INDIAN CONTRACT ACT,1872 (PART 2)

INDIAN CONTRACT ACT,1872 (PART 2)

CONTRACT OF INDEMNITY AND ITS ESSENTIALS

In general, indemnity can be defined as “protection against losses.” Indemnity is a protection or security against a loss. Contract of Indemnity is governed by Section 124 of the Indian Contract Act, 1872, which falls under Chapter VIII of the Act. Under this Section, the definition of a contract of indemnity is given as a contract “by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity.”

Essentials
There must be two parties and, there should be an agreement between them wherein the promisor promises to save the promisee from any kind of loss. This is the most vital element in the contract of indemnity. The loss occurring may be due to the conduct of the promisor or any other third party. The provisions of the Act restrict the loss to an extent because it is restricted to a human agency only and an act of God is not covered under the contract of indemnity. Marine Insurance, fire insurance, etc. also fall into the category of the contract of indemnity.

Rights of Indemnity Holder

Section 125 of the Act governs the rights of the indemnity holder.
The indemnity holder will have the right to recover any amount he was compelled to pay in a matter or a suit to which the promise of the indemnifier applies. For instance, A and B enter into a contract that A will indemnify B if C sues B in a particular matter. Now, C sues B and B had to make some payment. According to the contract, A will have to make good all the payment which B made to C in relation to that matter.

The indemnity holder is also entitled to recover any cost which he might have to pay to any third party. But the indemnity holder should have acted prudently and under the directions which were given by the indemnifier. In the judicial pronouncement of Adamson v Jarvis, Adamson was an auctioneer and under the instruction from Jarvis he auctioned some cattle. It was later known that Jarvis wasn’t the real owner of the cattle. The real owner of the cattle filed a suit against Adamson. The Court held that Adamson could recover the cost he incurred from Jarvis because he acted as per the instructions given by Jarvis.

The indemnity holder also has the right to recover nay sum that he may have paid under any suit or compromise provided it was not contrary to the instructions of the indemnifier.

Rights of the Indemnifier

Although the rights of the indemnity-holder have been mentioned under the Act, the rights of the indemnifier haven’t been mentioned expressly under the Act. In the judicial pronouncement of Jaswant Singh v. Section of State, it was opined by the Court that the rights of the indemnifier are similar to the rights of a surety. Rights of a surety have been stated under Section 141 of the Act. The indemnifier, upon indemnification, will be entitled to all the protection which the indemnified person was entitled to. The principle of subrogation comes into play here. The principle of subrogation follows the principle of substitution. Once the promisor pays the amount of compensation, he replaces the indemnified person.

Enforceability of Contract of Indemnity

In India, no provision expressly states that when a contract of indemnity will become enforceable. The judicial decisions are also conflicting with respect to the issue of enforceability. The case of O.J. and Sons Ltd. v. Gopal Purushottam[ is one of the earliest cases in India where the right to be indemnified before paying was recognized. But the trend and the Courts have changed a bit. In the cases of Gajanand Moreshwar, Shiam Lal v. Abdul Salal, and K. Bhattacharya v. Namo Kumar, the Court was of the opinion that the indemnified party can compel the indemnifier to pay so that he can meet a liability without waiting to actually discharge the liability. The principle followed is that the indemnified party shall never be called to pay. The obligation of the indemnifier starts as soon the loss becomes absolute.

CONTRACT OF GUARANTEE AND ITS ESSENTIALS

Section 126 of the Indian contract act defines a contract of guarantee as a contract to perform the promise or discharge the liability of the defaulting party in case he fails to fulfill his promise

Thus here we can infer that there the 3 parties to the contract

·       Principal Debtor – The one who borrows or is liable to pay and on whose default the guarantee is given

·       Creditor – The party who has given something of value to borrow and stands to receive the payment for such a thing and to whom the guarantee is given

·       Surety/Guarantor – The person who gives the guarantee to pay in case of default of the principal debtor

Also, we can understand that a contract of guarantee is a secondary contract that emerges from a primary contract between the creditor and the principal debtor.

Illustration- Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav promises that in case Pallav fails to repay the loan, then she will repay the same. In this case of a contract of guarantee, Ankita is the Creditor, Pallav the principal debtor and Srishti is the Surety.

A contract of guarantee may either be oral or written. It may be express or implied from the conduct of parties.

