INDEMNITY AND GUARANTEE

Contract of Indemnity:

“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”.

Rights of Indemnity Holder when sued:

The indemnity holder can recover from the indemnifier, all damages, all costs of the suit and compromise money, if any, provided he acted prudently or with due authority of the indemnifier.

Contracts of Guarantee

“A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default.”

Surety : Gives the guaranteePrincipal Debtor : his fault is guaranteedCreditor : is given the guarantee.

Consideration for Guarantee

“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”

Contract of Indemnity Contract of Guarantee

• 1. Two parties• 2. Reimbursement of loss

• 3. Only one contract• 4. Liability is primary• 5. acts independently

without any request.• 6. No existing debt• 7. Cannot sue third party for

loss directly

• 1. Three parties• 2. Security of debt

or good conduct• 3. Three contracts• 4. Liability is secondary• 5. surety gives guarantee at

the request of debtor• 6. existing debt or duty• 7. After debt is discharged,

can proceed against the principal debtor.

Liability of surety

• “the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.”

Continuing Guarantee

• When guarantee is given for a single specific transaction, it is called ‘ordinary or specific guarantee’. When the guarantee extends to series of distinct and separate transactions, it is called a ‘continuing guarantee’.

Revocation of Continuing guarantee

• 1. By notice of revocation by the surety.• 2. By death of surety.• 3. In the same manner as the surety is

discharged.– (a) by variance in terms of contract– (b) by release or discharge of principal debtor– (c) by arrangement with principal debtor– (d) by creditor’s act or omission impairing surety’s

eventual remedy

Rights of surety

1. Surety’s rights against the creditor:– (a) Right to benefit of creditor’s securities– (b) Right to claim set-off if any

2. Surety’s rights against the principal debtor:(a) Right of subrogation(b) Right to claim indemnity

3. Surety’s rights against co-sureties (a) Where there are sureties for the same debt for similar amount(b) Where there are sureties for the same debt for different sums

Discharge of Surety from Liability• 1. Notice of revocation• 2. Death of Surety• 3. Variance in terms of contract• 4. Release or Discharge of Principal Debtor• 5. Arrangement by Creditor with principal debtor

without surety’s consent• 6. Creditor’s act or omission impairing surety’s

eventual remedy• 7. Loss of Security• 8. Invalidation of the contract of guarantee

BAILMENT

“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.”

Essential Features:

• 1. delivery of movable goods from one person to another

• 2. the goods are delivered for some purpose• 3. delivered subject to the condition that

when the purpose is accomplished the goods are to be returned in specie or disposed of according to the directions (original or altered) of the bailor.

Kinds of Bailment1. Based on ‘benefits’

(a) Bailment for the exclusive benefit of the Bailor. (safe custody without compensation)

(b) Bailment for the exclusive benefit of the Bailee. (borrowing a fountain pen)(c) Bailment for the mutual benefit of the Bailor and the Bailee (repair, hire, tailoring)

2. Based on ‘reward’ (a) Gratuitous bailment.( lending of book or pen or depositing

goods without charge ) (b) Non-gratuitous bailment. (car given on hire, cloth given for

stitching.)

Consideration for ‘Gratuitous Bailment’

“The detriment suffered by the bailor in parting with the possession of the goods is sufficient consideration to support the promise on the part of the bailee to return the goods”.

Sale, License and Bailment distinguished

Sale and Bailment:In sale, ownership is transferred to the buyer, no

obligation to return the goods.In Bailment, ownership is not transferred, Bailee

must return the goods.

License and Bailment:In license, there is no delivery of goods to the

licenser, merely his premises are used.In Bailment goods are delivered to the Bailee who

is responsible for their safety.

Duties of Bailee

• 1. Duty to take reasonable care of goods delivered to him

• 2. Duty not to make unauthorised use of goods entrusted to him

• 3. Duty not to mix goods bailed with his own goods

• 4. Duty to return the goods• 5. Duty to deliver any accretion to the goods

Duties of Bailor

• 1. Duty to disclose faults in goods bailed• 2. Duty to repay necessary expenses in case of

gratuitous bailment• 3. Duty to repay any ‘extraordinary’ expenses

in case of non-gratuitous bailment• 4. Duty to indemnify bailee• 5. Duty to receive back the goods

Rights of Bailee

• 1. Enforcement of bailor’s duties• 2. Right to deliver goods to one of several

joint bailors• 3. Right to deliver goods, in good faith, to

bailor without title• 4. Right of lien

– Bailee’s particular lien– Bailee’s general lien

Rights of Bailor

• 1. Enforcement of Bailee’s duties– a) Right to claim damages for loss due to bailees’s negligence– b) Right to claim compensation for damage due to unauthorised use of the

goods– c) Right to claim compensation for loss due to unauthorised mixing of goods– d) Right to demand return of goods on expiry of time or fulfilment of purpose– e) Right to any natural accretion to the bailed goods.

