This article is written by Aniket nAand, Ba.LLb 4th sem, Rnb Global University, Bikaner.
A legally binding agreement between two or more parties is referred to as a contract. Although there are many different types of contracts, Indian law has recognised some particular and special types of contracts in order to give them a certain level of formality. Five categories of special contracts are recognised by the Indian Contract Act of 1872: Indemnity, Guarantee, Bailment, Pledge, and Agency. Each of these types of contracts has its own body of law. In this article the author discusses three of the specific contracts which are, Contract of Indemnity, Contract of Guarantee and Contract of Agency under the Indian Contract Act 1872.
CONTRACT OF INDEMNITY
Definition of “Indemnity” in Section 124 of the Indian Contract.
An Act is a little confined and this is how it goes: s. 124. Definition of “Contract of Indemnity.” A “Contract of Indemnity” is a contract in which one party promises to protect the other from loss brought on by the conduct of the promisor or any other party.
A agrees to hold B harmless from the effects of any legal action that C may bring against B in relation to a specific amount of 200 rupees. This is an indemnity agreement.
The above example attached to the section states that if someone takes action to protect another from the repercussions of a potential legal action against them, then that action constitutes a contract for indemnity. The indemnifier and the person they are protecting are referred to as the “indemnity holder” or “indemnified.”
Except for life and personal accident insurance, almost all insurance policies are indemnity contracts. The promise to indemnify made by the insurer is unbreakable. If a performance is not up to par, a lawsuit may be filed right away regardless of actual damages. One would have the right to request that the indemnifier save them from the liability by paying it off if the indemnity holder had liability and that liability was absolute.
Extent of liability
Section 125 lays down the extent of liability.
S. 125. Rights of indemnity-holder when sued.
Acting within the scope of his authority, the promisee in an indemnity agreement is entitled to compensation from the promisor.
(1) Any and all damages that they might be required to pay in a lawsuit regarding any matter covered by the promise to indemnify;
(2) All costs that they might be required to pay in any such suit if, in bringing or defending it, they did not disobey the promisor’s instructions and acted prudently under the circumstances absent any indemnity contract, or if the promisor gave them permission to bring or defend the suit;
(3) Any payments they may have made in accordance with any compromise of a similar lawsuit, provided that the compromise complied with the promisor’s instructions and was one that the promisee would have made if there had been no contract of indemnity or if the promisor had given them permission to do so.
Commencement of liability
When does the indemnifier become liable to pay, or when is the indemnity-holder entitled to recover his indemnity, is a crucial question in this context. The original English rule stated that an indemnity could only be paid if the party receiving it had actually lost money by paying the claim. The rule of law used to be that you had to be compensated before you could request compensation, but the rules have changed. In Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, CHAGLA J [then the Chief Justice of the Bombay High Court] provided a well-explained explanation of the process of transformation: “It is true that under English common law, no action could be maintained until the actual loss had occurred, but it was quickly realized that an indemnity could be provided even before the actual loss had occurred.
Specified time for notice
A motor vehicle with insurance was stolen and lost. According to the insurance contract, the insured was required to notify the insurer as soon as a theft or other criminal act occurred. The assured immediately reported the theft to the police but informed the insurer a month later. It was unclear if this qualified as a notice that was given right away. According to the court, the phrase “immediately” implies that notice should be given right away, avoiding needless delay. The legitimacy of the assured in the case was immediately evident in the police report. It would not be reasonable to consider a report to the insurer after one month. There was no way that indemnification denied.
CONTRACT OF GUARANTEE
S.126. “Contract of Guarantee”, “Surety”, “Principal debtor” and “Creditor”.
A “Contract of Guarantee” is an agreement to uphold a promise made by a third party or release them from liability in the event of a breach. The person providing the guarantee is referred to as the “Surety,” the party to whom it is given is referred to as the “Principal Debtor,” and the party to whom it is received is referred to as the “Creditor.” A promise may be expressed verbally or in writing.
The “Surety” is the one who provides the guarantee; the “Principal Debtor” is the one for whose default the guarantee is given; and the “Creditor” is the one to whom the guarantee is given.
