Agency – Law of Contracts II – Notes

  • A person is an agent only when he acts as a representative of the other in business negotiations, that is to say, in the creation, modification or termination of contractual obligations between that and other person. – Krishna v. Ganpathi
  • Parties have called their relationship as an agency is not conclusive enough to say it’s an agency and contradicting fact may prove otherwise.
  • A contract of minor by his agent is valid if minor himself is bound by contract.
  • Minor can become an agent but will not be liable to the principal.
  • Banker asked to keep goods and give to customer on payment. Held banker is a bailee and not an agent.
  • Factor – Agent entrusted with goods for purpose of selling them.
  • Broker – Agent appointed to negotiate and make contract to sale or purchase of goods on behalf of his principal.
  • Del Credere Agent – Agent undertaking on payment of extra commission to be liable to principal for failure of third party to perform contract. Not liable to buyer for default of principal. Not liable for dispute between buyer and principal relating to contract or sum due.
  • If a person authorises another to assume the apparent right of disposing of trade in the ordinary course of trade, it must be presumed that the apparent authority is the real authority. The agent may bind the principal within the limits of authority with which he has been clothed by the principal.
  • Wife is an agent of husband if she is buying things of necessity, and has a domestic establishment with husband.
  • Agencies of necessity – Such as selling of goods by carrier if perishable and delivery delayed due to some reason is valid.
  • A pre-existing agency is necessary to invoke agency of necessity. So finder of goods if spend money on property of other then it’s not agency.
  • Condition for invoking agency of necessity:-
    • Inability to communicate with principal
    • Act should be reasonable necessary
    • Bona fide in the interest of party concerned
  • Duties of Agent:-
    • Duty to Execute Mandate – E.g. Agent is asked to insure goods and he charges the premium but doesn’t insure the good then agent will be liable for any subsequent loss.
    • Duty to Follow Instructions or Customs – Agent instructed to store goods at a warehouse, agent stored goods at another equally safer warehouse. Agent held liable. Liley v. Doubleday
    • Duty of reasonable care and skill – Agent liable only for direct consequences of his act.
    • Duty to communicate with principal
    • Duty to avoid conflict of interest – If agent acts without principal’s consent or may conceal fact from principal or act in a manner disadvantageous to principal, then the principal may repudiate the transaction.
    • Principal has right to benefit gained by agent dealing on his own account in business of agency.
    • Duty not to make secret profit – If an agent sells his own stock to the principal without telling the same to the principal then he must hand over the commission even if he had sold the stock at prevailing market price.
    • Duty to remit sums
    • Duty to maintain accounts
    • Duty not to delegate – Permissible in following:-
      • Nature of Work – Agent employ auctioneer
      • Trade Custom – Architect appointing surveyor
      • Ministerial Action – Authority to sign
      • Principal’s contest
  • Sub agent if properly appointed as if principal’s agent only.
  • §192 – Sub agent is responsible to agent but not to principal except in case of fraud or wilful wrong.
  • Remedies of principal against agent:-
    • To ask for an account and also demand payment of secret & illicit profits
    • To seek damages for disregard of terms of agency as also want of care & skill
    • To resist the claims of the agent for commission and indemnity by the plea that the agent had acted for himself i.e. as a principal
  • Rights of agent against principal:-
    • Right to remuneration – Agent held auction, person takes information and directly approaches principal to buy house. Held agent entitled to commission. – Green v. Bartlett
    • Right to lien – Property held by agent for special purpose cannot be liened.
    • Right to indemnity – Agent be indemnified in all lawful contract even in wagering transaction where contract is void but not unlawful.
    • Right to compensation
  • Agent if having authority act even with improper motives can bind principal.
  • An agent placed in a certain position say manager has implied authority to do all the acts a person in that position ordinarily does.
  • §188 – An agent has authority to do necessary act like agent asked to sell manure without warranty sold manure without warranty and this warranty was usual in such transactions so agent was held not liable. – Dingle v. Hare
  • Apparent authority is real authority.
  • Possession of agent is possession of principal for all purposes.
