![Business Law Unit II: The Indian Contract Act, 1872 Specific Contracts Notes [Gauhati University FYUGP BCom 3rd Sem]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqsLzZhDSrSVq0daxbMvIVWhtk3_cVQzgHYV35o01U6v2C2WSZy9SgSbRlFvAaLsrFB_lVAn0VXTeLnybm33mMSgL356xnZxVSF5eac5sErd6Lw_4SORMgkUx6bwR9E2arGSeif6zsNUnBevpON0S2tiZ2OvTDjedtBfN3W6UikaBz_pxYUUJ-KjMoa9xP/s16000-rw/1000358853.webp "Business Law Unit II: The Indian Contract Act, 1872 Specific Contracts Notes [Gauhati University FYUGP BCom 3rd Sem]")
Unit II: The Indian Contract Act, 1872 – Specific Contracts
2 Marks Questions (Definitions / Direct Answers)
1. Define a contract of indemnity.
Answer: A contract of indemnity is one in which one party promises to save the other from loss caused by the conduct of the promisor or by the conduct of any other person. According to Section 124 of the Indian Contract Act, it refers to protection against losses, for example, insurance contracts.
2. What is a contract of guarantee?
Answer: 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 of the Indian Contract Act defines it. It involves three parties – creditor, principal debtor, and surety – and creates a secondary obligation on the surety.
3. State two essentials of a contract of indemnity. [GU BCom 2020, 2024]
Answer: Two essentials of a contract of indemnity are: i) There must be a promise to protect the indemnified party from loss, and ii) The loss must arise from the conduct of the promisor or any other person. These essentials ensure that the contract is valid and enforceable under the law.
4. Who is a surety? Write two rights of surety. [GU BCom 2019]
Answer: A surety is a person who gives a guarantee to the creditor that he will perform the obligation if the principal debtor defaults. Two rights of surety are: i) Right to be indemnified against losses from the principal debtor, and ii) Right of subrogation after paying the debt of the principal debtor.
5. Who is a bailor?
Answer: A bailor is the person who delivers goods to another person for some purpose under a contract of bailment. The bailor retains ownership but transfers possession of goods. For example, if A delivers his watch to B for repair, A is the bailor.
6. Who is a bailee?
Answer: A bailee is the person to whom goods are delivered by the bailor under a contract of bailment for a specific purpose. The bailee is bound to take reasonable care of the goods and return them once the purpose is accomplished. For example, a dry cleaner is a bailee.
7. What is bailment?
Answer: Bailment is the delivery of goods by one person (bailor) to another (bailee) for a specific purpose, under a contract that the goods shall be returned once the purpose is completed. Section 148 of the Indian Contract Act defines bailment. It involves transfer of possession, not ownership.
8. Define pledge. [GU BCom 2024]
Answer: A pledge is the delivery of goods as security for payment of a debt or performance of a promise. Section 172 of the Indian Contract Act defines pledge. The person who delivers goods is the pawnor, and the person to whom goods are delivered is the pawnee. It is a special kind of bailment.
9. State two duties of bailee. [GU BCom 2019, 2021]
Answer: Two duties of a bailee are: i) Duty to take reasonable care of goods as a man of ordinary prudence would take of his own goods, and ii) Duty to return the goods once the purpose of bailment is achieved. Failure to do so makes the bailee liable.
10. Who is a pawnee?
Answer: A pawnee is the person to whom goods are delivered under a contract of pledge as security for a debt or performance of a promise. The pawnee has the right to retain the goods until the debt is repaid. For example, a bank receiving gold as security is a pawnee.
11. Who is a pawnor?
Answer: A pawnor is the person who delivers goods under a contract of pledge to secure repayment of a debt or performance of a promise. The pawnor retains ownership of the goods but gives possession to the pawnee. For example, a customer pledging jewellery with a bank is a pawnor.
12. Define contract of agency.
Answer: A contract of agency is a contract where one person (agent) is authorized to act on behalf of another person (principal) to create legal relations with third parties. Section 182 of the Indian Contract Act defines agency. The acts of the agent within authority bind the principal as if done by him.
13. Who is an agent? Who is a principal?
Answer: An agent is a person employed to act on behalf of another, known as the principal, in dealings with third parties. The principal is the person who authorizes the agent to act for him. For example, a commission agent selling goods on behalf of a trader is an agent, and the trader is the principal.
14. Who appoints a sub-agent? [GU BCom 2019, 2021]
Answer: A sub-agent is appointed by the original agent with the authority of the principal. According to Section 190 of the Indian Contract Act, an agent cannot lawfully appoint a sub-agent without the consent of the principal. If appointed lawfully, the acts of the sub-agent bind the principal.
15. Define sub-agent.
Answer: A sub-agent is a person employed by and acting under the control of the original agent in the business of the agency. Section 191 of the Indian Contract Act defines sub-agent. He works under the supervision of the original agent, and his acts are binding on the principal if appointed lawfully.
16. Define substituted agent.
Answer: A substituted agent is a person appointed by the original agent, under the authority of the principal, to act for the principal in a specific matter. Unlike a sub-agent, a substituted agent directly establishes a relationship with the principal, and is responsible to the principal, not to the original agent.
17. Write two duties of an agent. [GU BCom 2020]
Answer: Two duties of an agent are: i) Duty to follow the principal’s instructions or conduct business according to the custom of trade if instructions are absent, and ii) Duty to act with reasonable skill, care, and diligence in the performance of his tasks. Failure makes the agent liable for losses.
18. Write two rights of an agent. [GU BCom 2019, 2021]
Answer: Two rights of an agent are: i) Right to remuneration – the agent is entitled to receive agreed commission or remuneration for services rendered, and ii) Right of lien – the agent has the right to retain goods, papers, or property of the principal until dues are paid.
19. What is an express agency?
Answer: Express agency arises when the authority of an agent is clearly given by the principal, either in writing or by spoken words. Section 186 of the Indian Contract Act recognizes it. For example, a written power of attorney authorizing an agent to sell property is an express agency.
20. What is an implied agency?
Answer: Implied agency arises when authority is not given expressly, but inferred from the conduct of the parties, circumstances of the case, or the usual course of dealing. For example, a wife pledging her husband’s credit for household necessities creates an implied agency, binding the husband.
21. Define the term Contract of Bailment under the Indian Contract Act, 1872.
Answer: According to Section 148 of the Indian Contract Act, a contract of bailment is the delivery of goods by one person to another for some purpose, under a contract that the goods shall be returned after the purpose is accomplished or disposed of according to the instructions of the bailor.
22. Define surety’s liability.
Answer: Surety’s liability refers to the responsibility of the surety to discharge the debt or obligation of the principal debtor in case of default. According to Section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal debtor, unless otherwise provided by the contract.