Essentials of a Contract of Guarantee

1) Must be made with the agreement of all three parties- All the three parties to the contract i.e the principal debtor, the creditor, and the surety must agree to make such a contract with the agreement of each other. Here it is important to note that the surety takes his responsibility to be liable for the debt of the principal debtor only on the request of the principal debtor. Hence communication either express or implied by the principal debtor to the surety is necessary. The communication of the surety with the creditor to enter into a contract of guarantee without the knowledge of the principal debtor will not constitute a contract of guarantee.

Illustration- Sam lends money to Akash. Sam is the creditor and Akash is the principal debtor. Sam approaches Raghav to act as the surety without any information to Akash. Raghav agrees. This is not valid.

2) Consideration- According to section 127 of the act, anything is done or any promise made for the benefit of the principal debtor is sufficient consideration to the surety for giving the guarantee. The consideration must be a fresh consideration given by the creditor and not a past consideration. It is not necessary that the guarantor must receive any consideration and sometimes even tolerance on the part of the creditor in case of default is also enough consideration.

In State Bank of India v Premco Saw Mill(1983), the State Bank gave notice to the debtor-defendant and also threatened legal action against her, but her husband agreed to become surety and undertook to pay the liability and also executed a promissory note in favor of the State Bank and the Bank refrained from threatened action. It was held that such patience and acceptance on the bank’s part constituted good consideration for the surety.

3) Liability- In a contract of guarantee, the liability of a surety is secondary. This means that since the primary contract was between the creditor and principal debtor, the liability to fulfill the terms of the contract lies primarily with the principal debtor. It is only on the default of the principal debtor that the surety is liable to repay.

4) Presupposes the existence of a Debt- The main function of a contract of guarantee is to secure the payment of the debt taken by the principal debtor. If no such debt exists then there is nothing left for the surety to secure. Hence in cases when the debt is time-barred or void, no liability of the surety arises. The House of Lords in the Scottish case of Swan vs. Bank of Scotland (1836) held that if there is no principal debt, no valid guarantee can exist.

5) Must contain all the essentials of a valid contract- Since a contract of guarantee is a type of contract, all the essentials of a valid contract will apply in contracts of guarantee as well. Thus, all the essential requirements of a valid contract such as free consent, valid consideration offer, and acceptance, intention to create a legal relationship etc are required to be fulfilled.

6) No Concealment of Facts- The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by the concealment of material facts.

7) No Misrepresentation- The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract of guarantee is not a contract of Uberrima fides i.e., of absolute good faith, and thus, does not require complete disclosure of all the material facts by the principal debtor or creditor to the surety before he enters into a contract. But the facts, that are likely to affect the extent of surety’s responsibility, must be truly represented

Kinds of guarantee

Contracts of guarantees may be classified into two types: Specific guarantee and continuing guarantee. When a guarantee is given in respect of a single debt or specific transaction and is to come to an end when the guaranteed debt is paid or the promise is duly performed, it is called a specific or simple guarantee. However, a guarantee which extends to a series of transactions is called a continuing guarantee (Section129). The surety’s liability, in this case, would continue till all the transactions are completed or till the guarantor revokes the guarantee as to the future transactions.

Illustrations

a) S is a bookseller who supplies a set of books to P, under the contract that if P does not pay for the books, his friend K would make the payment. This is a contract of specific guarantee and K’s liability would come to an end, the moment the price of the books is paid to S.

b) On M’s recommendation S, a wealthy landlord employs P as his estate manager. It was the duty of P to collect rent every month from the tenants of S and remit the same to S before the 15th of each month. M, guarantee this arrangement and promises to make good any default made by P. This is a contract of continuing guarantee.

Continuing guarantee

A continuing guarantee is defined under section 129 of the Indian Contract Act,1872. A continuing guarantee is a type of guarantee which applies to a series of transactions. It applies to all the transactions entered into by the principal debtor until it is revoked by the surety. Therefore Bankers always prefer to have a continuing guarantee so that the guarantor’s liability is not limited to the original advances and would also extend to all subsequent debts.

The most important feature of a continuing guarantee is that it applies to a series of separable, distinct transactions. Therefore, when a guarantee is given for an entire consideration, it cannot be termed as a continuing guarantee.