  • If employer collect premium from wages and doesn’t pay, employer is an agent of insurance company and insurance company is bound to pay.
  • Principal liable for unauthorised act of agent falling under apparent authority.
  • So knowledge gained by the agent in course of business is considered to be with the principal.
  • In cases of fraud and misrepresentation exaggerated statements by agent are acceptable as long as they weren’t sanctioned by principal.
  • Principal whose name & existence is not made by the agent could only intervene subject to certain qualifications.
  • In case of undisclosed principal, principal would be bound by the terms between agent and other party.
  • Third party could repudiate a contract in case of undisclosed principal if third party shows that had him/her known who the principal he/she wouldn’t have contracted.
  • Principal is also liable to third party and if agent goes bankrupt principal needs to pay.
  • Agent not liable for principal’s contract even if getting commission.
  • If agent excludes personal liability from contract with foreign then agent’s liability is dissolved.
  • To make agent liable it is essential to show that principal cannot be sued.
  • Either agent or principal or both could be sued when agent is personally liable.
  • Agent gives warranty and not guarantees that if contract within his authority then principal would not breach contract.
  • For ratification:-
    • On Behalf of Another – If agent doesn’t mention of agency no ratification can take place.
    • Competence of Principal –
  • Only lawful acts could be ratified.
  • Doctrine Relation Back – Offer made to unauthorised agent later ratified then if party revoke offer also prior to ratification then also offer doesn’t get revoked.
  • If agent’s interest is merely incidental to arrangement say commission or pay out of rent then that could be revoked.
  • Agency gets over after sale is completed but some courts have held that it extend till proceeds of sale are being paid.

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Bailment – Law of Contracts II – Notes

  • Essentials of Bailment
    • Delivery of Possession
    • Delivery should be upon contract
    • Delivery should be upon some purpose
  • Delivery of Possession – Custody without possession is not bailment. Waiter takes coat at restaurant and then coat is missing. Here possession hence bailment. – Ultzen v. Nicolls
  • Lady kept jewellery in a box at defendant’s place but kept the key of the box with her possession not given no bailment. – Kaliaperumal v. Vishalakshi  Similarly bank lockers also do not fall within the ambit of bailment.
  • Actual possession is physical transfer of goods. Constructive possession is when there is no change in physical delivery but something is done by the bailor so as to put the goods in possession of bailee.
  • Case involving insurance claim, where in case of an accident car had to be delivered to nearest garage for repairs. Later on car caught fire and this delivery was held sufficient to constitute insurance company as bailee and the garage keeper as sub bailee. – N.R. Srinivasa Iyer v. New India Insurance Co.
  • Delivery should be upon contract – Person’s ornament got stolen later on police recover it and it gets stolen from them. Held no bailment as there was no contract. – Ram Gulam v. Govt. of U.P.
  • The above stated view has been changed later on and it has been held that bailment can arise without an enforceable contract. –  State of Gujarat v. Memon Mahomed
  • Delivery should be upon some purpose – Bailment is to be for some purpose and is subject to the condition that when purpose is accomplished goods will be returned to bailor or disposed of as per his mandate. – R. v. Ashwel
  • Plaintiff gave several promissory notes and asked defendant’s servants to consolidate them into one single note. The servants lost the notes and he sued them as bailee. Court held since notes were not to be retuned no bailment. – Secy. of State v. Sheo Singh Rai
  • Similarly deposit with bank is not bailment as not same note and coins are to be returned. – U.O.I. v. K.V. Venugopalan
  • In sale ownership is transferred and buyer is not compelled to return good. In case of soft drink bottle where terms stipulates that  buyer will get money back on return of bottle then it is sale as buyer may not return the bottle.
  • Bailor has duty to tell bailee of any possible condition which put him at risk.  If goods damage then even if he is unaware he is liable however he is not liable for all damages but which could care and skill can guard against.
  • The burden of proof is on bailee to show that he was not negligent.
