Contract 2 - || - A Complete Guide to the Indian Contract Act, 1872: Exam Notes for Students (MCQ based exam )

 

Unit 1: Indemnity, Guarantee, Bailment, and Pledge

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Indemnity (Section 124).

Guarantee (Section 126),

Bailment (Section 148):,

and Pledge (Section 172)

1. Contracts of Indemnity

• Definition (Section 124):

• A contract in which one party promises to compensate(मुआवजा) the other for a loss caused by the promisor or a third party.

• Example: Car Insurance/ Life insurance contracts are common indemnity agreements.

• Rights of Indemnity Holder When Sued (Section 125):

• Recover all damages paid in a suit.

• Recover costs incurred in defending the suit.

• Recover sums paid under a compromise if made in good faith.

• Example: A principal indemnifies an agent for losses due to third-party claims.

• Commencement of Liability:

• Liability begins when the indemnity holder suffers a loss.

• Case Law: Adamson v. Jarvis (1827) – An auctioneer indemnified for acting on a third party’s instructions.

2. Contracts of Guarantee

• Definition (Section 126):

1. A contract to perform the promise or discharge the liability of a third person (3rd party) in case of their default. e.g home loan liya and dost ko guaranteer banaya ab apne loan nahi bhara to dost ko loan bharna padega warna use pe legal case ladna padega. E.g If A (creditor- Jis ne udhar pe paise diye) lends money to B (principal debtor - Jis ne paise liye) and C (surety- Jisne gurantee di ki kuch hua to mai paise dunga) guarantees the loan, if B fails to repay the loan, A can then claim the money from C

2. Parties Involved:

1. Principal Debtor

2. Creditor

3. Surety

• Consideration for Guarantee (Section 127):

1. No special consideration is required; the consideration for the primary contract suffices.

• Distinction Between Indemnity and Guarantee:

• Nature and Extent of Surety’s Liability (Section 128)

  The surety's liability is the same as the principal debtor's, meaning the surety is responsible for the full amount owed by the debtor unless stated otherwise.

  • Example:
    A lends ₹10,000 to B. C acts as a guarantor. If B defaults, C must repay the ₹10,000. The creditor (A) can demand the full amount from C without first trying to recover it from B.

  • Case Law: Bank of Bihar v. Damodar Prasad (1969)
    The Supreme Court held that the creditor can directly sue the surety without suing the principal debtor first.

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  Continuing Guarantee (Section 129)

  A continuing guarantee applies to a series of transactions until revoked.

  • Example:
    C guarantees payment for all purchases B makes from A over six months. B buys goods worth ₹2,000 every month. If B fails to pay for some months, C is liable for all unpaid amounts.

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  Revocation of Guarantee

  1. By Notice (Section 130):
     The surety can end a continuing guarantee for future transactions by giving notice.

     • Example: C notifies A that they won’t guarantee B’s purchases anymore. C is not liable for any debts B incurs after the notice.

  2. By Death (Section 131):
     The death of the surety revokes the guarantee for future transactions unless otherwise agreed.

     • Example: C dies. The guarantee ends for any purchases B makes after C’s death.

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  Discharge of Surety from Liability

  1. Variance in Contract Terms (Section 133):
     The surety is discharged if the terms of the contract between the principal debtor and creditor are changed without the surety’s consent.

     • Example: A agrees to extend B's repayment term without informing C. C is discharged.

  2. Release of Principal Debtor (Section 134):
     If the creditor releases the principal debtor, the surety is also discharged.

     • Example: A forgives B’s debt. C is no longer liable.

  3. Act of Creditor Impairing Surety’s Remedy (Section 139): 
     (Impaire- to damage something or make it weaker)
     If the creditor does something that prevents the surety from recovering from the debtor, the surety is discharged. Example: A releases a security deposit from B that C could have used to recover payment. C is discharged.

     • Scenario:
       A lends ₹10,000 to B. C acts as a guarantor for the loan. To secure the loan, B gives A a security deposit of ₹5,000.

     Later, A releases the security deposit back to B without consulting C.