ESSENTIAL FEATURES OF GUARANTEE
1. Principal debt
Recoverable debt necessary
The existence of a recoverable debt is required for the purpose of a guarantee because it is essential that a principal debtor be identified and that the surety agree to be liable in the event of their default. A guarantee cannot be considered valid if there is no principal debt. A tripartite agreement that includes the principal debtor, the creditor, and the surety is known as a contract of guarantee.
S. 127. Consideration for guarantee. –
Anything completed or a promise made on behalf of the principal debtor may be considered adequate compensation for the surety to provide the guarantee.
Accordingly, where a loan is granted or goods are sold on credit based on a guarantee, that serves as sufficient consideration. Similar to the previous example, refraining from suing the principal debtor after extending credit and the payment becoming due would be sufficient consideration for a guarantee.
When a banker received a guarantee while aware of factors seriously affecting the customer’s credit, it was determined that there was no obligation to disclose this information to the surety.
However, “It is the duty of a party taking a guarantee to put the surety in possession of all the facts likely to affect the degree of their responsibility; and if they neglect to do so, it is at their own risk.”
The court held that it could be said that the surety’s consent was taken by withholding the crucial fact from them, and as a result, they were not bound by the guarantee, where a person purchased land without disclosing that they were doing so on behalf of a society for which the surety would not have given the guarantee because the society was already involved in litigation. Sections 142 and 143 implement these principles.
S. 142. Guarantee obtained by misrepresentation, invalid. –
Any guarantee obtained by means of misrepresentation made by the creditor or with their knowledge and assent, concerning a material part of the transaction, is invalid.
S. 143. Guarantee obtained by concealment, invalid. –
Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
EXTENT OF SURETY’S LIABILITY
The fundamental tenet of the surety’s liability, as outlined in Section 128, is that the surety’s liability extends along with the principal debtors. However, the surety may limit their liability in an agreement. This is what the section says:
S.128. Surety’s liability. -The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
The first rule governing a surety’s liability is that it extends along with the principal debtor’s obligations. The phrase “co-extensive with that of the principal debtor” indicates the surety’s liability’s full extent. He is only responsible for the full amount for which the principal debtor is responsible. When the principal debtor admits liability and this has the effect of extending the period of limitation against them, the surety also becomes affected. This is stated in the only illustration appended to the section: “If the payment of a loan bond is guaranteed, the surety is liable not only for the amount of the loan, but also for any interest and charges which may have become due on it.”
2. Surety’s right to limit their liability or make it conditional
The surety is free to set a cap on their liability. Whatever the principal debtor may be owed, the surety’s liability cannot exceed the amount specified if they expressly states that their guarantee is
limited to a specific dollar amount, such as “my liability under this guarantee shall not at any time exceed the sum of £250.”
S.129. Continuing guarantee
A guarantee which extends to a series of transactions, is called a “Continuing Guarantee”.
a. A promises to be accountable for the proper collection and payment by C of those rents, up to a maximum of 5000 rupees, in exchange for B using C to collect the rent of B’s zamindari. This promise is enduring.
b. For any tea that he may occasionally supply to C, A promises to pay tea dealer 8 a sum of £ 100. Tea to the above value of £100 is provided by B, and C pays B for it. After that, 8 provides C with tea worth £200. C is non-paying. As a result of the continuing nature of the guarantee that A provided, he is now financially liable to B in the amount of £100.
Such a guarantee is meant to cover a number of transactions spread out over time. The surety undertakes to be answerable to the creditor for their dealings with the debtor for a certain time. A guarantee for a single particular transaction expires when the obligation arising from that transaction is satisfied.
S.132. Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety in other’s default. –
The obligation of each of the two parties to the third party under the first contract is unaffected by the existence of the second contract, even though the third party may have been aware of it. This is true even when two parties contract with a third party to assume a certain liability and also contract with each other that one of them will be responsible in the event of the other’s default.
Discharge Of Surety From Liability
A surety is said to be discharged from liability when their liability comes to an end. The Act recognises the following modes of discharge:
1. By revocation [S. 130]
Ordinarily a guarantee is not revocable when once it is acted upon. But Section 130 provides for revocation of continuing guarantees.
