Contracts II

INDEMNITY 3

124 - "Contract of indemnity" defined. 3

Adamson v Jarvis 3

GUARANTEE 4

CONTINUING GUARANTEE 4
S 129 : Illustration A - continuing guarantee 4
16. Mingyang Municipal Corporation v Maung Po Nun (AIR 1930 Rangoon) 4
17. MS Anirudhan v Thomcos Bank 4
18. Blest v Brown 4
19. Holme v Brunskill 4
S 134 - Release of Surety by Discharging the Principal Debtor 4
S 135 - Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal
debtor. 5
137 - Creditor's forbearance to sue does not discharge surety 5
138 - Release of one co-surety does not discharge others 5
139 - Discharge of surety by creditor's act or omission impairing surety's eventual remedy 5
20. State of MP v Kaluram 5
21. State Bank of Saurashtra v Chitranjan Rangnath Raja, (1980) 5
140 - Right to subrogation 6
145 - Implied promise to indemnify surety 6
141 - Surety's right to benefit of creditor's securities 6
22. Goverdhandas Goculdas Tejpal v. The Bank of Bengal (1890) 6
23. Parvateneni Bhushaya v Potluri Suryanarayana 6
138. Release of one co-surety does not discharge others 6
146. Co-sureties liable to contribute equally 7
147. Liability of co-sureties bound in different sums 7
INTERNATIONAL TRANSACTIONS – DOCUMENTARY LETTER OF CREDIT 7
24. RD Harbottle v Westminister Bank 7
25. Maharashtra State Electricity Board v Official Liquidator 7
26. UP State Sugar Corporation v Sumac International Corporation 8
27. I Tek Corp v FNNB 8
28. G Dayanand v Chief Conservator of Forest States Trading Circle 8
29. Basic Tele Services v Union of India 8
137. Creditor’s forbearance to sue does not discharge surety. 8
LAW OF LIMITATIONS 8
30. Mahant Singh v U Bayi 8
31. Carter v White 8
32. Syndicate Bank v Channaveerappa Beleri 9
33. H B Basavaraj v Canara Bank 9
34. HDFC v Gautam Kumar Nath 9

BAILMENT 10

WHAT IS A CONTRACT OF BAILMENT? 10

35. Ultzen v Nichols10
36. Kaliaperumal Pillai v Visalakshmi 10
37. Ram Gulam v State of UP 10
38. State of Gujarat v M Muhammed Haji 10
39. Basavva Kom Dyamangouda Patil v State of Mysore 10
 40. Hayman & Wife v Nye & Sons. 11
Bank lockers 11
41. Atul Mehra v Bank of Maharashtra 11
42. JC Trikha v PNB 11
BAILMENT IN CASE OF FINDER OF GOODS 11
RIGHT OF LIEN (170 AND 171) 12

AGENCY 29

DETERMINATION OF AGENCY 29
Rhodes v Forewood 29
Turner v Goldsmith 30

PARTNERSHIP ACT 31
Suresh Kumar Sanghi v Amrit Kumar Sanghi 31
Talakchand v KD Shetty 31
Nurse v Elphik 31

END SEM PREPARATION NOTES 32

 INDEMNITY

124 - "Contract of indemnity" defined.

A contract by which one party promises to the other from loss caused to him by the conduct
of the promisor himself, or by the conduct of any other person, is called a "contract of
indemnity".

1. Adamson v Jarvis
 GUARANTEE

Continuing Guarantee
A guarantee, to be a continuing guarantee must refer to a series of transactions, some of
which are unknown and not certain to come into existence.

S 129 : Illustration A - continuing guarantee

Employment Guarantee/ Guarantee of fidelity - what sort of guarantee would it be?

16. Mingyang Municipal Corporation v Maung Po Nun (AIR 1930 Rangoon)

Illustration A, S 129 is a wrong statement of law, guarantee of fidelity is a continuing

guarantee.

17. MS Anirudhan v Thomcos Bank

Referred to the Blest v Brown Judgement. But in this case, the surety was not discharged
because the variation was beneficial to him.

18. Blest v Brown

A surety is only bound on the terms of the agreement that he entered into. If there is any
alteration whatsoever, the surety’s obligation is at end.

19. Holme v Brunskill

Not any type of variation will negate the contract, the nature of the variation matters. If it is
prejudicial to the interests of the surety, that is when the surety will be discharged.

A guarantor is released from liability under a guarantee given to a creditor where that
creditor and the principal debtor have entered into an agreement, subsequent to the giving
of the guarantee, which has the effect of altering the contractual position between them, to
the disadvantage of the guarantor, without his prior consent, and even though a jury had held
that the variation had not substantially or materially altered the tenant’s obligations under
the lease.

Test - if on the face of it, it appears not to be prejudicial, then it is enforceable against the
surety; however, if it requires further discussion, whether it is prejudicial or not, the surety
will be discharged. - in order to determine the nature of the variation.

Any discussion whatsoever will mean that the surety can be discharged.

S 134 - Release of Surety by Discharging the Principal Debtor

1. Contract between C and PD, the effect of which the principal debtor is discharged, the
surety will also automatically be discharged.
 2. Any act or omission on the part of the creditor, the legal consequence of which is the
discharge of the principal debtor.
3. Omission

S 135 - Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor.
A contract between the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue, the principal debtor, discharges
the surety, unless the surety assents to such contract.

 Even if the agreement is not injurious to the surety, according to principles of equity,
the surety is entitled to be discharged.
 The surety is entitled under law to seek discharge of the debt.
 In some cases, however, the creditor my reserve his rights of recovery from the surety.

