2.1 Contract of Indemnity and Guarantee | unit 2 special contract

BRF

Unit -II

Special Contracts

Contract of Indemnity

According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity means “a contract by which one party promises to save the other from the loss caused to him by the conduct of the promissory himself or by the conduct of any other person”.

Thus, indemnity means a compensation for the loss incurred.

The person who promises to indemnify the other is called the indemnifier and the person whose loss is to be made good or to whom such promise is made by the indemnifier is known as the indemnified or indemnity holder.

For example, X, a shareholder of a company lost his share certificate. He applied for the duplicate. The company agreed to issue the same on the term that X will compensate the company against the loss where any holder produces the original certificate. Here there is a contract of indemnity between X and the company.

Essentials of a valid Contract of Indemnity

The essential elements of a contract of indemnity are stated below-

Contract: All elements of a valid contract must also be present in the contract of indemnity.

Two parties: There are two parties in a contract of indemnity-the indemnifier who promises to make good the loss of another party, and the indemnity holder or indemnified, whose loss is promised to be made good.

Loss to one party: A person can indemnify the loss of another person when he incurs it or it becomes certain that he will incur some loss.

Indemnity by the promissory: The purpose of the contract of indemnity is to protect the indemnity holder from any loss that may be caused to him.

Acts caused by human agency: The definition of indemnity as given under section 124 of the Indian Contract Act, 1872 has restricted the scope of indemnity only to loss caused by some human act. Thus, losses caused by accidents, fire or perils of the sea are excluded from the provisions of the contract of indemnity.

Rights of Indemnity Holder

Section 125 of the Act deals with the following rights of indemnity holder when sued upon:

Right to recover damages: The indemnity holder has a right to recover all damages paid by him in any suit in respect of any matter covered by the contract of indemnity.

Right to recover costs and sums paid: the indemnity holder has the right to recover all the costs incurred in bringing or defending the suit and sums paid by him under the terms of a compromise of such suit, subject to the following conditions-

The indemnifier authorized him to bring or defend the suit or to compromise the suit, or

The indemnity holder did not contravene the orders of the indemnifier and the indemnity holder acted as it would have been prudent for him to act in the absence of any contract of indemnity.

Contract of Guarantee

According to section 126 of the Indian Contract Act, 1872, a contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety/guarantor, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. The contract of guarantee may be oral or written.

For example, an employer agrees to keep Ramu as his peon on the guarantee given by his manager Mr. Verma. Later Ramu committed breach of his duties due to which the employer incurred losses. Hence, Mr. Verma was liable for such losses so suffered by the employer.

Essentials of a Contract of Guarantee

i) Existence of a debt: The contract of guarantee exists to secure the payment of a debt. Existence of a debt is primary for a contract of guarantee to arise.

ii) Tripartite agreement: There exist three agreements in a contract of guarantee- one between the creditor and the principal debtor, one between the debtor and the surety and one between the surety and the creditor.

iii) Nature of liability: The liability of the principal debtor is primary and that of the surety is secondary and conditional, as it arises only in case of default by the debtor.

iv) Consideration: There need not be direct consideration between the surety and the creditor. Some benefit accruing to the debtor from the creditor is sufficient consideration for the guarantor/surety.

v) No misrepresentation: The creditor should disclose and should not conceal any facts which are likely to affect the surety’s liability.

Difference between Contract of Indemnity and Guarantee

	Contract of Indemnity	Contract of Guarantee
1.	Defined U/S 124 of the Indian Contract Act, 1872.	Defined U/S 126 of the Indian Contract Act, 1872.
2.	Two parties are involved- Indemnity Holder and Indemnifier.	Three parties are involved- Creditor, Principal Debtor and Surety.
3.	There exists only one contract.	There exist three contracts.
4.	Indemnifier’s liability is primary.	Surety’s liability is secondary.
5.	Liability arises on happening of contingency.	Liability arises on existence of debt.
6.	All parties must be competent.	Principal debtor may be a minor.
7.	No Right of Subrogation	There is right of subrogation available to the surety.