S. 130. Revocation of continuing guarantee. –
A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
The surety may at any time, with respect to future transactions, revoke a continuing guarantee by giving notice to the creditor.
(a) In exchange for B discounting bills of exchange for C at A’s request, A promises to pay all such bills to the tune of 5000 rupees to B over the course of a year. B offers a 2000 rupee discount on C’s bills. Afterwards, at the end of three months, A revokes the guarantee. A is released from all obligation to pay B for any further discount as a result of this revocation. However, if C defaults, A is responsible to B for the 2000 rupees.
2. By Death of Surety (S. 131)
Unless there is a specific contract that states otherwise, a continuing guarantee is also determined by the surety’s passing. The section expressly provides that the surety’s heirs may be sued for liability already incurred. Once more, the termination becomes effective only for future transactions.
S. 131. Revocation of continuing guarantee by Surety’s death.
Absent a specific agreement to the contrary, the death of the surety effectively revokes a continuing guarantee with regard to future transactions.
Legal heirs’ obligations
The legal heir of the decedent surety may be held accountable. However, only to the extent of the assets they inherited.
3. By Variance.
S.133. Discharge of surety by variance in terms of contract. –
Any modification made to the terms of the agreement between the principal [debtor] and the creditor without the surety’s approval releases the surety with regard to any transactions that take place after the modification.
4. Release or discharge of principal debtor [S. 134]
S. 134. Discharge of Surety by release or Discharge of Principal Debtor.
The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C’s to assign to them their property in consideration of releasing them from their demands). Here 8 is released from their debt by the contract with C, and A is discharged from their suretyship.
5. Composition, Extension of time and promise not to sue [S. 135]
S.135. Discharge of surety when creditor compounds with, gives time or agrees not to sue principal debtor. –
The surety is released from liability if the surety does not consent to a contract between the creditor and the principal debtor in which the creditor makes a composition with promises to give the principal debtor time or not to sue the debtor.
6. By impairing surety’s remedy [S. 139]
S. 139. Discharge of Surety by Creditor’s act or omission impairing Surety’s eventual remedy.-
The surety is released if the creditor violates the surety’s rights in any way or neglects to take any action that their duty to the surety requires them to take, impairing the surety’s ultimate right of action against the principal debtor.
(a) B contracts for C to have a ship built for a specific price, with payments made in installments as the project progresses. A takes on the role of C’s surety for B’s proper performance of the contract. Without A’s knowledge, C prepays B for the final two payments. This prepayment discharges A.
RIGHTS OF SURETY
A surety has certain rights against the debtor, creditor and co-sureties.
Rights against principal debtor
1. Right of Subrogation [S. 140) 2. Right to Indemnity (S. 145)
1. Right of subrogation.
[S. 140] Section 140 provides for the right of subrogation:
S. 140. Rights of Surety on performance or payment.
The surety, upon payment or performance of all that they are liable for, is invested with all the rights that the creditor had against the principal debtor in cases where a guaranteed debt has become due or the principal debtor has failed to perform a guaranteed duty.
2. Right to compensation (S. 145)
S.145. Implied promise to indemnify surety. In every guarantee contract, the principal debtor makes an implicit promise to indemnify the surety. The surety is then entitled to recover from the principal debtor any money that was legitimately paid as part of the guarantee, but not any money that was paid in error.
Rights against creditor
The surety enjoys the following rights against the creditor:
1. Right to Securities [S. 141]
2. Right to Share reduction
3. Right of Set off
1. Right to Securities (S. 141)
S. 141. Right of the Surety to benefit from the assets of the Creditor.
Whether or not the surety is aware of the existence of a security held by the creditor against the principal debtor at the time the contract of suretyship is entered into, the surety is entitled to the benefit of such security and is discharged to the extent of the security’s value if the creditor loses or parts with it without the surety’s consent.
2. Right to Share Reduction
The Hobson v. Bass case provides an example of this right. In that case, E gave B a guarantee that read, “I hereby guarantee to give you the payment of all goods you may supply to E.H., but so that my liability under this or any other guarantee shall not at any time exceed the sum of £250.” B provided E.H. with goods, which you received for £657. E.H. went bankrupt B demonstrated the
full amount in E.H.’s insolvency. and then he called the guarantors, who had each given him £250. B subsequently received £657 in pounds from the receiver.
