CASE BOOK ON CONTRACTS II - (Special Contracts)

Prepared by Prof. K. Govindarajan

I CONTRACT OF INDEMNITY

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PARTIES TO THE CASE

GajananMoreshwarParelkar
Vs Moreszzhwar Madan
Mantri, 1942 Bom.L.J. 703

Sections 124 and 125 of the Contract Act

are not exhaustive of the law of Indemnity
and the courts here would apply the same
principles that the courts in England do

Secretary of State Vs Bank of

India,1938, 65 I.A.286

Damages were permitted to be recovered

from the Bank on the principle of implied
contract of Indemnity.

PRINCIPLES LAID DOWN

Osman Jamal & Sons Ltd. Vs

Gopal Purushottam, 1928 I.L.R.
56 Cal 262

The company being indemnifier was liable

and the liquidator is to keep the amount in
trust for payment of the vendor in respect of
whose supplies the company has incurred
liability.

Centax (India) Ltd. Vs

VinmarImpex Inc., and others,
A.I.R. 1986 Cal. 356

The enforceability of the contract of

indemnity depended on the terms and
conditions of the same.

II

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Contract of Guarantee

PARTIES TO THE CASE

State Bank of Patiala Vs Shri

Durga Oil and Flour Mills,
Mehatpur and others. A.I.R.
1984 NOC 22 HP 13A

PRINCIPLES LAID DOWN

a) The execution of mortgage by deposit of
Title deeds is sufficient to establish that they
have accepted to be Guarantors for the loan
given by the Bank
b) When the guarantee is existing and the
revival letter if any is given by the principaldebtor, such revival letter is also binding on
the Guarantor.

R.D.Harbottle Ltd. Vs National

Westminster Bank Ltd. 1978,
Q.B. 146.

Nature and extent of a Bank Guarantee

explained

S.M.S.Demag AG Vs
NilachalIspat Nigam Ltd.
A.I.R. 2004 Orissa 89

In case of an unconditional Bank Guarantee

the court will not grant an injunction
restraining the Bank from honoring the
bank gurantee except in the case of fraud
and irretrievable injustice.

M/s. Basant Polymers, Alwar

Vs State Chemical &
Pharmaceuticals Corporation of
India Ltd., and another A.I.R.
1986 Raj 1.

The Bank Guarantee, for all practical

purposes, should be taken to be a credit note
issued by the Bank and it should be
encashable just like credit-note ordinarily,
unless the intention of the parties is
otherwise.

Himadri Chemicals Industries

Ltd. Vs Coal Tar Refining
Company, A.I.R. 1927 SC
2798.

Principles regarding the encashment of a

Bank Guarantee has been listed out.

II

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Contract of Guarantee (CONTD)

PARTIES TO THE CASE

PRINCIPLES LAID DOWN

The benefit available under Section 130 of the

Contract Act cannot be availed of if the
guarantee that was revoked is founded on an
agreement which cannot be said to be
unlawful.
It is not necessary to exhaust the remedies
Bank of Bihar Ltd. Vs Damodar
of a decree-holder against the principal
Prasad, A.I.R. 1969 S.C. 297
debtor before proceeding against a surety or
guarantor.
When there is a decree against the principal
debtor, guarantor and the mortgaged
Union Bank of India Vs Manku
property, the decree-holder bank should
Narayana, AIR, 1987 SC 1078
first proceed against the mortgaged
property and then against the surety or
guarantor.
Sita Ram Gupta Vs Punjab
National Bank ,A.I.R. 2008
S.C. 2416

Anikumar Vs Central Bank of

India, AIR 1997 HP 150

Aypunni Mani Vs
DevassyKochouseph, AIR 1966
Ker 203
M.R.Chakrapani Vs Canara
Bank, AIR 1997 Kant 216

National Provincial Bank of

England Vs Brackenbury, 1906
22 TLR 797

When one of the co-sureties becomes

insolvent the entire liability to pay the
creditor the full amount lies on the other cosureties
A statutory reduction or extinguishment of
the principal debtor's liability will operate
as a pro tanto reduction of the
extinguishment of surety's debt.
When the creditor does any act or omission
impairing surety's eventual remedy, the
surety stands discharged.
Where the document was to be signed by
four parties but only three parties signed,
the three parties signed were held to be not
bound on the ground of variance from the
terms of the guarantee.

III CONTRACT OF BAILMENT

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

Kaliyaperumal Vs Visalakshi,
AIR 1938
Mad 32.

Held that that the bailee is not responsible for

the loss unless there has been an effective
delivery either actually or constructively

Coggs Vs Bernard, Harward

Law Review, 222,(1891 -1892)

Classification of Bailment by LORD HOLT.