137 - Creditor's forbearance to sue does not discharge surety

138 - Release of one co-surety does not discharge others
139 - Discharge of surety by creditor's act or omission impairing surety's eventual remedy
20. State of MP v Kaluram

Tender – option of felling trees – money was to be paid in installments

Where against the terms of the guarantee the Government allowed the contractor to remove
felled trees from a forest without payment of price, the surety was held to be discharged

Security – not used in technical sense; it includes all rights the creditor had against the
property on the date of the contract

On that day, the bank had the charge of the trees, there was a specific charge on part of the
creditor against the goods.

He is discharged to the extent that the security is destroyed (pro tento)

21. State Bank of Saurashtra v Chitranjan Rangnath Raja, (1980)

Where a bank could not take sufficient care of the contents of a godown pledged to it against
a loan and consequently they were lost, the surety, who had guaranteed the loan, was
allowed by the Supreme Court to claim discharge from liability to the extent of the value of
the lost goods.

Rights of the surety against:

 a. Creditor
b. Principal Debtor –
a. 140 – Right to Subrogation
b. 145 – Right to Indemnity

140 - Right to subrogation

Rights of surety on payment or performance.—Where a guaranteed debt has become due, or
default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon
payment or performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.

145 - Implied promise to indemnify surety

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 from the principal debtor whatever
su m he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.

141 - Surety's right to benefit of creditor's securities

A surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of suretyship is entered into, whether the surety knows
of the existence of such security or not; and, if the creditor loses, or, without the consent of
the surety, parts, with such security, the surety is discharged to the extent of the value of the
security.

British position – benefit of every security that the creditor has

Indian position – at the time the contract was entered into

If the creditor has the securities on the date of discharge of the contract, the surety is entitled
to benefit from them – principles of equity

22. Goverdhandas Goculdas Tejpal v. The Bank of Bengal (1890)

The case Goverdhandas Goculdas Tejpal v. The Bank of Bengal (1890) I.L.R. 15 Bom. 48 is also
a case of contract of suretyship strictly so called. The only point held there was that unless
the surety pays down the whole money he is not entitled to the transfer of the security.

The basis of the surety’s right to recover from the security is based on his right to be
indemnified, would be unequitable for him to recover more than what he is liable

23. Parvateneni Bhushaya v Potluri Suryanarayana

138. Release of one co-surety does not discharge others

Where there are co-sureties, a release by the creditor of one of them does not discharge the
others; neither does it free the surety so released from his responsibility to the other sureties
146. Co-sureties liable to contribute equally
Where two or more persons are co-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contracts, and whether with or without
the knowledge of each other, the co-sureties, in the absence of any contract to the contrary,
are liable, as between themselves, to pay each an equal share of the whole debt, or of that
part of it which remains unpaid by the principal debtor

147. Liability of co-sureties bound in different sums

Co-sureties who are bound in different sums are liable to pay equally as far as the limits of
their respective obligations permit.

International Transactions – Documentary Letter of Credit

Facilitates international trade and commerce

 Purpose of contracts – making or facilitating deferred exchanges

 Protection is not the purpose of the Law of Contracts, but the protection would
facilitate transactions

Bank Guarantee – documents of credit are independent and autonomous of the main
contract and therefore play an important role in international trade

24. RD Harbottle v Westminister Bank

such obligations "are the life-blood of international commerce".

"Apart from instances of clear fraud in which the bank itself is involved or has notice of, the
courts leave businessmen to settle their disputes in court or by arbitration as per the
contractual rights and obligations that each one undertook."

‘Except possibly in clear cases of fraud of which the banks have notice, the courts will leave
the merchants to settle their disputes under the contracts by litigation or arbitration as
available to them or stipulated in the contracts. The courts are not concerned with their
difficulties to enforce such claims; those are risks which the merchants take. The machinery
and commitments of banks are on a different level. They must be allowed to be honoured,
free from interference by courts. Otherwise, trust in international commerce could be
irreparably damaged.’

25. Maharashtra State Electricity Board v Official Liquidator

 The money is payable on demand and not on breach.

 Board had the right to to enforce payment of the guarantee and the bank could
reimburse itself out of its securities
 Only condition for the for the bank’s liability was demand by the board
26. UP State Sugar Corporation v Sumac International Corporation

The underlying dispute was not a matter of concern

Exceptions:

1. Fraud
2. Special equities/ irreparable harm – if the not granting of an injunction will cause
irreparable harm/ encashing of the bank guarantee would cause irreparable injustice

27. I Tek Corp v FNNB

 Type of the harm which

 Radical change of circumstances compared to when the guarantee was given

28. G Dayanand v Chief Conservator of Forest States Trading Circle

Court ultimately felt that allowing the bank guarantee would be an Empty formality

(Empty formality implies that a full remedy was available but not implemented – as per Sumac
– there was no fraud, or irreparable damage as per Itek – sir disagrees with this decision)

29. Basic Tele Services v Union of India

Court said it was a conditional guarantee, commercial documents are highly technical, no
discrepancies allowed; no concluded acceptances etc.

Court said that the plaintiff would suffer irreparable loss and injury inasmuch as they would
be deprived of their hard-earned money for no fault of theirs.

On the other hand, if an injunction is allowed, it would be tantamount to simply delaying the
repayment if the plea were reversed.

137. Creditor’s forbearance to sue does not discharge surety.

Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any
other remedy against him does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety.

But if there is a formal agreement extending the time period, that would discharge the surety.