Liabilities of Surety

The liability of the surety arises in case of default of the principal debtor. The extent of the surety’s liability is discussed below:

The liability of the surety is co-extensive: The surety’s liability is co-extensive with that of the principal-debtor, i.e., the surety is liable exactly for that amount for which the principal debtor is liable.

Liability of surety is secondary: The surety will be liable only in case of default of the principal debtor and not otherwise. Thus, the surety’s liability is secondary.

Creditor may proceed against the debtor or surety: Where the debtor makes a default in the payment, the creditor may either proceed against the debtor or the surety to recover his debt.

Surety’s liability may be conditional: The surety may impose certain conditions in the contract of guarantee.

Surety’s liability when the original contract is void or voidable: The surety can be held liable even if the original agreement between the creditor and the debtor becomes void or voidable.

Liability under continuing guarantee: The surety may agree to become liable for a series of transactions of continuous nature. However, the surety may fix a limit on his liability and a time period up to which the guarantee shall remain effective.

Rights of surety

The surety has the following rights against the Creditor, Principal Debtor and against co-sureties:

Rights of surety against the creditor

Right to all securities: According to Sec. 141 of the Indian Contract Act, 1872, a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the Contract of Guarantee is entered into.

Right of surety if creditor parts with the security: If the creditor losses or sells off the security (of the debtor) without notice to the surety then the surety is discharged to the value of the security.

Right of set-off: If the debtor had some counter claim against the creditor, then the surety has the right to set off such claim, against the claim of the creditor, against the debtor.

B. Rights of surety against the Debtor

Right of subrogation: Subrogation means “stepping into someone’s shoes”. As per Sec. 140 of the Act, when the guaranteed debt has become due and the surety has paid the debt amount to the creditor, thereafter the surety has all the rights which the creditor had against the debtor. This right of the surety is called the right of subrogation.

Right to indemnity: As per Sec. 145 of the Act, the surety is entitled to recover from the debtor all payments made by the surety in the contract of guarantee.

C. Rights of surety against co-sureties

Right of equal contribution: According to Sec. 146 of the Act, where there are more than one surety for a debtor, they all are called as co-sureties. Such co-sureties are liable to contribute equally (in absence of any contract) in case of default by the debtor.

Right of co-sureties bound in different sums: Sec. 147 states that, where the co-sureties have agreed to contribute different sums, they all contribute equally, subject to the maximum amount guaranteed by each one.

2.2 Contract of Bailment

Meaning of Bailment

The word ‘bailment’ is derived from the French word ‘bailer’ meaning ‘deliver’. A bailment is the delivery of commodities by an individual to another for specific purpose, on the condition that after the purpose is accomplished, the commodities have to be returned. Common examples of bailment are- hiring of commodities, furniture, or cycle etc. delivering of cloth to a tailor for making suit, delivering of car or scooter for maintenance, depositing luggage etc.

According to Section 148 of the Indian Contract Act, a bailment is the delivery of commodities by one individual 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 direction of the person delivering them. The person delivering the goods is called the ‘Bailor’ and the one to whom they are delivered is called the ‘Bailee’. The transaction is called ‘bailment’. Bailment involves change of possession & not transfer of ownership.

Characteristics of Bailment

Contract: A bailment is formed by a contract between the bailor and the bailee. The agreement may be express or implied.

Delivery of commodities/possession: A bailment involves delivery of commodities from one person to another. Delivery includes only change in possession of the commodities and not the ownership. Delivery or possession may be actual or constructive.

For some specific purpose: The delivery of the commodities from the bailor to the bailee must be for some specific purpose. Delivery by mistake to a person is not a bailment.

Return of specific commodities: After completion of the purpose, the commodities are returned or disposed of according to the directions of the bailor. If the commodities are not to be returned, there is no bailment.

Bailment is concerned only with commodities: According to Sec. 2 (1) of the Sale of Commodities Act, 1930, commodity means every kind of moveable property other than money and actionable claims. Bailment is concerned only with commodities.

