The article is written by Ansruta Debnath, a law student of National Law University Odisha. This article talks about defining features of special types of contracts that have specific legal recognition in India.

This article has been published by Sneha Mahawar.

Introduction

A contract is a legally binding agreement between two or more parties. While contracts can be of various types, certain specific and special types of contracts have been recognized by Indian law to attribute some kind of formality to them. The Indian Contract Act, 1872 recognizes five kinds of special contracts, namely indemnity, guarantee, bailment, pledge and agency. Each of these categories of contracts has developed its jurisprudence. They are peculiar to one another and warrants individual discussion as has been done by this author.

Contract of Indemnity

In English law, “indemnity” refers to a promise to save a person and render them legally harmless from the consequences of a particular act or incident. The pledge could be explicit or assumed, based on the facts of the case. The English meaning of indemnity is broad enough to encompass a promise of indemnification against loss resulting from any source, such as a fire or other calamity. Except for life insurance, every contract of insurance under English law is an indemnity contract.

Defining contract of indemnity

The definition of “indemnity” as given in Section 124 of the Indian Contract Act is quite narrow. It states that a contract by which one party promises to save the other, from a loss caused to them by the contract of the promisor or by the conduct of any other person is called a “contract of indemnity”. Thus, the loss must be caused by human agency and the contract aims to rectify a loss caused by human agency. For example, if goods are lost at sea due to a storm, the same cannot be considered to be within the purview of a contract of indemnity. 

The person who gives the indemnity is called the “indemnifier” and the person for whose protection it is given is called the “indemnity holder” or “indemnified”.  Further, the promise of indemnity may be expressed or implied. An important case in this regard is the decision of the Privy Council in the Secretary of State for India in Council v. Bank of India Ltd. (1938). A fake endorsement was submitted to a bank, which accepted it for its face value and in good faith. In their name, the Bank sent it to the Public Debt Office for renewal. The actual owner of the note was compensated by the State, and the State was entitled to sue the bank based on an implied contract of indemnity.

A strict reading of this Section does not include implied promises or losses caused by accidents. But in Gajanan Moreshwar v. Moreshwar Madan (1942), it was held that Section 124 and Section 125, the two Sections on indemnity in the Contract Act are not legally exhaustive and that “Indian Courts should apply the same equitable principles that the Courts in England do”.

Essentials

Thus the essentials of the special contract of indemnity can be summarised as follows-

1. There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder. 
2. A contract of indemnity is entered into, to protect the promisee from the loss. The loss may be caused due to the conduct of the promisor or any other person. 
3. The contract of indemnity may be expressed (i.e., made by words spoken or written) or implied (i.e., inferred from the conduct of the parties or circumstances of the particular case). 
4. A contract of indemnity is a special contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 apply to them. Therefore, it must possess all the essentials of a valid contract. 
5. In indemnity contracts, there is only one contract that is between the Indemnifier and the Indemnified. 

Insurance contracts

Section 124 does not include insurance contracts involved in non-man-made accidents within it. Other than that, almost all insurances other than life and personal accident insurance are contracts of indemnity. The insurer’s promise to indemnify is an absolute one. A suit can be filed immediately upon failure of performance, irrespective of actual loss. If the indemnity holder incurred liability and that liability was absolute, they would be entitled to call upon the indemnifier to save them from that liability by paying it off. 

However, through an insurance contract, if an insurer promises to pay insurance in the event of an accident like a fire, the same is not mentioned within Section 124. However, they are still valid contracts and come under Section 31 of the Contract Act which talks about contingent contracts.

Extent of liability under the contract of indemnity

Rights of indemnified

The rights of the indemnified or indemnity-holder, which can also be considered the duties of the indemnifier are as follows: 

1. Section 125 talks about the extent of liability that an indemnity-holder or indemnified is protected against. According to Section 125(1), the indemnified is entitled to recover all damages that they are compelled to pay in a suit with regards to any matter the contract of indemnity applies, from the indemnifier. 
2. Section 125 (2) states that the indemnified would also be able to recover all costs from a suit which they initiated or a suit in which they are the defendants. In this case, the indemnified must have acted in a way that would have been reasonable even in the absence of a contract of indemnity and must not have gone against the orders of the indemnifier. Further suits in which the indemnified is involved with the permission of the indemnifier are also within this sub-clause. 
3. Finally, Section 125(3) talks about sums made as a compromise concerning any suit. The suit must fulfil the same conditions as was required for costs of suits as in Section 125(2).

