“ALL AGREEMENTS ARE NOT CONTRACTS BUT ALL CONTRACTS ARE

AGREEMENTS”
An agreement, to be enforceable by law, must possess the essential elements of a valid contract
as contained in section 10 of the Indian Contract Act. According to Section 10, "All agreements
are contract if they are made by the free consent of the parties, competent to contract, for a
lawful consideration and with a lawful object and are not expressly declared to be void."
A Contract is an agreement made between two or more parties which the law will enforce.
According to Salmond, a contract is “an agreement creating and defining obligations between the
parties.”
An agreement may be a social agreement or a legal agreement. If A invites B to a dinner and B
accepts the invitation, it is a social agreement. A social agreement does not give rise to
contractual obligations and is not enforceable in a Court of law. It is only those agreements
which are enforceable in a Court of law which are contracts.
Examples :- (a) A invites his friend B to come and stay with him for a week. B accepts the
invitation but when he comes to A, A cannot accommodate him as his wife had died the day
before. B cannot claim any compensation from A as the agreement is a social one.
(b) A father promises to pay his son Rs.100 every month as pocket allowance. Later he refuses to
pay. The son cannot recover as it is a domestic agreement and there is no intention on the part of
the parties to create legal relations.
In conclusion: Contract = Agreement + Enforceability at Law
The following are the essential elements of a valid contract:
1) Offer and Acceptance: In order to create a valid contract, there must be a 'lawful offer' by
one party and 'lawful acceptance' of the same by the other party.
2) Intention to Create Legal Relationship: In case, there is no such intention on the part of
parties, there is no contract. Agreements of social or domestic nature do not contemplate legal
relations.
3) Lawful Consideration: Consideration has been defined in various ways. According to
Blackstone, "Consideration is recompense given by the party contracting to another." In other
words of Pollock, "Consideration is the price for which the promise of another is brought."
Consideration is known as quid pro-quo or something in return.
4) Capacity of parties: The parties to an agreement must be competent t contract. If either of
the parties does not have the capacity to contract, the contract is not valid. According the

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following persons is incompetent to contract. (a) Minors, (b) Persons of unsound mind, and (c)
persons disqualified by law to which they are subject.
5) Free Consent: 'Consent' means the parties must have agreed upon the same thing in the
same sense. According to Section 14, Consent is said to be free when it is not caused by-
(a) Coercion, or (b) Undue influence, or (c) Fraud, or (d) Mis-representation, or (e) Mistake. An
agreement should be made by the free consent of the parties.
6) Lawful Object: The object of an agreement must be valid. Object has nothing to do with
consideration. It means the purpose or design of the contract. Thus, when one hires a house for
use as a gambling house, the object of the contract is to run a gambling house. The Object is said
to be unlawful if- (a) it is forbidden by law; (b) it is of such nature that if permitted it would
defeat the provision of any law; (c) it is fraudulent; (d) it involves an injury to the person or
property of any other; (e) the court regards it as immoral or opposed to public policy.
7) Possibility of Performance: If the act is impossible in itself, physically or legally, if cannot
be enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such
Agreements is not enforceable.
8) Not Declared to be void or Illegal: The agreement though satisfying all the conditions for a
valid contract must not have been expressly declared void by any law in force in the country.
Agreements mentioned in Section 24 to 30 of the Act have been expressly declared to be void for
example agreements in restraint of trade, marriage, legal proceedings etc.
9) Legal Formalities: An oral Contract is a perfectly valid contract, expect in those cases
where writing, registration etc. is required by some statute. In India writing is required in cases
of sale, mortgage, lease and gift of immovable property, negotiable instruments; memorandum
and articles of association of a company, etc. Registration is required in cases of documents
coming within the scope of section 17 of the Registration Act.
All the elements mentioned above must be in order to make a valid contract. If any one of them
is absent the agreement does not become a contract.
Thus, “all contracts are agreements but all agreements are not necessarily contracts”.
EXECUTED AND EXECUTORY CONTRACTS
BASIS EXECUTED EXECUTORY
Nature The parties under Executed The parties under Executory
contract has to do nothing contract have yet to perform

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 more. their obligations.
Performance Performance is over on the Performance is due either on
part of both the parties. the part of both the parties.
EXPRESS AND IMPLIED CONTRACTS

BASIS EXPRESS CONTRACT EXECUTORY CONTRACT

Mode Mode of creation is by words Mode of creation is not by
written or spoken. words but inferred from act or
conduct by the parties.
Terms and Conditions Terms and Conditions are Terms and Conditions are
stated very clearly. stated very clearly.
“A STRANGER TO A CONTRACT CANNOT SUE”
It is a general rule of law that only parties to a contract may sue and be sued on that contract.
This rule is known as the doctrine of privity of contract. “Privity of contract” means relationship
subsisting between the parties who have entered into contractual obligations. It implies a
mutuality of a will and creates a legal bond or tie between the parties to a contract.
The following are the exceptions to the rule that “a stranger to a contract cannot sue”:
a) A trust or charge: - A person called beneficiary in whose favour a trust or other interest in
some specific immovable property has been created can enforce it even though he is not a
party to the contract.
b) Marriage settlement, partition or other family arrangements: - When an agreement is
made in connection with marriage, partition or other family arrangements and a provision is
made for the benefit of a person, he may sue although he is not a party to the agreement.
c) Acknowledgement or estoppels: - Where the promisor by his conduct, acknowledges or
otherwise constitutes himself as an agent of a third party, a binding obligation is thereby
incurred by him towards the third party.
d) Assignment of a contract:- T he assignee of rights and benefits under a contract not
involving personal skill can enforce the contract subject to the equities between the original
parties. Thus the holder in due course of a negotiable instrument can realize the amount on it
even though there is no contract between him and the person liable to pay.

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OFFER
An Offer is a proposal by one party to another to enter into a legally binding agreement with
him. The person making the offer is known as the offeror, proposer, or promisor and the person
to whom it is made is called the offeree or proposee. An offer may be made by express words,
spoken or written. This is known as express offer.
The communication of an offer is complete when it comes to the knowledge of the person to
whom it is made.
Example: - A proposes, by a letter, to sell a house to B at a certain price. The letter is posted on
10th July. It reaches B on 12th July. The communication of the offer is complete when B receives
the letter, i.e., on 12th July.
Legal rules as to Offer
a) Offer must be such as in law is capable of being accepted and giving rise to legal
relationship. A social invitation, even if it is accepted, does not create legal relations
because it is not so intended. An offer, must therefore, must be such as would result in a
valid contract when it is accepted.
b) Terms of offer must be definite, unambiguous and certain and not loose and vague.
If the terms of an offer are vague or indefinite, its acceptance cannot create any
contractual relationship.
c) Offer must be communicated. An offer, to be complete, must be communicated to the
person to whom it is made. Unless an offer is communicated to the offeree by the offerer
or by his duly authorized agent, there can be no acceptance of it.
d) Offer must be made with a view to obtaining the assent. The offeror do or not to do
something must be made with a view to obtaining the assent of the other party addressed
and not merely with a view to disclosing the intention of making an offer.
e) Offer should do not contain a term the non-acceptance of which may be assumed to
amount to acceptance. Thus a man cannot say that if acceptance is not communicated by
a certain time, the offer would be considered as accepted.
ACCEPTANCE
A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the
offeree to an offer. It is the manifestation by the offeree of his willingness to be bound by the
terms of the offer. Acceptance may be express or implied.