Illustration- K gave his house to S on a lease for ten years on a specified lease rent. P guaranteed that S, would fulfill his obligations. After seven years S stopped paying the lease rent. ‘K sued him for the payment of rent. P then gave a notice revoking his guarantee for the remaining three years. P would not be able to revoke the guarantee because the lease for ten years is an entire indivisible consideration and cannot be classified as a series of transactions and hence is not a continuing guarantee.

Revocation of Continuing Guarantee

So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an offer is accepted it becomes final. However, a continuing guarantee can be revoked for future transactions. In that case, the surety shall be liable for those transactions which have already taken place.

A contract of guarantee can be revoked in the following two ways-

1) By giving a notice (Section 130)- Continuing guarantees can be revoked by giving notice to the Creditor but this applies only to future transactions. Just by giving a notice the surety cannot waive off his responsibility and still remains liable for all the transactions that have been placed before the notice was given by him. If the contract of guarantee includes a clause that a notice of a certain period of time is required before the contract can be revoked, then the surety must comply with the same as said in Offord v Davies (1862).

Illustration- A guarantees to B to the extent of Rs. 10,000, that C shall pay for all the goods bought by him during the next three months. B sells goods worth Rs. 6,000 to C. A gives notice of revocation, C is liable for Rs. 6,000. If any goods are sold to C after the notice of revocation, A shall not be, liable for that.

2) By Death of Surety(Section 131)- Unless there is a contract to the contrary, the death of surety operates as a revocation of the continuing guarantee in respect to the transactions taking place after the death of surety due to the absence of a contract. However, his legal representatives will continue to be liable for transactions entered into before his death. The estate of deceased surety is, however, liable for those transactions which had already taken place during the lifetime of the deceased. Surety’s estate will not be liable for the transactions taking after the death of surety’even if the creditor had no knowledge of surety’s death.

Period of Limitation- The period of limitation of enforcing a guarantee is 3 years from the date on which the letter of guarantee was executed. In State Bank Of India vs Nagesh Hariyappa Nayak And Ors, against the advancement of a loan to a company, the guarantee deed was executed by its directors and subsequently a letter acknowledging the load was issued by same directors on behalf of the company. It was held that the letter did not have the effect of extending the period of limitation. Recovery proceedings instituted after three years from the date of the deed of guarantee were liable to be quashed.

Rights of a Surety

After making a payment and discharging the liability of the principal debtor, the surety gets various rights. These rights can be studied under three heads:

1.     Right against the, principal debtors.

2.     Right against the creditor, and

3.     Right against the co-sureties.

1.  Rights against the Principal Debtor

i) The right of surety on payment of debt or the Right of subrogation(Section 140)- The right of subrogation means that since the surety had given a guarantee to the creditor and the creditor after getting the payment is out of the scene, the surety will now deal with the debtor as if he is a creditor. Hence the surety has the right to recover the amount which he has paid to the creditor which may include the principal amount, costs and the interest.

ii) The right of Indemnity(Section 145)- In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. This is because the surety has suffered a loss due to the non-fullfillment of promise by the principal debtor and therefore the surety has a right to be compensated by the debtor

Illustration- Luthra and co has taken a loan from Khaitan and co where Amarchand acts as security on behalf of Luthra. Khaitan demands payment from Amarchand and on his refusal sues him for the amount, Amarchand defends the suit having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs. He can recover from Luthra the amount paid by him for costs, as well as the principal debt.

(2) Rights against the Creditor

i) Right to securities given by the principal debtor(section 141)- On the default of payment by the principal debtor, when the surety pays off the debt of the principal debtor he becomes entitled to claim all the securities which were given by the principal debtor to the creditor. The Surety has the right to all securities whether received before or after the creation of the guarantee and it is also immaterial whether the surety has knowledge of those securities or not.

Illustration - On the guarantee of Priya, Anita lent rs 100000 to Sita. This debt is also secured by security for the debt which is the lease of Sita’s house. Sita defaults in paying the debt and Priya has to pay the debt. On paying off Sita’s liabilities Priya is entitled to receive the lease deed in her favor.

ii) Right to set off- When the creditor sues the surety for the payment of principal debtor’s liabilities, the surety can claim set off, or counterclaim if any, which the principal debtor had against the creditor.

