Contracts of Indemnity & Guarantee

 Chapter VIII (sec. 124- 147) of Indian Contract Act 1872

covers these provisions
 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’. (sec 124)
 Promisor >> indemnifier & the promisee >> indemnity
holder
 Rights of indemnity holder when sued (sec 125) (all
damages/all expenses-costs/all sums)
 Rights of indemnifier (the act is silent)
 Guarantee
(Sec. 126)
 A contract of guarantee of a contract to perform the
promise or discharge the liability of a third person in
case of his default.
 The person who gives – ‘surety’

 Who defaults – ‘principal debtor’

 To whom it is given – ‘creditor’

 It may be oral or written; express or implied

 Essential features;

Concurrence/Primary & Secondary liability/Essentials

of a Valid Contract (in case of principal debtor being a
minor, the surety is regarded as principal debtor)
 Contract of Indemnity
v/s
Contract of Guarantee
CoI >> CoG
Two parties >> Three Parties
Liability is Primary >> Liability is Secondary
Only one Contract >> Total three contracts
Indemnifier not to >> Surety to give guarantee
Act on the request upon debtor’s request
Of Indemnified
Liability arises only >> Debt/duty already exists the
In case of performance of which has
Contigency been guaranteed by the
surety
 A few features
 Nature of surety’s liability
(coextensive/limitation)
 Kinds of guarantee (specific / continuing)

 Revocation of Continuing Guarantee

(notice/death etc.)
Discharge of Surety (surety’s liability ends)

(revocation/creditor’s conduct/invalidation)
 Bailment
Ch. IX (sec 148 - 181) of Indian Contracts Act 1872
 ‘Bailment’ means ‘delivery of goods’ by one person to
another for some purpose upon a contract, that they
shall, when the purpose is accomplished be returned or
disposed off as per the directions given by the person
delivering them. One who delivers called ‘Bailor’ and to
whom delivered called ‘Bailee’. >>> (sec. 148)
 Duties of Bailee (take care of bailed goods/not to make
unauthorized use/exclusive benefits to the bailee/not to
mix the bailed goods with his own/to return the goods)
 Duties of Bailor (disclose known faults/bear
extraordinary expenses of the bailee/receive back the
goods/indemnify bailee in case of premature
termination)
 1. Delivery of goods
 The possession of goods must transfer from
one person to another.
 Delivery is not same as custody.
 For example, a servant holding his master's
umbrella is not a bailee but only a custodian.
The goods must be handed over to the bailee
for whatever is the purpose of the bailment.
 Types of Delivery
 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. This means that the delivery can be made to
either the bailee or to any other person whom the baliee
authorizes. This person can be the bailor himself. This gives us
two types of delivery - Actual and Constructive.
 In actual delivery, the physical possession of the goods is
handed over to the bailee while in constructive delivery the
possession of the goods remains with the bailor upon
authorization of the bailee. In other words, the bailee
authorizes the person to keep possession of the goods.
 EXAMPLE
 A person pledged cinema projector with the
bank but the bank allowed him to keep the
projector so as to keep the cinema hall
running.
 AP HC held that this was constructive delivery
because something was done that changed the
legal possession of the projector. Even though
the physical possession was with the person,
the legal possession was with the bank.
 2.Delivery upon contract

For a valid bailment, the delivery must be

done upon a contract that the goods will be
returned when the purpose is accomplished.

If the goods are given without any contract,

there is no bailment.
 Example
 In Ram Gulam v. Govt. of UP AIR 1950,
plaintiffs ornaments were seized by police on
the suspicion that they were stolen.
 The ornaments were later on stolen from the
custody or police and the plaintiff sued the
govt. for returning the ornaments.
 It was held that the goods were not given to
the police under any contract and thus there
was no bailment
 However, this decision was criticized and
finally, in State of Gujarat vs Menon
Mohammad AIR 1967, SC held that bailment
can happen even without an explicit contract.
 In this case, certain motor vehicles were seized
by the State under Sea Customs Act, which
were then damaged. SC held that the govt. was
indeed the bailee and the State was responsible
for proper care of the goods.
 Conditional Delivery