Law of Limitations
If the limitation period (3 years) is exceeded, no relief can be sought. If the creditor omits to
sue within the limitation period, then he will be unable to recover from the principal debtor.

30. Mahant Singh v U Bayi 1939 PC 110

31. Carter v White

Court drew a distinction between rights and remedies.

32. Syndicate Bank v Channaveerappa Beleri

33. H B Basavaraj v Canara Bank

34. HDFC v Gautam Kumar Nath

Limitation bars only the institution of a suit, if there are other ways of recovery they may be
pursued.
 BAILMENT

Sections 148 onwards

What is a contract of bailment?

A sense of bailment is the delivery of goods from one person to another upon contract for
some purpose, so that they, upon accomplishment of purpose should be returned

35. Ultzen v Nichols

A man’s coat was taken from him in a restaurant, hung on a hook. When he was about to
leave, coat was no longer there. Restaurant was held liable as a bailee. (if the customer had
dictated where to put the coat, decision may have been different)

36. Kaliaperumal Pillai v Visalakshmi

Lady was getting jewels remade. Every night, she had all the jewels put in a box and put away
the key. Jewels were lost, goldsmith was not held to be liable; delivery is necessary to
constitute bailment.

37. Ram Gulam v State of UP

38. State of Gujarat v M Muhammed Haji

39. Basavva Kom Dyamangouda Patil v State of Mysore

 The case dealt about the theft of some property that was supposed to be in the court
safe custody.
 SC held that once the property is not available with the court, the court should not
disclaim all responsibility.
 SC ordered for the repayment of the full value of the property in order to meet the
ends of justice

Possession does not give one absolute rights.

Constructive delivery of goods

Duty of Bailor –

1. Gratuitous bailment – e.g. borrowing a book from a friend

Has to take care of the property as though it were his own
2. Bailment for reward –
  Parking lot issue –
 Bank locker facilities –

Control, animus to exercise control;

40. Hayman & Wife v Nye & Sons.

Test: Insurer against all defects that care and skill can guard against; not ALL defects.
Obligation to exercise due care. In these circumstances, the law says that one might not have
been aware, but ideally should have been aware of.

Gratuitous bailment: Liability for all defects that the bailee was aware of.

Q. How is gratuitous bailment enforceable if there is no consideration?

Parting with the possession of the property will constitute consideration in the case of
gratuitous bailment.

(ref Kedarnath Bhattacharya v Gorie Muhammed)

Bank lockers
41. Atul Mehra v Bank of Maharashtra

Bank locker robbery - Held that the bank was not liable for the loss of the contents of the
locker because the bank was not capable of accessing the locker by itself.

No animus, intention or physical control – no bailment

42. JC Trikha v PNB

Bailment in case of finder of goods

166,167 – Bailor not the rightful owner of the property

Re-delivery of the goods

Finder of goods – not constructive delivery of goods, but constructive bailment

You cannot compel a person to repay you for expenses incurred, but can retain the goods
until and unless reasonable expenses are paid – Right to lien

Finder of goods when reward is announced by the owner – finder of the goods can sue for
the reward

169 - Finder of goods may sell the goods in case:

 things commonly on sale/perishable nature may sell the goods

 Reasonable expenses – 2/3rd of the value of the goods
Right to expenses and remuneration (which are not mentioned in the contract of bailment)

Right of Lien (170 and 171)

What is lien?

Lien is the right of the bailor to retain the possession property or goods, unless his lawful
charges are paid to him.

It is a possessory right – right to retain possession – if the possession is lost, the right to lien
is also lost.

2 types:

1. Particular – you can retain the very particular goods

2. General – eg. Bankers’ general lien

Guarantee:

Gulam Hussain v Faiyaz Ali: Does “anything” also include past debts? Yes. Person executes
surety bond binding himself to pay a certain amount in case of default of instalments. Critique
– Past and Executed consideration distinction; contrary to illustration c

Position:

A guarantee for a past as well as a future debt – enforceable if further debt is incurred after
the guarantee

The benefit of a principle debtor is enough consideration to sustain the guarantee; PD need
not specifically have asked for a guarantee

Contracts of guarantee are not uberrima fides

No duty to disclose circumstances that might affect the credit of the husband to the surety;
but not disclosing facts to surety would be at your own risk

Guarantees for the good conduct of a servant – not disclosing all facts would not make the
surety liable even in case of default by the servant

Guarantee may be oral or written

Liability of the Surety –

Co-extensive: Responsible for the whole extent to which the surety is liable but no more

Loan bond – surety not just responsible for loan amount but interests and other charges
Harigopal Agarwal v SBI - If principal debtors’ actions increase the period of limitation, such
an action would also bind the surety

Condition Precedent

If there is a condition that is to be fulfilled prior to the surety’s liability, the surety will not be
liable till the condition is fulfilled

Co-surety – If a guarantee is given contingent to the fact that a co-surety will join, if the co
surety does not join the guarantee is not valid

National provincial Bank of England v Brackenbury – third surety did not sign, no agreement
to dispense with signature, so defendant not liable.

Surety may attach another condition to impose liability

If the liability is unconditional, court cannot introduce a condition –

Bank of Bihar v Damodar Prasad: SC overturned the trial court and the HC ruling that the bank
should enforce the remedies against the PD first – that would defeat the intentions of the
parties

Another case – SC held that creditor must first recover from mortgaged property and before
turning to the guarantee.