3. Right of Set-off
If the surety is sued by the creditor, the surety may be entitled to the benefit of any set-off the principal debtor may have had against the creditor. They are allowed to defend themselves against the creditor by using debtor’s rights. The surety may also present a counterclaim if, for instance, the creditor owes them money or if the creditor is holding something in their possession that belonged to the debtor and for which the creditor could have made a counterclaim.
Rights against Co-Sureties
Where a debt has been guaranteed by more than one person, they are called co-sureties. Some of their rights against each other are:
1. Effect of releasing a surety
2. Right to contribution.
1. Effect of releasing a Surety [S. 138]
S. 138. Release of one co-surety does not discharge others. –
When there are co-sureties, the creditor’s release of one of them does not release the other co sureties or the released surety from his obligation to the other co-sureties.
Any of the co-sureties may, at his discretion, be released from responsibility by the creditor. That, however, will not serve as a release of his co-sureties. In the event of default, the released co surety will still be responsible for making contributions to the others.
2. Right to contribution (Ss. 146-147]
Co-sureties are required to contribute equally under S. 146. In the absence of a contract to the contrary, co-sureties are obligated to pay each an equal share of the total debt or that portion of it that the principal debtor has not yet paid when two or more people are co-sureties for the same debt or duty, whether jointly or severally, under the same or different contracts, and with or without knowledge of one another.
Examples (a) E defaults on payment of the loaned sum of 3000 rupees, for which A, B, and C serve as sureties to D. As a group, A, B, and C are each responsible for paying 1000 rupees.
(b) There is a contract between A, B, and C that states that A is responsible for 25% of the debt, B for 25% of the debt, and C for 50% of the debt. A, B, and C are sureties to D for the loan of
1000 rupees to E. E is in payment default. A, B, and C are each required to pay 250, 250, and 500 rupees, respectively, as sureties.
147. Liability of co-sureties bound in different sums.-
who are obligated to pay different amounts are responsible for paying the same amount, to the extent that their respective obligations will allow.
CONTRACT OF AGENCY
The relationship between two parties is referred to as an agency when one party transfers some authority to the other, allowing the latter to act on behalf of the first party in a more or less independent manner. Agency can be explicitly stated or implied. The Indian Contract Act, 1872’s Chapter X covers the laws pertaining to agency. Since agencies are used in almost all business transactions worldwide, it is crucial to understand the laws governing them. All businesses, large or small, use agencies to complete their work. As a result, laws governing agencies are a crucial area of business law. Three main parties are involved in principal and agent relationships: the Principal, the Agent, and a third party.
The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do any act for another or to represent another in dealing with third persons.
According to Section 182, The person for whom such an act is done, or who is so represented, is called the “Principal”. Therefore, the person who has delegated his authority will be the principal.
• Businessman A assigns B to make some purchases on his behalf. Here, A is the principal, B is the agent, and the “Third Person” is the source of the goods.
• Joe designates Mary to handle his banking transactions. Joe is the principal, Mary is the agent, and the Bank is the third party in this situation.
• Lavanya runs a store in Delhi even though she resides in Mumbai. Susan is chosen by her to handle the business affairs of the shop. As a result of Lavanya’s delegation of power to Susan, Susan is now an agent and Lavanya is now the principal in this situation.
Appointment of Agent
Any person who has reached the age of majority and is of sound mind may appoint an agent in accordance with Section 183. In other words, it is acceptable for anyone who can enter into a contract to appoint an agent. A minor or a person who lacks mental capacity cannot appoint an agent.
Qualifications of an Agent.
In a similar way, Section 184 permits anyone who has reached the age of majority and is of sound mind to become an agent. Being responsible to the Principal requires an agent to be of sound mind and of an adult age.
Creation of Agency
An agency can be created by:
Direct (express) appointment—This is the typical method of establishing an agency. An agency is formed between two people when one person, either orally or in writing, appoints the other as their agent.
Implication: An agency by implication is established when an agent is not expressly appointed but their appointment can be inferred from the circumstances.