Ownership: - In bailment, bailor continues to be the owner even if the commodities are in possession of the bailee.

Classification of bailmentA. Gratuitous and non-gratuitous bailment

Gratuitous Bailment is a bailment which is without any reward or consideration. It is done for free, to help the bailee.

Non-gratuitous Bailment is a bailment for reward or consideration.

B. Bailment for benefits1. Bailment for the benefit of the bailor: Where only the benefit accrues to the bailor, such a bailment is exclusively for the benefit of the bailor. For example, delivering of commodities to a neighbor for safe custody, without charge.2. Bailment for the exclusive benefit of the bailee: This kind of bailment is formed for the exclusive benefit to the bailee. For example, lending a bike to a friend for his personal use.3. For mutual benefit of the bailee and the bailor: Where both the bailor and the bailee gain some benefit in the contract, such bailment is for mutual benefit. For example, hiring a car or giving a cycle for repair.

C. Voluntary and involuntary bailment

Voluntary bailment is the result of express contract between bailor and bailee whereas involuntary bailment is the result of operation of law.

Rights of Bailor

The rights enjoyed by the bailor are:

Enforcement of bailee’s duties: The duties of the bailee are the rights of the bailor.

Right to terminate bailment: The bailor has the right to terminate the bailment if the bailee does any act which is inconsistent with the terms of the bailment.

Right to demand return of goods: When the goods are lent without reward, the bailor can demand their return whenever he pleases even though he lent them for a specified purpose or time and the bailee is not guilty of wrongful use.

Duties of Bailor

The bailor has the following duties:

Duty to disclose faults in goods bailed: The bailor must disclose all the known faults in the goods and if he fails to do so, he will be liable for any damage resulting directly from facts.

Duty to repay necessary expenses in case of gratuitous bailment: When goods are delivered to any bailee without paying remuneration, it is the duty of the bailor to pay any extraordinary expenses incurred by the bailee in respect of such goods.

Duty to indemnify bailee: The bailor is bound to indemnify the bailee for any cost which the bailee may incur because of the defective title of the bailor for the goods bailed.

Duty to receive back the goods: It is the duty of the bailor to receive back the goods when the bailee returns them after the time of bailment has expired or the purpose of bailment has been accomplished. If the bailor refuses to take delivery, the bailee can claim compensation for all necessary expense of, and incidental to the safe custody.

Rights of Bailee

The rights enjoyed by a bailee are as follows:

Enforcement of bailor’s duties: The duties of the bailor are the rights of the bailee. Thus the bailee has the right to-

Claim damages for loss arising from the undisclosed facts in the goods bailed.

Claim reimbursement for extraordinary expenses incurred in relation to the goods bailed.

Be indemnified for any loss suffered by reason of defective title of the bailor to the goods bailed.

To claim compensation for expenses incurred for the safe custody of the goods if the bailor has wrongfully refused to take delivery of them after the term of bailment is over.

2. Right to deliver goods to one of the several joint bailers: when goods have been bailed by several joint owners, the bailee has a right to deliver the goods to one of the several joint owner without the consent of all, in the absence of any agreement to the contrary.

3. Right to deliver goods, in good faith, to bailor: If the bailor has no title to the goods, and the bailee delivers them back to the bailor in good faith, the bailee is not responsible to the true owner in respect of such delivery.

4. Right of action against third party: if a third party wrongfully deprives bailee of the use or possession of the goods bailed, he ha s a right of action against such third party in the same manner as the true owner has against the third person.

5. Right of lien: The bailee has a right to claim his lawful charges and if they are not paid, he is given the right to retain the goods until the charges due in respect of them are paid.

Duties of Bailee

The bailee owes the following duties:

Duty to take reasonable care: The bailee must take reasonable care of the goods bailed to him, as if they were his own. If he does so, he will not liable for any loss, destruction or deterioration of the goods bailed.

Duty not to make unauthorized use of the goods: It is the duty of the bailee not to make any unauthorised use of the goods bailed to him.

