Law of Contract, 1872 II

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INDEMNIFY: Indemnity means “to protect or compensate someone for any

loss, damage or injury that may occur in future time”. The person who
promises to protect or compensate is indemnifier, while the person who is
protected or compensated against loss is called indemnity -holder or
indemnified.
As defined by section 124, “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”.
Illustration: In other words, a contract of indemnity is a contract whereby one
person promises to protect or compensate the other for the loss suffered by
him due to the conduct of the promisor or any other person. This contract is
contingent in nature and will be enforceable if any loss is sustained to
indemnity-holder.
Exemptions: It does not deal with those cases where indemnit y arises from
the loss caused by events or accidents which do not depend on human
conduct.
Illustrations: A contract to indemnify B against consequences of any
proceedings which C may take against B in respect of a certain term of Rs.
200.
A manufacturer of wheelchair provides 20 chairs to a hospital and
thereby the hospital is asked to indemnify the manufacturer, if in -case any
patient is injured or suffered any loss from wheelchair.
What are the essentials of a valid contract of indemnity ?
A valid contract of indemnity must fulfill the following conditions:
1. There must be two parties, i.e. the indemnifier and the indemnity -holder
or indemnified.
2. A contract of indemnity must have all essentials of a valid contract.
3. There must be a promise to save the other party from any loss.
4. The loss may be due to the promisor or any other person.
5. The contract of indemnity may be expressed or implied.
Does the contract of indemnity include insurance contracts?
The purpose of indemnity is to compensate for any loss incurred, therefore,
indemnity contract are insurance contract but in case of any property
insurance only.
It does not apply to “life insurance”, because indemnity means to make the
whole again or, in other words to give back the value of loss and life cannot be
practically valued.
For example, if a car is damaged, the repair or replacement makes the owner
whole, but in life insurance this would mean bringing the person back to life.
What are the rights of indemnity-holder?
As defined by section 125, the rights of indemnity-holder are as under:
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1. to recover all damages which he may be compelled to pay in respect of

any suit filed against him.
2. to recover all expenses in respect of any suit filed by him with the
authority of indemnifier.
3. to recover all expenses which he may have paid under the terms of any
compromise, if the compromise was made with the consent of the
indemnifier.
GUARANTEE: to give surety or assume responsibility.
As defined by section 126, “ A contract of guarantee is a contract to perform
the promise, or discharge the liability of a third person incase of his default.
The person who gives the guarantee is called “surety”, the person in respect of
whose default the guarantee is given is called “principal debtor” and the
person to whom the guarantee is given is called the “creditor”. A guarantee
may either be written or oral.
For example, if you are taking out a student loan, you need your parents
to cosign it. You are the principal debtor, and your parents are the sureties,
which mean that if you fail to make your payments, they are liable. W hereas
the institution advancing loan is a creditor.
Illustrations: A advances a loan of Rs. 10,000/- to B, and C promises A that if
B does not repay the loan, I will pay it. This is a contract of guarantee.
A supplies goods to B, on the guarantee of C for payment by B to A
against the goods. If B does not pay, C is liable to pay. This is a contract of
guarantee.
As there are 3 parties involved in contract of guarantee, so at the same
time, there are three collateral contracts, namely:
i. As between A and B [A supplies goods to B on credit against price].
ii. As between A and C [C gives guarantee of the price of goods].
iii. As between B and C [B indemnifies C in case of B’s default in paying
the amount to A].
What are the liabilities of parties in a contract of guarantee?
Contract of guarantee is a promise to answer for the payment of the debt that
the principal debtor takes from the creditor or the performance of some duty.
The primary liability to pay or perform is of the principal debtor, incase of his
failure the secondary liability is of the surety to pay or perform.
What are the essentials of a contract of guarantee?
A valid contract of guarantee has following ingredien ts:
1. Tripartite agreement: A Contract of guarantee entails three parties,
surety, principal debtor and creditor. There must be three separate
contracts between the parties and each and every contract must be
consenting.
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2. Liability: The primary liability lies with principal debtor whereas surety
has the secondary liability which can only be invoked on the failure of
principal debtor.
3. Essentials of a valid contract: A contract of guarantee must have all
essentials of a valid contract.
4. Medium of contract: A contract of guarantee is either writher or oral.
What is the consideration of guarantee?
As defined by section 127, “anything done, or any promise made for the
benefit of the principal debtor, may be a sufficient consideration to the surety
for giving the guarantee”.
Is other words, something done or any promise made for the benefit of
the principal debtor is presumed by law to be sufficient consideration in the
contract of guarantee.
It is not necessary that there should be any benefit to the surety himself,
but the benefit received by principal debtor is sufficient consideration for the
surety. A contract of guarantee without consideration is void. A consideration
is either past consideration or a promise for the benefit of the principal debtor.
Illustrations: A agrees to sell and deliver goods to B on credit and on C’s
guarantee. C promises to guarantee the payment in consideration of A’s
promise to deliver the goods. This is a sufficient consideration for C’s promise.
A agrees to sell and deliver goods to B on credit and on C’s guarantee. C
afterwards without consideration agrees to pay for the goods in default of B.
this is not a sufficient consideration for A’s promise, hence the agreement is
void.
What are the liabilities of a surety?
As defined by section 128, “the liability of a surety is co-existence with that of
the principal debtor, unless it is otherwise provided by the contract ”.
The expression “co-extensive” means that the surety is liable to the same
extent as the principal debtor. For instance, if the principal debtor is not liable
for debt due to some reason, then surety is not liable for the same. If incase
principal debtor is discharged from creditor of his debts for some reasons, then
surety will also be discharged. This section depends on the contract as well,
therefore, the surety’s liability depends on the terms of the contract and he is
not liable to pay more than the principal debtor has taken.
Surety’s right to limit his liability: The surety may limit his liability by
expressing it in the contract. In other words, the surety may be made less by a
special contract but his liability cannot be made greater than that of the
principal debtor.
Surety’s liability on default of principal debtor: Surety’s liability is
secondary not primary. Therefore, it arises immediately on default by the
principal debtor. He cannot be called upon unless principal debtor commits
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default, but if principal debtor commits default, then the creditor is neither
bound to give notice of default to suret y nor to sue principal debtor first.
Surety’s liability where the original contract between the creditor or
principal debtor is void or voidable: W here the contract between the
principal debtor and creditor is void, the surety will be liable as if he is the
principal debtor. Similarly, where the contract between the creditor and the
principal debtor is voidable, the surety may not be discharged.
Explain continuing guarantee:
As defined by section 129, “a guarantee which extends to a series of
transactions is called continuing guarantee.
In other words, a continuing guarantee is not confined to a single
transaction and the surety is liable to pay the creditor for all the transactions.
Illustration: A and B promise that B will employ C for collecting the rents of
B’s Zamindari and in consideration of B’s promise, A promises to be
responsible to the amount of Rs. 5,000/ - for due collection and payment by C
of those rents. This is a continuing guarantee.
A guarantees B for the payment of price of five sacks of flour to be
delivered by B to C and to be paid in a month. B delivers five sacks to C and C
pays for them. Afterwards, B delivers four sacks to C but C does not pay for
them. The guarantee given by A was not continuing guarantee and accordingly
he is not liable for the price of the four sacks.
How a continuing guarantee is revoked?
By Notice: As defined by section 130, “a continuing guarantee may at any
time be revoked by the surety, as to future transactions, by notice to the
creditor”.
In other words, surety may revoke a continue guarantee at anytime for
the future transactions only by notice to the creditor.
Continuing guarantee extends to a series of transactions, thus surety has
a right to withdraw such guarantee. A surety may communicate the notice of
revocation in a mode mentioned in contract and if no mode is mentioned then
notice may be given in any form, and the surety stands discharged for future
transactions as soon as notice is communicated to creditor.
Illustrations: A sells and delivers goods for sum of Rs. 5,000/ - to B on the
guarantee of C for payment thereof. Later on C by notice to A revoke s his
guarantee, meanwhile B makes default in payment. C is liable for payment of
Rs. 5,000/- but he is not liable for payment of any future transaction.
By death: As defined by section 131, “the death of the surety operates, in the
absence of any contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions ”.
However, the liability for any transactions that took place prior to the
death of the surety will be borne by his heirs.
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Illustration: A sells and delivers goods for sum of Rs. 5,000/ - to B on the
guarantee of C for payment thereof. Later on C dies, meanwhile B makes
default in payment. C’ representatives are liable for payment of Rs. 5,000/- but
not for any liability arising out of any future transaction.
Liability of two persons primarily liable, not affected by arrangement
between them that one shall be surety on other’s default :
As defined by section 132, “where two persons contract with a third person to
undertake a certain liability and also contract with each other that one of them
shall be liable only on the default of the other, the third person not being a
party to such contract, the liability of each of two persons to the third person
under the first contract is not affected by the existence of the second contract,
although the third person may have been aware of its existence ”.
It contemplates a situation where two persons (sureties) simultaneously
give a guarantee to the third person (creditor). In such cases, where the said
two Sureties enter into a contract between themselves that one of the Surety
will pay in case of default of the other Surety, and where the Creditor is not a
party to the said Contract although he may be aware of such Contract, the joint
liability of the said two Sureties towards the Creditor is not affected in anyway
due to the existence of any such Contract between the Sureties.
DISCHARGE OF SURETY:
Section 133-139 explains all the circumstances in which surety is discharged.
All these sections can also be called the rights of the surety as the surety will
not be liable on the guarantee any more.
1. Discharge of surety by variance in terms of contract: As defined by
section 133, “any variance, made without the surety’s consent in the
terms of the contract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the variance”.
The surety is not liable for something which he has not contracted
for, therefore, when an amendment or variation takes place in the
contract without knowledge and consent of the surety, the surety is
discharged.
Illustration: A employs B as a manager in his bank on the guarantee of
C. thereafter, A and B make a contract that B’s salary shall be raised
whereas C was unaware about such contract. The surety stands
discharged.
A contracts to lend B Rs. 5,000/- on 1st March on guarantee of C
for repayment. A pays B Rs. 5,000/- on 1st January. C is discharged from
his liability as the contract varied without his knowledge.
Exception: If the alteration is made in the agreement without the
surety’s consent that is beneficial to the surety, the surety is not
discharged.
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2. Discharge of surety by release or discharge of principal debtor : As

