Principal-agent, Indemnity and

Guarantee Contract
Principal- Agency Contract

• Agent- is any person entrusted to do certain

action on behalf of the principal

• Example: Agent of an insurance company

• Principal could be held contractually liable for acts of

agent in case of principal-agent relationship

Cont.
• Example/Situation: ‘Baby Care’ is a business
organisation in the field of day care for infants and
toddlers
• Baby Care followed a franchisee model of business
• Kozhikode franchisee of Baby Care refused to return
Rs.1 lakh caution deposit received from the parents
• Parents are claiming ‘Baby Care’ to be responsible
• Baby Care states it is franchisee’s fault
Cont.
• Does principal agent relationship exist between Baby
care and their Kozhikode franchisee?
• If the franchisee is given the authority to enter into
contracts with third parties on behalf of the franchisor,
the relationship could be a principal- agent contract
Cont.
• Example/Situation: A life insurance company agent
collected premium from the customer
• He failed to pay the amount to life insurance company
• Customer is claiming that life insurance company is
responsible for agents action
• Life insurance company have a clause in their agent
contract stating that agents are not supposed to collect
premium payment on behalf of the company
Cont.

• If authority to act is exceeding the principal-

agent contract the principal cannot be held liable

• Can the life insurance company be held liable?

Indemnity Contract

• Indemnity contract – A contract to cover the

losses suffered by another
• Example: Insurance contract
• Can indemnity clauses be used in standard form
contracts?
Cont.
• Example:Indemnity clause mentioned in MyJio App Terms
and Conditions :
• “Indemnity: You agree to indemnify us and other persons
involved in the creation of this Application for all damages,
losses and costs (including legal costs) which arise out of or
relate to your use of this Application. This indemnification
includes, without limitation, liability relating to copyright
infringement, defamation, invasion of privacy, trade mark
infringement and breaches of this Application Terms”.
Tata Motor’s using indemnity clause for
mitigating risk
• Tata motor’s had insisted on indemnity clause
in the lease agreement while taking Singur land
on lease from West Bengal government
• The indemnity clause binds the state to
compensate Tata Motors in case of any loss or
harm arising out of the contract
• The indemnity clause includes loss suffered due
to relocation, overall loss and capital
expenditure of the company
(Source:
http://indianexpress.com/article/kolkata/state-
should-honour-singur-indemnity-clause-tatas-
in-hc/)
Cont.
Does indemnity clause have relevance in the
following contracts?
• Franchisee Contract,
• Principal- Agent Contract
• Joint Venture Contract,
• Government contract
Guarantee
• Guarantee- Contract to discharge the liability of a
third person
• Example: Guarantee in case of loan agreement
• Air India wants to raise around Rs.3000 crores as
loan from banks
• Government of India is ready to stand guarantee for
Air India
Cont.
• Promoters of company may provide personal
guarantee for loan
• Example: Vijay Mallya’s personal guarantee for loan
• Promoters are taking up contractual obligation to
pay in case of default by company to the extent of
loan
Cont.
Banks want promoters' guarantee for new
loans
• “To ring-fence risk, Indian banks are
increasingly asking promoters of companies with
high debt to give personal guarantees on
fresh loans or during rescheduling of loans. This
is to force promoters to repay loans as corporate
guarantees are not enough for recovering from
defaulters, say bankers”.
Cont.
Invoking personal guarantees on loans may
dampen entrepreneurial spirit

“Bankers cautioned against excessive zeal in handling

bad loans and building safeguards for the future,
warning that forcing promoters to make personal
guarantees and then invoking them in all cases of
default could kill off the entrepreneurial instinct.”
• Is insisting on promoter’s personal guarantee placing
unnecessary contractual obligation on promoters?
• Practical problem while enforcing personal loan
guarantee:
▫ Person who stand as guarantee, claims that they were
not aware of the nature of agreement while singing
and made to believe that they were signing as mere
witnesses
▫ Promoters of companies claim that they were coerced
Government Contracts
What are government contracts?
• Contract between government and private
companies
▫ Procuring goods and services
▫ Allotting licenses- Telecom licenses
▫ Infrastructure development-Road, airport
Fairness and Equitable treatment

• Fair, equitable treatment to all the bidders by

government is necessary
▫ Have to allot as per a competitive allotment
process- Bidding/Tender/Auction
▫ If not followed could lead to dispute/cancellation
Issues in Government Contract- 2G
spectrum scam

• The telecoms ministry’s process of issuing licences

lacked transparency and was undertaken in an
arbitrary, unfair and inequitable manner.
• The Indian Government had adopted a first come,
first serve policy in 2G spectrum license allotment
• Severely criticised for lack of transparency and
fairness
Integrity Pact to avoid corruption
issues
• The binding contract requires governments and
participating bidders in a specific contract to
commit to high levels of transparency, integrity and
accountability and to abstain from corrupt conduct
(Source: Transparency International).

• Breaches can result in serious sanctions, including

contract termination and blacklisting.
Cont.
• Example: Agusta Westland case
• The Indian Ministry of Defence cancelled
contract for helicopters worth over US$750
million because they ‘breached a pre-contract
Integrity Pact.’
Swiss Timing Example
• Swiss timing was awarded contract for providing
timing, score, result systems required to conduct
the Commonwealth Games in India.

• Under a clause in the contract the Swiss Timing

had warranted that they would not indulge in
corrupt practices

• If found to be indulging in corrupt practice the

contract will be cancelled.
Cont.
Adopt integrity pact to check graft: CVC tells
banks, Fis

} Citing increase in procurement activities, the

Central Vigilance Commission (CVC) has asked
public sector banks, insurance companies and
financial institutions to adopt integrity pact by April
30 and appoint independent external monitors to
check corruption.
Important Points
• Fairness and transparency- In government
contract fairness and transparency in allotment
process is important
• Corruption issues are increasingly regulated
through integrity pact
Cont.
• Lack of non-transparent process or corruption
issue could lead to cancellation and blacklisting
in government contracts