  • If bailee’s own goods are lost along with that of bailor then its not a valid excuse for showing reasonable care except when bailor knows of bailee’s negligent conduct. – Lakshmidas v. Megh Raj
  • Involuntary bailee is a person who comes into possession of something without his consent. He is not liable for any loss if he has taken reasonable care of goods.
  • Even if a clause in contract absolve bailee from his liability even if he has not taken reasonable care then that clause is valid as per §151 and §152 could only mean to take even higher duty of care and not below.
  • §154  – Provides that bailee must only use goods for purpose allowed to him by the bailor and if he uses them in other way then he is liable absolutely and even act of god won’t be a defence.
  • §155 -157 – Bailee must not mix his goods with that of bailor and if he does so and if the goods are separable then he must separate them and bear the expense of separating them or otherwise compensate the bailor.
  • §161 – If goods are not returned by bailee after completion of bailment then any loss to goods even due to act of god will be incurred by bailee. – Prakash Road Lines v. Oriental Fire and General Insurance Co.
  • §159 – If bailor take back good lend in gratuitous bailment then if bailee suffer any loss due to such pre-pone of bailment then bailor must pay for the same.
  • §162 – Bailment is terminated either by death of bailor or bailee.
  • Bailee is not entitled to keep goods even if bailor is not the true owner of the goods. He is liable to return the goods to bailor and he will not be liable for conversion while doing so.
  • If bailee return good to third person he need to show that third person had better claim over the goods. Seizure of goods from bailee by authority of law is permissible.
  • Finder of good is a bailee having only right to lien.
  • §170 – Particular lien could only be exercised when it improves good such as horse trainer and not merely maintaining good such as keeping and feeding horse a stable.
  • General lien could not be applied to deposit of money as then there is no bailment. It also does not apply to paper, security if they are kept for purpose of security or some other purpose.
  • Money could be considered as good and lien could be used. – Mercantile Bank of India Ltd. v. Rochaldas Gidumal
  • Bank could exercise lien on joint accounts. – Syndicate Bank v. Vijay Kumar
  • If security is deposited for one loan then it could not be used for another loan.
  • Factor or agent could only lien good that come in their possession in capacity of agency and also they could not lien good that come in their possession for specific purpose.
  • Solicitor forfeit their right to lien the moment they discharge themselves by misconduct or decide not to act for client or cannot represent client such as in a case where firm of lawyer got dissolved individual lawyer cannot lien.
  • If bailor wants to sue sub bailee then he is bound to the terms between bailee and sub bailee.

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Guarantee – Law of Contracts II – Notes

  • Guarantee has four elements:-
    • Recoverable Debt
    • Consideration
    • Wilful consent
    • Oral or written form
  • Recoverable Debt – Bank gave overdraft facility. Law prohibited overdraft and considered them void. Thus bank sued the surety the court held that when nothing is due on the behalf of debtor only then liability of surety stands to nothing.  – Swan v. Bank of Scotland
  • Guarantee may be enforceable in case of a void debt when debt is void due to void contract rather than void due to statute.
  • In case of minor, surety knows of minor’s age then he is liable as contract then is not collateral but principal.
  • Consideration – Past consideration is valid consideration. – SICOM Ltd. v.  Padmashri Mahipat J. Shah (2005)
  • Third illustration depicts that anything done applies to only those scenario where creditor suffer deterrence due to the surety.
  • Consent – §142 talks about misrepresentation and §143 talks about concealment both absolving surety from its liabilities.
  • Gave guarantee for servant who had committed dishonesty earlier, was not told this by the employer so held not liable. – London General Omnibus Co v. Holloway
  • Writing not necessary – §126 states both written & oral guarantee are valid.
  • §128 states that surety’s liability is coextensive to that of principal debtor.
  • If principal creditor had some security with him and he sells it off then liability of surety gets reduced accordingly. – Harigopal Agarwal v. State Bank of India.
