contract that they shall,
when the purpose is accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them. Bailment means to deliver or to hand over.
Bailor the person delivering the goods
Bailee the person to whom the goods are delivered
1. X who is going out of station gives his pet dog to Y for proper care.
2. Y hires a car from X for going on a vacation
3. X gives his car for servicing.
Essential Elements of Bailment
1. Agreement: expressed or implied
2. Delivery of Goods: delivery must be voluntary (Money is not included)
1. Delivery of jewellery by owner to thief who shows a revolver, does not create a bailment .
2. Delivery of jewellery by owner to goldsmith for repair or sale .
Delivery may be actual or constructive.
3. Purpose: for some intended purpose.
Wrong delivery of goods to Jaipur Golden Roadways instead of Patel Roadways, does not
create bailment.
4. Return of Specific Goods form may change
Delivery of gold jewellery to banker for safe custody creates a bailment because same old gold
jewellery in its original form is to be returned.
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Basis of Distinction Bailment Sale
Transfer of ownership/
possession
There is a transfer of possession
of goods from the bailor to the
bailee
There is a transfer of
possession of goods from
the seller to the buyer

Consideration The consideration need not be
passed between bailor and
bailee
The consideration in terms
of price must be passed
between seller and buyer
Return of goods The bailee must return the
goods to the bailor on the
fulfillment of the purpose for
which the bailment is made
There is no question of
such return of goods in
contract of sale.
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Delivery may be actual or constructive. Custody of goods without
possession is not bailment, for eg. Servant carrying goods is not a bailee.
Constructive delivery shipping documents, railway receipt, etc
Types of Bailment
(i) Gratuitous Bailment A gives his book to B, his friend for reading and to be
returned after examination, without any consideration.
(ii) Non - Gratuitous Bailment - For charge - giving car for repairs
(iii) Pledge
Duties and liabilities of Bailor
Put bailee into possession deliver goods to bailee
To disclose defects of which he is aware and material faults
In case of hire, bailor is responsible for damages even for defects which he is not
aware of.
1. A lends a horse, which he knows to be vicious, to B. He does not disclose the fact
that the horse is vicious. The horse runs away. B is thrown and injured. A is
responsible to B for damage sustained.
2. A hires a carriage of B. The carriage is unsafe, though B is not aware of it. A is
injured. B is responsible to A for the injury.
To bear expenses incurred by the bailee towards the bailment
To indemnify the bailee in case of premature termination of bailment
To indemnify the bailee against defective title of bailor stolen car given on hire
To receive back goods
To bear the risk of loss (provided the bailee has taken reasonable steps to protect
the subject)

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Duties and liabilities of Bailee
To take prudent care of goods bailed whether gratuitous or not
Not to make unauthorised use of goods
A gives his car to B for his personal use only for 5 days. B allows C, his son to drive the
car. C drives the car with care, but meets with an accident which damages the car . B
is liable to make compensation to A for the damage to the car.
Not to mix his own or others goods with bailors goods
A bails 100 bales of cotton marked with a particular mark to B. B without As consent
mixes the 100 bales with other bales of his own, bearing a different mark. A is entitled
to have his 100 bales returned, and B is bound to bear all the expenses incurred in the
separation of the bales, and any other incidental damages.
To return goods on expiration of time or accomplishment of purpose
A gave his car to B for five days for personal use. B did not return the car after 5 days.
On the 6th day the windshield of the car is broken because of a foreign object
crashing into it while the car was parked in Bs garage. B is liable to reimburse to A
for repair.
To return accretion to the goods
A leaves his pet dog in the custody of B to be taken care of. The dog delivers 2
puppies . B is bound to return the dog along with the puppies to A.
To pay damages


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Rights of Bailor
Claim damages in case of negligence by bailee
Terminate the contract in case of unauthorised use
1. Vehicle used to transport goods instead of people
2. A lets to B for hire a car for his own use. B allows his son C to use the
car. A can terminate the bailment.
Claim compensation in case of unauthorised use
A gives his car to B for his personal use only for 5 days. B allows C, his son
to drive the car. C drives the car with care, but meets with an accident
which damages the car . B is liable to make compensation to A for the
damage to the car.
Claim separation of goods in case of unauthorised mixture where
separation is possible
Claim separation of goods in case of unauthorised mixture where
separation is not possible
A bails a barrel of imported flour worth Rs. 45 to B. B, without As consent
mixes the flour with Punjabi flour of his own, worth only Rs. 25 a barrel. B
must compensate A for the loss of his flour.