(3) Rights against the Co-sureties

i) Release of one co-surety does not discharge others (Section 138)- When the repayment of debt of the principal debtor is guaranteed by more than one person they are called Co-sureties and they are liable to contribute as agreed towards the payment of guaranteed debt. The release by the creditor of one of the co-sureties does not discharge the others, nor does it free the released surety from his responsibility to the other sureties. Thus when the payment of a debt or performance of duty is guaranteed by co-sureties and the principal debtor has defaulted in fulfilling his obligation and thus the creditor compels only one or more of the co-sureties to perform the whole contract, the co-surety sureties performing the contract are entitled to claim contribution from the remaining co-sureties.

ii) Co-sureties to contribute equally (Section 146)- According to Section 146, in the absence of any contract to the contrary, the co-sureties are liable to contribute equally. This principle will apply even when the liability of co-sureties is joint or several, and whether under the same or different contracts, and whether with or without the knowledge of each other.

Illustration- A, B, C, and D are co-sureties for a debt of Rs. 2,0000 lent by Z to R. R defaults in repaying the loan. A, B, C, and D are liable to contribute Rs. 5000 each.

iii) Liability of co-sureties bound in different sums(Section 147)- When the co-sureties have agreed to guarantee different sums, they have to contribute equally subject to the maximum of the amount guaranteed by each one.

Illustration- A, B and C, sureties for D, enter into three separate bonds, each in a different penalty, A for Rs. 10,000, B for Rs. 20,000 and C for Rs. 40,000. D makes default to the extent of Rs. 30,000. A B and C are liable to pay Rs. 10,000 each. Suppose this default was to the extent of Rs. 40,000. Then A would be liable for Rs. 10,000 and B and C Rs. 15,000 each.

Discharge of Surety from Liability

Under any of the following circumstances a surety is discharged from his liability:

1.     By the revocation of the contract of guarantee,

2.     By the conduct of the creditor, or

3.     By the invalidation of the contract of guarantee

We have already discussed above the first circumstance in which how a surety can be discharged i.e by Revocation of the Contract of Guarantee. This includes by giving notice or death or the surety.

(2) Conduct of the Creditor

i) Variance in terms of the contract(Section 133)- When a contract of guarantee has been materially altered through an agreement between the creditor and principal debtor, the surety is discharged from his liability. This is because a surety is liable only for what he has undertaken in the guarantee and any alteration made without the surety’s consent will discharge the surety as to transactions subsequent to the variation.

Illustration- A becomes surety to C for B’s conduct as a manager in C’s bank. Afterward, B and C contract, without A’ s consent, that B’ s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to over-draw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent and is not liable to make good this loss.

ii) Release or discharge of the principal debtor(Section 134)- A surety is discharged if the creditor makes a contract with the principal debtor by which the principal debtor is released, or by any act or omission of the creditor, which results in the discharge of the principal debtor.

Illustration- A supplies goods to B on the guarantee of C. Afterwards B becomes unable to pay and contracts with A to assign some property to A in consideration of his releasing him from his demands on the goods supplied. Here, B is released from his debt, and C is also discharged from his suretyship. But, where the principal debtor is discharged of his debt by operation of law,say, on insolvency, this will not operate as a discharge of the surety.

iii) Arrangement between principal debtor and creditor- According to section 135 when the creditor, without the consent of the surety, makes an arrangement with the principal debtor for composition, or promise to give him time to, or not to sue him, the surety will be discharged.

However, when the contract to allow more time to the principal debtor is made between the creditor and a third party, and not with the principal debtor, the surety is not discharged (Section 136).

Illustration- C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B, A is not discharged.

iv) Loss of security(Section 141)- If the creditor parts with or loses any security given to him at the time of the guarantee, without the consent of the surety, the surety is discharged from liability to the extent of the value of the security.

Illustration- A, as surety for B, makes a bond jointly with 3 to C to secure a loan from C to B. Later on, C obtains from B further security for the same debt. Subsequently, C gives up further security. A is not discharged.