defined by section 134, “the surety is discharged by any contract
between the creditor and the principal debtor , by which the principal
debtor is released, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor”.
This section is connected with the section 128 of contract act,
which says that “the liability of the surety is co-extensive with that of
principal debtor”. The release so referred in this section may be of two
types, express release or implied release. Express release is a situation
in where an express contract between the credit and the principal debtor
results in discharge/release. W hereas, Implied release refers to any act
or commission of the creditor, the legal consequence of which is the
discharge of the principal debtor.
The acts or omissions by this section are referred as:-
a. Section 39- when a party to a contract has refused to perform or
disabled himself from performing his promise.
b. Section 53- when a contract contains reciprocal promises and
one party to the contract prevents the other from performing his
promise.
c. Section 54- when a contract contain reciprocal promises such
that one of them cannot be performed till the other has been
performed.
d. Section 55- W hen a party to a contract promises to do certain
things at or before a specific time and fails to do any such thing
within that time
e. Section 67- If a promisee neglects to afford the promisor,
reasonable facilities for the performance of his promise.
3. Discharge of surety when Creditor compound with, gives time to, or
agrees not to sue, principal debtor: As defined by section 135, “a
contract between the creditor and the principal debtor, by which the
creditor makes a composition with, or promise to give time to, or not to
sue, the principal debtor, discharges the surety, unless the surety
assents to such contract”.
In other words, when creditor and the principal debtor enter into a
contract without consent of surety, and by which, the creditor makes a
composition/compromise with, or promises to give time to, or promises
not to sue, the principal debtor, discharges the surety. Here:-
a. To make composition with means if the creditor makes any sort of
compromise with the principal debtor with respect to the debt, the
surety will be discharged.
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b. Promise to give time to means where the creditor extends time for
the payment of debt without the consent of surety, the surety will be
discharged.
c. Not to sue the principal debtor means if the creditor agrees with the
principal debtor to not to ever sue against him, the surety will be
discharged.
4. Surety not discharged when agreement made with third person to
give time to principal debtor : As defined by section 136, “where a
contract to give time to the principal debtor is made by the creditor with a
third person, and not with the principal debtor, the surety is not
discharged.
Illustration: A agrees with B to supply 5 sacks of flour against Rs.
1,000/-. C stands surety to A. A agrees with D (B’s father) to extend the
delivery date. C is not discharged as D is the third party and not the
principal debtor.
In the above illustration, A is the creditor, B is principal debtor, C is
surety to B and D is a third person (B’s father). If A agrees with B for
extension of time, the contract between A and B is varied as a result C is
discharged from his surety. But if A contract s with a third person D (B’s
father) to extend time of delivery, in such a case surety of C is not
discharged.
5. Creditor’s forbearance to sue does not discharge surety: As defined
by section 137, “mere forbearance on the part of the creditor to sue the
principal debtor or to enforce any other remedy against him does not, in
the absence of any provision in the guarantee to the contrary, discharge
the surety”.
According to section 135, where creditor promises not to sue the
principal debtor discharges surety, but mere neglect , forbearance,
avoidance or failure to sue before limitation period does not discharge
the surety.
However, the Surety may be discharged when there are provisions
in the Contract of guarantee that mere failure of the Creditor to sue or to
adopt any legal remedy against the Principal debtor will discharge the
Surety.
Illustration: A owes a debt of Rs. 1,000/- to B (creditor), guaranteed by
C. The debt becomes payable but B does not sue A for a year after the
debt has become payable. C is not discharged from his suretyship by
mere failure of B before limitation period. If incase, period of limitation
has expired, in such a case failure of B to sue A may discharge surety of
C.
6. Release of one co-surety does not discharge the others: As defined
by section 138, “where there are co-sureties, a release by the creditor o f
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one of them does not discharge the others, neither does it free the surety
so released from his responsibility to the other sureties”.
In other words, when there are two or more sureties to a contract of
guarantee, the creditor may release any of the Surety from his obligation,
but that release of any one surety does not release other sureties to the
contract of guarantee, and that mere release of a surety by the creditor
does not absolve the released surety from his obligation towards the rest
of the surety or sureties.
7. Discharge of surety by creditor’s act or omission impairing surety’s
eventual remedy: As defined by section 139, “if the creditor does any
act which is inconsistent with the rights of the surety, or omits to do, any
act which his duty to the surety requires him to do, and the eventual
remedy of the surety himself against the principal debtor is thereby
impaired (weakened), the surety is discharged”.
In other words, where if the creditor does any act or fails to do any
act, which impairs (weakens) the rights and eventual remedy of the
surety against the principal debtor, the surety is discharged from his
obligation in the said situation.
Illustrations: A contracts to build a ship for B for a sum to be pai d by
installments as the work reaches certain stages. C guarantees A’s
performance to B. Subsequently, B without knowledge of C prepays all
the installments to A, resultantly C is discharged by this prepayment.
A employs B as accountant of his shop on C’s guarantee for B’s
accuracy. A promises that he will check out performance of B atleast
once in a week. A omits to check performance as promised and in result
B commits fraud. C is not liable to A on his guarantee.
Rights of surety on payment or performance:
As defined by section 140, “where a guaranteed debt has become due, or
default of the principal debtor to perform a guaranteed duty has taken place,
the surety, upon payment or performance of all that he is liable for, is invested
with all the rights with the creditor had against the principal debtor”.
In other words, where the surety, at the maturity date of the performance,
on the default of the principal debtor, discharges his obligation under the
Contract of guarantee, in such situation, t he surety is invested with all the
rights which the creditor had against the principal debtor. This right of surety is
also known as the surety’s right of subrogation.
Illustration: A sells and delivers goods to B against price of Rs. 5,000/ - on C’s
guarantee for payment. B becomes defaulter and C discharges his obligations
by payment of Rs. 5,000/- to A. C has the right to recover Rs. 5,000/- from B.
Surety’s right to benefit of creditor’s securities :
As defined by section 141, “a surety is entitled to the benefit of every security
which the creditor has against the principal debtor at the time when the
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contract of suretyship is entered into, whether the surety knows of the

existence of such security or not; and if the creditor loses, or without the
consent of the surety, parts with such security, the surety is discharged to the
extent of the value of the security”.
Illustration: A advances Rs. 2,000/- to B on the guarantee of C. A has also a
further security for the 2,000/- rupees by a mortgage of B’s furniture. Later on,
A cancels the mortgage. B becomes insolvent so becomes defaulter, upon
which A sues C on his guarantee. C is discharged from liability to the amount
of the value of the furniture.
Explain guarantee obtained by misrepresentation invalid :
As defined by section 142, “any guarantee which has been obtained by means
of misrepresentation made by the creditor, or with his knowledge and assent
concerning a material part of the transaction, is invalid”.
In other words, any guarantee obtained by misrepresentation is invalid.
Illustration: A engages B as clerk for collecting money for him . B fails to
account for some of his receipts and A in consequence asks B to furnish
security. C gives guarantee for B’s duly accounting. A does not inform C with
B’s previous conduct. B afterwards makes default. The guarantee is invalid
because it was obtained by misrepresentation.
Explain guarantee obtained by concealment invalid:
As defined by section 143, “any guarantee which the creditor has obtained by
means of keeping silence as to material circumstances is invalid”.
In other words, any guarantee which is obtained by the creditor by
suppressing or concealing material circumstance, is invalid.
Illustration: A contracts B to deliver him iron on C’s guarantee for payment. A
and B privately agree that B shall pay 5 rupees per ton beyond market price
and such excess to be applied in settlement of an old debt. This agreement is
concealed from A. The guarantee is invalid as it is obtained by concealment.
Guarantee on contact that a creditor shall not act on it until co-surety
joins: As defined by section 144, “where a person gives a guarantee upon a
contract that the creditor shall not act upon it until another person has joi ned it
as co-surety, the guarantee is not valid if that other person does not joins”.
In other words, where a person gives a guarantee which is subjected to
the condition that some other person should join as a co -surety, than, unless
that some other person joins as a co-surety, the first surety cannot be forced
to discharge his obligation as a surety.
Illustration: A contracts with B to sell and deliver him goods on C’s guarantee
for payment. C gives his guarantee on the condition that another person shall
join as a co-surety and thus accepted by A. Afterwards, no other person joins
as co-surety and meanwhile B makes default, t hus guarantee of C is invalid
and A cannot force C to discharge his obligation as a surety.
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Implied promise to indemnify surety: As defined by 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, but no sums
which he has paid wrongfully.
In other words, principal debtor has to indemnify the surety later with the
rightfully sum. The surety can sue the principal debtor for the guarantee
amount as soon as his liability becomes absolute and he may recover all
damages, all costs and all sums in accordance with section 125.
Illustration: A promises to deliver rice to B for sum of Rs. 2,000/ - on C’s
guarantee for payment. B makes default in payment. C is forced for payment
and pays Rs. 2,000/- to A. C can recover the guarantee amount from B.
A promises to deliver rice to B for sum of Rs. 2, 000/- on C’s guarantee
for payment. Later, rice are delivered at less price. B makes default in
payment. A compels C for payment and C performs his obligations by paying
Rs. 2,000/- to A. C cannot recover full amount of Rs. 2,000/ - from B but only
the amount against which the rice were sold.
Co-sureties liable to contribute equally: As defined by section 146, “where
two or more persons are co-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contracts, and whether with
or without the knowledge of each other, the co -sureties, in the absence of any
contract to the contrary, are liable, as between themselves, to pay each an
equal share of the whole debt, or of that part of it which remains unpaid by the
principal debtor”.
In other words, where two or more persons are co-sureties for the same
debt or duty, in-case of default of principal debtor, all the co-sureties shall
equally contribute, if not mentioned in the contract. If it is mentioned in the
contract it should be according to the contract .
Illustration: A lends Rs. 2,000/- to B on the guarantee of C and D for
repayment. B makes default in payment, C and D shall contribute equally by
paying 1,000/- rupees each.
A lends Rs. 1,000/- to B on the guarantee of C, D and E for repayment
and it was mentioned in the contract that in-case of default by B, C shall pay
one-quarter, D shall pay one-quarter and E shall pay one-half. B makes default
in payment. As mentioned in the contract C shall pay Rs. 250/-, D shall pay
Rs. 250/- and E shall pay Rs. 500/-.
Liabilities of sureties bound in different terms: As defined by section 147,
“co-sureties who are bound in different sums, are liable to pay equally as far
as the limits of their respective obligations permit”.
Illustration: A, B and C are sureties for D enter into 3 several bonds. A in the
penalty of Rs. 10,000/-, B in that of Rs. 20,000/- and C in that of Rs. 40,000/-.
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D makes default to the extent of Rs. 30,000/-. A, B and C are each liable to
pay Rs. 10,000/-.
A, B and C are sureties for D enter into 3 several bonds. A in the penalty
of Rs. 10,000/-, B in that of Rs. 20,000/- and C in that of Rs. 40,000/-. D
makes default to the extent of Rs. 40,000/ -. A is liable to pay Rs. 10,000/-, and
B and C Rs. 15,000/- each.
A, B and C are sureties for D enter into 3 several bonds. A in the penalty
of Rs. 10,000/-, B in that of Rs. 20,000/- and C in that of Rs. 40,000/-. D
makes default to the extent of Rs. 70,000/ -. A, B and C are liable to pay full
penalty of their bonds.
BAILMENT: Bailment is derived from French word “Baillior” which means to
“To deliver”.
As defined by section 148, “a bailment is the 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 otherwise disposed of according to
the directions of the person delivering them. The person delivering the goods
is called bailor. The person to whom they are delivered is called th e bailee”.
Explanation: If a person is already in the possession of the goods and he
contracts to hold them as a bailee, he thereby becomes bailee and the owner
becomes bailor of such goods, although they may not have been delivered by
way of bailment.
Bailment is only transfer of possession, if incase property is passed
alongwith possession, it will not be called as bailment but a sale or agreement
to sale. It is also essential that the goods delivered to bailee must be returned
or re-delivered to the bailor or the purpose must be fulfilled. The examples are
loan, hire of goods, goods entrusted to warehouseman or carrier. Here, the
word “disposed of” refers that a bailee may also be clothed with authority to
sell the goods as direct by the bailor.
Illustration: A enters into agreement with B to deliver his bicycle to him on the
condition that it shall be redelivered to A after two days. This is a contract of
bailment. A is bailor, while B is a bailee.
What are the essentials of contract of bailment?
A valid contract of bailment has the following ingredients:
1. Contract: it is created by a contract, express or implied.
2. Delivery of goods: There must be delivery of movable goods from one
person to another. If the goods are immovable the contract will not be a
contract of bailment. Delivery of goods may be actual or constructive.
Actual delivery may be made by handing over goods to the bailee,
whereas constructive delivery may be made by doing something, which
has effect of putting the goods on the possession of bailee or any
authorized person.
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3. Change of possession: the possession must be affected by contract of

