Indemnity

 Indemnity is a promise to save a person harmless from the consequences of an act.

o Adamson v Jarvis – Auctioneer sells cattle of the defendant, turns out that the defendant
did not in fact own the cattle. The person to whom they did belong to sued the auctioneer
who in turn sued the defendant for indemnity for the loss he suffered due to acting on the
defendant’s directions.
 Indemnity may be expressed or implied
o Dugdale v Lovering – Plaintiffs possessed trucks claimed by both the defendants and
another company. Defendants demanded delivery, but the plaintiffs asked for an
indemnity bond, which was not responded to. Even so they delivered the trucks. The other
company was successful in their suit for the truck, plaintiffs were held entitled to recover
indemnity from the defendants as it was clear that they would only deliver the trucks on
indemnity.
 The English definition of indemnity is wide, covering loss from any cause whatsoever, including
all forms of insurance except for life insurance.
 The Indian Contract Act (S.124) narrowed the definition to cases where the promise to indemnify
is against loss caused either by the promisor himself or any other person. Thus, the loss must be
caused by human agency only, excluding accidents like fire. Furthermore, loss done at the
request of the promisor do not fall under this section, instead coming under S. 223 regarding
principal and agent (thus Adamson v Jarvis does not come under indemnity).
 Indemnity-holder and indemnifier.
 In Indian law as well, the indemnity promise is either express or implied.
 All insurances other than life and personal accident are indemnity contracts. A suit can be filed
immediately upon failure of performance, regardless of actual loss.
 S.125 holds the rights of indemnity-holder when sued, the promisee is entitled to recover all
damages he may be compelled to pay in a suit to which the indemnity promise applies, all costs
he may be compelled to pay in any such suit if he did not contravene the orders of the promisor
and acted prudently, or if the promisor authorised him to bring or defend the suit, and for all
sums he paid under the terms of any compromise of any such suit if the compromise was not
contrary to the orders of the promisor.
 When encashing the indemnity bond in the nature of a bank guarantee, the person can only
retain that part of the bond which represents the damages or loss he suffered.
 Originally one could claim indemnity only after suffering actual loss, however now the
indemnified is entitled to get the indemnifier to pay off the claim or to pay into court sufficient
money which would constitute a fund for paying off the claim whenever it was made.
o Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri – While in English common law
no action could be maintained until the actual loss occurred, the Court recognised that an
indemnity might be worth very little if the indemnified could not enforce his indemnity till
he actually paid the loss. If his liability is absolute, then he was entitled either to get the
indemnifier to pay off the claim or to pay into court sufficient money which would
constitute a fund for paying off the claim whenever it was made
o Richardson Re, Ex parte The Governors of St Thomas’s Hospital – Indemnity is not
necessarily given by repayment after payment. Indemnity requires that the party
indemnified shall never be called upon to pay
 As soon as the liability of the indemnified becomes clear and certain, he has a right to enforce
the indemnifier to put him in a position to meet the claim.
o Abdul Hussain v Bombay Metal Syndicate – Order of direct payment of sales tax to
authorities from the person due without intervention of the seller. An action may be
brought by the indemnity-holder within three years from the date of payment by him and
thus as soon as the liability of the indemnity-holder is clear and certain he should have the
 right to require the indemnifier to put him in a position to meet the claim. Limitation starts
from after actual loss
 A specific time can be placed, however bona fide intentions showing no unreasonable delay
implies that the indemnity cannot be denied.
 The expression immediately implies notice to be given with promptitude avoiding unnecessary
delay.
 Guarantee
 S.126 - Guarantee is a promise to discharge the liability or perform the promise of a third person
in case of a default.
 A guarantee enables a person to get a loan, employment, goods or credit
 Guarantee contracts are conditional promises to be liable on the default of the principal debtor.
A liability which is incurred independently of a default is not a guarantee.

 There are four essential features of a guarantee contract:

o Principal debt
 Purpose of a guarantee is securing the payment of the debt, thus there must be a
recoverable debt. If there is no principal debt, there is no guarantee
 There must be someone liable as a principal debtor and the surety liable only on his
default.
 Guarantees thus cannot exist without a principal debt.
 Swan v Bank of Scotland – Payment of overdraft of a banker’s customer was
guaranteed by the defendant. The overdrafts however were void and therefore
the surety was not held liable.
 Guarantees for void debts may be enforced if the reason for the voidness is different
from the consequence of the voidness brought by statute.
 When a minor’s debt has been knowingly guaranteed the surety is liable as the
principal debtor.
 Kashiba v Shirpat – Principal debtor for a loan from a lender was a minor, had
surety. When the lender wanted money back, father refused. Surety was held
liable as all parties knew of the fact of infancy of PD and thus the contract is
essentially the creditor giving money to the father and not the child. This
contract more resembles an indemnity contract than a guarantee, being a
guarantee in appearance alone.
 Edavam Kevingal Kellapan v Medikal Kunni Raman – Minor took loan, got a
guarantor. In this case however, the guarantor agreed to take obligation only if
the PD (minor) fails his obligation. Such an ancillary contract was considered
void and the surety was liable.

o Consideration
 S.127 – Anything done, or any promise made for the benefit of the principle debtor
may be sufficient consideration for the surety.
 Thus, if a loan is given or goods are sold on the basis of a guarantee, it is sufficient
consideration.
 Where a credit has already been given and the payment having become due, the
creditor refraining from suing the principal debtor would be sufficient consideration
for giving the guarantee
 A guarantee for a past debt is valid. Past consideration is valid consideration.
 However, a guarantee for a past and future debt is enforceable provided that some
further debt is incurred after the guarantee.
 Gulam Khan v Faiyaz Khan – Lessee agreed to pay sum under a lease in
instalments and after a few days a person executed a surety bond binding
himself to pay a certain amount in case of default in payments. This bond was
held valid and with consideration.
 SICOM Ltd v Padmashri Mahipatrai Shah – Guarantee was executed
subsequent to release of financial assistance to the borrower. Court held that it
 was still valid consideration and that past consideration would be valid
consideration.
 Even if the principal debtor was unaware of the guarantee or never asked for it, the
guarantee would be valid as long as there is some consideration, even in the form of
the principal debtor benefiting.
 There can be a counter-guarantor as well, someone who is called upon by the original
guarantor to pay the debt.

o Misrepresentation and Concealment must not be present

 A guarantee contract is not uberrima fides or one of absolute good faith. Thus, there
is no duty to speak or disclose information.
 However, it is the duty of the party taking a guarantee to put the surety in possession
of all facts likely to affect the degree of his responsibility. A surety must be
acquainted with the whole contract entered into with his principal. [should not
suppress vital facts like for a society, embroiled in litigation etc.]
 S.142 – Guarantee obtained by misrepresentation is invalid [misrep made by creditor
or with his knowledge and assent concerning a material part of the transaction]
 S.143 – Guarantee obtained by concealment is invalid. [means of keeping silence as
to material facts]
 It has been observed that for guarantees other than a guarantee of fidelity the
creditor is under no obligation to inform a surety of matters affecting the credit of the
debtor.
 If creditor is aware of circumstances affecting risk, bound to tell surety
 Sections 142, 143 – misrepresentation of or concealment of material facts and
circumstances makes the guarantee invalid.

o Writing not necessary

 May be oral or written as stated by S.126

 Surety’s Liability – laid down by S.128. The liability of the surety is co-extensive with that of the
principal debtor, unless otherwise provided by the contract.
 Co-extensive shows the maximum extent of the surety’s liability, he is liable for the whole of the
amount that the principal debtor is liable for and liable for no more.
 Thus, the surety is liable for the interest and charges that may have become due on it as well.
 If there is a condition precedent to the surety’s liability, he will not be liable till the condition is
fulfilled. This is partially recognised in S.144 – Where a person gives a guarantee upon a contract
that creditor shall not act upon it until another person has joined in it as a co-surety, the
guarantee is not valid if that person does not join.
o National Provincial Bank of England v Brackenbury – Defendant signed a guarantee which
on the face of it was intended to be a joint and several guarantee with three others. One of
them did not sign. There being no agreement to dispense with his signature, the defendant
was held not liable.
 A forged signature is also invalid, and the surety would not be held liable.
 If liability is unconditional then courts cannot impose a condition themselves.
o Bank of Bihar Ltd v Damodar Prasad – The defendant guaranteed a bank loan, default took
place and the defendant was sued. Trial court and High Court stated that the surety would
only be held liable after all other remedies against the principal debtor have been
exhausted but the Supreme Court overruled this, stating that this kind of condition defeats
the very purpose of a guarantee.
o Union of India v Manku Narayana – Creditor must proceed against the mortgaged property
first and then against the surety – overruled by SBI v Indexport Registered
 o SBI v Indexport Registered – Liability is joint and several, therefore the creditor can proceed
on whichever part and against whomever he desires. The decree is simultaneous, and it is
jointly and severally passed against all the defendants including the guarantor.
 Solvency of the principal is not a sufficient ground for restraining execution of the decree against
the surety. Surety’s duty to see that PD pays, not the creditor’s.
 S. 128 – liability co-extensive, arises immediately and not only until the creditor exhausted all
the remedies wrt PD
 The creditor is allowed to hold a suit against the principal debtor alone and cannot be rejected
on the ground that he has not joined the guarantor as a defendant to the suit. Dismissal of a suit
against the PD does not absolve the surety of his liability
 Vulnerable surety: when there is a relationship of trust and confidence between him and the
debtor – court may rescue these sureties
 The creditor is also allowed to file a suit against the surety without impleading the principal
debtor.

Proceeding against the guarantor’s mortgaged property

 A surety’s mortgaged property cannot be taken from him without notice nor issue a public sale
for auction of the same without notice to the guarantor.
 Property of the surety offered as security can be proceeded against without exhausting
remedies against principal debtor
 Even if the principal debtor dies before a suit is filed, the surety is not discharged.

Surety’s right to limit his liability

 The surety can place a limit to his liability, even to a fixed amount.
 A surety can attach any other condition to his liability
 Guarantor can insist on collateral security
 The guarantor must show that the contract of guarantee created had a part which specified that
there must be a valid collateral given by a third party
 Where it is no part of the contract that other sureties join in, releasing of another several surety
does not discharge liability. However, entitled to contribution to the same extent as if they had
been joint, not only several.
Impossibility of main contract
 Impossibility of performance does not exempt the surety from liability
 Liability of the surety does not depend on the possibility of the surety being able to recover the
amount from the principal debtor
 Guarantor of a company’s loan cannot escape by fact of change in company’s management.
 Novation of the main contract renders the guarantor not liable if he does not sign again as a
guarantor.

Continuing Guarantee
 A guarantee which extends through a series of transactions is a continuing guarantee.
 The essence of a continuing guarantee is that it is not for a specific number of transactions but
to any number of them and makes the surety liable for unpaid balance at the end of the
guarantee.
 A guarantee for a cash-credit account is a continuing guarantee. The sureties could not be
claimed to be discharged by reason of the fact that the goods in the hypothecated store were
changed.
 A guarantee for conduct of a servant appointed to collect rent is also a continuing guarantee.
 A guarantee for conduct of a tenant in paying the rent due under tenancy is always a guarantee
for one transaction.
 Employment of a person is one transaction and the guarantee for his good conduct is one
transaction and not continuing
 A guarantee for appointment of an agent has been held to not be a continuing guarantee. The
bond only remains in force during the subsistence of the agency
 Guarantee for conduct of a servant appointed to collect rents – continuing guarantee

Bank Guarantee
 A bank guarantee is an absolute undertaking to pay the amount whenever demanded by the
guarantee-holder.
 Ordinary guarantees are dependent on the underlying transaction however bank transactions
are guarantees independent and autonomous of the primary transaction.
 There are professional guarantors who issue guarantees for a certain fee, such as banks
o Maharashtra SEB v Official Liquidator, Ernakulum – Supplier undertook a bank guarantee of
Rs. 50,000 to be given to the Maharashtra SEB (State Electricity Board) and deposited
sufficient securities with no conditions to the bank’s liability except demand by the Board.
Board demanded payment however the supplier went into liquidation. The liquidator thus
filed for an injunction to prevent the Board from realising the guarantee and the bank from
paying. However, no such injunction was granted as it was held that bank guarantees are
autonomous and independent from the primary/underlying transaction and thus the Board
could enforce payment of the guarantee even after liquidation of the supplier
o Bond remaining in force only during the subsistence of agency – not continuing guarantee –
appointment of agent under bank guarantee.
o Hindustan Steelworks Construction Ltd v Tarapore & Co – This case laid down the law in
terms of bank guarantees:
 A bank guarantee is an independent and distinct contract between the bank and the
beneficiary and in not qualified by the primary contract between the person at whose
instance the guarantee is given and the beneficiary
 In an unconditional bank guarantee the nature of the obligation of the bank is
absolute and not dependent upon any dispute or proceeding between the party
insisting on a guarantee and the beneficiary
 Commitment by banks must be free from court interference except in cases of fraud
or where irretrievable injustice would occur if the bank guarantee is allowed to be
encashed
 The person claiming the guarantee must establish that the conditions for invoking the bank
guarantee do exist
 When the bank guarantee is conditional, the beneficiary cannot have unfettered rights to invoke
the bank guarantee and the court can issue an injunction against encashing the guarantee based
on the facts
 Injunction is allowed when banks knows of any fraudulent demand, even if there was no breach
of contract or any loss or damage. The operation of a bank guarantee should be stayed only in
cases of serious dispute, fraud, or special equities.
o UP Coop Federation Ltd v Singh Consultants and Engineers (P) Ltd – Two bank guarantees
were given by a contractor for proper construction of a plant. The bank was not to revoke
the guarantees up to a fixed date and their payment was to be unconditional. The Board
was the sole judge of the fulfilment of contract. Disputes arose as to the erection of the
plant. While there was a dispute between the principal debtor and the creditor in the
primary contract, the bank was still liable to pay the guarantee.
- Seller has an assured right; that does not permit of any dispute with the buyer as to
performance of the contract of sale being used as a ground for non-payment or
reduction or deferment
 For fraud it must be clear both to the fact of fraud and to the bank’s knowledge of the fraud.
 o Bolivinter Oil SA v Chase Manhattan Bank NA – Injunction may be granted where it is
proved that the bank knows any demand for payment already made or which may be made
will be clearly fraudulent. Evidence must be clear both as to the fact of fraud and as to the
bank’s knowledge. A bank acting on an uncorroborated statement may cause irreparable
damage to its credit
o Itek Corpn v First National Bank of Boston – Itek entered into a contract with the
Government of Iran to manufacture high-tech optical equipment. The Government gave an
advance payment for which Itek was to provide security for in the form of a bank guarantee
with the Bank Melli. As a condition to issuing this guarantee, Bank Melli required Itek to
supply documentary letters of credit, issued by an American bank. Itek thus provided Bank
Melli with five letters of credit issued by FNBB. The Iranian Revolution then occurred and
America blocked all Iranian assets. Bank Melli attempted to encash its letters of credit
however Itek directed FNBB to refuse both, seeking an injunction to the same based on
irretrievable harm. The Court held that there are four factors to determine whether
irretrievable injustice occurred – irreparable harm (no adequate legal remedy), balance of
injury (injury to the plaintiff outweighs the harm which granting the requested relief would
inflict on the defendants), likelihood of success on merits (particularly of fraud) and public
interest (whether such an injunction benefits the public or harms them). Itek’s plea was
allowed and a permanent injunction was granted.
o UP State Sugar Corporation v Sumac International Limited – UP Sugar entered into an
agreement to design, to prepare an engineering lay-out and to manufacture or procure and
supply to the appellant the machinery and equipment for a complete sugar plant for
extension and modernization of the appellant's existing sugar plant. Under the terms of the
agreement the respondent was required to set up the plant and make it ready for
commercial production by 30th of November, 1990. The agreement stated that in this
regard time was of the essence of the contract and if the respondent failed to do so the
consequences were also spelt out in the contract. There was a requirement for bank
guarantees for timely delivery, guaranteed performance and in respect to the advance
payments made, all of which were payable on demand. There was a dispute between the
two parties and there was a claim of fraud due to an earlier invocation and then withdrawal
of the guarantee. Further irretrievable injustice was claimed. Court rejected both claims,
stating no grounds for either, and rejected injunction.
o KL Steel v Maharashtra SEB – Defendants invited tenders, which plaintiff submitted giving
RM Chopra as the contact person, however no power of attorney was executed in his
favour. Further an unconditional bank guarantee was issued. RM Chopra signed a contract
which he did not have the power to. Plaintiffs protested that he did not have the authority
and refused to commence supply. Defendant thus became adamant in invoking the bank
guarantee. Plaintiff tried to file suit for declaration of the fact that there was no valid
agreement and thus the bank guarantee would not be in operation. It was held however
that bank guarantees are distinct and independent of the underlying contract and could
thus be executed.
 In an unconditional bank guarantee the beneficiary need not show that he suffered a loss by
reason of non-fulfilment of the contract.
 Guarantee may continue to persist even after termination of the contract to enable invocation
up to the date of its expiry.
 A clause that may vary the terms of the contract without affecting the liability of the bank is valid
 Bank guarantees are separate transactions not construed by the terms of any other contract
o Harbottle RD (Mercantile) Ltd v National Westminster Bank Ltd - The plaintiffs had entered
into contracts of sale with Egyptian buyers. Each contract provided that the plaintiffs would
establish a guarantee confirmed by a bank in favour of the buyers. The guarantees were
widely expressed, and secured payment on the buyers’ demand. They were established
 with Egyptian banks and confirmed by the defendant English bank. The buyers demanded
payment under the guarantees. The plaintiffs maintained that there was no justification for
the demand for payment, and sought declarations to that effect and injunctions against the
defendants from making payment under the guarantees. The Court however held that there
was no ground for an injunction and only in exceptional cases would the court interfere
with a bank guarantee.
- Fraud and contrary to law – only reasons for injunction
 Arbitration proceedings – enforcement of bank guarantee cannot be subject; however, bank can
withhold payment while proceedings are going on, and amount encashed can be subject to
adjustment under final award to be passed by arbitrator
 Period of limitation for enforcing a guarantee is three years from the date on which the letter of
guarantee was executed.
 Recovery proceedings instituted after 3 years from the date of the deed of guarantee may be
quashed.
 No need for separate acknowledgement from the surety
 For a continuing guarantee period of limitation starts from when the notice invoking guarantee
is given.
 S. 132 – creditor is not affected by any private arrangement between joint debtors (who are
primarily liable) where one of them agrees to be surety to the other, even if he possesses
knowledge of it. He may not become a party to the arrangement.
 Where, however, the creditor knows of any such arrangement, he must refrain from doing
anything which would have the effect of discharging surety (variance, release, compounds etc.)
 Unless there’s a specific agreement to make the principal debtor be liable alone, the creditor can
proceed against the surety to the same extent as if he was the principal debtor himself.