Duty not to mix bailed goods with his own goods: It is the duty of the bailee not to mix the bailed goods with his own goods, without the consent of the bailor. If he does so, the bailee will have to bear the expenses incurred due to such mixture.

Duty to return the goods: It is the duty of the bailee to return the goods according to the bailor’s directions, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished.

Duty to deliver any accretion to the goods: It is the duty of the bailee to deliver to the bailor any natural increase or profit accruing from the goods bailed, unless there is a contract to the contrary.

Termination of Bailment

A contract of bailment terminates under the following circumstances:

If the bailment is for a specific period, it terminates on the expiry of that period.

If the bailment is for a specific purpose, it terminates as soon as that purpose is fulfilled.

If the bailee does not act with regard to the goods bailed which is inconsistent with the terms of the bailment, the bailment may be terminated by the bailor even though the terms of bailment has not expired or the purpose of bailment has not been accomplished.

A gratuitous bailment can be terminated by the bailor at any time, even before the specified time or before the purpose is achieved, subject to the limitation that where such termination causes loss in excess of benefit actually derived by the bailee, the bailor must indemnify the bailee for the amount in which the loss occasioned exceeds the benefit derived.

A gratuitous bailment is terminated by the death of either of the parties.

Pledge

According to Sec. 172 of the Indian Contract Act, 1872, pledge means the bailment of goods as security for payment of a debt or performance of a promise. In this case the bailor is called the ‘Pledger’ or ‘Pawnor’ and the bailee is called the ‘Pledgee’ or the ‘Pawnee’.

This is a special type of bailment where both moveable and immovable properties are pledged.

Pledge by non-owners

The general rule is that it is the owner who ordinary can create a valid pledge. But in the following even non-owner can make a valid pledge.

(a) Pledge by mercantile representative: Where a mercantile mediator is in possession of commodities or the credentials of the title of the commodities, any pledge made by him with the approval of the owner, will be valid and will bind the owner. (Sec. 178).

(b) Pledge by seller in possession after sale: A seller left in possession of commodities after sale can make a valid pledge. The original buyer can obtain damages from the seller but cannot recover the goods from the pledge.

(c) Pledge by co-owner in possession: One of the co-owners in sole possession of the goods may make a valid pledge of the goods with the consent of other co-owners.

(d) Pledge by person in possession under a voidable contract: Pledge created by a person who obtains possession of goods under a voidable contract, is valid, provided the contract has not been rescinded at the time of the pledge and the pledgee acts in good faith.

Rights of pawnee The rights enjoyed by a pawnee may be enumerated as follows:

Right of retainer: The Pawnee may retain the goods pledged till the charges are paid. He may retain them not only for the clearance of the dues but for

The interest due on the debt, and

All necessary expresses incurred by him in respect of the preservation of the goods pledged. (Sec 173)

2. Right of retainer for subsequent advances: When the Pawnee borrows money to the same pawnor after the time of the pledge, it is assumed that the right of retainer over the pledge of goods extends to subsequent advances also. (Sec174).

3. Rights to extraordinary express: The Pawnee is to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged but he has no right to retain the goods. (Sec. 175)

4. Right against true owner, when the pawnor’s title is defective: When the pawnor obtained possession of the goods pledged by him under a voidable contract i.e. (by fraud, undue influence, coercion) but the contract has not been rescinded at the time of the pledge, the Pawnee acquires a good title to the commodities (Sec178-A)

5. Pawnee’s right’s where pawnor makes default: Where the pawnor fails to pay debt or performance of the promise, the Pawnee may exercise the following rights:

He may file a suit against the pawnor for recovery of the debt amount and retain the goods pledged as a collateral security.

He may sell the property pledged after giving to the pawnor, reasonable notice of his intention to sell.

Rights of pawner:

Right to get back the goods pledged: The pawnor is entitled to get back the commodities pledged on the repayment of the debt or performance of the promise.

Rights to redeem the debt: The pawnor has a right to redeem the debt at any time for which the pledge is made. (Sec. 177)

Right to check the condition of goods: The pawnor has a right to check that the pawnee, like bailee, preserves the goods pledged and properly maintains them.

