12

Specific Contracts
Ceneral principles of contract law are
contained from Sections 1-75 whereas specific contracts are
given from Section 124 onwards. It must be mentioned here that
Sections 76-123 which contained provisions
related to Sale of Goods have been repealed. Those
1030 Sections 239-266 which contained provisions are now contained in Sale of Goods Act,
provisions related to Partnership are also repealed. Provisions
related to partnership are now contained in Indian Partnership Act,
1932. Sections 124-238 deals with
following specific contracts:
1. Indemnity and Guarantee [Chapter VIII, Sections 124-147]
2. Bailment and Pleadge [Chapter IX, Sections 148-181]
3. Agency [Chapter X, Sections 182-238]

Contract of Indemnity
The term 'indemnify' means to make good the loss of another in certain situations. It is asecurity
against, or compensation for loss. Section 124 defines 'Contract of Indemnity'. It is acontract by which one
party promises to save the other from loss caused to him:
) By the conduct of the promisor himself; or
(i) By the conduct of any other person
Parties in contract of indemnity:-There are two parties in a contract of indemnity
Indemnifier: the person who gives the indemnity.
Parties
Indemnity-holder: the person for whose protection the indemnity is given.
consequences of any proceedings which Y
For example, 'P' contracts to indemnify 'Q' against the
Qin respect of a certain sum of Rs. 500. This is a contract of indemnity.
ytake against holder.
contract of indemnity is a direct contract between two parties i.e. indemnifier and indemnity
A
the loss is the contingency on which the liability of the
t1s acontingent contract wherein the happening of
indemnifier is dependent. India as
definition in Indian law: The scope of definition of indemnity' is restricted in
Scope of
English law. Under Indian law the promise to indemnify is limited to cases where loss is
cOmpared to of loss
the promisor himself and (2) by any other person. The definition does not cover cases
used by (1)
Indian law loss must be caused by human
arising from accidents like fire, natural consequences etc. In contract and not
covered under contingent
Therefore. in India, contracts of insurance are
intervention. Samarth Agrawal Books
465
 under contract of indemnity. The definition in English law is wide enough to cover loss arising
from any
cause whatsoever. Under English Law, every contract of insurance except life insurance is a
contract of
indemnity.Court in Secy of Statefor IndiainCouncil v. Bank of India Ltd AIR 1938 PC 191 hld
that contract of indemnity can be express or implied.
Commencement of liability of indemnifier: Commencement of the liability of indemnifier is an
important question. The question is when does an indemnifier liable to pay. Whether the indemnifier can he
asked to indemnify before the indemnity holder has actually suffered the los or his liability arises only afer
the loss has been suffered by the indemnity holder?
According to original English Common law the indemnity was payable only after the indemnity holder
had suffered actual loss by paying off the claim. It was governed by the maximn You must be demnified
before you claim to be indemnified'. This position of law was modified by the courts of equity to overcome
the hardships faced by this strict law. Equity courts evolved the law that indemnity holder can claim
compensation even before he has suffered actual loss. This position of law was expounded in Re Richardson.
(1911) 2 KB 705 wherein the court held that indemnity is not necessarily given by
repayment after payment.
Indemnity requires that the party to be indemnified shall never be called upon to pay. Therefore, now the
law is settled that as soon as the liability of the indemnity holder to pay
becomes clear and certain he should
have the right to require the indemnifier to put him in a position to meet the claim.
Rights of indemnity holder: Section 125 provides for certain rights of indemnity-holder.
Indemnity
holder is entitled to recover from the promisor:
(1) All damages which he may be compelled to pay in any suit in
matters to which the promise to
indemnify applies.
(2) All costs which he may be compelled to pay in any such suit if
(a) In bringing or defending it he did not contravene the orders of the
promisor and acted as
a prudent person, or
(b) Allsums which he may have paid under the terms of any
compromise of any such suit if
() The compromise was not contrary to the orders of the promisor, and was one
which it would have been prudent for the promisee to make in the absence of any
contract of indemnity, or
() The promisor authorized him to compromise the suit.