  • If surety signs only on the belief that there would be other co-sureties then if signature of one of surety is forged then other sureties are not liable if the premise of the contract was to make sureties jointly and severable liable. Plaintiff took guarantee of three directors, one of director’s signatures were forged. Held, not liable. – James Graham v. Southgate Sands
  • Principal creditor may directly go after surety instead of exhausting its means against the principal debtor. – Bank of Bihar v. Damodar
  • In case where surety could be prevailed over such as husband – wife relation surety could be absolved if it could be shown that there was undue influence. – Barclays Bank v. O’ Brien
  • Surety has the right to limit his liability or make it conditional.  In case surety liability was upto Rs. 15,000 and also the amount decreed by the court. It was held that the surety’s liability would be no more than Rs 15,000. – Bapanna v. Devata
  • If surety does not demand for another co-surety and merely has the knowledge that there are other co-sureties then in case of absence of these co-sureties surety’s liability will not dissolve. – Traill v. Gibbons
  • In case of impossibility of contract, surety’s liability is not dissolved.  Debtor took loan to develop and maintain bee culture but bees died due to infection. Surety was held liable. Florence Mabel v. State of Kerala
  • §129 – Continuing guarantee extend to series of transactions.
  • Bank guarantee is different and is independent of underlying transaction. In case of unconditional bank guarantee liability of bank is absolute and court won’t interfere unless there is element of fraud or possibility of irretrievable justice. – Hindustan Steelworks Corp. Ltd. v. Tarapore & Co.
  • Bank’s liability in bank guarantee is unconditional and court can only interfere in case where irretrievable injustice would be done. Hindustan Steelworks Corp. Ltd. v. Tarapore & Co.
  • Bank guarantee is unequivocal and unconditional. Beneficiary need not show loss suffered by non fulfilment of contract. – Amrok Logistics Ltd. v. Digvijay Cement Ltd.
  • Where contract was alleged to be impossible and there was allegedly concealment of important facts then also debtor was not able to prevent encashment of guarantee. – D.T.H. Corp. v. S.A.I.L.
  • Failure of party to point out exact amount of loss suffered despite having the means to know so was considered fraudulent and stay was provided. Banerjee & Banerjee v. H.S.W. Constructions Ltd.
  • If encashment of guarantee is contrary to law stay is provided. In case where person had to bid by putting security withdrew its bid before it could be accepted. – Kirloskar Pneumatic Co Ltd. v, N.T.P.C.
  • Enforcement of bank guarantee cannot be made subject-matter of arbitration proceeding. – National Project Constn. Corp. v. G. Ranjan
  • §132 provide if joint debtor has some arrangement amongst themselves and even if creditor knows about it then also their liability towards creditor remains unaffected.
  • Discharge of Surety’s Liability:-
    • Revocation §130
    • Death §131
    • Variance in Terms §133
    • Discharge of principal debtor §134
    • Act or Omission on part of creditor §139
  • §130 provide in revocation of continuing guarantee, guarantor is absolved only from future transactions. Provided guarantee of 600 pounds for 12 months and revoked it before credit was provided and accordingly surety was not liable. – Offord v. Davies
  • Death of surety becomes effective only for future transactions and estate is liable for existing debts. – Durga Priya Chowdhury v. Durga Pd Roy
  • The liability of deceased surety could be extended to its heirs but only to extent of property inherited by them. – R.K. Dewan v. State of U.P.
  • Surety is discharged as soon as original contract is altered without his consent. – Pratapsingh v. Keshavlal
  • If change in terms is not material say guarantee is lowered from Rs 25,000 to Rs 20,000 then it would not absolve surety. – M.S. Anirudhan v. Thomco Bank Ltd.
  • Any alteration that absolves surety also releases property of surety if given as guarantee.  Debtor took further loan than told to surety and then consolidated previous and new loans in a new deed. The surety’s property was released. – Bolton v. Salmon
  • Guarantee is absolved of its liability if substituted by another guaranteed bond signed by other guarantors. – P.N.B. v. Yarlapadda
  • Extension of cash limit does not absolve surety as its liability is limited to its guarantee. – M.V. Shantanarasimhaiah v. Dena Bank
  • Advance authorisation of surety for alteration of terms in contract is contrary to what is stated in §133 and hence void. Consent may be prior or subsequent to alteration though.