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Demand return of goods on expiration of time or accomplishment of purpose
Claim compensation in case of unauthorised retention of goods
Demand accretion to goods

Rights of Bailee

To claim damages in case bailee suffers loss due to undisclosed defects
To claim reimbursement of expenses
To be indemnified in case of premature termination
Recover loss in case of defective title: stolen car taken on hire
Recover loss in case of bailors refusal to take the goods back
Right to deliver goods to any one of the joint bailors
Right to deliver the goods to bailor in case of bailors defective title


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Rights of Bailor and Bailee against Wrongdoers (Sec. 180)

If a third party wrongfully deprives a bailee of the use or possession of the
goods bailed, or does them any injury, the bailee is entitled to such remedy as
the owner might have used in the like case if no bailment had been made; and
either the bailor or the bailee may bring a suit against a third person for such
deprivation or injury.

X delivered a car to Y for repairs. Z forcefully takes possession of car from Y. In
this case, either X or Y may sue Z. If Y files the suit, he shall handover the
amount received after deducting his repair charges.

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What is Lien??
Right of a person having possession of goods belonging to another to retain goods
until satisfaction of sum claimed by the person in possession of goods.
Kinds of Lien
Particular Lien (Sec. 170)
Where the bailee has, in accordance with the purpose of the bailment, rendered any service
involving the exercise of labour or skill in respect of the goods bailed he has in the absence of
a contract to the contrary, a right to retain such goods until he receives due remuneration for
the services he has rendered in respect of them.
1. A delivers a rough diamond to B, a jeweller, to be cut and polished which is accordingly
done. B is entitled to retain the stone till he is paid for the services he has rendered.
2. A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon
as it is finished, and to give A three months credit for the price. B is not entitled to retain
the coat until he is paid.
General Lien (Sec. 171)
A general lien is a right to retain all the goods as a security for the general balance of account
until the full satisfaction of the claims due whether in respect of those goods or other goods.
In the absence of a contract to the contrary, a general lien is available only to bankers, factor,
wharfingers, attorneys of a High Court and policy brokers. General lien is available to other
persons only when there is an express contract to that effect.
X deposited shares of Tata Steel Ltd and Reliance Industries Ltd as security with Axis Bank and
took a loan against these shares. Bank may retain both the securities until its claims are fully
satisfied.



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Particular lien vs General lien
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Particular General
Available against those goods in respect
of which some charges are due.

Available against all goods in respect of
which claims are due or not.

Available only for non-payment of
remuneration of the services

Available for a general balance of
account

Available to every bailee to whom
goods have been bailed

Available to specific bailee like bankers,
factors, etc.

Available only when some service
involving exercise of labour or skill has
been rendered

Available even when no such services
have been rendered

Purpose of delivery of goods is to
confer an additional value to goods by
exercise of labour or skill

Purpose of delivery of goods is to
deposit the goods as security

Rights of a Finder of goods :
FINDER is a person who finds goods which do not belong to him
1. Right to Lien: towards expenses to preserve and find out owner
2. Right to Sue for reward: where owner has offered a specific reward
3. Right to Sell: owner not found; owner refuses to pay expenses; perishable
goods; lawful charges of finder exceeds 2/3rd of its value
Duties of Finder of goods :
1. Take reasonable care
2. Not to use for personal purpose
3. Not to mix with his own goods
4. To find the owner
Termination of Bailment:
1. On expiry of fixed period
2. On fulfilment of purpose
3. Inconsistent use of goods
4. Destruction of subject matter (or incapable of being use)
5. Gratuitous Bailment Before the expiry of a fixed period and on death of
Bailor/Bailee.