Rights of indemnifier

The Indian Contract Act is silent about the rights of the indemnifier. From a general idea of an indemnity contract and case laws like Jaswant Singh v. the State (1965), the following can be made out:

1. After successful indemnification, the indemnifier gains rights over the indemnified property of the indemnity-holder. Consequently, the indemnifier will have the right to sue third parties over the indemnified property.
2. Indemnifiers have the right to pay for only those losses that are covered in the indemnity contract.
3. The indemnifier has the right to recover money and possession from the indemnity-holder in certain cases, as the contract may specify.  

Commencement of liability

There is a difference of opinion in India among various High Courts regarding the time when the liability of the indemnifier starts. English law initially stated that action for indemnity cannot be brought against the indemnifier unless some loss is suffered by the indemnity-holder. However, this principle evolved through judgments by the Court of Equity that allowed for indemnity claims before the loss had been suffered.

The original English law principle has been used by the Nagpur High Court in Ranganath v. Pachusao (1935). The Court has held that indemnity could be claimed only when the indemnity-holder has been demnified in the first place.

The new principle of commencement of indemnity has been followed by the High Courts of Calcutta, Bombay, Madras, Patna and Allahabad. The main rationale behind this principle is that indemnity is not about repayment to the indemnified once the indemnified has been paid. It means that the indemnified should not have to make a payment by themself in the first place. This principle has been used in the case of Osman Jamal and Sons Ltd. v. Gopal Purshttam (1928). 

Contract of Guarantee

Defining contract of guarantee

According to Section 126 of the 1872 Contract Act, a “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety” and the person in respect of whose default the guarantee is given is called the “principal debtor”. The person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. In English law, a guarantee is defined as “a promise to answer for the debt, default or miscarriage of another”. 

A basic illustration of a contract of guarantee is as follows. Suppose a person A buys an item from B. C, another person states that if A does not pay B for that item, C themself will pay for that. Thus, in the given scenario, A is the principal debtor, B is the creditor and C is the surety. Thus, the primary motive behind the creation of contracts of guarantee is to provide additional security to the creditor.

Section 127 talks about consideration for guarantee. According to this Section,  anything done for the benefit of the principal debtor is sufficient consideration for the surety for giving the guarantee. For example, in the above scenario, C promises to pay B if A defaults with the consideration that the item that A is buying from B is delivered to the latter. This is a valid contract where the consideration is delivery of the item to A. 

But in an alternate scenario, suppose the delivery of the item already happens to A and then C promises that they will pay in case A defaults on the payment. In this case, there is no consideration and hence no valid contract.

Essentials

Thus, the essentials of a contract of guarantee can be summarised as follows-

1. Can be an oral or written contract.
2. Presence of principal debtor, surety and creditor
3. Fulfilment of essentials of a standard contract including but not limited to-

1. Consideration to surety must be present 
2. The guarantee should not be obtained by concealment or misrepresentation (Section 142 and Section 143)

Extent of guarantee

The scope of a guarantor’s responsibility is determined by the contract’s provisions. In Syndicate Bank v. Channaveerappa Beleri (2006), this was effectively explained. The Supreme Court ruled that a surety’s or guarantor’s liability cannot be universal and that a contract of guarantee can take many forms. There is a distinction between a guarantee that states that a surety is only obligated to pay the creditor on demand and a guarantee that does not contain such a condition. Furthermore, depending on the terms of the contract, a surety’s responsibility may be limited to a specific amount rather than being equal to that of the principal debtor. The liability to pay may arise on the principal debtor and surety at the same time or at different points of time. A claim may be even time-barred against the principal debtor but still enforceable against the surety. The parties may agree that the liability of a surety shall arise at a later point of time than that of the principal debtor.

Continuing guarantee 

According to Section 129, a guarantee which extends to a series of transactions is called a continuing guarantee. A continuing guarantee can be revoked by the surety as to future transactions by giving notice to the creditor (Section 130). Further, Section 131 states that the death of a surety also acts as a method for the revocation of contracts of guarantee for future transactions.

Surety

A surety or guarantor is a person who comes forward to pay an amount when a person is unable to do so. If a decree is passed in favour of a creditor and against a principal debtor, the same can be extended to the surety as according to Section 128, the liability of a surety is co-extensive with the principal debtor unless stated otherwise, as mentioned in the previous section. 

