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 guarantee

Principal Debtor : his fault is guaranteed
Creditor : 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 • 1. Three parties

• 2. Reimbursement of • 2. Security of debt
loss or good conduct
• 3. Three contracts
• 3. Only one contract • 4. Liability is secondary
• 5. surety gives guarantee
• 4. Liability is primary at the request of debtor
• 5. acts independently • 6. existing debt or duty
without any request. • 7. After debt is
• 6. No existing debt discharged, can proceed
• 7. Cannot sue third against the principal
party for loss directly 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 Bailment
1. 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 owner
2. Duty to take reasonable care of the goods as a bailee

• Rights:
1. Right to retain possession of the goods until true owner is found
2. Right of lien over the goods for expenses
3. Right to sue for reward
4. Right of sale
a) when the goods are in danger of perishing
b) when lawful charges of finder exceeds two-thirds of its value
surplus 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 • 1.Bailment is for repairs,
specific purpose i.e. to safe-custody etc. –
provide security for a loan purpose is quite different
or for the fulfilment of an from the two purposes
obligation. under pledge.

• 2. Pledgee has a right of • 2. No such right of sale.

sale on default after Bailee may retain the
giving notice. goods or sue the bailor
for non-payment of dues.

• 3. Pledgee has no right to • 3. If the nature of

use the goods pledged. 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-owners
Pledge 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 Agent
A 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 emergency
e,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 permitted
2. 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.