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Pledge or Pawn
The bailment of goods as security for payment of a debt or performance of a
promise is called pledge or pawn.
X borrows Rs.5 lacs from State Bank and gives his shares as security for payment
of debt.
Pawnor (or Pledgor) : The person who delivers the goods as security for
payment
Pawnee (or Pledgee) : The person to whom the goods are delivered as security


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Basis of Distinction Pledge Bailment
Purpose Pledge is bailment of goods for
a specific purpose i.e.
repayment of a debt or
performance of duty.
Bailment is for a purpose of
any kind.
Right to use Pawnee cannot use the goods
pledged
Bailee can use the goods as
per terms of bailment.
Right to sell Pawnee can sell the goods
pledged after giving notice to
the pawnor in case of default
by the pawnor
Bailee can either retain the
goods or sue the bailor for
his dues.
Rights of a Pawnee
1. Right of retainer for payment of debt or performance of promise, interest
or other expenses incurred.
2. Right to claim reimbursement of extraordinary expenses
3. Right to sue pawnor
4. Right to sell
5. Right against true owner
Duties of a Pawnee
1. Duty to take reasonable care of goods pledged
2. Duty not to make unauthorized use of goods.
3. Duty not to mix goods pledged with his own goods.
4. Duty to return goods
5. Duty to return accretions to the goods.


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Rights of a pawnor
1. Right to get Pawnees duties duly enforced
2. Right to redeem the goods pledged to get the goods back by making
payment or performance of promise.
Duties of a Pawnor
1. Duty to comply with terms of pledge repaid debt, etc
2. Duty to compensate the pawnee for extraordinary expenses.
Pledge by Non- owners
1. Pledge by a Mercantile agent (trader) in an ordinary course of business
2. Pledge by person in possession under voidable contract (undue influence,
coercion, fraud, etc.)
( for 1 and 2 - good title to pawnee who acts in good faith)
3. Pledge where pawnor has a limited interest valid to the extent of interest
finder of goods
4. Pledge by a co-owner in possession
5. Pledge by seller or buyer in possession
X sold goods to Y who left the goods with X who then pledged those goods with Z
who acted in good faith and has no notice of prior sale. Such pledge is valid.



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LAW OF AGENCY
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Who is an agent and a principal ?? (Sec. 182)
An agent is a person employed to do an act for another or to represent another
in dealings with third persons. The person for whom such act is done, or who is
so represented, is called the principal. The relationship between them is called
agency. An agent therefore brings together his principal and the third person.
A appoints B to purchase a house for him. A is the principal, B an agent the
relationship between the two is that of agency.
Who can be appointed an agent?
Any person (whether he has contractual capacity or not) may become an agent
as between principal and third person. Thus, a minor or a person of unsound
mind can also become an agent, but he will not responsible to his principal.
Who can employ an agent?
A person who is of the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an agent.
No consideration is necessary to create an agency.

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Modes of creating Contract of agency
By express
authority
By operation
of law
By estoppel
By holding
out
By
necessity
By implied
authority
By
ratification
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Test of agency is whether a person has the capacity to bind the principal
by acts done on his behalf. When the agent can establish privity of contract
between third party and his principal, an agency exists.
How is agency constituted ?
1. Agency by agreement - express or implied
(i) X who owns a shop, appoints Y to manage his shop by executing a power of
attorney in Ys favour. Here, the relationship of principal and agent has been
created between X and Y by an express authority.
(ii) A owns a shop in Shimla, living himself in Calcutta, and visiting the shop
occasionally. The shop is managed by B, and he is in the habit of ordering goods
from C in the name of A for the purposes of the shop and of paying for them out
of As funds with As knowledge. B has an implied authority from A.
2. Agency by necessity due to necessity, communication with principal not possible,
in the best interest of the principal,
(i) X consigned some vegetables from Delhi to Bombay by truck. The truck met
with an accident . The vegetables being perishable were sold by the transporter.
This sale is binding on X. In this case, the transporter became an agent by
necessity.
(ii) X stored some furniture in Ys house free of charge. After three years, Y needed
the space occupied by the furniture. He obtained Xs address from his bank and
wrote two letters to him but he received no reply. Y then sold the furniture. It
was held that the sale was not binding on the owner because there was no
emergency which required the sale of furniture.