The above case overruled in SBI v Indexport Rgd. – SC held that the creditor could seek to
recover the debt from the PD, Mortgage or the guarantor, as he pleased

Surety’s liability not contingent upon the possibility of recovery of the debt amount from the
PD.

Novation of main contract

Satish Chandra Jain v National Small Industries Corporation Ltd. – Business converted to
company, business loan was treated as company loan, therefore the personal property of the
father who had guaranteed his son’s business loans could no longer be attached

If the management of a company changes, it does not automatically mean that the guarantors
of the company’s loans are automatically discharged.

Continuing guarantee –

Kay v Groves – 5 sacks of wheat case – not continuing guarantee

Specific guarantee – specific advances/ fixed sum

Eg: Guarantee for the appointment of an agent

Continuing – Fluctuating account, secures the balance owing at any time within the guarantee
period

Eg: servant appointed to collect rent, personal guarantee – till the borrower paid loan amount
on demand (?)

Bank Guarantee

Absolute undertaking – arrangement to pay whenever the creditor invokes the guarantee

Bird and Co. v Tribunal Jute Mills – unconditional guarantee – no justification needed –

It is a commercial document, can be invoked in a commercial manner – bank just has to

understand that the guarantee has been invoked

Guarantee money is payable on demand and not on breach – seller usually not allowed to
prevent payment even if it is demanded without justification

Performance guarantees are promissory notes payable on demand – similar standing as

letters of credit – to be honoured in case of absence of evidence of clear fraud.

Winding up of a company will not provide an escape from the payment of the guarantee

Stay order preventing payment – exceeding of limitation period – still liable to pay

Fraud – must be clearly established

ITEK corporation case – READ!!

Bank guarantee not to be concerned with the underlying rights and wrongs of the parties

Bank guarantee to comply with the terms it was formed under, otherwise the encashment
may be stayed

Letters of credit and bank guarantees

Centax (India) Ltd v Vinmar Impex Inc. – Commitments from banks must be allowed to be
honoured free from interference from the courts. Otherwise the trust in international
commerce will be irreparably damaged

“Courts will do their utmost to enforce it according to its terms. They will not in the ordinary
course of things interfere by way of injunction to prevent its implementation”

RD Hardbottle v National Westminister Bank Ltd. – courts will interfere with the irrevocable
obligations of banks only in exceptional circumstances. They are the lifeblood of international
commerce
Exceptional circumstance – Banerjee & Banerjee v HSW Construction Ltd – intent to suppress
vital information, guarantee was stayed.

Letter of Credit

2 banks - issuing bank (home country of the buyer) – this bank opens credit in a bank in the
seller’s country in favour of the seller (advising bank) – upon submission of documents,
payment under letter of credit is released.

Buyer cannot countermand payment under a letter of credit, if bank refuses to pay under an
irrevocable letter of credit it is liable for damages.

Documents demanded must be exactly the same other, not almost the same. Payment under
a letter of credit may be refused under these grounds.

Enforcement of a bank guarantee – cannot be subject matter of an arbitration

Exception – Kudremukh iron ore v Karola Rubber Co Ltd – there was a pending arbitration
under which the liabilities of all the parties had to be ascertained

ITEK Corporation Case:

Since there is no barrier to the court's issuing preliminary relief, the district court is free, on
remand, to reinstate its preliminary injunction barring FNBB from making any payments on
the standby letters of credit until such time as the court is free to render a final judgment on
the validity of Bank Melli's demands on the letters of credit or the dispute is suspended in the
courts and submitted to the Tribunal for resolution.

Itek had substantially performed its obligations under [the contract] prior to the cancellation
of its export license in April, 1979 ... [and] the value of Itek's performance far exceeded Iran's
payments under the contract. After the export license was cancelled, Itek made several
attempts to meet with the appropriate Iranian authorities in order to negotiate the parties'
respective contractual obligations. When these attempts failed, Itek followed the procedure
specified in the contract for cancellation, which should have resulted in the release of all
guarantees and letters of credit. Under these circumstances, any demand on the guarantees
or letters of credit by Iran in March, 1980 would necessarily have been fraudulent.

Having considered all the arguments raised by the plaintiff and defendants in their briefs,
affidavits and pleadings, I find that the plaintiff has demonstrated that it is likely to suffer
irreparable harm if an injunction does not issue, that such injury outweighs any harm to be
inflicted upon the defendants, that the plaintiff has demonstrated a sufficient likelihood of
success on the merits, and that the public interest will not be adversely affected by the
granting of the requested relief. Accordingly, the plaintiff's motion for a preliminary injunction
is hereby granted.
The defendant First National Bank of Boston and all persons acting in concert with it are
hereby enjoined from honoring any demand for payment or making any payment on letters
of credit bearing the *1219 serial numbers S-14555, S-14558, and S-14559, until further order
of this Court. The requirement of bond is waived.

Joint Debtors and Suretyship

Discharge of surety from liability:

1. Revocation - § 130
Continuing guarantee may be revoked, but only with respect to future transactions
Clifford v Davies: Held that the surety had the right to revoke

Employment of a Servant: guarantee of good favour is a specific, not continuing

guarantee, cannot be revoked while he is still in service

Liability of directors who guaranteed the payment of a company’s overdraft and

subsequently left – had to pay the amount due till the date of their resignation

2. Death of Surety - § 131

Continuing guarantee will be revoked for future transactions, but heirs of the surety
may be sued for liability already incurred, but only to the extent of their inherited
property (RK Dewan v State of UP)

3. Variance: § 133
Duty of utmost good faith is imposed upon the creditor. So if without informing the
surety the creditor alters the contract with the principal debtor the contract stands
discharged
Bonar v MacDonald – person made manager, was to be liable for one-fourth of the
losses – no communication made to the surety – manager allowed customer to
overdraw – there was a loss – turns out surety discharged bc fresh agreement, not the
original one because of which the surety agreed.