23. What is meant by “consideration for guarantee”?
Answer: Consideration for guarantee is the benefit or advantage received by the principal debtor or creditor, which is sufficient to support the surety’s promise. According to Section 127 of the Indian Contract Act, anything done or any promise made for the benefit of the principal debtor is sufficient consideration for the surety’s promise.
24. Write two differences between contract of indemnity and guarantee. [GU BCom 2023, 2024]
Answer: i) In a contract of indemnity, there are only two parties – indemnifier and indemnified, whereas in a contract of guarantee, there are three parties – creditor, principal debtor, and surety. ii) Indemnity involves primary liability, while guarantee involves secondary liability, as the surety is liable only if the principal debtor defaults.
25. What is continuing guarantee?
Answer: A continuing guarantee is a guarantee which extends to a series of transactions over time, rather than a single transaction. Section 129 of the Indian Contract Act defines it. For example, a guarantee given by a surety to a bank for all advances made to a trader is a continuing guarantee.
26. Define revocation of guarantee.
Answer: Revocation of guarantee means the cancellation of a continuing guarantee by the surety. According to Section 130 of the Indian Contract Act, a surety can revoke a continuing guarantee for future transactions by giving notice to the creditor. However, the surety remains liable for transactions already entered into.
27. Define “Lien” under bailment.
Answer: Lien under bailment is the right of the bailee to retain the goods of the bailor until payment is made for services rendered regarding those goods. According to Sections 170 and 171 of the Indian Contract Act, lien may be particular (for specific goods) or general (for all goods).
28. Define gratuitous bailment.
Answer: Gratuitous bailment is bailment made without any reward or consideration. It occurs when goods are delivered to the bailee for safe custody or use without payment. The bailee must take reasonable care of goods and return them, but since it is gratuitous, the bailee is not liable for extraordinary care.
29. Define pledge and hypothecation.
Answer: A pledge is the delivery of goods as security for payment of a debt or performance of a promise (Section 172). Hypothecation, on the other hand, is a charge created on goods without transferring their possession. Goods remain with the borrower, but the lender has the right to sell them in case of default.
30. Mention one difference between bailment and pledge.
Answer: The main difference is that bailment is the delivery of goods for a specific purpose, such as safekeeping or repair, while pledge is a special type of bailment where goods are delivered as security for repayment of a debt or performance of a promise.
5 Marks Questions (Short Notes / Brief Explanations)
1(a) Indemnity and Guarantee [GU BCom 2019, 2021, 2023, 2024]
1(b) Bailment and Pledge
1(c) Sub-agent and Substituted Agent
1(d) Surety and Guarantor
1. Write short notes on:
a) Rights of Surety against the Creditor and Principal Debtor [GU BCom 2020]
Answer: A contract of guarantee is an agreement where the surety promises to perform the obligation of the principal debtor if he fails. Under the Indian Contract Act, the surety has the following rights:
(i) Rights against the Principal Debtor:
Right of Indemnity (Sec. 145): The surety has the right to recover from the principal debtor all sums paid under the guarantee.
Right of Subrogation (Sec. 140): On paying the debt, the surety steps into the shoes of the creditor and acquires all rights that the creditor had against the principal debtor.
Right to Securities (Sec. 141): If the creditor had any securities against the principal debtor, the surety is entitled to those securities once he pays off the debt.
(ii) Rights against the Creditor:
Right to be Discharged: If the creditor varies the terms of the contract without the surety’s consent, the surety is discharged.
Right to Benefit of Securities: If the creditor loses or parts with the securities without the surety’s consent, the surety is discharged to that extent.
Right to Demand Legal Action: The surety can compel the creditor to sue the principal debtor if the debt is due.
b) Duties of Bailee [GU BCom 2019, 2021]
Answer: A bailment is delivery of goods by one person (bailor) to another (bailee) for a specific purpose. The bailee has the following duties:
Duty to Take Reasonable Care (Sec. 151): The bailee must take care of the goods as a prudent man would take of his own goods.
Duty Not to Make Unauthorized Use (Sec. 154): If bailee uses goods without the bailor’s consent, he is liable for compensation.
Duty Not to Mix Goods (Sec. 155–157): If the bailee mixes goods with his own without consent:
If separable: Bailor gets his goods back at bailee’s expense.
If inseparable: Bailor can claim compensation.
Duty to Return Goods (Sec. 160): Goods must be returned once the purpose is accomplished or the time expires.
Duty to Return Accretions (Sec. 163): The bailee must deliver any increase/profit from the goods (e.g., offspring of cattle).
Duty Not to Deny Bailor’s Title: The bailee cannot deny the ownership of the bailor.
c) Duties of Agent [GU BCom 2020]
Answer: An agent is a person employed to act on behalf of another (principal). His duties are:
Duty to Follow Instructions (Sec. 211): He must conduct the business according to the principal’s directions.
Duty to Show Skill and Diligence (Sec. 212): He must act with reasonable skill and diligence as a prudent man.
Duty to Render Accounts (Sec. 213): He must maintain proper accounts and render them to the principal.
Duty to Communicate (Sec. 214): He must keep the principal informed in case of difficulty.
Duty Not to Deal on His Own Account (Sec. 215): If he deals on his own account, the principal may repudiate the transaction.
Duty to Pay Sums Received (Sec. 218): The agent must pay all money received on behalf of the principal.
Duty Not to Make Secret Profit: If he earns any profit without the principal’s knowledge, he must return it.
d) Rights of Agent [GU BCom 2019, 2021]
Answer: The Indian Contract Act grants the following rights to an agent:
Right of Remuneration (Sec. 219): The agent is entitled to remuneration for services rendered.
Right of Retainer (Sec. 217): He may retain sums received on principal’s behalf for expenses, advances, and remuneration.
Right of Lien (Sec. 221): The agent has a lien on the principal’s property in his possession until dues are paid.
Right to Indemnification (Sec. 222–223): The principal must indemnify the agent for lawful acts and good faith actions.
Right to Compensation (Sec. 225): If the principal’s neglect or misconduct causes injury to the agent, he is entitled to compensation.
e) Essentials of a Valid Contract of Guarantee [GU BCom 2020]
Answer:
A contract of guarantee is valid only if it fulfills the following essentials:
Tripartite Agreement: It involves three parties – creditor, principal debtor, and surety.
Consideration (Sec. 127): Anything done for the benefit of the principal debtor is sufficient consideration for the surety.
Consent of Surety: The surety’s consent must be free and not obtained by misrepresentation or concealment.
Writing and Registration: Not mandatory, but if required by law, it must be in writing.
Principal Debt Must Exist: Guarantee is valid only if there is an enforceable principal debt.
Competency of Parties: The parties must be competent to contract.