2.3 Contract of Agency

An agency is a comprehensive word which is used to describe the relationship that arises where one person is employed by another in order to bring the latter into legal relations with a third person.

The terms ‘agent’ and ‘principal’ are contained in Section 182 of the Indian Contract Act, 1872. Accordingly, an agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal.

Characteristics of Agency

A contract of agency has all the essentials of a contract with some special features of its own. They are as follows:

The essential characteristic of an agency is that the agent can render the principal answerable to the third-party.

The relationship of agency being based on confidence between the principal and agent, no consideration is necessary.

The principal must delegate the power to the agent to act on his behalf.

Principal must be a person capable of entering into a valid contract.

Agent may be a minor also.

The object of appointment must be to establish relationship between principal and third parties.

Test of agency

To determine whether agency relationship exist between the parties, following questions may be answered:

Whether the agent has capacity to bind the principal and make him answerable to third parties?

Whether he can create legal relations between the principal and such third party?

If both the questions are answered ‘yes’ then he is an agent otherwise he is not.

Difference between Agent and Servant:

An agent creates legal relations with third party. But the servant does not create any legal relations between the employer and the third persons.

A principal has a right to direct agent for a particular work. But master of a servant has a right to direct and say how to do the work.

A principal is liable for the wrongs of his agent done within the scope of his authority. A master is liable for the wrongs of the servant which are done during the employment.

An agent is paid commission whereas servants are paid salary.

An agent may work for several principals at the same time, but servant usually services only one master at a time.

Classification of agentsA. Classification according to extent of authority:

Specific agent: A special agent is one who is appointed to perform a particular act or to represent his principal in some particular transaction. For example, an Auctioneer.

General agent: A general agent is one who has authority to do all acts conducted with a particular trade, business or employment. For example, the manager of a firm.

Universal agent: - A universal agent is one whose authority is unlimited. He has authority to do all acts which the principal can lawfully do and can delegate.

B. Classification according to nature of work:

Commercial or mercantile agent: A mercantile agent is one who has the authority either to sell or to buy goods or to raise money on the security of goods. The various kinds of mercantile agents are as follows:

Factor: An agent entrusted with the goods for the purpose of selling them is known as factor. He enjoys discretionary power in relation to the sale of goods and also to pledge the goods.

Broker: A broker is an agent who is employed to buy or sell goods on behalf of another. He is not entrusted with the possession of goods in which he deals and cannot act or sue in his own name and also has no right of lien.

Commission agent: He is an agent who buys or sells goods for the principal on the best possible terms in his own name and who receives commission for his labour. He may or may not have possession of the goods.

Auctioneer: - An auctioneer is one who is authorized to sell the goods of his principal by public auction. He keeps goods in his possession. He always auctions goods in his double capacity, i.e., up to the sale, he is an agent of the seller and after the sale, he is the agent of the buyer.

Del credre agent: A del credre agent is one who, in consideration of an extra commission, guarantees his principal that the persons with whom he enters into contract on behalf of the principal shall perform their obligation.

2. Non-mercantile agent: Non-mercantile agents include legal practitioners, attorneys, insurance persons, clearing and forwarding agents and wife etc.

Modes of Creation of Agency

An agency may be created in different ways. It need not be created expressly. It is created from circumstances and conduct of the parties.

Agency by express bond: A contract between the principal and agent may be created by an express bond.

Agency by implied bond: Implied agency comes from the accomplishment, conditions or bond of parties. Implied agency may be of following types:

(a) Agency by estoppel: In many cases an agency may be implied from the conduct of the party, though no express authority has been given. Where the principal knowingly permits a person to act in a certain business on his behalf, such principal is stopped from denying the authority of the agent.

(b) Agency by holding out: This agency is based on the ‘doctrine of holding out’ which is a part of the law of estoppels. In this case also the alleged principal is bound by the acts of the supposed agent, if he has induced third parties to believe that they are done with his authority. But unlike an ‘agency by estoppel’, this kind of agency requires some positive act or conduct by the principal to establish agency subsequently.