Discharge of surety

The methods by which the surety in a contract of guarantee can get discharged from the contract are as follows-

1. Section 133: by any variance of terms of the original contract of guarantee without the surety’s consent.
2. Section 134: by release or discharge of the principal debtor.
3. Section 135: by way of contract between the creditor and principal debtor wherein the creditor promises not to sue and give time to the debtor unless the surety assents to such a contract. 
4. Section 139: by an act or omission by the creditor which affects the rights of the surety and eventual remedy of the surety as against the principal debtor is affected.

However, a discharge of surety does not occur in the following circumstances-

1. Section 136: when an agreement is made with a third person by the creditor to give time to the principal debtor.
2. Section 137: mere forbearance to sue the principal debtor or enforce any other remedy does not discharge the surety unless otherwise is provided in the concerned contract of guarantee.
3. Section 138: discharge of one co-surety does not automatically discharge the others.

Rights of a surety

According to Section 140, once the surety performs the required act or omission or makes the required payment to the creditor, the surety gains all the rights that the creditor had against the principal debtor. Further, a surety is entitled to the benefit of every security that 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. This is given in Section 141. 

In every contract of guarantee, a surety has the right to be indemnified by the principal debtor. This promise is implied (Section 145). Also, according to Section 146, co-sureties are liable to all contribute equally in a contract of guarantee. In case they are liable to pay different sums, even that must be paid as equally as possible as far as the limits of their contract permit. For example, A, B and C, as sureties for  D, enter into three several bonds, each in a different penalty, namely, A in the penalty of each 10,000  rupees,  B in that of 20,000 rupees, C in that of 40,000  rupees, conditioned for D’s duly accounting to E. D makes default to the extent of  30,000 rupees. Person A, B and C are each liable to pay 10,000 rupees. 

Contract of Bailment

Defining contract of bailment

The word “bailment” comes from the French word “ballier”, which means “to deliver”. Bailment is derived from the words ‘handing over’ and ‘change of possession’. According to Section 148 of the Act, a bailment is defined as the conveyance of goods by one person to another for a specific purpose with the condition that the items would be returned or otherwise disposed of according to the directives of the person who delivered them. The “bailor” is the person who delivers the merchandise. The “bailee” is the individual to whom they are handed.

The main characteristic of bailment is that there is the delivery of possession for a temporary purpose. If there is a transfer of ownership, then it is no bailment. The delivery is done with the promise that the bailee will restore the property to the bailor as directed by the latter. In Tilendra Nath Mahanta v. United Bank of India (2002), it was stated that the primary responsibility of the bailee was to deal with the goods according to the directions of the bailor.

Bailments can exist independent of contracts. They are said to exist sui generis as was stated in the case of Building and Civil Engineering Holidays Scheme Management Ltd. v. Post Office (1964). Thus, voluntarily taking into possession or custody goods which are the possession of another is a bailment of finding and is independent of any contract.

Essentials

1. Delivery of possession of some goods.
2. Delivery of some goods for some purpose.
3. Return of the goods to the bailor after the end of bailment. 

Delivery of possession is given in Section 149. The 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. Essentially there are two types of delivery possible-

1. Constructive delivery involves a change of physical possession while goods remain where they are. For example, delivery of a railway receipt amounts to delivery of the goods.
2. Actual delivery involves physical handing over of goods by the bailor to the bailee.

Even if a person takes delivery of certain goods without a prior formal arrangement, the same can constitute bailment. For example in Ulzer v. Nichols (1894), a waiter took the plaintiff’s court when the latter entered a restaurant. Later the coat went missing and the defendant, i.e., was considered a bailee and thus liable. But if the bailor retains possession and control over a good, the same does not constitute bailment. In Kaliaperumal Pillai v. Visalakshmi Achi (1937), a lady was melting her jewellery and making new ones by a goldsmith. Every evening she used to keep the half-made jewels in a locked box in the premises of the goldsmith’s workshop but retained the key to the box with herself. The box then got stolen. The goldsmith was not held liable as they had not received possession of goods at all.

Bailor

As mentioned above, the bailor is the person to whom the goods belong and is the one who initiates the contract and transfers possession of their goods to another person. There are two types of bailors-

1. Gratuitous bailor: A person who lends his articles or goods without any charge, is called a “gratuitous bailor”. His duty is naturally much less than that of a bailor for hire or consideration. Section 150 states that a bailor is responsible for disclosing all the known flaws of the good that is being given for bailment. Also, Section 162 states that a gratuitous bailment terminates with the death of either the bailee or the bailor. 
2. Bailor for reward: A bailor for consideration has a far bigger responsibility. He is profiting from his occupation, so it is his responsibility to ensure that the commodities he provides are reasonably safe for the bailment’s purposes. He has no defence if he claims he was unaware of the flaw. He must inspect the goods and correct any flaws that a reasonable assessment would have shown.