No Concealment or Misrepresentation (Sec. 142–143): Guarantee obtained by fraud or concealment is invalid.
f) Types of Bailment
Answer:
The types of bailment are:
Bailment for Gratuitous Purpose: Goods delivered without any consideration (e.g., lending books to a friend).
Bailment for Hire/Reward: Goods delivered for consideration (e.g., leaving clothes at a dry cleaner).
Bailment for Safe Custody: Goods delivered only for safekeeping.
Bailment for Carriage: Goods delivered for transportation (e.g., luggage to a transport company).
Pledge or Pawn: Goods delivered as security for a loan.
g) Rights of Pawnee
Answer: A pawnee is a person to whom goods are pledged. His rights are:
Right of Retainer (Sec. 173): He can retain goods pledged for payment of debt, interest, and expenses.
Right to Extraordinary Expenses (Sec. 175): He can recover expenses for preserving goods.
Right against True Owner (Sec. 178A): If goods are pledged under voidable contract, pawnee can acquire good title if acted in good faith.
Right of Sale (Sec. 176): If the pawnor defaults, the pawnee may:
Retain goods until payment, or
After giving reasonable notice, sell the goods and recover dues.
h) Implied Authority of Agent
Answer: Implied authority means the authority that is not expressly given but is necessary to carry out the duties of the agency.
Examples of Implied Authority:
Right to Sell Goods: If the agent is a mercantile agent, he has implied authority to sell or buy goods.
Right to Receive Payments: An agent can receive payments on behalf of the principal.
Right to Do What is Customary: The agent can do acts that are usual in the course of business.
Authority in Emergency (Sec. 189): The agent has authority to take necessary steps to protect the principal’s interest in emergencies.
i) Termination of Agency
Answer: An agency may terminate in the following ways:
(i) By Act of Parties:
By Mutual Agreement: Principal and agent may mutually agree to end the agency.
By Revocation (Sec. 203): Principal can revoke authority before it is exercised.
By Renunciation (Sec. 206): Agent may renounce the agency by giving reasonable notice.
(ii) By Operation of Law:
Completion of Business: Agency ends when the purpose is achieved.
Expiry of Time: If agency was for a fixed time, it ends when time expires.
Death or Insanity: Death or unsoundness of mind of principal/agent terminates the agency.
Insolvency of Principal: If the principal is adjudicated insolvent, agency ends.
Destruction of Subject-Matter: If subject-matter of agency is destroyed, agency is terminated.
5 Marks Question Answer:
1. State the essentials of a contract of bailment.
Answer: Bailment means delivery of goods from one person to another for a specific purpose under a contract, with the condition that goods shall be returned after the purpose is accomplished. The essentials are:
Delivery of goods: There must be delivery of goods from the bailor (owner) to the bailee (custodian). Delivery may be actual or constructive.
Purpose: Goods must be delivered for some specific purpose or objective, e.g., safe keeping, carriage, repair.
Return of goods: The bailee is bound to return the goods after the purpose is accomplished or otherwise dispose of them according to the instructions of the bailor.
Ownership remains with bailor: Only possession is transferred; ownership is never transferred.
Consent of parties: Bailment must be based on agreement or consent of both parties.
Consideration: Bailment may be gratuitous (without reward) or for consideration (with charges).
2. State the essentials of a contract of pledge.
Answer: A pledge is a special kind of bailment where goods are delivered as security for repayment of a debt or performance of a promise. The essentials are:
Delivery of goods: Goods are delivered by the pawnor (debtor) to the pawnee (creditor).
Purpose of security: Goods are delivered specifically as security against a debt or obligation.
Return of goods: The pawnee must return the goods once the debt is repaid or the promise is performed.
Ownership remains with pawnor: Only possession is transferred; ownership does not pass.
Right of sale: If the pawnor defaults, the pawnee has the right to sell the goods after giving due notice.
3. State the duties of bailor.
Answer: The bailor (owner of goods) has the following duties:
Disclosure of known faults: Bailor must disclose known defects in the goods that may affect the bailee’s use.
Bear expenses: In a gratuitous bailment, the bailor must bear extraordinary expenses incurred for bailment.
Indemnify bailee: Bailor is responsible for any loss suffered by bailee due to defective goods or wrongful delivery.
Receive goods back: Bailor must accept the goods back after the purpose of bailment is completed.
4. State the rights of bailee.
Answer: The bailee (to whom goods are delivered) enjoys the following rights:
Right to compensation: Bailee can claim compensation from bailor if he suffers due to defects in goods.
Right of reimbursement: Bailee can recover necessary expenses incurred for bailment.
Right of lien: Bailee has a right to retain goods until lawful charges are paid by the bailor.
Right to recover costs: Bailee may recover damages or costs caused by the negligence of the bailor.
5. State the rights and duties of pawnee.
Answer:
Rights of Pawnee:
Right to retain goods: Pawnee can retain pledged goods until debt, interest, and expenses are paid.
Right to recover extraordinary expenses: Pawnee can claim expenses for preservation of goods.
Right to sell: On default by pawnor, pawnee may sell the goods after giving reasonable notice.
Duties of Pawnee:
Duty to take reasonable care: Pawnee must take reasonable care of the pledged goods.
No unauthorized use: Pawnee cannot use the goods for his personal benefit.
Return goods: Pawnee must return the goods once the debt is discharged.
Deliver increase/profits: Any accretion or profit from pledged goods (like dividends on shares) must be returned.
6. State the different modes of creation of agency.
Answer: Agency is the legal relationship where one person (agent) acts on behalf of another (principal). It can be created in the following ways:
By express agreement: Created expressly through oral or written contract.
By implied agreement: Arises from conduct, circumstances, or relationship of parties.
By ratification: When the principal approves an act already done without authority.
By necessity: In emergencies, when it is impossible to obtain the principal’s consent, agency is created by necessity.
By estoppel: If a person, by words or conduct, leads others to believe another is his agent, he cannot deny it later.
7. Explain the circumstances under which an agent is personally liable.
Answer: Generally, an agent is not personally liable since he acts on behalf of the principal. However, in certain cases, the agent becomes personally liable:
When acting for a foreign principal: If the principal resides abroad, the agent is liable.
When principal is undisclosed: If the agent does not disclose the name of the principal, he is personally liable.
When principal is not in existence: e.g., contracts made before company incorporation.
When acting without authority: If an agent exceeds his authority, he is personally liable.
Personal liability by agreement: If the agent expressly agrees to be personally liable.
When trade usage provides: In certain trades or customs, agents are made personally liable.
8. Briefly explain the concept of Continuing Guarantee.
Answer: A continuing guarantee is a type of guarantee which extends to a series of transactions over a period of time.
Meaning: It is a guarantee which applies to future transactions as well, not just a single debt.