(c) Agency by necessity: In certain urgent circumstances, the law confers an authority on a person to act as an agent for the benefit of another, there being no opportunity of communicating with the other. Such agency is called an ‘agency of necessity’.

3. Agency by Ratification: Ratification means subsequent adoption and acceptance of an act originally done without instruction or authority. Thus, where a principal affirms or adopts the unauthorized act of his agent, he is said to have ratified that act and there comes into existence an agency by ratification.

4. Agency by operation law: Sometimes an agency arises by operation of law. For example, partners of firm, promoters of a company.

Duties of an Agent

To act according to principal’s directions: It is the duty of the agent to act according to the directions given by his principal. If the agent does not act according to the principal and the principal suffers losses, the agent is liable for such loss. And the agent must account for all profits arising in the general course of the business of the principal.

To act with reasonable skill and diligence: An agent must perform his duties with reasonable care and diligence.

Duty to render accounts: An agent must render all accounts prepared by him supported with vouchers to his principal.

Duty to communicate: An agent must communicate to his principal and obtain necessary instructions whenever he is acting on behalf of the principal. When communication is impossible, the agent must act in the interest of the principal.

Duty not to deal on his own account: The agent cannot deal on his own account without the consent of the principal and if he does so, the principal can terminate the transaction.

Duty not to use any information against the principal: The agent must not use any information obtained in the course of the agency against the interest of the principal.

Not to set up adverse title: Agent has no rights to transfer ownership rights of goods of the principal to anyone, including himself, without the consent of the principal.

Duty not to delegate: An agent cannot employ a sub-agent to get the work done. The contract of agency is based on fiduciary relationship between the principal and the agent and thus the agent cannot further delegate the trust reposed on him by the principal.

Duty to protect interest: If the principal dies, becomes insolvent or lunatic, the agent must act on his behalf and preserve the interests of the principal.

Rights of an agent

Right to remuneration: An agent working gratuitously (without reward) cannot later demand remuneration for his services. In other cases, the agent has the right to get the agreed remuneration or reasonable remuneration if not agreed.

Right of retainer: The agent may retain all money, property or documents of the principal, which are in his possession, until his claims are satisfied.

Right of lien: The agent may retain possession of goods, property, documents or accounts of principal until all his remuneration, commission or lawful expenses are paid by the principal.

Right to be indemnified for lawful acts: The agent must be indemnified by the principal for the lawful acts done by him, within the scope of his authority, for his principal.

Right to be indemnified for acts done in good faith: When an agent does something in good faith (except criminal acts) for the principal and the act causes injury to the rights of the third person, then the agent is still indemnified for such acts by the principal.

Right to compensation: Where due to the negligence of the principal, the agent suffered any loss, the agent must be compensated for such loss by the principal.

Rights of the Principal

The duties of the agent are the rights of the principal, such as:

To ask for all accounts.

To seek damages for loss suffered due to agent’s neglect.

To demand all money received by agent on his account.

To demand all secret profit from agent, if any.

Right to injunction from court for restraining the agent to use any information against the principal.

Right to be indemnified for setting an adverse title to the goods.

Duties of Principal

The duties of the principal are the rights of the agent, such as:

Duty to pay remuneration to the agent.

Duty to indemnify the agent for lawful acts.

Duty to indemnify the agent for acts done in good faith, except criminal acts.

Duty to compensate the agent for loss suffered by him due to the principal’s negligence.

Liabilities of the principal and agent towards third parties

When agent is acting for a named principal: When the third party knows the name, identity and existence of the principal and that the agent is working for the principal, that principal is called named principal and his liabilities are as follows:

Agent working within the scope of his authority: The principal is liable for all lawful acts of the agent done within the scope of his authority.

Agent exceeding his authority: If the agent works beyond the limit of his authority and such act can be separated from the authorized act, then the principal is liable only for the authorized act. However, if such act cannot be separated from the authorized act, the principal may repudiate or terminate the whole transaction.