bailment. Mere custody without possession is not a contract of bailment.
4. Purpose of delivery: The delivery of the goods is for temporary
purposes. It may be for safe custody, repair, carriage, or for gratuitous
use by the bailee.
5. Number of parties: There must be two parties to a contract of bailment.
The person delivering the goods is called bailor and the person to whom
the goods are delivered or bailed is called bailee.
6. Right of ownership: In a contract of bailment, the right of ownership
remains with an owner (bailor). If ownership is transferred the contract is
of sale and is not of bailment.
7. Change of form: In a contract of bailment, the goods may b e altered in
form by the bailee i.e. old ornaments can be changed into new one,
clothes may be stitched into shirt.
8. Redelivery of goods: In a contract of bailment, after accomplishment of
purpose the goods must be redelivered to the bailor or disposed of
according to the directions of the bailor.
9. Consideration: In a contract of bailment, consideration is genrally in
form of money payment either by the bailor or bailee. E.g. A (bailor)
gives his TV to B (bailee) for repair; here the bailor h as to pay. A (bailee)
takes furniture on hire. Here bailee has to pay.
In some cases, detriment suffered by the buyer is sufficient
consideration against bailee’s promise to return them.
How a delivery is made to bailee?
As defined by section 149, “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 in his behalf”.
Delivery of goods may be actual or constructive. Actual delivery may be
made by handing over goods to the bailee, whereas constructive delivery may
be made by doing something, which has effect of putting the goods on the
possession of bailee or any authorized person.
Illustrations: A delivers goods directly to B for so me purpose. It is actual
delivery.
A buys goods from B which are in possession of C as bailee, afterwards
C agrees to hold them for A as a bailee. It is constructive delivery of goods
from A to C.
DUTIES OF BAILOR:
1. Bailor’s duty to disclose faults in goods bailed: As defined by section
150, “the bailor is bound to 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
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does not make such disclosure he is responsible for damage arising to

the bailee directly from such fault”. & “if the goods are bailed for hire, the
bailor is responsible for such damage, whether he was or was not aware
of the existence of such faults in goods bailed”.
Illustrations: A lends a horse to B, which he knows to be vicious. He
does not disclose the fact that the horse is vicious. The horse runs away.
B is thrown and injured. A is responsible to B for damage susta ined.
A hires a carriage of B. The carriage is unsafe, though B is not
aware of it, and A is injured. B is responsible for any injury to A.
2. Repayment by bailor for necessary expenses : As defined by section
158, “where, by the 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 (earning) , the bailor
shall pay to the bailee the necessary expenses incurred by him for the
purpose of the bailment”.
In other words, it is liability of bailor to repay all those expenses,
which bailee spends for purpose of bailment.
Illustration: A is a friend of B and repairs B’s television free of cost. On
this repair, he bears Rs. 500 actual expenses due to a replacement of
parts. B is bound by law to pay Rs. 500, the actual cost of repair to A.
3. Restoration of goods lent gratuitously: As defined by section 159, “the
lender of a thing for use may at any time require its return, if the loan
was gratuitous )‫(بالوجہ‬, even though he lent it for a specified time or
purpose. But if on the face of such loan made for a specified time or
purpose, the borrower has acted in such a manner that the return of the
thing lent before the agreed upon would cause him loss exceeding the
benefit actually derived by him from the loan, the lender must, if he
compels the return, indemnify the borrower for the amount in which the
loss occasioned exceeds the benefit so received”.
Illustration: A lends his car to B, a driver for using it as a source of
earning. B uses it for 09 months and has earned much from it. A can
require the return of the car from B.
A lends his car to B, a driver for using it as a source of earning. B
engages with a company for a year on the condition that if B withdraws
before completion of 01 year then he shall pay 5 lac as penalty. Later on
after 8 months A requires return of his car but w ith such return B will
bear loss from company. If in-case A compels the return then he shall
indemnify B for the amount of loss.
4. Bailor’s responsibility to bailor: As defined by 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”.
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Illustration: A delivers goods to B for safe custody till 1 s t January, 2018.

B was to leave country on 2 nd January, subsequently on the fixed day A
fails to get redelivery of goods from B and resultantly B has to postpone
his flight and suffers loss. A is responsible to the losses occurred to B
and he shall make compensation to B.
RIGHTS OF BAILOR:
1. Right of termination of bailment by bailee’s act inconsistent with
conditions: As defined by section 153, “a contract of bailment is
voidable at the option of the bailor, if the bailee does any act with regard
to the goods bailed, inconsistent with the conditions of the bailment”.
In simple words, the bailor has the right to terminate the bailment if
bailee does any act inconsistent with the terms of the contract.
Illustration: A lends his horse to B for his personal use. B uses it for
carrying passengers. This bailment is voidable at the option of A as the
act of B is inconsistent with the terms of the contract.
DUTIES OF BAILEE:
1. Care to be taken by bailee: As defined by section 151, “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 )‫(ہوشیاری‬ would, under similar
circumstances take of his own goods of the same bulk, quality and value
as the goods bailed”.
In simple words, the bailee is bound to take as much care of the
goods bailed to him as a common person takes of his own goods.
2. Bailee when not liable for loss, etc, of thing bailed : As defined by
section 152, “the bailee, in the absence of any special contract, is not
responsible for the loss, destruction, or deterioration of the thing bailed,
if he has taken the amount of care of it described in section 151”.
In simple words, if there is no special contract , the bailee is not
responsible for any loss to the goods if he has taken as much care of the
goods bailed as a man of ordinary prudence would.
3. Liability of bailee making unauthorized use of goods bailed: As
defined by 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”.
In simple words, if the bailee makes unauthorized use of goods
bailed to him, he is liable to pay compensation for any loss to the goods
occurred during such unauthorized use.
Illustration: A hires goods from B for his personal use. A used it for
carrying passengers instead and the horse falls and is injured during
carriage. A shall make compensation to B for the injury to the horse.
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4. Effect of mixture, with bailor’s consent, of his goods with bailee’s :

As defined by section 155, “if the bailee, with the consent of the bailor,
mixes the goods of the bailor with his own goods, the bailor and the
bailee shall have an interest, in proportion to their respective shares, in
the mixture thus produced”.
5. Effect of mixture without bailor’s consent,
a. when the goods can be separated: As defined by section 156, “if
the bailee, without the consent of the bailor mixes the goods of the
bailor with his own goods, and the goods can be separated or
divided, the property in the goods remains in the p arties,
respectively; but the bailee is bound to bear the expense of
separation or division, and any damage arising from the mixture”.
Illustration: A delivers 100 bales of cotton with a particular mark to
B for some purpose and B mixes them with his own b ales of cotton
bearing different mark. A is entitled to get returned his own 100
bales and B shall is bound to bear all the expenses incurred in the
separation of the bales and any other incidental damage.
b. When the goods cannot be separated: As defined by section 157,
“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”.
Illustration: A delivers lubricant oil worth of Rs. 50 per liter to B
and B mixes them with his own lubricant oil worth of Rs. 40 per
liter. B must compensate A for the loss.
6. Return of the goods bailed on expiration of time or accomplishment
of purpose: As defined by 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”.
7. Bailee’s responsibility when goods are not duly returned: As defined
by section 161, “if by the default of the bailee, the goods are not
returned, delivered, or tendered at the proper time, he is responsible to
the bailor for any loss, destruction or deterioration of the goods from that
time”.
If such delay is caused by bailor’s fault while bailee is ready and
willing to return goods, bailor may be liable to compensate the bailee for
any necessary expenses of and incidental to their safe custody.
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Illustration: A delivers his bicycle to B for some purpose which was to

be returned on 1 s t January, 2018. B fails to redeliver bicycle on 1 st
January. B is liable for any kind of loss to the goods.
8. Bailor entitled to increase or profit from goods bailed: As defined by
section 163, “in the absence of any contract to the contrary , the bailee is
bound to deliver to the bailor, or according to his directions, any increase
or profit which may have occurred from the goods bailed”.
Illustration: A leases 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 A.
9. Bailee not responsible on redelivery to bailor without title : As
defined by section 166, “if the bailor has no title to the 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”.
In simple words, the bailee is only responsible to redeliver the
goods to bailor not the owner, unless bailee is under the effective
pressure of an adverse claim.
Illustration: A not the owner of a car lends it to B. B shall redeliver it
back to A.
TERMINATION OF BAILMENT:
A contract of bailment is terminated in the following terms: 153-162-
1. On inconsistent act: As defined by section 166, i f the bailee does an
inconsistent act with regard to the goods, the contract of bailment is
voidable at the option of bailor.
2. On the expiry of term: As defined by section 160, where the bailment is
for a specific period of time, it terminates on the expiry of that time
3. On the accomplishment of purpose: As defined by section 160, the
bailment terminates as soon as the purpose for which the goods were
bailed has been accomplished.
4. On the destruction of the goods bailed: W hen the goods bailed are
destroyed or becomes incapable of use , for the purpose of bailment due
to the change in its nature, the bailment is terminated.
5. Gratuitous Bailment: As defined by section 159, in case of gratuitous
bailment, the bailment can be terminated by a notice from the owner to
the bailee provided the termination does not cause inconvenience to the
bailee.
6. On the death of the bailor or bailee: A gratuitous bailment terminates
on the death of the bailor or the bailee.
Bailment by several join-owners: As defined by section 165, “if several joint
owners of goods bail them, the bailee may deliver them back to, or according
to the directions of one joint owner without the consent of all in the absence of
any agreement to the contrary”.
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Illustration: A, B and C joint owner of a cow lend it to D for a week. After

