Specific Contracts: Bailment, Pledge, Indemnity, Guarantee and Agency

Definition (s.148): 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 delivering person is the bailor; the person to whom goods are delivered is the bailee.

Essentials: (1) a contract (express or implied), (2) delivery of possession (not ownership), (3) goods only (movable property; not money meant to be spent, not immovables), (4) for a purpose, and (5) the obligation to return or dispose according to directions. Delivery (s.149) may be actual or constructive (doing anything with the effect of putting the goods in possession of the bailee or any person authorised to hold them on his behalf).

Kinds: gratuitous bailment (no reward) and bailment for reward; also bailment for the benefit of the bailor, of the bailee, or of both. Examples: loan for use, deposit, hire, pawn, carriage, repair.

Duties of the bailor:

• s.150: disclose known faults in the goods that materially interfere with their use or expose the bailee to risk. In gratuitous bailment the bailor is liable for damage if he knew of the faults and did not disclose them. In bailment for hire, the bailor is liable whether or not he knew of the faults.

• s.158: to repay necessary expenses (gratuitous bailment) and extraordinary expenses.

• s.164: to indemnify the bailee for loss arising from the bailor’s defective title.

Duties of the bailee:

• s.151: take as much care of the goods as a man of ordinary prudence would take of his own goods of the same bulk, quality and value. s.152: the bailee who takes such care is not liable for loss, destruction or deterioration, in the absence of a special contract.

• s.153: the bailor may terminate the bailment if the bailee does an act inconsistent with its terms.

• s.154: the bailee who makes unauthorised use is liable for damage arising from it.

• ss.155–157 (mixture of goods): with consent, the parties share in proportion; without consent but separable, the bailee bears the expense of separation and any damage; without consent and inseparable, the bailee must compensate the bailor for the loss.

• s.160: return or deliver according to the bailor’s directions when the time has expired or the purpose has been accomplished. s.161: if the bailee fails to return on time, he is responsible for loss even without negligence.

• s.163: deliver any increase or profit accruing from the goods (accretions), unless otherwise agreed.

• s.165–166: bailee’s delivery to one of several joint owners, and to the bailor without title.

Termination: s.153 (inconsistent act), s.162 (death of bailor or bailee in gratuitous bailment), and completion of purpose or expiry of time.

Rights of the bailee: s.168 (finder’s rights to compensation and to sue for reward offered), s.170 particular lien (retain goods bailed to him for work done on them till he is paid), s.171 general lien (bankers, factors, wharfingers, attorneys of High Court and policy-brokers may retain goods bailed to them as a security for a general balance of account, unless there is a contract to the contrary). s.169: the finder may sell if the owner cannot be found with reasonable diligence, if the goods are perishable, or if the lawful charges equal two-thirds of the value.

Special bailees: carriers (Carriers Act, 1865: a common carrier is liable as an insurer subject to statutory exceptions); railways (Railways Act, 1989); innkeepers; banks keeping lockers.

Bailment vs sale: in bailment ownership remains with the bailor and the same goods must be returned; in sale ownership passes to the buyer. Bailment vs pledge: a pledge is a bailment made as security for a debt.

Definition (s.172): the bailment of goods as security for payment of a debt or performance of a promise. The bailor is the pawnor (pledgor) and the bailee is the pawnee (pledgee).

Essentials: goods (movable), delivery of possession (actual or constructive), a debt or promise to be secured, and a contract.

Rights of the pawnee:

• s.173: retain the goods for payment of the debt, interest, and necessary expenses.

• s.174: no right to retain for any debt other than the one pledged, unless there is a contract to the contrary (but presumed for subsequent advances).

• s.175: claim extraordinary expenses incurred for preservation.

• s.176: on default, the pawnee may (a) sue on the debt and retain the goods as collateral, or (b) sell the goods after giving the pawnor reasonable notice. If the proceeds are less than the debt, the pawnor remains liable for the balance; any surplus must be paid to the pawnor.

Right of the pawnor (s.177): to redeem at any time before actual sale, on payment of the debt, interest and expenses incurred owing to the default. Cases: Lallan Prasad v Rahmat Ali (1967: the pawnee’s sale without notice is not valid); Bank of Bihar v Damodar Prasad (1969).

Pledge by non-owners (exceptions to the rule nemo dat):

• s.178: by a mercantile agent in possession of goods or documents of title with the owner’s consent, acting in the ordinary course of business, if the pawnee acts in good faith without notice.

• s.178A: by a person in possession under a voidable contract (if the contract has not been rescinded before the pledge and the pawnee acts in good faith without notice).

• s.179: by a pawnor having a limited interest (to the extent of that interest).

• A pledge by a co-owner in possession with the consent of the others, and by a seller in possession after sale.

Pledge vs mortgage, hypothecation and lien:

Definition (s.124): 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. The promisor is the indemnifier and the promisee is the indemnified (indemnity-holder).

Nature: two parties; a contingent contract; the liability arises on the loss. The Act’s definition is narrower than the English one because it covers only losses caused by human conduct; losses from fire, accident or other events not caused by human agency are not within the strict statutory definition. In Gajanan Moreshwar v Moreshwar Madan (Bombay HC, 1942), the court held that the Act’s provisions are not exhaustive and that equitable principles of indemnity apply, so the indemnifier must pay even before the indemnity-holder has actually paid, if the liability has become absolute. Insurance contracts (fire, marine, motor) are contracts of indemnity, but life and personal accident insurance are not (the loss cannot be measured).