Discharge of Surety from Liability

 Revocation
o S. 130 – A continuing guarantee may be revoked at any time with respect to future
transactions. An ordinary guarantee may not be revoked once it has been acted upon. A
clear and specific notice intending to terminate liability under the guarantee is necessary.
o S. 131 – Death of surety. A continuing guarantee is terminated upon death of the surety
unless there is a contract to the contrary. Termination is only effective as to future
transactions, those already made would be paid out of the heir’s estate.
o S.133 – By variance – Any variance made in the terms of the contract between the principal
debtor and the creditor without the surety’s consent discharges the surety from liability to
any transactions subsequent to the variance.
 Bonar v Macdonald – Defendant guaranteed conduct of the manager of a bank. Bank
later raised salary on the condition that he would be liable for one-fourth of the
losses on discounts allowed by him. No communication was made to the surety of
this new arrangement. Manager allowed a customer to overdraw but the surety was
not held liable as there was no communication of the new arrangement.
 M.S. Anirudhan v Thomco’s Bank Ltd – Defendant guaranteed repayment of a loan of
25,000. Principal then reduced the amount to 20,000 without intimation to the
surety. Surety held liable though there was a variation as the variation was beneficial
to him.
 Blest v Brown – Surety is bound according to the proper meanings and effect of the
written engagement he has entered into, and after any alteration, if the surety has
the right to say that the contract is no longer the one he engaged to be surety, he
may put an end to his obligation
 Holme v Brunskill – If there is any agreement with the principals as to the contract
guaranteed, the surety ought to be consulted and that if he has not consented to the
 alteration he may not be held liable to pay unless the alteration is prima facie
unsubstantial or only beneficial.
 Advance authorisation legitimises changes however advance authorisation by the
surety enabling any alteration would be contrary to 133 and thus invalid. Consent
may be prior or subsequent to the alteration. Consent should not be in vacuum.
[substantial increase of interest cannot come under “any indulgence or
consideration] [extending cash-credit limit did not discharge surety because his
liability was the same under the guarantee]
 Need to see the effect of the alteration – if unsubstantial or beneficial to the surety,
not discharged.
 An attempted variance that does not become effective leaves the surety bound; If
surety released, property also released
 Once a liability is converted into a decreed debt, the earlier constraints of the
underlying contract cease to be applicable. After a joint decree has been passed, no
longer PD and surety but joint debtors. A settlement under this limiting the liability of
either party would still be enforceable. The liability as determined by the decree
cannot thereafter be modified by anything that a decree holder may do or omit to do
 An alteration that does not disturb the basic structure of liability created by a
guarantee would not render it unenforceable.

o S.134 – Discharge of surety by release or discharge of principal debtor

 If the principal debtor is released from liability the surety is also released (by
contract), OR where the act or omission of the creditor causes such discharge.
 Mere suspension of the debt for a short period of time with a clause that period of
limitation will not run, will not affect the liability of the guarantor
 A discharge of liability of the principal debtor due to insolvency does not absolve the
surety of his liability (Maharashtra SEB v Liquidator)
 Any act or omission which acts as discharge of the debt owed by the principal debtor
exempts the surety too.

o S.135 – Discharge of surety when creditor compounds with, gives time to or agrees
(promises) not to sue the principal debtor unless surety assents
 Composition – If the creditor makes a composition with the principal debtor without
consulting the surety the latter is discharged. Composition involves variation of the
original contract to the amount of a novation and thus the surety is discharged.
 A compromise in terms of a court decree is different from private composition. That
does not discharge the surety unless the decree is collusive.
 If the creditor gives more time to pay off the debt without consent of the surety, then
this discharges the surety (includes promissory notes).
 S.136 – Surety not discharged when agreement made with third person to give time
to principal debtor – when a contract to give time is made between the creditor and a
third person and not with the principal debtor then the surety is not discharged.
 S.137 – Forbearance to sue does not discharge surety
 A failure to sue the principal debtor until the recovery is barred by the statute
of limitations does not discharge the surety
 However, a promise not to sue does discharge the surety – this right is
positively violated when the creditor promises not to sue
 Mahant Singh v U Ba Yi – Plaintiff engaged as a contractor for construction
work. Payment guaranteed by defendants. Trustee defaulted, plaintiff sued
trustee who employed contractor and surety. Beneficiaries of the trust
 replaced the trustees and the plaintiff dropped the case, not allowed to sue
them in their personal capacity. Suit was maintained. Surety not discharged.

o S.139 – Discharge of surety by creditor’s act or omission impairing the surety’s eventual
remedy
 A surety is entitled after paying off the creditor his indemnity from the principal
debtor
 Same duty requires creditor to preserve the securities. If securities are
sold/lost/damaged, surety discharged to that extent. Forfeiture of property might
deprive the surety of his right to that security.
 However, the ultimate remedy of the surety against the PD must be impaired. Mere
non-cancelling and not reissuing license of a shop by the creditor of the PD’s
securities does not discharge surety.
 Creditor also owes to the surety the duty of realising the proper value of the
securities in case he exercises his power of sale
 Delay of creditor in executing decree releases surety from paying interest
 Creditor in being paid in full was bound to assign the mortgaged securities to the
surety
 State of MP v Kaluram – – The State sold a lot of felled timber to a person payable in
four instalments, guaranteed by the defendant. Contract further provided that in
case of default the State would get the right to prevent further removal of timber and
sell the remaining for the realisation of the price. Defendant defaulted but the State
allowed him to continue to remove timber against the terms of the guarantee, thus
losing their security. This discharged the surety of the value of security.
 State Bank of Saurashtra v Chitranjan Rangnath Raja – Bank granted a loan on the
security of the stock in godown, guaranteed by surety. Goods lost from godown due
to negligence of bank officials – surety discharged to the extent of value of goods.

 Rights of the surety against principal debtor

o S.140 – Right of subrogation – Where a guaranteed debt has become due or default of the
principal debtor to perform a guaranteed duty has taken place, the surety is invested with
all the rights the creditor had against the principal debtor
 Thus, after payment the surety in essence becomes the creditor and he may sue in
the rights of the creditor
 Not always good, because surety can’t make creditor pursue his remedy against PD;
surety has to pay even if PD is insolvent
 The surety may get certain rights before payment also. If the principal debtor
attempts to remove or dispose his property with intent to defraud his creditor and
surety an injunction may be granted.
 After debt has become due, surety may also compel debtor to exonerate them from
liability by paying the debt or sue in the creditor’s name and collect the debt from the
PD if he will indemnify creditor against risk, delay, expense of suit. But an action
won’t lie if the debt is not actual, accrued, etc. and the guarantee precludes action
before creditor demands payment.
o S.145 – Right to indemnity – In every contract of guarantee there is an implied promise by
the principal debtor to indemnify the surety, and the surety is entitled to recover any sum
he rightfully paid but not those he paid wrongfully.

 Rights of surety against creditor

o S.141 – Right to securities – A surety is entitled to the benefit of the security which the
creditor has against the principal debtor at the time when the contract of surety-ship is
 entered into, whether the surety knows of it or not, and if the creditor loses or parts with
the security without the consent of the surety, the surety is discharged as to the value of
the security.
 On paying off the creditor the surety gets the rights to the securities which the
creditor has against the principal debtor
 If creditors do anything to the security to have them discharged/ don’t call out
defaults etc, surety discharged to that extent
 If securities are burdened with further advances, it will not affect the rights of the
surety
 Security includes all rights that the creditor had against the PD at the date of contract
– limited to at the date of him becoming a surety
 It is immaterial if the loss of securities occurred due to a positive action or a mere
inaction. But if not by creditor, then surety does not have reduced liability (does not
apply to hypothecation)
 Creditor’s right to hold his securities is paramount to the surety’s claim upon the
securities, which only arises once the creditor’s claim against such securities has been
satisfied – position changed ---- surety upon payment for all that he is liable for
becomes invested with the rights of the creditor. Where the guaranteed debt is only
a fraction of the debt, the surety’s right comes into existence immediately on
payment of that fraction
 State of MP v Kaluram
 Goverdhandas Goculdas Tejpal v Bank of Bengal – Mortgages given to bank as
security. Plaintiff, who was a surety in part, paid a part and claimed that he was
entitled to that extent to stand in the place of the bank and receive a share of the
proceeds of the securities proportioned to the sum he paid. Surety’s claim upon
securities only exists when creditor’s claims against such securities have been
satisfied.
 Parvateneni Bhushayya v Potluri Suryanarayana – Bank advanced three different
loans with three different sureties for each loan. Principal debtor did not repay the
loans in time and therefore the bank obtained mortgage on his property. Ultimately
the bank had to file suits and three different decrees were obtained against the
principal debtor and the surety on each loan. First two sureties paid off their decrees
but the third did not. The question is whether the first two sureties were entitled to a
proportionate share in the mortgage. Considering that that fraction of the entire loan
they paid was their whole liability, they do get a proportionate share.

o Right to share reduction

 Hobson v Bass – J guaranteed to B payment of all good to the extent of 250 pounds.
Similarly, E gave a guarantee.

o Right to set off – If creditor sues the surety the surety may use the defences of the debtor
against the creditor. Not only against creditor but also against third parties

 Rights against co-sureties

o S.138 - Release of one co-surety does not discharge the others. Doesn’t discharge him of his
duties to other co-sureties
o S.146 - Co-sureties are liable to contribute equally
o Co-sureties bound in different sums are liable to pay equally as far as the limit of their
obligations permit.
o If one of them has been compelled to pay more than his share, he can recover from co-
sureties to equalise loss between all of them.
 o Immaterial that the creditor has not yet demanded payment. It is enough that the creditor
could enforce the guarantee either forthwith or after a demand for more than the surety’s
rateable share

 Indemnity and guarantee

o Liabilities is contingent in indemnity while in guarantee it subsists in the sense that once a
guarantee has been acted upon the liability automatically arises.
o Undertaking in guarantee is collateral, it is original in indemnity. Indemnifier’s liability is
primary
o In indemnity there are only two parties, guarantee has three
o Indemnity is only one contract. Guarantee there are three – loan, guarantee and implied
indemnity between surety and principal debtor
 Bailment
 Relationship in which the property of one person temporarily goes into the possession of
another. Thus, ownership remains with one person while possession transfers to another.
 S.148 – Definition of bailment – delivery of goods by one person to another for some purpose
upon a contract that they shall, when the purpose is accomplished, be returned or disposed of
according to the directions of the person delivering them
 Bailor – Person delivering goods, original possessor
 Bailee – Person receiving goods, receives possession

 Essential features of bailment are:

o Delivery of possession
o Delivery should be upon contract
o Delivery should be upon some purpose

 Delivery implies that the goods must be handed over to the bailee for whatever is the purpose of
the bailment, and only upon this completion does a bailment arise, regardless of the way it
arises
o Ultzen v Nicols – A customer went into a restaurant. When he entered a waiter took his coat
without his permission and hung it on a hook behind him. When the customer rose to leave
the coat was gone. Restaurant was held liable as bailee
o Kaliaperumal Pillai v Visalakshmi – Lady handed jewels to goldsmith for being melted and
used as new jewels. Every evening after the goldsmith was done working, the lady received
the half-made jewels and put them in a box in the goldsmith’s room, keeping the key in her
possession. Jewels were lost one night however the goldsmith was not held as the bailee as
he had no possession of the goods. There was no delivery.

Possession
 To constitute bailment, it is necessary to show that the actual and exclusive possession of the
property was given by the hirer of the locker (customer) to the bank. The locker-holder then has
no direct access to his locker nor can he operate it on his own and thus the possession transfers
to the bank.
o Atul Mehra v Bank of Maharashtra – Hiring of a bank locker and storing things in it would
not constitute a bailment. Things kept there are put in a hired portion and not entrusted to
the bank – there is no delivery. The court also found that there was no proof of the fact that
at the time when the bank locker was robbed, there was no way to determine whether
there were indeed any goods inside. Further, the court stated that there was no way to
infer that reasonable precautions were not taken. Thus, the customer was not allowed to
claim damages

 S.149 – Delivery to the bailee may be made by doing anything which has the effect of putting the
goods in the possession of the intended bailee or of any person authorised to hold them on his
behalf
 Delivery of possession is of two types – actual and constructive
 When the bailor hands over to the bailee the physical possession of the goods then it is called
actual delivery
 Constructive delivery is when there is no change of physical possession, goods remaining where
they are, but something is done which puts the possession of the goods in the hands of the
bailee [character of possession is changed]
o Ex: Delivery of a railway receipt amounts to delivery of goods
Upon contract
 Delivery of goods should be made for some purpose and upon a contract that when the purpose
is completed the goods will be returned or disposed of as specified.
 English law recognises bailment without contract, and in India also certain bailments are
recognised without contract
 In the case of State of Gujarat v Memon Mohamed Haji Hasan it was held that while bailment in
the Indian Contracts Act arises only in cases where it arises from a contract, it is not correct to
say that there cannot be a bailment without an enforceable contract.
 When police obtain stolen goods, there is bailment between the State and the original owner of
the goods and the State is thus liable to take reasonable cares and precautions.
o Lasalgaon Merchants Coop Bank Ltd v Prabhudas Hathibai – Tobacco lying in the godown of
a partnership firm were pledged to the plaintiff bank. As some of the partners failed to clear
their tax dues, the Income Tax Officer ordered seizure of the goods, locking the godown and
handing over the key to the police. Heavy rains came down however and the goods got
damaged. Court held that it was the duty of the officers to take care as a prudent manager
was and prevent such outcomes. The officers were recognized as bailees.
 Bailment is a relationship sui generis and unless it is sought to increase or diminish the burdens
upon the bailee by the bailment, it is not necessary to prove consideration or incorporate it into
law of contract

Special Purpose
 There can be no bailment without a delivery of goods, a specific purpose for the delivery and a
disposal of the same upon completion of the purpose
 A deposit of money to a banker is not bailment as he is not bound to return the same notes and
coins
 Bailment is distinguishable from sale, exchange or barter because it is transfer of possession and
ownership and thus the person has no obligation to return or dispose of the same.
 Bailors are of two kinds – gratuitous and for reward. Gratuitous bailors lend their goods without
charge
 S.150 – Bailor is bound to disclose to the bailee faults in the goods bailed of which the bailor is
aware and which materially interfere with the use of them, or expose the bailee to extraordinary
risks, and if he does not disclose the same, he is responsible for damage arising to the bailee
directly from such faults. If the goods are bailed for hire (bailor for reward) then the bailor is
responsible for such damage, whether or not he was aware of the existence of such faults

 Conditions of liability for a gratuitous bailor is thus:

o Should have knowledge of the defect and the bailee should not be aware
o Defect in the goods must be such as exposes the bailee to extraordinary risks or interferes
with the use of the goods

 Duty of a bailor for reward is much higher – it is his duty to see that the goods which he delivers
are reasonably safe for the purpose of bailment.
 It is no defence that he was not aware of the faults in the goods
o Hyman & Wife v Nye & Sons – Plaintiff hired defendant for a specific journey by carriage. A
bolt of the carriage broke off, carriage was upset and the plaintiff injured. The defendant
was held liable.