Lyell Vs Ganga Dai, 1875, 1

ALL 60..

Canara Bank Vs Bhavani Oil

Co., Chennamannur, AIR
20004 Ker 273.

SitalaBaksha Singh Vs
BarijNath, AIR 1936
Oudh, 264.
General Manager, Central
Railway Vs Lakshmi Ratan
Cotton Mills Ltd, AIR 1971
All,531.

Coldman Vs Hill, 1919 1 K.B

443,456

Bailor will be held liable if he fails to disclose

the defects known to him

Banker will be liable for loss of goods

hypothecated even if there is an exclusion
clause contained in the agreement.
If the bailee has taken adequate care in
respect of the safety of goods bailed and if in
spite of such care the gods have been lost,
the bailee is not responsible for the loss.
The position of the railway administration
regarding the goods entrusted to it is that of
a bailee.

The failure of the bailee to lodge a police

complaint if the goods have been lost whilst
in his custody will not absolve him from
liability

III CONTRACT OF BAILMENT (CONTD)

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

Held that the loss or damage of things

bailed was prima facie evidence of the
negligence and the burden of disproving
negligence lied on the bailee..
If the goods are to be kept in one place as per
Lilly Vs Double-day, 1881, 7
the terms of the agreement and if it is kept in
QBD 510.
a different place and loss if occasioned
principle of deviation from the terms of the
contract will apply.
Edwards Vs Newlands,
If the bailee changes the custody of the goods
1950,1All.L.R 1072.
to any other person without the consent of the
bailor it would amount to breach of duty by
the bailee.I
If the bailee has not chosen to return the
Shaw & Co. Vs Symmons&
goods bailed within a reasonable time and if
Sons, 1917, 1 K.B. 799
loss occasions to the goods the bailee become
responsible for the loss of goods.
A finder of lost goods is entitled to retain
Hollins Vs Fowler, 1875, 7 HL
possession of the goods as against the whole
757
world except the true owner when he is
deprived of his possession by anybody he can
maintain an action for trespass.
Observation by Best, Chief Justice: "if a
Bevan Vs Waters, 1828, 3 Carr.
man has an article delivered to him, on the
520.
improvement of which he has to bestow
trouble and expense, he has a right to detain
it until his demand is paid "...
Right of lien would attach to all goods even
Chase Vs West more, 1816, 15
though on
M&S 180
different dates deliveries were effected so long
as the work is covered under one contract.
Rangaraju Vs Muthukrishna,
1963, 2 MLJ60

IV: Pledge or Pawn

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

Morvi Mercantile Bank Ltd. Vs A) Meaning of 'Pledge' explained.

Union of
India, AIR 1965
SC 1954
B)
The status of a Mercantile Agent
explained.
Bank of Baroda, Ahmadabad
Distinction
between
Pledge
and
Vs R. BachubaiHirahabai and
Hypothecation pointed out.
others, AIR, 1988 Guj 1.
When tools, equipments and plants were
Hindustan Construction
hypothecated as security for the advance, the
Company Vs Board of
document was held not to be a mortgage deed
Revenue, AIR 1986 Ker 148
but only an agreement relating to pawn

Bank of Bihar Vs State of

Bihar, AIR 1971 SC 1210

When goods are held by the pledgee as

security under a cash credit agreement, if any
seizure is made by the Government, it
becomes the duty of the Government to pay
the amount.

State Bank of Hyderabad,

If any sale proceeds have been deposited in
Secunderabad, VS Susheela and court, the Pawnee has a special right and his
others, AIR 1980 AP 1.
lien being one of not ordinary nature no other
creditor can take away the money.
Rehmet Ali FatehUllah Vs
Lallan Prasad, 1962, ALJ. 374

Prabhat Bank Ltd. Vs Babu

Ram, AIR 1966, Aii. 134.

If the goods pawned are not available in the

hands of the Pawnee and cannot return them
to the Pawnor, the Pawnee cannot compel the
debtor to pay the debt
An agreement authorizing the sale of goods
by the Pawnee without proper notice to the
Pawnor "would be inconsistent with the
provisions of the Contract Act and as such
would be wholly void and unenforceable.

V Law of Agency
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PARTIES TO THE CASE

A) Pole Vs Leask, 1860, 54 ER

481.
1

B) De Bussche Vs Alt, 1878, 8

Ch.D 286. .

PRINCIPLES LAID DOWN

A) 'No man can become the agent of another
except by the will of that other person'.

B) In as much as confidence in the particular

person employed is at the root of the contract
of agency, such authority cannot be implied
as an ordinary incident in a contract.