What if the variation is not substantial/is beneficial to the surety?

MS Anirudhan v Thomcos Bank – PD reduced the loan amount because the bank did
not grant a loan for the original amount – did not intimate the surety – PD did not pay
– held that the alteration had not discharged the surety
 Bolton v Salmon – PD took further loans against the surety’s property without
informing the surety, surety was held to be discharged

PD and surety are jointly and severally liable – so adjustment given to the surety might
not have discharged the PD

4. Effect of discharge of the PD –

a. Release of the PD –
Contract between the creditor and the principal debtor discharging the surety – surety
will be discharged
But surety will not be absolved if the reason for the release of the PD are bankruptcy
laws

Debt relief acts –

Nagpur HC – Maharashtra SEB v official liquidator – held that the provision was
intended to benefit PD and not S
But Madras HC, full bench –
Balakrishna v Atmaram – also used Madras Agriculturists Debt Relief Act – said if the
amount that was due from the surety was not scaled down proportionately, it would
defeat the purpose of the act because as per §144 of ICA, the surety would be entitled
to recover from the PD

Application of insolvency laws:

Maharashtra SEB v Official Liquidator – Held that since the bank was a secured creditor
it was entitled to recover from the securities; the fact that the supplier company that
had provided the security for the loan would prove irrelevant

b. Act or Omission
If the creditor does something that would legally discharge the PD, then the surety
would also be discharged

Composition, Extension of time, promise not to Sue

Surety may be discharged in 3 ways (§135)

1. Composition
2. Promise to give time
3. Promise not to sue (to be distinguished from a mere forbearance to sue, which is not
negatively refraining; a mere forbearance to sue will not discharge the surety)
But what if forbearance leads to reaching of the limitation period, as a result of which the
surety is discharged? - §134 and §137 seemingly in conflict

Mahant Singh v U Ba K (???) – defendants guaranteed payment by the trustees, beneficiaries

replaced the trustees, plaintiff dropped case and was not permitted to sue in personal
capacity, but held that the suit against the surety was maintainable

Position in England was that failure to sue the PD within limitation period would not discharge
the surety

Rights of a Surety

1. Right to Securities
Craythorne v Swinburne – surety is entitled to every remedy that the creditor has
against the PD.
State of MP v Kaluram – surety is not liable to the extent of lost securities
Goverdhan Das v Bank of Bengal – surety has guaranteed only a part of the debt – held
that the creditor’s right to the securities is paramount over those of the surety, claim
of the surety will arise only once the claim of the creditor has been satisfied
Bhushayya v Suryanarayana – 3 loans, 3 sureties, 2 paid, one didn’t – held that the
sureties who had paid were entitled to a sufficient share in the mortgage
2. Right to Set off
If the creditor sues the surety, the Surety is entitled to use the defences of the PD
against the creditor or any other third party who gains his title from the creditor

Rights against co-sureties

1. Effect of release
Releasing of one co surety will not discharge the others, and the released co surety
will still be liable to the other two
2. Right to Contribution
Each will pay an equal share of the whole debt in an absence of a contract to the
contrary (§147)

Indemnity and Guarantee Distinguished

Indemnity Guarantee
1. Contingent liability 1. Liability arises once the guarantee is
2. Original Undertaking acted upon
3. Bipartite 2. Collateral Undertaking
4. One contract 3. Tripartite
4. Two contracts

Bailment:
Delivery of possession

Ultzen v Nichols – restaurant – coat – was missing when he was done eating

Kalia Perumal v Visalakshmi – lady kept the keys with herself, so no delivery of possession, so
goldsmith not held liable

Jagadish Chandra Trikha v PNB – jewellery box with declared contents was lost

Bank Locker

Putting things in a hired bank locker would not be bailment, as the items are not entrusted to
the bank as such; no actual and exclusive possession was given by the hirer of the locker to
the bank

Delivery upon a contract:

Goods should be delivered for some purpose upon a contract that once the purpose is
accomplished the goods must be returned to the bailor

When a person comes into the possession of another’s goods without a contract, there is no
bailment, as per §148 of the ICA

Ram Gulam v State of UP – jewels recovered by the police were stolen from police custody,
but the police were not held liable for the loss

Non-Contractual Bailments

Contract is useful, but not essential

Lasalgaon Merchants Co-operative bank v Prabhudas Hathibai – seized goods (tobacco) were
damaged due to heavy rains – court said that the government officers had to take such care
as any prudent manager would – ruled in favour of bailees

Express and Implied Contracts

Governor general of India in Council v Jubilee Mills Ltd – packages kept on railway platform
caught on fire due to spark from a passing train – the company was held liable

3. For a bailment to come into existence, the person to who whom the goods are
delivered must be under the obligation to deliver the goods once the purpose for the
said delivery has been accomplished

Duties of a bailor:

Gratuitous:
 1. Should have known of defect, which bailee did not know of
2. Defect should expose the bailee to serious risks

Non-Gratuitous:

Bailor is responsible for damage, whether or not he was aware of the damage

Hyman and Wife v Nye and Sons

Reed v Dean – launch with a faulty fire extinguishment system

Duties of Bailee:

1. Reasonable care – what a man of ordinary prudence would, under similar

circumstances take (§151) – in the absence of a contract to the contrary, the bailee, if
he has taken such care, will not be held liable
In the absence of a special contract, bailee is not responsible for the loss, damage or
destruction of the goods
If goods are stolen from the bailee, he will be liable if there has been negligence

Burden of Proof

NR Srinivasa Iyer v New India Assurance Co. –

Bullen v Swan Electric Graving Co.