• 2. Right to terminate bailment if the bailee uses the goods wrongfully

• 3. Right to demand return of goods at any time in case of gratuitous bailment

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Bailee’s particular lien

• “Where the bailee has, in accordance with the purpose 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 a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.”

• Besides Bailee, others who can claim the right of particular lien:

Finder of goods, Pawnee, Agent, Unpaid seller

For exercising Bailee’s particular lien, what conditions must be fulfilled?

For exercising this particular lien, the following conditions must be fulfilled:(i) The bailee must have rendered some service in relation to the thing bailed, must be entitled to some remuneration for it, which must not have been paid.(ii) The service rendered by the bailee must be one involving labour and skill, so as to confer additional value on the article. No lien if value is not increased.(iii) Services performed in full, as desired by the Bailor, within the agreed time.(iv) There must not be an agreement to perform on credit.(v) Goods must be in the possession of the Bailee. No possession, no lien.(vi) There must not be any contract to the contrary.(vii) While retaining the article, he cannot charge for keeping it.(viii) Non-payment of extra-ordinary expenses incurred will not give the right. He should sue for them.

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Bailee’s General lien

“Right of general lien entitles a person to retain possession of any of those goods belonging to another for any amount due to him whether in respect of those goods or any other goods”.

• The following bailees have a ‘general lien’:Bankers, Factors, Wharfingers, Attorneys of High Court, Policy Brokers and anyone having an express contract to that effect.

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Rights of Bailor

• 1. Enforcement of Bailee’s duties– a) Right to claim damages for loss due to bailees’s negligence– b) Right to claim compensation for damage due to unauthorised use of

the goods– c) Right to claim compensation for loss due to unauthorised mixing of

goods– d) Right to demand return of goods on expiry of time or fulfilment of

purpose– e) Right to any natural accretion to the bailed goods.

• 2. Right to terminate bailment if the bailee uses the goods wrongfully

• 3. Right to demand return of goods at any time in case of gratuitous bailment

Termination of Bailment

• 1. When stipulated period expires

• 2. When specific purpose is fulfilled

• 3. When bailee does any act inconsistent with the terms of bailment

• 4. A gratuitous bailment can be terminated anytime – loss in excess of benefit to be made good.

• 5. A gratuitous bailment is terminated by the death of either bailee or bailor.

Finder of Lost Goods

“A person who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee.”

• Duties:1. Duty to find true owner2. Duty to take reasonable care of the goods as a bailee

• Rights:1. Right to retain possession of the goods until true owner is found2. Right of lien over the goods for expenses3. Right to sue for reward4. Right of sale

a) when the goods are in danger of perishingb) when lawful charges of finder exceeds two-thirds of its valuesurplus if any belongs to the true owner.

Pledge

• “A bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’.

• “In pledge, bailor is called the pawnor;bailee is called the pawnee”

Bailment and Pledge• 1. Pledge is bailment for

specific purpose i.e. to provide security for a loan or for the fulfilment of an obligation.

• 2. Pledgee has a right of sale on default after giving notice.

• 3. Pledgee has no right to use the goods pledged.

• 1.Bailment is for repairs, safe-custody etc. – purpose is quite different from the two purposes under pledge.

• 2. No such right of sale. Bailee may retain the goods or sue the bailor for non-payment of dues.

• 3. If the nature of transaction so requires, bailee has no such restriction to use goods.

Rights of Pawnee• 1. Right of retainer• 2. Right of retainer for subsequent advances• 3. Right to extraordinary expenses• 4. Right to sue the pawnor or sell the goods on

default of the pawnor– A) suit against pawnor for recovery of dues– B) sell the goods after giving proper notice

• Reasonable notice is a statutory obligation.• Pawnee cannot sell the goods to himself• If full claims are not met out of proceeds, he may recover the

balance. But if surplus, he must pay the surplus to pawnor.