Contract of Guarantee

Guarantee can be defined as an agreement by which one person undertakes to discharge the liability in
case another person makes default. Section 126 defines Contract of Guarantee', Surety', Principal Debtor
and 'Creditor. According to Section 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.
466 Samarth Agrawal Books
 Indian Contract Ad
The person who gives the
is
guarantee is called the surety. The person in respect t of whose default the
guarantee is given called the 'principal debtor. The
creditor'.
person to whomthe guarantee is given is called the
For example, 'A' asks 'B' to lend Rs 1 lac to Cand
amount'A' will pay. This is a contract of
undertakes aguarantee that ifC fails to pay the
guarantee in which 'A'is the surety,'B' is the creditor and 'Cis the
principledebtor.
Essential features of contract of guarantee:
Following are the essential features of the contract of
guarantee:

Tripartite contract Consideration Conditional promise Writing not necessary

1. Tripartite contract: In contract of guarantee there are three parties i.e. creditor, principal debtor
and surety. Contracts between the parties are:
As between Principal Debtor and Creditor (Main Contract, express)
D ) As between Surety and Creditor (Contract of guarantee, express)
() As between Surety and Principal Debtor (Implied contract, Section 145)
The contract between principal debtor and creditor constitutes principal deb. The purpose ofguarante
is to secure payment of this principal debt. If there is no principal debt there is no guarantee. In the first set
of contract the principal debtor makes a contract with creditor to pay the debt. In second set of contract
surety contracts with creditor and undertakes to pay the creditor if principal debtor defaults. In third set of
contract there is an implied promise by the principal debtor in favour of surety that in case the surety has to
discharge the liability of the principal debtor, the principl debtor shall reimburse the same to the surety.
2. Consideration: Contract of guarantee should also be supported by some consideration. Section
127 provides that anything done, or any promise made for the benefit of principal debtor may
be sufficient consideration to the surety for giving the guarantee. Aguarantee without consideration
is void. Benefit to the principal debtor is sufficient consideration. For example, '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
promise.
A's promise to deliver the goods. This is a sufficient consideration for C's
3. Conditional promise: There must be a conditional promise to be liable on default of the
principal debtor. Supreme Court in Punjab National Bank v. Sri Vikram Cotton Mills,
(1970) 1SCC 60 held that there must be a conditional promise to be liable on the default of the
principal debtor. Aliability which is incurred independently of adefault is not within the definition
of guarantee.
Samarth Agrawal Books 467
 4. Writing not necessary: Section 126 expressly declares that aguarantee may be either oral or
written.

Surety's liability: Fundamental principle of surety's liability is laid down in Section 128. It provides
thatsurety's liability is co-extensive with that of the principal debtor, unless it is otherwise provided by the
contract. The creditor can sueeither the surety or the principal debtor or both. The expression
'co-extensive
with that of principal debtor denotes extent of the surety's liability. It means surety is liable for the whol.
amount for which principal debtor is liable and he is liable for no more. However, the extent of liabilitre
be regulated by the contract between the parties. For example, 'A' furnished aloan of Rs 50000/- to 'R 3
C is asurety in the transaction. In this case the maximum liability of surety C can be the liability of
principal debtor 'B' ie. Rs 50000/- Since principal debtor is not liable for more than Rs 50000/- urehy ie
also not liable for more than that. However, if the parties wish they may mutually agree to restrict the
liability of surety to any amount less then Rs 50000/-.
Supreme Court in Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297 held that the liability of the
principal debtor and the surety is joint and several. The creditor can sue both of them together or either of
them individually. It cannot be held that surety should be made liable only when the creditor has exhausted
his remedies against principal debtor. Similarly in Ram Kishan v. State of U.P., AIR 2012 SC 2288
Supreme Court held that surety has no right to restrain the execution of decree against him until the creditor
has exhausted his remedies against the principal debtor.
Discharge of liability of surety: The surety may be discharged from his liability in the following
conditions