Loss due to Bailee’s servant:

Servant’s act is within the scope of employment – person is liable

Sanderson v Collins: Held that the servant driving away the carriage for personal use was not
within the scope of employment – not liable

Bailee’s own goods lost with that of the bailor:

Voluntary courtesy – good faith – both parcels seized – held not liable because in good faith
he had taken care of both parcels

Involuntary Bailee:

A person who has come into possession of goods through no act of his own and without his
consent

Howard v Harris – a play script was lost – he was held not liable as he had received something
he had not asked for

Later positions –
Newman v Bourne and Hollingsworth: Diamond brooch left in a shop put away for
safekeeping was lost – shop was held liable

Contract to the Contrary

Bombay Steam Navigation Co. v Vasudev Baburao – a bailee can contract himself out of a
position that would result from 151

However, it was submitted that it would constitute an unnatural reading of the two sections
– liability may be increased but not diluted

Mahendra Kumar Chandulal v CBI – a bank was held liable for the losses of bales of cloth
despite the fact that there was a clause absolving him of all liability

Duty not to make unauthorised use:

Unauthorised use of goods would make the bailee absolutely liable for any loss or damage to
the goods, act of god/inevitable accident would not serve as a defence

Bailor may terminate the contract if the bailee uses goods outside the scope of the bailment
and demand that the goods be returned immediately

Contract of bailment is voidable at the option of the bailor if the bailee does anything
inconsistent with the conditions of bailment

Duty not to Mix

If there is micture:

1. With bailor’s consent – proportionate interest in the mixture produced

2. Without consent, goods can be separated – bailee has to bear the cost of separation
and any damages that ensue
3. Without consent, non-separable – bailee is liable to compensate the bailor for the
goods

Duty to return

Bailee has a duty to return the goods once the purpose of bailment has been accomplished

Juggilal Kamalpat Oil Mills v UOI – adulterated oil sent through railways was seized and
destroyed - There is no need for the bailor to return the goods if the goods were taken away
by an authority of law

Pledge

Special kind of Bailment - The object of the delivery of goods is to provide the security for a
loan or fulfilment of an obligation
Essentials:

1. Delivery of Possession – may be actual or constructive (eg. Delivery of the key of a

godown)/ delivery by attornment
Morvi Merchantile Bank v UOI -
The Supreme Court was called to decide whether a railway receipt could be equated
with the goods covered by it for the purpose of constituting delivery of goods. SUBBA
RAO, J (afterwards CJ), who delivered the majority opinion, held, that delivery of
railway receipts was the same thing as delivery of goods; the pledge was, therefore,
valid and the pledgee was entitled to sue for the loss.

Pledge by way of hypothecation –

Reeves v Capper – Captain pledged something to shipowner who let the captain use
it for the voyage, captain pledged it to someone else – first pledge was held to be valid
Bank of Chittoor v Narashimhulu – Cinema projector and accessories were pledged,
but allowed to remain because they were needed to run the cinema, later they were
sold. Held that the items were subject to the pledge

Other creditors, in such cases, cannot claim anything until the claim of the first pledgee
is satisfied

Pledge is made in pursuance to a contract; loan and delivery of possession need not
be simultaneous (example cases in final tutorial notes – Raghu)

Rights of a Pawnee

Pawnee can retain the good till the debt + interest + necessary expenses are repaid

Pawnee cannot retain goods for any purpose other than the reason they were pledged for,
unless there is a contract to the contrary – but, if a subsequent advance is made without
additional security, it will be presumed that the initially deposited goods shall serve as
security.

In the nature of a general lien, but lien is different from pledge. In case of the bankruptcy of
the pawner the pawnee is a secured creditor with respect to things pledged.

Bank of Bihar v State of Bihar – seizure would not deprive the pledgee of his rights to realise
the amount for which the goods were pledged, state was bound to indemnify him up to the
amount that would be realised from the goods

Hypothecatee – no right of seizure

In this case, goods cannot be seized by entering the premises – consent of the borrower/
court order is needed

UoI v Shenthilnatlian – agreement said that in case of default the lender could seize the goods,
but the court held that that right could not be directly exercised

Right to Extraordinary Expenses

A pawnee can recover any extraordinary expenses incurred by him. But to recover these, he
can sue, but cannot retain the goods.

Right of Sale

Pawnee, upon default, may:

1. Sue, and retain goods as collateral security

2. Sell the good, upon reasonable notice
a. Less amount – may still recover remaining from the pawner
b. Greater amount – must pay the surplus to the pawner

Lallan Prasad v Rahmat Ali – security worth 35k for a loan of 20k, plaintiff sued for repayment
but had sold the securities, so loan action was rejected

Trustees of the Property of Ellis and Co. v Dixon Johnson

Requirement of Notice

Prabluit Bank v Babu Ram – a contract to the contrary cannot extinguish this requirement

Loss of goods due to pledgee’s negligence – Gurbax Rai v PNB

Right to Redeem

Right exists till the goods are actually sold and not till the stipulated time period

Heritable right

Who can pledge?