The delivery of goods is not permanent. The

possession is given to the bailee only on the condition
that he will either return the goods or dispose them
according to the wishes of the bailer after the purpose
for which the goods were given.
 For example, when the stitching is complete, the
tailor is supposed to return the garment to the bailor.
If the bailee is not bound to return the goods to the
bailor, then the relationship between them is not of
bailment. This is a key feature of bailment that
distinguishes it from other type of relations such as
agency.
 J Shetty of SC in U Co. Bank vs Hem Chandra
Sarkar 1990, observed that the distinguishing feature
between a bailment and an agency is that the bailee
does not represent the bailor.
 He merely exercises some rights of the bailor over the
bailed property. The bailee cannot bind the bailor by
his acts. Thus, a banker who was holding the goods
on behalf of its account holder for the purpose of
delivering them to his customers against payment,
was only a bailee and not an agent.
 Duties of a Bailor

A bailor may give his property to the bailee either without any
consideration or reward or for a consideration or reward. In
the former case, he is called a gratuitous bailor, while in the
latter, a bailor for reward. The duties in both the cases are
slightly different.
 Section 150 specifies the duties for both kinds of bailor. It
says that the bailor is bound to disclose any faults in the
goods bailed that the bailor is aware of, and which materially
interfere with the use of them or which expose the bailee to
extraordinary risk.
 For example
If a person bails his scooter to his friend and if
the person knows that the brakes are loose,
then he must tell this to the friend.
 Otherwise, the bailor will be responsible for

damages arising directly out of the faults to the

bailee. But the bailor is not bound to tell the
bailee about the fault if the bailor himself does
not know about it.
 Section 150 imposes a bigger responsibility to
the non-gratuitous bailor since he is making a
profit out of the bailment.
 A non gratuitous bailor is responsible for any
damage that happens to the bailee directly
because of the fault of the goods irrespective
of whether the bailor knew about it or not.
 Example
 In Hyman and Wife v. Nye & Sons 1881, the
plaintiff hired a carriage from the defendant.
 During the journey, a bolt in the under part of
carriage broke, causing an accident in which
the plaintiff was injured. The defendants were
held liable even though they did not know
about the condition of the bolt.
 Duties/Responsibilities of a Bailee
Duty to take reasonable care


In English law the duties of a gratuitous and non-

gratuitous bailee are different. However, in Indian law,
Section 151 treats all kinds of bailees the same with
respect to the duty.
 It says that in all cases of bailment, the bailee is bound to
take as much care of the goods bailed to him as a man of
ordinary prudence would, under similar circumstances
take, of his own goods of the same bulk, quality, and
value as the goods bailed. The bailee must treat the goods
as his own in terms of care.
 However, this does not mean that if the
bailor is generally careless about his own
goods, he can be careless about the bailed
goods as well.
 He must take care of the goods as any
person of ordinary prudence would of his
things.
 In Blount vs War Office 1953, a house belonging to
the plaintiff was demanded by the War Office. He
was allowed to keep his certain articles in a room of
the house, which he locked. The troops who occupied
the house were not well controlled and broke into the
room causing damage and theft of the articles.
 It was held that War office did not take care of the
house as an owner would and held the War Office
liable for the loss.
Bailee, when not liable for loss etc.
for thing bailed
 As per section 152, in absence of a special contract,
the bailee is not responsible for loss, destruction,or
deterioration of the thing bailed, if he has taken the
amount of care as described in section 151.
 This means that if the bailee has taken as much care
of the goods as any owner of ordinary prudence
would take of his goods, then the bailee will not be
liable for the loss, destruction, or deterioration of the
goods.

 If the bailee has taken sufficient care in the security of the
goods, then he will not be liable if they are stolen. However,
negligence in security, for example leaving a bicycle unlocked
on the street, would cause the bailee to be liable.
 In Join & Son vs Comeron 1922, the plaintiff stayed in a
hotel and kept his belonging in his room, which were stolen.
The hotel was held liable because they did not take care of its
security as an owner would.