Rights and liabilities of a Bailor

Other important rights and liabilities of a bailor as given in the Indian Contract Act are as follows-

1. Section 153 states that a bailor can terminate bailment if the bailee’s acts concerning the bailed goods are inconsistent with the terms of bailment. 
2. Section 158 makes it necessary for the bailor to pay for the expense that the bailee has to undertake in relation to transportation etc. of the bailed goods if the latter is not receiving remuneration of the same. 
3. Section 163 states that the bailor is entitled to any increase or profit which may have accrued from the goods by the bailee unless stated otherwise in the contract.
4. Section 164 re-iterates the bailor’s responsibility to the bailee and states that the former shall be responsible for any loss which the bailee may sustain by the reason that the bailor was not entitled to make the bailment or to receive back the goods or to give directions respecting them. 

Bailee

The person to whom the possession of certain goods is temporarily given is the bailee. They have the following duties-

1. Duty to take reasonable care of goods bailed as given in Sections 151–152
2. Duty to not make unauthorised use of the good bailed as given in Sections 153–154
3. Duty to not mix own goods with the bailor’s goods as given in Sections 155–157
4. Duty to return the goods on fulfilment of purpose as given in Sections 159–161 and 165–167

Bailment of finding

According to Section 71, a person who finds items belonging to another and takes them into his custody is subject to the same liability as a bailee. Because the role of the finder of goods is similar to that of a bailee, he is expected to exercise the same level of care with the goods as a bailee under Section 151. He also has all of the responsibilities of a bailee, including the obligation to return the goods once the rightful owner is identified. If he refuses to return, he may face conversion charges. Furthermore, he shall be liable for any loss, damage, or deterioration of the products as a result of his failure to return the goods. (Section 160 and 161 of the Indian Contract Act).

Section 168 further states that the finder of goods has no right to sue the owner for compensation for the trouble and expense voluntarily incurred by him to preserve the goods found. Also under Section 169, when a thing which is commonly the subject of sale is lost and the finder cannot locate the original owner with reasonable diligence, the same can be sold if the thing is in danger of perishing or losing the greater part of his value or when the lawful charges of the finder in respect of the things is determined to be two-thirds of its value. 

Contract of Pledge

Defining the contract of pledge

“Pledge”, which is also called “pawn”, is a kind of bailment of good with a special purpose. It is defined in Section 172 of the Contract Act. The goods pledged to serve as security for the payment of a debt or performance of a promise. The bailor, in this case, is called the “pawnor” or “pledger” and the bailee in this case is called the “pawnee” or “pledgee”. The pawnee thus has a special property or special interest in the thing pledged. The special property or interest is continuous and exists to compel the payment of the debt or sell the property if the need arises. The special nature of a pledged property was explained by the Supreme Court in Bank of Bihar v. the State of Bihar (1971). Sometimes a case may arise when a pledge in which the pawnor has a limited interest is made. Even then, the pledge is valid to the extent of that interest (Section 179).

Ordinarily, goods may be pledged by the owner or by any person with the owner’s authority. A pledge made by any other person may not be valid. Thus, in Biddomoy Dabee v. Sitaram (1878), it was observed that a pledge made by a servant in whose care the good was left by the owner is not a valid pledge. However, an exception to this rule is found in Sections 178 and 178-A which provide for certain circumstances in which a person, being left in possession with the consent of the owner, may make a valid pledge though without the owner’s authority.

Essentials

The following are the essentials-

1. There shall be a bailment for security against payment or performance of the promise.
2. The subject matter of the pledge is goods. 
3. Goods pledged for shall be in existence.
4. There shall be the delivery of goods from pledger to the pledgee.