 The duties of the bailee are:

o Duty of reasonable care
o Duty not to make unauthorised use
 o Duty not to mix
o Duty to return
o Duty not to set up jus tertii (defence that goods belong to a third person)
o Duty to return increase
 S.151 – Bailee is bound to take as much care of the goods 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
 Thus, standard of care is that of reasonable care and would be the same whether the bailment
was gratuitous or for reward (unlike in England)
 S.152 – Bailee, in the absence of a special contract, is not responsible for the loss, destruction or
deterioration of the thing bailed if he has taken the degree of care described in S.151
 When the bailor’s goods are stolen from the custody of the bailee, the bailee will be liable if
there has been negligence on his part.

 Burden of proof lies upon the bailee to show that he exercised reasonable care. If he proves that
he took reasonable care to avoid damage which was reasonably foreseeable or had taken all
reasonable precautions to obviate risks which were reasonably apprehended, he would be
absolved of liability
o Jagdish Chandra Trikha v Punjab National Bank – Jewellery box with declared contents was
handed over to a bank with the clause “The articles in safe custody will be kept in the
strong-room under joint custody of the manager”, it was held that the bank was liable to
account for the missing articles of jewellery and became liable because it failed to give any
sufficient explanation.

 When the loss is due to the act of the bailee’s servant the bailee would be liable if the servant’s
act was within the scope of his employment
 When the bailee’s goods are lost along with those of the bailor, the justification would not hold
that he took as good care of his own goods as he did of the bailor’s if the bailee was careless
with both goods in the first place
 A person who comes into possession of a chattel through no act of his own and without his
consent is an involuntary bailee. If an involuntary bailee, without negligence, does something
which results in the loss of property he will not be liable

 A bailee cannot contract himself out of the obligation under S.151; the words in S.152 allow an
increase of standard of duty and not a reduction. No one can get a license to be negligent
o Mahendra Kumar Chandulal v CBI – Bales of cloth were lost from bank custody under
circumstances showing negligence. Though the banker had a clause absolving him of
liability, he was still held liable

 S.154 – If the bailee makes any use of the goods bailed which is not according to the conditions
of the bailment he is liable to make compensation to the bailor for any damage arising to the
goods from or during such use
 Any unauthorised use of the goods would make the bailee absolutely liable.
 S.153 – A contract of bailment is avoidable at the option of the bailor if the bailee does any act
with regard to the goods bailed that are inconsistent with the conditions of the bailment
 The bailee should maintain the separate identity of his goods with the bailor’s.
 S.155 – If the goods are mixed with the content of the bailor, both will have a proportionate
interest in the mixture
 S.156 – If mixed without consent and the goods can be separated, the bailee bears all costs of
separation as well as any damage arising from the mixture
 S.157 – If the mixture, without consent, cannot be separated, the bailee must compensate the
bailor for his loss
 S.160 – It is the duty of the bailee to return or deliver according to the bailor’s directions the
goods bailed without demand as soon as the time has expired or the purpose accomplished
 S.161 – If by the default of the bailee, the goods are not returned/delivered at the proper time,
he is responsible to the bailor for any loss, destruction or deterioration of goods from that time
 When the lending is gratuitous, the bailor may at any time require return of the goods even if he
lent it for a specific time or purpose not completed.
 If the bailee has acted on the faith of the loan made and the return of such goods causes loss to
the bailee [loss> benefit he derived from that transaction], the bailor must compensate the
bailee for the same
 S.159 – The lender of a thing for use may at any time require its return if the loan was
gratuitous, even though he lent it for a specific time or purpose. If on the faith of such loan, the
borrower acted in a manner that the return of the thing lent, the lender must compensate the
borrower for the same
 S.162 – A gratuitous bailment is terminated by the death of the bailor or bailee
 S.165 – If several joint owners of goods bail them the bailee may deliver them back to one joint
owner without the consent of all in the absence of any agreement to the contrary
 Bailee is not entitled to set up against the bailor’s demand that the goods belong to a third
person. He is estopped from denying the right of the bailor to bail the goods and to receive them
back. Even if someone else has a better title than the bailor, the bailee must return them to the
bailor
 S.166 – 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 is not responsible to the owner in respect
of such delivery
 S.167 – If a third person other than the bailor claims goods bailed, he may apply to the Court to
stop the delivery of the goods to the bailor.
 S.163 – In the absence of any contract the bailee is bound to deliver to the bailer any increase or
profit which may have been accrued
 S.168 – The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him to return the goods, but he may retain the goods against the
owner until he receives such compensation. When the owner has offered a specific reward, he
may sue and may retain such goods till he gets it
 S.169 – When a thing which is commonly the subject of sale is lost, and the owner cannot with
reasonable diligence be found or refuses to pay the lawful charges to the finder, the finder may
sell it when the thing is in danger of perishing or losing the greater part of its value or when the
lawful charges of the thing amounts to two-thirds the value
 A finder of goods is a bailee of the same and as such is bound by the duty of reasonable care

 Bailee’s rights
o Right to compensation
o Right to expenses or remuneration
o Right of lien
o Right to sue

 S.164 – The bailor is responsible to the bailee for any loss which the bailee may sustain by
reason that the bailor was not entitled to make the bailment
 S.158 – Where the goods are to be kept or carried or to have work done upon them by the
bailee for the bailor, and the bailee is to receive no remuneration, the bailor shall repay the
bailee for the necessary expenses
 If in using the thing the borrower is put to some expense, he must pay that himself.
 If the bailee’s lawful charges are not paid, he may retain the goods called the right of lien
 S.170 – Particular lien – Where the bailee has, in accordance with the purpose of bailment,
rendered any service involving the exercise of labour or skill in respect of the goods bailed, he
has in absence of a contract, a right to retain such goods until he receives due remuneration for
the services rendered
 This labour or skill must improve the goods, maintaining it in its former condition is not enough
o Hutton v Car Maintenance Co – Owner of a motor car gave it to a company to maintain it for
three years on a fixed annual payment. An amount became due for maintenance charges,
company claimed lien to the car. As the company did not improve the car but only
maintained it in its former condition, there arose no right of lien
o Kalloomal Tapeshwari Prasad v RC & F – No lien for mere storage of fertilizers as it is not a
service involving the exercise of labour or skill
o Vithoba Laxman Kalar v Maroti Ukandsa Kalar – Person to whom cattle are given for grazing
does not have the right of lien on them for his charges

 The labour or skill must have been exercised in accordance with the purpose of the bailment and
terms of the contract
 Only such goods can be retained on which the bailee has bestowed trouble and expense
 He cannot retain any other goods belonging to the bailor, only those which he worked on.

 Right depends on possession and is lost as soon as possession of the goods is lost
o Eduljee v Café John Bros – Plaintiff purchased an old refrigerator, vendor agreed to repair it
for a fixed charge. When the repair was over and condition satisfactory, delivered to the
plaintiff but a part of the repair money was unpaid. Machine broke down again, vendor
took the broken parts back and claimed lien until the outstanding charges of repair were
paid. Court however held no lien as delivery of possession after repairs puts an end to lien
and cannot be revived because of further repairs

 Right of lien may be defeated by a contract to the contrary

 S.171 – General lien – Bankers, factors, wharfingers, attorneys and policy brokers may in the
absence of a contract to the contrary, retain as security for a general balance of account any
goods bailed to them, but no other persons have a right to retain as a security for balance, goods
bailed to them unless there is an express contract to that effect
 General lien thus means the right to hold goods bailed as security for a general balance of
account. Right of particular lien enables a bailee to detain only that particular property in
respect of which the labour is done and the charges are due

 Bankers and general lien:

o Mercantile Bank of India Ltd v Rochaldas Gidumal & Co – Customer gave his banker a sum of
money for transmission of telegraphic transfer to his own firm at another place. Bank
purported to hold the money for their balance of accounts against the firm. While in this
case money was held as goods, the court held that holding this money would be
inconsistent with the right of lien, considering the urgency of the payment. General lien of
bankers attaches to all goods and securities deposited with them as bankers by a customer
or a third person on a customer’s account, provided there is no contract inconsistent with
such lien.
o Fixed deposit receipts deposited by way of security for cash-credit facilities were usable as
security against the customer’s other debts also
o Gold ornaments and other jewellery may be used as security as well
o Goods given to the banker must be given in the capacity of a bailee, as lien only extends to
goods which have been bailed to the banker
 o Money paid in a bank to be credited into the current account does not constitute bailment
and thus S.171 and lien does not apply. The bank legitimately owns the money and thus
cannot claim lien against itself
o When a customer has a deposit account and a loan account the banker may transfer money
in the deposit account to the loan account without any specific instruction to the same
o Syndicate Bank v Vijay Kumar – Banker’s lien could extend to a joint account and fixed
deposits.
o When a banker knows that the securities deposited belong to some other person he cannot
hold them in the exercise of lien against the customer

 Factor
o A factor is an agent entrusted with possession of goods for the purpose of selling them for
his principal
o Given possession of the goods in the ordinary course of his business for the purpose of sale
and possesses a general lien on the goods of his principal for his balance of account against
the principal.
o It is necessary that the goods have been delivered to the factor in the course of business
and in his capacity as a factor

 Wharfingers
o Wharfinger has general lien on the goods bailed to him until his wharfage, charges due for
the use of his wharf, are paid
o It is a place not used for storage of goods but in the process of their transit to or from water

 Attorney of High Court

o An attorney who is engaged by a client is entitled to general lien until the fee for his
professional service and other costs incurred by him are paid
o This right extends to the proceeds of the action that come to the hands of the attorney
o He has a right of lien over funds which are deposited with the court
o A man may change his solicitor, however the papers in the suit cannot be taken out of the
hands of the solicitor without having his costs paid
o If the attorney himself decides not to act for the client he forfeits his lien and therefore
must hand over the papers to the client, whether or not the client has paid him
o RD Saxena v Balram Prasad Sharma – Advocates have no right of lien over clients’ papers
for their unpaid fee. The Court said that files containing copies of the records or original
documents are not goods as they have no marketability and thus do not fall under the
category of goods bailed under S.171

 Policy Brokers
 Right of lien can be exercised even when an action for recovery of the debt is time-barred
 Set-off – Different from lien as it can be carried out without bailment. If a bank has loaned
money to a landlord, some of which is still outstanding the bank may take the arrears of the land
as set off to pay off the loan
 S.180 – If a third person wrongfully deprives the bailee of the use or possession of the goods
bailed or does them injury, the bailee is entitled to the same remedies the owner might have
used and either the bailee or the bailor may bring a suit against this third party
 S.181 – Whatever is obtained by way of relief or compensation in such suit will be dealt with
between the bailor and bailee according to their respective interests
 Pledge
 S.172 – Pledge is a bailment of goods as security for payment of a debt or performance of a
promise is pledge. Bailor is the pawnor and bailee is the pawnee
 Pledges are thus special kinds of bailments with basis being object of contract – when object of
delivery of goods is to provide a security for a loan or for the fulfilment of an obligation, it is
pledge

 Essential features of pledge are:

o Delivery of possession – delivery of chattel to pawnee is a necessary requirement of pledge
 Revenue Authority v Sundarsanam Picture – The producer of a film borrowed a sum of
money and agreed to deliver the final prints of the film when ready. This was not a
pledge as there was no actual transfer of possession
 Delivery may be actual or constructive
 When goods are in the possession of a third person, who, on the direction of the
pledger, consents to hold them on the pledgee’s behalf – delivery by attornment
 Morvi Mercantile Bank v Union of India – Goods were being transferred by rail.
Railways gave a receipt to be used to get the goods back. The owner of the goods
obtained a loan from the bank, depositing this receipt as security. Loan was for 20,000
while goods were worth 35,000. Railways lost the goods, owner defaulted. SC held
that delivery of railway receipt is the same as delivery of goods and thus the pledge
was valid and the pawnee was entitled to recover the full value of the goods lost and
not merely the amount of his advance.
 A pledge being a bailment of goods as security for the payment of a debt, the pledgee
will have the same remedies as the owner of the goods would have against a third
person for deprivation of said goods or injury to them.
 Goods may be allowed to remain in the custody of the pawnor for a special purpose.
This is known as hypothecation where the pawnor pledges an asset as collateral while
retaining ownership and usage of the same, as well as the benefits thereof. The
hypothecator is entitled to recover the property on default.
 In hypothecation the possession is never intended to be transferred to the
hypothecator and on default he gains ownership and thus possession of goods as
well.
 Hypothecation thus means a charge in or upon a movable property existing or
future created by a borrower in favour of a creditor without delivery of
possession to such creditor
 Reeves v Capper – Captain of a ship pledged his chronometer to the shipowner
who allowed him to use the instrument for the purpose of the voyage. Captain
pledged it over again with a second person. The first pledge was held to be valid
as it was a constructive pledge by constructive delivery.
 Bank of Chittoor v Narasimbulu – Cinema projector and accessories pledged with
a bank however bank allowed property to remain with the pawnors since they
were a requirement to running the cinema. Subsequently pawnors sold the
equipment. Sale was subject to the pledge.

o In pursuance of a contract
 All pledges are in pursuance to a contract and it is essential that delivery of the chattel
shall be made by the pawnor to the pawnee in pursuance of the contract of pledge
 Delivery and advance need not be simultaneous. Delivery may be made before or in
contemplation of an pledge, which ripens into a pledge as soon as the advance is
made.
  Blundell Leigh v Attenborough – Plaintiff gave jewellery to a Miller to value it and let
her know what offer he would make as to lending her money; he was to keep it as
security if he made an advance. This Miller pledged the same to a pawnbroker for
1000 pounds and gave the plaintiff 500. He died. Plaintiff upon finding out sued the
pawnbroker stating that there was no pledge and he was only a gratuitous bailee.
However, the Court held it was a pledge from the moment he handed her the money
(the loan) which she accepted.

