LAW OF

CONTRACT-II
Anchal Mittal (Asst. Professor)

DISCLAIMER: No copyright violation is Intended. This

presentation is purely for educational purpose.
RESOURCES TEXT BOOK :
1. Avtar Singh, Law of Contract and Specific Relief, Eastern Book Company,
Lucknow, 2020.
2. Pullock & Mulla on Indian Contract and Specific Relief Acts, LexisNexis, 2013.
3. Avtar Singh , Introduction to Law of Partnership, Eastern Book Company,
Lucknow,2019.
4. Avtar Singh, Sale of Goods, Eastern Book Company, Lucknow, 2021.
5. Avtar Singh, Introduction to Negotiable Instruments, Eastern Book Company,
Lucknow, 2016.
6. VSLLS Case study Manual: Law of Contract-II
INDEMNITY
&

GUARANTEE
INDEMNITY
CHAPTER VIII
Meaning
It is protecting against loss, esp. in the form of a promise to pay, or payment for loss of
money, goods, etc.
The person who promises to indemnify is known as indemnifier, and
The person in who favour such a promise is made is known as indemnified or indemnity
holder.

indemnifier indemnified or
indemnity
holder.
Promisor Promisee
CONTRACT OF INDEMNITY
Chapter VII
According to Section 124 Contract of indemnity is defined to be ‘ 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 other person is called a ‘contract
of indemnity’.

Illustration
A contracts to indemnify B against the consequence of any proceedings which C may take against B
in respect of a certain sum of 200 rupees. This is contract of indemnity.

Case Law: Gajanan Moreshwar v. Moreshwar Madan, 1942.

 RIGHTS OF INDEMNITY-
HOLDER
promisee All damages (pay in any suit in respect of any matter to
in a which the promise to indemnify applies)
contract
of
indemnit
y is All costs (payment in in bringing or defending suit)
entitled
to
recover
from the All sums (paid under the terms of any compromise of any
promisor such suit)
 CONTRACT OF GUARANTEE
According to section 126 of the Indian Contract Act, 1872 a “Contract of guarantee’
is defined as:
A “contract of guarantee” is a contract to perform the promise, or
discharge the liability, of a third person in case of his default.

Objective of Contract of Guarantee: To provide additional security to

the creditor.
Example: Mr. ABC takes a loan from a bank. Mr. ABC promises to the
bank to repay the loan. Mr. XYZ makes a promise to the bank saying
that if Mr. ABC does not repay the loan then I will pay.
 2

CONT..
Parties In
Contract Of
Mr. XYZ Guarantee
(Secondary liability) Bank

Surety Principal Debtor Creditor

1
3 Mr. ABC
FEATURES OF CONTRACT OF
GUARANTEE
The Contract may be either oral or written (Section 126),
 There should be a principle debtor (primary liability)
Consideration for Guarantee (Section 127)
Consent of the surety should not have been obtained by
misrepresentation (Section 142) or concealment (Section 143).
GUARANTEE : KINDS

Specific guarantee
(single debt or specific transaction &
is to come to an end when the
guaranteed debt is paid or the promise
is duly performed)
Continuing guarantee
(guarantee which extends
to a series of transactions is
called a continuing
guarantee (Section129))
CONTINUING GUARANTEE &
REVOCATION OF CONTINUING
GUARANTEE
According to section 129, A guarantee which extends to a series of transactions, is called a
“continuing guarantee’’.
Illustrations: A, in consideration that B will employ C in collecting the rent of B‟s zamindari,
promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment
by C of those rents. This is a continuing guarantee.
Revocation of Continuing Guarantee: (Section 130)
A continuing guarantee can be revoked for future transactions not existing debts (final).
Revoked by the surety, as to future transactions,
by giving notice to the creditor,
The death of the surety operates, as a revocation of a continuing guarantee, so far as regards
future transactions. (in the absence of any contract to the contrary).(Section 131)
 SURETY: LIABILITY &
DISCHARGE
According to Section 128 the liability of the surety is co- extensive with that of the principal debtor,
unless it is otherwise provided by the contract.
Illustration: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges
which may have become due on it.