expiration of one week A or B or C may get the cow back. A demands
redelivery, D may deliver it to A.
Right of third person claiming goods bailed: As defined by section 167, “if a
person, other than the bailor, claims goods bailed, he may apply to the court to
stop the delivery of the goods to the bailor, and to decide the tile of the
goods”.
RIGHTS OF FINDER OF GOODS;
1. May sue for specified reward offered: As defined by section 168, “the
finder of goods has no right to sue the owner for compensation for
trouble and expense voluntarily incurred by him to preserve the goods
and to find out the owner; but he may retain the goods against the owner
until he receives such compensation,; and, where the owner has offered
a specific reward for return of goods lost, the finder may sue for such
reward, and may retain the goods until he receive it”.
Illustration: A finds a cow of B and takes its care. Afterwards it found
out that B is owner of cow, though A can demand compensation for any
expense and trouble incurred but cannot sue B for it and may retain c ow
until such payment.
A lost his cow. H announced reward of Rs. 5,000/- to the finder of
cow. B finds it, B he entitled to claim reward so announced from A but
cannot sue A for it and until such receiving such reward B can retain the
cow.
2. When finder of things commonly on sale may sell it: As defined by
section 169, “when a thing which is commonly the subject of sale is lost,
if the owner with reasonable diligence, be found, or if he refuses, upon
demand, to pay the lawful charges of the finder, the finder may sell it:-
(a) when the thing is in danger of perishing or of losing the greater part
of its value, or, (b) when the lawful charges of the finder, in respect of
the thing found, amount to two-thirds of its value”.
In simple words, if the owner refuses to pay lawful charges of the
finder, the finder may sell it only if, (a) if the goods are supposed to be
perished, wholly or partly, (b) if the lawful charges amount to two -third of
the value of goods.
Bailee’s particular lien: Lien is a right to keep possession of property
belonging to another person until a debt owed by that person is discharged.
As defined by section 170, where the bailee has, in accordance with the
purposes of the bailment, rendered any service involving the exercise of labour
or skill in respect of the goods bailed, he has, in the absence of the contract to
the contrary, a right to retain such goods until he receives due remuneration
for the services he has rendered in respe ct of them”.
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In simple words, if bailee renders any service giving him right to

remuneration by the bailor, he has the right to retain the goods until he
receives such remuneration.
Illustrations: A delivers her golden ornaments to B, a goldsmith to polish
them which is done accordingly. B has the right to retain the ornaments until
he is paid for his services.
A gives cloth to B, a tailor to make into a contract. B promises A to
deliver the coat as soon as it is ready to be paid for them after three months. B
is not entitled to retain the coat because he has agreed for payment after three
months.
Exceptions of bailee’s right of lien: The bailee cannot exercise the right of
lien in the following cases:
1. If the bailee does not complete the work within the time agreed or
reasonable time.
2. If he voluntarily permits the bailor to regain the possession of the goods
without payment of the charges.
3. If he allows credit to the bailor.
General lien of bakenrs, factors, wharfingers, attorneys, and policy-
brokers: As defined by section 171, “banker’s factors, wharfingers, attorneys
of High Court and policy-brokers may, in the absence of a contract to the
contrary, retain, as a security for a general balance of account any goods
bailed to them; but no other persons have a right to retain, as a security for
such balance, goods bailed to them, unless there is an express contract to that
effect”.
In simple words, a general lien is a right which can only be exercised by
banker’s factors, wharfingers, attorneys of High Court and policy-brokers, if the
debtor or bailor makes default they can retain the goods as security. This right
does not extent to securities or valuable property deposited for safe custody or
for specific purpose (pledges). Nor does it extend to a trust account which is
not the property of customer.
Illustration: A has two accounts in a bank, a saving and credit account. In
saving account he has balance of Rs. 500/ - while an overdraft of Rs. 1,000/-
lies in his current account. The bank can exercise the right of lien on the
savings account for the amount due on the current account.
Bailment of pledges )‫(گروی‬
Define Pledge, pawner and pawnee: As defined by section 172, “the bailment
of goods as security for payment of a debt or performance of a promise is
called “pledge”. The bailor is in this case called the “pawnor”. The bailee is
called the “pawnee”.
The pledge is a variety of bailment. It means a deposit of personal
property as security for a debt. W hen the objective of transferring the goods is
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completed or when the payment of debt for which the goods are pledged is
met, then the receiver (pawnee) shall return the goods to its real owner.
Illustration: A takes loan from B and pledges gold as security for payment of
debt. This is an example of pledge.
What are the essential of contract of pledge?
Following are the essential ingredient of a valid contract of pledge:
1. Contract: A pledge is a contract of bailment where goods are given as
security for the payment of a debt or for the performance of promise.
2. Delivery of goods: There must be delivery of movable goods from one
person to another. If the goods are immovable the contract will not be a
contract of bailment. Delivery of goods may be actual or constructive.
Actual delivery may be made by handing over goods to the bailee,
whereas constructive delivery may be made by doing something, which
has effect of putting the goods on the possession of bailee or any
authorized person.
3. Change of possession: the possession must be affected by contract of
bailment. Mere custody without possession is not a contract of bailment.
4. Purpose Of Delivery: The purpose of delivery must be a security for the
payment of a debt or for the performance of a contract.
5. Number Of Parties: There are two parties i.e., the pawnor and pawnee.
The person who gives the goods as security is known as pawnor and the
person to whom goods are given as security is known as pawnee.
6. Right Of Ownership: In a contract of pledge (pawn), the right of
ownership remains with the pawnor and is not changed. If the ownership
is transferred, the contract will be a contract of sale and not of pledge.
7. Change Of Form: The goods must not change the form and same goods
must be returned to pawnor after the performance of the contract.
8. Redelivery Of Goods: The goods are redelivered to the pawnor when
the debt is paid by him or the promise has been performed for which
goods are given as security.
9. Right Of Sale: If the pawnor becomes defaulter, the pawnee can sell the
goods to recover his funds by giving reasonable notice of this fact to the
pawnor.
RIGHTS OF PAWNEE
1. Pawnee’s right of retainer: As defined by section 173, “the pawnee may
retain the goods pledged, not only for payment of the debt or the
performance of the promise, but for the interest of the debt, and all
necessary expenses incurred by him in respect of the possession or for
the preservation of the goods pledged”.
In simple words, pawnee may retain the goods for payment of the
debt, or for the performance of the promise, or for the interest of any
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debt, or all necessary expenses incurred in respect of possession or

preservation of goods.
2. Pawnee not to retain for debt or promise other than that for which
goods pledged-Presumption in-case of subsequent advances: As
defined by section 174, “the pawnee shall not, in the absence of a
contract to that effect, retain the goods pledged for any debt or promise
other than the debt or promise for which they are pledged; by such
contract, in the absence of anything to the contrary, shall be presumed in
regard to subsequent advances made by the pawnee”.
In simple words, the pawnee can only re tain the goods for any debt
or performance for which they are pledged and not otherwise.
3. Pawnee’s right as to extraordinary expenses incurred: As defined by
section 175, “the pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the preservation of the goods
pledged”.
In simple words, if pawnee bears any extraordinary expenses in the
preservation of goods pledged, the he is entitled to receive them , but he
has no right to retain the goods for such purpose.
4. Pawnee’s right where pawnor makes default: As defined by section, “if
the pawnor makes default in payment of the debt, or performance, at the
stipulated time of the promise, in respect of which the goods were
pledged, the pawnee may bring a suit against the pawnor upon the debt
or promise, and retain the goods pledged as a collateral security, or he
may sell the thing pledged, on giving the pawnor reasonable notice of the
sale”.
If the proceeds of such sale are less than the amount due in
respect of the debt or promise, the pawnor is still liable to pay the
balance. If the proceeds of the sale are greater than the amount so due,
the pawnee shall pay over the surplus )‫ (زائد‬to the pawnor.
In other words, if pawnor fails to pay or perform within the
stipulated time, the pawnee may sue pawnor and retain the pledged
goods, or he may also sell the pledged goods on giving of such sale to
pawnor. If the goods are sold for fewer amounts, the pawnee can sue
pawnor for rest amount and if goods are sold for greater amount, the
pawnee shall pay excess amount to the pawnor.
RIGHTS OF PAWNOR:
1. Defaulting pawnor’s right to redeem (restore): As defined by section
177, “if a time is stipulated for the payment of debt, or the performance of
the promise, for which the pledge is made, and the pawnor makes default
in payment of the debt or performance of the promise at the stipulated
time, he (pawnor) may redeem (restore) the goods pledged at any
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subsequent time before the actual sale of them; but he must, in that
case, pay, in addition, any expenses which have arisen from his default”.
In other words, if pawnor fails to pay or perform promise within
stipulated time, he may get back the pledged goods after elapse of
stipulated time and before actual sale of goods, but on the payment of
any expenses arisen from his failure.
PLEDGE BY NON-OWNER OF THE GOODS:
Generally, pledge by non-owner of the goods is invalid. However, there
are some situations where a person having possess ion of the goods with
owner’s consent, is entitled to pledge those goods even without sellers
consent for the pledge. These situations are as under: -
1. Pledge by mercantile agent: As defined by section 178, “where a
mercantile agent is, with the consent of the owner, in possession of
goods or the documents of title to goods any pledge made by him, when
acting in the ordinary course of business of a mercantile agent, shall be
as valid as if he were expressly authorized by the owner of the goods to
make the same, provided that the pawnee acts in good faith, and has not
at the time of the pledge notice that the pawnor has no authority to
pledge”.
In other words, a mercantile agent being in possession of goods
with owner’s consent can pledge the goods without owner’s consent for
the pledge, only if the pawnee acted in good faith and not noticed at the
time of pledge that the pawnor (mercantile agent) has no authority to
pledge.
Illustration: A, a mercantile agent possess 50 sacks of flour owned by B
with his consent. A may pledge the goods without B’s consent for the
pledge.
2. Pledge by a person under voidable contract: As defined by section
178-A, “when the pawnor has obtained possession of the goods pledged
by him under a contract voidable under section 19 or 19 -A, but the
contract has not been rescinded at the time of the pledge , the pawnee
acquired a good title to the goods, provided he acts in good faith and
without notice of the pawnor’s defect of the title”.
In other words, where a pawnor has possession of goods under the
contract which is voidable at the option of another party to that contract,
the pawnee can only acquire good title to the goods if the contract was
not rescinded at the time of pledge only if the pawnee acts in good fait h
without notice of the pawnor’s defect of the title.
Illustration: A purchases a wristwatch from B under coercion and
pledged it with C before the contract is cancelled by B. the Pledge is
valid. In this case, C will get a good title to the watch and B can only
claim damages from A.
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3. Pledge where pawnor has only a limited interest: As defined by

section 179, “where pawnor pledges goods in which he has only a limited
interest, the pledge is valid to the extent of that interest”.
Illustration: A goes to B (tailor) to get his coat sewed for a charge of Rs.
2,000/-. W hen the suit was ready, B needed urgent cash and pledged the
coat with C for Rs. 3,000/-. Pledge is valid to the extent of B’s int erest
i.e. 1500/-. A can recover the coat directly from C on payment of Rs.
1500/-.
[ [
Suits by Bailees or Bailors against wrong-doers