Duties of Pawnee

Duties of Pawnee are similar to Bailee

• 1. To take reasonable care of the goods pledged.

• 2. Not to make any unauthorised use of the goods pledged

• 3. Not to mix the goods pledged with his own goods.

• 4. Not to do any act in violation of the terms of the contract.

• 5. To return the goods pledged on receipt of full dues

• 6. To deliver any accretion to the pledged goods.

Pledge by Non-ownersPledge in the following cases of non-

owners will be valid.1. Mercantile Agents.

• 2. Person in possession under voidable contract.

• 3. Pledgor having limited interest• 4. Seller in possession of goods after

sale• 5. Buyer in possession of goods under

an ‘agreement to sell’• 6. Co-owner in possession

AGENCY“An agent is a person employed to do any act for another or to

represent another in dealings with third persons. The person for whom such act is done or who is represented, is called the principal.”

The contract which creates the relationship of ‘principal’ and ‘agent’ is called an ‘agency’.

It is only when one acts as a representative of the other in business dealings so as to create contractual relations between that other and third persons, that he is an agent and there is an agency.

General Rules of Agency• 1. Whatever a person competent to contract may do by

himself, he may do through an agent.

Exceptions: Acts involving personal skill and qualifications.Work is obviously personal viz. marriage, painting.

• 2. “The acts of the agent are, for all legal purposes, the acts of the principal”. “He who does through another, does by himself”.

“Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal”.

• Who may employ an Agent?

• “Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent.”

• Who may be an Agent?

• “As between Principal and third persons, any person may become an agent”. Even a minor or person of unsound mind can be appointed an agent. Since act of the agent is the act of the principal, the principal runs a great risk in appointing minor or persons of unsound mind as agent.

• No consideration is necessary to create an ‘Agency’

Kinds of Agents• 1. General Agent – to do all acts connected with a particular

business or employment e.g. Manager

• 2. Special Agent – only for particular transaction with limited power.

• 3. Universal Agent – unlimited authority.

• 4. Mercantile Agents e.g.Factor, Commission Agent, Del-credere Agent, Broker.(Del-credere : both as surety & as agent)

• 5. Non-Mercantile Agents e.g. advocates, attorneys, insurance agent, wife.

Mercantile AgentA mercantile agent is one who has authority either to sell goods or

buy goods or to raise money on the security of goods.a) Factor: A factor is a mercantile agent to whom goods are entrusted for sale.

He sells the goods in his own name upon such terms as he thinks fit. He may also pledge the goods.

b) Commission agent: He is a mercantile agent who buys or sells goods for his principal at the best possible terms in his own name and receives a commission for his services. He may or may not take possession of goods.

c) Del-credere agent: In consideration of an extra commission, stands guarantee for his principal to third persons. He acts as both a surety as well as an agent.

d) Broker: He acts as a connecting link and brings the two parties – buyer and seller – together in a bargain. He makes contracts in the name of his principal. He is entitled to brokerage if the transaction materialises.

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Creation of Agency

• 1. By Express Agreement

• 2. By Implied Agreement

Agency by Implied Agreement

• 1. Agency by estoppel• 2. Agency by holding out• 3. Agency by necessity• 4. Agency by ratification

Agency by necessity:

• “An agency by necessity is conferred by law in certain cases, where a person is faced with an emergency in which the property or interests of another are in imminent danger, and it becomes necessary in order to preserve the property or interests, to act before the instructions of the owner can be obtained. The law assumes the consent of the owner to the creation of the relationship of principal and agent.” – Bowstead.

• a) there should be a real necessity• b) impossible to communicate with the principal within the time frame.• c) the person should act bonafide in the interests of the principal.

Agency by necessity arises 1. Where the agent exceeds his authority, bonafide, in

an emergency e.g.perishing fruits disposed off instead of transporting.

2. Where the carrier of goods acting as a bailee, does anything to protect or preserve the goods, in an emergencye,g,public carrier developing engine trouble, pledges a part of the goods to raise money for repairs. Pledge is valid.

3. Where husband improperly leaves his wife without providing means for her sustenance.Wife can pledge husband’s credit for necessaries even against husband’s wishes.

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Essentials of a valid ratification(confirm/accept an

agreement made in one’s name)• 1. The agent must purport to act as agent for a

principal who is in contemplation.• 2. There should be an act capable of ratification.• 3. The principal must be in existence.• 4. The principal must be competent to contract.• 5. The principal must have full knowledge of material

facts.• 6. Whole transaction must be ratified.• 7. Ratification must be done within a reasonable time.• 8. Ratification must not injure a third person.