Discharge of surety by variance in terms of contract (Section 133)

Discharge of surety by release or discharge of principal debtor (Section 134)
Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal
debtor (Section 135)
Surety is discharged by creditor’s act or omission impairing surety’s eventual remedy (Section
139)
CONT.
Creditor’s forbearance to sue does not discharge surety (Section 137)
Release of one co-surety does not discharge others (Section 138)
Discharge of surety by creditor’s act or omission impairing surety’s eventual
remedy (Section 139)
Rights of surety on payment or performance (Section 140)
Surety’s right to benefit of creditor’s securities (Section 141)

State of M.P v Kaluram,1967

Bank of Bihar Ltd. v Damodar Prasad and Anothers,1969
DISTINCTION BETWEEN
INDEMNITY AND GUARANTEE
- In contract of Indemnity there are
two parties.
Indemnity
- One Contract: Contract between
indemnifier and indemnified.
- Contract of Indemnity is A contract
which one party promises the other
from loss caused to him by the
contract of the promisor himself, or
by the conduct of any other person.
(section 124)
- The liability arises on the
happening of a contingency.
- The object of Contract of
Indemnity is to reimburse the loss.
- In guarantee there are three
parties
- Three Contracts: 1) contract
between Surety and Creditor 2)
contract between Principle debtor
and Surety 3) contract between
Guarantee  
Creditor  and Principle debtor    
-A “contract of guarantee” is a
contract to perform the promise,
or discharge the liability, of a
third person in case of his
default.  (Section 126)
-The liability arises, if there is
default by Principle debtor.
- The object is to provide
security to creditor.
CONTRACT OF
BAILMENT
 BAILMENT
CHAPTER IX
According to section 148 of the Indian contract act 1872,
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.
For example, Ram delivering his car for
Service at the car service.
Bailor (The
person delivering Bailee (The person
the goods) to whom they are
delivered)
 Bailment
Bailment is a involves transfer
contract of possession of
goods

Goods must be The bailor has the

ESSENTIAL
delivered to other right to the S OF
person return of goods
BAILMENT

The transfer
Bailment is of
under bailment is
movable goods
temporary
TYPES OF DELIVERY

Actual Constructive Token/Symboli

Delivery Delivery c Delivery
TYPES OF BAILMENT

Non Gratuitous
Gratuitous Bailment Bailment (Bailment
for Reward)
 CONT.
Ultzen vs. Nicols, 1894
Facts: A customer went to a restaurant to dine there. When he entered the restaurant, a waiter without being
asked for help, took his coat. The waiter, who worked in the restaurant, hung the coat on a hook behind the
customer. When the customer rose to leave, the coat was no longer there on the hook.
Held: The waiter had merely acted in courtesy to a customer of the restaurant. However, once the waiter
took the coat in his possession, he had relieved the customer of its care. Thus, the waiter took on the
responsibility of a bailee. Further, it was the waiter who selected the place where the coat was to be hung
without any direction from the gentleman. Therefore, the restaurant keeper was held liable for the loss of
the coat.
If the customer had instructed the waiter where and how the coat should be put, the result, perhaps, would
have been otherwise.
To create a bailment, the bailee must intend to possess and in some way physically possess or control the
bailed goods or property. In a situation where a person keeps the goods in possession of another person but
in fact, continues to have control over such goods, there is no delivery for the purpose of bailment.
 CONT.
Kaliaporumal Pillai vs. Visalakshmi,1938
Facts: A lady, A, gave her jewelry to a goldsmith to melt and use in making new jewelry for
her. Every evening, A received the semi-finished jewelry from the goldsmith and put it in a
box in the goldsmith’s room. Then, A would lock the box herself and leave the goldsmith’s
place with the key in her possession. One night, the box so locked was stolen from the room
and the jewelry within it was lost. A brought an action against the goldsmith.

Held: The goldsmith was not liable as any bailment in this case came to an end when the
lady received the semi-finished jewelry from the goldsmith every evening. Leaving the
locked box in the defendant’s premises was not enough to constitute delivery under Section
149 especially since the lady kept the keys with herself. Without legal possession, there
cannot be any bailment and there was no duty on the goldsmith to take care of the box.
 BAILOR: RIGHTS
Right to recover damages-Bailor can claim for the damages that arise due to bailee’s negligence. He can
also claim damages arising due to unauthorized use of goods. (Sec. 152 possess a duty on he bailee to take
care of the goods)
Example- A bailed some goods to Z but due to the negligence of Z the goods were stolen. A can recover the
damages

Right to terminate bailment- According to Sec. 153 the bailor can terminate the bailment if the bailee does
any act which is inconsistent with the terms of bailment.