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3. Agency by estoppel by words or conduct inducing third person to believe
X tells Y in the presence and within the hearing of Z that he (X) is Zs agent. Z does
not contradict this statement. Later on Y enters into a contract with X believing that
X is Zs agent. In such a case Z is bound by this contract and in a suit between Z and
Y, Z cannot be permitted to say that X was not his agent, even though X was not
actually his agent.
4. Agency by holding out due to past conduct
X allows Y, his servant to purchase goods for him on credit from Z and later on pays
for them. One day X pays cash to Y to purchase goods. Y misappropriate the money
and purchases goods on credit from Z. Z can recover the price of his goods from X
because X had held out Y as his agent on earlier occasions.
4. Agency by operation of law
On formation of partnership, every partner becomes the agent of others.
5. Agency by ratification may be expressed or implied tantamounts to prior
authority
1. A, without authority, buys goods for B. Afterwards B sells them to C on his own account;
Bs conduct implies a ratification of the purchases made for him by A.
2. X holds a flat on a lease from Y. The lease is terminated on 3 months notice. Z, without
Ys authority gives notice of termination of lease to X. Y cannot ratify the notice given by
Z so as to binding on X.
3. Act of a director ultra vires the company cannot be ratified.
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Essentials of valid ratification
1. Full knowledge
2. Whole transaction
3. No damage to third party
4. Act on behalf of another person
5. Acts within principals power
6. Existence of principal
7. Contractual capacity
8. Lawful acts
9. Within reasonable time
10. Communication

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Classification of agents
1. General agent
2. Special agent
3. Universal agent global agent
4. Mercantile or commercial agent
5. Broker
6. Factor - has a general lien on goods
7. Auctioneer
8. Commission agent
9. Del credere agent guarantor
10. Sub agent
Can an agent delegate his authority?
Delegatus non potest delegare means an agent cannot lawfully employ another
to perform acts which he has expressly or impliedly undertaken to perform
personally.
Exception sub - agent properly appointed -
Agent is responsible to the principal for the acts of the sub agent.
Sub agent is responsible for his acts to the agent and not to the principal except
in case of fraud or wilful wrong.
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11. Substituted agent - direct privity between principal and substitute agent
1. A directs B, his solicitor, to sell his estate by auction, and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C
is not a sub agent, but is As agent for the conduct of the sale.
2. A consigns goods to B, a merchant for sale. B in due course, employs an
auctioneer in good credit to sell the goods of A and allows the auctioneer to
receive the proceeds of sale. The auctioneer afterwards becomes insolvent
without having accounted for the proceeds. B is not responsible to A for the
proceeds.
Extent of agents authority capacity of agent to bind principal
To do every lawful thing which is necessary to do such act
A is employed by B, residing in London, to recover at Bombay a debt due to B. A
may adopt any legal process necessary for the purpose of recovering the debt,
and may give a valid discharge for the same.
In case of emergency to do all such acts to protect the principal
from loss
Butter was being transported by railways. Because of delay in transit there was
a possibility of butter becoming stale. The railway sold the butter at the best
possible price. The principal was bound.


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Duties and liabilities of agent to principal
1. To conduct business as per directions or custom of trade
2. Conduct the business with skill and diligence
3. To render proper accounts
4. To pay sums received for principal
5. On principal's death or insanity
6. To communicate with principal
7. Not to deal on his own account
8. To disclose material information
9. Not to make secret profits
10. Not to create adverse title
11. Not to delegate without authority
12. Naming an agent for principal
13. Liable for acts of sub-agents
14. For misrepresentation or fraud
15. To bear damages for misconduct

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1. A, an agent for the sale of goods, having authority to sell on credit, sells to B
on credit, without making the proper and usual enquiries as to the solvency
of B. B at the time of such sale is insolvent. A must make compensation to his
principal in respect of any such loss thereby sustained. (Reasonable skill and
care)
2. A directs B to sell As estate. B, on looking over the estate before selling it,
finds a mine on the estate which is unknown to A. B informs A that he wishes
to buy the estate for himself, but conceals the discovery of the mine. A allows
B to buy in ignorance of the existence of the mine. A on discovery that B knew
of the mine at the time he bought the estate, may either repudiate or adopt
the sale at his option (Disclosure of material circumstances)