Necessity – Without being formally appointed as an agent, a person may act on behalf of another in an emergency to protect that person from harm or loss. Because of this, an agency is created.
Estoppel: Estoppel can also be used to establish an agency. An agency by estoppel is established when one person acts in a way that leads a third party to believe that they are acting as someone else’s authorized agent.
Ratification: When an action taken by someone acting inadvertently as another person’s agent (on that person’s behalf) is later confirmed by that person, it establishes an agency relationship between the two.
Types of Agents
1. Special Agent—Agent designated to carry out a single, precise act
2. General Agent—Agent designated to carry out all tasks associated with a particular job. 3. Sub-Agent: An agent chosen by a principal.
4. Co-Agents are agents who have been appointed to perform a joint act.
5. Factor – An agent who receives commission payments (one who looks like the apparent owner of the things concerned)
6. Broker: An agent whose responsibility it is to establish a legal connection between two parties.
7. An auctioneer is an agent who represents the Principal as a seller during an auction.
8. A commission agent is tasked with procuring the best deals for his principal when buying and selling goods.
9. Del Credere – A representative who serves as the Principal’s salesperson, broker, and guarantor.
Authority of an Agent
Authority of an agent can be both express or implied.
According to Section 187, the authority is said to be express when it is given by words spoken or written.
Section 187 states that when authority can be deduced from the facts and circumstances of the case, it is said to be implied. The agent has the right to pursue any legal action in carrying out the work of the Principal. In other words, the agent is free to take any legal action required to complete the Principal’s work.
Implied authority is of four main types
• 1. Acting in a manner that is incidental to the proper exercise of express authority
• 2. Usual authority: carrying out tasks that are typically performed by those in the same position.
• 3. Customary authority refers to acting in accordance with a location’s long-standing traditions.
• 4. Circumstantial authority- acting in accordance with the facts of the situation
• Ali owns a store in Bihar, despite residing in Mumbai. John is the person who runs his store. With Ali’s knowledge, John manages the business transactions for the store and makes purchases from Ram. In this instance, John has implicit permission from Ali to purchase these items.
• Soham employed Abhay, who is a shipbuilder to build ships for him. In doing so, Abhay may legally buy all the material necessary to build the ships.
Chairman L.I.C v. Rajiv Kumar Bhaskar
According to the L.I.C. salary saving plan in this instance, the employer was required to take the premium out of the employee’s pay and deposit it with L.I.C. When the employee passed away, his heirs discovered that the employer had fallen behind on payments, which led to the policy expiring. It was mentioned that the employer would act as the employee’s agent and not as the agent of L.I.C., according to a clause in the acceptance letter. According to the ruling, the employer was acting as the company’s agent, making the company (L.I.C.) accountable as a Principal due to the Agent’s negligence (the employer).
Agency between Husband and Wife
In general, there is no agency between a husband and wife, unless it has been explicitly or implicitly agreed that one of them would carry out certain acts or transactions on the other’s behalf. In other words, a relationship of agency between the two parties may be established through a contract, an appointment, or ratification. When a husband’s fault results in his wife living apart from him, he is responsible for providing her with the necessities. This leads to a situation where the wife can use her husband’s credit to pay for things she needs to survive. However, if the wife separates from the husband for unjustified reasons, such as her own whims or faults, the husband is not responsible for providing for her necessities.
An agent may occasionally assign a different person to carry out the task that the Principal has given them. In general, an agent cannot assign a duty that they are expected to carry out personally to another person (delegatus non potest delegare—discussed below) unless they are forced to do so by necessity. A sub-agent is a person who works for and manages the original agent in the agency’s business, according to Section 191 of the Indian Contract Act of 1872.
Delegatus non potest delegare
In normal circumstances, an agent cannot assign the task that was given to them. The underlying tenet of the principle is that when a principal appoints an agent, they do so by investing their confidence and trust in the agent, even though they may not have the same level of confidence in the work of another person.
Difference between a Substitute agent and a Sub-agent
The fundamental distinction between a sub-agent and a substituted agent is when an agent is asked to suggest a candidate for a job, the candidate is not the Principal’s sub-agent; rather, they are the Principal’s substituted agent.