(3) By Invalidation of the Contract- A contract of guarantee, like any other contract, may be avoided if it becomes void or voidable at the option of the surety. A surety may be discharged from liability in the following cases:

i) Guarantee obtained by misrepresentation(Section 142)- When a misrepresentation is made by the creditor or with his knowledge or consent, relating to a material fact in the contract of guarantee, the contract is invalid

ii) Guarantee obtained by concealment(Section 143)- When a guarantee is obtained by the creditor by means of keeping silence regarding some material part of circumstances relating to the contracts, the contract is invalid

iii) Failure of co-surety to join a surety(Section 144)- When a contract of guarantee provides that a creditor shall not act on it until another person has joined in it as a co-surety, the guarantee is not valid if that other person does not join.

Extent of a surety’s liability

In the absence of a contract to the contrary, the liability of a surety is co-extensive with that of the liability of the principal debtor. It means that the surety is liable to the same extent to which the principal debtor is liable.

Illustration- A guarantees to B the payment of a bill of exchange by C, the acceptor. On the due date, the bill is dishonored by C. A is liable, not only for the amount of the bill but also for any interest and charges which may have become due on it.

DIFFERENCE BETWEEN CONTRACR OF INDEMNITY AND CONTRACT OF GUARANTEE

Contract of Indemnity	Contract of Guarantee
It refers to a Contract by which one party promises to save the other from loss caused by conduct of the promisor or another person.	It refers to a Contract to perform the promise or discharge the liability of a third person in case of his default
In contract of indemnity, the liability of the promisor is primary.	In contract of guarantee, the primary liability is of principal debtor and the liability of surety is secondary.
Contract between the indemnifier and the indemnity holder is express and specific.	Contract between surety and principal debtor is implied and between creditor and principal debtor is express.
In contract of indemnity there are two parties indemnifier and the indemnity holder.	In contract of guarantee there are three parties i.e. creditor, the principal debtor and surety.
In Contract of indemnity there is only one agreement i.e. the agreement between indemnifier and indemnity holder.	In contract of guarantee there are three agreements i.e. agreement between the creditor and principal debtor, the creditor and surety and surety and principal debtor.
Contract of indemnity protects the promise from loss.	Contract of guarantee is for the surety of the creditor.
In Contract if indemnity, the promisor cannot file the suit against third person until and unless the promisee relinquishes his right in favour of the promisor.	In contract of guarantee, the surety does not require any relinquishment for filing of suit. The surety gets the right to file suit against the principal debtor as and when the surety pays the debt.

BAILMENT

According to section 148 of The Indian Contract Act, 1872, Bailment means delivery of goods from one person to another person for some purpose. On the accomplishment of such purpose, the person receiving the goods returns or otherwise disposes of them as per the instructions of the person delivering them. The person who delivers the goods is known as bailor. The person to whom such goods are delivered is known as bailee.

ESSENTIALS OF BAILMENT

1. There shall be a contract between the parties for the delivery of goods,
2. The goods shall be delivered for a special purpose only,
3. Bailment can only be done for movable goods and not for immovable goods or money,
4. There shall be a transfer of possession of goods,
5. Ownership is not transferred to Bailee, therefore Bailor remains the owner,
6. Bailee is duty bound to deliver the same goods back and not any other goods.

Exception: The money deposited in the bank shall not account to bailment as the money returned by the bank would not be the same identical notes. And it is one of the essentials of the bailment that same goods are to be delivered back.

Duties of a Bailor

Section 150 of the Indian Contract Act, 1872 bound the bailor with certain duties to disclose the latent facts specifically pertaining to defect in goods. Bailor’s duty of disclosure are:

• Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods that he is aware of to the Bailee that can interfere with the use of goods or can expose him to extraordinary risks. And failure to do the same will make bailor liable for damages.
• Non Gratuitous Bailment (Bailment for Reward):This duty particularly deals with the goods given on hire. As per this provision, when the goods are bailed for hire, then in such a situation even if the bailor is aware of the defect in the goods or not will be held liable for the injury that has been caused due to the existence of such defect.

In Hyman v Nye & Sons, the plaintiff took a carriage on hire from the defendant but the carriage was not fit for the journey and subsequently, the plaintiff suffered injuries. The court held that even though the defendant was aware of such defect or not he shall be liable.