  • If creditor obtains a decree against debtor and in it accepts a payment less than he is entitled to then that does not absolve surety. – U.O.I. v. Manku Narayana
  • If creditor accept compromise and discharge debtor then surety is also discharged. – Kahn Singh v. Tek Chand
  • Liability of surety is coextensive to that of debtor. Debt Relief Act case – Mani v. Devassy
  • Act or omission on part of creditor leading to discharge of debtor’s liability also discharges surety’s liability.
  • Composition of debt by parties and not by court discharges surety.
  • Extension of time without surety’s consent even if it is for benefit of surety discharges surety.
  • If creditor promises not to sue debtor then surety is discharged but this is to be distinguished from forbearance to sue.
  • Prevailing view in India is that the surety is not discharged even if creditor fails to sue debtor within limitation period.
  • If creditor fails to realise the proper value of goods put as security then liability of surety is reduced accordingly. – State Bank of Saurashtara v. Chitranjan
  • Surety’s right against debtor:-
    • Right of Subrogation §140
    • Right to indemnity §145
  • Surety is vested with all rights which creditor had against debtor after he has paid all he is liable for. – Babu Rao Ramchandra Rao v. Babu Manaklal
  • If debtor is selling off his personal property lest surety after paying his debt seize them then surety is entitled to an injunction by the court to prevent debtor from doing so. – Mamata Ghose v. Union Industrial Bank
  • Surety is only entitled to be indemnified for the amount he paid rightly. Anything paid wrongfully would not be indemnified.
  • Surety is entitled to any security given to creditor by debtor after paying off the debts even if the surety doesn’t know about existence of such security.
  • There are different view  (Pg 653 &654) when surety has paid its part of debt and demands proportionate share in security in cases where surety’s liability is less than value of security. In some cases it was held that interest of creditor is paramount whereas in others it was held that all power of creditor are vested in surety from the moment he makes the payment as per §140.
  • Surety can only claim reduction in payment if there has been a voluntary act on part of creditor in loosing security.  Industrial Finance Corp. v. Cannaore Spg
  • If creditor or some third party has some goods in his hands as lien then surety after paying debt has right against creditor and such third party to lien these goods.
  • §138 – Release of one co surety does not discharge other
  • §146 – Co sureties liable to contribute equally
  • §147 – Liability of co sureties in different sum
  • It does not matter whether co-surety knows or not about other co-sureties.
  • Liability under indemnity is contingent whereas in guarantee it is subsisting in the sense that once a guarantee has been acted upon liability of surety automatically arises, though it remains suspended animation till principal debtor commits default.
  • Undertaking in a guarantee is collateral in an indemnity it is original.
  • Indemnity has two parties guarantee has three parties.
  • Indemnity has only one contract whereas in a guarantee there are three contracts, debt, between creditor and surety, debtor and surety.

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Indemnity – Law of Contracts II – Notes

  • Indemnity (English Law) – Promise to save a person harmless from the consequences of an act.
  • It could be express or implied. – Secretary of State v. Bank of India Ltd.
  • Shefield Corp. v. Barclay – A corporation, having registered a transfer if stock on the request of a banker, was held entitled to recover indemnity from the banker when the transfers were discovered to be forged.
  • §124 talks of loss caused by the promisor himself or other person and therefore loss by accident like fire or peril of sea is not covered.  It must be by human agency only. – Gajanan Moreshwar v, Moreshwar Madan
  • §124 does not deal with indemnity between principal and agent.
  • Persons can only encash indemnity to meet losses suffered. Anything more would be undeserved windfall doe one and penalty for other. – Cargill Intl. v. Bangladesh Sugar & Food Ind. Corp.
  • If the liability of the indemnity-holder has become absolute then the indemnifier must indemnify the indemnity-holder even if the indemnity-holder hasn’t damnified. –Moreshwar v. Moreshwar

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Pledge – Law of Contracts II – Notes

  • Delivery of Possession – Property pledged should be delivered to the pawnee.  When producer of a film borrowed a sum of money and agreed to deliver the prints of film when ready, it was not pledge as no actual transfer of possession took place.
