Indemnity Bailment Pledge Guarantee

Presentation on

Contracts of Indemnity & Guarantee

Contracts of Bailment & Pledge

Contract of Agency

By Group No. 2

Parikshit Jain Anushree Singh

Suneet Sharma Varun Sharma

Paras Sharma Raunaq Singh

“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 .”

• All Contracts of Insurance are contracts of Indemnity except Life insurance.Parties in a Contract of Indemnity:

1. Indemnifier (Promisor) – the person who promises to make good the loss.

2. Indemnified / Indemnity holder (Promisee) – the person whose loss is to be made good.

1. There must be a loss.

2. The loss must be caused either by the promisor or by any other person.

3. Indemnifier is liable only for the loss.

4. It may be express or implied.

Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss occurs.

Essentials for a contract to Indemnity

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

b) A and B go into a shop. B says to the shopkeeper: “Let him (A) have the goods, I will see you paid.”

[Goulston Discount Co. Ltd. Vs. Clark (1967) 2 Q.B. 493]

1. All damages.

2. All costs of suit.

3. All sums.

Thus, it is clear that this contract is contingent in nature and is enforceable

only when the loss occurs.

The rights of indemnifier are similar to the rights of surety under S. 141, viz, he becomes entitled to the benefits of all the securities which the creditor has against the principal debtor whether he was aware of them or not.

(rights of surety discussed later…)

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

Surety -The person who gives the guarantee. Principal Debtor- The person in respect of whose

default the guarantee is given. Creditor- The person to whom the guarantee is

given.

a) S requests C to lend Rs. 500 to P and guarantees that if P fails to pay the amount, he will pay.

• S in this case is the surety, C is the creditor and P is the principal debtor.

b) S and P go into a shop. S says to the shopkeeper, C, “Let P have the goods, and if he does not pay, I will.”

[Birkymr Vs. Darnell, (1704) 1 Salk, 27]

Security of loans: guarantee may be given for the payment of debt ; or for the payment of the price of goods sold on credit.

Performance bond: for the good conduct or honesty of a person employed in a particular office (Fidelity guarantee).

Bail bonds: a device which ensures, that a criminal defendant will appear for trial. If the prisoner does not appear in court as desired then the bond is forfeited.

1. Concurrence

2. Primary liability in some person other than surety

3. All the essentials of a valid contract

4. It may be written or oral

5. It may be express or implied

Oral or Written Guarantee

Specific Guarantee This guarantee is restricted to a

specific transaction or engagement. For eg: availing a loan from a bank.

Continuing Guarantee (S. 129) Such guarantee covers a series of

transactions. For eg: guarantee furnished to a supplier for making supplies during the next one year.

Basis of DifferenceContract of Indemnity

(S. 124)

Contract of Guarantee (S. 126)

No. of parties

Two parties:a) Indemnifierb) Indemnified

Three parties:a)Principal Debtorb)Creditorc)Surety

No. of contracts

One contract between the indemnity holder (Indemnified) & Indemnifier.

Three contracts between:a)Creditor & P.Db)Surety & Creditorc)Surety & P.D

Nature of the liability

The liability of Indemnifier is primary, there is no secondary liability.

Primary liability is that of the Principal debtor, the surety’s liability is only secondary i.e. if the debtor does not pay.

Basis of DifferenceContract of Indemnity

(S. 124)

Contract of Guarantee (S. 126)

Purpose of contractReimbursement of loss.

Secure performance of contract (debt etc) by P.D

Scope of Contract

Its scope is narrower than contract of guarantee as it does not include the contract of guarantee.

Its scope is wider than that of contract of Indemnity as it includes contract of Indemnity also.

Consideration

Valuable consideration is available to the indemnifier from the very beginning.

No valuable consideration is available to the surety from the beginning. It may arise only in case of default committed by the P.D.

Remedy

The indemnity holder is not entitled to sue third party for whose sake the loss is caused.

The creditor is entitled to sue the surety in case the principal debtor commits the default.