Principal is bound by notice given to the agent: A notice served to the agent in normal course of business conducted by him as authorized by the principal shall be presumed to be served on the principal and shall be binding on him.

B. When agent is acting for unnamed principal: Where the agent does not disclose the name of his principal to the third party, such principal is known as unnamed principal and is liable for all lawful acts of the agent.

C. When agent is acting for an undisclosed principal: Where a third party enters into a contract with the agent without knowing that he is merely an agent of some principal, then the agent will be personally liable to the third party. The principal may intervene any time and demand the third party to perform.

Liability of agent towards third party

An agent working in good faith, on behalf of the principal, and disclosing that he is merely an agent, cannot be held liable towards third parties. However, the agent is liable for any criminal acts done by him.

Termination of agency

According to Sec. 201, the various modes of termination of agency are as follows:

1. Termination of the agency by an act of the parties:-

(a) Agreement: The relation of principal and agent, like any other agreement, may be terminated at any time and at any state by the mutual agreement between the principal and agent.

(b) Revocation by the principal: A principal has an authority to terminate the agency at any time before the agent has exercised his authority, so as to bind the principal unless the agency is irrevocable.

(c) Revocation by the agent: An agency may also be terminated by the agent after giving a reasonable notice to the principal.

2. Termination of organization by operation of law:(a) Performance of the contract: The most obvious mode of terminating the agency is to do what the agent has undertaken to do. An agency is terminated when the object of the appointment of agent is accomplished.(b) Death and insanity: When the agent or the principal dies or becomes insane, the agency is terminated.(c) Destruction of subject matter: An agency which is created to deal with a certain subject matter comes to an end by the destruction of the subject matter.(d) Principal becoming an alien enemy: When the agent and the principal are alien enemies, the contract of agency is void until the countries of the principal and the agent are at peace. If war breaks out between the two countries, the contracts of agency are terminated.(e) Termination of sub-agents’ authority: The termination of an agent’s authority puts an end to the sub-agent’s authority.(f) Dissolution of a company: If the principal or agent is an incorporated company, the agency automatically ceases to exist on dissolution of the company.(g) Termination by subsequent impossibility: When the implication of an agency becomes unlawful due to subsequent change of law, the agency automatically gets terminated.

Key Takeaways

A contract of indemnity means a contract by which one party promises to save the other from the loss caused to him by the conduct of the promissory himself or by the conduct of any other person. The person who promises to indemnify the other is called the indemnifier and the person whose loss is to be made good or to whom such promise is made by the indemnifier is known as the indemnified or indemnity holder.

A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety/guarantor, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. The contract of guarantee may be oral or written.

A surety has certain rights against the creditor, the principal debtor and also against co- sureties.

A bailment is the delivery of commodities by one individual 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 direction of the person delivering them. The person delivering the goods is called the ‘Bailor’ and the one to whom they are delivered is called the ‘Bailee’. The transaction is called ‘bailment’. Bailment involves change of possession & not transfer of ownership.

Bailment may be gratuitous, which is not done for reward or non-gratuitous, which is done for reward.

Both bailor and bailee have certain rights against one another and also have duties towards one another.

Pledge means the bailment of goods as security for payment of a debt or performance of a promise. In this case the bailor is called the ‘Pledger’ or ‘Pawnor’ and the bailee is called the ‘Pledgee’ or the ‘Pawnee’. This is a special type of bailment where both moveable and immovable properties are pledged.

In certain situations, even non-owners can make a valid pledge.

Both pawnor and pawnee has rights against each other.

An agency is a comprehensive word which is used to describe the relationship that arises where one person is employed by another in order to bring the latter into legal relations with a third person. An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal.

There may be different types of agents, based on extent of authority and nature of work.

There are different modes of formation of agency- agency by express bond, agency by implied bond and agency by ratification.

There are rights and duties of principal and agent.

References

Dam, B.B. Business Law. Gayatri Publications, Guwahati (Assam), 2020.

Dhingra, J. Business Law. Kalyani Publishers, Delhi, 2019.

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