Compensation for unauthorized use of goods by the bailee (S. 154)

Compensation incases of goods of bailor and bailee are mixed by bailee (Sec. 155-157)
CONT…
Right to recover goods (Gratuitous bailment) [Sec. 159]
Right to get the goods back- According to Sec. 160 on the expiry of the agreed duration
of bailment or when the objective of bailment or when the objective of bailment has been
fulfilled the bailor is entitled to get back the goods under bailment.
Example- S give a car to M on hire for 5 days. M fails to return on 5th day. S can claim
damages.
Right to claim increase- The Bailor can claim any increase or profit, which may accrued
from the bailed goods. (Sec. 163)
Example-A bailed a cow to K. Cow gave birth to a calf. A can claim cow along with calf.
BAILOR: DUTIES
It is the duty of a bailor to disclose all faults. If bailor fails to disclose such faults
then he will be responsible for the damage caused to goods or loss suffered by the
bailee.
The bailor is under the duty to pay the extraordinary expenses incurred by the
bailee for such bailment.
It is the duty of the bailor to indemnify the bailee for the cost incurred due to
the defective title of goods bailed to the bailee.
It is the duty of the bailor to accept the goods after the purpose for which such
goods were bailed is accomplished.
BAILEE : RIGHTS

Right Right Right Right

Right to recover Right to recover Right to have a Right of suit

necessary expenses compensation from lien on the goods against wrongdoer
incurred on the bailor (Sec. bailed (Sec. 170- (Sec. 180)
bailment (Secs. 164) 171)
158)
BAILEE : DUTIES
Duty to take reasonable care of the goods bailed (Secs. 151-152)
Duty not to make unauthorized use of the goods bailed (Secs.153-157)
Duty not to mix bailor’s goods with his own goods (Secs. 155-157)
Duty to return the goods on fulfilment of the purpose (Sec. 159-161, 165-167)
Duty to delivery to the bailor increase or profit on the goods bailed (Sec. 163).
 CONT.
Right to terminate bailment- The Bailor has a right to terminate the bailment if Bailee does
any act which is against the terms and conditions of bailment.
Example- A gives his car on hire to J for personal use but J start driving it as carriage. A can
terminate contract.
Right to sue-Bailor can sue Bailee if he fails to return goods or breaches contract.
Example-A gives his mobile to Z for repairing. Z sold it to T. A can sue Z.
Compensation- If the Bailee without the permission of Bailor mixes the goods of Bailor with
his own goods in such a way that it becomes impossible to separate them, the Bailor has a right
to claim for the compensation for the loss of goods.
Example-M bailed 2 bags of Basmati Rice to H. H mixed them with his own rice that was of
cheap quality. M can claim for the compensation.
LIEN
Lien in its elementary sense is a right of a person to retain the possession of
goods until the demands of the possessor are satisfied. (Section 170 and 171)

The following are the cases where the rights of Lien have been recognized:
 An unpaid seller had a Lien over the goods in possession.
 The agent had a lien on the property of the principal for unpaid
remuneration.
 A bailee had a lien on the property in his possession.
LIEN : KINDS

Particular lien (Section 170) General lien (Section 171)

the person reserves the It is a right to retain the
right to retain the possession for the payment
possession of the goods of the sum which is owed
until the charges due in and even if the payment is
respect of the property are not connected with the
paid. property in possession.

Case: R.D. SAXENA VS BALRAM PRASAD SHARMA,2000

 Anchal Mittal (Asst. Professor)
FINDER OF
GOODS &
DISCLAIMER: No copyright violation is Intended. This
PLEDGE
presentation is purely for educational purpose.
FINDER OF GOODS
The finder of the lost goods is a person who finds the goods of another person
presumably not knowing the true owner at that time.
The position of a finder of lost goods is exactly that of a bailee.
Rights of Finder of Goods
Right of lien (Section 168 of the Indian Contract Act)
Sue for a specific reward Section 168 of the Indian Contract Act)
When finder of thing commonly on sale may sell it (Section 169 of the Indian
Contract Act)
Duties of Finder of Goods-Duties of the finder of goods are the same as of the bailee,
namely-Duty to take reasonable care, not to make unauthorised use, not to mix goods
with his goods, Duty to Return the goods, Duty to return the increase or profit from
goods.
 PELDGE
Pledge or pawn is a contract whereby an article is
deposited with a lender of money or promisee as security
for the repayment of a loan or performance of a promise.
The bailor or depositor is called the Pawnor and the bailee
or depositee the “Pawnee” (Section 172).
The following are the essential ingredients of a pledge:
 (i) The property pledged should be delivered to the pawnee.
 (ii) Delivery should be in pursuance of a contract.
 (iii) Delivery should be for the purpose of security.
 (iv) Delivery should be upon a condition to return.
 RIGHTS &DUTIES OF
PAWNOR & PAWNEE
Rights of Pawnor are- Right to redeem goods, Right of the pawnor to get the
compensation.

Duties of Pawnor are as follows:

 Duty to pay the loan
 Duty of the pawnor to pay the extraordinary expenses to the pawnee
 Duty to pay the compensation or damages to the Pawnee

 Rights of Pawnee- Right to retain Goods, right to get the compensation, Right to
Sell, To get extraordinary expenses incurred by him.