     • Impact:
       Because the security deposit could have helped C recover some of the money from B if B defaults, A’s action impairs C’s ability to recover the debt. As a result, C (the guarantor) is no longer liable to pay the loan.

  These principles ensure fairness while protecting the rights of creditors, sureties, and debtors.

3. Bailment

Definition (Section 148)

Bailment is defined as the delivery of goods by one person (the bailor) to another (the bailee) for a specific purpose under a contract. The goods must be returned or otherwise disposed of according to the instructions once the purpose is fulfilled. Explanation:

• Bailor: A, the owner of the car.
• Bailee: B, the valet who receives the car.
• Purpose: Parking the car safely.
• Fulfillment: After A finishes dining, B must return the car to A in its original condition.

NOTE: If B damages the car during parking due to negligence, B (the bailee) is responsible for compensating A, as per Section 151 (reasonable care by bailee).

Kinds of Bailment

1. Gratuitous Bailment:

• No consideration is involved between the bailor and bailee.

• Example: A lends his bicycle to B for free for a day.

2. Bailment for Hire:

• Consideration is involved, such as payment or benefit.

• Example: Renting a car from a service provider.

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Duties of Bailor

1. Disclose Known Faults (Section 150):

• The bailor must inform the bailee about any known defects in the goods.

• Example: A gives a horse to B, knowing it is prone to aggressive behavior but does not inform B. If B gets injured, A is liable.

2. Bear Extraordinary Expenses (Section 158):

• The bailor must cover any special expenses incurred by the bailee.

• Example: A asks B to take care of his sick horse, and B incurs medical expenses. A must pay for those expenses.

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Duties of Bailee

1. Take Reasonable Care (Section 151):

• The bailee must take care of the goods as an ordinary prudent person would.

• Example: If B negligently damages A’s car while parked under a tree, B is responsible.

2. Return Goods on Completion (Section 160):

• The bailee must return the goods once the purpose is complete.

• Example: A gives clothes to B for dry cleaning. B must return them once cleaned.

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Termination of Bailment (Sections 153-154)

1. Completion of Purpose or Expiry of Time:

• Bailment ends when the purpose is achieved or the agreed time expires.

• Example: Renting a lawnmower(Machine) for a week ends the bailment after 7 days.

2. Unauthorized Use of Goods:

• If the bailee uses the goods without the bailor’s consent, the bailment is terminated.

• Example: B uses A’s car for personal errands despite an agreement to use it only for delivering goods.

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Finder of Goods (Sections 168-169)

1. Right to Retain Goods:

• A finder can retain goods until reasonable expenses for their maintenance are reimbursed.

• Example: C finds A’s lost dog and incurs costs for its care. C can hold the dog until reimbursed.

2. Right to Sell:

• If the owner cannot be located despite reasonable efforts, the finder may sell the goods.

• Example: C finds a valuable watch but cannot find the owner after advertising and informing the police. C can sell the watch.

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Important Case Law

• Coggs v. Bernard (1703):
  This case established the duty of care required by a bailee. It clarified that a bailee must handle the goods entrusted with reasonable care and is liable for negligence. SHORT NOTE of Bailment:

• Definition (Section 148):

• The delivery of goods by one person (bailor) to another (bailee) for a specific purpose under a contract, to be returned or otherwise disposed of after the purpose.

• Kinds of Bailment:

• Gratuitous Bailment: No consideration involved.

• Bailment for Hire: With consideration.

• Duties of Bailor:

• Disclose known faults in goods (Section 150).

• Bear extraordinary expenses (Section 158).

• Duties of Bailee:

• Take reasonable care (Section 151).

• Return goods on completion (Section 160).

• Termination of Bailment (Sections 153-154):

• By completion of purpose or expiry of time.

• Unauthorized use of goods leads to termination.

• Finder of Goods (Sections 168-169):

• Has the right to retain goods until expenses are paid.

• Can sell goods if the owner cannot be found after reasonable effort.

• Case Law: Coggs v. Bernard (1703) – Defined the duty of care required by a bailee.

  
  
  

4. Pledge

Definition (Section 172)

A pledge is a type of bailment where goods are delivered as security for the repayment of a debt or the performance of a promise.