Suits by Bailees or Bailors against wrong-doers: As defined by section 180,
“if a third person wrongfully deprives the bailee of the use or possession of the
goods bailed, or does them any injury, the bailee is entitled to use such
remedies as the bailor might have used in the like case if no bailment had
been made; and either the bailor or the bailee may bring a suit against a third
person for such deprivation or injury”.
In other words, the right to sue against a third person wrongfully
depriving bailee of the use or possession of goods bailed or does any injury to
bailed goods, lies with bailor and bailee, with the bailee as possessor while to
with bailor as his property.
Exception: where a bailee is deprived lawfully by the state, the bailee is
entitled to sue the bailor for the money advanced by him and not the state for
recovery of the goods.
Illustration: A wrongfully takes away bailed goods from B (bailee) and
wrongfully deprives B from possession of the goods bailed to him by C (bailor).
B sues A for recovery of goods and claim damages for any loss against him .
Apportionment of relief or compensation obtained by such suits : As
defined by section 181, “whatever is obtained by way of relief or compensation
in any such suit shall, as between the bailor and the bailee, be dealt with
according to their respective interests”.
Apportionment means distribution. It does not matter, whether one sues
or both i.e. bailor and bailee, or which one of them recovers first, any
compensation or relief recovered by either party shall me distributed between
both i.e. bailor and bailee, according to their resp ective interests.
Illustration: A takes away bailed goods from B (bailee) and wrongfully
deprives B from possession of the goods bailed to him by C (bailor). B sue A
and recovers 3,000/- from A and the amount so recovered is distributed
equally between both as per their respective shares.
AGENCY
Appointment and authority of agents
Define Agent and Principal: As defined by section 182, “an Agent is a
person employed to do any act for another or to represent another in dealings
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with third persons. The person for whom such act is done, or who is so
represented is called the Principal.
Illustration: Coca-cola company engages Ali as its agent and pay s him Rs.
30,000/- per month, on certain terms and conditions. This is a contract of
agency. Ali who represents the company is an agent, whereas Coca -cola
company who has engaged Ali to represent is Principal.
What are the essentials of contract of agenc y?
Following are the essential ingredients of contract of agency:
1. Competency of Principal: The principal must be of age of majority
according to the law to which he is subject, and must be of sound mind.
2. Competency of Agent: Any person may become agent, who is of
majority according to the law to which he is subject and of sound mind.
3. Power of agent: Agent has a power on behalf of the principal to deal
with the third persons so as to bind the principal.
4. Subject Matter: Sub-matter of the agency has to be dealt with as the
property of the principal and not of the agent.
5. Consideration: Consideration is not necessary for the contract of
agency. Although an agent is remunerated by way of commission for
rendering his services.
6. Liability of Agent: The liability of the agent is always to account for the
sale-proceeds to the principal.
Who may employ agent?
As defined by section 183, “any person who is of the age of majority according
to the law to which he is subject, and who i s of sound mind, may employ an
agent”.
Who may be an agent?
As defined by section 184, “as between principal and third persons any person
may become agent, but no person who is not of the age of majority and of
sound mind can become an agent, so as to responsible to his principal
according to the provisions in that behalf herein contained”.
In other words, a person who is of age of majority according to the law to
which he is subject and who is of sound mind may become age nt.
Consideration not necessary: As defined by section 185, “no consideration is
necessary to create an agency”. In other words, contract of agency without
consideration is valid, though consideration is not necessary but an agent is
remunerated by way of commission for rendering his services
Agent’s authority may be expressed or implied : As defined by section 186,
“the authority of an agent may be expressed or implied”. In other words, it not
necessary that a contract of agency be created by written agreement, but such
a contract may be made from the circumstances and conduct of the parties.
Definitions of express and implied authority: As defined by section 187, “an
authority is said to be express when it is given by words spoken or written. An
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authority is said to be implied when it is to be inferred from the circumstances

of the case; and the things spoken or written, or the ordinary course of
dealing, may be accounted circumstances of the case”.
Illustrations: (1) A by a written contract makes B his agent to manage his
shop. B has an express authority to manage the shop of A. (2) A is an owner
of shop Quetta which is managed by B. B in the name of A orders goods to C
and makes him payment from A’s funds with the knowledge of A. B has an
implied authority to order goods to C and make him payment in the name of A
for the purpose of shop.
Extent of agent’s authority: As defined by section 188, “an agent having an
authority to do an act has authority to do every lawful thing which is necessary
in order to do such act.
An agent having an authority to carry on a business has authority to do
every lawful thing necessary for the purpose, or usually done in the course of
conducting such business”.
However, the authority of an agent may also be limited by the contract.
Illustrations: A employs B to recover a due debt from C. B can adopt any
legal process to recover the debt and may give a valid discharge for the same.
A constitutes B as his agent to carry on his business of ship builder. B
may purchase timber and other material, and hire workmen for the purposes of
carrying on the business.
Agent’s authority in an emergency: As defined by section 189, “an agent
has authority in an emergency, to do all such acts for the purpose of protecting
his principal from loss as would be done by a person of ordinary prudence, in
his own case, under similar circumstances”.
Illustration: A constitutes B as his agent and hands him over vegetables to be
sold at Karachi. Vegetables could not bear journey to Karachi without spoiling
and B sells them in Hyderabad in order to avoid any loss.
Sub-agents
When agent cannot delegate: As defined by section 190, “an agent cannot
lawfully employ another to perform acts which he has expressly or impliedly
undertaken to perform personally unless by the ordinary custom of trade a
sub-agent may, or, from the nature of the agency , a sub-agent must, be
employed”.
The agent cannot delegate his powers to another person. The maxim
applicable in this case is “delegates non protest delegate” which means that “a
person to whom authority has been delegated cannot delegate that authority to
another”.
Exceptions: The agent may delegate his authority and appoint sub -agent:
1. Where the principal has expressly or impliedly allowed agent.
2. Where the nature of work demands appointment of sub -agent.
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3. Where there is a custom of trade to that effect.

4. Where unforeseen emergencies render it necessary.
Define “sub-agent”: As defined by section 191, “a sub-agent is a person
employed by, and acting under the control of, the original agent in the
business of the agency.
A sub-agent appointed by agent without authority of principal, the sub-
agent is agent of the agent, the principal has nothing to do with him and any
act done by such an unauthorized sub -agent cannot bind the principal.
Representation of principal by sub-agent properly appointed : As defined
by section 192, “where a sub-agent is properly appointed, the principal is, so
far as regards third persons, represented by sub-agent, and is bound by and
responsible for his acts, as if he were an agent originally appointed by the
principal”.
Agent’s responsibility for sub-agent: The agent is responsible to the
principal for the acts of the sub-agent.
Sub-agent’s responsibility: The sub-agent is responsible for his acts to the
agent, but not to the principal, except in case of fraud or willful wrong.
Agent’s responsibility for sub-agent appointed without authority: As
defined by section 193, “when an agent, without having authority to do so, has
appointed a person to act as a sub-agent, the agent stands towards such
person in the relation of principal to an agent, and is responsible for his acts
both to the principal and to third person; the principal is not represented by or
responsible for the acts of the person so employed, nor is that person
responsible to the principal ”.
Further that, in such case, the principal may take suitable action against
his agent for wrongfully appointing sub -agent.
Relation between principal and person duly appointed by agent to act in
business of agency: As defined by section 194, “where an agent, holding an
express or implied authority to name another person to act for the principal in
the business of the agency, has named another person accordingly, such
person is not a sub-agent, but an agent of the principal for such part o f the
business of the agency as is entrusted to him”.
Such named person may also be called “substituted agent”.
Illustrations: A direct B, his solicitor, to sell his estate by auction, and employ
an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale.
C is not a sub-agent, but A’s agent for the conduct of the sale.
A authorizes B to recover money due to from C. B instructs D, a solicitor,
to take legal proceedings against D for recovery of money, D is not a sub -
agent, but is a solicitor to A.
Agent’s duty in naming such person: As defined by section 195, “in
selecting such agent for his principal, an agent is bound to exercise the same
amount of direction as a man of ordinary prudence would exercise in his own
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case; and, if he does this he is not responsible to the principal for acts or
negligence of the agents so selected”.
An agent who was directed or authorized by the principal to name
another person is not responsible for any negligence of that other person, but
that another person is responsible to principal.
Illustration: A instructs B to buy a ship for him. B employs a ship surveyor of
good reputation to choose a ship for A. The surveyor makes the choice
negligibly and the ship turns out to be unseaworthy and is lost. B is not, but
the surveyor is responsible to A.
Ratification )‫(منظوری‬
Ratification: The confirmation or adoption of an act that has already been
performed.
Right of person as to acts done for him without his authority -effect of
ratification: As defined by section 196, “where acts are done by one person
on behalf of another, but without his knowledge or authority, he may elect to
ratify or to disown such acts if he ratifies him, the same effects will follow as if
they had been performed by his authority”.
Act done by a person on behalf of another if assumed to be done by
another if later ratified by that another person, but the act done which was not
authorized or purport to be done at that time cannot be adopted by ratification.
Illustration: A makes an offer to B, C accepts it on behalf of B without
authority and later B ratifies it. The acceptance is assumed as to have been
accepted by B.
Ratification may be expressed or implied: As defined by section 197,
“ratification may be expressed or may be implied in the conduct of the person
on whose behalf the acts are done”.
Express ratification: Express ratification is by words written or spoken. It
cannot be completed until it is communicated; until such communication it is
liable to revocation. Illustration: A makes an offer to B, C accepts it on behalf
of B without authority. Afterwards B supports C’s decision, hence ratification is
complete. Until such support of B for C’s decision, A may revoke his offer, but
not afterwards.
Implied ratification: Ratification other that in words spoken or written. It is
assumed by the conduct of the person on whose behalf the acts has been
done. Illustration: A buys goods for B, without his authority . B afterwards sells
them to C on his own account. B’s conduct implies a ratification of the
purchases made for him by A.
Knowledge requisite for valid ratification : As defined by section 198, “No
valid ratification can be made by a person whose knowledge of the facts of the
case is materially defective”. In other words, the principal should have full
knowledge of the material facts.
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Illustration: A authorized his agent B to purchase 50 sacks of flour for him. B