Duties of Bailee

Bailee has to fulfil several obligations as per Indian Contract Act, 1872. That is:

1.Duty to take reasonable care: It is the duty of the Bailee to take care of goods as his own goods. He shall ensure all safety measures that are necessary to protect the goods. The standard of care should be such as taken care by a prudent man. The goods shall be taken care of equally whether they are gratuitous or non-gratuitous. The Bailee shall be held liable for payment of compensation if he fails to take due care. But if the Bailee has taken due care and instead of that the goods are damaged then in such a situation Bailee will not be liable to pay compensation. The Bailee is not liable for the loss of goods due to destruction by fire. (Section 151-152)

2.Duty not to make unauthorized use of the goods: Bailee is duty bound to use the goods for a specific purpose only and not otherwise. If he uses the goods for any other purpose than what is agreed for then the bailor has the right to terminate such bailment or is entitled with compensation for damage caused due to unauthorized use. (Section 153-154)

3.Duty not to mix bailor’s goods with his own goods: It is the duty of the Bailee not to mix bailor’s goods with his own. But if he wants to do the same then he shall seek consent from the bailor for mixing of goods. If the bailor agrees for the mixing of the goods then the interest in the mixed goods shall be shared in proportion. In case, Bailee without the consent of bailor mixes the goods with his own then two situations arise: goods can be separated and goods can’t be separated. In the former case the Bailee has to bear the cost of separation and in the latter case since there is the loss of the goods, therefore, bailor shall be entitled with damages of such loss. (Section 155-157)

4.Duty to return the goods on the fulfilment of purpose: Bailee is duty bound to return the goods once the purpose is achieved or on the expiry of the time period for which the goods were bailed. But if the Bailee makes default in returning the goods on proper time then he will be responsible with the loss, destruction or deterioration of the goods if any. (Section 160-161)

In the case of Bank of India v. Grains & Gunny Agencies the court held that if the goods are lost or destroyed due to the negligence of servant of Bailee, then in such case as well Bailee shall be liable.

5.Duty to deliver to the bailor increase or profit if any on the goods bailed:The Bailee has a duty to return the goods along with increase or profit subject to contract to the contrary. Accretion that has accrued from the bailed goods is the part of the bailed goods and therefore bailor has the right over such accretions if any. And such accretions shall be handed over to the bailor along with the goods bailed. For instance, A leaves a cow in the custody of B and cow gives birth to the calf. Then B is duty bound to hand over the bailed goods along with accretion to the bailor. (Section 163)

Rights of a Bailor

As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a Bailor is same as Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee. So the rights of bailor are:

1.Enforcement of Bailee’s Duty:Since Right of the bailor is same as the right of the Bailee, therefore on the fulfilment of all duties of Bailee the bailor’s right is accomplished. For example, it is the duty of the Bailee to give the accretions and it is the right of bailor to demand the same.

2.Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the right to claim damages for such loss. (Section 151)

3.Right to Termination the Contract: If the Bailee does not comply with the terms of the contract and acts in a negligent manner in such case the bailor has the right to rescind the contract. (Section 153)

4.Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or mixes the goods which cause loss of goods in such case bailor has the right to claim compensation.

5.Right to demand the return of goods: It is the duty of the Bailee to return the goods and the bailor has the right to demand the same.

Rights of a Bailee

1.Right to recover expenses: In the contract of Bailment, the Bailee incurs expenses to ensure the safety of goods. The Bailee has the right to recover such expenses from the bailor. (Section 158)

2.Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration for services that he has rendered. But in case of gratuitous bailment, the Bailee is not awarded any remuneration.

3.Right to recover compensation: At times a situation arises wherein bailor did not have the capacity to contract for bailment. Such a contract causing loss to the Bailee, therefore the Bailee has the right to recover such compensation from the bailor. (Section 168)

Right to Lien: Bailee has the right over Lien. By this, we mean that if the bailor fails to make payment of remuneration or does not pay the amount due, the Bailee has the right to keep the goods bailed in his possession till the time debtor dues are cleared. Lien is of two types: particular lien and general lien. (Section 170-171)

In the case of Surya Investment Co. v. S.T.C, the court held that expenses incurred by Bailee during preservation of goods under lien shall be borne by bailor.

4.Right to suit against a wrongdoer: After the goods have been bailed and any third party deprives the Bailee of use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180).

PLEDGE

Pledge is a kind of bailment. Pledge is also known as Pawn.It is defined under section 172 of the Indian Contract Act, 1892. By pledge, we mean bailment of goods as a security for the repayment of debt or loan advanced or performance of an obligation or promise. The person who pledges the goods as security is known as Pledger or Pawnor and the person in whose favour the goods are pledged is known as Pledgee or Pawnee.