Rights of the indemnity-holder (s.125), when sued: (1) all damages he is compelled to pay in a suit in respect of any matter covered by the promise; (2) all costs he is compelled to pay in bringing or defending the suit, if he acted as prudently as in his own case or under the promisor’s authority; and (3) all sums paid under the terms of a compromise of the suit, if not contrary to the promisor’s orders and if prudent or authorised.

Definition (s.126): a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person giving the guarantee is the surety; the person in respect of whose default it is given is the principal debtor; the person to whom it is given is the creditor. A guarantee may be oral or written.

Essentials: three parties (principal debtor, creditor, surety); a liability which is existing or likely to arise; a promise by the surety; consideration (s.127: anything done or any promise made for the benefit of the principal debtor is sufficient consideration; the surety need not benefit directly); free consent, and no misrepresentation or concealment (ss.142–143). A guarantee obtained by misrepresentation or concealment of a material part of the circumstances is invalid (but contracts of guarantee are not contracts uberrimae fidei in the strict insurance sense; the creditor must disclose facts that would affect the surety’s willingness).

Kinds: specific (a single debt or transaction) and continuing (s.129: extends to a series of transactions, such as a bank overdraft). Revocation of a continuing guarantee: by notice to the creditor as to future transactions (s.130), and by the death of the surety as to future transactions in the absence of a contract to the contrary (s.131).

Extent of liability (s.128): the surety’s liability is co-extensive with that of the principal debtor, unless the contract provides otherwise. It is immediate, and the creditor need not first proceed against the principal debtor or realise other securities (Bank of Bihar v Damodar Prasad, 1969; State Bank of India v Indexport Registered, 1992).

Discharge of the surety (ss.133–139):

Not discharging the surety: s.136 (agreement by the creditor with a third person to give time to the principal debtor), s.137 (mere forbearance to sue), s.138 (release of one co-surety does not discharge the others, nor free him from liability to contribute), and the principal debtor’s insolvency (a discharge by operation of law).

Rights of the surety:

• Against the principal debtor: subrogation and indemnity on payment (s.140, s.145), the right to the benefit of the creditor’s securities (s.141).

• Against the creditor: to have the securities handed over on payment.

• Against co-sureties: contribution (s.146: equally, in the absence of a contract; s.147: where co-sureties are bound in different sums, equally, subject to the limit of the maximum).

Bank guarantees and letters of credit: a performance or bank guarantee is an independent contract between bank and beneficiary and generally must be honoured on demand. Courts restrain payment only for fraud or irretrievable injury/special equity (U.P. Co-operative Federation v Singh Consultants, 1988; Svenska Handelsbanken v Indian Charge Chrome, 1994; Standard Chartered Bank v Heavy Engineering Corporation, 2020).

Indemnity vs guarantee:

Definition (s.182): 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 the act is done is the principal.

Capacity: the principal must have attained majority and be of sound mind (s.183). Any person may be an agent, but a minor or person of unsound mind cannot be made responsible to the principal (s.184). No consideration is necessary (s.185).

Kinds of agents: general, special and universal; mercantile agents (factor, broker, commission agent, auctioneer, del credere agent, banker); sub-agents (s.191) and substituted agents (s.194). Del credere agent: for an extra commission guarantees the solvency of third parties.

Creation of agency: express or implied (s.187); by necessity (s.189, emergency, Great Northern Railway v Swaffield); by ratification (ss.196–200); by estoppel/holding out (s.237); by operation of law (partnership, s.18 Partnership Act); and by prior relationship (husband and wife in the matter of household necessities).

Authority of agent: s.188 (an agent having authority to do an act has authority to do every lawful thing necessary); s.189 (emergency); s.190 (delegation): delegatus non potest delegare, but sub-agency is allowed where ordinary business custom, the nature of the agency requires, or purely ministerial acts.

Ratification (ss.196–200): where acts are done by one person on behalf of another without authority, the principal may ratify them, expressly or impliedly.

• The agent must have purported to act for the principal; the principal must have been in existence at the time of the act (Kelner v Baxter: a promoter cannot bind a company not yet in existence) and competent at ratification.

• The principal must have full knowledge of material facts (s.198).

• The whole transaction must be ratified (s.199).

• Ratification cannot be used to injure a third person (s.200), and it cannot be made after the time for performance has passed.

• Ratification has retrospective effect (relation back; Bolton Partners v Lambert).

Duties of an agent: follow the principal’s directions (s.211); act with reasonable skill and diligence (s.212); render accounts (s.213); communicate with the principal in difficulty (s.214); no secret profit and no dealing on his own account without disclosure (ss.215–216); pay sums received (s.218). Rights: remuneration (s.219), retainer (s.217), lien (s.221), indemnity for lawful acts (s.222), and indemnity for acts done in good faith (s.223).

Termination (s.201): by revocation by the principal, renunciation by the agent, completion of the business, death or unsoundness of mind of either, insolvency of the principal, and expiry of time. Agency coupled with interest (s.202): the agent has an interest in the property that is the subject matter; it cannot be terminated to the prejudice of that interest in the absence of an express contract. Revocation is not allowed after the authority has been partly exercised (s.204), and reasonable notice is needed (s.206).

Liability to third parties:

• Disclosed principal: the principal is bound, the agent is not personally liable (s.226 and s.230).

• s.230 exceptions (agent personally liable): contract for goods to be bought from abroad, where the agent does not disclose the principal’s name, and where the principal cannot be sued.

• Undisclosed principal (s.231): the third party may hold either the agent or the principal liable once the principal is discovered.

• s.235: a pretended agent is liable for breach of the warranty of authority. s.237: the principal is bound where he induced the third party to believe the agent’s acts were authorised (estoppel).

• s.238: misrepresentation or fraud by an agent affects the contract as if made by the principal. s.229: notice to the agent is notice to the principal.