supplied his own 50 sacks of flour to A at a higher price. A ratified the
purchase without knowing the fact that the grains belonged to B himself and he
charged price higher than that in the market. The ratification made by A was
not valid as it was made without the full knowledge of the facts of the case.
Effect of ratifying unauthorized act forming part of a transaction : As
defined by section 199, “a person ratifying any of unauthorized acts done on
his behalf ratifies the whole of the transaction of which such act formed a
part”.
In other words, an act done on behalf of another cannot be ratified
partially, but it must be ratified as a whole.
Illustration: A purchased 100 sets of TV for B without his authority.
Subsequently, B discovered that among 100 sets, 80 sets were good while 20
sets were defective. B accepted the good sets of TVs and rejected the
defective ones. In this case, the acceptance of part of TVs amounts to
ratification of whole transaction, thus, B is bound to take delivery of all TVS
purchased on his behalf, including defective ones.
Ratification of unauthorized act cannot injure third person: As defined by
section 200, “an act done by one person on behalf of another, without such
other person’s authority, which, if done with authority, would have the effect of
subjecting a third person to damages, or of terminating any right or interest of
a third person cannot, by ratification, be made to have such effect”.
In other words, a ratification which causes some damage or terminates
any right or interest of third person is not valid.
Illustrations: A demands goods of B on his behalf, without his authority, from
C who is in possession of the goods. This demand cannot be ratified by B as it
would make C liable for damages for his refusal to deliver.
A holds a lease from b, terminable on three months’ notice. C, an
unauthorized person, gives notice of termination to A. the notice cannot be
ratified by B as it would be binding on A.
Revocation of agency
Section 201 to 210 deals with termination or rev ocation of agency or authority.
Termination of agency: As defined by section 201, “an agency is terminated
by the principal revoking his authority; or by the agent renouncing (leaving) 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 (decided) an insolvent under the provisions of any
act for the time being in force for the relief of insolvent debtors”.
Termination of agency where agent has an interest in subject -matter: As
defined by section, “where the agent has himself an interest in the property
which forms the subject-matter of the agency, the agency cannot in the
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absence of an express contract be terminated to the prejudice (bias) of such

interest”.
In other words, an agency whose termination would affect the interest of
agent, cannot be terminated even by the death or insanity of principal. Here
interest means interest by way of security, lien or any special right or security,
and the principal gives authority to agent as a security for his payable debt ,
hence it is irrevocable.
Illustration: A authorized B to sell his land and to pay himself out of the
proceeds the debt due to him from A. A cannot revoke this authority, nor it be
terminated by his A’s insanity or death.
When agent may revoke agent’s authority : As defined by section 203, “the
principal may, save as i s otherwise provided by the last preceding section
(202), revoke the authority given to his agent at any time before the authority
has been exercised, so as to bind the principal”.
In other words, the principal may revoke authority of his agent before it
has been exercised by the agent so as to bind the principal. If the principal
without any cause revokes his agent’s authority before expiration of the period
mentioned in the contract, he must make compensation to the agent.
Illustration: A appointed B as his agent to purchase certain goods. A may
only revoke his B’s authority before B purchases goods and not afterwards.
Revocation where authority has been partly exercised: As defined by
section 204, “the principal cannot revoke the authority given to his agent after
the authority has been partly exercised so far as regards such acts and
obligations as arise from acts already done in the agency”.
In other words, where the agent has partly exercised his authority and
becomes personally liable, the agency becomes irrevocable.
Illustrations: A authorizes B to buy 1000 bales of cotton on account of A, and
to pay for it out of A’s money remaining in B’s hands. B buys 1000 bales of
cotton in his own name and become personally liable for the price. A cannot
revoke B’s authority regarding payment for the cotton.
A authorizes B to buy 1000 bales of cotton on account of A, and to pay
for it out of A’s money remaining in B’s hands. B buys 1000 bales of cotton in
A’s name so as not to render himself personally liable for the price. A cannot
revoke B’s authority in respect of buying cotton but can revoke B’s authority to
pay for the cotton.
Compensation for revocation by principal or renunciation by agent : As
defined by section 205, “where there is an express or implied contract that the
agency should be continued for any period of time, the principal must make
compensation to the agent, or the agent to the principal, as the case may be,
for any previous revocation o r renunciation of the agency without sufficient
cause”.
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This section like section 203 deals with revocation without sufficient
cause. If there is an express or implied to carry on agency for a certain time
period and either party i.e. principal or agent, revoke it without sufficient
cause, must make compensation to the other. In such cases, there must be
express or implied contract, merely undertaking of the agency is not sufficient
ground for compensation.
Illustration: A authorized B to manage his shop of timber for the period of 01
year. After 06 months A without sufficient cause revokes B’s authority, he shall
make compensation to B.
A authorized B to manage his shop of timber for the period of 01 year.
After 06 months B without sufficient cause renounces the business, he shall
make compensation to A.
Notice of revocation or renunciation: As defined by section 206,
“reasonable notice must be given of such revocation or renunciation; otherwise
the damage thereby resulting to the principal or the agent, as the case may be,
must be made good to the one by another”.
If either party revokes or renounces the agency, he must give notice to
the other party otherwise the party failed to make notice shall make
compensation to the other party.
Revocation and renunciation may be expressed or implied : As defined by
section 207, “revocation and renunciation may be expressed or may be implied
in the conduct of the principal or agent, respectively”.
Express revocation and renunciation is by words spoken or written,
whereas implied revocation and renunciation is by the conduct of the parties.
Illustration: A authorizes B to purchase certain goods for him. Later A buys
them himself. This is an implied revocation of B’s author ity.
When termination of the agent’s authority takes effect as to agent, and as
to third person: As defined by section 208, “the termination of the authority of
an agent does not, so far as regard the agent, take effect before it becomes
known to him, or, so far as regards third persons, before it becomes known to
them”.
In other words, agent’s authority is revoked at the time when such
revocation is made to him and to third persons when they came to know about
it, and not before.
Illustration: A authorizes B to sell his cotton lying in his warehouse and to pay
05 percent commission on such sale, but later A revokes B’s authority by
letter. But B sells cotton for Rs. 100/- before he receives letter. The sale is
binding on A and B is entitled to five rupees as his commission.
A authorizes B to sell his goods lying in his warehouse, but later A by
letter revokes B’s authority. B after receiving letter sells the goods to C and C
without knowledge of revocation buys goods and pays for them to B, with
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which B absconds. C’s payment is good as against A due to the fact the C was
unaware about revocation of B’s authority.
A directs his agent B to pay certain money t o C. A dies and D takes out
probate to his will. B after A’s death but before hearing of it, pays the money to
C. The payment is good as against D, the executor.
Agent’s duty on termination of agency by principal’s death or insanity : As
defined by section 209, “when an agency is terminated by the principal dying
or becoming of unsound mind, the agent is bound to take, on behalf of the
representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted t o him”.
In other words, after the death or of insanity of principal, the agent is
bound to protect and preserve interests of principal’s representatives. In such
cases a new agency is created between Principal’s representatives and agent.
Illustration: A authorized B to manage his shop. Later A dies leaving his
representative C. B is bound to continue managing shop of A in order to
protect interest of C and new agency is created between B and C.
Termination of sub-agent’s authority: As defined by section 210, “the
termination of the authority of an agent causes the termination (subject to the
rules herein contained regarding the termination of agent’s authority) of the
authority of all sub-agents appointed by him”.
In other words, the authority of sub-agent will be terminated as and when
the main agency is terminated. However, the substituted agency will not be
terminated automatically if the authority of the main agent is terminated.
Illustration: A appoints B as his agent in a course of business. B appoints C
as his sub-agent. Later A revokes B’s authority, alongwith termination of B’s
authority C’s authority will be terminated automatically.
Agent’s duty to principal
Section 211 to 221 deals with agent’s duty to the principal
Agent’s duty in conducting principal’s business : As defined by 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. W hen 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”.
In other words, the agent is bound to follow the directions of principal
and in the absence of such directions according to custom usage. W hile acting
otherwise, agent is responsible to the principal for any loss or profit.
Illustrations: A appoints B as his agent to manage his shop. A directs B to
buy goods from Hyderabad, B is bound to purchase goods from Hyderabad as
per the directions of A.
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A appoints B as his agent to manage his shop in Hyderabad. A gives no