Extent of Agent’s Authority

• 1. Actual Authority: express or implied• 2. Ostensible or apparent authority:• “An agent having an authority to do an act or to

carry on a business has authority to do every lawful thing which is necessary in order to do such act, or which is usually done in the course of conducting such business.”

• 3. Authority in emergency – to do all such acts for protecting principal from loss as would be done by ordinary prudent person.

Delegation of Agent’s Authority:“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 agency, a sub-agent must, be employed.”

Sub-Agent:

“A sub-agent is a person employed by, and acting under the control of, the original agent in the business of agency”

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Delegation of Agent’s Authority

“delegatus nonpotest delegare” meaning“delegate cannot further redelegate”

Exceptions to this general rule :1. Where principal has expressly permitted2. Where principal has impliedly allowed.3. By ordinary custom of trade, sub-agent can be

employed – stock brokers employing clerks to do the job.

4. Very nature of agency makes it imperative to appoint sub-agents.-Manager employing sales assistants.

5. Acts to be done are purely ministerial – clerical routine work.

6. Unforeseen emergencies require appointment of sub-agents.

Consequences of appointing a Sub-Agent:When properly appointed:a) The principal is bound to third parties for his acts, as if originally

appointed by Principal.b) Agent is responsible to the Principal for the acts of Sub-Agent.c) Sub-agent is responsible for his acts to the Agent not to the Principal. In

case of fraud or willful wrong, he is directly responsible to the Principal.When improperly appointed:a) Principal is not represented by the sub-agent and hence is not

responsible for his acts.b) The agent is responsible for the act of sub-agent to Principal and to third

parties.c) Sub-agent is responsible only to Agent. Even for acts of fraud or willful

wrong, he cannot be held liable by the Principal.

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Substituted Agent:

“When an agent has an express or implied authority of his principal to name another person to act for the principal and the agent names another person accordingly, such person is not a sub-agent but a substituted agent of the principal”

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Duties of Agent

• 1. Duty to follow principal’s directions or customs.• 2. Duty to carry out the work with reasonable skill and

diligence.• 3. Duty to render accounts.• 4. Duty to communicate.• 5. Duty not to deal on his own account.• 6. Duty not to make any profit out of his agency except his

remuneration.• 7. Duty on termination of agency by principal’s death or

insanity – to take all reasonable steps to protect and preserve the interests entrusted.

• 8. Duty not to delegate authority (subject to exceptions)

Rights of Agent

• 1. Right to receive remuneration.• 2. Right to retainer.• 3. Right of lien.• 4. Right to be indemnified against

consequences of lawful acts.• 5. Right to be indemnified against

consequences of acts done in good faith.• 6. Right to compensation due to principal’s

neglect or want of skill.• 7. Right of stoppage of goods in transit.

Principal’s liability for acts of agent

• 1. When agent acts within the scope of his actual and apparent authority.

• 2. When agent exceeds his actual as well as apparent authority.

• 3. Liability for agent’s misrepresentation or fraud.

• 4. Notice given to agent as notice to principal.• 5. Liability based on the ‘doctrine of estoppel’.

When Agent personally liable to third parties

• 1. Where the agent expressly agrees.• 2. Where the agent acts for a foreign principal.• 3. Where the agent acts for an unnamed principal.• 4. Where the agent acts for an undisclosed principal.• 5. Where the agent acts for a principal who cannot be

sued.• 6. Where the agent exceeds his authority.• 7. Where there is a trade usage or custom.• 8. Where agent’s authority is coupled with interest.

Termination of Agency

• A. Termination by act of the parties

– 1. By mutual agreement.

– 2. Revocation by the Principal..

– 3. Renunciation by the agent.

Termination of Agency (Contd.)

• B. Termination by Operation of Law:– 1. Completion of the business of agency.– 2. Expiry of time.– 3. Death of the principal or agent.– 4. Insanity of the principal or the agent.– 5. Insolvency of the principal.– 6. Destruction of the subject-matter.– 7. Dissolution of the company.– 8. Principal or agent becomes alien enemy.

Agency when irrevocable

• 1. Where the agency is coupled with interest.

• 2. When revocation would cause the agent personal loss.

• 3. When the authority has been party exercised by the agent.