Essentials of Pledge

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the pledge. Apart from that, the other essentials of the pledge are:

·       There shall be a bailment for security against payment or performance of the promise,

·       The subject matter of pledge is goods,

·       Goods pledged for shall be in existence,

·       There shall be the delivery of goods from pledger to pledgee,

·       There is no transfer of ownership in case of the pledge.

Exception: In exception circumstances pledgee has the right to sell the movable goods or property that are been pledged.

Rights of Pawnor

As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. By this, we mean that on the repayment of the debt or the performance of the promise, the Pawnor can redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual sale. The right of redemption is extinguished once the actual sale is done by the Pawnee as per his right under section 176 of the Indian Contract Act, 1872.

Rights of a Pawnee

The rights of the Pawnee as per Indian Contract Act, 1872 are:

1.Right to retain the goods: If the Pawnor fails to make the payment of a debt or does not perform as per the promise made, the Pawnee has the right to retain the goods pledged as security. Moreover, Pawnee can also retain goods for non-payment of interest on debt or non-payment of expenses incurred. But Pawnee cannot retain goods for any other debt or promise other than that agreed for in the contract. (Section 173-174)

2.Right to recover extraordinary expenses: The expenses incurred by Pawnee on the preservation of goods pledged can be recovered from Pawnor. (Section 175)

3.The right of suit to procure debt and sale of pledged goods: On the failure to make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit proceedings against him or sell the goods. In the former case, the Pawnee retains the goods with himself as collateral security and initiate the court proceedings. He need not provide any notice of such proceedings to the Pawnor. And in the latter case, the Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount received from the sale of goods is less than the amount due then the rest amount can be recovered from Pawnor. And if the Pawnee gets more amount than the due amount then such surplus is to be given back to Pawnor. (Section 176).

DIFFERENCE BETWEEN BAILMENT AND PLEDGE

BASIS	BAILMENT	PLEDGE
Meaning	Transfer of goods from one person to another for a specific purpose is known as the bailment.	Transfer of goods from one person to another as security for repayment of debt is known as the pledge.
DEFINED IN	It is defined under section 148 of the Indian Contract Act, 1872.	It is defined under section 172 of the Indian Contract Act, 1872.
PARTIES	The person who delivers the bailed goods is known as Bailor and the person receiving such goods is known as Bailee	The person who delivers the pledged goods is known as Pledger or Pawnor and the person receiving such goods is known as Pledgee or Pawnee.
CONSIDERATION	The consideration may or may not be present.	Consideration is always there.
RIGHT TO SELL	Bailee has no right to sell the goods bailed.	Pledgee or Pawnee has the right to sell the goods.
USE OF GOODS	Bailee can use the goods only for a specific purpose only and not otherwise.	Pledgee or Pawnee cannot use the goods pledged.
PURPOSE	The purpose of bailed goods is for safekeeping or repairs etc.	The purpose of pledged goods is to act as security for repayment of debt or performance of the promise.

CONTRACTS OF AGENCY

An agent does not act on his own behalf but acts on behalf of his principal. He either represents his principal in transactions with third parties or performs an act for the principal. The question as to whether a particular persons is an agent can be verified by finding out if his acts bind the principal or not.

Definition

Sec 182 of the Indian contract act, 1872 defines Agent and Principal as:

Agent: means a person employed to do any act for another or to represent another in dealing with the third persons and

The principal: means a person for whom such act is done or who is so represented.

Essentials of Agency-

1. Principal : To constitute Agency there must be Principal, who appoints another person as agent to represent or work on his behalf.

2 Principal must be competent : According to Section 183 principal must be competent to contract. Section 183 says that any 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.

3 There must be an Agent :   In a Contract of Agency, Agent is a person one who is appointed by Principal to work on his behalf. According to Section 184 any person may become an agent, but no person who is not of the age of majority and sound mind can become an agent.

4.Consideration not Necessary :Section 185 of the Indian Contract Act 1872 says that, no consideration is necessary to create an agency.  It is exception to the general rule - a contract without consideration is void. but as per this exception, it can be say that a contract without consideration is valid.

A) Duties of an Agent :

1) Agent's duty in conducting principal's business (Section 211) : An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it.