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Example: - At an auction sale, S is the highest bidder. The auctioneer accepts the offer by
striking the hammer on the table. This is an implied acceptance.
Legal rules as to Acceptance
a) It must be absolute and unqualified, i.e., it must conform with the offer. An
acceptance in order to be binding, must be absolute and unqualified in respect of all terms
of the offer, whether material or immaterial, major or minor.
b) It must be communicated to the offeror. To conclude a contract between the parties;
the acceptance must be communicated in some perceptible form. A mere resolve or
mental determination on the part of the offeree to accept an offer, when there is no
external manifestation of the intention to do so, is not sufficient.
c) It must be given within a reasonable time. If any time limit is specified, the acceptance
must be given with that time. If no time limit is specified, it must be given within a
reasonable time.
d) It cannot be implied from silence. The acceptance of an offer cannot be implied from
the silence of the offeree or his failure to answer, unless the offeree has by his previous
conduct indicated that his silence means that he accepts.
CONSIDERATION
Consideration is one of the essential elements to support a contract. According to Sec 2(B)
”when at the desire of the promisor, the promise or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or to abstain from doing, something,
such act or abstinence or promise is called a consideration for the promise.”
LEGAL RULES AS TO CONSIDERATION
a) It must move at the desire of the promisor:-An act constituting consideration must
have been done at the desire or request of the promisor. If it is done at the instance of a
third party or without the desire of the promisor, it will not be a good consideration.
b) It may move from the promise or any other person:-Under the Indian Law,
consideration may move from the promise or any other person, i.e., even a stranger. This
means that as long as there is consideration for a promise it is immaterial who has
furnished it.
c) It may be past, present or future:- This means consideration may be past, present or
future. When consideration by a party for present promise was given in the past, i.e.,

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 before the date of the promise, it is said to be past consideration. When consideration is
given simultaneously with promise, i., at the time of the promise, it is sent to be present
consideration. When consideration from one party to another is to pass subsequently to
the making of the contract, it is future or executor consideration.
d) It must not to be illegal, immoral or opposed to public policy:-The consideration
given for an agreement must not be lawful.
“A CONTRACT WITHOUT CONSIDERATION IS VOID”
The general rule is that an agreement made without consideration is void, but there are certain
cases under which the agreements are enforceable even though they are made without
consideration. These cases are:-
a) Love and affection: Where an agreement is expressed in writing and registered under the
law for the time being in force for the registration of documents and is made on account
of natural love and affection between parties standing in a near relation to each other, it is
enforceable even if there is no consideration.
b) Compensation for voluntary services: A promise to compensate wholly or in part, a
person who has already voluntarily done something for the promisor, is enforceable, even
though without consideration.
c) Promise to pay a time-barred debt: A promise by a debtor to pay a time-barred debt is
enforceable provided it is made in writing and is signed by the debtor or by his agent
generally or specially authorized in that behalf. The promise may be to pay the whole or
any part of the debt.
d) Charitable subscription: Charitable subscription where the promise on the strength of
the promise makes commitments, i.e., changes his position to his detriment.
e) Agency: No consideration is necessary to create agency.
DISCHARGE OF A CONTRACT
Discharge of contract means termination of the contractual relationship between the parties. A
contract is said to be discharged when it ceases to operate, i.e., when the rights and obligations
created by it come to an end. A contract is discharged when the obligation created by it comes to
an end. A contract may be discharged in any one of the following ways:
1) Discharge by Performance

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Performance of a contract is the principal and the most usual mode of discharge of contract.
Performance may be:
a) Actual Performance: when each party to a contract fulfills his obligation arising
under the contract within the time and in the manner prescribed, it amounts to actual
performance of the contract and the contract comes to an end or stands discharged. But if
one party only performs his promise, he alone is discharged; such a party gets a right of
action against the other party who is guilty of breach.
b) Attempted performance or tender: when the promisor offers to perform his
obligation under the contract, but is unable to do so because the promise does not accept
the performance, it is called “attempted performance or tender.” Thus “tender” is not
actual performance but only an offer to perform the obligation under the contract. A valid
tender of performance is equivalent to performance.
2) By Agreement
Since a contract is created by means of an agreement, it may also be discharged by another
agreement between the same parties. The following are the methods-
a) Novation: Novation occurs when a new contract is substituted for an existing
contract, either between the same parties or between different parties, the consideration
mutually being the discharge of the old contract. If parties are not changed then the nature
of the obligation must be altered substantially in the new substituted contract for, a mere
variation of some of the terms of a contract, while the parties remain the same, is not
“novation” but “alteration.” When the parties to a contract agree for “novation” the
original contract is discharged and need not be performed.
Example: A who owes B Rs20000 enters into an agreement with him thereby giving M a
mortgage of his estate for Rs15000. This arrangement constitutes a new contract and
terminates the old.
A owes money to B under a contract. It is agreed between A, B and C that B shall
thenceforth accept C as his debtor instead of A. The old debt of A to B is at an end, and a
new debt from C to B has been discharged.
b) Rescission: Rescission means cancellation of all or some of the terms of the contract.
When parties mutually decide to cancel the terms of the contract, the obligations of the
parties there under terminate. A contract may also be taken to be impliedly rescinded

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 where none of the parties has performed his part till a long time and no party has any
complaint against the other.
Example: A promises to deliver certain goods to B on a certain date. Before the date of
performance A and B mutually agree that the contract will not be performed. The
contract stands discharged by rescission.
c) Alteration: Alteration means change in one or more of the conditions of the contract.
Alteration made by the mutual consent of the parties will be perfectly valid. But any
material alteration in terms of a written contract by one party without the consent of the
other party will discharge such party from its obligation under the contract.
Example: A enters into contract with B for the supply of 100 bales of cotton at the
godown no.1 by the first of the next month. A and B may alter the terms of the contract
by mutual consent.
d) Remission: Remission means acceptance of a lesser performance than what was
actually due under the contract. A party may dispense with or remit wholly or in part, the
performance of the promise made by him. He can also extend the time of such
performance or accept instead of it any satisfaction which he deems fit. A promise to do
so will be binding even though there is no consideration for it.
Example: A owes B Rs. 5000. A pays to B and B accepts in satisfaction of the whole
debt Rs. 2000 paid at the time and place where Rs. 5000 were payable. The whole debt is
discharged.
A owes B, under a contract, a sum of money, the amount of which has not been
ascertained. A without ascertaining the amount gives Rs. 2000 to B and B accepts the
sum. This is a discharge ps the whole debt whatever may be its amount.
e) Waiver: A contract may be discharged by agreement between the parties to waive
their rights arising from the contract. Thus, in case of waiver, the person who is entitled
to any right under the contract, intentionally relinquished them without consideration and
whether a new agreement. Waiver takes place when the parties to a contract agree that
they shall no longer be bound by the contract. This amounts to a mutual abandonment of
rights by the parties to the contract. Consideration is not necessary for waiver.
Example: A promises to paint a picture for B. B afterwards forbids him to do so. A is no
longer bound to perform the promise.