• The person delivering the goods is called the pawner (or pledgor).
• The person receiving the goods is called the pawnee (or pledgee).
  Once the debt is repaid or the promise is fulfilled, the pledged goods must be returned to the pawner.

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Rights of the Pawnee (Sections 173 and 176):

1. Right to Retain Goods (Section 173):
   The pawnee can keep the pledged goods until:

   • The debt is fully repaid.

   • Interest and other agreed charges are cleared.

   • Example: A borrows ₹50,000 from B and pledges gold jewelry as security. B can keep the jewelry until A repays the loan with interest.

2. Right to Recover Expenses (Section 174):
   If the pawnee incurs expenses for the preservation of the pledged goods, they can recover those expenses from the pawner.

3. Right to Sell Goods in Case of Default (Section 176):
   If the pawner fails to repay the debt, the pawnee:

   • Must give reasonable notice to the pawner.

   • Can then sell the pledged goods to recover the debt.

   • Example: A defaults on a loan, and B, after notifying A, sells the pledged jewelry. Any surplus from the sale after repaying the debt must be returned to A.

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Pledge by Non-Owners (Section 178):

A pledge by someone who is not the owner can still be valid if:

• The pawner has possession of the goods with the owner’s consent.

• The pawnee acts in good faith and does not know that the pawner lacks ownership rights.

• Example: A gives his watch to B for repair. B pledges it to C for a loan. If C acts in good faith, the pledge is valid.

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Case Law: Lallan Prasad v. Rahmat Ali (1967)

This case clarified the pawnee's rights to:

1. Retain pledged goods until the debt is repaid.
2. Sell the goods after giving reasonable notice in case of default.
   The court emphasized the importance of fulfilling the terms of the pledge and following legal procedures before selling the goods.

Short Understanding:

• Definition (Section 172):

• Bailment of goods as security for payment of a debt or performance of a promise.

• Rights of Pawnee:

• Retain pledged goods until the debt is repaid (Section 173).

• Sell goods after reasonable notice in case of default (Section 176).

• Pledge by Non-owners:

• Valid if the pawner has possession with the owner’s consent (Section 178).

• Case Law: Lallan Prasad v. Rahmat Ali (1967) – Clarified the rights of a pawnee to retain and sell goods.

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UNIT 2: Agency

1. Definitions

• Agent:(Section 182):

  • An Agent is a person appointed to act on behalf of another person (the Principal).
  • The agent can perform tasks, make decisions, or enter into contracts with third parties on behalf of the principal.
  • Key Point: The agent’s actions bind the principal if performed within the scope of authority.

  Principal:

  • The Principal is the person who appoints the agent to act on their behalf.
  • The principal is responsible for the agent’s actions performed within the scope of their authority. E.g
  • Principal: A homeowner (P).
  • Agent: A broker (A).
  • Act: The broker negotiates with a buyer for the sale of the house.
  • Result: The agreement made by the broker (A) binds the homeowner (P).

2. General Rules of Agency

Authority of Agent (Section 187)

1. Express Authority:

• The agent's authority is clearly stated by the principal, either in writing or verbally.

• Example: A shop owner explicitly tells their manager to order goods worth ₹50,000.

2. Implied Authority:

• The authority is not directly stated but is assumed based on the situation or nature of the job.

• Example: A hotel receptionist has the implied authority to book rooms for guests.

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Creation of Agency

1. By Agreement (Express or Implied)

An agency relationship is created when the principal and agent agree that the agent will act on behalf of the principal.

• Express Agreement:
  This happens when the agreement is clearly stated, either in writing or verbally.
  Example:

• You hire a real estate agent to sell your house.

• Both of you agree on the agent's role, and this forms an agency relationship explicitly.

• Implied Agreement:
  This occurs when the relationship is understood from actions or circumstances, even if not explicitly stated.
  Example:

• A business partner acts on behalf of the company without a formal agreement.

• Their actions imply they are an agent.

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2. By Ratification (Section 196)

An agency can also be created after an action has been taken by someone on behalf of the principal, even without prior authority. If the principal approves the act later, it becomes valid.