Example: A person guarantees payment to a supplier for all goods supplied to another up to ₹1,00,000. This covers multiple deliveries until the limit.
Revocation: It can be revoked by notice to the creditor or by death of the guarantor (as to future transactions).
Importance: It provides continuous security to the creditor and facilitates ongoing business dealings.
10 Marks Questions (Long / Essay Type)
1. Define a contract of indemnity. State the rights of indemnity holder.
Answer: The Indian Contract Act, 1872 defines a contract of indemnity under Section 124. It states that “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.”
In simple terms, it means one person agrees to compensate the other person against possible losses. The person who promises is called the indemnifier and the person who is protected is called the indemnified or indemnity-holder.
Example: If A contracts with B to indemnify him against consequences of any proceedings that C may take against B in respect of a sum of ₹50,000, here A is indemnifier and B is indemnified. If B suffers any loss, A must compensate.
The essence of this contract is protection from loss. Such contracts are very common in insurance, shipping, and commercial dealings. For example, in fire insurance, the insurance company indemnifies the policyholder against loss due to fire.
Rights of Indemnity Holder (Section 125): The indemnity-holder enjoys three important rights once he has acted within the scope of his authority:
i) Right to recover damages paid in suits: The indemnity-holder has a right to recover all damages which he is compelled to pay in any suit in respect of any matter to which the promise of indemnity applies. This ensures that if he suffers actual loss, the indemnifier must reimburse.
ii) Right to recover costs incurred in defending suits: If the indemnity-holder is sued and he defends the suit prudently and with the authority of the indemnifier, he has a right to recover all legal costs incurred.
iii) Right to recover sums paid under compromise: If the indemnity-holder settles or compromises a dispute, he can recover the amount from the indemnifier provided that the settlement was made prudently and with the consent of the indemnifier.
Case Law: In Gajanan Moreshwar v. Moreshwar Madan (1942), the Bombay High Court observed that the indemnity-holder can compel the indemnifier to place him in a position to meet a liability and not merely after actual loss is suffered.
Conclusion: Thus, a contract of indemnity is primarily for compensation of loss, and the law gives the indemnity-holder broad rights to recover damages, costs, and sums paid, thereby ensuring protection against financial harm.
2. Define a contract of guarantee. Explain the rights of surety. [GU BCom 2019, 2020]
Answer: A contract of guarantee is defined under Section 126 of the Indian Contract Act, 1872. It is “a contract to perform the promise, or discharge the liability, of a third person in case of his default.”
There are three parties involved in such a contract:
i) Creditor – to whom the guarantee is given.
ii) Principal debtor – whose default is to be covered.
iii) Surety – the person who gives the guarantee.
Example: If A lends ₹20,000 to B, and C promises A that if B does not repay, C will repay on his behalf, then C is the surety.
The liability of surety is secondary; it arises only when the principal debtor fails. However, it is co-extensive with that of the principal debtor unless otherwise stated in the contract (Section 128).
Rights of Surety: The surety enjoys several important rights for his protection:
i) Rights against the principal debtor:
Right of subrogation (Section 140): After the surety pays the debt, he steps into the shoes of the creditor and acquires all the rights which the creditor had against the debtor.
Right of indemnity (Section 145): The surety has the right to be indemnified by the principal debtor for all sums rightfully paid under the guarantee.
ii) Rights against the creditor:
Right to securities (Section 141): The surety is entitled to every security the creditor has against the debtor at the time of guarantee, whether he knew about it or not. If the creditor loses the security, the surety is discharged to that extent.
Right to ask creditor to sue: When the liability has matured, the surety can compel the creditor to proceed against the principal debtor before turning to him.
iii) Rights against co-sureties: Where a debt is guaranteed by two or more sureties, and one of them pays more than his share, he has the right to recover proportionate contribution from the others (Sections 146–147).
Case Law: In Bank of Bihar v. Damodar Prasad (1969), the Supreme Court held that the surety’s liability is immediate and the creditor is not bound to exhaust remedies against the principal debtor before suing the surety.
Conclusion: The contract of guarantee strengthens commercial transactions by providing security to creditors. At the same time, the law balances this by providing several rights to the surety to prevent him from suffering unfair losses.
3. Define a contract of guarantee. Explain the discharge of surety.
Answer: A contract of guarantee, as defined in Section 126, is a contract where a person promises to discharge the liability of another in case of default. The person giving guarantee is surety, the person in whose favour guarantee is given is creditor, and the person whose liability is secured is principal debtor.
Discharge of Surety: The surety can be discharged from his liability under the following circumstances:
i) By revocation of guarantee (Section 130): A continuing guarantee can be revoked at any time by notice to the creditor in respect of future transactions.
ii) By death of surety (Section 131): Unless otherwise agreed, the death of the surety operates as revocation of continuing guarantee for future transactions.
iii) By variance in terms of contract (Section 133): Any change made without surety’s consent in the terms of contract between creditor and debtor discharges the surety as to subsequent transactions.
iv) By release or discharge of principal debtor (Section 134): If the principal debtor is released by the creditor, the surety is discharged.
v) By creditor’s act or omission impairing surety’s remedy (Section 139): If the creditor does anything inconsistent with the rights of the surety, or omits to do an act which his duty requires, the surety is discharged.
vi) By loss of security (Section 141): If the creditor parts with or loses the security held against the debtor without consent of surety, the surety is discharged to that extent.
Case Law: In Punjab National Bank v. Sri Vikram Cotton Mills (1970), the court held that material variation in the terms of the loan agreement without consent of surety discharged the surety.
Conclusion: Thus, the discharge of surety ensures fairness, and the law does not bind the surety beyond what he agreed to, especially when the terms of contract are altered or securities are lost.
4. Distinguish between a contract of indemnity and a contract of guarantee. [GU BCom 2019, 2021, 2023, 2024]
Answer: Although both contracts are based on the principle of protecting parties from loss, they are different in nature and scope.
5. Define a contract of bailment. State the rights and duties of bailor and bailee. [GU BCom 2024]
Answer: 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, under a contract that the goods shall be returned when the purpose is accomplished, or otherwise disposed of according to the directions of the person delivering them.”
The person delivering goods is called the bailor and the person receiving goods is the bailee. Bailment is based on trust and good faith. For example, leaving clothes at a dry-cleaner is a bailment.
Duties of Bailor:
i) To disclose known defects in goods.
ii) To bear expenses of bailment when it is for his benefit.
iii) To indemnify the bailee for loss caused by defective title or defects in goods.
Rights of Bailor:
i) Right to return of goods after purpose is over.
ii) Right to receive any profit or increase from goods bailed.
iii) Right to claim damages if bailee does not take reasonable care.
Duties of Bailee:
i) To take reasonable care of goods as an ordinary prudent man would take of his own goods.
ii) Not to make unauthorized use of goods.
iii) To return goods after purpose is accomplished.
iv) To return any increase or profit from goods.