 Rights of Pawnee
o Right to retainer
 S.173 – Pawnee may retain the goods pledged, not only for payment of debt or
performance of promise, but also for interest of the debt and all necessary expenses
incurred in respect of possession and preservation of the goods pledged
 S.174 – Pawnee shall not retain the goods pledged for any debt or promise other than
the debt or promise for which they are pledged [Particular], but such contract will be
presumed in regard to subsequent advances made by the pawnee
 Thus, if a pledge is created, a subsequent advance, without any other security, a
contract upon the same goods is presumed
 Rights of retainer end on proper tender – if pawnee refuses a proper tender he would
be liable under S.160 & 161 for failure to return in time
 Right of lien is in nature of a particular lien. Pawnee gets special property in the goods
pledged. The general property remains with the pawnor and wholly reverts to him on
discharge of the debt. Right to property vests in the pawnee only so far as is necessary
to secure the debt
 Bank of Bihar v State of Bihar – Goods that were under pledge of a bank were
seized by the State of Bihar. Held that the seizure could not deprive the pawnee
of his right to recover the amount the goods were pledged for and thus the State
was to indemnify him for the amount the goods would have amounted to. This
special property or interest is different from the right to detention of lien as it is
transferrable in the sense that a pawnee may assign or pledge his special
property or interest in the goods. Thus, the goods of the pawnor cannot be
seized unless he satisfies the claims of the pawnee.
 As long as the pawnee’s claims is not satisfied no other creditor has any right to
take away the goods or their price. (eg. Seizure etc.)
 Hypothecatee cannot directly seize the goods, he must do so either with consent of
the pawnor or through a court order

o Right to extraordinary expenses

 S.175 – Pawnee is entitled to receive from the pawnor extraordinary expenses
incurred by him for preservation of the goods pledged. However, no right to retain the
goods for this. He can only sue to recover them.

o Right to sell
 S.176 – If the pawnor makes default in payment of the debt or performance at the
stipulated time in respect of which the goods have been pledged, the pawnee may
bring a suit against the pawnor upon the debt or promise and retain the goods as
collateral security or he may sell the thing pledged, on giving the pawnor reasonable
notice. If the proceeds of the sale are less than the amount due in respect of the debt,
the pawnor is liable to pay the balance. However, if it more than the amount due the
pawnee must pay the surplus to the pawnor.
  If by any reason of his own act, pledgee is unable to return the goods, he cannot
have judgment for the debt.
 Right to proceed against property is not just an accessory to right to proceed
against debtor personally.
 Until the money due is recovered the pledged goods may be retained though they
would have to be surrendered upon realisation of the loan
 Before making the sale, the pawnee is required to give a reasonable notice of his
intention to sell to the pawnor, which cannot be excluded by a contract to the
contrary
 Reasonable notice is to be given before pawnee sells the goods.
 A mere reminder to the repayment is not a notice however.
 Date, time and place of sale are not necessary for notice to be valid
 Right of sale can be exercised against a time-barred debt
 A sale to the pawnee himself is not void. It does not terminate the contract of pledge
so as to have back the goods without payment of the loan. But pledgee may hold the
pledger liable for any loss he may have suffered by reason of the fact that goods were,
for eg., given at less than market price.
 When goods are lost due to the negligence of the pawnee the pawnor’s liability is
reduced by the value of those goods lost
 S.177 – Pawnor’s right to redeem – If a time is stipulated for the payment of the debt or
performance of the promise and the pawnor defaults, he may redeem the goods pledged at any
subsequent time before the actual sale of them but he must pay in addition any expenses arising
from his default
 Special interest of the pledgee come to an end as soon as the debt for which the goods were
pledged is discharged
 This right continues till the goods are lawfully sold.
 The right to redeem is thus extinguished by the actual sale of goods, not merely notice.
 Pawnor has right to take back goods with increase, if any, that the goods have undergone during
the period of pledge.
 Legal heir’s right to redeem
 Agency

Introduction
- Section 182 defines agent – an agent is a person employed to do any act for another (principal)
or to represent another in dealings with third persons.
- Essential feature is the representative character of the agent (in the creation, modification, or
termination of contractual obligations) coupled with the power to affect the legal relations of
the principal with third persons.
- An agent is merely an extended hand of the principal and cannot claim independent rights.
- Role of agent ends the moment deal is effected and agent cannot sue and can’t be sued
thereafter. Liability arises between Principal and third person. Agent has the authority to create,
modify or terminate contractual obligations on behalf of principal.

Test of Determining Existence of Agency Relationship

- Use of the words ‘agency’ in the contract does not establish such relationship. Court must
establish true nature of relationship, and functions and responsibilities of the alleged agent
- Procurement agent has been held to not be an agent as he is only directed to do an act on
commission and not to represent another.
- Wholesale dealers would be agents. Purchase and sell at a price fixed by the state and also
responsible for its safety. Thus, he was a channel through which the state was operating and
became an agent of the state
- Another way to check is to see if the person is affecting legal relations

Agency of Hire-Purchase Transactions

- Hire-Purchase transactions: 3 parties generally – dealer – provides the goods; financier –
provides dealer money to buy goods; hirer – takes the good and pays hire-purchase instalments
to financier
- Since most people do not know of the finance company, dealer not just intermediary. So general
responsibility of finance company for acts, receipts, and omissions of the dealer ought to flow
from this general structure of relationship.

Co-agents and Co-principals

- Where authority of co-agents is only joint, it would be necessary for them to act jointly and only
then will their principal be bound. Where authority is joint and several, any one of them would
be competent to act for the principal.
- An agent who represents co-principles in the same transactions, should account for all of them
jointly, for an account given only to one may not absolve him from liability.

Essentials of Agency
1. Principal should be competent to contract
- S. 183 – provides for who may employ an agent – Major, of sound mind.
- Minor cannot appoint an agent. Not only is the appointment itself void, but everything done by
the agent on behalf of the infant is also void and incapable of ratification. [Because infant has no
sufficient discretion to choose an agent]
- In situations where a minor is capable of binding himself by contract, he may appoint an agent to
contract on his behalf. [Whatever a person can do personally he can do through an agent]
- There is nothing that prevents a guardian of the minor from appointing an agent for him.
- When principal who had executed a power of attorney (when appointment is made by deed)
became old, weak, mentally infirm, and not in a position to think independently – power of
attorney had become useless
- Every person has the right to appoint an agent for any purpose. This principle does not apply
where the act to be performed is personal in character or when it is annexed to a public office or
to an office involving any fiduciary obligation

2. Agent need not be competent

- Agent need not be major or of sound mind
- Though minor can be appointed as an agent, but such a person is not liable to the person
because of his act.

3. Consideration for appointment not necessary

- Section 185 says that no consideration is necessary to create agency.
- Generally, an agent is remunerated by way of commission for services rendered; but no
commission is immediately necessary at the time of appointment.

Agent and Servant

Agent Servant
1. Authority to act on behalf of his principal and 1. Same power not enjoyed by servant
to create contractual relations between
principal and third parties
2. Principal has right to direct what the agent 2. Master has not only the power to direct what
has to do servant has to do, but also how it is to be done
3. Agent receives commission 3. Mode of remuneration – Salary or wages
4. Principal liable only if agent’s wrongful act is 4. Within ‘scope of employment’
done within the ‘scope of authority’
5. May work for several principals at same time 5. Usually only one master

- Managing director of a company is an employee of the company but on its dealing with third
parties, he becomes agent. People engaged to simply produce a specified result, to prepare a
report or painting, have no power to act on behalf of their clients, not agents.

Agent and Bailee

Agent Bailee
1. This not necessary. Agent may also to an 1. Relationship of bailor-bailee subsists only so
extent be a bailee. [Ordinary bailee may long as the bailee holds some goods belonging
become agent when he is authorized to to the bailor
dispose of bailor’s property]
2. Representative to contract on behalf of his 3. Bailee does not have that power.
principal

Agent and Buyer

- Even an agent can become a purchaser when he pays the price to the principal and discloses to
him that fact.
- If it were an outright sale and not any agency – necessary to provide for price, for time of
delivery, facts that sales tax was to be borne by the defendants.

Kinds of Agency
- Factor – Mercantile agent entrusted with the possession of goods for the purpose of selling
them, whose ordinary course of business is to dispose of goods.
- Broker – kind of mercantile agent – appointed to negotiate and make contracts for the sale or
purchase of property on behalf of his principal but is not given possession of goods.
- Del Credere Agent – Type of mercantile agent – Agent undertakes, on the payment of some
extra commission, to be liable to the principal for the failure of the third party to perform the
contract. [extra commission – del credere commission].
o Not a contract of guarantee because agent has a personal interest in the transaction.
o Del Credere Agent incurs only a secondary liability towards the principal. [legal position
partly insurer, partly surety]. His liability does not extend to making him liable to the
principal when there can be no profit because of stringency of market
o Not liable to buyer for any default of his principal, nor disputes, nor for sum due. His liability
limited to contingent pecuniary liability to make good the default of the buyer

Creation of Agency
- Section 186 provides that the authority of an agent can be expressed and implied. Expressed in
when one is expressly empowered to do an act by words, written or spoken. Implied authority is
when it is to be inferred from the facts and circumstances surrounding. Implied authority is
actual authority.
- Ostensible authority and apparent authority: It’s not actual authority. It appears to the third
party that agent has such authority. Since the agent does not have the authority, principal would
be liable to third party and agent would be liable to the principal. In ostensible authority the
agent does an act which makes it look like as if he had authority to do such an act.
- Principal-Agent relationship may be created by:
o Express appointment
o Conduct or situation of the parties
o Necessity of the case
o Subsequent Ratification of an authorised act

1. Express appointment
- Can be in writing or oral [Oral appointment is valid, but the contract that the agent is authorised
to make has to be in writing]. Only by the will of the employer that an agency may be created
- This relationship can only be created by consent of both. There is consent if they have agreed to
what amounts in law to such a relationship, even if they do not recognize it themselves and eve
if they disclaim it.
- S. 182 – Indian law does not limit the definition to employment by principal only. It will include
an employment by any authority authorised by law to make the employment. Can also include
those appointments made by a court.
- Multiple principals can own separate property but had signed the same power of attorney and
still have one agent

2. Implied Agencies
- Arise from conduct, situation, or relationship of parties. Whenever a person places another in a
situation in which that other is understood to represent or to act for him, he becomes an implied
agent. Eg. Mom allowing son to drive for her

Estoppel
- Where principal, by his voluntary act, placed an agent in such a situation that a person of
ordinary prudence, conversant with business usages and the nature of the particular business, is
justified in presuming that such agent has authority to perform a particular act and therefore
deals with the agent, the principal is estopped as against such third person from denying the
agent’s work.
- May be presumed that Apparent authority is real authority

Husband and Wife [abolished?]

- Wife’s implied authority to bind her husband by her credit purchases. Limitations to this:
o Necessary that husband and wife should be living together
 If wife is living apart without husband’s fault, she may become agent of necessity:
extent of reasonable maintenance (but she will not be implied agent)
o Must be living together in a domestic establishment of their own [if this is there and
someone is acting as manager, presumption will arise even if that person is not wife)
 If these conditions are fulfilled, then it is immaterial if other party does not know that
buyer was married woman.
o Wife can run her husband into debt only for necessities [cannot purchase things beyond
their station]
o Husband will not be liable if he makes reasonable allowance to her wife for her needs
- Husband can negative liability by proving:
o That he expressly warned tradesman not to supply goods on credit
o Wife was already supplied with sufficiency of articles
o Wife was supplied with sufficient means for buying articles w/o pledging husband’s credit
- Husband implied agent of wife
- Wife by virtue of being the agent of husband cannot institute a suit against the seller of
necessaries.
- If the husband is supplying the wife with sufficient amount of necessaries despite that if she
pledges the credit of husband. Since it stems out from the husband obligation to supply
necessaries to the wife. Once duty is discharged by husband there is no need of implying agency.
- Inference which the law applies is not for the benefit of the seller but rather it is for the benefit
of wife to make sure that she is getting the necessaries.
- Notice of revocation or terminations is not necessary. Hence, it is not required to show whether
the wife is provided with necessaries.
- What constitutes necessaries? - Definition of necessaries will vary from party to party depending
upon the stature which they enjoy.
- If husband informs the shopkeeper to not give goods to his wife and even after that shopkeeper
gives necessaries to his wife then he would only be liable for paying up for the necessaries.

Agencies of Necessity
- An agent is entitled to take a decision which a reasonable and prudent person would take in
cases of emergency.
o It must be situation of emergency
o It must not be possible or practicable to communicate with the principal
- Situation wherein a person is not an agent initially but due to circumstances he acted as an
agent and did some act which an actual agent would have done.
- If a person is not appointed as an agent but he voluntarily did an act which implies a contract of
agency, then such person shall be reimbursed by the principal.
- Another situation – injured person in urgent need of medical help: bound to pay back doctor

Pre-existing agency not necessary

- Section 189 earlier pertained to the existence of principal-agent relationship. Though now there
is no such limitation.

Conditions for application of the principle

1. Inability to communicate with principal
- If directions can be obtained, agent should ask it before acting
2. Act should be reasonably necessary
- Material circumstances should be taken into account – danger, distance, accommodation,
expense, time, etc. – should be a nature of emergency, high standard of proof
3. Agent must have acted in the bona fide interest of the party concerned

Duties of the Agent

1. Duty to execute mandate
- Agent is to carry out mandate of his principal. He should perform the work that he has been
appointed to do. Any failure would make him absolutely liable for the principal’s loss.

2. Duty to follow instructions or customs [211]

- Agent’s duty in conducting Principal’s business: Directions have to be followed and if no
directions are given, one has to follow the customs prevailing in that business of the same kind
at the place where the agent conducts such business. (business customs)
- If directions are not followed by the agent, then he has to compensate the Principal for the loss
caused. If after not following directions the actions of agent result in profit, then such profit shall
be given to the Principal.
- Where a principal had given instructions of ambiguous nature which were capable of two
meanings, he was not permitted to argue as against the agent that he should have read the
instruction in the other sense than what he actually did
- Also has duty to maintain the business secrets of his principal. Agent under a duty to maintain
confidence, secrecy, and non-disclosure of any sensitive information about the affairs of his
principal. [except under statutory compulsion]

3. Duty of reasonable care and skill [212]

- Skill and diligence required from agent – Agent bound to conduct business of agency with as
much skill as is generally possessed by persons engaged in similar business, unless principal has
notice of his want or skill.
- Agent must possess the requisite such skills to do the work given to him and if on account of his
inadequacy of skills his actions (should be direct consequence of actions, not those that are
remote or indirect) result in loss to the Principal, then he is bound to compensate the principal
for loss so caused.
- Standard of care depends upon nature of profession
- Agent’s duty to communicate to Principal [214]
o In case of emergency or uncertainty, agent must use all reasonable diligence of
communicating with his principal, and in seeking to obtain his instructions.
- Agent misinforming the Principal also comes under 212

4. Duty to avoid conflict of interest [215]

- Right of principal when agent deals, on his own account, in business of agency without
principal’s consent – Agent has to tell the Principal that he is acting in his own account and
Principal has to be informed about the conflict of interest. Agent is required to acquaint the
Principal to all the material circumstances which have come to his own knowledge.
o The principal may repudiate the contract if:
(a) he comes to know that any material fact has been dishonestly concealed from him or
(b) that dealings of the agent resulted in some disadvantage to him.
- Principal’s right to benefit gained by agent dealing on his own account in business of agency
o Principal is entitled to claim from the agent any benefit which may have resulted to him
from the transaction.
o Agent occupies fiduciary position, and therefore, it is his duty to not do anything which
would bring his personal interest and his duty to the principal in conflict with each other.
This conflict invariably arises when the agent is personally interested in the principal’s
transactions.
o Material circumstances will vary from case to case.
 o First step is to inform the Principal about the fact that the agent is acting on his own
account. If he does, not bound to account for profits. If he does not, bound to account.
- When 215 will be applicable
o Agent has to disclose the fact that he is acting on his account.
o If agent reveals the fact that he is acting on his own account, then he is also bound to
disclose of the material fact. If agent conceals any material fact from the Principal and
Principal proves that the actions of the agent are disadvantageous to him, he is entitled to
repudiate the contract.
o There has to be a dishonest concealment of material fact.
- Under English law there is no requirement of proving that the duty of the agent is in conflict with
the Principal.
- He owes a duty not only to not injure the interest of the Principal but also do everything to
promote the interest of the beneficiary (Principal).
- When one puts oneself in such kind of situation where there is some kind of temptation, law
does not take into account such cases and it is assumed that the actions of agent were
disadvantageous. (English law)
- On the other hand, Indian law requires dishonest concealment of material fact.
- In some situation where the price is fixed, there won’t be any conflict and Principal won’t be
able to repudiate the contract even if he does not disclose the fact that he is acting on his
account.