3. A directs B, his agent to buy a certain house for him. B tells A it cannot be
bought and buys the house for himself. A may, on discovering that B has
bought the house, compel him to sell it to A at a price he gave for it.
(Disclosure of material circumstances)

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Rights of agent
1. Right of retainer out of sums received
2. Right to claim/ receive remuneration
3. No right to remuneration for business not conducted properly
4. Right of lien on principals property lawfully acquired by the agent
5. Right to be indemnified not in case of criminal acts
6. Compensation
7. To do lawful things
8. In emergency
9. To appoint substitute agent
10. To renounce agency
11. Compensation for premature revocation

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1. Right to receive remuneration
X, an agent introduced a customer to purchase the principals property. The sale was
settled and earnest money was paid. The sale could not complete because of customers
inability to pay. State whether the agent was entitled to remuneration if (a) he was
appointed to sell a property on the terms that he would be paid commission on the
completion of sale, (b) he was appointed to introduce a customer to purchase the
principal's property
=>(a) the agent was not entitled to remuneration because the sale has not been
completed.
(b) The agent was entitled to remuneration because he did what he was required to do,
ie, to introduce a customer to buy the principals property.
2. Agent not entitled to remuneration for misconduct
(i) A employs B to recover Rs. 1,00,000 from C, and to invest it in good security. B
recovers Rs. 1,00,000 and invested Rs. 90,000 on good security, but invested
Rs.10,000 on security which he ought to have known to be bad, whereby A loses
Rs.2,000. B is entitled to remuneration for recovering Rs. 1,00,000 and for investing
Rs. 90,000. He is not entitled to remuneration for investing the Rs.10,000 and he
must make good Rs.2,000 to B.
(ii) A employs B to recover Rs.1,000 from C. through Bs misconduct the money is not
recovered. B is entitled to no remuneration for his services, and must make good the
loss.
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3.Right to be indemnified against consequences of lawful acts
(i) B, at Singapore, under instructions from A of Calcutta, contracts with C to
deliver certain goods to him. A does not send the goods to B and C sues B for
breach of contract. B informs A of the suit, and A authorises him to defend the
suit. B defends the suit , and is compelled to pay damages and costs and incurs
expenses. A is liable to B for such damages, costs and expenses.
(ii) B, a broker at Calcutta, by the orders of A, a merchant there contracts with C
for the purchase of 10 casks of oil for A. Afterwards, A refuses to receive the
oil, and C sues B. B informs A, who repudiates the contract altogether. B
defends, but unsuccessfully, and has to pay damages and costs and incurs
expenses. A is liable to B for such damages, costs and expenses.
4. Right to be indemnified against consequences of Acts done in good faith
B, at the request of A sells goods in possession of A, but which A had no right to
dispose of. B does not know this, and hands over the proceeds of the sale to A.
Afterwards C, the true owner of the goods, sues B and recovers the value of the
goods and costs. A is liable to indemnify B for what he has been compelled to pay to
C and for Bs own expense.

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Duties and liabilities of principal to agent
1. To indemnify the agent against consequences of lawful act.
2. To indemnify the agent against consequences of the acts done in good faith
3. Compensate the agent for injury caused due to principals neglect
4. To pay remuneration and dues
5. Misrepresentation or fraud by agent within the agents authority
6. On notice given to agent same as given to principal
7. Where principal induces third person to believe that agents un-authorised acts
were authorised
Rights of principal
1. To repudiate contract
2. To claim benefit
3. To ratify or disown agents acts
4. To revoke agents authority
5. To claim loss or profit
6. To demand accounts
7. To refuse remuneration when agent is guilty of misconduct.