Rights of Bailee:
i) Right to recover necessary expenses.
ii) Right of lien – right to retain goods until lawful charges are paid.
iii) Right to be indemnified by bailor for loss due to defective title.
Case Law: In Coggs v. Bernard (1703), it was held that a bailee must take the same care of goods as a reasonable man would take of his own goods.
Conclusion: Bailment is a mutual arrangement which creates reciprocal duties and rights, ensuring that both bailor and bailee are protected under law.
6. What is pledge? Discuss the rights of pawnee and pawnor.
Answer: A pledge is a special type of bailment defined under Section 172 of the Indian Contract Act, 1872. It is the bailment of goods as security for repayment of a debt or performance of a promise. The person delivering goods is called the pawnor, and the person to whom they are delivered is the pawnee.
Example: If A borrows ₹50,000 from B and delivers gold ornaments as security, it is a pledge.
Rights of Pawnee:
i) Right to retain goods (Section 173): The pawnee may retain pledged goods until payment of debt, interest, and necessary expenses.
ii) Right to recover extraordinary expenses (Section 175): If the pawnee incurs extraordinary expenses for preservation of goods, he may recover from pawnor.
iii) Right to sell goods (Section 176): On default, the pawnee may sue for debt and retain goods as collateral security, or sell goods after giving reasonable notice to pawnor.
iv) Right to retain for subsequent advances (Section 174): Unless otherwise agreed, pawnee may retain goods for subsequent advances also.
Rights of Pawnor:
i) Right to redeem goods: The pawnor has the right to redeem goods by making payment before pawnee sells them.
ii) Right to notice before sale: The pawnor is entitled to receive reasonable notice before pawnee sells the goods.
iii) Right to surplus: If the pawnee sells the goods, any surplus after deducting the debt and expenses must be returned to pawnor.
Case Law: In Lallan Prasad v. Rahmat Ali (1967), the Supreme Court held that pawnee must return the goods on payment of debt and cannot sue for debt and retain goods simultaneously.
Conclusion: Thus, pledge provides strong security to creditors while also safeguarding borrower’s ownership rights, thereby balancing both sides of the transaction.
7. Define contract of agency. Explain the rights and duties of an agent.[GU BCom 2019, 2020, 2021]
Definition of Contract of Agency A contract of agency is a legal relationship in which one person, called the agent, is authorized to act on behalf of another person, called the principal, in dealings with third parties. The purpose of such a relationship is to create legal relations between the principal and the third parties. The foundation of the law of agency is the maxim “Qui facit per alium facit per se” which means “he who acts through another acts himself.” Therefore, acts done by the agent, within the scope of authority, are considered as acts of the principal.
Rights of an Agent
An agent enjoys certain rights against the principal in the course of his duties. These include:
i) Right to Remuneration: The agent has the right to receive agreed remuneration, commission, or salary for conducting the agency business properly.
ii) Right of Retainer: The agent can retain, out of any sums received on behalf of the principal, all amounts due to him for expenses, advances, or remuneration.
iii) Right of Lien: The agent has a right to retain the principal’s goods, papers, and other property until the dues such as commission, expenses, or services are paid.
iv) Right to Indemnity: The principal must indemnify the agent against the consequences of all lawful acts done in the exercise of authority.
v) Right to Compensation: The agent is entitled to claim compensation for any injury or loss suffered due to the principal’s neglect, misconduct, or lack of skill.
Duties of an Agent
An agent also owes certain duties towards the principal, which include:
i) Duty to Follow Instructions: The agent must act strictly according to the instructions of the principal or, in their absence, according to the customs of trade.
ii) Duty to Exercise Care and Skill: The agent must carry out his functions with reasonable care, diligence, and skill as expected in the nature of business.
iii) Duty to Render Accounts: The agent must keep proper accounts of all transactions and render true accounts to the principal whenever demanded.
iv) Duty to Communicate in Difficulty: In situations of difficulty, the agent must make reasonable efforts to communicate with the principal and seek instructions.
v) Duty not to Deal on Own Account: The agent must not carry on the agency business on his own behalf without the knowledge and consent of the principal.
vi) Duty not to Make Secret Profit: The agent should not make any personal profit beyond his agreed remuneration. If he does, the principal has the right to recover such profits.
8. Who is a sub-agent? Distinguish between sub-agent and substituted agent. [GU BCom 2019, 2021]
Who is a Sub-Agent? A sub-agent is a person appointed by the original agent to assist him in the business of the agency, and who works under the control of the agent. The agent acts as a link between the principal and the sub-agent. According to the principle “Delegatus non potest delegare” (a delegate cannot further delegate), an agent generally cannot appoint a sub-agent without the principal’s consent.
Distinction between Sub-Agent and Substituted Agent
9. State the different modes of creation of agency. Explain termination of agency.
Modes of Creation of Agency
Agency may be created in the following ways:
i) Agency by Express Agreement: This arises when the principal appoints an agent through written or oral agreement, e.g., Power of Attorney.
ii) Agency by Implied Agreement: Created by conduct, circumstances, or usual course of dealings. This includes:
Agency by Estoppel: Where the principal’s conduct leads a third party to believe a person is his agent, he cannot later deny the agency.
Agency by Necessity: Arises when a person, in an emergency, acts to protect the principal’s interest without authority.
Agency by Marital Relation: A wife may bind her husband for necessaries supplied to her.
iii) Agency by Ratification: When an unauthorized act done on behalf of a principal is later ratified by him, it creates a valid agency with retrospective effect.
Termination of Agency
Agency can be terminated in two ways:
A. By Act of the Parties:
i) Revocation by the Principal before authority is exercised.
ii) Renunciation by the Agent by giving notice.
iii) By mutual agreement between both parties.
iv) Completion of the business for which agency was created.
v) Expiry of the period fixed for agency.
B. By Operation of Law:
i) Death or insanity of either the principal or the agent.
ii) Insolvency of the principal.
iii) Destruction of subject matter of the agency.
iv) Business of the agency becoming unlawful due to change in law.
10. Discuss the circumstances when a surety is discharged from liability.
A surety is discharged from liability in the following cases:
I. Discharge by Revocation of Continuing Guarantee:
i) By notice to the creditor under Sec. 130.
ii) By death of the surety under Sec. 131, unless otherwise agreed.
II. Discharge by Conduct of Creditor:
i) Variance in terms of contract without the surety’s consent (Sec. 133).
ii) Release or discharge of principal debtor by creditor (Sec. 134).
iii) Compounding, giving time, or covenant not to sue principal debtor without surety’s consent (Sec. 135).
iv) Creditor’s act or omission impairing surety’s eventual remedy against debtor (Sec. 139).
v) Loss of security by creditor (Sec. 141).