Rights of a pawnee

1. Section 173 gives the pawnee the right to retain the goods that have been placed to them in case of the non-performance or non-payment of the debt by the pawnor. Further, the pawnee is entitled to retain the goods or the expenses that he had to incur for the possession and preservation of that pledged good. This section was used in the case of Central Bank of India v. Siruguppa Sugars and Chemicals Ltd (2007)
2. Section 174 also states that unless stated otherwise by a contract it shall be presumed that subsequent advances are included within the original debt and the good can be retained to recover those advances. This position was reiterated in Cowasji Muncherji Banaji v. Official Assignee of Bombay (1928). Ordinarily, however, a pawnee can retain goods only as security for the debt or promise the good was pledged in the first place.
3. Section 175 gives an additional right to the pawnee. This is the right to receive extraordinary expenses from the pawnor which he had to undertake for the preservation and possession of the good. The same right could be enforced by filing a suit. 
4. Upon default of payment by pawnor, Section 176 gives two distinct rights. First, the pawnee can bring legal action against the pawnee and retain the goods as collateral security. Secondly, the pawnee can also sell the pledged goods after giving reasonable notice to the pawnor. If the cost of the pledged product is less than the debt, then the pawnor continues to be liable. If it is more than that, the pawnee is liable to return the surplus amount to the pawnor. Further, the pawnor is allowed to pay the amount after receiving notice of sale and before the actual sale takes place. But he will be liable to pay for all extra expenses that the pawnee had to incur because of the default.
5. In K.M. Hidayathulla v. Bank of India (2001), it was held that the pawnee’s two rights, namely the right to sue the pawnor for personal recovery or resort to selling the security after reasonable notice, are disjunctive, i.e., being independent of each other. The fact that a period is prescribed for filing suit would not mean that the prescribed period would also apply to the alternative remedy of selling the goods.

Rights and duties of a pawnor

The pawnor is responsible for repaying the loan or fulfilling the commitment, as the case may be. It is the pawner’s responsibility to reimburse the pawnee for any out-of-pocket expenses. It is the pawner’s responsibility to disclose any hazards that may put the pawnee in jeopardy. If the pawnee suffers a loss as a result of faults in the pledged goods, the pawnor must compensate the pawnee. The pawnor must pay the deficit if the pawnee sells the item because of the pawnor’s default.

On the other hand, the pawnor has the right to receive back the pledged good on successful payment of debt or performance of the act as the case may be.

Contract of Agency

Defining contract of agency

According to Section 182, an “agent” is a person employed for acts/activities to be committed for another person and to represent that person in dealings with a third person. The person who employs an agent is called the “principal”. Thus, a “contract of agency” involves the creation of a principal-agent relationship. The test of determining the existence of agency relationships has been explained in the Allahabad High Court case of Loon Karan Sohan Lal v. John and Co. (1967). 

The relationship of principal and agent may be created in any of the following ways: 

1. by express appointment,
2. by the conduct or situation, 
3. by the necessity of the case,
4. by subsequent ratification of an unauthorised act, or
5. by the presumption of agency in a husband-wife relationship. 

Essentials

1. Agreement between agency and principal  
2. Competency of principal, as given in Section 183. Competency is determined by the same factors whose fulfilment is required for a basic standard contract. Although a minor is incompetent to appoint an agent, it was held in Madanlal Dhariwal v. Bherulal (1964) that a guardian was allowed to appoint an agent for a minor and such an appointment was protected by Indian law.  
3. According to Section 184, an agent is just the connecting link between the principal and third party and need not be competent to make a contract with the third party on behalf of the principal. Thus, anyone can act as an agent of the principal and enter into contracts on behalf of them. However, an agent must be competent to enter into a contract when the contract is with the principal for the creation of a principal-agent relationship. If the agent is not competent, they cannot be made legally responsible to the principle.  
4. The contractual relationship must be created to enter into legal relations.
5. Consideration is not required in a contract of agency and this is given in Section 185.  The law does not require any consideration as for the validity of a contract of agency. Since consideration may be of some benefit to the plaintiff or some detriment to the defendant, the principal’s willingness to be bound by the acts done by the agent on his behalf serves as a sufficient detriment to the principal. Also, Section 222–223 of the Indian Contract Act imposes a duty on the principal to indemnify the agent.