5. Duty to not make secret profits

- Fiduciary relationship; requires absolute good faith
- Secret profit – any advantage obtained by the agent over and beyond agreed remuneration and
which he would not have been able to make but for his position as agent [Bribes etc.]
- When an agent sells his own stock to the principal without disclosing the fact, he is bound to
account for the profits. Immaterial that he charged prevailing market price
- Knowledge which is acquired by the agent in the course of the business of agency and which he
converts into advantage does not require accountability if the agent neither used the principal’s
property in the process nor diverts his business opportunities. He is not to disclose confidential
info received from principal.

6. Duty to remit sums [218]

- Agent’s duty to pay sums received for principal – all sums received on his account, even if
received in pursuance to void or illegal contracts.

7. Duty to maintain accounts [213]

- Agent bound to render proper accounts to his principal on demand.
- Accounts necessary for proper performance of agent’s other duties. Eg. Remit sums.
- No provision for Agent to ask principal for accounts; it is an equitable right arising under special
circumstances. To be claimed when this is the only relief which will enable the claimant to
satisfactorily assert his legal rights. [eg. When all accounts are in possession of principal]
- If it is found that the agent has no accounts due to his own failure or fault, he should not be
granted the relief he claims, especially if he is withholding accounts.
- Only when agent’s remunerations to be given in a suit depends upon extent of dealings which
are not known to him or he cannot be aware of it unless accounts are gone into, suit might be
competent.
- Inspection of Agents Accounts
o Principal entitled to know what his personal contractual rights and duties are in relation to
third parties as well as what he is entitled to receive from agent
 o Obligation arises out of agency relationship (entrusted with authority to bind principal) and
does not depend on that relationship having been created by contract
o Duty to provide access to the records survives the termination of the contract

8. Duty not to delegate [190]

- Delegatus non potest delegare
- Principal chooses a particular agent because he has trust and confidence in his integrity and
competence. Ordinarily, therefore, an agent cannot further delegate the work delegated to him
- Unless authorised, cannot appoint sub-agent and delegate powers which require special skill and
care
- Unless: by ordinary custom of trade or from nature of agency, sub-agent may/must be employed
- Exceptions:
a. Nature of work [eg. Agent to sell estate may have to retain auctioneer or lawyer]
b. Trade Custom [eg. Architects generally appoint surveyors]
c. Ministerial Action [Agent cannot delegate acts requiring personal or professional skill. But
agent may delegate acts purely ministerial in nature. Eg. Authority to sign]
d. Principal’s consent [expressly allow agent to appoint sub-agent; may also be implied;
Principal may also ratify agent’s unauthorized delegation]

Delegation to sub-agent [191]

- Sub-agent is appointed by the agent and hence he would be under agent’s control instead of
Principal.
- Sub-agent: person employed by, acting under control of, original agent in business of agency
- Liability of the Principal will further depend upon the appointment. If the appointment is proper
(with the consent of Principal) (Section 192) and if it is improper (without the consent of
Principal) (Section 193).

1. Improper Delegation [193]

- Agent’s responsibility for sub-agent appointed without authority: If the appointment is improper
then the original agent becomes the Principal with respect to sub-agent, responsible to third
parties. In such cases the actual Principal is not liable to third party, third-party not responsible
to principal.
- Agent stands towards such person in the relation of a principal to an agent and is responsible for
his acts both to the principal and to third persons.
- Delegation is improper when it is not authorized (by any exceptions)

2. Proper Delegation [192]

- If the appointment is proper, then the act done by the sub agent will bind the Principal to the
third party and vice versa. In such appointment, sub-agent is liable for acts to agent, but not to
the Principal, except in cases of fraud and wilful wrong. Agent is liable to Principal for acts of
sub-agent, because there is no privity of contract between the sub-agent and the Principal.
- If sub-agent properly employed, principal cannot claim against sub-agent for negligence or
breach of duty.
- Effects of appointment:
a. Principal represented by Sub-Agent
o So far as regards third persons, the principal is represented by the sub-agent. Bound as if he
were agent originally appointed by principal.
b. Agent’s Responsibility for Sub-Agent
o No privity of contract between principal and sub-agent, and therefore cannot sue sub-agent
except for fraud or wilful wrong. Agent is responsible to principal for acts of sub-agent. Even
in case of fraud or wilful wrong, principal has the choose either agent or sub-agent.
 o Agent may exempt himself from such liability
c. Sub-agent’s Liability to Principal
o Not directly liable to principle except fraud, wilful wrong.
- Sub-agent bound by all the duties of an ordinary agent, cannot go beyond that of the agent, and
have to be exercised through agent except where direct action would be necessary to give
business efficacy

Substituted Agent [194-195]

- Relation between principal and person duly appointed by agent to act in business of agency:
When the principal authorizes or asks his agent to name another person to act for him in the
business of the agency, such category is called a substituted agent, not a sub-agent.
- Substituted agent is not under the control of main agent as the Principal is asking him to find an
agent. If a substituted agent does something wrong, then the liability depends upon the nature
of the wrong. If there is negligence on the part of subst. agent, then the original agent is not
liable but if the original agent is negligent in selecting the agent then he is liable.
- Agent’s duty in naming such person – bound to exercise same amount of discretion as man of
ordinary prudence would exercise in his own case. If he does this, he is not responsible to the
principal for the acts or negligence of the agent so selected.
- Difference between sub-agent and substitute agent:
o Direct privity of contract is established between the principal and the substitute. Agent is
not concerned about the work of the substitute

Remedies of Principal for breach of duty of agent

1. To ask for accounts and to demand payment of secret and illicit profits earned by him as an
agent
2. To seek damages for disregard of terms of agency and also for want of skill and care
3. To resist claim of agent for commission and indemnity by plea that agent had acted for himself

Rights of Agent
1. Right to Remuneration [219]
- When agent’s remuneration becomes due – in absence of special contract, payment for
performance becomes due only on completion of the act. However, agent may detain money
received by him on account of goods sold even though the whole of the goods consigned to him
for sale have not been sold or though sale may not be complete
- Entitled to agreed, or reasonable, remuneration.
- When does payment become due? On completion
o When is act complete? Is the act a result of agent’s services? – depends on nature of the
service that agent undertakes to provide. Bargain must be a direct result of his services.
- When the agent’s services are only remotely connected with the transaction, remuneration is
not earned.
- Principal has duty to not prevent agent from earning his commission. But this does not prevent
the principal from selling the property himself or from refusing to sell at all. Agent necessarily
incurs certain risks
- If agent not responsible for contract not being able to be seen through by other party, he will be
entitled to commission. [Sufficient privity if direct relations b/w agent and other party, can sue]
- Jurisdiction – if cause of action had arisen there
- Effect of Misconduct [220]
o Agent not entitled to remuneration for business misconducted – in respect of that part of
business that he had misconducted.
o Effect twofold:
a. Agent forfeits right to commission – irrespective of any loss suffered by the principal
 b. Principal entitled to recover compensation for any loss caused by the misconduct –
damages on top forfeiture of commission or remuneration

2. Right of Retainer [217]

- Agent’s right of retainer out of sums received on principal’s account – all moneys due to him
incurred in the business of the agency or his remuneration.
- He can retain only the money in his possession.
- Not entitled to equitable lien – does not have the right to have his claims satisfied in preference
to other creditors out of the principal’s money not in his possession. [Solicitor/Vakil entitled to
equitable lien]. Entitled to have proceeds pass through his hands

3. Right of Lien [221]

- Agent’s lien on principal’s property (goods, papers, movable, immovable etc.) – until amount
due to him is paid.
- Conditions:
a. Agent to be lawfully entitled to receive money by way of commission etc.
b. Property over which lien exercised is to belong to principal; should have been received by
agent in his capacity and during the course of his ordinary duties as agent [Property is
considered to be sufficiently in his possession when he has been dealing with it]. Property
held by an agent for a special purpose cannot be subjected to lien. If possession obtained by
agent through fraud or misrepresentation, no lien. [agent’s possession must be lawful]
c. Agent only has particular lien
- Effect of Lien
o Limited in nature. Confers no authority to sell or otherwise dispose of the property without
consent of the owner
o Where, however, in the terms of his agreement with the principal, the agent has become a
pledgee of the goods, he may sell them after giving a reasonable notice to the principal of
his intention to sell
o As against third parties, lien is effective only to the extent of the principal’s rights on the
property. But where property on which lien being exercised is a negotiable instrument,
agent will become a holder for value to the extent of his lien and will acquire a title free of
prior equities if he acts in good faith and without notice of them.
o If principal creates any charge subsequent to lien, it will be subject to lien
- Loss of Lien
o Lien lost as soon as possession lost [possessory right]
 Possession lost when agent delivers good to principal himself or to carrier. Agent cannot
retrieve lien by stopping transit of goods. But where property is delivered for special
purpose inconsistent with lien, lien not lost. Possession not terminated where property
has been obtained from him by unlawful means or by fraud or misrepresentation
o Lien lost when agent waives his right
o Subject to contract to the contrary

4. Right to Indemnity [222-223]

- Agent to be indemnified against consequences of lawful acts – done by agent in exercise of
authority conferred upon him. Extends to all losses and expenses incurred by agent in the
conduct of the business
- Agent must have been damnified in the lawful conduct of the business of the agency
- Liability of agent under dishonoured cheque
- Agent to be indemnified against consequences of acts done in good faith
- Where an act in question is apparently unlawful or criminal (publication of libel etc.), principal
will not be liable upon an express or implied promise to indemnity agent against consequences
of such act.
- Non-liability of employer of agent to do a criminal act – employer not liable to agent to
indemnify him against consequences of the act

5. Right to Compensation [225]

- Compensation to agent for injury caused by principal’s neglect or want of skill – duty of principal
not to expose him to unreasonable risks.

Agent’s Authority [Relations of Principal with Third Parties]

- 226 – Enforcement and consequences of agent’s contracts – may be enforced in same manner
and will have same legal consequences as if the contract had been entered into by principal in
person
- Authority and scope of it ambiguous – because authority does not depend on one source.
Emanates from principal, but depends on purpose of agency and desire to protect bona fide
commercial transaction
- Authority – refers to the sum total of acts it has been agreed between the principal and agent
should do on behalf of principal. (acted within his authority)

Actual Authority
- Authority conferred on him by principal.
- Express or implied [186, 187]
- Express Authority
o Given by words, written or spoken.
o Scope is to be expressed by construction of word used in document
o Where the agent acted in good faith to meet the principal’s genuine business needs,
Principal will be held liable.
o But where the third party has knowledge of the limitation on the agent’s authority or could
have discovered it by reasonable examination, he would be bound by it. [Duty of third party
to make a reasonable inquiry whether the agent had the authority to use the principal’s
money for his personal purposes]
o Agent cannot borrow on behalf of his principal unless he had clear authority to do so. When
agent has power to borrow, fact that he borrowed beyond the authorized limit, does not
prevent the third party from holding the principal liable [because third party has no means
to ascertain fact]
o Fact that agent acted from improper motive does not take scope beyond authority [because
third party has no means to ascertain fact]
- Implied Authority
o When it is to be inferred from conduct; circumstances of the case, things spoken or written,
or ordinary course of dealing
o If agent is placed in a certain position, he has the implied authority to do all the acts a
person in that position ordinarily does.
o However, agent so appointed cannot take payments or give warranty unless actually
authorized

- Extent of agent’s authority depends upon: [188 – agent has authority to do every lawful thing
necessary in order to do the act he is authorised to do]
a. Nature of act or business he is appointed to do
b. Things incidental to business or usually done in carrying it out
 c. Usual customs and usages of trade
o Principal is bound by such usages even if he is unaware of them or if they conflict with his
instructions.
o But custom or usage must not be unlawful or unreasonable. [Any custom which changes
very nature of agency is unreasonable. Eg. One which changes agent to principal] Principal
would however have been bound by custom if he was aware of it.

- Authority of special agents

o Factor – he has authority to sell goods in his own name, warrant them if it is usual to do so,
fix selling price and to receive payment
o Broker – He is not given possession, he may sell the goods in his own name and may receive
payment. But if he discloses name of principal, he can’t receive payment.
o Estate or House Agent – since property is to be transferred only after investigation of title
etc. involving the owner, agent ordinarily does not have the authority to complete the
transaction in such cases. [Once agent finds a buyer, his commission becomes absolute. Not
affected by the fact that Principal sold the property to him at a lesser price]
o Right of refund available to person who had prior knowledge of defect
o Auctioneer – authority to sell by public auction, not by private contract. Cannot sell on
credit, only cash, cannot warrant the goods. Acts for both buyer and seller, can sign
contract for both
o Power of Attorney Holder – except where matter is required to be done personally, acts and
statement are attributable to principal

- Ostensible or Apparent Authority

o Authority of an agent as it appears to the others.
o When agent is appointed, implied authority vested to do all things that fall within the scope
of that office.
o Usually coincides with actual authority, but sometimes exceeds it
o Company is bound by the ostensible authority in his dealings with those who do not know
of the limitation. Principal liable for the acts of the agent which are within authority usually
confided to an agent of that character, notwithstanding limitations
o If an act was within scope of apparent authority, means that act appeared to be authorised
o Implied authority is real authority, binding principal-agent and principal-third party.
Ostensible authority – denotes no authority at all, third party misled into believing authority
exists.

- Apparent authority is real authority

o Appearance of authority depends upon facts of case
- Appearance of Authority arising from course of dealing
o Liable in subsequent acts if the first act had been authorized. If it hadn’t, principal would
not have been liable for second even if he had paid for the first
- Representation of Authority by conduct
o Has to emanate from some conduct of the principal. [eg. By permitting the agent in acting in
some way in the conduct of the principal’s business with other persons]
o If principal hasn’t done anything to enable the servant to acquire an appearance of
authority, then no liability even if he pays for those acts in ignorance
o If imposter could not have occupied position of apparent authority without the negligence
of principal, then principal liable
- Continuance of Apparent Authority till termination
o Apparent authority once created continues to exist unless it is terminated by notice to a
third party. Cannot be terminated or restricted privately.
- Agent’s possession
o Possession of servant or agent is that of his master or principal for all purposes. Suit against
agent on such possession cannot be maintained (defendant cannot be permitted to claim
his own possession)

- Employer’s undertaking to pay insurance premia

o Where a person, by words or conduct, represents or permits to be represented that
another person has authority to act on his behalf, he is bound by the acts of that other
person with respect to anyone dealing with him as an agent on the faith of any such
representation, to the same extent as if such other person had the authority that he was
represented to have even though he had no such actual authority.
o Employer impliedly agent of insurance company if all communication is done through him
o Information of agent amounts to information of principal

- Statutory provision and Apparent authority

o 237 – liability of principal who is bound if he induced belief that agent’s unauthorized acts
were authorized
o Contracting party has an honest belief in the existence of authority to the extent apparent
to him
o Where person contracting with agent has actual or constructive notice of lack of
authority/restriction on ostensible authority, bound by restriction
o Just and Reasonable solution – if servant makes a fraudulent misrepresentation or if the
belief of the third party has been brought about by the misguided reliance on the servant
himself, when the servant is not authorised to do what he purports to do, when what he is
purporting to do is not within the class of acts that an employee in his position is usually
authorised to do, and when the employer has done nothing to represent that he is
authorised to do it, employer not bound to bear the loss.

- Agent’s authority in an emergency [189]

o Agent in emergency has authority to do all such acts for the purpose of preventing loss to
the principal, as would be done by a person of ordinary prudence in his own case under
similar circumstances. [Only if communication with principal not possible]

- Where agent exceeds authority [227]

o When agent does more than he is authorised to do, and part of what he does within his
authority can be separated from the part beyond his authority, only so much of what he
does is binding as between him and the principal
o 228 – principal not bound when excess of agent’s authority is not separable

- Effect of notice to agent [229]

o Any notice given to or information obtained by agent in course of business transacted by
him for principal, shall, as between principal and third parties, have same legal
consequences as if it had been given to or obtained by principal.
o Knowledge of broker [broker as agent for insurer or insured?]