directions to manage shop and B buys goods Hyderabad and sells them,
resultantly B sustains loss. B must make it good to A, or, incase of any profit B
must account A for it.
Skill and diligence required from agent: As defined by 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 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 to skill or misconduct, but not in respect of loss o r damage which
are indirectly or remotely caused by such neglect, want of skill or misconduct”.
If an agent does not work with reasonable care, skill and diligence, he
must make compensation to his principal in respect of direct consequences of
his own neglect, want of skill or misconduct, but not for indirect or remote
losses.
Illustrations: A appoints B as his agent to sell certain goods. B sells goods to
C without enquiring about C’s solvency. C at the time of such was insolvent. B
must make compensation to A for any loss thereby sustained.
A directs his agent to ship 100 bales of cotton to England on 1 s t January,
2018. B omits to do so and thereafter ships them on 5 th January, 2018, but at
the time of late shipment rate of cotton declined. B must make compensation
to A for the loss sustained due to decline of price of cotton.
Agent’s accounts: As defined by section 213, “an agent is bound to render
proper accounts to his principal on demand”.
Whenever the principal demands, the agent is bou nd to account.
Illustration: A authorizes B to manage his shop. B is bound to account to A
whenever he demands.
Agent’s duty to communicate with principal : As defined by 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”.
Illustration: A authorized B to cultivate his lands. Later B faces shortage of
water which may suffer loss to the crops. B must communicate to A in order to
seek his instructions.
Right of principal when agent deals on his own account, in business of
agency without principal’s consent: As defined by section 215, “if an agent
deals on his own account in the business of the agency, without first obtaining
the consent of his principal and acquainting him with all material
circumstances which has come to his own knowledge on the subject, the
principal may repudiate the transaction, if the case show either that any
material fact has been dishonestly concealed from him by the agent, or that
the dealings of the agent have been disadvantageous to him”.
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In other words, where the agent deals on his own account without prior
consent and acquaintance of the principal and afterwards it appears that the
agent has dishonestly concealed material facts or the dealings of agent have
been disadvantageous to the principal, the principal is at liberty to repudiate
the agency.
Illustration: A directs B to sell his estate. B buys the state for himself in the
name of C. On discovering that B has bought the estate for himself, A may
repudiate the sale after proving that B has dishonestly concealed any material
fact or that the sale is been disadvantageous to him.
A directs B to sell his estate. Before sale B finds a mine on the estate
which is unknown to A. B informs A that he is willing to buy the estate for
himself, but dishonestly conceals the discovery of mine. A allows B to bu y in
ignorance of the existence of the mine. A on discovering that B has
dishonestly concealed the existence of mine, may either repudiate or adopt the
sale.
Principal’s right to benefit gained by agent dealing on his own account in
business of the agency: As defined by section 216, “if an agent, without the
knowledge of the principal, deals in the business of the agency on his own
account instead of on account of principal, the principal is entitled to claim
from the agent any benefit which may have resulted to him from the
transaction”.
Here benefit means a profit made by an agent inconsistent with his
position of agent. W here an agent working inconsistent with his position of
agent receives any profit in business of the agency, without principal’s
knowledge, the principal has right to claim it after discovering this fact.
Illustration: A directs B, his agent, to buy a certain house. B tell A that it
cannot be bought and buys the same house for himself. On discovering that B
has bought the house, A may compel him to sell it to A at the price he gave for
it.
A direct B, his agent to sell his 100 bales of cotton at the rate of Rs.
100/- per bale. B sold the cotton bales at higher price of Rs. 110/ - per bale and
concealed the fact from A. A may, on discovering that B has sold the cotton
bales at higher price than that directed, claim such benefits from B which were
concealed by B.
Agent’s right of retainer out of sums received on principal’s account : As
defined by section 217, “an agent may retain, out of any sums received on
account of the principal in the business of the agency, all moneys due to
himself in respect of advances made or expenses properly uncured by him in
conducting such business, and also such remuneration as may be payable to
him for acting as agent”.
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Here agent has been empowered to retain money received on principal ’s

account, if he has made advances or incurred expenses or in respect of
remuneration for rendering his services as agent.
Illustrations: A advanced an amount of Rs. 1000/- to the B. Afterwards, B
authorized A to sell 100 bales of cotton lying in B’s warehouse. B sold 100
bales of cotton to C against Rs. 10,000/ -. A may retain Rs. 1000/- form the
amount received on the sale of 100 bales of c otton.
A directs B to sell 100 mounds of wheat. B hires C to transport the goods
to the market and pays C himself. B sells the wheat and receives amount
thereof. B may retain the sum paid by him to C for transportation from the
money recovered by selling wheat.
A directs B to sell certain goods and agrees to pay 5% commission
thereon. B sells the goods. B may retain the amount of 5% commission from
the money recovered by selling goods on account of A.
Agent’s duty to pay sums received for principal : As defined by section 218,
“subject to such deductions, the agent is bound to pay to his principal all sums
received on his account”.
Agent is under duty to pay all sums received on his principal’s behalf
even if it has been obtained under illegal or void contract. However, as
according to section 217 agent is entitled to deduce his lawful charges but
subject to his right only.
Illustrations: A directs B to sell certain goods. B sold the goods to C and
received payment thereof. Later it was discovered that the sale was caused by
mistake as to fact and contract become void. B is bound pay the sums so
received on behalf of A to him.
When agent’s remuneration becomes due : As defined by section 219, “in
the absence of any special contract, payment for the performance of any act is
not due to the agent until the completion of such act; but an agent may detain
moneys received by him on account of goods sold, although the whole of the
goods consigned to him for sale may not have been sold, or although the sale
may not be actually complete”.
The payment to an agent is not due unless such act is complete, but an
agent may detain money received on account of goods sold, despite of the fact
that the goods have not been sold or the sale has not been actually completed.
Illustration: A consigns certain goods to B in order to sell them. B contracts C
to deliver him goods and performs it accordingly. B has completed his
performance, hence his remuneration becomes due.
Agent not entitled to remuneration for business misconduct : As defined by
section 220, “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”.
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An agent who is misconducts in discharge of his duties is not liable to

