Contract II - LLB QUESTION PAPER PDF

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Contract of Indemnity Q. No. 1) Define contract of Indemnity. Explain the rights of Indemnity holder. In the old English law, Indemnity was defined as a “promise to save a person harmless from the consequences of an act”. This view was illustrated in the case of Adamson vs Jarvis (1827.) In this case, the plaintiff, an auctioneer, sold certain cattle upon the instructions of Defendant. It turned out that the livestock did not belong to the defendant, but to another person and the true owner held the auctioneer liable. The auctioneer, in turn, sued the defendant for indemnity for the loss suffered by him by acting on his instructions. It was held that since the auctioneer acted on the instructions of the defendant, he was entitled to assume that if, what he did was wrongful, he would be indemnified by the defendant. This gave a very broad scope to the meaning of Indemnity and it included promise of indemnity due to loss caused by any cause whatsoever. Thus, any type of insurance except life insurance was a contract of Indemnity. According to English Law promise may be express or implied. Dugdale Vs Lovering: The plaintiffs were in possession of certain trucks which were claimed both by the defendants and one K.P.Co.. The defendants demanded delivery and the plaintiffs asked for an indemnity bond, but received no reply. Even so they delivered the trucks to the defendants. K.P.Co, having successfully sued the plaintiffs for conversion of their property, the plaintiffs were held entitled to recover indemnity from the defendants on an implied promise. Because by demanding an indemnity, they made it quite clear that they had no intention to deliver except on indemnity. The English definition of indemnity is wide enough to include a promise of indemnity against loss arising from any cause whatsoever e.g. loss caused by fire or by some other accident. Indeed every contract of insurance, other than life insurance, is a contract of indemnity. Contract of indemnity under Indian Contract Act: Indian contract Act 1872 makes the scope narrower by defining the contract of indemnity as follows: Section 124 - A contract by which one party promises to save 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". 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’. Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs 200. This is a contract of indemnity. This definition provides the following essential elements – 1. There must be a loss.

2. The loss must be caused either by the promisor or by any other person. 3. Indemnifier is liable only for the loss. Thus under Indian law the scope of ‘indemnity’ is restricted to cases where there is a promise to indemnify against loss caused: (a) by the promisor himself or (b) by any other person. The definition excludes from its purview cases of loss arising from accidents like fire or perils of the sea. Loss must be caused by some human agency. Almost all insurances other than life and personal accident insurance are contracts of indemnity. Rights of indemnity -holder when sued: Section 125, defines the rights of an indemnity holder. These are as follows The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor – i. Right of recovering Damages - all damages that he is compelled to pay in a suit in respect of any matter to which the promise of indemnity applies. ii. Right of recovering Costs -all costs that he is compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor and has acted as it would have been prudent for him to act in the absence of the contract of indemnity, or if the promisor authorized him in bringing or defending the suit. iii. Right of recovering Sums -all sums which he may have paid under the terms of a compromise in any such suit, if the compromise was not contrary to the orders of the promisor and was one which would have been prudent for the promisee to make in the absence of the contract of indemnity, or if the promisor authorized him to compromise the suit. As per this section, the rights of the indemnity holder are not absolute or unfettered. He must act within the authority given to him by the promisor and must not contravene the orders of the promisor. Further, he must act with normal intelligence, caution, and care with which he would act if there were no contract of indemnity.

Contract of Guarantee What is continuing Guarantee? Explain the various modes of discharge of surety from his liability. (16) Explain the circumstances in which a surety can be discharged from his liability.(Essay) Section 129 defines Continuing guarantee as follows: “A guarantee which extends to a series of transactions is called a continuing guarantee’. Illustration: A, in consideration that B will employ C in collecting the rent of B’s zamindari, promises B to be responsible, to the amount of 5,000 rupees for the due collection and payment by C of those rents. This is a continuing guarantee. Case Law: Kay Vs Groves A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the four sacks. Thus the essence of a continuing guarantee is that it applies not to a specific number of transactions, but to any number of them and makes the surety liable for the unpaid balance at the end of the guarantee. A guarantee of this kind is intended to cover a number of transactions over a period of time. The surety undertakes to be answerable to the creditor for his dealings with the debtor. MODES OF DISCHARGE OF SURETY FROM LIABILITY: A surety is said to be discharged from liability when his liability comes to an end. The Act recognizes the following modes of discharge. 1. By revocation: Ordinarily a guarantee is not revocable when once it is acted upon. But a continuing guarantee can be revoked at any time by the surety by notice to the creditor. Once the guarantee is revoked, the surety is not liable for any future transaction however he is liable for all the transactions that happened before the notice was given. Case Law: Offord Vs Davies: The defendants guaranteed the repayment of bills to be discounted by the plaintiffs for Davies & Co. for twelve months not exceeding 600 pounds. The defendants revoked the guarantee before any bill was discounted. But the plaintiffs discounted the bills which remained unpaid. In the case of Lloyd's vs Harper 1880, it was held that employment of a servant is one transaction. The guarantee for a servant is thus not a continuing guarantee and cannot be revoked