By notice By surety's By variance By release When creditor By creditor's

of revocation death in terms of or discharge compounds act or omission
by the surety contract between of principal with, gives impairing surety's
the principal debtor time to or eventual
debtor and
agree not to remedy
creditor
sue, principal
debtor
) By notice of revocation by the surety: Section 130
provides that in case of continuing guarantee,
it may be revoked by the surety, as to the
future transactions, by notice to the creditor.
() By surety's death: Section 131 provides that in
case of continuing guarantee the death of surety
operates revocation of the guarantee. However, this provision issubiect to the
as
contract to the
contrary i.e. if there is a contract between the parties that in case of
death of surety the continui
guarantee will not be revoked then this section will not apply.
468 Samarth Agrawal Books
 Indian Contract Ad
fo) By variance in terms of contract between the
princinal debtor and creditor: Section o9
provides that if there is any variance in the terms of the contract
between the principal e
and the creditor without the consent of surety then in
such case surety gets dischargeu w
respect the transactions subsequent to the change. Surety will not be discharged by variation if
to
he has consented to the same. Section 133 incorporates the
principle that surety is entitled to stau
by the original contract, which cannot be altered without his
consent.
(iv) By release or discharge of principal debtor: Section 134 provides that the surety is discharged
by any contract between the creditor and the principal debtor. by which the principal debtor 1s
released, or by any act or omission of the creditor, the legal consequence of which is the discharge
of principal debtor.
() When creditor compounds with, gives time to or agree not to sue, principal debtor:
Section 135 provides that when the creditor makes composition with the principal debtor or
creditor promises to give time to the principal debtor or the creditor promises not to sue the
principal debtor, the surety is discharged thereby unless the surety assents to such contract.
(vi) By creditor's act or omission impairing surety's eventual remedy: Section 139 provides
that if the creditor does any act which is inconsistent with the rights of surety and it results in
impairing the eventual remedy of the surety against the principal debtor then in such case surety
is discharged.
Conditions when surety is not discharged-- Under following conditions surety is not discharged:

When an agreement Creditor's Release of one

is made by creditor forbearance co-surety by
to sue the creditor
with third person
to give time to
principal debtor
() When an agreement is made by creditor with third person to give time to principal
debtor: Section 136 provides that where a contract to give time to the principal debtor is made
by the creditor with the third person, and not with the principal debtor, the surety is not discharged.
() Creditor's forbearance to sue: Section 137 provides that mere forbearance on the part of the
creditor to sue the principal debtor or to enforce any other remedy against him does not discharge
parties.
the surety. This however, subject to the contract between the
(u) Release of one co-surety by the creditor: Section 138 provides that where there are co
sureties, a release by creditor of one of them does not discharge the others, neither does it free
the surety so released from his responsibility to the other sureties.
Samarth Agrawal Books 469
 Rights of surety: Following are the rights of sureties under the Act:
Right against principal debtor

Rights of
surety

Right against creditor Right of contribution against co-sureties

1.
Right against principal debtor: Section 140 provides that when the principal debtor makes -
default in performance of his duty and surety makes the necessary
payments on behalf of the
principal debtor then in that case he becomes invested with all the rights which the
creditor had
against the principal debtor. This is called right of subrogation.
145 in every contract of guarantee there is an implied
Furthermore, according to Section
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.
2. Right against creditor: Section 141 provides that a
surety is entitled to benefit of every security
which the creditor has against the principal debtor at
the time when the contract of
entered into. If the creditor loses the security or suretyship is
without the consent of the surety parts with the
security the surety is discharged to the extent of the
the surety is entitled to every remedy security. It is based on the rule of equity that
which the creditor has against the principal debtor
security. Supreme Court in State of M.P. v. including
Kaluram,
'security' in Section 141 is not to be used in technical AIR 1967 SC 1105 held that the expression
had against the property at the date of
sense. It includes all rights which the
creditor
contract.
3. Right of contribution against
co-sureties: Section 146 provides that in absence of any
agreement to the contrary co-sureties are liable to
sureties to D for the sum of Rs 9000/-lent to X. Ifcontribute equally. For example, if A, B, C are
Xmakes a default in
Care equally liable for Rs 9000/- i.e. Rs payment then A, Band
3000/- each. Further, Section 147 lays down
co-sureties are bound in different sumsthen they are liable to that when
pay as far as limits of their
obligations permits. Like, in above mentioned example, if Ais respective
byRs 3000/- and Cis
bound by Rs 4000/- then they are liable to bound by Rs 2000/-, Bis bound
respective liabilities. pay up to limits of their
Continuing Guarantee: Section 129 provides that a
guarantee which
is calleda continuing
guarantee. For example, "A, in consideration that 'B extends to a series of
transactions
will employ Cincollecting the
rent of B's Zamindari, promises 'B' tto be
by C of those rents. This is
responsible, to the amount of Rs. 5,000 for the due collection and
payment a
continuing guarantee.
470 Samarth Agrawal Books
 Indian Contract Ad
Acontinuing guarantee, as to future transactions, may be revoked either by notice of revocation by
surety Section 130] or by the death of the surety [Section 131].
Difference between contract of indemnity and contract of guarantee
Contract of indemnity Contract of guarantec
There are two parties i.e. indemnifier and 1. There are three parties i.e. creditor, principal
indemnified. debtor and surety.
2.
There is only one contract between indemnifier 2. There are three contracts. One between creditor
and indemnified. and principal debtor, one between creditor and
surety and one between surety and principal
debtor.
3 The nature of contract is for reimbursement3. The nature of contract is for the security of the
of loss. creditor.