remuneration. If agent has misconducted in pursuance of business of agency
as whole agent is not entitled for any remuneration, or, if agent has
misconducted for a part, agent is not entitled for remuneration of that part.
Illustrations: A employs B to recover Rs. 1000/- from C. through B’s
misconduct the money is not recovered. B is entitled to no remuneration for his
services and must make good the loss.
A directs B, his agent to recover Rs. 10,000/- from C and to invest them
with good security. B recovers Rs. 1, 0,000/- from C and invests 6,000/- with
good security but invests rest of Rs. 4,000/- with such security which ought to
have been bad, whereby he loses Rs. 1,000/-. B is entitled to remuneration for
recovering Rs. 10,000/- and investing Rs. 6,000/- but he is not entitled to
remuneration for investing 4,000 and he must make good Rs. 1000/ - to A.
Agent’s lien on principal’s property: As defined by section 221, “in the
absence of any contract to the contrary, an agent is entitled to retain goods,
papers and other property, whether moveable 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”.
Agent’s right to lien is that he may retain principal’s movable or
immovable property until he is accounted or paid with the amount for his
commission, disbursements and services. The right to lien exists only if the
property has been obtained lawfully and such property has not been delivered
with special directions. Lien is tied with possession of goods, where there is
not possession, there is no lien, but the lien is not lost where the property from
agent has been obtained by fraud or unlawfully without his consent.
Illustration: A directs B to sell certain goods and agrees to pay 5%
commission thereon. B sells the goods. B may retain the amount of 5%
commission from the money recovered by selling goods on account of A.
How agent’s lien is lost?
Agent’s lien is lost if,
1. Agent Enter into an agreement or acting in any character inconsistent
with its continuance.
2. May be waived by the conduct of agent.
Principal’s duty to Agent
(222 to 225)
Agent to be indemnified against consequences of lawful acts : As defined
by section 222, “the employer of an agent is bound to indemnify him against
the consequences of all lawful acts done by such agent in exercise of such
authority conferred (bestowed) upon him”.
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The principal is bound to compensate the agent for any loss or liability
arising in the course of discharging his obligations within the scope of his
authority.
Limit of indemnity: Agent is liable to be indemnified where he sustains any
damage working within the scope of his authority, where he works unknown or
unreasonably, he has not right be indemnified but subject to principal’s
ratification to that act.
Illustration: A, from Karachi directs B, in England to deliver certain goods to
C. A does not send the goods to B, and C sues B for breach of contract. B
informs A regarding suit. A authorizes B to defend the suit. B defends the suit
and he is compelled to pay damages and costs and incurs expenses. A is
liable to indemnify B for such damages, costs and expenses.
Agent to be indemnified against consequences of acts done in good faith:
As defined by section 223, “where one person employs another to do an act
and the agent does the act in good faith, the employer is liable to indemnify
the agent against the consequences of that act, though it causes an injury to
the rights of third persons”.
An agent has the right to be indemnified against all the acts done by him
in good faith.
Illustration: A employs B to sell the goods in A’s possession. B sells the
goods being unaware of the fact that C is the actual owner of the goods. Sues
B for recovery of the value of the goods. In this case, B has the right to be
indemnified by A for the amount paid and express incurred.
Non-liability of employer of agent to do a criminal act: As defined by
section 224, “where one person employs another to do an act which is
criminal, the employer is not liable to the agent, either upon an express or an
implied promise, to indemnify against the consequences of that act”.
Any damages or costs paid in consequence of a crimi nal act done on the
directions of principal are not liable to be indemnified by principal even if there
is an express or implied promise.
Illustration: A employs B to beat C and agrees to indemnify him against the
consequences of the act. B beats C and thereafter B has to pay damages to C
for so doing. A is not liable to indemnify B for such damages.
A requests B, a proprietor of a newspaper, to publish a libel upon C and
promises to indemnify B against all the consequences of the publication and
costs and damages to be incurred. C sues B and B has to pay damages and
also incurs expenses. A is not liable to indemnify B.
Compensation to agent for injury incurred by principal’s neglect : As
defined by section 225, “the principal must make compensation to his agent in
respect of injury caused to such agent by the principal’s neglect or want of
skill”.
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The agent has the right to be compensated for the injuries sustained by
him due to the principal’s neglect or want of skill. However, the principal is not
liable for any compensation for the injuries caused agent’s own neglect.
Illustration: A employs B as a bricklayer in building house and A himself puts
up the scaffolding. The scaffolding is unskillfully put up and B in consequence
hurt. A must make compensation to B.
Effect of Agency on Contracts with third persons
Enforcement and consequences of agent’s contract: As defined by section
226, “contracts entered into through an agent, and obligations arising from
acts done by an agent maybe enforced in the same manner, and will have the
same legal consequences, as if the contracts had been entered into, and acts
done by the principal in person”.
In other words, the acts or contract of the agent, as between the principal
and the third persons are binding on the principal.
Illustration: A directs B to sell certain goods. B sells goods to C knowing that
B is agent for their sale but knowing who is the principal. A is entitled to claim
price of goods from C and C cannot, in the suit by the principal, set-off against
that claim a debt due to himself from B.
A authorizes B to receive money on his behalf. B receives money from C
due to A. C is discharged oh his obligation to pay the sum in question to A.
Principal how far bound, when agent exceeds authority: As defined by
section 227, “when an agent does more tha n he is authorized to do, and when
the part of what he does, which is with his authority can be separated from the
part which is beyond his authority, so much only of what he does as in within
his authority, is binding as between him and principal”.
The principal is only bound by the authorized acts of his agent and not by
unauthorized acts. W here an agent does an act exceeding his authority and
such unauthorized act is separable form authorized act, the principal is only
bound with authorized act and not for unauthorized act.
Illustration: A, an owner of ship and cargo, authorizes B to procure insurance
for Rs. 4,000/- on the ship. B procures a policy of Rs. 4,000/- on the ship and
another for the like sum on the cargo. A is bound to pay premium for the policy
on the ship, but not the premium for the policy on the group.
A directs B to buy a certain house for him. B buys that house and
another house adjacent to that house. A is only liable to pay for the house
indicated by him.
Principal not bound when excess of agent’s authority is not separable: As
defined by section 228, “where an agent does more that he is authorized to do,
and what he does beyond the scope of his authority cannot be separated from
what is within it, the principal is not bound to recognize the transaction”.
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Where an agent does any act exceeding his authority to do and where
unauthorized part is not separable from authorized act, the principal is not
bound by such act and he may repudiate it.
Illustration: A authorizes B to draw bills to the extent of Rs. 200 each. B
draws bills in the name of A for Rs. 1000 each. A may repudiate the whole
transaction.
A authorize B to buy 500 sheep for him, B buys 500 sheep and 200
lambs for one sum of Rs. 6,000/-. The transaction is not separable and A may
repudiate the whole.
Consequences of notice given to agent: As defined by section 229, “any
notice given to or information obtained by the agent, provided it be given or
obtained in the course of the business transacted by him for the principal,
shall, as between the principal and third parties, have the same legal
consequences as if it had been given to or obtained by the principal”.
Any notice or information given to or obtained by the agent for the
principal shall be presumed to have been obtained by the principal himself.
Illustration: A employs B to buy certain goods from C of which C is apparent
owner and B buys them accordingly. B was aware that D is real owner of
goods but A is ignorant about it. B is not entitled to set-off a debt owing to him
from C against the price of the goods.
A employs B to buy certain goods from C of which C is apparent owner.
B was aware of the fact before he was so employed that D is the real owner of
the goods but A was ignorant about it. B may set-off the price against the price
of the goods a debt owing to him from C.
Agent cannot personally enforce, nor be bound by, contracts on behalf of
principal: As defined by section 230, “in the absence of any contract to that
effect, an agent cannot personally enforce contracts entered into by him on
behalf of his principal , nor he is personally bound by them”.
Presumption of contract to contrary: Such a contract shall be presumed to
exist in the following cases:
1. Where the contract is made by an agent for the sale or purchase of
goods for a merchant resident of abroad;
2. Where the agent does not disclose the name of his principal;
3. Where the principal, though disclosed, cannot be sued.
Rights of parties to a contract made bby agent not disclosed : As defined
by section 231, “if an agent makes a contract with a person who neither
knows, nor has reason to suspect, that he is an agent, his principal may
require the performance of the contract; but the other contracting party has, as
against the principal, the same rights as he would have had as against the
agent if the agent had been principal”.
“If the principal discloses himself before the contract is completed, the
other contracting party may refuse to fulfill the contract, if he can show that, if
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he had known who was the principal in the contract, or if he had known that
the agent was not a principal, he would not have entered into the contract”.
If an agent has contracted with third party, who is not known about
principal’s identity; the principal may require the performance of the contract
and the third party will have the same rights against the principal as the party
would have had against the agent if the agent were the principal. In-case
where principal’s identity has been revealed before execution of the contract
by the principal himself, then the third party may refuse to perform if he can
show that if he had known principal’s identity, he would not have entered into
the contract. Further that, when the identity of the principal becomes known,
the third party may either sue the principal or the agent.
Performance of contract with agent supposed to be principal : As defined
by section 232, “where one man makes a contract with another, neither
knowing, nor having reasonable ground to suspect that the other is an agent,
the principal, if he requires the performance of the contract, can only obtain
such performance subject, to the rights and obligations subsisting between the
agent and the other party to the contract”.
Where agent enters into a contract with third party without disclosing the
name of principal and the third party being ignorant about identity of principal
enters into contract that agent is himself the principal, the rights of third party
is protected. The undisclosed principal can e nforce the contract only on the
bases of right and obligations existing between the agent and third party.
Illustration: A owes Rs. 1000/- to B, A enters into a contract with B to sell him
rice worth of Rs. 2,000/-. A enters into the contract on behalf of C, the
principal, whose name A does not disclosed and enters into the contract as he
himself is the principal. B has no k nowledge about identity of C. in such a
case, B can set-off the amount A owes him and C cannot compel B to
purchase the rice without setting off the amount of the debt.
Right of person dealing with agent personally liable : As defined by section
233, “in cases where agent is personally liable, a person dealing with him may
either hold him, or his principal, or bother of them, liable”.
This section confers a right upon a person contracting with an agent that,
he may sue either agent or his principal, or both. W here he has sued any of
them but fails to recover his claim, afterwards he cannot sue the other. But in
case of dismissal of suit, he can sue the other party i.e. agent or principal.
Illustration: A enters into a contract with B to sell him 100 bales of cotton, and
afterwards discovers that B was acting as agent of C. A may sue, either B or
C, or both for the price of the goods.
Consequence of inducing agent or principal to act on belief that principal
or agent will be held exclusively liable: As defined by section 234, “when a
person who has made contract with an agent induces the agent to act upon the
belief that the principal only will be held liable or induces the principal to act
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upon the belief that the agent only will be held liable, he cannot afte rwards
hold liable the agent or principal respectively”.
Where a third party enters into a contract with assurance that he shall
only hold liable either agent or principal, afterwards he will act upon
accordingly.
Illustration: A directs B to buy certain goods for him. B contract C and C
induces B to act on the belief that he will hold principal liable for the price of
goods. C may only sue A for the price and cannot sue B.
Liability of pretended agent: As defined by section 235, “a person untruly
representing himself to be the authorized agent of another, and thereby
inducing a third person to deal with him as much agent, is liable, if his alleged
employer does not ratify his acts, to make compensation to the other in
respect of any loss or damage which he has incurred by so dealing”.
An agent who pretends to be an authorized person is liable to make
compensation to the third party for any loss or damage which he incurs by so
dealing.
Illustration: A buys certain goods from B, pretending himself to be an agent
for C. Later C does not ratify the act of A. A is liable to make compensation to
B.
Person falsely contracting a agent not entitled to performance : As defined
by section 236, “a person with whom a contract has been entered into in the
character of agent is not entitled to require the performance of it if he was in
reality acting not as agent, but on his own account”.
If a person enters into a contract purporting himself an agent of
undisclosed principal but in real he is himself a principal and acts on his own
account is not entitled to claim performance of contract.
Illustration: A contract with B to sell certain goods from him and A introduces
himself as an agent, but in real he is principal himself. A is not entitled to claim
performance of contract from B.
Liability of principal inducing belief that agent unauthorized acts were
authorized: As defined by section 237, “when an agent has, without authority,
done acts or incurred obligations to third persons on behalf of his principal, the
principal is bound by such acts or obligations if he has by his words or conduct
induced such third persons to believe that such acts and obligations were
within the scope of agent’s authority”.
Whereby principal induces, by his words or conduct, unauthorized acts of
agent as authorized, he is bound by such acts and obligations.
Illustration: A, an agent of B, enters into a contract with C for which he is not
authorized. B gets to know about this dealing but does not take steps to clarify
his position. B would be liable for the transaction performed by A on his behalf.
A, consign goods to B for sale and gives him instructions not to sell
under a fixed price. C, being ignorant of C’s instructions enters into a contract
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with B to buy the goods at a price lower than the reserved price. A is bounded
by the contract.
Effect, on agreement, of misrepresentation or fraud by agent : As defined
by section 238, “misrepresentation made or frauds committed, by agent acting
in the course of their business for their principals, have the same effect on
agreements made by such agents as if such misrepresentation or frauds had
been made or committed by the principals; but misrepresentations made or
fraud committed, by agents, in matters which do not fall within their authority,
do not affect their principal”.
Illustrations: A, the captain of B’s ship, signs bills of lading without having
received on board the goods mentioned herein. The bills of lading are void as
between B and the pretended consigner.
A, an agent of B for the sale of goods, induces C to buy them by a
misrepresentation, which he was not authorized by B to make. The contract is
voidable, as between B and C, at the option of C.
General and particular lien:
Particular lien is one in which the person has a right to retain the
possession of goods for which the charges are due. E.g. A delivers gold to B
for making jewelry, B is entitled to retain jewelry until he is paid for the
services rendered. W hereas, general lien is one in which bailee is entitled to
retain any goods bailed to him for any amount due t o him in respect of those
goods or any other goods. E.g. A has two accounts in a bank, a saving and
credit account. In saving account he has balance of Rs. 500/ - while an
overdraft of Rs. 1,000/- lies in his current account. The bank can exercise the
right of lien on the savings account for the amount due on the current account.
Lien is tied with possession of goods, where there is not possession,
there is not lien.
What are the kinds of lien?
Following are the kinds of liens in this act:
1. Lien of finder of goods, sec 168
2. Particular lien of bailees, sec 170
3. General lien of bakenrs, factors, wharfingers, attorneys, and policy -
brokers, sec 171
4. Lien of Pawnees, sec 173 and 174
5. Lien of agents, sec 221.
DIFFERENCES
Sr. Indemnity Guarantee
1. It is a promise to compensate It is a promise to perform to pay or
other party for any loss suffered perform act of another, in case of his
by him by act of promisor or any default.
other person .
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2. There are two parties, i.e. There are three parties, i.e. debtor,
indemnifier and indemnified. creditor and surety.
3. The indemnifier has primary The surety has the secondary
liability. liability.
4. The purpose of contract of The purpose of contract of guarantee
indemnity is to save the party is to assure the creditor that either
from suffering loss. the contract will be performed or
liability will be discharged.
5. Liability arises when contingency Liability already exists.
occurs.
Sr. Bailment Pledges

1. Goods are transferred from one Goods are delivered to act as
person to another for specific security against the debt owed by one
purpose. person to another.
2. Consideration may or may not be Consideration is always present.
present.
3. The party whom goods are The party whom goods are being
delivered has no right to sell delivered as security has right to sell
them. them if the party delivering goods
fails to pay the debt.
4. Its purpose is safe keeping or It is a security against payment of
repair, etc. debts.
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Law of Contract, 1872 II

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INDEMNIFY: Indemnity means “to protect or compensate someone for any

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1. to recover all damages which he may be compelled to pay in respect of

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2. Discharge of surety by release or discharge of principal debtor : As

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contract of suretyship is entered into, whether the surety knows of the

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Implied promise to indemnify surety: As defined by section 145, “in every

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3. Change of possession: the possession must be affected by contract of

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does not make such disclosure he is responsible for damage arising to

Illustration: A delivers goods to B for safe custody till 1 s t January, 2018.

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4. Effect of mixture, with bailor’s consent, of his goods with bailee’s :

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Illustration: A delivers his bicycle to B for some purpose which was to

Illustration: A, B and C joint owner of a cow lend it to D for a week. After

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In simple words, if bailee renders any service giving him right to

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debt, or all necessary expenses incurred in respect of possession or

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3. Pledge where pawnor has only a limited interest: As defined by

Suits by Bailees or Bailors against wrong-doers

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authority is said to be implied when it is to be inferred from the circumstances

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3. Where there is a custom of trade to that effect.

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Illustration: A authorized his agent B to purchase 50 sacks of flour for him. B

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absence of an express contract be terminated to the prejudice (bias) of such

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A appoints B as his agent to manage his shop in Hyderabad. A gives no

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Here agent has been empowered to retain money received on principal ’s

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An agent who is misconducts in discharge of his duties is not liable to

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Sr. Bailment Pledges

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