• Example:

• An employee orders office supplies without asking the boss.

• The boss later approves the order, making the employee's actions valid as an agent.

This approval is called ratification and creates an agency relationship for that ac

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No Consideration Required (Section 185)

• An agency relationship does not need consideration (payment or reward) to be valid.

• Example: A son managing his father’s property does not need to be paid to qualify as an agent.

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Difference Between Agent and Servant

Short Explanation:

1. Authority of Agent (Section 187):

• Express: Clearly stated. e.g A shop owner explicitly tells their manager to order goods worth ₹50,000.

• Implied: Derived from circumstances. e.g A hotel receptionist has the implied authority to book rooms for guests.

2. Creation of Agency:

• By agreement (express or implied).

• By ratification (Section 196): Principal approves unauthorized acts of the agent.

3. No Consideration Required (Section 185):

• Consideration is not mandatory for agency.

4. Difference Between Agent and Servant:

• Agent: Represents the principal in business dealings.

• Servant: Works under direct supervision and control.

3. Rights and Duties of Agent and Principal

Duties of Agent (Sections 211-214):

1. Conduct business as per principal’s instructions.

2. Exercise reasonable care and skill.

3. Maintain proper accounts.

4. Communicate with the principal.

Rights of Agent:

1. Right to remuneration (Section 219).

2. Right to retain money for expenses (Section 217).

3. Right to indemnity(Protection against loss) for lawful acts (Section 222).

Duties of Principal:

1. Compensate agent for lawful acts (Section 225).

2. Indemnify agent against consequences of lawful acts (Section 222).

4. Liability of Principal and Agent

1. Principal is liable for acts of the agent within authority.

2. Agent is personally liable when:

• Acts without authority.

• The principal is undisclosed.

5. Termination of Agency (Sections 201-210):

Termination of an agency means ending the relationship between the principal and the agent. Here’s how it can happen:

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1. By Acts of the Parties

This happens when the principal or the agent takes action to end the agency:

• Mutual Agreement:
  Both the principal and the agent agree to end the agency.
  Example: You hire a broker to sell your property, but later both decide to cancel the agreement.

• Revocation by Principal:
  The principal decides to end the agent’s authority.
  Example: A company stops its representative from signing further contracts.

• Renunciation by Agent:
  The agent decides to step away from the agency.
  Example: A sales agent quits their job and informs the employer.

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2. By Operation of Law

Certain events automatically terminate the agency:

• Completion of Business:
  The agency ends when the assigned task is completed.
  Example: A lawyer’s agency ends after the case is resolved.

• Death or Insanity:
  If either the principal or the agent dies or becomes mentally incapable, the agency ends.
  Example: An agent managing a store loses authority if the store owner passes away.

• Insolvency of the Principal:
  If the principal becomes bankrupt, the agency automatically ends.
  Example: A company goes bankrupt, ending the agency of its representatives.

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3. Irrevocable Agency (Section 202) - Gold loan wala example

• Some agencies cannot be terminated, especially when they are coupled with interest, meaning the agent has a personal stake in the subject matter of the agency.
  Example:

• A bank (agent) is given authority to sell pledged goods to recover a loan.

• The principal cannot revoke the bank’s authority until the loan is repaid.
  
  
  

SHORT Version:

• By Acts of Parties:

• Mutual agreement.

• Revocation by principal or renunciation by agent.

• By Operation of Law:

• Completion of business.

• Death or insanity of principal or agent.

• Insolvency of the principal.

• Irrevocable Agency (Section 202):

• Agency coupled with interest cannot be terminated.

Case Law:

• Pannalal Jankidas v. Mohanlal (1951): Principal’s liability for agent’s actions within authority.

• Syed Abdul Khader v. Rami Reddy (1979): Liability in cases involving undisclosed principals.

MCQ for Preparation ( Double check answer with Book/Notes/ Online /Offline source)

• Unit 1: Indemnity, Guarantee, Bailment, and Pledge

  1. Which section defines a contract of indemnity?
     a. Section 125
     b. Section 124
     c. Section 126
     d. Section 148
     Answer: b
     Explanation: Section 124 defines a contract of indemnity as a promise to save the other from loss caused by the promisor or a third party.
     