as long as the servant is in the same employment. However, in the case of Wingfield vs De St Croin 1919, it was held that a person who guarateed the rent payment for his servant but revoked it after the servant left his employment was not liable for the rents after revocation. 2. By death of surety: (S. 131) A continuing guarantee is also determined by the death of the surety unless there is a contract to the contrary. But the termination becomes effective only for the future transactions. The surety’s heirs can be sued for liability already incurred, but only to the extent of the property inherited by them. 3. By variance:( Section 133): The surety is held discharged when without his consent the creditor makes any change in the nature or terms of his contract with the principal debtor. Case Law: Bonar Vs Macdonald: A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised and that he shall become liable for one- fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent and is not liable to make good this loss. 4. Release or discharge of principal debtor: (Section 134): This section provides for two kinds of discharge from liability. a) Release of Principal debtor: If the creditor makes any contract with the principal debtor by which the latter is released, the surety is discharges. Example: where the creditor accepts a compromise and releases the principal debtor, the surety is also released. b) Act or omission: When the creditor does any act or omission the legal consequence of which is the discharge of the “principal debtor”, the surety would also be discharged from his liability. Illustration: ‘A’ contracts with ‘B’ for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his suretyship. 5) Composition, Extension of Time and Promise not to sue: This section provides for three modes of discharge from liability. a) Composition b) Promise to give time and c) Promise not to sue the principal debtor. Composition: If the creditor makes a composition with the principal debtor, without consulting the surety, the latter is discharged.

Promise to give time: When the time for the payment of the guaranteed debt comes, the surety has the right to require the principal debtor to pay off the debt. It is the duty of the creditor towards the surety not to allow the principal debtor more time for payment. Promise not to sue: If the creditor under an agreement with the principal debtor promises not to sue him, the surety is discharged. But mere forbearance to sue does not discharge the surety. 6. By impairing surety’s remedy: If the creditor does any act which is inconsistent with the rights of the surety or omits to do any act which his duty to the surety requires him to do and the eventual remedy of the surtety against the principal debtor is impaired, then the surety is discharged. Illustration:

Continuing guarantee. What is contract of guarantee ? How it differ from continuing guarantee? Right of surety. Co-surety. The surety is a favoured debtor. Discuss. Define contract of guarantee. What are the effects of misrepresentation and concealment on contract of guarantee ? Explain. What are the rights of surety against the principal debtor, creditor and co-sureties?

BAILMENT: Introduction: Bailment implies a sort of relationship in which the personal property of one person temporarily goes into the possession of another. Delivering a cycle, watch, mobile for repair, delivering garments to dry-cleaner, delivering goods for carriage are all familiar situations which create the relationship of bailment.

Definition of bailment: Bailment is defined in Section 148 of the Contract Act, 1872, in the following words: “A bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the bailor. The person to whom they are delivered is called the bailee”. Explanation: If a person already in possession of the goods of another contracts to hold them as bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods, although they may not have been delivered by way of bailment. Essential features: The following essential features of bailment are emphasised by this definition. 1. Delivery of possession: The first important characteristic of bailment is “ the delivery of possession” by one person to another. But one who has custody of goods without possession, like a servant or a guest using his host's goods is not a bailee. Only possession but not the ownership of the goods is transferred. Delivery of possession may be by way of actual delivery or constructive delivery. 2. Delivery should be upon contract: Delivery of goods should be made for some purpose and upon a contract that when the purpose is accomplished the goods shall be returned to the bailor. When a person's goods go into the possession of another without any contract, there is no bailment within the meaning of its definition in Section 148. The contract may be express or implied. 3. Delivery should be upon some purpose: Bailment of goods is always made for some purpose and is subject to the condition that when the purpose is accomplished the goods will be returned to the bailor or disposed of according to his mandate. 4. Delivery is temporary:

The goods handed over to a bailee are intended to keep them in his possession for a limited time and for some purpose and not permanently. After the prescribed time, or after fulfilling the specific purpose, it is the duty of the bailee to return it. The delivery is only temporary. RIGHTS OF BAILOR: The following are the rights of bailor. 1. Right to take back the goods bailed: As per Section 148 of the Contract Act, the bailor can take back the goods bailed after the fulfilment of specific purpose or after completion of the time fixed or within a reasonable time. 2. Right to terminate the bailment: (Section 154) A bailor has a right to terminate the bailment and claim damages if the conditions of bailment are disobeyed by the bailee. For example: A lets B, for hire, a horse for his own riding. B drives the horse in his carriage. A can terminate the contract of bailment if he wants to do so. 3. Right to demand return of goods: (Section 159) In the case of gratuitous bailment, the bailor can demand the return of goods whenever he pleases even though he lent them for a specific time or purpose.` 4. Right to claim the increase or profit from goods bailed: (Section 163): In the absence of any contract to the contrary, bailor is entitled to claim any increase or profit from the goods bailed. For example, A leaves a cow in the custody of B to be taken care of. The cow has a calf. A is entitled to take the calf as well as cow. 5. Right to claim damages due to mixing up of goods (Section 156): The bailor has a right to have his separate goods when his goods are mixed with the goods of the bailee without bailor's consent. 6. Right to claim proportionate share in mixed goods (Section 155): The bailor shall have an interest in proportion to his respective share in this mixure if the bailor consents to mix his goods with the goods of the bailee. 7. Right for enforcement of bailee's duties: The bailor can enforce, by suit, all the liabilities or duties of the bailee as bailor's right. 8. Right to sue: If a third person wrongfully deprives the bailee of the use or possession of the goods bailed, or does any injury, the bailor may bring a suit against the third person for such deprivation or injury.

DUTIES OF BAILOR: The duties of the bailor are as follows: 1. Duty to disclose faults in the goods bailed (Section 150): It is the duty of the bailor to disclose defect or facts in the goods bailed which are known to him. If the bailment is for the consideration the bailor is responsible for the loss sustained by the bailee on account of the defect of the goods bailed. The bailor in case of gratuitous bailment is not responsible for those defects of which he was not aware of. If the bailment is non- gratuitous, the bailor is laible for known as well as unknown faults. 2. Bailor is liable to repay necessary expenses: (Section 158): The bailor shall bear all the extraordinary expenses incurred by the bailee in carrying the goods bailed or doing some work upon them. 3. Bailor’s responsibility to bailee to compensate: (Section 164): The bailor is responsible to the bailee for any loss due to his imperfect title in the goods. 4. To receive back the goods: It is the duty of the bailor to receive back the goods when the bailee returns them after the expiry of the time or period of bailment. RIGHTS OF BAILEE: 1. Right to compensation:(Section 164): 2. If the bailor has no right to bail the goods, or to receive them back, or to give directions respecting them and consequently the bailee is exposed to some loss, the bailor is responsible for the same. 2. Right to expenses or remuneration (Section 158): A bailee is entitled to recover his agreed charges. But where there is no such agreement at all, the bailee has a right to ask the bailor for payment of necessary expenses incurred by him for the purpose of bailment. 3. Right of lien (Sections 170 &171): If the bailee's lawful charges are not paid he may retain any property until the charges due in respect of the property are paid. This is called as right of lien. For example, A gives mobile for repair to B. The repair work is done but A has not paid the repair charges. B can retain the mobile until his repair charges are paid. 4. Right to sue (Section 180 &181): A bailee can bring an action against any person who has wrongfully deprived him of the use or possession of the goods bailed or has done them any injury. The bailee's rights and remedies against the wrongdoer are just the same as those of the owner. Whatever is obtained by way of

compensation shall, as between the bailor and bailee, be dealt with according to their respective interests. DUTIES OF BAILEE: The following are the duties of every bailee. 1. Duty of reasonable care (Section 151 &152): As provided in the Contract Act, in all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence under similar circumstances, take of his own goods. However the bailee, in the absence of any contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken reasonable amount of contract. He would also be not liable for loss or damage due to causes beyond his control. e.g.: natural calamities. 2. Duty not to make unauthorised use: Goods must be used by the bailee strictly for the purpose for which they have been bailed to him. Any unauthorised use of the goods would make the bailee absolutely liable for any loss or damage to the goods. If the bailee does any act which is inconsistent with the conditions of bailment, the bailor has an option to terminate the bailment. 3. Duty not to mix: (Section 155-157): The bailee should maintain the separate identity of the bailor's goods. He should not mix his own goods with those of the bailor and without his consent. If the goods are mixed with the consent of the bailor, both will have a proportionate interest in the mixure. If the mixure is made without bailors consent and if the goods can be separated, the bailee is bound to bear the expenses of separation. But if the mixure cannot be separated, then the bailee must compensate the bailor for his loss. 4. Duty to return ( Sections 160 &161): When the purpose of bailment is accomplished or the time for which the goods were bailed has expired, the bailee should return the goods to the bailor without demand. If he fails to do so, he will keep the goods at his risk and will be responsible for any loss. 5. Duty not to set up any adverse title( jus tertii) against the bailor: The bailor should not deny the title of bailor. He should not set up his own title or that of a third party.Even if there is a person who has a better title to the goods than that of the bailor or who claims ownership of the goods, the bailee may safely return the goods to the bailor and he will not be liable to the owner for conversion. 6. Duty to return increase (Section 163): Bailee is bound to deliver to the bailor any increase or profit accruing from the goods bailed during the period of bailment. Illustration: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as cow. PLEDGE:

Section 172 defines pledge as follows: “ The bailment of goods as security for the payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. Thus pawn or pledg...