Loon Karan Vs John and Co.,

AIR, 1967, All 308, 311

The crucial test of the status of an agent is

that his acts bind the principal

Delhi Electric Supply

Undertaking Vs Basanti Devi,
AIR 2000 SC 43.

The employer who deducts the LIC premium

under the Salary Savings Scheme is an agent
of the LIC.

Sakthi Sugar Ltd. Vs Union of

India, AIR, 1981, Delhi 212.

Held that the State Trading Corporation,

which was a legal entity, when permitted to
export sugar, did not become the agent of
UOI, we while exercising that commercial
function

Lakshmi Narain Ram Gopal &

Differences between an agent and servant
Sons Vs Hyderabad
pointed out.
Government, AIR. 1954 SC 364
A DEL CREDERE agent incurs only a
secondary liability towards the principal. His
Champa Ram Vs Tulsi Ram,
legal position is partly that of an 'insurer' and
1927, 26 All.L.J. 81
partly that of a 'surety' for the parties with
whom he deals.

V Law of Agency (Continued)

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

Peacock Vs Baijinath, 1891, 18

I.A. 78
Calico Printers' Association
Barday's Bank, 1931 145 LT
51.

The principal has no right of account

against a banian (sub-agent).
Held that the principal cannot recover
damages from the sub-agent.
Where in the course of employment,
unforeseen emergencies arise which
impose upon the agent the necessity of
employing a substitute, and that when
such authority exists and is duly
exercised privities of contract arises
between the principal and the substitute
Held that an officer of the Government
e.g., Post-master General was not liable
for the acts of those employed under
him, because the latter were not his
servants but the servants of the
Government.

De Bu ssche Vs Alt, 1878, 8

Ch,D. 286

Mersey Docks Trustees Vs

Gibbs, 1866, 1 HL 93.

Devanham Vs Mellon, 1880, 6

A presumption arises that a wife can
AC 24.
pledge her husband's credit for
necessaries from the fact of cohabitation.
In my opinion if an agent directly or
indirectly colludes with the other side
and so acts in opposition to the interests
of his principal he is not entitled to any
commission".

Andrews Vs Ramsay & Co.,

1903, 2 KB 635.

Ram Prasad Vs State of MP,

Significance of Agent's lien explained.
AIR, 1970, SC 1818 at P 1821.

V Law of Agency (Continued)

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PARTIES TO THE CASE

Firm PannalalJankidas Vs
Mohanlal, AIR, 1951 SC 144.

ArlapaNaick Vs
NarsiKeshavji, 1871, 8 BHC
AC 19.

16

Gloriya Chemicals Vs
R.K.Cables, AIR 1988 Delhi
213.

17

Baxter Vs Gapp& Co. Ltd,

1939, 2 All.E.R. 752.

18

S. Paul & Co. Vs State of

Tripura, AIR 1984 Cal. 378.

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PRINCIPLES LAID DOWN

Held that the agent is liable to
compensate her principal to the full
value of the goods as she had failed to
insure the goods as per the directions of
the Principal.
Instructions involving performance of a
void or illegal act need not be followed.
If an Advocate has acted contrary to the
instructions given by his client, or
against the custom or practice of his
profession and any loss was caused to his
client thereby, he must make good the
loss.
A person acting as a skilled agent is
expected to have reasonable skill and
knowledge in regard to his duties.
Held that the duty to keep accounts is a
statutory duty and cannot be negative by
agreements.

De Bussche Vs Alt, 1878,

Ch.D 286.

Secret profits, if any, earned by the

agent can be recovered by the Principal.
Where a merchant abroad buys goods
here through an agent, the seller
contracts with the agent and there is no
contract or privy between him and the
foreign principal.

Smith Vs Anderson, 1848,

137, ER 9.

V Law of Agency (Continued)

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

Held that the Secretary of the committee

Bhojabhi Vs Hayem Samuel, was liable on a rental agreement made
1898, 22 Bom. 754
by him where the principal was an
association in England.
TutikaBasavaraju Vs Parry & When foreign principals have contracted
Co. 1903, 27 Mad 315.
in their names, the agent in India is not
liable.
If an agent has entered into a contract
Alliance Mills Vs Indian
for the purchase of goods describing
Cements Ltd, AIR 1989 Cal.
himself as the purchaser, not disclosing
59.
his status as an agent, he could enforce
the contract and he is also personally
liable for the same.
If an agent has been authorized by a
power of Attorney to sell only one
property and if he has sold more than
Cicifford George Pinto Vs
one property, the transactions are
M.R.Shenava, AIR 2005 Karn.
binding on the Principal in view of the
167
conduct of the Principal inducing the
third parties to believe that the act of the
agent is within the scope of his authority.