- Liability for agent’s wrongful acts [238]

o deals with situations where there is a fraud committed by an agent. An agent is deemed to
be an agent when he is working towards the responsibility assigned to him. The fact that a
person is an agent and later he commits fraud then the Principal shall be held liable as long
as the fraud was committed in pursuance of the assigned duty. In such situation Principal
can’t take the excuse that the agent was not authorized to do so.
 o Particular act may not be authorized but liable if done in course of carrying on authorized
business

- Misrepresentations and frauds

o Law does not hold principal liable for agent’s exaggerated statements unless it finds some
fault with the principal himself (eg. If he authorised false statement)
o Liability of principal is enforced, at option of third party, by avoiding contract if executory,
or claiming damages. [plaintiff has to rely on representation, whether he was deceived by
both or either]
o No guilt if either principal or agent did not know the statements agent made were false.
This criticized – duty of principal to apprise the agent of the whole situation, otherwise he
creates the risk of innocent misrepresentation being made by the agent, but critique not
taken into account in further decisions
o Principal not liable for fraud unless:
 He intends or knowingly permits agent to make a false statement
 Agent acting within actual or apparent authority makes a statement with the knowledge
of its falsity or recklessly not caring whether it be true or false.

- Agent’s torts
o Doctrine of respondeat superior (let superior answer) – liable for tort committed by agent in
scope of his agency
o Not relevant if it was for the purpose of personal benefit of agent or benefit of principal

Rights and Liabilities of undisclosed Principal

- Depend upon whether:

a. Principal’s existence and name disclosed by agent – Where the principal is disclosed
o 226 – agent’s acts and contracts will have same legal consequence as if contracts had been
entered into and acts done by principal in person. Principal and third party can sure each
other, not the agent.
b. Principal’s existence disclosed but not name – Unnamed Principal
o If agent’s own representative character disclosed, contract will be contract of principal,
unless there is something in its form or signature to show that agent intended to be
personally liable
c. Neither existence nor name were disclosed – Undisclosed Principal
o Since agent has contracted in his own name, he is bound by contract. He may be sued on it
and he has right to sue third party, principal not liable.
o Principal also has right to intervene and assert his position – Section 231 – though an
anomalous right, can be justified by business convenience.
 Subject to qualifications: [231, 232]
a. Other contracting party has, as against the principal, same rights as he would have
had against the agent if the agent had been principal
o Subject to equities: [231+232 – same rights as agent-other party]. Main
concern of these sections – third party not put to any disadvantage by the
intervention
o But where agent does not believe the agent to be a principal or there are
suspicious circumstances, he may not be able to claim a set-off.
b. If principal discloses himself before contract is completed, other party can refuse to
fulfil contract if they can prove that if they had known who the principal was, or
that the agent was not a principal, they would not have entered into the contrac t –
third party’s right to repudiate executory contract arises only when the identity of
 the undisclosed principal (/some personal considerations) is so material that if he
had known true facts, he wouldn’t have contracted.
c. Principal can only obtain performance of contract subject to rights and obligations
subsisting between the agent and other party
o Undisclosed principal cannot intervene if some express or implied term of the
contract excludes him from doing so. [Eg. Where agent describes himself as
‘owner’ etc.]
o Third party has right to sue the principal. [Problems arise when principal has
already paid agent assuming he will pay third party, but agent defaulted. Court
– when person is supplied with goods, it is his duty to see that the seller is
paid]

Personal Liability of Agent

- 230 – Agent cannot personally enforce, nor be bound by, contracts on behalf of principal, in
absence of any contract to that effect. Agent cannot sue or be sued unless contrary contract:
Principle of Agent’s immunity from personal liability.
o Rule applies even when agent has contracted beyond his authority. Can’t be sued if he
professed to act for the principal. However, he will then be liable to compensate third party
for their loss.

Presumption of contract to contrary in these cases:

1. Where contract is made by agent for sale or purchase of goods for merchant resident abroad –
Foreign Principal
o 230(1). Now, due to changed conditions of international trade, presumption less imp. It is
still to be taken into account, unless contract shows intention not to incur personal liability.
India – statutory presumption. [if company registered in England but place of business
India, still foreign principal]
o Both principal and agent cannot be sued together. If suit against foreign principal, agent
automatically discharged of liability.
2. Where agent does not disclose name of principal – Principal Unnamed
o Agent is personally liable, being a party to contract. Presumption may arise even where
agent discloses representative character, but not name, if anything in the contract points to
the fact that the agent wanted to be personally liable.
o Otherwise, personal liability cannot be imposed, even if representative character is already
known to third party.
o Under copra – dealer may have reimbursement from principal against any such liability but
so far as consumer is concerned, he was bound to either rectify defect or take back vehicle
and refund price
3. Where principal, though disclosed, cannot be sued – Non-existent or incompetent principal
o Agent presumed to be personally liable. [eg. Minor, projected company]
o However, result may not follow where other party already knows that principal is minor.
o Directors of company not agents in conventional sense, not liable in damages for breach of
contract committed by their company. But general Principal – agent committing tort or
some wrong, director liable.

Election by Third Party

- 233 – right of person dealing with agent personally liable may hold either him or his principal, or
both of them liable [once choice made, it shall bind]. [departure from English law, where third
party has to elect between principal and agent, and once election is made, it is binding.
Disadvantageous esp when third party does not know of Principal’s existence]
- Election may be express or implied. Filing of suit strong prima facie evidence, but not conclusive

Estoppel of Third Party [234]

- Consequence of inducing agent or principal to act on belief that principal or agent will be held
exclusively liable – cannot afterwards hold liable agent or principal liable respectively.

4. Pretended Agent [235]

- Liability of pretended agent - this section is based on the principle of implied warranty. When
somebody is representing himself as an agent of someone he is warranting the fact that he has
the authority to perform such transactions on behalf of the alleged Principal.
- If such untrue representation falls apart, the pretended agent has to compensate for any loss
suffered. [Liable if alleged employer does not ratify his acts]. But if the act of the pretended
agent is later ratified by the Principal then the Principal would be held liable.
- No difference to liability that he honestly believed that he had the authority in question or that
principal would ratify. False representation must be cause of contract.
- If truth is known to other party, no liability
- Where pretention is as to a matter of law, agent not liable.
- Agent himself cannot sue on a contract which he has made pretending to be an agent – 236
o Person falsely contracting as agent, not entitled to performance.
o Agent will be personally liable whether he feigns named or unnamed principal.
- If the third party performed his obligation irrespective of any inducement or there wasn’t any
inducement in the first place, then the Principal wouldn’t be held liable.

5. Breach of warranty of authority

- Where person is in fact an agent but exceeds authority or represents to have a kind of authority
which he in fact does not have, he commits breach of warranty of authority; is personally liable
to third party for any loss caused to him by reason of acting on a false representation.
- In cases where person believes he has that authority and represents it to the third party. But
principal has not given him that authority

Ratification

- This doctrine comes into play when a person has done an act on behalf of another without
knowledge or consent. Doctrine gives person on whose behalf act is done an option to either
adopt act by ratification or disown it. [may ratify even if agent used his own name to commit
fraud upon third party]
- 196 – If he had ratified acts, same effects will follow as if they had been performed by his
authority.
- 197 – Authorization or ratification can be expressed or implied.
- If act is adopted, it is adopted throughout. May be oral/ writing (deed must be writing).
Ratification of a contract required to be in writing need not be in writing.

- Requirements of ratification:
1. On behalf of another:
 Act must be done on behalf of somebody. If you are not acting on behalf of other, then
no one else can approve that particular act.
 ‘On behalf of other’ doesn’t mean that one has to specify the person on whose behalf
he is working but such person should be ascertainable. Must be such description of him
as shall amount to a reasonable designation of person intended to be bound
  If agent contracts in his own name, act not open to anybody’s ratification, subsequent
ratification ineffective.

2. Competence of Principal
 Principal must be competent (major, in existence) to enter into such a transaction
when the first transaction happens to ratify such a contract.
 If company incorporated it, other party can also enforce

3. What acts can be ratified – Act should be lawful [200]

 Section 200: Ratification cannot happen in such a manner which results in injuring the
rights of some third party.
 Agent stands in a fiduciary relationship with his Principal. Section 200 provides
that agency is based on the fiduciary obligation that exists between the agent and
the Principal. Fiduciary obligation can be defined as a relationship of trust which
one has with the other. If agent puts himself in such a situation where his interest
conflicts with that of the Principals’, he would be deemed to have been acting on
his own account.
 There should not be a conflict of interest between the parties.
 Only lawful acts can be ratified. If the act is void ab initio, then there cannot be any
ratification of such an act.
 Ratification must be in relation to a transaction which may be valid in itself and not
illegal. Subject to this, any act may be ratified whether it is founded on tort or contract
 Acts which would become injurious to others by ratification cannot be ratified.
 Acts done on behalf of govt. – can be ratified in the same way

4. Knowledge of Facts [198]

 Knowledge requisite for valid ratification - Knowledge of the fact which the Principal is
ratifying must not be materially defective.
a. Must have been done for and in the name of supposed principal
b. There must be full knowledge of what those acts were, or such unqualified
adoption that it can be inferred that principal intended to take responsibility

5. Whole Transaction [199]

 Ratification of the entire act, not of parts of contract. Cannot ratify only beneficial part.

6. Within reasonable time

 If time is fixed for performance, ratification must come before that otherwise too late

Effects of Ratification
1. Establishes principal-agent relationship between person ratifying and person doing the act.
2. Establishes relationship of contract between principal and third party
- Doctrine of Relation Back – relates back to date from when agent first contracted – contract
between principal and third party not from date of ratification
- [old] Can be ratified even after offer from third party withdrawn if act to be ratified done before
that. [Now position] Exception – leaves third party in worse off position. Affirmation must come
before other party has manifested their withdrawal either to purported principal or agent and
before offer or agreement have been otherwise terminated or discharged. No more binding that
an unaccepted offer which can be withdrawn before acceptance
- Exception 2 – Where ratification would prejudice interests acquired by others.
- Retrospective ratification also becomes ruled out where agent and third party have already by
mutual consent cancelled contract
 Determination of Agency

Termination of Agency (Section 201 – 210)

- 201 – Once the agency is terminated the agent does not have the power to enter the position of
principal in order to contract with third party.
1. If the Principal revokes his authority [Revocation]
2. If the agent renounces the agency [Renunciation by agents]
3. By the business of the agency being completed [Completion of business]
4. Principal or agent’s death
5. Principal or agent becoming person of unsound mind
6. If the Principal becomes insolvent
7. Termination by mutual consent and expiry of time agreed upon
[Destruction of the subject matter, Agency subsequently becoming unlawful, Dissolution of the
company/firm]

1. Revocation [203]
- Can revoke authority given to agent any time before authority has been exercised so as to
bind the principal
- Agency as a contract is determined by any event which terminates a contract – eg. war
- 207 – can be express or implied
- Revocation subject to:
a. Revocation operates prospectively – where authority has been partly exercised [204]
 Cannot revoke after authority has been partly exercised as far as regards acts and
obligations arising from acts already done in the agency. May revoke for future.
 Where agent carried on business even after his authority has been revoked by
principal, latter cannot recover profits if any, made by agent in that business.
Agent has no claim to remuneration (however, compensate, restrain new
appointee if provision)
b. Notice precedent to revocation [206]
 Reasonable notice, otherwise damage resulting to principal or agent must be
made good. [reasonable – depends on length for which agency has continued,
among other things]
 Liability to compensate [205-206] – if agency is to continue for a specified time, if
revoked or renounced without sufficient cause.
 Liability to pay does not arise when agency is not for a fixed period (even if it lasts
for long time). In these cases:
a. Agency not been created for any definite period
b. Where reasonable notice given
 If third party receives the notice of revocation and thereafter he still sells the
goods then the Principal can’t be held liable.
 If the same is not known, then there exists an ostensible authority due to which
Principal can be held liable.
2. Renunciation by agent [206]; [sufficient cause – 205] – same principles as principal: notice etc.
3. Agency coupled with interest [202]
- Section 202 provides for irrevocable agency: If the agent has some interest in the subject
matter of the agency then such an agency cannot be revoked by the Principal unless there is
an express contract to the contrary.
- Nature of the interest which the agent should have in the subject matter in order to make it
fall under section 202. The agency is created in order to protect some interest of the agent.
 The interest of the agent is coupled with the contract of agency. (eg. Commission, if he is to
receive running payments).
- This kind of agency not even terminated by principal’s death or insolvency.
- This kind of agency essentially a transfer of property
- Tests to be applied for finding out whether irrevocable:
1. If the agency is created for the protection of the interest. The interest must exist at the
time of creation of agency. Where agency is created as a matter of security and
protection of a pre-existing interest.
 Subsequent advance could not convert agency into one coupled with interest
 Interest need not be a pre-existing interest, can be created simultaneously with
agreement.
2. Primary purpose of agency – protection of existing interest
 Whether primary object in giving power was for the purpose of protecting or
securing any interest of the agent.
 If primary object was to recover on behalf of the principal, and in doing so, the
agent’s rights were also incidentally protected, power is revocable.
[commission/mere arrangement to be paid out of rents not an interest for this]
4. Completion of business [201]
- Agency automatically and operation of law determined when business is completed. [when
sale is completed. But Allahabad (prayagraj lol) and Calcutta HCs – not complete until
payment proceeds to principal]
5. Death or Insanity [201]
- Death terminates the agency immediately. Does not obliterate acts done by agent on behalf
of the principal during the tenure of his agency
6. Principal’s Insolvency
7. On expiry of Time [whether purpose of agency has been accomplished or not]

Effects of termination [208]

- Termination, wrt agent or third persons, does not take effect before it becomes known to them
- Termination communicated to agent but not to third party still makes principal liable
- Even when agency terminated by death of principal, termination effective only when it comes to
knowledge of agent
- Termination of sub-agent’s authority
o Section 210 - once the authority of the agent is terminated the authority of other sub
agents also gets terminated.