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 f) Merger: A contract is said to have been discharged by way of “merger” where an
inferior right possessed by a person or party under contract coincides with a superior right
accruing to the same person or party under the same or some other contract.
Example: P holds a property under a lease. He later buys the property. His rights as a
leasee merge into his right as an owner.
3) Discharge by Lapse of Time
Every contract must be performed either within the period fixed or within a reasonable time of
the contract. Lapse of time may discharge the contract by barring the right to bring an action to
enforce the contract under the Limitation Act. If it is not performed, and if no action is taken by
the promise within the period of limitation, he is deprived of his remedy at law. In other words,
we may say that the contract is terminated.
Example: The price of goods sold without any stipulation as to credit should be paid within
three years of the delivery of the goods. Where goods are sold on credit to be paid for after the
expiry of a fixed period of credit, the price should be paid within three years of the expiry of
period of credit. If the price is not paid and creditor does not file a suit against the buyer for the
recovery of price within three years, the debt becomes time-barred and hence irrecoverable.
4) Discharge by Operation of Law
A contract may be discharged independently of the wishes of the parties, i.e., by operation of
law. This includes discharge –
a) By death: In contracts involving personal skill or ability, the contract is terminated
on death of the promisor. In other contracts, the rights and liabilities of a deceased person
pass on to the legal representatives of the deceased person.
b) By merger: merger implies considering and meeting of an inferior and a superior
right in one the same person. In such a case, inferior right available to a party under an
agreement will automatically vanish.
Example: A is holding a property under lease. He subsequently buys that property. A‟s
right as a tenant is inferior to his right as a owner of the property. The right as a tenant
and right as an owner have coincided and met in one person i.e., A, therefore, A‟s rights
as a lease will terminates.

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 c) Death: in case, a contract is a personal nature, the death of the promisor will
discharge the contract. In other cases, the rights and liabilities of the deceased person
shall pass to his legal representatives.
d) By insolvency: an insolvent is released from performing his part of the contract by
law. The order of discharge gives a new lease of life to the insolvent and he is discharged
from all obligations arising from all his earlier contracts.
e) Loss of evidence: a material alteration made in a written document or contract by one
party without the consent of the other, will make the whole contract void.
5) Discharge by Impossibility of Performance
If an agreement contains an undertaking to perform impossibility, it is void ab initio.
a) Impossibility at the time of agreement: This includes
i) Known to parties: this is known as absolute impossibility. In case of absolute
impossibility, the agreement is void ab initio. Example: when A agrees with B to
discover treasure of magic, or undertakes to put life into the dead wide of B, the
agreement is void or even if A agrees to pay B Rs1000 and B promises to bring
for A stars from heaven. The agreement is void.
ii) Unkown to parties: where at the time of making the contract both the parties
are ignorant of the impossibility, as in the case of destruction of subject matter to
the ignorance of both the parties, the contract is void on the ground of mutual
mistake. However, if the promisor alone knows of the impossibility of
performance at the time of making the contract, he shall have to compensate the
promise for any loss which such promise sustains through the non-performance of
the promise.
Example: A sold to B certain goods supposed to be on voyage. The goods had
ceased to exist due to the perils of the sea. Held, the contract was void.
b) Impossibility arising subsequent to the formation of contract: Impossibility which
arises subsequent to the formation of a contract is called post-contractual or supervening
impossibility. In such a case, the contract becomes void when the act becomes impossible
or unlawful. Impossibility of performance of a contract, as a generic rule, is no excuse for
the non performance of the contract; but where this impossibility is caused by the

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 circumstances beyond the control of the parties, the parties are discharged from further
performance of the obligation under the contract.
This maybe due to the happening of certain events which were neither in the
contemplation of the parties when they entered into the agreement nor either of the
parties is responsible for causing the performance of the contract impossible. In such a
case the contract will be void as soon as such events make the performance of the
contract impossible. The impossibility must be either legal or physical but not
commercial.
6) By Breach of contract
Breach of contract by a party thereto is also a method of discharge of a contract, because
“breach” also brings to an end the obligations created by a contract on the part of each of the
parties. Of course the aggrieved party i.e, the party not at fault can sue for damages for breach of
contract as per law, but the contract as such stands terminated.
Breach of contract may be of two kinds:
a) Actual breach: Actual breach means breach committed either
i) At the time when the performance of the contract is due
ii) During the performance of the contract
Example: A agrees to supply B on 1stFeb. 1000 bags of sugar. On 1stFeb. he fails to
supply. This is actual breach of contract. The breach has been committed by A at the time
when the performance is due.
It occurs when a party fails to perform his obligation upon the date fixed for performance by the
contract. Actual breach entitles the party not in default to elect to treat the contract as discharged
and to sue the party at fault for damages for breach of contract.
b) Anticipatory breach: Repudiation of an integral part of the contract by the promisor
before the actual due date of the performance of the contract is called an anticipatory
breach of contract. The contract in this case is repudiated before the time fixed for its
performances arrives and is so discharged. Anticipatory or constructive breach of contract
may take place because of:
i) Express repudiation or contructive breach of contract by any party before the date
of its performance, or
ii) The act of any party making the performance of the contract impossible.

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 Example: A agrees to employee B on 1st march. On 1stFebruary he writes to B that he
need not join the service. The contract has been expressly repudiated by A before the
date of its performance.
DOCTRINE OF FRUSTRATION
The doctrine of frustration is rally an aspect of the law of discharge of contract by reason of
supervening impossibility or illegality of the act agreed to be done and hence comes within the
purview of the contact Act. In England the doctrine of frustration is the parallel concept of
„supervening impossibility‟. It comes into play when the common object of a contract can no
longer be achieved or when the contract, after it is made, becomes impossible of performance
due to circumstances beyond the control by reason of the parties. It is really an aspect or part of
the law of discharge of contract by reason of supervening impossibly or illegality of the act
agreed to be done and hence comes with the purview of Section56.
REMEDIES TO BREACH OF CONTRACT
A remedy is the means given by law for the enforcement of a right. When a contract is broken,
the injured party (i.e., the party who is not in breach) has one or more of the following remedies:-
1. Rescission of the contract: - When a contract is broken by one party, the other party may
sue to treat the contract as rescinded and refuse further performance. In such a case, he is
absolved of all his obligations under the contract.
For example: - A promises B to supply 10 bags of cement on a certain day. B agrees to pay the
price after the receipt of the goods. A does not supply the goods. B is discharged from liability to
pay the price.
2. Suit for Damages: - Damages are a monetary compensation allowed to the injured party by
the Court for the loss or injury suffered by him by the breach of the contract. The object of
awarding damages for the breach of contract is to put the injured party in the same position, so
far as money can do it, as if he had not been injured, i.e., in the position in which he would have
been performance and not breach. There are different types of damages: - Ordinary damages,
Special damages, vindictive damages, Nominal damages, Damages for loss of reputation,
Damages for inconvenience and discomfort, etc.
For example:- A contracts to sell and deliver 50 quintals of farm wheat to b at 775 per quintal,
the price to be paid at the time of the delivery. The price of wheat rises to Rs.800 quintal and A
refuses to sell the wheat. B can claim damages at the rate of Rs.25 per quintal.