25

Lloyd Vs Grace Smith & Co.,

1912, AC 716.

26

Armstrong Vs Stokes, 1872, 7

QB 598

10

If
an
agent
commits
fraud,
misrepresentation or torts in the course
of agency he is liable for the loss that has
occasioned.
Where a person employs another to
make a contract of purchase he as
Principal , is liable to the seller, though
the seller never heard of his existence
and entered into the contract solely on
the credit of the person whom he
believed to be the Principal though, in
fact, he was not.

V Law of Agency (Continued)

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

When an agent has insured the goods
without the Principal's authority and if
the Principal ratified his agent's act of
insurance, the Principal is bound even if
he has notice of the loss at the time of
ratification.

Williams Vs North China

Insurance Co., 1876, 1 CPD
757.

Bolten Vs Lambert, 1885, 41

Ch.D.295.

Ratification relates back to the date on

which the offer was first accepted.

The first essential to the doctrine of

ratification
with
its
necessary
consequences of relating back is that the
agent shall not be acting for him, but
shall be intending to bind a named or
ascertainable Principal.
A promoter of a company was held
Kelner Vs Baxter, 1866, LR 2
personally liable since at the time of
CP 174.
entering onto a contract the company
was not in existence.
M.P.State Cooperative Bank Held that the authority of an agent to
Ltd. Vs P.B.Dalal, AIR 1967 collect bills and to remit the proceeds
Bom. 279.
when realized by demand drafts come to
an end as soon as the drafts were
dispatched.
Blackburn Vs Scholes, 1810, 2 A broker employed to sell the goods
Camp. 341.
became functus officio on the completion
of the sale.
"Where an agent has been appointed for
Lalljee Vs Dadabhai, 1916, 23
a fixed term, the expiration of the term
Cal L.J. 190,202.
puts an end to the agency whether the
purpose of the agency has been
accomplished or not".
Imperial Bank of Canada Vs
Begely 1936, ALJ 944.

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V Law of Agency (Continued)

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

Moosajee Ahmed & Co. Vs

Administrator General, 1921,
60 IC 739.

When a person enters into a contract

with an agent after the Principal's death
with knowledge of the fact would be
precluded from subsequently impugning
the validity of the transaction on the
ground of want of authority of the agent
Held that if after the termination of
agency by the death of the Principal the
erstwhile agent continued in the service
of the deceased's Principal's heirs, a new
agency was created and there was
nothing to show in Section 209 that the
agency continued on old terms.

Madhusudan Vs Rakhal
Chandra, 1816, ILR 43.

36

Salton Vs New Beeston Cycle

Co., 1900, 1 Ch.D. 43.

Death or insanity revokes an agent's

authority

37

Parker Vs Smith, 1812, 104

ER 1133.

Bankruptcy of the agent also terminates

the agency.

38

French & Co Vs Leeston

Shipping & Co., 1922, 1 AC
451.

39

Where the subject-matter for which the

agency was created, the agency comes to
an end.
Held that where an agent was
authorized to recover a sum of money
Jagadhari Vs Rustomji, 1885, 9 due by a third party to the Principal and
Bom. 311.
to pay himself, out of the amount so
recovered , the debts due to him from
the Principal, the agent had an interest
in the subject matter of the agency, and
the authority could not be revoked.

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V Law of Agency (Continued)

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PARTIES TO THE CASE

PRINCIPLES LAID DOWN

Held that where in pursuance of the

authority the agent had incurred
contractual liability to pay money to a
Chappell Vs Bray, 1860, 6
third party, he was entitled to be
H&N 143.
indemnified in respect of payments
made by him though the Principal then
forbade the payments.
The doctrine of 'imputed notice' dealt
with in Section 229 is based on the
Rivers Steam Navigation Co. assumption that an agent who gets
Vs Bisweswar, 1928, Cal. 371. notice or receives any information does
do his duty to communicate the same to
the Principal and therefore the
knowledge of the agent is the knowledge
of the Principal.
The rule laid down in Section 229 is
intended to declare general principle of
Wylie Vs Pollen, 1863, 32 LJ
law. It is not a mere question of
Ch. 782.
constructive notice or inference of fact
but a rule of law which imputes the
knowledge of the agent to the Principal.
Bawden Vs London etc.
If the agent had knowledge of a
Assurance Co., 1882, 2 QB
particular fact it will be imputed to the
534
Principal and the contract cannot be
avoided on the ground of non-disclosure.
When the knowledge of an agent was
imputed to the Principal , the Principal
Proudfoot Vs Monteflori,
is considered to have notice as from the
1867, LR 2 QB 511.
time when he would have received notice
if the agent had performed his duty and
communicated with him with reasonable
diligence.

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