4. An indemnifier cannot sure a third party for4. Surety can proceed against principal debtor after
loss in his own name. He can bring such suit in discharging the debt due.
the name of indemnified only.
5. The liability incase of an indemnity is contingent.5. The liability is subsisting The liability arises when
the guarantee is acted upon, though it remains
suspended until the principal debtor makes
default.

Bailment

Bailment : Bailment is a kind of relationship in which the moveable property of one person temporarily
is vested in one person and
goes in the possession of another for some purpose. Ownership of the goods
defines the terms 'Bailment',
possession in another. Bailment may be of movable goods only. Section 148
another for some
bailor and 'bailee'. According to it a 'bailment' is the delivery of goods by one person to
accomplished, be returned or otherwise
Purpose, upon a contract that they shall, when the purpose is
disposed of according to the directions of the person delivering them.
to whom they are delivered is called
The person delivering the goods is called the bailor. The person
purpose ie. repair of
the bailee. For example. 'A' delivers a watch to 'B' for repairs. Upon fulfillment of
bailor and 'B' is bailee.
watch it is to be returned to 'A'. Here A' is
means every kind of
The term 'goods' is defined in Section 2(7) of Sale of Goods Act, 1930. It
claim. Therefore, keeping money in bank is not
movable property other than money or actionable
bailment.
Samarth Agrawal Books 471
 Explanation to Section 148 provides that if aperson who is already in possession of the goods of
another person, contracts to hold them as abailee, he thereby becomes the bailee, and the owner
the bailor of such goods.
becomes
Essential elements of Bailment: Following are the essential elements of bailment:

Delivery of possession Delivery upon contract Delivery upon purpose

Delivery of possession: In bailment the possession of goods must be delivered by the bailo.
tothe bailee. Such delivery of possession is for temporary purpose. If the whole of the
property
is transferred then there cannot be bailment. Another important aspect 1s that delivery of possession
must be distinguished from mere custody. One who has custody without possession like servant
cannot be held to be bailee.
Section 149 provides that the delivery to the bailee may be made by doing anything which
has the effect of putting the goods in the possession of the intended bailee or of any
person
authorized to hold them on his behalf. Therefore, the delivery of goods may be actual or
constructive
delivery. For example, giving keys of the place where the goods are kept may be
delivery. Constructive delivery happens when there is no change of physical constructive
)
possession.
Delivery upon contract: Such delivery of goods must be made under some
contract and for
some purpose. When the purpose is accomplished the goods shall be
there is no contract there can be no bailment. In Ram
returned to the bailor. If
Gulam v. Govt. of U.P., AIR 1950 All
206, court held that the obligation of abailee is a
the contract of bailment. It cannot arise contractual obligation and springs only from
independently of a contract. However, in certain
circumstances there can be a case of bailment even without any contract. For example, in case of
finder of goods there is no contract between the
in the eyes of law the finder is treated as a
finder of goods and owner of goods but still
bailee of the lost article.
(m) Delivery upon purpose: The goods
should be
subject to the condition that when the purpose is delivered for some specific purpose and it is
bailor or disposed of according to his accomplished the goods will be returned to the
is not bound to restore them to direction. If the person to whom the goods are
the person delivering them or to deal delivered
directions, relationship will not be that of bailor and
their with them according to his
bailee.
Duties of the Bailee: Following are the duties of
bailee:
Duty to take Duty not to Duty not to Duty to return
reasonable care make Duty to
mix the goods the goods Duty not to
of goods unauthorised bailed with his return the question the
bailed
bailed use of the own goods increase in title of
goods bailed the goods the Bailor
bailed
472
Samarth Agrawal Books
 Indian Contract Ad
) Duty to take reasonable care of goods bailed:
bailment the bailee is
bound to take as much careSections 151 provides that in all cases of
of the goods bailed to him as a
ordinary prudence would, under man of
quality and value as the goods
similar circumstances take, of hisown goods of the same bulk,
loss or damage to the goods if
bailed. Section 152 further provides that
the standard of care falls bailee would be liable for
cection unless there is any special below the standard mentioned in this
was exercising reasonable case.
contract. The burden of proof is on the bailee to
show that he
C Duty not to make
bailee makes any use ofunauthorised use of the goods bailed: Section 154 provides that if
the goods bailed which is not the
he is liable to make accor£ing the conditions of the bailment,
to
compensation to the bailor for any damage arising to the goods from or
during such use of them. In other words, the
goods must be used by the bailee strictly for
prupose for which they have been bailed to him. the
G) Duty not to mix the goods
bailed with his own goods: It is
maintain separate identity of the bailor'sgoods. He should not important that bailee should
the bailor and without his mix his own goods with those of
consent. Section 155 provides that if the goods are mixed
consent of the bailor both will have a proportionate with the
interest in the mixture. Section 156 provides
that if the mixture is made without the
bailor's consent and the goods can be separated or
divided, the property in the goods remains in the parties respectively but the
bailee is bound to
bear the expenses of separation. Section 157 provides that if the
bailee, without the consent of
the bailor, mixes the goods of the bailor with his own goods, in such a
manner that it is impossible
to separate the goods bailed from the other goods and deliver them back, the bailor is
entitled to
be compensated by the bailee for the loss of the goods.
(v) Duty to return the goods bailed: Sections 160 provides that 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 has expired or the purpose has been accomplished. Section 162 further provides that
if by the fault of the bailee, the goods are not returned at the proper time then he is responsible
to the bailor for any loss, destruction or deterioration of the goods from time to time.
" Duty to return the increase in the goods bailed: Section 163 provides that 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. This is however, subject to the contract to the contrary.
) Duty not to question the title of the Bailor: The bailee is under a duty to return the goods to
the bailor and nobody else. He cannot refuse to return the goods to the bailor by pleading jus
tertii ie. title of the third person being better than that of bailor. Sections 166 provides that if the
bailor has no title tothe 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.
Samarth Agrawal Books 473
 Duties of the Bailor: Following are the duties of bailor:

Duty to disclose Duty to bear Duty to indemnify

expenses of the bailee
the faults in
goods bailed bailment

() Duty to disclose the faults in goods bailed: Section 150 provides that the bailor is bound
disclose to the bailee faults in the goods bailed of which the bailor is aware and which materially
interfere with the use of them, or expose the bailee to extraordinary risks and if he does not
make such disclosure, he is responsible for damage arising to the baile directly from such faults,.
For example, 'A' lends ahorse, 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 as injured, A' is responsible to 'B for
damages sustained.
() Duty to bear expenses of bailment: Section 158 provides that bailee is entitled to recover
from the bailor necessary expenses for the purpose of bailment.
() Duty to indemnify the bailee: Section 164 provides that where the title of the bailor to the
goods is defective and the bailee suffers as a consequence, the bailor is bound to indemnify the
bailee for any cost or loss which the bailee may incur.
Termination of Bailment: Bailment can be terminated in the following manner:
) Where the contract of bailment is made for a specific purpose, it
terminates as soon as such
purpose is achieved.
Where the contract of bailment is made for specific period, it
terminates on the expiry of such
period.
(11) When bailee does any act with regard to the goods bailed,
inconsistent with the conditions of
bailment, then it is voidable at the option of the bailor.
(iv) In case of gratuitous bailment, it is
terminated on death either of the bailor, or of the bailee.
Right of lien: Lien means right to retain goods or
property until
rendered for its improvement, are paid. Lien is a right given by law some charges due upon it or services
give any right of property or ownership to and not contract. This right does not
bailee. Abailee has right of lien. Liens are of two types
Particular Lien Retain specific goods
Lien