Owner/person with the owner’s authority

Pledge by pledgee –

Ineffective pledge in favour of the pledgee – repledge by him will also be ineffective

Jaswantrai Manilal Akhaney v State of Bombay – A co-operative bank had an overdraft facility
with an exchange bank – had deposited securities – The bank did not use the overdraft facility
for a very long time, attempted to sue, but the exchange bank(?) had pledged the securities
with a private financier – but since the co-op bank had not availed of the overdraft facility,
the exchange bank had accrued no interest that would allow it to sub-pledge the securities to
a third party

Additional Exceptions – Sale of Goods Act

Pledge by a seller retaining possession after sale; buyer retaining possession before sale, both
are valid.

If one joint owner is in possession, a pledge by him is valid if the buyer has no notice of the
situation

AGENCY

Representative Character, Derivative Authority – distinguishing feature of an agent

Necessity

Jebara v Ottoman – agency of necessity comes from a pre-existing agency, applies only to
unforeseen events

Matheson v Smiley – Surgeon entitled to recover expenses from the family of the deceased
after he attempted to save him after a suicide attempt

Inability to Communicate with the Principal

Agency of necessity does not arise if the plaintiff can communicate with the defendant

Act should be Reasonably Necessary

Prager v Blastiel Stamp and Heacock ltd. – sale of fur skins in wartime Romania because of
inability of the defendants to contact the plaintiffs – held that it was not a necessity as the
skins would not have deteriorated if reasonable care had been used

Bona fide intention

Tronson v Dent – not only must there be an actual necessity, there must be a bona fide in the
interest of the parties

Duties of Agent

1. To execute mandate
Pannalal Jankidas v Mohanlal – agent failed to insure goods after receiving money
for that purpose – agent was held liable to compensate the loss
 2. Duty to follow instructions or customs
Lilley v Doubleday – Agent was to keep goods in a particular warehouse, he kept it in
another equally safe one and the goods were lost – agent was held liable because duty
to adhere to customs

3. Duty of care and reasonable skill –

As much skill as is generally possessed by such a practitioner – and liability extends
only to the direct consequences of such lack of skill/ neglect / misconduct; but not
liable for any remote consequences

4. Duty to avoid conflict of interest

De Busche v Alt. – agent bought the ship himself, then the cost of ships rose and the
principal could recover the extra profit the agent made upon resale from the agent.
5. Duty not to make secret profits
6. Duty to remit sums
7. Duty to maintain accounts

Delegated Agency

Calico Printers’ association v Barclays Bank – sun agent is not directly liable to the principal
except in case of fraud and wilful wrong

Substituted Agent –

There exists a privity of contract now between the substituted agent and the principal, as
opposed to the case of a sub-agent, where the agent is an intermediary of sorts between the
principal and the agent

Remedies against the agent’s breach of duty:

1. Right to recover damages – for want of skill and care etc

2. Account and payment of illicit profits
3. Resist the agent’s claim for commission and for indemnity against the acts of the agent
if the agent has acted as the principal himself

Rights of Agent

1. Right to remuneration
Green v Bartlet – house was not sold at an auction, one of the people who attended
the auction procured the address from the auctioneer and bought the house from the
owner directly – but was held that the sale was the result of the actions of the agent
so he had the right to be remunerated for the same

2. Right of Retainer
 3. Right of lien –
a. Conditions:
i. Lawfully entitled to receive money
ii. Property over which lien is exercised should belong to the principal
iii. Only a particular lien

Gopaldas v Thakurdas – Agent does not have an unrestricted authority; needs consent of the
owner to sell the property; but if he has become a pledgee, then he may sell

Right of lien extends only as far as the principal’s ownership of the property

b. Loss of lien
i. Possessory right, lost as soon as possession is lost
ii. When the agent waives his right
iii. Contract to the contrary

4. Right to indemnity
All losses and expenses incurred in the course of business
Kishanlal v Banwarilal – an agent could recover losses that had ensued because of a
wagering agreement he had entered into upon the directions of the principal
If an act is seemingly lawful but later turns out to be unlawful or injurious to a third
person, agent is entitled to be indemnified from such an act

A principal is not liable to indemnify the agent against a criminal act that he might
have himself directed

5. Right to compensation
Injury caused by principal’s neglect

Relations of principal with third parties-

Agent’s authority

1. Express
2. Implied
Ryan v Pilkington – held that an estate agent had an implied authority to take deposit;
but not authority to receive payment

Extent of an agent’s authority:

1. Nature of business
2. Incidental to business
3. Usual customs and usages
Scope of Authority

Agent has authority to act as per customs and usages of a particular market/trade

But a custom which changes the very nature of agency is unreasonable –

Robinson v Moller – held that the agents actions would make him a wholesaler rather than
an agent, so there is an apparent conflict of interest

Custom which allows agent to adjust personal account by way of set off or otherwise for the
claims of the principal – unreasonable

The fact that an agent has the authority to sell goods does not mean that he has the authority
to receive payment for the same

Authority of special agents;

1. Factors
2. Brokers
3. House agents
The need is to find someone willing to be a purchaser and not find a man who is ready
to be the purchaser: Abdulla Ahmed v Animendra Kissen Mitter
Once this was done, agent’s commission became absolute, even if the agent for some
reason sold the property at a lower price

Ostensible/ Apparent Authority

Authority as it appears to others. Ostensible authority may be more than the actual authority
– eg. Limitations imposed on a managing partner that a third party will not know of – if the
third party is unaware, company will be bound by the ostensible authority

Watteau v Fenwick – Apparent authority of the manager to be able to get cigars on credit
– accepted practice of such institutions – principal is liable for all acts of the agent that are
within the authority usually given to an agent of that nature

Valapad co-op stores v Srinivasa Iyer – authority of a co-op society to procure goods
on credit

Representation of authority must emanate from the conduct of the principal

Apparent authority cannot be inferred because the principal had previously authorised the
agent to do such an act

Undisclosed Principal

1. Disclosed
2. Unnamed Principal, but third party knows of existence
 3. Existence of the principal is unknown – the principal will still be liable unless there was
something in the contract to indicate that the agent intended to be personally liable

Ratification

(****)

Bolton v Lambert – upheld the validity of retrospective ratification

This position was criticised for putting the third party in a worse position than he had been in
originally.