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Ordinary and Special Damages
Ordinary Damages Special Damages
When a contract is broken the injured party Special damages are those which arise on
can always recover ordinary or general account of special or unusual circumstances
damages from the guilty party. affecting the plaintiff.
It is restricted to the direct or proximate They are such remote losses which are not
consequences i.e arising naturally and directly natural and probable consequence of the breach
in the usual course of things. of contract.
Remote or indirect losses are not regarded. These can be claimed only if the special
circumstance would result in a special loss in
case of breach of contract is brought to the
notice of the other party.
3. Suit upon Quantum Meruit: - The phrase „quantum meruit’ literally means „as much as
earned‟. A right to sue on a quantum meruit arises where a contract, partly performed by one
party, has become discharged by the breach of the contract by the other party. The right is
founded not on the original contract which is discharged or is void but on an implied promise by
the other party to pay for what has been done.
For example: - CE was employed as a managing director in a company. After he rendered
service for three months, it was found that the directors were not qualified to appoint him. Held,
CE could recover remuneration for the services rendered by him on quantum meruit.
This principal of law provides for payment of compensation under certain circumstances, to a
person who has rendered goods or services to another person under a contract which could not or
has been fully performed.
Example: X forgets certain goods at Y‟s house. He has no intention to leave them with him
gratuitously. Y uses those goods for his personal benefit. X can comppel Y to pay for those
goods.
Limitations:
i) A person guilty of breach cannot be allowed to claim any payment under the
doctrine of quantum meruit.

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 ii) In a contract not divisible into parts and a lump sum of money is promised to be
paid for the complete work, part performance will not entitle the party to claim
any payment.
4. Suit for specific performance of the contract: - In certain cases of breach a contract,
damages are not an adequate remedy. The court may in such cases, direct the party in breach to
carry out his promise according to the terms of the contract. This is a direction by the court for
specific performance of the contract at the suit of the party not in breach. Some of the case in
which specific performance of a contract may, in the discretion of the Court, be enforced as
follows:
a. When the act agreed to be done is such that compensation in money for its non-
performance is not an adequate relief.
b. When there exists no standard for ascertaining the actual damage caused by the non-
performance of the act agreed to be done.
5. Suit for Injunction: - Where a party is in breach of a negative term of a contract (i.e., where
he is doing something which he promised not to do), the court may, by issuing an order, restrain
him from doing what he promise not to do. Such an order of the court is known as an
„Injunction’.
For example: - N, a film actress, agreed to act exclusively for W for a year and for no one else.
During the year she contracted to act for z. held, she could be restrained by injunction from
doing so.
CONTRACT OF INDEMNITY AND CONTRACT OF GUARANTEE
Basis Contract of Indemnity Contract of Guarantee
Number of Parties There are two parties- the There are three parties - the
indemnifier and the indemnity creditor, the principal debtor
holder. and the surety.
Nature of Liability The liability of the The liability of the surety is
indemnifier is primary and collateral or secondary i.e the
independent in nature. surety is liable only on default
of the the principal debtor.
Request by the Debtor The indemnifier acts It is necessary that the surety
independently without any should give the guarantee at

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 request of the debtor or the the request of the debtor.
third party.
Existing debt or duty There is no existing debt or There is an existing duty or
duty, the liability arises only debt, the performance of
on the happening of a which is guaranteed by the
contingency. surety.
Right to sue The indemnifier cannot sue The surety, after he
the third party for loss in his discharges the debt owing to
own name, because there is no the creditor can proceed
privity of contract. against the principal debtor in
his own right.
RIGHTS OF BAILOR
The person delivering the goods is called the „bailor’
a) Enforcement of Rights: - The bailor can enforce by suit all the liabilities or duties of the
bailee, as his rights.
b) Avoidance of contract: - The bailor can terminate the bailment if the bailee does, with
regard to the goods bailed, any act which is inconsistent with the terms of the bailment. For
example, A lets Horse to B for his own riding only. B uses the horse with a carriage. A can
terminate the bailment.
c) Return of goods lent gratuitously: - When the goods are lent gratuitously, the bailor can
demand their return whenever he pleases even though lent them for a specified time or purpose.
d) Compensation from a wrong-doer:- If a third person wrongfully deprives the bailee of the
use or possession of the goods bailed, or does them any injury, the bailor or the bailee may bring
a suit against the third person for such deprivation or injury.
DUTIES OF BAILOR
a) To disclose known facts:-It is the first and foremost duty of the bailor to disclose the
known faults about the goods bailed to the bailee. If he does not make such disclosure, he is
responsible for any damage caused to the bailee directly from such faults. For example, A lends
a horse, which he knows to be vicious; to B. he does not disclose that the horse is vicious. The
horse runs away and B is thrown and injured. A is responsible to B for damage sustained.

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b) To bear extraordinary expenses of bailment: - The bailee is found to bear ordinary and
reasonable expenses of the bailment but for any extraordinary expenses the bailor is responsible.
For example, A lends his horse to B, a friend, for two days. The feeding charges to be paid by
B. but if the horse meets with an accident, A will have to repay B medical expense, incurred by
B.
c) To indemnify bailee for loss in case of premature termination of gratuitous bailment: -
A gratuitous bailment can be terminated by the bailor at any time even though the bailment was
for a specified time or purpose. For example, A lends an old discarded bicycle to B gratuitously
fir three months. B incurs Rs.120 on its repairs. If A asks for the return of the bicycle after one
month, he will have to compensate B for expenses incurred by B in excess of the benefit derived
by him.
d) To receive back the goods:- It is the duty of the bailor to receive back the goods when the
bailee returns them after the expiry of the term of the bailment or when the purpose for which
bailment was created has been accomplished.
RIGHTS OF BAILEE
The person to whom they are delivered is called the „bailee’.
1) Right to interplead: If a person other than the bailor, claims the goods bailed. Bailee may
apply to the court to stop the delivery of the goods to the bailor and to decide the title to the
goods.
2) Right against third person: If a third person wrongfully deprives the bailee of the use or
possession of the goods bailed, or cause them any injury, the bailee is entitled to use such
remedies as the owner might have used in a like case if no bailment has been made. Bailee can
thus bring a suit against a third person for such deprivation or injury.
3) Right of particular lien for payment for service: Where the bailee has (a) in accordance
with the purpose of bailment, (b) rendered anyservice involving the exercise of labour or skill,
(c) in respect of the goods, he shall have, in the absence of a contract to the contrary, right to
retain such goods until he receives due remuneration for the services he has rendered in respect
to them. Bailee has however only a right to retain the article and not to sell it. The services must
have entirely been performed within the time agreed on a reasonable time and the remuneration
must have become due. This right of particular lien shall be available only against the property in
respect of which skill and labor have been used.