General Lien - Retain all the

goods
() Particular Lien: Particular lien is
limited to specific goods. It means the right to retain the
rfor which the charge is due.
Section 170 provides that where the bailee has in particular
accordance with the
474 Samarth Agrawal Books
 Contrat Ad

purposeoffbailment, rendered any service involving the exercise of labour or skill in respect of the goods
bailed, he hasinthe absence of a contract to the contrary, a right to retain such goods until he receives due
remunerationfor-the services he has rendered in respect of them. For example, 'A' delivers arough diamond
to B,ajeweler, to be cut and polished, which is accordingly done. 'B' is entitled to retain the stone till he 1s
services he has rendered.
paidfor the
(2) General Lien: General lien means the right to retain all the goods of the other party until all the
claimsofthe holder are satisfied. Right given under Section 171 is the right to hold the goods bailed as
securityfor general balance of account. Right to general lien is conferred on certain kinds of bailee only like
(1) bankers (2) factors (3) wharfingers (4) attorneys of High Court and (5) policy brokers. This right of
general| lien is subject to the contract between the parties.
Termination of right of Lien: Right of lien terminates in the following circumstances:
O As soon as the amount due to the bailee is paid.

G) As soon as possession of goods is surrendered by the baile.

111 Where bailee has given up his right of lien by entering into an agreement.

Right of finder of goods: Sections 168 and 169 deals with rights of finder of goods. Section 168
provides that the finder of goods may exercise the following rights:.
0 Hemay retain in the goods against owner until he receives compensation for trouble and expenses.
(6) Wherethe owner has offered aspecific reward for the goods lost, he may sue for reward.
Section 169 provides that in the following circumstances the finder of goods may sell the goods:
) When the goods is in danger of perishing or of losing the greater part of its value; or
(1) When the lawful charges of the finder, in respect of such goods, amount to two-thirds of its
value.

Pledge
bailment of goods as security
dccion 172 defines 'Pledge', Pawnor' and 'Pawnee. It provides that the
fo payment of a debttor performance of a promise is called 'pledge'. The bailor is in this case called the
pawnor and the bailee is called'pawnee'. The main purpose of pledge is to secure a loan or performance
of a promise by delivering the possession of movable goods. Pledge can be-made of movable property
only. Ifthe immovable property is pleadged then it is called mortgage.
Essentials of pledge: Following are ththe essentials of pledge:-
Transfer of possession Purpose of pledge
Delivery of goods
Samarth Agrawal Books 475
 1.
Delivery of goods: Pledge is akind of bailment and therefore, the delivery of goods from the
pawnor to pawnee is necessary. Such delivery may be actual or constructive. Delivery must be
made in pursuance of a contract.
2.
Transfer of possession: Transfer of possession is necessary to constitute avalid pledge. Possession
must be ajuridical possession and not merely physical possession.
3.
Purpose of pledge: Purpose of pledge is security for payment of debt or performance of a
promise.

Who can make pledge?

As a general rule only the owner of goods can make pledge. However, under circumstances provided
under Sections 178, 178-A and 179 following person may also, make
pledge:
Mercantile agents (Section 178].
() Persons whoare in possession under voidable contract.
(m) Aperson having limited interest in goods (Section 179].
Rights of pawnee: Following are the rights of
pawne:

Pawnee's lien or Right to recover Right of sale Right against true

right of retainer extraordinary owner, when the
expenses
pawnor's title
is defective

1. Pawnee's lien or right of retainer: Section 173 provides that

the pawnee may retain the goods
pledged, not only for the payment of the debt or
interest of the debt and all necessary expenses performance the promise, but also for the
of
the preservation of the goods
incurred by him in respect of the possession or for
pledged. Section 174 further lays down that in case of
debts there is a presumption that they are
also part of the original debt and subsequent
the goods to recover subsequent
advances also. pawnee may retain
2. Right to recover
extraordinary expenses: Section 175 provides that the pawnee is
receive from the pawnor
extraordinary expenses incurred by him for the entitled to
pledged. preservation of goods
3. Right of sale: Section 176 provides that if
the pawnor makes default in
performance promise at the stipulated time then the
of payment ofthe debt or
pawnor upon the debt or promise and retain the
pawnee may (1) institute a suit against the
goods as collateral security or (2) may sell the
he
476 Samarth Agrawal Books
 Ad

