Contracts of Agency, Indemnity and Guarantee

BY Sheetal Jain Rahul Sahu Rahul Modi Mayank Sharma

Contracts of Agency

Sec 182 of the Indian contract act,1872 defines Agent and Principal as: Agent means a person employed to do any act for another or to represent another in dealing with the third persons and The principal means a person for whom such act is done or who is so represented.

Essentials of relationship of Agency

Agreement Intention to act on the behalf of the principal.

Creation of agency

Any person who is of the age of majority and is of sound mind may employ an agent.(section183) Between the principal and the third persons, any person may become an agent. But no person who is a minor and of unsound mind can become an agent.(184) No consideration is necessary to create an agency.(185) It is not essential that a contract of agency be entered in to. It is sufficient if a person acts on behalf of another and is accepted by the latter.

Creation of agency

1. 2.

An agency can be created either in writing or orally. An oral appointment is a valid appointment even though the contract of agency by which agent is authorized has to be in writing. Creation of Agency Express Agreement Implied Agreement

Types of Implied Agency

Agency by Estoppel or Holding out Agency by Necessity Agency by Ratification

Types of Agents

Special agents General agents Universal agents Co-agents Sub-agents Substituted agents

Further classification of Agents

Factor Broker Auctioneer Commission Agents Del-credere agents Forwarding agents Clearing agents Identing agents

RIGHTS AND DUTIES OF PARTIES

Duties of Agent An agent is bound to conduct the business of his principal according to the directions given, or in the absence of directions, according to the custom. An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business unless the principal has notice of his want of skill. An agent is bound to render proper accounts to his principal, and has duty, irrespective of any contract to that effect, to produce vouchers by which items of disbursement are supported as part of the obligation to render proper accounts to the principal on demand.(section213)

It is duty of an agent in cases of difficulty, to use all reasonable diligence in communicating with his principal and seeking to obtain his instruction (section214) An agent should not set up an adverse title to the goods which he receives from the principal as an agent. An agent is duty bond to pay sums received to the principal on his account.

An agent must not use confidential information entrusted to him by his principal for his own benefit or against the principal. The agent must not make secret profit from the extract agency. He must disclose any extra profit that he may make. An agent must not allow his interest conflict with his duty. For example, he must not compete with his principal. An agent must not delegate his authority to a sub-agent . This rule is based on the principle Delegatus non protest delegare a delegate cannot further delegate(section190).

RIGHTS OF AGENT

The agent has a right to retain any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of his remuneration and advances made or expenses properly incurred by him in conducting such business. The agent has a right to receive remuneration. Right of lien: In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property.

RIGHTS OF AGENT

The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. Where he has bought goods for his principal by incurring a personal liability, he has a right of stoppage in transit against the principal, in respect of the money which he has paid or is liable to pay. Where he is personally liable to the principal for the price of the goods sold, he stands in the position of an unpaid seller towards the buyer and can stop the goods in transit on the insolvency of the buyer.

RIGHTS OF PRINCIPAL

Right to repudiate the Transaction To claim any resulted benefit from Agency Right to Recover Damages To Resist Agents claim for Indemnity

DUTIES OF PRINCIPAL

To indemnify against consequences of all lawful acts of agent To indemnify the agent against consequences of acts done in good faith To pay compensation against agents injury To pay the agent the commission or other remuneration agreed.

TERMINATION OF AGENCY
According to section 201, an agency is terminated by: By an agreement between the parties, or By the principal revoking his authority; or By the agent renouncing the business of agency; or By the business of agency being completed; or By either the principal or the agent dying or becoming of unsound mind; or

TERMINATION OF AGENCY

By the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for relief of insolvent debtors.

AGENCY MAY BE TERMINATED BY

Agreement Revocation of authority by the principal By operation of Law

By operation of Law

On performance of the contract. Where an agent is appointed to perform a specified transaction, his authority comes to an end on the completion of the said transaction. On expiry of time. When the agent or the principal dies or becomes of unsound mind. The death of the agent terminates his authority. The death of one of the joint agents will terminate the agency only as far as he is concerned, while it will continue to be valid as regards the other surviving agents in the absence of contrary intention.

BY OPERATION OF LAW

On the insolvency of the principal On the destruction of the subject matter. On the principal becoming an alien enemy. On the dissolution of a company. On termination of sub-agents authority.