Rights1. Demand payment from surety

2. Where the surety is insolvent

Obligations1. Not to change any terms of the original contract (S. 133)

2. Not to release or discharge the principal debtor (S. 134)

3. Not to compound, or give time to, or agree not to sue the principal debtor

(S. 135)

Exceptions to this rule: (S. 136, 137, 138)

4. Not to do any act inconsistent with the rights of the surety (S. 139)

Rights & Obligations of Creditor

S. 130 - By a notice of revocation. S. 131 - By death of surety. S. 133 - By variance in terms of contract. S. 134 - By discharge of principal debtor. S. 135 - By composition, extension of

time, or promise not to sue. S. 139 - By impairing surety's remedy. S. 141 - By loss of security.

“A bailment is the delivery of goods by one person to another person 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.”

Bailor – Person delivering the goods. Bailee – Person to whom the goods are

delivered.

a) A delivers a piece of cloth to B, a tailor, to be stitched into a suit. This is a contract of bailment between A & B.

b) A lends a book to B to be returned after the exams.

c) An insurance company places a damaged insured car of A in possession of R, a repairer. A is the bailor, the insurance company is the bailee, and R is sub-bailee.

[N.R. Srinivasa Iyer Vs. New India Ass. Co. Ltd., A.I.R. (1983) S.C. 899]

1. Bailment is based on a contract -- Exception: bailment is implied by law as between the finder of goods & the

owner

2. Temporary delivery of the possession of goods (S. 149)-- Actual delivery-- Constructive delivery

3. Delivery of goods must be for some purpose

4. Return of specific goods **Bailment is concerned only with goods such as every kind of movable property

other than money and actionable claims.

1. Deposit – delivery of some valuables to a neighbor for safe custody, without charge.

2. Commodatum – lending a bicycle to a friend for his use, without charge.

3. Hire – hiring a bicycle or giving a watch for repair.

4. Gratuitous bailment – where no consideration passes between the bailor & bailee. E.g., A lends a book to his friend B.

5. Non-gratuitous bailment – where consideration passes between the bailor & bailee. E.g., where A hires a bicycle from B.

1. To disclose known faults (S.150)

e.g.- A lends a horse, which he knows to be vicious, to B. He does not disclose that the horse is vicious. The horse runs away and B is thrown & injured. A is responsible to B for damage sustained.

• In case goods are bailed for hire, bailor’s responsibility is greater, he is responsible even for those faults which are not known to him.

e.g.- A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and thereby A gets injured. B is responsible to A for the injury.

• In a gratuitous bailment, however, the bailor is responsible only for those faults which are known to him & which are not disclosed.

2. To bear extraordinary expenses of bailment e.g.- A leaves his car with B, a friend, for safe custody for 2 months, B has to pay

Rs. 100 per month to the night watchman for keeping a watch over the car. It is the duty of A to pay B the necessary expenses incurred by B.

3. To indemnify bailee for loss in case of premature termination of gratuitous bailment (S. 159)

e.g.- A lends an old discarded bicycle to B for 3 months. B incurs Rs. 120 on its repairs. If A asks for the return of the bicycle in 1 month, he will have to compensate B for expenses incurred by B in excess of the benefit derived by him.

4. To receive back the goods

5. To indemnify the bailee (S. 164)

1. To take reasonable care of goods bailed

2. Duty not to make unauthorized use (S. 154)

e.g. – A lends a horse to B for his riding only. B allows C, a member of his

family, to ride the horse. C rides with care, but the horse accidently falls and

is injured. B is liable to make compensation to A for the injury caused to the

horse.

3. Duty not to mix bailor’s goods with his own (S. 155-157)

4. Duty to return the goods bailed (S. 160)

5. Duty to return any accretion of goods bailed (S. 163)

e.g. – A leaves a cow in the custody of B to be taken care of. The cow has a

calf. B is bound to deliver the calf as well as the cow to A.

1. Right to Sue (S. 180-181)

2. Right to terminate the contract if the bailee acts against the terms of the contract. (S. 153)

e.g. – A lends a horse to B for his own riding only. B uses the horse with a carriage. A can terminate the bailment.

3. Right to receive the goods back (S. 160)

4. Right to be indemnified for any loss if the bailee acts against the terms of the contract (S. 154)

e.g. – A hires a horse in Delhi from B expressly to ride it till Ghaziabad. A rides with due care, but rides it to Haridwar instead. The horse accidently falls and is injured. A is liable to indemnify B for the injury to the horse.