     

  2. What rights does an indemnity holder have under Section 125?
     a. To recover damages
     b. To recover costs of defending a suit
     c. To recover sums paid under compromise
     d. All of the above
     Answer: d
     Explanation: Section 125 outlines the rights of an indemnity holder, including recovering damages, costs, and sums paid in compromise.
     
     

  3. When does the liability of an indemnifier commence?
     a. When the loss occurs
     b. When the contract is signed
     c. When the indemnity holder incurs liability
     d. When the indemnifier gives consent
     Answer: c
     Explanation: The liability of the indemnifier arises when the indemnity holder suffers a loss or incurs liability.
     
     

  4. Which case law establishes the liability of an indemnifier?
     a. Coggs v. Bernard
     b. Adamson v. Jarvis
     c. Mohori Bibee v. Dharmodas Ghose
     d. Carlill v. Carbolic Smoke Ball Co.
     Answer: b
     Explanation: In Adamson v. Jarvis, the indemnifier was held liable for the indemnity holder's loss due to following instructions.
     
     

  5. A contract of guarantee involves how many parties?
     a. Two
     b. Three
     c. Four
     d. Five
     Answer: b
     Explanation: A contract of guarantee involves three parties: the principal debtor, the creditor, and the surety.
     
     

  6. Which section defines a contract of guarantee?
     a. Section 126
     b. Section 124
     c. Section 148
     d. Section 172
     Answer: a
     Explanation: Section 126 defines a contract of guarantee and the roles of the principal debtor, creditor, and surety.
     
     

  7. What is the liability of a surety as per Section 128?
     a. Co-extensive with the principal debtor
     b. Lesser than the principal debtor
     c. Limited to the principal amount
     d. None of the above
     Answer: a
     Explanation: As per Section 128, the surety's liability is co-extensive with that of the principal debtor unless otherwise specified.
     
     

  8. Which type of guarantee is applicable to a series of transactions?
     a. Specific guarantee
     b. Continuing guarantee
     c. Absolute guarantee
     d. Reciprocal guarantee
     Answer: b
     Explanation: A continuing guarantee, defined under Section 129, applies to multiple transactions.
     
     

  9. Which section deals with revocation of continuing guarantee?
     a. Section 130
     b. Section 129
     c. Section 133
     d. Section 139
     Answer: a
     Explanation: Section 130 allows revocation of a continuing guarantee by notice or the death of the surety.
     
     

  10. What discharges a surety from liability?
      a. Change in contract terms without surety’s consent
      b. Release of the principal debtor
      c. Act of the creditor impairing the surety’s remedy
      d. All of the above
      Answer: d
      Explanation: Sections 133, 134, and 139 describe various circumstances under which a surety is discharged.
      
      

  Unit 2: Agency

  11. Which section defines agent and principal?
      a. Section 182
      b. Section 185
      c. Section 201
      d. Section 211
      Answer: a
      Explanation: Section 182 defines an agent as a person employed to act on behalf of another (principal).
      
      

  12. What is not required for a contract of agency?
      a. Consideration
      b. Competence of the agent
      c. Competence of the principal
      d. Legal purpose
      Answer: a
      Explanation: As per Section 185, consideration is not necessary for a valid agency.
      
      

  13. What is the principal’s liability for an agent’s unauthorized act?
      a. The principal is always liable
      b. The principal is liable if the act is ratified
      c. The principal is never liable
      d. The agent is always liable
      Answer: b
      Explanation: Under Section 196, ratification by the principal makes the unauthorized act binding.
      
      

  14. Which section discusses the delegation of authority?
      a. Section 187
      b. Section 190
      c. Section 196
      d. Section 202
      Answer: b
      Explanation: Section 190 outlines when an agent can delegate authority.
      
      

  15. What happens when an agency is irrevocable?
      a. It cannot be terminated at all
      b. It cannot be terminated if coupled with interest
      c. It can be terminated only by mutual agreement
      d. It is void from the beginning
      Answer: b
      Explanation: Section 202 states that an agency coupled with interest cannot be revoked.