III. Discharge by Invalidity of Contract:
i) Guarantee obtained by misrepresentation (Sec. 142).
ii) Guarantee obtained by concealment of material facts (Sec. 143).
Thus, a surety’s liability is co-extensive with that of the principal debtor, but these circumstances ensure fair protection of the surety’s interests.
11. Explain the doctrine of Agency by Ratification with examples.
Agency by Ratification arises when a person acts without authority on behalf of another, and the latter subsequently accepts or adopts the act. Ratification validates the act as if it was originally authorized, with retrospective effect.
Essentials of Valid Ratification
i) The act must be done on behalf of a named or ascertainable principal.
ii) The principal must have existed and been competent to contract at the time of the act.
iii) The principal must have full knowledge of all material facts.
iv) Ratification must be of the whole act, not a part of it.
v) The act must be lawful and capable of ratification.
Example: A, without authority, buys goods worth ₹50,000 for P. On learning this, P accepts the goods and pays the price to the seller. P’s acceptance amounts to ratification, and the act becomes binding on P as if it were originally authorized.
12. Explain the doctrine of Agency by Necessity with examples.
Agency by Necessity is an implied form of agency which arises in emergencies when a person acts on behalf of another without authority in order to prevent loss to the principal’s property or interests.
Conditions for Valid Agency by Necessity
i) There must be a real and imminent necessity.
ii) It must be impossible to communicate with the principal.
iii) The act must be done in good faith and in the best interest of the principal.
iv) The act must be necessary for preserving the principal’s property.
Example: A transporter carrying perishable goods like fresh fish faces a road blockade due to floods and cannot reach the buyer or contact the owner. To prevent loss, he sells the goods in the nearest market at a reasonable price. This sale, though without authority, is valid under the doctrine of necessity and binds the principal.
13. Who is an Agent? State the Legal Relationship Between Principal and Agent.
Who is an Agent? According to Section 182 of the Indian Contract Act, 1872, “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 so represented, is called the principal.” In simple words, an agent is a representative of the principal, appointed to create contractual relations between the principal and third parties. For example, a commission agent who buys goods on behalf of his principal is regarded as an agent.
Legal Relationship Between Principal and Agent
The legal relationship between a principal and an agent is one of trust, confidence, and representation. Its main features are as follows:
i) Fiduciary Relationship: The relationship is fiduciary in nature, meaning the agent must act honestly, faithfully, and in the best interest of the principal. He cannot allow his personal interest to conflict with his duty.
ii) Representative Capacity: The agent does not act in his personal capacity. He acts as a representative of the principal, and his actions, within authority, bind the principal.
iii) Binding Effect of Acts: Any contract entered into by the agent within the scope of authority is binding on the principal as if the principal had entered into it himself. This is based on the maxim “Qui facit per alium facit per se.”
iv) Control and Direction: The principal has the right to direct and control the manner in which the agent performs his work. The agent is bound to follow such lawful instructions.
v) Mutual Consent: The relationship is created by mutual consent. No person can be compelled to act as an agent without his consent, and no principal can be forced to employ someone as his agent against his will.
vi) Creation of Legal Relations: The primary purpose of an agency is to establish contractual relations between the principal and third parties through the medium of the agent.
vii) Contractual Obligations: The principal is bound by the obligations created by the agent with third parties, provided the agent acts within the scope of his authority.
Conclusion: Thus, an agent is the representative of the principal and acts as a connecting link between the principal and third parties. Their relationship is based on trust, representation, and authority.
14. Discuss the Rights and Duties of Bailor and Bailee.
Definition of Bailment: 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.” The person delivering the goods is the bailor, and the person to whom they are delivered is the bailee.
Rights of a Bailor
i) Right to Return of Goods: The bailor has the right to get back the goods when the time expires or the purpose is accomplished.
ii) Right to Terminate Bailment: If the bailee uses the goods contrary to the terms of bailment, the bailor can terminate the contract.
iii) Right to Sue for Damages: The bailor can sue the bailee for compensation if his goods are damaged due to the negligence of the bailee.
iv) Right to Accretions: The bailor has a right to any profit or increase arising out of the bailed goods, such as offspring from cattle or bonus shares on securities.
Duties of a Bailor
i) Duty to Disclose Defects: The bailor must disclose known defects in the goods which may expose the bailee to risk.
ii) Duty to Bear Expenses: In a gratuitous bailment, the bailor must bear ordinary expenses of keeping the goods.
iii) Duty to Indemnify: The bailor is bound to indemnify the bailee for any loss caused by defects in title or undisclosed faults.
iv) Duty to Accept Goods Back: When the purpose of bailment is completed, the bailor must accept the goods back from the bailee.
Rights of a Bailee
i) Right to Necessary Expenses: The bailee can recover expenses incurred for the purpose of bailment.
ii) Right to Indemnity: He is entitled to be indemnified for losses due to defects in the bailor’s title or goods.
iii) Right of Lien: He can retain the goods until lawful charges are paid by the bailor.
iv) Right to Sue Third Parties: If a third person wrongfully deprives him of the use of goods, he can sue in his own name.
Duties of a Bailee
i) Duty of Reasonable Care: He must take the same care of the goods as a reasonable man would take of his own goods.
ii) Duty Not to Make Unauthorized Use: He must not use the goods for purposes other than agreed.
iii) Duty Not to Mix Goods: He must keep bailed goods separate unless agreed otherwise.
iv) Duty to Return Goods: He must return the goods along with any accretion when the purpose is over.
v) Duty to Return Increase: Any profit from bailed goods must also be returned, e.g., dividends on shares.
Conclusion: The relationship of bailor and bailee is reciprocal. Rights of one are duties of the other, ensuring the safe keeping and proper use of goods.
15. State the essential elements of a contract of pledge. Distinguish between pledge and bailment.
Definition: Section 172 of the Indian Contract Act defines pledge as “the bailment of goods as security for payment of a debt or performance of a promise.” The bailor is called the pawnor and the bailee is called the pawnee.
Essential Elements of Pledge
i) Delivery of Goods: The goods must be delivered to the pawnee, either physically or symbolically (e.g., delivery of keys).
ii) Goods: The subject matter must be goods, not money or immovable property.
iii) Security for Debt or Promise: The delivery must be for securing repayment of a debt or performance of a promise.
iv) Ownership: The ownership remains with the pawnor; only possession passes to the pawnee.
v) Return on Payment: The pawnee must return the goods once the debt is repaid or the promise performed.
vi) Right of Sale: In case of default by the pawnor, the pawnee has the right to sell the goods after giving due notice.
Distinction between Pledge and Bailment
Conclusion: Thus, pledge is a special form of bailment with the additional feature of goods being delivered as security for repayment of debt.