 Duties of Pawnee- Duty to take reasonable care, Duty to give back the goods
after repayment of the loan, Duty not to make unauthorized use of goods, Duty to
give back the owner any increment in the goods, Duty not to mix the goods.
 PLEDGE BY NON-
OWNERS
Ordinarily, the owner of the goods would pledge them to secure a
loan but the law permits under certain circumstances a pledge by a
person who is not the owner but is in possession of the goods.
Therefore, a valid pledge may be created by the following non-
owners-
A mercantile agent
Pledge by co-owner in possession
Pledge by person in possession under a voidable contract
Pledge where pawnor having limited interest
Pledge by seller or buyer in possession after sale
LAW OF
AGENC
Y
 AGENCY
CHAPTER X
‘Agent’ according to Section 182 is a person employed to do any act for another or to represent
another in dealing with third persons.
‘Principal’ according to Section 182, is the person for whom such act is done, or who is so
represented.
For Example- A, a storeowner, delegates B to buy some goods on his behalf. Here, A is the principal
and B is the agent, and the person from whom the goods are bought is the ‘Third Person’.
Any person who has attained the age of majority and has a sound mind can appoint an agent as per
Section 183. Minors and persons of unsound mind cannot appoint an agent.
Similarly, the person who has attained the age of majority and has a sound mind can become an
agent as per Section 184. A sound mind and a mature age is a necessity because an agent has to be
answerable to the Principal.
According to Sec. 185 Consideration is not necessary to create an agency.
 CREATION OF AGENCY
 Direct (express) appointment (Sec. 186): The standard form of creating an agency is by direct
appointment. When a person, in writing or speech appoints another person as his agent, an agency is
created between the two.
Implication (Sec. 186/187): When an agent is not directly appointed but his appointment can be
inferred from the circumstances, an agency by implication is created.  
Necessity (Sec. 189): In a situation of necessity, one person can act on behalf of another to save the
person from any loss or damage, without expressly being appointed as an agent. This creates an agency
out of necessity.
Estoppel: If one person behaves in such a manner in front of a third person, as to make someone believe
he is an authorized agent on behalf of someone, an agency by estoppel is created.
Ratification: When an act of a person, who acted as another person’s agent (on his behalf) without his
knowledge is later ratified by that person, this creates an agency by ratification between the two.
Read Section 186 to 190
 AGENCY : TERMINATION &
ENDS
When the agent’s authority is revoked by the Principal
When the agent renounces the business of the agency
When the business of the agency is completed
When either of the parties dies or becomes mentally disabled
When the Principal is adjudicated an insolvent
Performance of the Contract of agency.
By agreement between the Principal and Agent
By revocation of the authority by the Principal
By renunciation of the authorities by the Agenct

*Read Sec. 201 – 210

 VICARIOUS LIABILITY:
PRINCIPAL
Section 238 provides that when there is fraud or misrepresentation by an agent while making an
agreement on behalf of the principal, apart from affecting the validity of the contract, an agent's fraud or
wrongful act makes a principal liable if the agent is acting in the course of the principal’s business.
Principal's liability is based on the rule "Qui facit per alium facit per se", which means that the act of
an agent is the act of the principal.
In the case of Lloyd v. Grace Smith & Co. In this case one Mrs. Lloyd, who owned two cottages but
was not satisfied with the income from them, went to the office of Grace, Smith & Co., a firm of
solicitors, to consult them about the matter of her property. She was attended by the firm's managing
clerk. The managing clerk, who was acting as firm's agent, advised her to sell the two cottages and then
invest the money in a better way. She was asked to sign two documents, which were supposed to be sale
deeds. In fact, the documents got signed were gift deeds in the personal name of the managing clerk.
The managing clerk then disposed of the cottages and misappropriated the proceeds. He had acted
without the principal's knowledge and solely for his personal gain. It was held that since the agent was
acting in the course of the principal's business, the principal was liable for fraud.
CONT..
State Bank of India v Shyama Devi AIR 1978 SC
The plaintiff’s husband gave some amount and cheques to his friend, one Mr.
Shukla. Who worked as an clerk in State Bank of India. The cheques & amount was
given to Mr. Shukla to deposit it in the plaintiff’s account maintained in the State
Bank of India. No proper receipt for the deposits was obtained. The bank employee
misappropriated the amount.
It was held by the Apex Court that the employee, when he committed the fraud, was
not acting in the scope of bank’s employment but in his private capacity as the
depositor’s friend, therefore, the defendant bank could not be made liable for the
same.