goods pledged after giving the pawnor

sale are less than the amount due
reasonable notice of the sale. If the proceeds of such
then the pawnor is still
proceeds of the sale are greater than liable to pay the balance and if the
theamount due, the
pawnor. pawnee has to pay the surplus to the
Bicht against true owner, when the
pawnor's title is defective: Section 178A provides that
when the pawnor had obtained possession of the
goods pledged by him under acontract which
is voidable under Section 19 or 19A of the
Contract Act, but the contract has not been rescinded
at the time of the pledge, the pawnee
acquires agood title to the goods, provided he acts in good
faith and without notice of the pawnor's defect in title.
Right of redemption
Section 177 provides that the pawnor has right of redemption on the
goods pledged. He can redeem
any time before the actual sale of the goods. Supreme Court in Lallan
Prasad v. Rahmat Ali, AIR 1967
sc 1322 held that the pawnor has an absolute right to redeem the property
pledged upon tender of the
amount advanced.

Difference between Pledge and Bailment

Pledge Bailment
1. It is the bailment of goods for security for 1. Bailment is for any kind of purpose. When the
payment or performance. purpose is security of payment such bailment
becomes pledge.
|2. In case of default of pawnor, the pawnee after 2. In case of default by the bailor, bailee may retain
giving notice, can sell the goods pledged. the goods or sue him for charges.
|3. Pawnee has no right to use the goods pledged3. The bailee may do it if the terms of bailment
with him. so provide.

Agency
An agency isa contract whereby one person employs another to represent him or to act on his behalf.
The term 'Agency' 1S not defined under Contract Act. Section 182 of the Contract Act defines 'Agent' and

Principal!. to do any act for another, or to represent another in dealings with

, n t 1S a person employed
third is called the 'Principal'.
persons. The person for whom such act is done, or who is so represented, decide whether the
of the nature of agreement and the subsequent dealings with the parties
Examination the principal and
rtheilradtionsparties.
hip Essential
of : agency has been established or not. An agent is a connecting link between
feature of agent is his power of making the principal
answerable to third persons.
477
Samarth Agrawal Books
 Supreme Court in Lakshminarayan Ram Gopal v. Govt. of Hyderabad, AIR 1954 SC 367 helA
that though agent is bound to exercise his authority in accordance with the lawful instructions of his principal,
he is not subject to direct control or supervision of the principal. Whereas, a servant works under direct
control and supervision of the principal.
Creation of agency: Agency can be created by the following ways:
By actual authority (express or implied)

Creation
By operation of law of In case of emergerncy or necessity
Agency

By ratification

1.
By actual authority (express or implied): The authority of an agent means his capacity to
bind the principal. When the principal gives the actual authority to the agent on represent him in
dealings with the third persons then in such case agency is said to be created by authority. Section
186 provides that the authority of an agent may be express or implied. Section 187 further says
that an authority is said to be express when it is given by words spoken or written. It is said to be
implied when it is inferred from the circumstances of the case. According to Section 186 when
an agent has the authority to do an act then he has authority to do all the lawful thing which is
necessary to do that act.
2. In case of emergency or necessity: In certain circumstances authority is conferred on the
person by virtue of law to act without requiring consent of another person. Such agency is called
'agency by necessity or emergency'. Section 189 provides that an agent has authority, in emergency
to do all such acts for the purpose of protecting his principal from the loss
caused to him. Acts
required to be done by the agent are those acts which a person of ordinary prudence, in his
own
case would do.