16. Discuss the Rights and Duties of a Pawnee.
Rights of a Pawnee
i) Right to Retain Goods: The pawnee can retain the pledged goods until the debt, interest, and necessary expenses are paid.
ii) Right to Recover Extraordinary Expenses: If he incurs expenses for preservation of goods, he can recover them from the pawnor.
iii) Right in Case of Default: In case of default, the pawnee may either sue the pawnor for the debt and retain the goods as collateral or sell the goods after giving reasonable notice.
iv) Right to Deficit or Surplus: If the sale proceeds are less than the debt, the pawnee can sue for the balance. If more, he must return the surplus to the pawnor.
v) Right to Accretions: If the pledged goods yield an increase, e.g., bonus shares, the pawnee can retain them till payment.
Duties of a Pawnee
i) Duty of Care: The pawnee must take reasonable care of goods as an ordinary prudent person would.
ii) Duty Not to Make Unauthorized Use: He must not use the pledged goods without authority.
iii) Duty Not to Mix Goods: The pledged goods must be kept separate.
iv) Duty to Return Goods: Once the debt is paid, the pawnee must return the goods immediately.
v) Duty to Return Accretions: Any increase in goods (e.g., dividends, offspring, bonus shares) must be delivered to the pawnor.
vi) Duty to Give Notice Before Sale: Before selling goods in case of default, he must give reasonable notice to the pawnor.
Conclusion: Rights and duties of the pawnee ensure fair treatment to both parties. While the pawnee enjoys strong security rights, he is bound to protect the goods and act fairly towards the pawnor.
17. What is a Contract of Agency? Explain how an Agency can be Terminated.
Definition of Contract of Agency: A contract of agency is a legal relationship in which one person (the agent) is authorized to act for another (the principal) to create legal relations with third parties. It is based on the maxim “he who acts through another acts himself.” The agent is a link between the principal and outsiders, and the principal is bound by his acts if done within authority.
Modes of Termination of Agency
A. By Act of the Parties
i) Revocation by the Principal: The principal may revoke the authority of the agent before it is exercised. However, agency coupled with interest cannot be revoked.
ii) Renunciation by the Agent: The agent can renounce his authority by notice to the principal.
iii) Mutual Agreement: Both may mutually agree to terminate the contract.
iv) Completion of Business: When the agency’s purpose is achieved, it comes to an end.
v) Expiry of Time: If created for a fixed period, it automatically terminates after the period expires.
B. By Operation of Law
i) Death or Insanity: The death or unsoundness of mind of either the principal or agent terminates the agency.
ii) Insolvency of Principal: If the principal is adjudged insolvent, the agency ends.
iii) Destruction of Subject-Matter: Destruction of the property related to the agency terminates it.
iv) Unlawful Business: If the performance of the agency becomes unlawful due to a change in law, the contract ends.
v) Dissolution of Firm/Company: If either party is a firm or company that gets dissolved, the agency terminates.
Conclusion: Termination of agency can take place by choice of the parties or by operation of law. It ensures that once the purpose or legal capacity ceases, the principal is no longer bound by the acts of the agent.
18. “An Agent is Personally Liable Under Certain Circumstances.” Explain.
Ordinarily, an agent is not personally liable for contracts entered into on behalf of a disclosed principal. The general rule is that the principal is liable, and the agent is only a connecting link. However, the Indian Contract Act, 1872 recognizes certain exceptional situations where the agent himself incurs personal liability:
i) Contracting for a Foreign Principal: When an agent makes a contract on behalf of a principal residing outside India, the law presumes that the agent undertakes personal liability, unless a contrary intention appears. This protects third parties against difficulties in suing a foreign principal.
ii) Undisclosed Principal: If the agent does not disclose the existence and identity of the principal, the third party considers the agent as the real contracting party. In such a case, the agent is personally liable. Once the principal is disclosed, the third party has the option to sue either the agent or the principal.
iii) Incompetent Principal: If the principal is incompetent to contract, for example, being a minor or of unsound mind, the agent may be personally liable. The law presumes that the agent has warranted the capacity of the principal.
iv) Excess of Authority: When the agent exceeds his authority and the unauthorized part cannot be separated from the authorized part, he becomes personally liable for the entire contract. This is called the breach of “warranty of authority.”
v) Agent’s Agreement to be Personally Liable: If the agent expressly agrees to be personally liable under the contract, he is bound by his own promise. For example, if he signs in his own name without mentioning that he is acting for a principal, he is personally bound.
vi) Agency Coupled with Interest: In cases where the agent himself has an interest in the subject matter of the agency, he can be held personally liable. For example, a factor advancing money on goods consigned to him may have a personal interest.
vii) Usage or Custom of Trade: By the established custom of a particular trade, the agent may be personally liable. Auctioneers, del credere agents, and brokers often fall under this category.
Thus, though the general rule exempts agents from liability, the law imposes responsibility in these exceptional situations to safeguard third parties and ensure fairness in contractual relations.
19. Explain the Rights of Indemnity Holder Under the Indian Contract Act.
A contract of indemnity is a contract whereby one party (indemnifier) promises to save the other party (indemnity holder) from loss caused by the conduct of the promisor himself or by the conduct of any other person. Section 125 of the Indian Contract Act, 1872 lays down the rights of an indemnity holder:
i) Right to Recover Damages: The indemnity holder is entitled to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of a matter covered by the contract of indemnity. Example: If A promises to indemnify B against the consequences of any proceedings instituted by C, and B has to pay damages to C, then B can recover the same from A.
ii) Right to Recover Costs: He can recover all costs reasonably incurred in defending such a suit, provided that:
He acted prudently and in accordance with the directions of the indemnifier.
The indemnifier authorized him to defend the suit.
iii) Right to Recover Sums Paid Under Compromise: If the indemnity holder has compromised the claim, he can recover the sums paid in compromise, provided:
The compromise was not against the instructions of the indemnifier.
It was a prudent compromise, or the indemnifier authorized the compromise.
iv) Implied Rights: Apart from statutory rights, courts have also recognized implied rights of the indemnity holder. He can call upon the indemnifier to place him in a position to meet liability as soon as liability becomes absolute, even before he has discharged it.
Thus, the indemnity holder is fully protected against all losses, expenses, and liabilities arising from the contract, ensuring that the promise of indemnity is not illusory but practically enforceable.