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Example: A delivers a rough diamond to B, a jeweller, to be cut and polished, which his
accordingly done. B is entitled to retain the stone till he is paid for the services he has rendered.
4) Right of general lien: Bankers, factors, whar fingers, attorneys of a high court and policy
brokers will be entitled to retain as a security for a general balance of account, any goods bailed
to them in the absence of a contract to the contrary. By agreement other types of a bailee may
also be given this right of general lien.
5) Right to indemnity: Bailee is entitled to be indemnified by the bailor for any loss arising to
him by reason than the bailor was not entitled to make the bailment or to receive back the goods
or to give directions respecting them. If the bailor has no title to the goods, and the bailee in good
faith, delivers them back to, or according to the directions of the bailor, the bailee shall not be
responsible to the owner in respect of such deliver. Bailee can also claim all the necessary
expenses incurred by him for the purpose of gratuitous bailment.
6) Right to claim compensations in case of faulty goods: A bailee is entitled to receive
compensation from the bailor for any loss caused to him due to the failure of the bailor to
disclose any faults in the goods known to him. If the bailment is for hire, the bailor will be liable
to compensate even though he was not aware of the existence of the faults.
7) Right to claim necessary expenses: Where the bailee is not to receive any remuneration for
the work to be done by him as per terms of the bailment, he is entitled to recover from the bailor
all necessary expenses incurred by him for the purposes of bailment.
8) Right of delivery of goods to any one of the several joint bailers of goods: Delivery of
goods to any one of the several joint bailers of goods will amount to deliver of goods to all of
them in the absence of any contract to the contrary.
DUTIES OF BAILEE
1) To take reasonable care: Bailee is bound to take as much care of the goods bailed to him as
a man of ordinary prudence would, under similar circumstances, take of his own goods of the
same bulk, quality and value as the goods bailed. It will not make any difference whether the
bailment is gratuitous or for reward. If any lose is caused to the goods, inspite of such reasonable
care by the bailee, he shall not be liable for the loss. Bailee shall be held liable for all losses
arising due to his negligence. Bailee shall be held liable for having not taken reasonable care of
the goods bailed as a prudent man would have taken in all those cases where goods bailed are
used for any other purpose which is inconsistent with the terms of the agreement. However, a

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bailee will not be liable for any loss resulting from action of the third parties over which the
bailee has no control or for destruction or deterioration of the things bailed if he has taken the
amount of care required of him.
Example: A deposited his goods in B‟s godown. On account of unprecedented floods, a part of
goods were damaged. Held B is not liable for the loss.
The fact that bailee‟s goods were also lost or damaged with those of the bailee cannot be taken
as a reasonable proof for this fact that the bailor has taken reasonable care of the goods. In case
the goods are lost from bailee‟s custody, it is his duty to take reasonable steps for recovering
them.
2) To use goods according to the conditions of bailment:Bailee must use the goods according
to the conditions of the contract of bailment or the directions of the bailor. He shall be held liable
for compensation to the bailor if any damage is caused to the goods because of his unauthorized
use. Liability on this account will arise even if the bailee is not found to be guilty of any
negligence and the damages may result from an accident. bailee must not do any act with regard
to the goods bailed which is inconsistent with the terms of the bailment, otherwise the contract
shall become voidable at the option of the bailor and bailee shall be held liable to compensate
for any damages caused to the goods.
Example: A lends his horse to B for his own riding only. B allows C, a member of his family to
ride the horse. C rides with care but the horse accidently falls and is injured. A can claim
damages from B for the injury caused to the horse from an unauthorized use.
3) Must not mix up the goods with his own goods:Bailee is not entitled to mix up the goods
bailed with his own goods except with the consent of the bailor. If he, with the consent of the
bailor, mixes the goods bailed with his own goods, both the parties shall have an interest in
proportion to their respective shares in the mixture thus produced.
Example: A bails of barrel of cape flour worth Rs45 to B. B without A‟s consent mixed the flour
with country flour of his own, worth only Rs 25 a barrel. B must compensate A for his flour.
4) To return the goods: Bailee must return or deliver the goods bailed according to the
directions of the bailor, on the expiry of the time of bailment or on the accomplishment of the
purpose of bailment. Bailee shall be responsible to the bailor for any loss, destruction or
deterioration of the goods from the date of the expiry of the contract of bailment, if he fails to
return, deliver or tender the goods at the proper time.

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Example: S delivered certain books to C, a binder who promised to bind and return them to S
within a reasonable time. The binder could not complete his job within a reasonable period. The
books were subsequently burnt by an accident was of no avail.
5) To return any increase or profit from the goods:Bailee is bound to deliver to the bailor
any increase or profit which might have accrued from the goods bailed provided the contract
does not provide otherwise.
Example: A leaves a cow in the custody of B. the cow gives birth to a calf. B is bound to deliver
the calf as well as the cow to A.
6) Must not set up an adverse title:bailee must not set up a title adverse to that of the bailor.
He must hold the goods on behalf of and for the bailor. He cannot deny the title of the bailor.
FINDER OF GOODS
A finder of goods is under no obligation to take charge of the goods when he comes across. But
if he does take the charge of the goods, he becomes responsible for the goods like a bailee in a
gratuitous bailment. Thus a person who finds goods belonging to another and takes them into his
custody is subject to the same responsibility as a bailee.
Duties: a) Duty to find the true owner.
b) Duty to take reasonable care for goods as a bailee.
Rights: i) Right to retain possession of the goods until the true owner is found.
ii) Right of lien over the goods for expenses.
iii) Right to sue for reward.
iv) Right of sale.
RIGHTS OF PAWNOR
The bailment of goods as security for payment of a debt or performance of a promise is called
„pledge‟. The bailor in this case is called „pawnor‟.
a) Right to get back goods: - On the performance of promise or repayment of loan and interest
if any, the pawnor is entitled to get back the goods pledged.
b) Right to redeem debt: - Quite often a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is made. In such a case if the pawnor makes
default to payment of the debt or performance of the promise at the stipulated time, he may still
redeem the goods pledged at any subsequent time before the actual sale of them.