General trend was against this decision, this was upheld in

Watson v Davies – Revocation before ratification – ratification was held to be too late and
therefore withdrawal from the contract was allowed
 AGENCY

 Agency – may be express or implied

o A contract of Agency – power of attorney
 Attribution by law
o Director of a company
 Ratification
 Necessity – facts + circumstances
 Not transferrable or assignable
o i.e. original principal cannot give his agent to anyone else
o Case: Firm Eli v.
o The agent himself must be willing
 Hire – Purchase transactions
 Agency is derivative in character
 S 184 – does not negate the possibility of a minor becoming an agent
 Scope of an agent’s authority:

Ireland v Livingstone:

 Nature of the act

 Incidental Activity
 Usual custom

Watteau v Fenwick:

 Case of apparent authority

 The taking cigars on credit – usual practice of the establishment one

 Assumption that the rights of the agent would be the duties of the principal
o Vasanthi Moojli v Narsimdas Tejpal
 When can remuneration not be given:
o Business misconducted
o Agent’s actions only remotely connected with the transaction


Determination of Agency
Rhodes v Forewood

Though that the agreement was for 7 years the parties had not intended to irrevocably
continue the agency for 7 years – there was room for determination of agency
Turner v Goldsmith

Mill got burnt – renounced the business completely – but still not buying and selling – liable
to the extent where he could have bought and forwarded

1. Agency can be terminated if there is a provision in the contract for the same
2. Agent can renounce his agency whenever he seeks
3. Death, Insanity of either of the parties
4. If the agency is construed for the benefit of the agent
5. Accomplishment of purpose
 PARTNERSHIP ACT

 Partnership – legal entity but not separate legal entity – liability of the firm is the
liability of its partners –
o Agreement between only persons, natural or legal
o has to be an agreement to generate and share the profits
o Implied authority to act on behalf of the firm
 Company – Separate legal entity – is a person in itself – separate from its shareholders
 Debt – incurred in the name of the company – so partners are liable only to the extent
of their shares
 Partnership will arise out of agreement and not status; unless the partnership deeds
state as such (status must be recognised by a partnership agreement)
 All act for one, and one for all – effectively one acts as an agent for the other

Suresh Kumar Sanghi v Amrit Kumar Sanghi

A partnership agreement – agreement was so that once the partners died, their children
would be partners

Is it a partnership at will?

Renouncing the partnership will not dissolve the partnership – so not a partnership at will.

Talakchand v KD Shetty

Any partner could retire whenever he wished but needed to give a 6-month notice

Nurse v Elphik
 END SEM PREPARATION NOTES

 Documents as to title:
o Represents the goods
o Ordinary course of business:
 Serves as a proof of possession/control
 Entitles the possessor to transfer/receive goods represented thereby
o Ramdas v Amarchand: possession of goods covered by a railway receipt may
be transferred by endorsement of the receipt. The last endorsee is entitled to
the delivery of the goods
 What are goods:
o Described under S 2.7
o Movable property
o Shares are goods: represent a bundle of rights
o Gas, electricity: not goods
o Growing crops, anything that is a part of land agreed to be severed before sale
 Types:
o Specific
 Identified at the time of sale
 Actually identified, not merely capable of identification
o Unascertained
 No oral contract wrt these because a sale of the goods cannot be
effected
o Future
 Mercantile goods:
 Essential elements of a contract of sale of goods:
o Goods
o Price
 Money consideration
o 4 ESSENTIAL ELEMENTS:
 Competency
 Mutual assent
 Passing of property in the goods to the buyer
 Payment/ promise of payment
 Property:
o General vs Special property:
 Eg. In case something is pledged:
 Actual owner has general property
 Pledgee has special property
 Property = ownership
o Risk:
  General rule – seller’s risk until property is transferred to the buyer
 After transfer: goods are at buyer’s risk, regardless of whether
or not delivery is made
 Sale and Agreement to sell:
o Transference of property in goods
o Contract of sale – absolute/conditional
o Property in goods transferred: sale; Otherwise it is an Agreement to Sell
o Agreement to sell  sale; when time elapses / conditions fulfilled
o “Contract of Sale” – generic term: includes both sale and agreement to sell
o Sale: Transfer of property in the goods from the seller to the buyer
 If the transfer is to happen at a later date/ post the fulfilment of a later
condition – agreement to sell – a.k.a. Executory contract of sale
 Sale – a.k.a. executed contract of sale
 Should be 2 persons; there must be a contract
o
 EXAMPLES:
o Supply of meals in a restaurant – service

Partnership Act:

Section 11: Determination of rights and duties of partners by contract:

1. Mutual rights and duties – may be determined by contract; contract may be express
or implied
2. Restraint of trade – may restrict the partner from carrying on non-firm business when
he is a partner

11.1. Contract subject to the provisions of the Act