Sarah requests that her lawyer appoint an auctioneer to sell her antique goods. Naaz is appointed as the auctioneer by her solicitor. Naaz is not a sub-agent in this case; instead, she is a substitute agent for the sale.
Affiliation by Ratification
A principal may later approve an action taken by someone acting on their behalf without their knowledge or consent. If the act is approved, an agency relationship will be established, and it will be as if they had previously given the individual permission to act as their agent. Ratification may be implied or expressed (in writing or speaking) (by act or conduct).
Apples were purchased on Mark’s behalf by Steve without his knowledge or consent. Later, Mark sold those apples to someone else. Mark’s action effectively validates Steve’s purchase.
Following situations do not allow for ratification
1. When the person’s understanding of the relevant facts is flawed. That is, they are ratifying things that they only partially understand.
2. An action taken on behalf of another person that, if carried out with that person’s authority, would have the effect of harming or injuring that person or violating any of his rights.
Termination of Agency
There are five ways that an agency may be terminated or is terminated:
1. When the Principal revokes the agent’s authority
2. When the agent renounces the agency’s business
3. When the agency’s business is finished
4. When one of the parties passes away or develops a mental disability
5. If the Principal is determined to be insolvent
Revocation of Agent’s authority
The authority of an agent may be revoked under specific conditions.
1. It is subject to revocation at any time before the power is used.
2. If the agency must last for a specific amount of time in accordance with the terms of the two parties’ agreement, any prior termination by the Principal must be made up to the agent.
3. The termination is not effective until it is informed to the agent.
4. When an agent’s authority is revoked, all of their sub-agents also lose their power.
Agent’s duties to Principal
An agent has 6 duties towards his Principal:
1. He must carry out the Principal’s business in accordance with the Principal’s instructions.
2. An agent is required to carry out their duties with the same level of skill that someone in their position would normally possess.
3. An agent is required to provide the Principal with access to the pertinent accounts as and when the Principal requests.
4. An agent has a responsibility to report any difficulty of any kind they encounter while carrying out the Principal’s business. They have a responsibility to do their research in this area.
5. The Principal may revoke the agreement between them if any material fact has been omitted or if the business is not conducted as instructed by the Principal.
The Principal may withhold from the agent any benefit they may have received if the agent conducts the business in the manner he desired to conduct it rather than following the Principal’s instructions.
Hala instructs her agent Saima to purchase a specific home on her behalf. Hala is informed by Saima that the house cannot be purchased for a number of reasons, but Saima ultimately decides to purchase the home herself. Hala has the legal right to purchase the home from Saima in this situation for the same price that Saima paid for it.
Principal’s duties to Agent
There are 4 obligations the Principal has to the Agent:
1. The agent must be protected by the principal from any legal wrongdoing committed by them while acting in the capacity of an agent.
2. Even if the agent acted in good faith and ended up violating the rights of third parties, the principal is required to hold them harmless.
3. If the act that is being delegated is unlawful, the Principal is not responsible to the agent. Additionally, the agent will never be protected against crimes.
4. If the agent harms them due to their own negligence or lack of competence, the principal must compensate the agent.
Liability of Principal for Agent’s Fraud or Misrepresentation
In accordance with Section 238, the Principal is liable for any fraud or misrepresentation committed by their agent while acting on behalf of the Principal, just as if the Principal had committed the fraud or misrepresented themselves.
Rights of an Agent
The following 3 rights apply to agents:
1. Retainer right. An agent is entitled to keep any compensation or costs incurred while carrying out the principal’s business.
2. Right to compensation – After completely carrying out the agency’s business, an agent is entitled to compensation for any costs he incurred.
3. Right of Lien on Principal’s Property: Until the Principal pays the agent their just compensation, the agent has the right to hold (keep with themselves) any movable or immovable property of the Principal.
3. https://gargicollege.in/wp-content/uploads/2020/03/Unit-2-Special-Contracts.pdf 4. https://www.legalserviceindia.com/legal/article-7255-contract-of-agency.html
5. Books referred – LAW OF CONTRACT BY AVTAR SINGH
LAW OF CONTRACT BY RK BANGIA