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c) Preservation and maintenance of the goods: - The pawnor has a right to see that the
pawnee, like bailee, preserves the goods pledged and properly maintains them.
d) Rights of an ordinary debtor:-The pawnor has, in addition to the above rights, the rights of
an ordinary debtor which are conferred on him by various statutes for the protection of debtors.
DUTIES OF PAWNOR
The more important duties of a pawnor are as follows:
1) To compensate the pawnee for any extraordinary expenses incurred by him
2) To meet his obligation on stipulated date and comply with the terms of contract.
RIGHTS OF PAWNEE
The bailment of goods as security for payment of a debt or performance of a promise is called
„pledge’. The bailee in this case is called „pawnee‟.
a) Right of retainer:The pawnee may retain the goods pledged until his dues are paid. He may
retain them not only for the payment of the debt or the performance of the promise, but for the
interest due on the debt.
b) Right of retainer for subsequent advances: When the pawnee lends money to the same
pawnor after the date of the pledge, it is presumed that the right of retainer over the pledged
goods extends to subsequent advances also.
c) Right to extraordinary expenses:The pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the preservation of the goods pledged.
d) Right against true owner, when the pawnor’s title is defective:When the pawnor has
obtained possession of the goods pledged by him under a voidable contract but the contract has
not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods,
provided he acts in good faith and without notice of the pawnor‟s defect of title.
DUTIES OF PAWNEE
Pledge being a special kind of bailment, the duties of a pawnee are just like a bailee. Thus a
pawnee‟s duties may be enumerated as follows:
a) To take reasonable care of the goods pledged.
b) Not to make any unauthorised use of the goods pledged.
c) Not to mix the goods pledged with his own goods.
d) Not to do any act in voilation of the terms of the contract of pledge and of the provisions
of the Contract Act.

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 e) To return the goods pledged on receipt of his full dues.
f) To deliver any accertion to the goods pledged.
AGENT
One who agrees and is authorized to act on behalf of another, a principal, to legally bind an
individual in particular business transactions with third parties pursuant to an agency
relationship. Agent is a person who is authorized to act for another (the agent's principal) through
employment, by contract or apparent authority. The agent can bind the principal by contract or
create liability if he/she causes injury while in the scope of the agency. Who is in agent and what
is his/her authority or often difficult and crucial factual issues.
PRINCIPAL
In an agency relationship, the principal is the person who gives authority to another, called an
agent, to act on his or her behalf. Principal is the main person in a business. He acts as an
employer to hire and direct the agents to perform his/her/its business. It is particularly important
to determine who the principal is since he/she/it is responsible for the acts of agents.
MODES OF CREATION OF AGENCY
The following are different modes of creation of agency.
1) Agency by Express agreement: Number of agency contract come into force under this
method. It may be oral or documentary or through power of attorney.
2) Agency by operation of law: At times contract of agency comes into operation by virtue of
law.
For example: According to partnership act, every partner is agent of the firm as well as other
parties. It is implied agency. On account of such implied agency only a partner can bind over
firm as well as other partners, to his activities. In the same way according to companies act
promoters are regarded as agents to the company.
3) Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after
ratification principal – agent relations will come into operation. The person who has done the
activity will become agent and the person who has given ratification will become principal.
Ratification can be express or implied. In case where adoption of activity is made by means
of expression, it is called express ratification. For example: Without A`s direction, B has
purchased goods for the sake of A. There after A has given his support (adoption) to B`s
activity, it is called Ratification. Now A is Principal and B is agent.

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 The ratification where there is no expression is called implied ratification. For example: Mr.
Q has P`s money with him. Without P`s direction Q has lent that money to R. There after R
has paid interest directly to P. Without any debate P has taken that amount from R. It implies
that P has given his support to Q`s activity. It is implied ratification.
4) Agency by implied authority: This type of agency comes into force by virtue of relationship
between parties or by conduct of parties.
For example: A and B are brothers, A has got settled in foreign country without any request
from A, B has handed over A`s agricultural land on these basis to a farmer and B is
collecting and remitting the amount of rent to A. Here automatically A becomes principal
and B becomes his agent. Agency by implied authority is of three types:
(i) Agency by Necessity: At times it may become necessary to a person to act as agent to the
other. For example: A has handed over 100 quintals of butter for transportation, to a road
transport company. Actually it is bailment contract, assume that in the transit all vehicles
has got stopped where it takes one week for further movement. So the transport company
authorities have sold away the butter in those nearby villages. Here agency by necessity
can be seen.
(ii) Agency by Estoppel: In presence of A, B says to C that he (B) is A`s agent though it is
not so actually. A has not restricted B from making such statement. Here agency by
estoppel can be seen.
(iii) Agency by Holding out: B is A`s servant and A has made B accustomed to bring good
on credit from C. On one occasion A has given amount to B to bring goods from C on
cash basis. B has misappropriated that amount and has brought goods on credit as
usually, here is agency by holding out and therefore A is liable to pay amount to C.
RIGHTS OF PRINCIPAL
A person who allow agent to come into contract for third party is called principal.
a) To recover damages: - If the principal, suffers any loss due to disregard by the agent of the
directions by the principal, or by not following the custom of trade in the absence of directions
by the principal, or where the principal suffers due to lack of requisite skill, care, or diligence on
the part of the agent, he can recover damages accruing as a result from the agent.

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b) To obtain an account of secret profits and recover them and resist a claim for
remuneration:- If the agent without the knowledge and assent of the principal, makes any secret
profits out of agency, the principal has the right to recover them from the agent.
c) To resist agent’s claim for indemnity against liability incurred:-Where the principal can
show that the agent has acted as principal himself and not merely as agent, he can resist the
agent‟s claim for indemnify against liability incurred by him in such a transaction.
DUTIES OF PRINCIPAL
a) To indemnify the agent against the consequences of all lawful acts:- The principal is
bound to indemnify the agent against the consequences of all lawful acts done by such agent in
exercise of the authority conferred upon him.
b) To indemnify the agent against the consequences of acts done in good faith:- Where one
person employs another to do an ac, and the agent does the act in good faith, the employer is
liable to indemnify the agent against the consequences of that act, though it causes injury to the
rights of a third person.
c) To indemnify agent for injury caused by principal’s neglect: - The principal must make
compensation to his agent in respect of injury caused to such agent by the principal‟s neglect or
want of skill.
RIGHTS OF AGENT
An agent is a person employed to do any act for another or to represent another in dealings with
third party.
1) Right to claim reimbursement for expenses: agent has the right to retain, out of the money
received on behalf of the principal, money advanced or expenses properly incurred in conducting
the agency business. The agent may have paid the money at the request of the principal or on
account of the understanding implied by the terms of the agency or through mercantile usage.
2) Right to receive remuneration: agent has also a right to claim remuneration as may be
payable to him for acting as an agent. The amount of remuneration may be retained by him out
of the money received on account of principal in the business of agency. But an agent cannot
retain sums received by him in one business for his commission in other business though it may
be on behalf of the same principal.