Agent’s duty on termination [209] – When an agency is terminated by principal’s death or insanity,
agent bound to take on behalf of representatives of late principal, all reasonable steps for protection
and preservation of interests entrusted to him.
 Sale of Goods
S.2 – Definitions
 Buyer
 Person who buys and agrees to buy
 If agreement (generally hire-purchase agreement) gives option to buy without
imposing any legal liability to buy, the person is not a buyer. [until option is exercised,
no binding)
 Person who agrees to buy is bound by agreement
 Delivery
 Transfer to be voluntary, not under fraud, duress etc.
 Law presumes in favour of honest dealing
 Delivery of goods may be made by doing anything which has the effect of putting the
goods in the possession of the buyer or any person authorized to hold them on his
behalf.
 May be actual or constructive [when it is effected without any change in custody or
actual possession]
 Constructive delivery when: seller is in possession but after dale, he is buyers bailee;
when goods are with buyer before sale only; goods in possession of third persons
o There is a change in character of possession but not in actual physical custody
 Symbolic delivery [goods in course of transit]
 deliverable state
 document title of goods
 Inclusive, not exhaustive
 Any document can fall under this section provided:
a. It represents the goods
b. In the ordinary course of business
c. It serves as proof of possession or control of goods
d. Entitles the possessor of such document to transfer or receive goods
represented thereby
 May refer to unascertained goods
 Possession of bill of lading is constructive possession, not shipper’s receipt.
 Delivery order is a document of title, passes from hand to hand by endorsement
 fault
 future goods
 goods
 S.2(7) – Goods includes every kind of movable property other than actionable claims
and money
 Shareholder does not at once become entitled to property in the company. He
becomes entitled to participate in the profits of the company.
 Electricity held to be goods – [Associated Power v. Ram Ratan]
 Interest of partners in partnerships assets of immovable property – movable property
 Current money not goods. Old/rare coins out of circulation may be goods.
 Goods should have marketability; person to whom they are bailed should be in a
position to dispose of them in consideration of money – must be saleable.
 Lottery ticket – actionable claim [where person has no enjoyment of a thing but
merely right to recover it by suit of action], not in possession of other. Not a good
 Types of goods:
o Specific
o Unascertained – the goods exist in bulk, not ascertained till a portion is kept
aside for the contract
 o Future – do not exist at the time of the contract
 insolvent
 mercantile agent
 price
 Two essentials of a contract of sale – goods and price (money consideration)
 Resale is also a sale
 Essentials elements of a sale
1. Competency of parties
2. Mutual assent
3. Passing of property
4. Payment or promise of payment
 Compulsory delivery also considered a sale because elements fulfilled
 Property
 General property and not special property (/interest)
 Unless otherwise agreed, goods remain at the seller’s risk until property is
transferred to buyer. When it is transferred, whether it has been delivered or not, it
is buyer’s risk.
 quality of goods
 seller
 specific goods.
 S.2(14) – Specific goods – goods ascertained, identified and agreed upon after the
contract of sale of goods
 Buying 500 tonnes of 800 tonnes is not specific goods – identifying which specific 500
tonnes are the subject matter of the contract is essential
 There can be no oral contract with reference to unascertained goods because it is not
possible to effect delivery of such goods.
 Appropriation of goods in a deliverable state renders contract complete
 Goods must be actually identified. It is not enough that are capable of being
identified
 Specific goods not equal to ascertained goods, does not mean goods examined by
buyer
- ‘unless there is anything repugnant in subject or context’ – definitions are general and may be
interpreted having regard to their context and subject in which they have been used
- ‘included’ – definition is not exhaustive, clause enlarges meaning of term.
- True nature of contract to be ascertained from its covenants and not simply what the parties
choose to call it. To see whether there is a sale or not – to be considered whether as a result of
the transaction, the property in the goods passed to another in return for a price.
- Once the parties have reduced the terms to writing, no evidence wrt negotiations which
preceded the contract to be allowed.

Formation of the Contract

S.4 – Sale and agreement to sell

 Essence of sale – transfer of general property from seller to buyer for a price
 Sale – executed contract
 Agreement to sell – executory contract
 Essential features:
 Bilateral contract – 2 parties
 Money consideration – excludes narters
 Sale and contract for work and material [needs to be a contract]
  Goods [person who does not does not own the goods fully or partially cannot transfer
fully or partially.
 Bilateral Contract
 Consensual, bilateral and commutative
 Seller and buyer must be different people
 Parties must have free consent to transfer the property and to accept it, to do so in
return for money which is paid and received as the price of the goods
 Graff v Evans – Accused was the manager of a club. Club was not licensed for sale of
intoxicating liquors, but these were supplied to the members by the manager at fixed
price. Held not to be a sale, merely distribution of liquors among members, being joint
owners of the club.
 Money Consideration
 Consideration for sale of goods must be money, called price
 Goods for goods is not a sale
 Goods however sold for a definite sum, part of which is case and the other part is paid
in terms of valued up goods is a sale
 Sale and contract for work and material
 Sales carry conditions and warranties, not contracts involving exercise of skill or labour
 Tests for determining differences:
 If the thing to be delivered has individual existence before delivery as the sole
property of the party who is to deliver it
 If the main object is to transfer for a price the property of an object that
previously was not transferred from A to B, then it is a sale
 Main object of a sale is to transfer property and to deliver possession of the
chattel
 Whether the work is the essence of the contract
 Goods
 Defined in S.2(7)

Goods

Connotation of ‘Goods’ under Section 2(7) of the Sale of Good Act, 1930

Definition - Every kind of movable property other than actionable claims and money; and includes
stock and shares, growing crops, grass, and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale will be considered good
No need to learn the case laws – just for reference purposes, unless of course Sir himself has
mentioned a case.

A. Money
- If money is considered ‘goods’ then all transactions would be exchange and not ‘goods’
since the price element, and the good element would be the same – money. Hence
exchange.
- More simple explanation – money is expressly excluded from the definition of ‘goods’.
- However, where coins or notes are transferred for their intrinsic value, as opposed to their
extrinsic value, then they could be considered to be ‘goods’
- For instance, if I am transferring coins, not because of the value which the government has
assigned to it, but because of its innate value, say transferring antique coins of the previous
century. The value of the coin comes because the fact that it’s a historical piece (innate
value), as opposed to an externally assigned value.
 B. Human Organs
- Although there exist contrary views, I am simply mentioning Shafi Sir’s view. Sale & Trade in
organs is not allowed. [“Law does not recognize trade property in a dead body”]
- Hence falls outside the purview of ‘goods’

C. Animals
- Domesticated animals fall within purview of ‘goods’, but not living wild animals
- Underlying logic – Not under our control and therefore not capable of being owned
absolutely

D. Lottery Tickets
- Current Position of Law exemplified in Sunrise Associates v. Government of NCT of Delhi
which overruled H Anraj v. Government of Tamil Nadu on the limited point of whether
lottery tickets constitute goods.
- Sunrise held that lottery ticket merely gives a chose-in-action, and a mere right to participate
in the draw. Not necessary, that you will win. Hence it is a right in future and not a right in
prasenti.
- Hence fall outside the purview of ‘goods’

E. Shares and Debentures

- Relevant case – RD Goyal v. Reliance Infrastructure
(i) Shares
- Held that shares and debentures convey different meanings. A ‘share’ conceptually
represents the contribution of the shareholder in towards the share capital of the company.
Hence it represents a share/interest in the share capital. For this reason it comes within the
purview of shares. Also, the definition expressly includes shares.
- Allotment means the appropriation of share capital in favour of someone through the
instrument of ‘shares’. Pre-allotment, it is still unappropriated capital. Hence allotted
shares would fall outside the purview of goods.
(ii) Debentures
- Would not include debentures – it is merely an actionable claim – it is merely a certificate or
a loan evidencing the fact the company has to repay a certain amount. Also debentures
would probably come under the definition of actionable claims, which are specifically
excluded from the definition. ‘Actionable claims’ are defined in S.3 of the Transfer of
Property Act, 1882
a. Explicitly includes shares – basically the contribution of the shareholders
towards the share capital of the company.
b. Would not include debentures – it is merely an actionable claim – it is
merely a certificate or a loan evidencing the fact the company has to
repay a certain amount. Also debentures would probably come under
the definition of actionable claims, which are specifically excluded from
the definition.
c. Limited to movable property, all things attached become goods only
when they are removed.

F. Providing Telephone Service by giving a ‘Landline’

- Nothing but a service. Falls outside the purview of ‘goods’ – BSNL v. UOI.
G. Software
- Shafi Sir mentioned the case of Tata Consultancy Services v. State of AP
 - In this case, it was held that a software programme on a CD/Floppy Disk (canned software) is
a ‘good’.
- Connotation of ‘goods’ extends to both tangible and intangible property. Although the
copyright still remains with the original holder (say Microsoft). That being said, when the
holder man makes copies of the software, and packages and sells them (say Microsoft Office
packs you find in Croma), there exists a transfer of ownership atleast with respect to those
specific copies.
- Hence, it falls within the purview of ‘goods’
- However, the good needs to be specified and identifiable. Therefore, Drop Box services
would not constitute a ‘good’ since there is no specified tangible or intangible property is
being transferred. It is just a temporary subscription.
H. Actionable Claim
- Expressly excluded, from definition.

Movable and Immovable goods

Connotation of terms ‘Movable & Immovable Property’ with respect to definition of ‘Goods’ under
SOGA

- The definition of ‘goods’ limits the scope of the term to ‘movable property’. But what is
‘movable property’? SOGA, does not have an independent definition of ‘movable goods’.
For this reason, in context of SOGA, Courts have looked at Section 3 (36) of the General
Clauses Act, 1987 defines "movable property shall mean property of every description,
except immovable property”

- Since the definition of ‘movable property’ is a negative one, it is not possible to ascertain
what constitutes ‘movable property’ without ascertaining what ‘immovable property’ is.
Since only something which is outside the purview of ‘immovable property’ could constitute
movable property.

- "Immovable property" has been defined to include land, benefits to arise out of land, and
things attached to the earth, or permanently fastened to anything attached to the earth;” in
the General Clauses Act, 1897.

- The question is when does something becomes ‘permanently fastened or attached’ to the
earth. Emphasis to be placed on the word ‘permanent’ – just because machinery is fixed to
the earth does not mean that it is immovable property. It needs to be ‘permanently’ fixed.

- There was a statement given by Sir, which some students had a doubt on, wherein he stated
that ‘fish’ would fall within the purview of immovable property. While, I had originally found,
the statement to be a bit fishy, the existing case laws reveal that ‘fish’ in certain specific
circumstances would constitute ‘immovable property’ and hence not constitute a ‘good’.
This understanding arises from the presence of the underlined phrase ‘benefits to arise out
of land’ - also known as ‘profit a pendre’. Where there is a contract for transfer of right to
extract fish from a pond, the fish is a future benefit that is to be derived from the pond/sea.

- The pond/sea is an immovable property, and any contract for transfer of interest from this
immovable property will constitute a ‘profit a pendre’ which is included within the definition
of immovable property. [Anand Behera v. State of Orissa]
- That being said, if the fish has already been extracted, wherein I am buying fish from the
supermarket – in that circumstance, it would fall within the purview of ‘movable’ property
since in this case, fish is not a ‘profit a pendre’ – it is not being derived from immovable
property.

- Now, the definition of ‘goods’ includes “growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before sale or under the contract of
sale” In fact standing timber, growing crops, and grass have been excluded from the
definition of ‘immovable property’
-
o Why is that? If its attached then shouldn’t it be an immovable property?
o Ans: Not necessarily. As regards things which are capable of being removed from
land, the test for deciding whether they are to be regarded as movable or
immovable would be: if there is an intention to severe them from immovable
property.
o This is where the case which Sir taught (Marshal v. Green) comes into picture. It was
observed, in this case – VVV.IMP:
 “The principle of these decisions appears to be this, that wherever at the
time of the contract it is contemplated that the purchaser should derive a
benefit from the further growth of the thing sold from further vegetation
and from the nutriment to be afforded by land, the contract is to be
considered as for an interest in land; but where the process of vegetation is
over or the parties agree that the thing sold shall be immediately withdrawn
from, the land, the land is to be considered as a mere warehouse of the thing
sold and the contract is for goods
o Therefore, where I am growing crops for the very purpose of immediately
extracting them, if the pre-requisites fulfilled in the above observation are fulfilled,
then it would constitute a ‘good’ and hence the sale of such crops would be covered
by the Sale of Goods Act.

 S. 4(2) – Absolute and conditional contracts

 Absolute – sale, pure and simple, transferring property absolutely to buyer
 Conditions – if there are conditions annexed to contract by the parties
 Conditions precedent – agreement to sell
 Conditions subsequent – actual sale. But is condition not complied with, property
revests in seller
 Relevant factor for determining where a sale takes place is seen from the intention of
the parties

 S. 4(3) – Distinction between sale and agreement to sale

 Sale is immediate transfer of property from the seller to the buyer, agreement to sell is
where the transfer of the property in the goods is to take place at a future time or
subject to some condition to be fulfilled.
 Contract of sale can be a sale or an agreement to sell. Contract of sale (not agreement
to sell) operates by itself and without delivery
  Distinction between sale and agreement to sell:
 Agreement to sell is a jus in personam (only right of remedy) while sale is a jus in
rem
 If buyer defaults on the sale, seller may sue for the contract price on the goods.
When an agreement is broken it is an action for unliquidated damages, he has a
personal remedy against the seller. Goods are still the property of the seller
however
 In a sale, the buyer has a personal remedy as well as proprietary remedies with
respect to the goods. The buyer may sue for recovery of the goods by specific
performance in sale and may follow the goods to a third person unless that third
person had bought them in good faith and without notice. In agreement to sell,
the buyer has right to sue for damages and not recovery of goods
 Thus, in agreement to sale, the loss when goods are destroyed falls upon the seller
while in a sale it falls upon the buyer even if the goods never actually came into
his control. Thus, risk falls on buyer in sale and seller in agreement.
 Contract of sale and Contract of work
 Contract of sale:
o To distinguish whether contract of sale – to see whether the thing to be
delivered has any individual existence before delivery as sole property of the
party.
o Where main object is to transfer chattel, even if some work required to be
done incidentally, contract of sale.
o Intention of the parties should be that a chattel is produced and transferred
as a chattel – contract of sale. [materials used were never passed to the
customer. Only whole thing]. Throughout the contract, chattel being
transferred should be spoken of as a composite thing (bus bodies on chassis,
incl. movable seats etc.).
o Risk on seller. [Work – risk on buyer because property not transferred.]
o Photographs – taking photos is contract of work, but selling them is contract
of sale.
 Contract of work
o if contract primarily involved carrying on of work involving labour and service,
and use of materials is only incidental
o If property was always with the buyer, then not a sale but contract of work –
no transfer of possession.
o If materials being supplied by, and constant supervision of buyer – contract
not of sale
o If manufacturing and then fixing, if the fixing requires special skill – contract
of work

 S. 4(4) – Agreement to sale becomes sale when time elapses or conditions are fulfilled.

 Mortgage, pledge, hypothecation – provisions of this Act does not apply to these
transactions. Mortgage may be created with to without delivery, but not pledge. Pledge
creates special property only.
 Hire-purchase agreements – hirer only gets possession if he exercises the option to buy
 Even if price by instalments, property passes as soon as the sale is made.
 Contract entered into under statutory compulsion may still be a sale if there is mutual
assent [compulsion of law not coercion] But an offer and acceptance (lack of fraud etc.)
necessary
 Formalities of the Contract

S.5 – Contract of sale how made

 An offer to buy or sell goods for a price and the acceptance of such offer is a contract.
[agreement which presupposes competency of parties]
 Contract may provide for immediate delivery of goods or immediate payment of price or
both, or delivery/payment in stages [must be transfer of property] [price is essential]
 May be by word of mouth or writing, or partly in both or implied by conduct of the parties
- Letters of intent merely keep offer open, are not to be treated as purchase orders
- Earnest – agreement to sell often concluded by earnest money indicating good faith. If carried
out, part payment of price. If not, seller bound to pay it to purchaser. If fault of purchaser, it
goes back seller

Subject matter of Contract

S.6 – Subject Matter of the contract

 Goods may be existing or future goods
 A contract for sale of goods whose acquisition depends upon a contingency is valid
 Only if stated that goods were to arrive on a particular ship, seller liable for damages. If
it is contingent on a condition and the condition never comes to pass – no liability. If
agreement is absolute or conditional on an event happening that happens – liable.
 India – mere agreement to sell tangible immovable property would not confer an
equitable interest to the purchaser.
 A present sale of future goods is an agreement to sell
 In Equity – buyer is in a better position once goods come into existence
 Future goods are goods to be manufactured or produced or acquired by the seller after the
making of the contract of sale

S.7 – Destruction of goods

 In a sale of specific goods, the sale is void if the goods without the knowledge of the seller
at the time when the contract was made, perished or became so damaged as no longer
fitting the description of the contract
 Contract not void if unascertained good.
 If they still fit description, though damaged, buyer must take risk to their quality and
condition.
 Even if only part of the goods were destroyed the sale is void as the buyers had contracted
to buy a specific quantity (contract is indivisible). Seller cannot be forced to deliver what is
remaining nor can the buyer be forced to accept it. But if contract is divisible, destruction of
part will not avoid contract for remainder.
 Even if the goods have some commercial or marketable value if they lose their description
in the contract then the contract is void
 When the seller has knowledge of the destruction of the goods he must make good his
contract or pay compensation for its breach, except where the buyer too knows of the
perishing of the goods
 If the seller ought to know of the destruction of the goods, then too he would be liable
- Fact scenario – Say, A agrees to sell to B, a parcel of 700 bags of groundnuts lying at a particular
place, and at the date of the contract, there were not 700 bags in the parcel, but only 591 bags,
 the remaining bags had already perished, before the date of the contract, without the
knowledge of the seller.
- Now, does S.7 apply here?
 Only part of the goods have perished, and a substantial part of the contract can yet be
performed?
 Ans: Void.
 The subject matter of the contract, was 700 bags, if you instead say that the contract can
yet be carried out by the supply of only 591 bags (with the price being reduced
commensurately), then you are replacing the subject matter of the contract with an
altogether different subject matter – 591 instead of 700. VVVVV.IMP – This factual scenario
is an actual case which Shafi has taught, hence please learn this case – Barrow Lane &
Ballard v. Phillip Philip.