Illustrations : (a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, on its to make such investments. A must make good to B the interest usually obtained by such investments.

2) Skill and diligence required from agent (Section 212) : An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.

Illustrations :(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on A’s account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest, from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss - as, e.g., by variation of rate of exchange — but not further.

3) Duty to render proper accounts (Section  213): According to Section 213 of Indian Contract Act 1872, An agent is bound to render proper accounts to his principal on demand.

4) Duty to communicate with principal (Section 214) : It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions.

5) Not to deal on his own Account : Section 215 of the Indian Contract Act 1872 deals with right of principal when agent deals, on his own account, in business of agency without principal's consent. Section 215 runs as follows -

  

Illustrations  (a) A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him.

6)  Not to make Secret Profits: Section 216 of Indian Contract Act, deals with Principal's right to benefit gained by agent dealing on his own account in business of agency.  An Agent, without the knowledge of his principal, should not deal in the business of agency on his own to make secret profit.

Illustration: A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he gave for it.

7) Duty to pay sums received for principal :  According to Section 218 of the said Act, An agent is bound to pay to his principal all sums received on his account.

8) Not to Disclose Secret : It is duty of an agent to maintain secrecy of the business of agency and should not reveal the confidential matters.

 B) Rights of an Agent 

Rights of an Agent are as follows -

1)  Right to Receive Remuneration : According to Section 219 of the Indian Contract Act, An agent is entitle to his remuneration.But Section 220 of the said Act says that, 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.

2)  Right of Lien (Section221) : Agent's lien on principal's property  :In the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other property, whether movable 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.

3) Right to Indemnity :  Agent to be indemnified against consequences of lawful acts. Indemnity means promise make good the loss (See.. Contract of indemnity ) According to Section 222 of the Indian Contract Act, 1872 "The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.

Illustrations :(a) B, at Singapure, 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 authorities 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.

4) Right to Compensation :  According to section 225 of the said Act,  an agent is entitled to claim compensation for the  injuries suffered as a consequence or want of skill of the principal.

Illustration:A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B.

Termination of Agency -

 As above said termination of agency means putting end to the legal relationship between principal and agent. Section 201 to 210 of the Indian Contract Act 1872 lay down the provision relating to the termination of Agency.

Section 201, Indian  Contract Act 1872 provides for termination of an agency –

An agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors.

Agency may be terminated two ways -

1) By the Act of the Parties - 

2) By Operation of Law -

 1) By the act of the parties -

i) By agreement -  The Contract of Agency can be terminated at any time by mutual agreement between the principal and agent

ii) By revocation of the principal - The Principal revoke agency at any time by giving notice to the agent

iii) By Renunciation of an agent - Renunciation which means withdrawing from responsibility as Agent.  Like Principal, Agent can also renounce the agency.  According to Section 206 of the Indian Contract Act 1872, the agent must give to his Principal reasonable notice of renunciation. Otherwise, he will be liable to make good for the damage caused to the principal for want of such notice.

2) By operation of law -

Agency can be terminated by operation of law

i) By the completion of agency - Agency can become to an end after the completion of work for which the agency is created.

ii) By expiry of the time - Agency can also be terminated by the expiry of time. if the agency is created for the specific period, it is terminated after the expiry of the time.

iii) Death or insanity of principal or agent -  Section 209 of the Indian Contract Act 1872 imposes an agent, duty to terminate the contract of agency on the death of the principal. In other words, Agency comes to an end on the death or insanity of the principal or agent.

iv) Insolvency of principal - According to Section 201 of the Indian Contract Act 1872, an insolvent or bankrupt is a person who is unable to run the business due to Excess of liabilities over assets. In this way, if the principal becomes an insolvent agency can be terminated.

v) Destruction of the subject matter - If this subject matter of the agency is destroyed agency comes to an end.

For example - Any agency is created for sale of an Airplane if the Airplane caught fire before the sale the agency comes to an end. In this contract Airplane is the subject matter.

vi) Principal becoming an alien enemy - If the Principal becomes an alien enemy the contract of agency comes to an end.

vii) Dissolution of company or firm - A Firm or company may be regarded as a Principal in the contract of Agency. If the company or firm is dissolved the agency comes to an end.

INDIAN CONTRACT ACT (PART 1)