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Example: A broker who was engaged to negotiate a lease deed succeeded in getting a lessee to
agree to the terms of the lease could not be put through s the defendant had failed to make out a
title to the promises. It was held that the broker was entitled to recover his brokerage.
3) Right to indemnification against consequences of all lawful acts: an agent has a right to
be indemnified by the principal against the consequences of all lawful acts done in exercise of
his authority. The losses and damages must be direct and natural consequences of his acts under
the contract of agency. The exercise of authority must be according to the rules and customs of
the particular trade or market in which the agent has to deal, provided the same is a reasonable
one. Right of indemnification will be lost if the agent acts beyond his authority or performs his
duties negligently.
Example: B, broker at Calcutta, by the orders of A, a merchant there, contracts with C for the
purchase of 10 cakes of oil for A. Afterwards A refuses to receive the oil and C sues B. B
informs A, who repudiates the contract altogether. B defends but unsuccessfully and has to pay
damages and incurs expenses. A id liable to B for such damages, costs and expenses.
4) Right of indemnification against consequences of acts done in good faith: an agent has a
right to be indemnified by the principal for any compensation which he may be required to pay
to the third parties for injuries caused to them by his wrongful acts within the scope of his actual
authority done in his good faith, i.e. without any wrong or dishonest.
Example: B, at the request of A, sells goods in the possession of A, but which A had no right to
dispose of. B does not know this, and hands over the proceeds of sale to A. Afterwards C, the
true owner of the goods, sues B and recovers the value of the goods and cost. A is liable to
indemnify B for what he has compelled to pay to C and for B‟s own expenses.
5) Right to indemnification for injuries caused by principal’s neglect: an agent has a right to
claim compensation from the principal for injuries caused to hum by the negligence or want of
skill on the part of the principal. But he cannot claim compensation if the injury results from his
own negligence or acquiescence after knowledge of the risk of agency. This is because the agent
is presumed to undertake ordinary consequences of the risk incidental to the nature of agency.
Example: A employees B as a bricklayer in building a house, and puts up the scaffolding
himself. The scaffolding is unskillfully put up and B is in consequence hurt. A must make
compensation to B.

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6) Right of particular Lien: An agent is entitled to retain under his possession both moveable
and immovable property of the principal received by him until the amount due to him for
commission, disbursements and services has been paid or account to him, provided the contract
does not provide otherwise. The property on which the agent claims his lien must have not been
received by him by a wrongful act. No sooner the agent parts with the possession of the goods,
his right of lien is lost, the right of lien can equally by claimed by a properly appointed sub
agent.
DUTIES OF AGENT
1) Duty not to delegate his authority: an agent cannot delegate his authority to another person
unless authorized or warranted by the usage of trade or nature of the agency. A work entrusted to
the agent must be done by him.
2) Duty to protect the interest of principal or his legal representative in the event of
principal’s understanding of mind or his death: when an agency is terminated by the principal
dying or becoming of unsound mind, the agent is bound to take on behalf of the representatives
of his late principal, all reasonable steps for the protection and preservation of the interests
entrusted by him.
3) Duty to pay sums received for principal: the agent is bound to pay to his principal all sums
received on his account after deducting for his own claim.
4) To follow instructions of his principal: the agent must conduct the business of the
principal according to the latter. In the absence of any such directions, he must follow the custom
of the business prevailing in the locality where the agent is conducting such business. If the agent
acts otherwise and the principal sustains a loss, the former must compensate the latter for it. He
will also lose his remuneration.
Example: a, as agent engaged in carrying on for B, a business in which it is the custom to invest
from time to time, at interest, the moneys which may be in hand, omits to make such investment.
A must make good to B in the interest usually obtained by such investment.
5) Duty to act with skill and diligence: the agent must conduct the business of agency with as
much skill as is generally possessed by persons engaged in a similar business unless the principal
has notice of his want of skill. An agent must act with reasonable diligence and to the best of his
skill. An agent must compensate the principal for any loss directly attributable to the agent‟s

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neglect want of skill or misconduct. But he is not responsible for indirect or remote losses caused
by such neglect, want of skill or misconduct.
Example: A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit, without making the proper and usual enquiries as to the solvency of B. B at the time of
such sale is insolvent. A must make compensation to his principal in respect of any loss thereby
sustained.
6) Duty to render account: an agent is bound to render proper accounts to his principal on
demand. He must explain those accounts to the principal and produce the vouchers in support of
the entries.
7) Duty to communicate with the principal: in cases of difficulty, it is the duty of the agent to
use all reasonable diligence in communicating with the principal and in seeking to obtain his
instructions. It is only in an emergency where there is no time to communicate that he may act
bona fide without consulting the principal. Principal can repudiate the act of agent in cases where
communication with him was possible and the agent did not ask for his instruction.
8) Duty not to deal on his own account: the relationship of principal and agent is of a
fiduciary character. An agent, therefore, should not deal on his own account and should not do
anything which may indicate a clash between his interest and duties.
KINDS OF AGENT
1) Extent of authority
i) Special agent: a special agent is one whois appointed to perform a particular act
or to represent his principal in some particular transaction. Such an agent has limited
authority and as soon as the act is performed, his authority comes to an end.
ii) General agent: a general agent is one who has authority to do all acts connected
with a particular trade, business or employment. Such authority of the agent is
continuous until it is put to an end. If the principal limits the authority of the general
agent the principal is bound by the agent‟s acts done within the scope of his authority.
iii) Universal agent: a universal agent is one whose authority to act for the principal
is unlimited. He has authority to bind his principal by any act which he does,
provided that act is legal and agreeable to the law of the land.
2) Nature of work

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 i) Commercial / mercantile agent: a mercantile agent having in the customary
course of business as such agent, authority either to sell goods, or to consign goods
for the purposes of sale, or to buy goods or to raise money on the security of goods.
 Factor: a factor is a mercantile agent entrusted with the possesion of
goods for the purpose of selling them. He has a general lien on the goods
of his principal for general balance of account between him and the
principal.
 Auctioneer: an auctioneer is an agent appointed by a seller to sell his
goods by public auction for reward generally in the form of a commission.
 Broker: a broker is an agent who is employed to buy or sell goods on
behalf of another. He is to bring about a contractual relation between the
principal and the parties.
 Commission agent: a commission agent belongs to a somewhat indefinite
class of agents. He is employed to buy or sell goods or transact business
generally for other persons receiving for his labour and trouble a money
payment, called commission
 Del credere agent: is one who guarantees his principal that the person
with whom he enters into a contract on behalf of the principal shall
perform their obligations.
ii) Banker: the relationship between a banker and a customer is really that of debtors
and creditors. But there is a super added obligation on the part of the banker to pay
when called upon to do so by the draft opr order of the customer
iii) Non mercantile agents: these include attorneys, solicitors, insurance agents,
clearing and forwarding agents and wife, etc.
SUB-AGENT
A person who has capacity to contract may enter into a contract with another either by himself,
or through another person. When he adopts the latter course, he is said to be acting through an
„agent‟.
A „sub-agent‟ is a person employed by, and acting under the control of, the original agent in the
business of the agency. This means he is the agent of the original agent. The relation of the sub-
agent, to the original agent is, as between themselves, that of the agent and principal.