.
 Servant’s act
 If loss is caused due to the servant of the
bailee, the bailee would be liable if the
servant's act is within the scope of his
employment.
 Special Contract
 The extent of this responsibility can be changed by a contract
between the bailor and the bailee. However, it is still debatable
whether the responsibility can be reduce or it can be increased
by a contract. Section 152 opens with, "In absence of special
contract", which is interpreted by Punjab and Haryana HC, as
the bailee can escape his responsibility by way of a contract
with the bailor.
 However, in another case Gujarat HC held that the bank was
liable for loss of bales of cotton kept in its custody irrespective
of the clause that absolved the bank of all liability. This seems
to be fair because no one can get a license to be negligent and
a minimum standard of care is expected from everybody.
 Duty not to make unauthorized use
(Section 154)
 if the bailee makes any use of the goods
bailed which is not according to the conditions
of the bailment, he is liable to make
compensation to the bailor for any damage
arising to the goods from or during such use of
them.
 Illustration
 A lends horse to B for his own riding only. B
allows C, a member of his family, to ride the
horse. C rides with care but the horse is
injured. B is liable to compensate A for the
injury to the horse.
 A hires a horse in Calcutta from B expressly to march
to Benares. A rides with care but marches to Cuttack
instead. The horse accidentally falls and is injured. A
is liable to make compensation to B.

Thus, we can see that bailee is supposed to use the

goods only as per the purpose of the bailment. If the
bailee makes any unauthorized use of the goods, he
will be held absolutely liable for any damages.
 Duty not to mix (Section 155-157)
 The bailee should maintain the separate
identity of the bailor's goods. He should not
mix his goods with bailor's good without
bailor's consent.
 If he does so, and if the goods are separable,
he is responsible for separating them and if
they are not separable, he will be liable to
compensate the bailor for his loss.
 Duty to return (Section 160)
 It is the duty of the bailee to return or deliver
according to the bailor's directions, the goods
bailed, without demand, as soon as the time for
which they were bailed has expired or the
purpose for which they were bailed has been
accomplished.

.
 If the bailee keeps the goods after the expiry of
the time for which they were bailed or after the
purpose for which they were bailed has been
accomplished, it will be at bailee's risk and he
will be responsible for any loss or damage to
the goods arising howsoever.
 Example
 In Shaw & Co vs Symmons & Sons 1971, the
plaintiff gave certain books to the defendant to be
bound. The defendant bound them but did not return
them within reasonable time. Subsequently, the books
were burnt in an accidental file.
 The defendants were held liable for the loss of books.
 Duty to return increase (Section 163)
As per Section 163, in absence of any contract to the
contrary, the bailee is bound to deliver to the bailor,
or according to his directions, any increase of profit
which may have accrued from the goods bailed.

 Illustration - A leaves a cow in the custody of B to be

taken care of. The cow has a calf. B is bound to
deliver the calf as well as the cow to B.
 Rights of a Bailee
1. Right to necessary expenses (Section 158)
The bailee is entitled to lawful charges for providing his service.