20. Explain the Liabilities of Surety Under a Contract of Guarantee.
A contract of guarantee is a contract to discharge the liability of a third person in case of his default. The surety’s liability is defined under Section 128 of the Indian Contract Act, 1872. The liabilities of the surety are as follows:
i) Co-extensive Liability: The liability of the surety is co-extensive with that of the principal debtor, unless otherwise agreed. This means that whatever the principal debtor is liable for, the surety is equally liable.
ii) Secondary Nature of Liability: The surety’s liability is secondary, meaning it arises only when the principal debtor makes a default. However, the creditor can sue the surety directly without first proceeding against the debtor.
iii) Immediate Liability: The creditor is not bound to exhaust remedies against the debtor before suing the surety. The surety may be sued as soon as the debtor defaults.
iv) Joint and Several Liability: The creditor may sue the surety, the principal debtor, or both together. The liability of the surety is therefore joint and several with the debtor.
v) Limited by Contract: The surety may fix a limit to his liability. For example, a surety may guarantee a loan up to ₹50,000 only. In such a case, his liability is limited to that amount.
vi) Continuing Guarantee: In case of a continuing guarantee, the surety’s liability extends to all transactions covered until the guarantee is revoked by notice, death, or otherwise.
vii) Liability in Case of Death: Unless expressly provided otherwise, the death of the surety terminates future liability but does not affect liabilities already incurred.
Thus, the liability of the surety is wide but subject to the terms of the contract, balancing the creditor’s protection with fairness to the surety.
21. Discuss the Different Kinds of Bailment.
Bailment means delivery of goods by one person to another for some purpose under a contract that the goods will be returned or otherwise disposed of according to the directions of the bailor. Bailments may be classified on the basis of reward and purpose.
A. Based on Reward (Benefit):
i) Gratuitous Bailment: Bailment without remuneration.
For the sole benefit of the bailor – e.g., leaving a suitcase at a friend’s house for free.
For the sole benefit of the bailee – e.g., lending a book or a cycle free of cost.
Standard of care differs: low for bailor’s benefit, high for bailee’s benefit.
ii) Bailment for Consideration (Non-Gratuitous Bailment): Bailment for mutual benefit where the bailee is remunerated. Example: leaving a watch for repair, or depositing goods in a warehouse.
B. Based on Purpose:
i) Bailment for Safe Custody: The bailee keeps the goods safely for the bailor, e.g., goods deposited in a bank locker.
ii) Bailment for Use: Goods are delivered to the bailee to be used, e.g., hiring a car.
iii) Bailment for Carriage: Goods are delivered for transportation from one place to another, e.g., giving goods to a transporter.
iv) Bailment for Work or Service: Goods are delivered for some work to be done, e.g., giving cloth to a tailor.
v) Pledge (or Pawn): A special kind of bailment where goods are delivered as security for repayment of a loan.
Thus, bailment covers a wide range of situations, from simple gratuitous arrangements to commercial contracts like carriage and pledge, each governed by specific rights and duties of the bailor and bailee.
22. State the Essentials of Contract of Agency.
The contract of agency is a contract where one person (agent) is authorized to act for and on behalf of another (principal) in dealings with third persons. The essentials of a valid agency are:
i) Agreement (Express or Implied): There must be an agreement between the principal and the agent. It may be express (oral or written) or implied by conduct, situation, or relationship of the parties.
ii) Intention to Act on Behalf of Principal: The agent must intend to represent the principal and not act for himself. The object is to create legal relations between the principal and third parties.
iii) Competency of Principal: The principal must be competent to contract, i.e., of majority age and sound mind, because he is the person ultimately bound by the contract.
iv) Agent Need Not be Competent: An agent may be a minor or of unsound mind, because he only creates contractual obligations between the principal and the third party.
v) No Consideration Necessary: Unlike ordinary contracts, no consideration is required to create an agency. For example, even if no commission is fixed, an agency may still be valid.
vi) Lawful Purpose: The purpose of the agency must be lawful and possible. An illegal or immoral object cannot be the subject of agency.
vii) Delegability: The authority must be such that it is delegable to an agent. Acts of personal nature (e.g., marriage) cannot be delegated.
Thus, an agency is formed by mutual consent with the object of representation, and it operates even without consideration, provided the principal is competent and the purpose is lawful.
23. Explain the Duties of Principal Towards Agent.
The principal has certain obligations towards the agent, which correspond to the rights of the agent. These duties are:
i) Duty to Remunerate (Section 219): The principal is bound to pay the agent the agreed remuneration or commission for services rendered. In the absence of agreement, reasonable remuneration must be paid.
ii) Duty to Indemnify Against Lawful Acts (Section 222): The principal must indemnify the agent against the consequences of all lawful acts done in the exercise of authority. For example, if an agent incurs expenses in buying goods for the principal, he can recover them.
iii) Duty to Indemnify Acts Done in Good Faith (Section 223): Even if the act turns out to infringe the rights of third persons, the principal must indemnify the agent if it was done in good faith. Example: selling goods believed to belong to the principal, which later turn out to belong to another person.
iv) Duty to Compensate (Section 225): The principal must compensate the agent for any injury caused due to principal’s neglect or lack of skill. For example, if the principal sends the agent to transact in a dangerous place without warning, the principal must compensate for injury.
v) Duty Not to Prevent Performance: The principal must not obstruct or prevent the agent from earning remuneration by completing the task. If prevented, the agent can still claim reasonable remuneration.
These duties ensure that the agent, while working on behalf of the principal, is adequately protected, compensated, and supported.
24. Explain the Legal Rules Regarding Sub-Agent and Substituted Agent.
A. Sub-Agent (Sections 191–193): A sub-agent is a person employed by an agent, acting under the control of the agent, in the business of the agency.
i) General Rule of Delegation: The rule is delegatus non potest delegare – a delegate cannot further delegate. Hence, an agent cannot appoint a sub-agent without the principal’s consent, unless justified by necessity or custom of trade.
ii) Proper Appointment: If properly appointed, the acts of the sub-agent bind the principal, as if he was directly appointed. The agent is responsible to the principal, and the sub-agent is responsible to the agent.
iii) Improper Appointment: If the sub-agent is improperly appointed, the agent becomes personally liable to both the principal and third parties. The principal is not bound by the acts of the sub-agent.
iv) Liability of Sub-Agent: Normally, the sub-agent is liable only to the agent. He is not directly liable to the principal except in cases of fraud, misrepresentation, or willful misconduct.
B. Substituted Agent (Sections 194–195):
A substituted agent is one appointed by the principal on the recommendation or nomination of the original agent.
i) Direct Relationship with Principal: Once appointed, the substituted agent becomes directly responsible to the principal, and not to the original agent.
ii) Original Agent’s Duty: The duty of the original agent is to exercise due care in recommending a suitable substituted agent. If he does so, he is not liable for the substituted agent’s acts.
iii) Privity of Contract: There is privity of contract between the principal and the substituted agent, but not between the substituted agent and the original agent.
Distinction: A sub-agent works under the control of the original agent, while a substituted agent is directly under the principal.
Thus, the law carefully distinguishes between sub-agents and substituted agents to protect the rights of the principal and avoid misuse of delegated authority.
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