5. Right to receive increase or growth of bailed goods (S.163)

6. Right to receive damages in case of mixing the goods without the consent of the bailor (S. 156 & 157)

Right of Lien – right of a person to retain possession of some goods belonging to another until some debt or claim of the person in possession is satisfied.

All duties of the bailor become the rights of bailee.

Finder of lost goods: Right to retain the goods (S. 168) – as such he can retain the goods

against the owner until he receives compensation for trouble & expense incurred in preserving the goods & finding out the owner.

Right to sell (S. 169) – If the owner cannot be traced with reasonable diligence If found, he refuses to pay the lawful charges to the finder If the goods are in danger of perishing or of losing the greater part of

their value

Rights of Bailee

1. On the expiry of the period, when bailment is for a

specific period.

2. On the achievement of the object.

3. Inconsistent use of goods.

4. Destruction of the subject-matter.

5. Gratuitous bailment.

6. Death of the bailor or bailee.

“The bailment of goods as a security for the payment of a debt or

performance of a promise is called Pledge. The bailor in this case is called a Pawnor and the bailee is

called Pawnee.”

• Pawnor - The bailor in this case.

• Pawnee - The bailee in this case.

If A borrows Rs. 200 from B and keeps his watch as a security for payment of the debt, the bailment of watch

is pledge.

• Any kind of movable property, i.e. goods, valuable documents (property papers etc), or valuables (jewellery, car etc), may be pledged.

• Delivery is compulsory to complete a Pledge. If, because of the bulk of the property, actual delivery is

impracticable, a symbolic delivery will suffice (e.g.- keys to a safe deposit box).

1. Pledge by Mercantile agent (S. 178)

2. Pledge by seller or buyer in possession after sale e.g. – S sells 100 bags of wheat to B, delivery & payment of price to be made in

the next 3 months. Before the goods are delivered to B, S pledges the goods with P who acts bona fide and has no notice of the prior sale. The pledge is valid.

3. Pledge by a person with limited interest (S. 179) e.g. – F finds a watch on a road and pledges it with P for Rs. 200. F had,

however incurred Rs. 100 in getting the watch repaired. The owner can get the watch by paying Rs. 100 to P, the pledgee.

4. Pledge by a co-owner in possession

Bailment Pledge

1. Bailment can be for many reasons ranging for reward to gratuitous.

1. A pledge is bailment done for a specific type of purpose, which is to secure a loan or performance of a promise.

2. The bailee does not get a right to sell the goods.

2. A pawnee has a right to sell the goods in case of default.

3. The bailee only get a right of lien over the goods.

3. A pawnee gets a right of retainer and a special interest in the goods, which is more that just the lien.

4. The bailee can use the goods bailed. 4. The pawnee has no right to use the goods.

5. The bailee is not responsible for the loss, destruction, or deterioration if he uses the

goods with reasonable care.

5. The pawnee is absolutely liable for the upkeep of the goods.

Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true.

Right to sue the pledgor on default.

Right to sell the things pledged on giving suitable

notice to the pledgor.

Right to claim damages because of non disclosure

of any defect or fault.

Right to claim damages suffered because of

defective title of the pledgor.

Pledgee’s rights are not limited to his interest in

goods.

Right to recover any extraordinary expenditure.

Taking care of the goods. Not putting the goods to unauthorised

use. Return of goods including accruals on

payment of debt.

Rights and duties of a Pledgor can be drawn from the above duties and rights of a Pledgee respectively.

Agency is a special type of contract. The concept of agency was developed as one man cannot possibly

do every transaction himself. Hence, he should have opportunity or facility to transact business through

others like an agent.

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”

[Sec. 182]

Agent must be distinguished from a servant.

a) A being P’s agent, with authority to receive money on his behalf, receives from T a sum of money due to P. T is discharged of his obligation to pay the sum in question to P.

b) Ram while purchasing a house hires a broker (an agent) to negotiate the price of the house on behalf of Ram with a third person.

WHO MAY EMPLOY 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. [section 183] Thus, any person competent to contract can appoint an agent.

WHO MAY BE AN AGENT ?- As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]

The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.

CONSIDERATION NOT NECESSARY - No consideration is necessary to create an agency. [section 185] Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

(a) Excepting matters of personal nature.