 Underlying logic -Take the example of Starbucks making an order for 100 uniforms for their
100 employees , now if you supply 70 uniforms, what will they do for the other 30? They
will have to ask another supplier, who might not be able to prepare the same design. The 70
costumes which are supplied are useless unless the other 30 are not supplied by the same
supplier. The underlying point being attempted to be conveyed here is that unless the
complete goods are not supplied in toto, the goods that could be supplied in part would
be considered to be useless, which is why the seller should not be allowed to put forward
the argument, that ‘’unless pay me for the 70”. Which is why S.7 would apply, and the
contract can be avoided.

 Hence, in case of non-existence of a part of the goods, it follows, that the seller could not
be compelled to deliver what was left, and equally the buyer, if he had paid the whole or
part of the price, can recover it as a ‘total failure of consideration’

S. 8 – Goods perishing after agreement to sale

 When there is an agreement to sell the specific goods and without any fault of the seller or
buyer perish or become so damaged as to no longer answer to the description, the
agreement is void
 This section deals with goods perished before the sale but after agreement to sell
 Barrow Lane & Ballard Ltd v Phillip Phillips and Co Ltd – Contract for sale of a parcel of 700
bags of Chinese groundnuts. Unknown to the seller, 109 bags had been stolen at the time of
the contract. Seller delivered the remaining, buyer refused. Held that the buyer was not
liable to take or pay for the goods. The buyer had contracted to buy a specific amount and
to take less would be to force the buyer to do what he had not contracted to do
 Asfar & Co v Blundell – A cargo of dates was sold. The dates were contaminated with
sewage so as to make them unsaleable as dates, however they could be used for making
spirits. Held as void as the goods no longer answered their description in the contract –
perishing of goods includes losing their commercial value
 Howell v Coupland – Defendant agreed to sell to plaintiff 200 tons of regent potatoes to be
grown on the land belonging to the defendant. The defendant sowed sufficient land to grow
more than 200 tons, but a disease attacked the crop and he could only deliver 8 tons.
Agreement was held void – held to be specific goods as a specific number was agreed upon
on specific land, thus it is an agreement to sell what will and may be called specific thingsS.9
– Ascertainment of price
 Price in a contract of sale may be fixed by the contract or may be left to be fixed in a
manner agreed or may be determined by the course of dealing between the parties
 Where the price is not determined the buyer shall pay the seller a reasonable price
- The moment the price is determined, and the pre-emptor exercises the willingness to purchase,
but still raises a dispute wrt valuation, contract still becomes complete.

S.10 – Agreement to sell at valuation

 When there is an agreement to sell goods on the term that the price is to be fixed by the
valuation of a third party and such third party cannot or does not make such valuation, the
contract is void
 If any goods are delivered or any part of the same, then the buyer must pay a reasonable
price [may be fixed by court/arbitrator]
 When the third party is prevented from making the valuation by fault of the buyer or seller
then the party not in fault may maintain a suit for damages

Conditions and Warranties

S.11 – Stipulations as to time

 Unless a different intention appears from the terms of the contract, stipulations as to time
of payment are not deemed to be of the essence of the contract of sale. [or wrt immovable
property]
 When the time is essential to the contract, a failure to pay in time entitles the seller to treat
the contract as repudiated and sue the buyer in damages. [Voidable at option of promisee.]
 When the time is extended at the seller’s insistence, the extended time is also of the
essence
 If the seller acquiesces to delay in payment, he cannot later insist that time was of the
essence
 In ordinary commercial contracts for the sale of goods the rule is that time is prima facie of
the essence with respect to delivery
 Thus, time is of the essence where:
 The parties have explicitly stated it to be essential (language/conduct)
 Where delay acts as injury
 Where the nature and necessity of the contract require it to be so constructed
(surrounding circumstances)]
 V.IMP -Please learn the case of Martindale v. Smith which Shafi Sir has taught with respect
to S.11. The case is an authority for the proposition that words “not deemed to be of the
essence of contract of sale” would mean that the failure by the buyer to pay the price in
time would not as a rule entitle the seller to treat the contract as repudiated.

S.12 – Conditions and warranties

 Stipulation in a contract of sale with reference to goods may be a condition or warranty
 Conditions are essential to the main purpose of the contract; breach gives rise to repudiate
contract and claim damages
 Non-performance of conditions may be considered as substantial failure to perform
contract at all
 Warranty is collateral to the main contract; breach gives claim for only damages
 Mere words of commendation of seller about goods does not constitute warranty
- Mere representation cannot be a term of the contract, so not a condition or warranty. [during
negotiations]
- Either express or implied
- Express condition or warranty does not negative a condition or warrant implied by the Act unless
inconsistent.

S.13 – When condition to be treated as warranty

  Buyer may waive a condition to be fulfilled by the seller [cannot afterwards insist on
fulfilment] or treat the breach as a breach of warranty. Buyer’s election to the same may be
express or implied
 Where a contract of sale is not severable, and the buyer has accepted the goods a part of
the same, the breach of any condition must be treated as a breach of warranty and not as a
ground, for rejecting the goods or repudiating the contract
 Buyer who has used the goods cannot repudiate transaction. If goods are accepted, remedy
is confined to damages
 Acceptance is defined in S.42 as when he intimates to the seller that he has accepted
the goods or when the goods have been delivered to him and he does any act which is
inconsistent with the goods being in the ownership of the seller or retains them in his
possession.
 The buyer reselling the goods is acceptance
 Mere fact that the buyer has taken delivery does not constitute acceptance
 Nothing in S.13 shall affect the case of any condition or warranty fulfilment of which is
excused by law by reason of impossibility
 If the goods are not answering to the description contracted for the buyer may:
 Reject the goods and obtain a refund of the price in advance and sue for damages,
obtaining the difference between the market price and the contract price
 Waive the condition and accept the goods, suing for breach of warranty

S.14 – Implied undertaking

 Implied condition that the seller has a right to sell the goods and in an agreement to sale
will have the right to sell the goods at the time when the property comes to pass
 Goods should be of merchantable quality
 Implied warranty that the buyer shall have and enjoy quiet possession of the goods
 Implied warranty that the goods shall be free from any charge or encumbrance in favour of
any third party not declared or known to the buyer before or at the time of the contract
 If the seller’s title turns out to be false, the buyer may reject the goods
 Rowland v Divall – Buyer bought and used car for several months, seized by police as a
stolen vehicle – buyer allowed to recover full price of the car
 Niblett v Confectioners’ Materials Co – Defendant sold to the plaintiffs 3000 tons of
condensed milk. Found that 1000 tins were ‘Nissly brand’. Another manufacturer of
condensed milk, Nestle, claimed infringement of trademark. Plaintiff had to remove all the
labels and was forced to sell at a lower value. He sued for breach of condition, and it was
held he had the right to reject the goods or to recover as damages the loss caused by the
sale at a reduced price.
 The buyer may claim damages for any loss caused to him by the seller failing to provide a
safe and secure title. If he gets dispossessed because seller did not have title, he can ask for
a full refund of the whole of the purchase paid as a failure of consideration.
 Each buyer only has a remedy against his immediate seller. The owner has the right to
recover the possession from the last of the buyer

S.15 – Sale by description

 Implied condition that the goods shall correspond with the description and if the sale is by
sample as well as description, must correspond to the description as well as the sample, and
not only the sample.
 Description – particular class or kind of goods. Includes statements essential to the
identity of the goods (quality or fitness, time of dispatch, mode of packing etc.) Implied
condition that goods must be of merchantable condition.
 Sample mainly corresponds to quality. Description is the one that is to be adhered to.
  If there is a breach, seller entitled to reject the goods whether buyer is able to inspect them
or not.
 The buyer must not have seen the goods and buys them solely on the basis of the
description of the seller
 If the buyer has seen the goods but relies upon the description of the seller’s word,
then it is a sale by description
 Even if the goods supplied fit the buyer’s purpose, if they don’t correspond with the
description the buyer may reject it [Buyer can reject goods for breach of condition
although he suffers no damage as the goods may be of merchantable quality]
 Contract may contain terms whereby the seller may guard himself from any responsibility
as to quality, yet if sale is by description, it has to correspond to that description. But only a
fair allowance for inferiority in quality.
 Packing of goods may be a part of the description (number of tins for example)
 Arrival of goods at a particular time and place may be relevant
 There cannot be a sale of goods by description if the description is not relied upon
 The fact that a description was provided does not necessarily make the contract one for the
sale of goods by description
 Leaf v International Galleries – Plaintiff bough a painting from the defendants who
innocently represented to him that it was by John Constable when it was not. Later the
plaintiff was informed it was not actually a Constable and asked for a refund. The court held
that since the plaintiff did not reject the goods within a reasonable time period could be
said to have accepted the goods

S.16 – Implied conditions as to quality of fitness – Caveat Emptor

 S.16(1) requires the seller to sell goods fit for the buyer’s purpose
 For 16(1) the following must be attained:
 Buyer should make known the particular purpose for buying the goods
 The buyer should rely on the seller’s skill or judgement
 The seller must be in the business of the same
 If not indicated by the buyer the seller may assume the goods are bought for the normal
purposes and the buyer must indicate expressly otherwise
 The buyer making the particular purpose clear is testament to his reliance upon the seller’s
judgement and skill
 When relying on a trade name, the responsibility does not fall upon the seller
 S.16(2) – A dealer who sells goods by description is bound to deliver goods of merchantable
quality (implied condition)

 As regards nature or quality – caveat emptor – in the absence of fraud, buyer has no
remedy. Question is whether the buyer had made any reasonable enquiry
 This principle cannot be applied to an examinee at a public examination
 There is no implied conditions to quality or fitness for any particular purpose of goods
supplied under a contract except:
 When buyer makes in known to the seller the particular purpose for which the goods
are required so as to show that the buyer relies on the seller’s skill or judgement and
goods are one that the seller is in the business to supply – implied condition to its
fitness for the particular purpose [fit for the purpose they are required for]
 All 3 conditions are to co-exist
 Purpose – made known expressly or by implication (may arise from vary nature of
goods, liable if it does not fit with standards laid down by an act/ fit the buyer).
Must be express if the goods are used for multitudinous purposes
  Skill or judgment of seller – special purpose is disclosed, and acceptance is given,
sufficient to show reliance. When buyer specifies form, style, etc. he uses his own
judgment, liability of manufacturer is only to execute the work and exercise due
care and diligence.
 Business – The seller must be one who deals in goods of that description. This
applies only to sale of specific goods at the counter
o In the case of a sale of a specified article under patent or other trade name,
no implied condition about its fitness [but if buyer, while asking to be
supplied with article so named, indicates that he relies on his skill and
judgment, he does not buy it under its trade name, proviso will not apply]

 Where good are bought by description from a seller who deals in goods of that
description (whether he is the manufacturer or not), there is an implied condition that
the goods shall be of merchantable quality
 Merchantable quality means that the goods are purchasable for resale, they must
be capable of passing in the market under the name or description by which they
are sold
o Gardiner v Gray – Sale for imported waste silk, purchaser has a right to expect
a saleable article answering the description in the market. Seller was bound
to make good the loss caused by not selling merchantable goods
o If buyer takes them after examining – no implied condition wrt defects. Then
implied condition protects him only from latent defects. Mere opportunity of
examination is not sufficient.
 Merchantable thus implies that the goods should be saleable in the market at full
value price
 Goods are not merchantable if they have defects that make it unfit for proper use
but are not apparent upon examination. Merchantable only if article is of such
quality and in such condition that a reasonable man, acting reasonably, would
accept it under the circumstances of the case in performance of his offer to buy
that article, whether he buys it for use or resale. Should be reasonable capable of
being used for one or more purpose, even if it was not fit for the particular
purpose buyer intended [Example of not pig food but fungus for other animals]
 However, if the goods do not obtain full market price that is not a signal to its lack
of merchantability
o In Leaf v International Galleries, while it was true that the painting was
defective, it was not unsaleable. Further the defect did not remove from the
aesthetic appreciation of the painting and thus was held to be of
merchantable quality

 There is an emphasis upon physical quality rather than saleability when it comes
to merchantability
 The goods must not violate any applicable statute in order to be merchantable
 If the goods are bought for self-use, merchantability means that the goods must
be reasonably fit for the purpose they are generally used for.
 Packing of the goods is often taken into consideration for merchantability, a bottle
which cannot be opened is not merchantable
 Even if some of the goods are defective, the buyer may reject the whole lot, even
if he accepted some deliveries before finding out about the defect
 If no purpose is made known to the seller, then the test of merchantability is on
quality and not purpose – goods would be held to be merchantable if they are fit
for any one of the several purposes that the goods may ordinarily be used for
  In England merchantable has been replaced with satisfactory, implying that the
goods must be fit for all purposes that the goods are commonly supplied for
 A seller selling goods for one specific purpose must explicitly make that clear in his
description
 If the buyer examines the goods, then there is no condition as to defects which
such examination would have revealed
 Even if no implied condition as to provisions being fit for a purpose, seller may be
liable in action for negligence. [Eg. Stone in food]
 When a person sells goods he knows to be dangerous without warning buyer of
fact, he may be held liable in damages

 Apart from these exceptions the seller should not be liable for the fitness of the goods
 Ward v Hobbs – Pigs were sold in an auction and no warranty was given in respect of any
fault or error. The buyer paid fair price for healthy pigs, but they were all ill and one died of
typhoid. They also infected the buyer’s pigs. While selling infected pigs was an offense, it
was held that there was no breach of condition or warranty
 Burnby v Bollet – A farmer bought the carcass of a dead pig from a butcher and left it
hanging up. Another farmer bought it off the first farmer. It turned out to be unsound for
human consumption, however there was no warranty of soundness between the farmers

 There are points of distinction between 16(1) and 16(2):

 16(1) requires that the buyer makes the purpose of his purchase known to the seller
while 16(2) requires sale by description
 16(1) relies upon the seller’s skill and judgement
 Reliance on trade mark/patent only comes to importance in merchantability (16(2))
 16(4) – express terms. The parties may include any express conditions and warranties in
their contract
 The conditions of S.16 all apply when the seller is selling goods that are in the course of his
business
 For the goods to be those used in the course of a business, there must be a sufficient
degree of regularity in such transactions for them to constitute an integral part of his
business

S.17 – Sale by sample

 A contract of sale is a contract for sale by sample when there is a term in the contract to
that effect
 There are implied conditions in a sale by sample:
 Bulk shall correspond with the sample in quality
 Buyer shall have a reasonable opportunity of comparing the bulk with the sample
 Goods shall be free of any defect that makes them unmerchantable which would not
be apparent on reasonable examination of the sample

o Even if some of the goods are found to be defective the buyer has the option to reject the
entire quantity of goods. Or may claim the whole and claim damages for inferior portion.
But cannot retain part and reject part, unless contract is severable.
o On rejection of the goods, the buyer is entitled to recover from the seller the price as
money
o The bulk of the goods must match the sample in quality, however if the buyer accepts the
goods, he would be entitled to damages for breach of the warranty
 o The buyer must be given reasonable opportunity to compare the bulk of the goods with the
sample. If buyer is to pay in cash on arrival and takes the goods, on subsequent examination
is entitled to reject the goods.
o The goods must be free from any latent defects which make the goods unmerchantable
o If the sample possesses any faults or defects and the buyer accepts the sample, then it is
implied that he accepts the bulk with the same defect

 Implied warranties
o S.14(b) – The buyer has a right to quiet possession, which implies that no one can have a
higher right to the goods than the buyer after buying the goods
o S.14(c) – Goods must be free from any charge or encumbrance in favour of any third party
not known to the buyer