Principal-agent relationship

Duties of an agent

The duties of an agent are as follows-

1. A principal’s mandate must be carried out by an agent, according to Section 211. They must complete the tasks that have been assigned to them. In the absence of instructions, the agent should work according to the trade’s customs. Any failure to do so would result in the agent being held accountable for the principal’s loss. A commission agent purchased commodities for his principal and placed them in a godown in Pannalal Jankidas v. Mohanlal and Anr. (1950). The agent was given the task of insuring the items. The agent collected the insurance premium but failed to insure the goods. Following that, the cargo was lost in an explosion in the Bombay harbour. The agent was held liable to compensate the principal for his loss.
2. According to Section 211, every agent is bound to carry on the business of the agency with reasonable skill and care. The standard of care and skill which an agent has to maintain depends upon the nature of his profession. This was the major finding in the case of Pandurang v. Jairamdas Pandurang (1925).
3. An agent has the duty to not delegate his duties. This is given in Section 190. The rule is contained in the maxim “delegatus non potest delegare” which means that an agent to whom some authority has been delegated cannot delegate that authority to another person. However, an exception to this does exist in Section 190 which states that delegation to another person cannot happen unless by the ordinary custom of the trade or from the nature of the agency a sub-agent can or must be employed.
4. Section 214 states that an agent has the duty to communicate with their principal.
5. The agent has the duty to not receive secret profits while in a contract of agency.
6. The agent has the duty to remit sums received on behalf of the principal (Section 218)
7. The agent has the duty to avoid conflict of interest and not act on his account. An act to the contrary by the agent gives the principal two rights-

1. Section 215 says that the principal can repudiate the contract if the agent acts on their own account and conceals materials from the former or engages in dealings which are the disadvantages to the principal. 
2. Section 216 says that in the event of the agent acting on their account the principal will get the right to extract and receive from the agent any benefit that might have arisen from those kinds of transactions. 

Rights of agent and corresponding duties of the principal

1. According to Section 219, an agent is entitled to some amount of remuneration. It becomes due to him with the completion of the activities assigned to him. This rule is subject to special contracts between the principal and the agent. In Saraswati Devi v. Motilal (1981),  Motilal was an estate agent who was engaged by Saraswati Devi to find the purchaser for her property. The estate agent was able to find such a person and eventually, the deal was decided upon. However, later Devi refused to sell the property. The estate agent brought an action against the former to recover some amount of money as remuneration. It was held that according to the nature of this agreement the remuneration was payable to the plaintiff when he found the purchaser who was willing and able to purchase the property and since that had been done, he was entitled to the commission. However, the agent is not entitled to any remuneration for the misconduct of business (Section 220).
2. All funds received on the principal account must be returned to the agency. However, he has the right to keep all money owing to him from advances given or expenditures properly paid by him in conducting such business, as well as any income that may be payable to him for acting as an agent, out of any sums received on account of the principal in the agency’s activity. 
3. According to Section 221, an agent is entitled to retain goods, papers and other property of the principal received by him until the amount due to himself for commission, disbursement and services in respect of the same has been paid to him. This provision is subject to the absence of any contract to the contrary.
4. Section 222-223 details how the agent has the right to be indemnified and the principal has the duty to indemnify the agent. 
5. Every principal has the duty to protect the agent from their neglect. In cases of principal’s neglect causing injury to the agent, the latter must be compensated for the same.

Liability of the principal

The liability of a principal can be discussed in the following aspect-

1. When an agent exceeds the authority granted to them by the principal, Section 227 states that a portion of the act performed by the agent may be within the authority while the other party is outside. The principal is liable for the part of the act that is within his or her authority, but not for the part that falls outside his or her power. This can be further appreciated by looking at the Kerala High Court’s decision in Ahammed v. Mammad Kunhi (1986). The agent in this instance was given power of attorney to sell a half-right over a property. He did, however, sign a contract to sell the entire land. It was held that the purchaser had rights over only that portion of the land that the agent was originally asked to sell. 
2. If the two parts cannot be separated, then the principal is not bound to recognize the transaction (Section 228). For example, if A authorises B to buy 500 sheep and B buys 500 sheep and 200 lambs for a sum of ₹6000, A has to repudiate the whole transaction.
3. According to Section 229, any notice given to or information obtained by the agent for the principal shall, as between the principal and the third person, have the same legal consequences as if it had been obtained by the principal.
4. When agents acting in the course of the principal’s business make a misrepresentation or commit fraud, it has the same effect on agreements made by such agents as if such misrepresentation or fraud has been made or committed by the principal. Thus, principles of vicarious liability apply. Section 238 contains the following provision in this regard-

1. Misrepresentations committed by agents acting in the course of the business for their principles have the same effects on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principal.
2. Misrepresentations or frauds committed by agents in matters which do not fall within the principal’s authority do not affect the latter.

Personal liability of an agent

According to Section 230, the personal liability of an agent can crop up when-

• the agent acts on behalf of a foreign principal,
• the agent acts for an undisclosed principal, 
• the principal is disclosed but cannot be sued, 
• there is a contract for the agent’s personal liability and,
• the agent makes a breach of some legal obligation. 

References

• Unit 2 – Special Contracts
• Indian Contract Act, 1872
• Rights And Duties of Indemnifier | LawFoyer

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