(b)A person acting through an agent is acting himself.

(c) Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also.

(d) No consideration is necessary to create an agency.

Express Agency (S. 187) – The agent may, in such a case, be appointed either by word of mouth or by an agreement in writing.

Implied Agency (S. 187) – A and P are brothers. A lives in Delhi while P lives in Meerut. A with the knowledge of P leases P’s land in Delhi. He receives the rent and delivers it to P. A is the agent of P, though not expressely appointed as such.

Agency by Estoppel or Holding out (S. 237) – when a person has, by his conduct or statements, induced others to believe that a certain person is his agent, he is estopped from subsequently denying it. e.g. – Paras allows Varun to represent as his agent by telling Cooper that

Varun is Paras’s agent. Later on, Cooper supplied goods to Varun thinking him to be Paras’s agent. Paras shall be liable to pay the price to Cooper. By allowing Varun to represent himself as his agent, Paras leads Cooper to believe that Varun is really his agent.

Agency by operation of law – when a company is formed, its promoters are its agents by operation of law.

Agency of Necessity (S. 189) – a horse was sent by train. When it arrived at the station of destination, nobody took its delivery. The railway company, therefore, had to feed the horse. Held, the railway company was an agent of necessity and could recover the amount spend on feeding the horse.

[Great Northern Railway Vs Swaffield, (1874) L.R. 9Ex. 132]

Agency by Ratification or Ex-post facto (Ss. 196-200) – A person may act on the behalf of another without his knowledge or consent and if that person on whose behalf the act is done, accepts such an act, even if done without his consent, he is said to have ratified that act & places the parties in the same position where they’d have been if the act was done with consent.

1. Special Agent - appointed to perform a particular act or represent his principal in some particular transaction

2. General Agent – has authority to do all acts connected with a particular trade, business or employment (e.g. manager of a firm)

3. Universal Agent – his authority to act for the principal is unlimited, can even bind his principal by any lawful act which he does

4. Factor – is entrusted with the possession of the goods for the purpose of sale. Besides this job, he has the power to sell the goods on credit and to receive the price from the buyers.

5. Broker – he has an authority to negotiate at the time of sale or purchase of goods on the behalf of his principal with a third person. Unlike factor he himself has no possession of the goods.

6. Auctioneer – he sells goods or other property by auction i.e. by open sale.

7. Del Credere Agent – on the payment of some extra commission, he guarantees the

performance of the contract by the third person.

These includes attorneys, solicitors, insurance agents, clearing and forwarding agents and wife etc.

Duties Rights

To conduct the business of an agency

according to the principal's directions and

not deviate even for the benefit of the principal.

Right to receive agreed and reasonableremuneration.

To conduct the business with the skill and

diligence generally possessed.

Right to retain money of the principaltowards advances / expenses.

To render proper accounts to his principal.

Right of lien i.e. to retain properties of theprincipal for commission , expense etc.

To communicate with principal in case of difficulty.

Right of compensation for any injuries sustained by him by neglect or want of skill on the part of the principal.

Not to make any secret profits. Right to be indemnified for all acts donewithin his rights.

Not to deal on his own account.

To preserve & protect the interest of the principal in case of his death or insolvency.

Duties Rights

Pay remuneration to agent as agreed .

Recover damages from agent if he disregards directions of Principal.

Indemnify agent for lawful acts done by him as agent.

Obtain accounts from Agent.

Indemnify Agent for all acts done by him in good faith.

Recover money collected by Agent on behalf of Principal.

Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.

Obtain details of secret profit made by agent and recover it from him.

Forfeit remuneration of Agent if he misconducts the business.

an agency is terminated by the principal revoking agent’s authority.

by mutual agreement between the principal & agent.

by the business of the agency being completed.

by either the principal or agent dying or becoming of unsound mind.

by the principal’s insolvency. expiry of time. by destruction of subject matter. by dissolution of a company.

Agency coupled with interest (Sec. 202) e.g. - P gives authority to A to sell P’s land, and to pay himself, out

of the proceeds, the debt due to him from P. P cannot revoke this authority, nor is it terminated by his insanity or death.

Agent has partly exercised his authority

(Sec. 203)

Agent has incurred personal liability.