Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency: formula sheet

Key formulas

Definition of indemnity (Section 124)

Promise to save the other from loss caused by the promisor's own conduct or the conduct of any other person

Two parties: indemnifier and indemnity-holder. The loss may be caused by the promisor or by a third party.

Right to damages (Section 125(1))

Recover all damages he is compelled to pay in any suit in respect of any matter to which the promise to indemnify applies

The suit must relate to a matter covered by the promise, and the holder must be acting within the scope of his authority.

Right to costs (Section 125(2))

Recover all costs he is compelled to pay in the suit, if (he did not contravene the promisor's orders AND acted as a prudent person would without any indemnity) OR the promisor authorised him to bring or defend the suit

Two alternative routes to recovery. Either route is enough.

Right to compromise sums (Section 125(3))

Recover all sums paid under a compromise, if (the compromise was not contrary to the promisor's orders AND was prudent without any indemnity) OR the promisor authorised the compromise

Same two-route structure as costs.

Indemnity versus guarantee

Indemnity: 2 parties, protects against loss. Guarantee (Section 126): 3 parties, performs the promise or discharges the liability of a third person on his default

Use this as the base of any comparison answer.

Definition of guarantee (Section 126)

Guarantee = contract to perform the promise, or discharge the liability, of a third person in case of his default

Can be oral or written. Quote the key words 'third person' and 'in case of his default'.

Three parties (Section 126)

Surety = gives the guarantee; Principal debtor = person whose default is guaranteed; Creditor = person to whom the guarantee is given

Name the parties in every answer using the facts given.

Continuing guarantee (Section 129)

Continuing guarantee = guarantee which extends to a series of transactions

Illustrations: guarantee for tea supplied from time to time is continuing; guarantee for five sacks of flour in one delivery is not.

Revocation by notice (Section 130)

Surety may revoke a continuing guarantee at any time, as to future transactions, by notice to the creditor

Liability for transactions already made stays. Past transactions are not wiped out.

Revocation by death (Section 131)

Death of surety = revocation of continuing guarantee as to future transactions, in the absence of any contract to the contrary

Applies only to continuing guarantees and only for future transactions.

Extent of surety's liability

Surety's liability = Principal debtor's liability (unless the contract provides otherwise)

Section 128. Includes interest and charges that have become due on the debt.

Discharge by release of principal debtor

Contract releasing debtor, or creditor's act/omission legally discharging debtor ⇒ surety discharged

Section 134. Illustrations: composition with creditors; B diverting water so A cannot grow the crop.

Discharge by variance

Variance without surety's consent ⇒ surety discharged as to later transactions

Section 133. Past transactions before the variance are not wiped out.

Discharge by compounding or giving time

Creditor + principal debtor contract to compound, give time or not sue, without surety's assent ⇒ surety discharged

Section 135. The contract must be with the principal debtor.

Time given to a third person

Contract to give time made with a third person, not the debtor ⇒ surety not discharged

Section 136.

Mere forbearance

Creditor's mere forbearance to sue ⇒ surety not discharged (absent contrary provision)

Section 137.

Impairing surety's remedy

Act inconsistent with surety's rights, or omission of duty owed to surety, impairing eventual remedy ⇒ surety discharged

Section 139. Example: prepaying instalments without the surety's knowledge.

Loss of security

Creditor loses or parts with security without consent ⇒ surety discharged to the extent of the security's value

Section 141. Applies to securities held when the guarantee was given.

Release of a co-surety

Release of one co-surety ⇒ others not discharged; released surety still liable to co-sureties

Section 138.

Co-surety condition

Guarantee given on condition that another joins as co-surety; if he does not join ⇒ guarantee not valid

Section 144.

Surety's rights after payment

Surety pays or performs all he is liable for ⇒ gets all rights the creditor had against the principal debtor

Section 140. The debt must be due or default must have occurred.

Bailment (Section 148)

Bailment = delivery of goods + for a purpose + contract to return or dispose as directed

Bailor delivers, bailee receives. Ownership does not pass. Quote the section wording in answers.

Bailment by existing possession

Person already holding goods contracts to hold them as bailee → he becomes bailee

Explanation to Section 148. No fresh delivery is needed.

Pledge (Section 172)

Pledge = bailment of goods as security for a debt or promise; bailor = pawnor, bailee = pawnee

Use this for the bailment vs pledge difference.

Bailor's duty to repay expenses (Section 158)

Where the goods are to be kept, carried or worked on by the bailee for the bailor and the bailee receives no remuneration → bailor repays the necessary expenses incurred for the bailment

Applies where goods are to be kept, carried or worked on and the bailee gets no remuneration.

Bailor's responsibility (Section 164)

Bailor is responsible to bailee for loss caused by bailor's lack of right to bail, to receive back goods, or to give directions

Applies where the bailor had no title or authority.

Termination by inconsistent act (Section 153)

Bailee's act inconsistent with the conditions → bailment avoidable at bailor's option

Illustration: a horse let for riding is driven in a carriage.