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Agents when personally liable?
1. Where the principal is a foreigner residing abroad
2. Where principal is undisclosed
3. Where principal is incompetent lunatic, minor, etc.
4. Where principal is non- existent promoters before company is incorporated
5. In case where acts not ratified
6. In case of acts where in agents own name
7. In case of express agreement
8. Agency coupled with interest
9. Personal liability of an agent by usage or custom
10. Where an agent acts beyond his authority
11. Pretending agent
12. Where agents misrepresents or commits fraud
A enters into a contract with B to sell him 100 bales of cotton, afterwards discovers
that B was acting as agent for C. A may sue either B or C, or both, for the price of
the cotton.
13. Where the agent appoints sub-agent without authority
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Termination or determination of agency (sec. 201-210)
1. By act of parties
1. By agreement
2. By revocation and renunciation
3. By renouncing
2. By operation of law
1. By death or insanity
2. By insolvency of the principal
3. By completion of performance
3. Other modes of termination of agency
1. By efflux of time
2. By destruction of the subject matter
3. By incapacity of principal or agent
4. Principal or agent becoming an alien enemy
5. By object of agency becoming unlawful




When termination takes effect (sec 208)
The termination of the authority of an agent, does not as far as regards the agent,
take effect before it becomes known to him, or, so far as regards third persons,
before it becomes known to them.
1. A directs B to sell goods for him, and agrees to give B 5% commission
on the price fetched by the goods. A afterwards, by letter, revokes Bs
authority. B, after the letter is sent, but before he receives it, sells the
goods for Rs. 10000. The sale is binding on A, and B is entitled to Rs.
500 as his commission.
2. A, at Madras, by letter directs B to sell for him some cotton lying in a
warehouse in Bombay, and afterwards, by letter, revokes his authority
to sell, and directs B to send the cotton to Madras. B, after receiving
the second letter, enters into a contract with C, who knows of the first
letter, but not of the second, for the sale to him of the cotton. C pays B
the money, with which B absconds. Cs payment is good as against A.

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Revocation by principal
The principal may revoke the authority given to his agent at any time
before the authority has been exercised so as to bind the principal.
1. A empowers B to let As house. Afterwards, A lets it to himself. This is
an implied revocation of Bs authority.
2. A directs B to sell goods for him and agrees to give B five per cent
commission on the price fetched by the goods. A, afterwards, by a
letter , revokes Bs authority. B, after the letter is sent but before he
receives it, sells the goods for Rs. 10, 000. The sale is binding on A and
B is entitled to Rs. 500 as his commission.

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When agency cannot be revoked/terminated?
1.Agent has exercised authority partly: 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.
A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of As
money remaining in Bs hands. B buys 1000 bales of cotton in his own name, so as to
make himself personally liable for the price. A cannot revoke Bs authority so far as
regards payment for the cotton.
2.Agency coupled with interest: Where the agent has himself an interest in the
property which forms the subject matter of the agency, the principal cannot revoke
agents authority to the prejudice of such interest.
X consigned 100 bags of wheat to Y who has advanced Rs.10,000 to X. X authorised Y
to sell the wheat and to pay himself Rs.10,000 out of the proceeds of wheat. Later on, X
directed Y not to sell the wheat. Ignoring X`s direction, Y sold the wheat to recover
Rs.10,000. X could not revoke his authority because the agency was coupled with
interest. Hence Y could sell the wheat.
3.When agent incurs personal liability - agency cannot be revoked
A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of As
money remaining in Bs hands. B buys 1000 bales of cotton in his own name, so as to
make himself personally liable for the price. A cannot revoke Bs authority so far as
regards payment for the cotton.


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When revocation takes effect? (Sec. 208)
Revocation of authority terminates the agents authority. The termination of
the authority takes effect as regards the agent, after it becomes known to
him. As regards third persons, termination of authority takes effect after it
becomes known to them.
A directs B, his agent, to pay certain money to C. A dies; and D takes out
probate to his will. B, after As death, but before hearing of it, pays the money
to C. The payment is good as against D, the executor.
Renunciation by Agent: An agent may also renounce his
agency by giving a reasonable notice of such renunciation to the principal;
otherwise the damage thereby resulting to the principal must be made good
by the agent to the principal.
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THANK YOU
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