As per Section 158 says that where by conditions of the

bailment, the goods are to be kept or to be carried or to have
work done upon them by the bailee for the bailor and the
bailee is to receive no remuneration, the bailor shall repay to
the bailee the necessary expenses incurred by him for the
purpose of bailment.
1. Thus, a bailee is entitled to recover the charges
as agreed upon, or if there is no such
agreement, the bailee is entitled to all lawful
expenses according to this section.
 In Surya Investment Co vs STC AIR 1987, STC
hired a storage tank from the plaintiff. On account of
a dispute, STC appointed a special officer to take
charge of the tank, who delivered the contents as per
directions of STC.
 Thus, the plaintiff lost his possession and with it,
his right of lien. SC held that the plaintiff is entitled
to the charges even if he loses his right of lien
because the bailor has enjoyed bailee's services.
 2. Right to compensation (Section 164)
As per section 164, the bailor is responsible to the
bailee for any loss which the bailee may sustain by
reason that the bailor was not entitled to make the
bailment, or to receive back the goods, or to give
directions respecting them.
 This means that if the bailor had no right to bail the
goods and if still bails them, he will be responsible
for any loss that the bailee may incur because of this.
Cntg. >>>
Law relating to lien;
Lien means right of a person to retain possession of some
goods until the claims are satisfied. These could be of
two types;
i) Particular Lien & ii) General Lien
(sec 170) (sec 171)
Only those goods All the goods which
Against which services are in possession
Have been rendered (bankers/attorneys)
 RAVI found a purse in a computer education
centre. He deposited the purse with proprietor
of the centre so that the real owner can claim
it. However, no one claimed the purse. Ravi
wants the purse back. Can he succeed?
 Yes, Ravi will succeed.
 The proprietor of the computer education centre is in
the position of a bailee.
 Section 160 provides that it is the duty of the bailee to
return or deliver the goods bailed without demand, as
soon as the time for which they were bailed has
expired or the purpose for which they were bailed has
been accomplished. If the purpose for which goods
bailed is not accomplished, the bailee is liable to
return the goods to the bailor.
 Pledge
 Bailment of goods as security for payment of a
debt for performance of a promise is called
‘pledge’; in this case
 The bailor is called >> pledger or pawnor
 The bailee is called >> pledgee or pawnee
(sec 172)
 Pledge is bailment of goods as security,
bailment is for a purpose of any kind
 In case of default, pawnee may sell the pledged
goods, bailee may either retain the goods or sue
for his charges
 In case of pledge, the pawnee cannot use the
goods pledged, in case bailment bailee may do
so if the contract so provides
 Purpose
 A pledge is made for a specific purpose, while
bailment can be made for any purpose.
 Property
 In bailment, the bailee gets only the possession
of goods bailed. The ownership remains with
the bailor.
 In the case of pledge, the pledgee acquires a
special property in the goods pledged whereby
he gets possession coupled with the power of
sale, on default.
 Right of sale
 Bailee can exercise a lien on the goods bailed.
He has no right of sale.
 But in case of a pledge, the pledge can sell the
goods after due notice to pledgor.
 Right of pledgee
 Right of retainer
 Right of retainer for subsequent advances
 Right to extraordinary expenses
 Right to sue the pledger or sell the goods on
default of the pledger.
 Contracts of Agency
 An 'Agent' is a person employed to do any act
or to represent another in dealings with third
persons.
 The person who employs the agent and for
whom such act is done,or who is so
represented, is called the 'principal'. The
relation between the agent and the principal is
called 'Agency'.

 I t is only when a person acts as a
representative of the other in the
creation,modification or termination of
contractual obligations,between that order and
third persons,that he is an agent.
 The essence of a contract of agency is the
agent's representative capacity coupled with a
power to affect the legal relations of the
principal with third persons.
Contracts of agency are based on
two important principles
 Whatever a person can do personally shall also
be allowed to be done through an agent except
in case of contracts involving personal services
such as painting, marriage, singing, etc.
 He who does an act through a duly authorised
agent does it by himself i.e. the acts of the
agent are considered the acts of the principal.
 Contract of Agency
Ch. X (sec. 182-238) of Indian Contract Act 1872
 An Agent is a person employed to do any act for
another, or to represent another in dealings with
third person(s) --- [sec. 182]
Person who represent called “Agent”
Person who is represented called “Principal”
 Essentials of Agency Relationship;
1. Agreement btn. Principal and the Agent (no
consideration is necessary to create agency) &
2. Intention of the Agent to act on behalf of the
Principal
 A few features
 Creation of an Agency
(Express Agreement/Implied Agreement/Ratification)
 Duties of Agent
(to carry out work undertaken as per instructions/to
carry out work with reasonable care,skill & dilligence/to
render accounts to the Principal/not to deal on his own
account/to pay sums received for the principal/to protect
& preserve interest of the principal in case of his death
or insolvency/not to use the information obtained in the
course of agency against the principal/not to make
secret/not to delegate authority