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Sec 190 provides that an agent may appoint a sub-agent and delegate the work to him if-
a) There is a custom of trade to that effect, or
b) The nature of work is such that a sub-agent is necessary.
There are some more exceptions recognized by English Law. These exceptions are also
recognized in India and are as follows:-
a) Where the „principal is aware of the intention of the agent to appoint a sub-agent but does not
object to it.
b) Where unforeseen emergencies arise rendering appointment of a sub-agent necessary.
c) Where the principal permits appointment of a sub-agent.
d) Where the act to be done is purely ministerial not involving confidence or use of discretion.
Examples, (a) A banker authorized to let out a house and collect rent may entrust the work to an
estate agent.
(b) A banker instructed to make payment to a particular person at a particular place may appoint
a banker who has an office at that place.
TERMINATION OF AGENCY
Sec 201 describes the modes of termination of agency. Agency maybe terminated by any of the
following ways:
a) By act of the parties: A contract of agency may come to an end either on account of the
act of the principal or agent or both. Thus, agency may be terminated:
1) By agreement between principal and agent.
2) By revocation of agency by the principal.
3) By renunciation of business by the agent.
b) By operation of law: in the following cases agency will terminate on account of operation
of law:
1) By completion of the business of agency
2) By efflux of time
3) By death of principal or agent
4) By insanity of principal or agent
5) By the insolvency of the principal
6) By the destruction of the subject matter of agency.
7) Dissolution of the company

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By Act of Parties
1) By agreement between the principal and agent: In some cases contract of agency itself
may contain provisions as regards the termination of agency. They may be express or implied,
which may be inferred from the circumstances of the case and the terms of the contract. Parties
to a contract of agency may enter into a fresh agreement terminating or replacing the earlier
contract.
2) By revocation of agency by the principal: Principal may either expressly or impliedly, after
giving reasonable notice; revoke the authority of the agent before it has been exercised by the
latter so as to bind the former. Example: A empowers B to let A‟s house. Afterwards lets it
himself. This is an implied revocation of B‟s authority.
Revocation of authority by the principal is subject to the following conditions:
i) In the case of a continuous agency, the principal may revoke it for the future. It
cannot be revoked with regard to acts already done in the agency.
ii) Where an agency has been created for a fixed period and the principal revokes the
authority of the agent before the expiry of the period, without sufficient cause, the
principal is bound to pay compensation to the agent for the resulting loss, even if the
authority is revoked after reasonable notice.
3) Renunciation by the agent: An agency may also be terminated by an express renunciation by
the agent because a person cannot be compelled to continue as agent against his will. Agent after
giving reasonable notice to the principal may renounce the business of agency. In case the
contract of agency is entered into for a fixed period, agent shall have to pay compensation to the
principal for his earlier renunciation of the business of agency.
By Operation of Law
1) Completion of the business of agency: An agency automatically comes to an end when the
business of agency is completed. Thus, for example, an agency for the sale of a particular
property terminates on the completion of the sale. Similarly, where a lawyer is appointed to
plead in a suit, his authority comes to an end with the judgment.
2) By efflux of time: When a person is appointed agent for a fixed term, the contract of agency
will terminate on the expiry of the fixed period. The quantity of work done is immaterial. Agent
will have no right to represent his principal after the fixed period is over.

Latika Malhotra Business laws Unit-1

3) By death of principal or agent: An agency is terminated automatically on the death of the
principal or the agent. After coming to know about the principal‟s death although the agency
terminates but the agent must take all reasonable steps for the protection of the interests of the
late principal entrusted to him.
4) By insanity of the principal or agent: An agency also stands terminated when the principal
becomes of an unsound mind. Here also it is the duty of an agent to protect the interests of the
former principal by taking all reasonable steps. Likewise when the agent becomes insane during
the agency, his authority terminates at once and the agency comes to an end. It is interesting to
mention that a person of unsound mind can be initially appointed as an agent.
5) By insolvency of the principal: The contract of agency will come to an end when the
principal becomes insolvent and the fact of his insolvency comes to the knowledge of the agent.
As against third persons, the agency will terminate when the fact of the insolvency of the
principal comes to their knowledge. Insolvency of an agent will not lead to the termination of the
contract of agency.
6) Destruction of the subject matter of the contract of agency: The contract of agency will
come to an end when the subject matter of the agency ceases to exist or when the principal is
deprived of his powers on the subject matter of the contract of agency.
Example: where the agency was created for the sale of a house and the house is destroyed by
fire, the agency ends.
7) Dissolution of a company: If the principal is an incorporated company, the agency
automatically ceases to exist on dissolution of the company.
8) Principal becoming an alien enemy: Breaking out of war between two countries, in one of
which resides the principal and in the other resides the agent, shall cause the termination of the
authority of an agent.
DELEGATION OF AUTHORITY
The general rule is that an agent is not entitled to delegate his authority to anoher person without
the consent of his principal. Section 190 provides that “an agent cannot lawfully employ another
to perform acts which he has expressly or impliedly undertaken to perform personally, unless by
the ordinary custom of trade a sub agent may, or form the nature of agency, a sub agent must be
employed”. “Delegatus non potestdelegare” is the maxim which means that a person to whom
authority has been given cannot delegate that authority to another. this is because when the

Latika Malhotra Business laws Unit-1

principal appoints a particular agent to act on his behalf, he relies upon the agent‟s skill, integrity
and competence.
IRREVOCABLE AGENCY
When the authority given to an agent cannot be revoked, it is said to be an irrevocable agency.
An agency becomes irrevocable in the following cases:
a) When agency is coupled with interest: an agency where the agent himself has an
interest in the property which forms the subject matter of agency is said to be agency
coupled with interest. An interest of the agent in the subject matter may arise when
the principal has entered into an agreement to give something to a person and has
appointed the latter as agent to collect and secure it for himself.
Example: a gives authority to C to sell land and to pay himself out of the proceeds
the debt due to him from A. A cannot revoke this authority nor can it be terminated
by his insanity or death.
b) Where authority has been partly exercised by the agent: if authority has partly
been exercised by agent, the principal cannot revoke the authority of the agent as far
as regards such acts and obligations as arise from acts already done in the agency.
Example: A asks B his agent, to pay out of A‟s funds a sum of Rs1000 to C in two
equal installments in his personal letter. A revokes B‟s authority. Before this
revocation B had already paid a sum of Rs500 to C. A is bound by this payment.
c) Where agent has incurred personal liability: Where the agent has entered into
contracts in his personal name for the principal and has thereby made himself
personally liable the principal cannot revoke agent‟s authority without his consent.
Example: A authorises B to buy 1000 bales of cotton on account of A and to pay for
it out of A‟s money remaining in B‟s hands. B buys it in A‟s name and so as not to
render himself personally liable for the price. A can revoke B‟s authority to pay for
the cotton.

Latika Malhotra Business laws Unit-1