Termination by death (Section 162)

Gratuitous bailment ends on death of bailor or bailee

Do not apply this to bailments for reward.

Mixture with consent (Section 155)

Goods mixed with bailor's consent → both have interest in proportion to their shares

Without consent, other rules apply, so state that condition.

Suit against wrong-doer (Section 180)

Third person wrongfully deprives bailee of goods or injures them → bailee has owner's remedies; bailor or bailee may sue

Both parties have a right to sue.

Finder of goods (Sections 71, 168, 169)

Finder = bailee's responsibility; no suit for compensation but may retain goods; may sue for a specific reward; may sell a thing commonly on sale if in danger of perishing or losing greater part of its value, or if lawful charges reach two-thirds of its value

Sale under Section 169 also needs that the owner cannot be found with reasonable diligence, or refuses on demand to pay the lawful charges.

Pledge defined (Section 172)

Pledge = bailment of goods as security for payment of a debt or performance of a promise

Bailor = pawnor. Bailee = pawnee. Delivery of goods is essential.

Pawnee's right of retainer (Sections 173-175)

Retain goods for: debt + interest + necessary expenses of possession or preservation; extraordinary expenses are recoverable from the pawnor

Other debts: no retainer without a contract (Section 174), but such a contract is presumed for subsequent advances.

Pawnee's remedies on default (Section 176)

Sue on the debt and retain the goods as collateral security, OR sell the goods after reasonable notice to the pawnor

Shortfall: pawnor pays the balance. Surplus: pawnee pays it over to the pawnor.

Pawnor's right to redeem (Section 177)

After default, redeem before actual sale by paying the dues plus expenses arising from the default

Applies where a time was stipulated for payment or performance.

Pledge by mercantile agent (Section 178)

Valid if: consent of owner to possession of goods or document of title + ordinary course of business of a mercantile agent + pawnee in good faith without notice of lack of authority

Mercantile agent and documents of title take meanings from the Sale of Goods Act, 1930.

Pledge under voidable contract (Section 178A)

Pawnor got possession under a contract voidable under Section 19 or 19A, not yet rescinded at the time of pledge + pawnee in good faith without notice of defect = good title

If the contract was already rescinded, this protection does not apply.

Limited interest (Section 179)

Pledge valid to the extent of the pawnor's interest

The pawnee gets no more than the pawnor's interest.

Who may be an agent (Section 184)

Any person can be an agent as between principal and third parties; only an adult of sound mind is responsible to the principal

A minor agent binds the principal to third parties but cannot be held liable to the principal.

Sub-agent defined (Section 191)

Sub-agent = person employed by, and acting under the control of, the original agent in the business of the agency

Control by the original agent is the test.

Properly appointed sub-agent (Section 192)

Principal is bound by the sub-agent's acts as if he were an original agent; agent is responsible to principal for sub-agent; sub-agent is responsible to agent, not principal, except fraud or wilful wrong

Three liability links to remember.

Sub-agent appointed without authority (Section 193)

Agent stands as principal to the sub-agent and is responsible for his acts to the principal and third persons

Principal is not represented by, or responsible for, that person.

Substituted agent (Section 194)

Agent with authority to name another person, who names him: that person is an agent of the principal, not a sub-agent

Example: solicitor told to employ an auctioneer; the auctioneer is the principal's agent.

Modes of creation

Express | Implied | Necessity | Ratification | Operation of law

Consideration is not necessary for agency.

Conditions for valid ratification

Act done on behalf of principal + principal in existence and competent at the time + full knowledge of facts + whole act ratified + lawful + no injury to third party

Effect relates back to the date of the act.

Express authority

Authority given by words spoken or written

Authority of an agent may be express or implied.

Implied authority

Authority inferred from the circumstances of the case, including words, writing or ordinary course of dealing

Look for habit of dealing known to the principal, as in the shop manager illustration.

Principal bound by unauthorised act (apparent authority)

Principal is bound if his words or conduct induced the third person to believe the act was within the agent's authority

The inducement must come from the principal, not from the agent's own claim.

Agent exceeds authority

If authorised part is separable from the excess, only the authorised part binds the principal

Applies as between the agent and the principal. If the two parts cannot be separated, this rule does not help.

Notice to agent

Notice or information obtained by the agent in the course of the business he transacts for the principal = notice to the principal

Knowledge gained outside that business, for example in earlier employment with another, is not treated this way, as the second illustration shows.

Undisclosed principal

Third party who neither knows nor suspects agency has the same rights against the principal as against the agent

If the principal discloses himself before completion, the third party may refuse to perform if he shows he would not have contracted had he known the true position.

Pretended agent

Person falsely representing himself as authorised agent is liable to compensate the third party for loss, if the alleged principal does not ratify

Requires that the third party was induced to deal because of the false representation.

Sub-agent appointed without authority

Agent stands as principal to that person and is responsible for his acts to the principal and third parties

The principal is not responsible for that person, nor is that person responsible to the principal.