  • Delivery of possession may be constructive or actual.
  • Delivery by attornment – When delivery is made to third person on direction of pledger.
  • Delivery of documents of tile is effective to create a pledge. – Morvi Mercantile Bank v. Union of India
  • Pledgee having bailment of goods as security for payment will have same remedied as owner of goods against third person for deprivation of goods or injury to them.
  • Pledge by Hypothecation – When goods are allowed to remain in custody of pledger for special purposes.
  • If pledger pledges the good to A by hypothecation and later on pledges good again to B then B cannot claim anything from goods as long as A’s claim is not satisfied.
  • In pursuance of contract – Pledge shall be made in pursuance to contract.
  • Blundell Leigh v. Attenborough – The case involved that plaintiff gave jewellery to X to let her know what offer he could to him as to lending money, and in return jewellery was kept as advance. X pledged jewellery to Y for 1000 pounds and gave 500 pounds to plaintiff.  Then X died and plaintiff after paying 500 pounds sued Y for jewellery and contended no pledge took between X and Y as X had first become gratuitous bailee and later on advancement of money possession was already passed from plaintiff to X. Court held otherwise.
  • §173 & §174 – Pawnee may retain goods till all due including interest is paid but may do only so for the debt goods were pledged and not for other debt.
  • Pawnee has first claim over goods than any other creditor. Bank had rights over the stock of sugar then cane commissioner for remaining dues as goods were pledged to bank and cane commissioner was an unsecured creditor. Central Bank of India v. Siriguppa Sugars & Chemicals Ltd.
  • In case of hypothecated pledge pawnee cannot seize the good himself and need court’s decree for the same.
  • Duty of Care – Pledgee need to take reasonable care of goods or else suffer loss.
  • Security holder is not bound to proceed against the security first or surrender it before maintaining a summary suit against the buyer.  – Suraj Sanghi Finance Ltd. v. Credential Finance Ltd.
  • Requirement of Notice – Pledgee before making the sale of goods kept as security needs to give a reasonable notice of his intention to sell. This requirement cannot be done away with a contract to the contrary.
  • Banker sold goods as right to sell of pledgee, the buyer returned goods and banker sold the goods to somebody else for lower price and sued pledger for balance. Court dismissed the claim stating that should have consulted the pledger before refunding the amount. L.N.  Arjundas v. State Bank of India
  • If consent of pledgee is real it is immaterial if consent has been obtained by fraud or misrepresentation. Jeweller took jewellery stating that he has a customer and then later on pledged it, the pledge was valid.- Ah San v. Maung Ba Thi
  • Plaintiff sent diamond for sell, the pawnbroker asked his friend to pledge them. Pledge not valid as it is not in course of business of a mercantile agent to ask a friend to pledge goods. – De Gorter v. George Attenborough & Sons
  • When the transfer of possession is voidable merely by reason of its being induced by fraud, which can be rescinded at the option of the owner, the consent which followed false representation is a sufficient consent within the meaning of section 30(2) of the Sale of Goods Act. But where the fraud induced an error regarding the identity of the person to whom or the property in respect of which possession was given, the whole thing is void and there is no consent in the sense of an agreement of two persons on the same thing in the same sense.
  • If contract is rescinded before pledge takes place then no valid title passes such as if a swindler gives a cheque then if police is informed and Automobile Association is informed to trace the vehicle then its sufficient to show of intent to rescind.
  • §179 – When a person pledges goods in which he has only a limited interest, he pledge is valid to the extent of that interest.
  • If a pledgee further pledge the goods pledged to him, original pledger is still entitled to his goods as long as he is willing to pay the amount for which he pledged the goods. – Thakurdas v. Mathura Prasad
  • If the original pledge made to pledgee is not valid then any pledge further made by pledgee is also equally ineffective. – Jaswantrai Manilal Akhaney v. State of Bombay

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