3. By ratification: If the agent acts on behalf of the principal without the

authority then such act
does not bind the principal. However, in few cases the principal may be
bound by such acts if he
elects to ratify them. Ratification means according subsequent approval to
the acts of the agent
donewithout authority. Section 196 provides that where acts are done
by one person on behalf
of another, but without his knowledge or authority, he may elect to
ratify or disown such acts
Section 197 provides that ratification may be express or implied,
Ratifcation can be of the
whole transaction. It cannot be of a part of transaction. Section 199 provides
that a person
Samarth Agrawal Books
478
 Indian Contract At
ratifying any unauthorized act
such act forms the part.
done on his behalf ratifies the
whole of the transaction of which
he act ratified is Ratification
establishes the relationship
concerned. It relates back to the date when the ofactprincipal and agent insofar as
4. By operation of law: Agency is was done by the agent.
also created by
operation of law. For example, in every
Dartnership, a partner 1s an agent of the firm. An act done
hinds the firm and also the other by the partner in course of
partners. partnership
Esentials of agency: Following are the essentials of
agency
Competence of Noconsideration
Intention to act
principal and agent
necessary on behalf
of principal
1. Competence of principal and agent: Section 183 provides that any person may
agent: employ an
Who is major,
() Who is of sound mind.
Section 184 provides that any person may become an agent, but if such person is not of
the age of majority and sound-mind, he willnot be responsible to his principal. Thus, if agent is
minor, through him avalid contractual relationship will be created between the principal and the
third person, although such agent himself will not be responsible for his acts to his principal.
2. No consideration necessary: Section 185 provides that no consideration is necessary to create
an agency. The fact that the principal agrees to be bound by the act of his agent, sufficient
consideration is presumed.
3. Intention toact on behalf of principal: Intention to act on behalf of principal is the test of
agency. Question of intention is aquestion of fact and it is to be determined on the basis of facts
of each case. Mere fact that a person says he is an agent does not make him one if he intends to
act on his own behalf and not on behalf of principal. Court must examine the true nature of the
agreement and the subsequent dealings between the parties and then decide whether it established
arelationship of agency under the law.
Delegation by agent
General rule is that the agent cannot delegate his authority to another person without the consent of the
Principal. It is based on the maxim "elegatus non-potest delegare" which means adelegatee cannot further
delegate. Section 190 provides that an agent cannot lawfully employ another to perform acts which he has
PeSly or impliedly undertaken to perform personally, unless by ordinary custom of trade a sub-agent
may, or from the; nature of agency, a sub-agent must be employed.
Samarth Agrawal Books 479
 Sub-agent: Section 191 defines 'sub-agent' as a person employed by and acting under the control of
the original agent in the business of the agency. Section 192 provides that the acts of sub-agents, properly
appointed, regarding third person are binding on principal. Agent is also responsible to the principal for the
acts of the sub-agent. Sub-agent is responsible for his acts to the agent, but not to the principal, except in
cases of fraud or willful wrong. Section 193 provides that where asub-agent is appointed without authority,
the principal and such sub-agent are not responsible to each other. Section 210 provides that the termination
of the authority of an agent causes termination of the authority of all sub-agents appointed by him.
Substituted agent: Section 194 provides for Substituted Agent. Asubstituted agent is an agent of
the principal for such part of the business of the agency as is entrusted to him, though he is nominated by
original agent. There is a difference between sub-agent and substituted agent. Sub-agent is agent's agent
while substituted agent is principal's agent in conducting agency's work.
Termination of agency: Section 201 provide for termination of agency. Under following
circumstances an agency is terminated:
) When principal revokes agent's authority.
(1) When agent renounces the business of the agency.
(m) When business of agency has completed.
(iv) When either the principal or agent died or become unsound-mind.
() When principal is adjudicated as an insolvent.
Section 202 provides that where agent has an interest in the subject matter of agency, the agency, in the
absence of an express contract, cannot be terminated to the prejudice of such interest.
Duties of an agent: Following are the duties of an agent:
Duty to follow directions of the principal in conduct of business (Section 211].
() Duty to take reasonable care and skill |Section 212].
(m) Duty to render proper accounts [Section 213].
(iv) Duty to communicate with principal [Section 214].
(v) Duty not to allow his personal interest and his duty to conflict with each other [Section 215].
(vi) Duty not to make secret gains from agency Section 216].
(vi) Duty to pay sums received for principal [Section 218).
Rights of an agent: Following are the rights of an agent:
Right to receive remuneration [Section 219).
() Right to indemnity [Section 222).
480 Samarth Agrawal Books
 Indian Contract At
G)
(m) Right to indemnity for injuries caused to the third person [Section 223].
(iv) Right to get compensation for injury caused by negligence of principaB [Section 225]
(v) Right toretain outof sums received on principal's account [Section 217].
(vi) Right of lien on principal's property (Section 221].
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