Person named by agent with authority

Not a sub-agent but an agent of the principal for the part of the business entrusted to him

Example: a solicitor told to employ an auctioneer; the auctioneer is the owner's agent.

Agency for a fixed period

Where the contract says agency continues for a period, wrongful revocation or renunciation without sufficient cause requires compensation

Compensation is paid by the principal to the agent, or by the agent to the principal, as the case may be.

Agent with interest in subject-matter

Agency cannot, without an express contract, be terminated to the prejudice of the agent's interest

Example: agent authorised to sell land and pay his own debts from the proceeds.

Modes of termination (Section 201)

Revocation by principal | Renunciation by agent | Business completed | Death or unsound mind of either | Principal adjudicated insolvent

Learn all five. Note that the agent's insolvency is not in the list.

Implied revocation or renunciation (Section 207)

Revocation / renunciation = express OR implied from conduct

Example: principal himself does the act he had authorised the agent to do.

Notice (Section 206)

Reasonable notice required, else damage resulting must be made good

Applies to both revocation and renunciation.

Fixed-period agency (Section 205)

Express or implied contract for a period + revocation/renunciation without sufficient cause = compensation

Compensation is paid by the party who ended it, to the other.

Agent's interest (Section 202)

Agent has interest in the subject-matter + no express contract to the contrary = cannot be terminated to prejudice of that interest

The interest must be in the property itself, not just a right to commission.

Duty on principal's death or insanity (Section 209)

Agent must take all reasonable steps to protect and preserve the interests entrusted to him, on behalf of the principal's representatives

Applies when agency ends by the principal's death or unsound mind.

Quick revision

• A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default (section 126).
• The three parties to a guarantee are the surety (gives it), the principal debtor (whose default is covered) and the creditor (to whom it is given).
• A guarantee may be oral or written (section 126).
• Variance in the contract terms without the surety's consent discharges the surety for transactions after the variance (section 133).
• Release of the principal debtor by contract with the creditor discharges the surety (section 134).
• Composition, giving time, or promise not to sue the principal debtor discharges the surety unless the surety assents (section 135).
• Time given by the creditor to a third person, not the principal debtor, does not discharge the surety (section 136).
• Mere forbearance to sue does not discharge the surety unless the guarantee says otherwise (section 137).
• A creditor's act inconsistent with the surety's rights that impairs the surety's eventual remedy discharges the surety (section 139).
• On paying all he is liable for, the surety gets all the rights the creditor had against the principal debtor (section 140).
• Pledge is bailment of goods as security for a debt or promise; the bailor is the pawnor and the bailee is the pawnee (section 172).
• Ending an agent's authority ends the authority of the sub-agents he appointed (section 210).

Common mistakes

• Treating indemnity as a three-party contract like guarantee Fix: Remember: indemnity has two parties; guarantee has three (surety, principal debtor, creditor) and is about default of a third person under Section 126.
• Saying indemnity covers only loss caused by a third party Fix: Section 124 covers loss caused by the conduct of the promisor himself or of any other person. Quote both.
• Saying a guarantee must be in writing. Fix: Quote Section 126: a guarantee may be either oral or written.
• Mixing up the surety and the principal debtor. Fix: Surety gives the guarantee. Principal debtor is the one whose default is guaranteed. Label each name before writing.
• Saying the surety is discharged because the creditor did not sue for a long time. Fix: Remember Section 137: mere forbearance does not discharge the surety unless the guarantee says otherwise.
• Treating every change as discharging the surety for the whole guarantee. Fix: Write that discharge is as to transactions subsequent to the variance, and only where the surety did not consent.
• Saying ownership passes to the bailee. Fix: Only possession passes. The bailor stays owner. Sale transfers property, bailment does not.
• Treating a bank deposit or money loan as bailment. Fix: Bailment needs the same goods returned or disposed of as directed. A deposit is a debt, so there is no bailment.
• Treating every bailment as a pledge. Fix: Ask for the purpose. Pledge is bailment only for security of a debt or promise. Bailment for repair, carriage or safe custody is not a pledge.
• Allowing the pawnee to sell without notice. Fix: Always write that Section 176 requires reasonable notice of the sale to the pawnor.

Exam tips

• Begin every answer with the Section 124 definition in your own words, then add the Act's illustration if you remember it. It earns the first marks quickly.
• For a 'rights of indemnity-holder' question, use three headings: damages, costs, compromise. Add the section number against each.
• When asked for difference between indemnity and guarantee, cover number of parties, purpose, liability, and the nature of the promise. Use Section 124 and Section 126 as anchors.
• In MCQs, look for the number of parties and the type of promise. Two parties and a promise to make good a loss points to indemnity. A promise to answer for a third person's default points to guarantee.
• In problems, state the facts against each condition (orders, prudence, authorisation) in one line each. That is where step marks are awarded.
• Start every answer with the Section 126 definition in your own words, then apply it. This gets the definition marks even if the facts are tricky.
• In fact-based problems, write the labels surety, principal debtor and creditor against the actual names. Examiners look for this.
• For continuing guarantee questions, always separate past and future transactions in two lines.