EXCEPTIONS
Irrevocable Agency:- When an agency cannot be put an end to, it is said to be irrevocable agency. An agency is irrevocable where the agent himself has an interest in the property which forms the subject-matter of the agency. Time when Termination takes Effect:The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him. As regards third persons, it terminates when it comes to their notice.

INDEMNITY

A contract of Indemnity is a contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Illustration- A contracts to indemnify B against the consequence of any legal proceedings which C may take against B in respect of a certain sum or Rs. 2,00,000

A person who promises to make good the loss ,i.e., the promisor is called the indemnifier and the person whose loss is to be made good ,i.e., the promisee is called the indemnity holder or the person who is indemnified. E.g.- A contract of Insurance other than life insurance is a kind of contract o Indemnity

Rights of indemnity holder

Damages- An indemnity- holder when sued is entitled to recover from the indemnifier Costs- All costs which he may be compelled to pay in any such suit in defending it Suits for specific performancean indemnity holder can sue for specefic performance of the contract of indemnity

Contract Of Guarantee

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"; the person in respect of whose default the guarantee is given is called the "principal debtor ", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written.

I.

Guarantee may be: Written Oral PARTIES in a contract of guarantee Surety/Guarantor-- The Person who gives Guarantee Creditor--the person in whose favor guarantee is given

Principal Debtor--the person who primarily incurrs liability/debt

Nature of a Contract of Guarantee Primary Contract. Primary contract between Principal Debtor and Creditor. Secondary Contracts. a) The Contract between surety and creditor and b) Contract between surety and principal debtor

Characteristics or essentials of contract of guarantee Following are the characteristics or essentials of contract of guarantee: i. Tripartite agreement: In a contract of guarantee, there are three parties namely: principal creditor, creditor and surety. Under this contract, three separate contracts are made among them and consent of all the three parties is necessary. The contracts connecting each-other as contract between:

a. the principal debtor and creditor,

b. the creditor and surety, and

c. the surety and principal debtor,

ii. Liability: Under such contract the primary liability is of the principal debtor and only secondary liability is of the surety. As a conditional contract, liability of the surety arises only when the principal debtor (primarily liable) defaults. iii. Essentials of valid contract: It is also as same as other general contract in respect of essentials. All the requirements for valid contract, i.e. free consent, consideration, lawful object, competency of the parties etc. are necessary to form this kind of contract. But, in respect of consideration, no direct consideration in the contract between the surety and creditor. Consideration of principal debtor is considered to be adequate for the surety. iv. Written form: A contract relating to guarantee must be concluded in writing in Nepal and England. But, the Indian legal framework does not compel to form such contract in Written form. Both written and oral is valid in India.

Kinds Of Guarantee. pecific Guarantee or (Ordinary S Guarantee). --this guarantee is restricted to a specific transaction or engagement. For example availing a loan from a bank. ontinuing Guarantee: C --Such guarantee covers a series of transactions. For example guarantee furnished to a supplier for making supplies during the next one year.

Distinction Between Indemnity & Guarantee

Indemnity.
1)Number Of Parties a) Indemnifier b) Indemnity holder
1)

Guarantee.
Three Parties a)Creditor b) Principal Debtor c) Surety

2)Liability of indemnifier : is primary and independent from Principal debtor.

2) Liability of surety: is secondary ,it accrues when principal debtor fails to perform his obligation

3)Request :Indemnifier gives indemnity at his own not on the request of third party. 4)Purpose : Reimbursement of loss.

3)Guarantor: Surely furnishes/gives guarantee on the request of principal debtor. 4) Purpose: To secure performance of a contract (debt etc) by principal debtor.

5)Existence Of Liability: Liability of indemnifier arises only on the happening of a contingency/liabilit y. 6) Filing of Suit: Indemnifier cannot sue (in his name) except when there is an assignment of claim in his favor.

5)Liability already exist: Performance is guaranteed by the surety eg loan already existGuarantor promises performance of repayment of loan if P.D. defaults. 6) Surety after discharging his obligation can sue principal debtor.

Case study

Penelope Principal tells Ambika Agent, her sales agent, that under no circumstances does she have authority to make any warranties covering the chairs she sells for Penelope. No third party ever learns about Penelope's limitation on Ambika's authority. Then Ambika goes out and makes the prohibited warranties in a sale of 100 chairs to Tekla Third. The warranties Ambika makes are customary in the trade, Tekla knows this, and Tekla knows nothing about the limitation on Ambika's authority. Did Ambika have implied authority to bind Penelope here? What about apparent authority?

Case study

'A, thinking that he possesses authority to represent P in a certain transaction, but possessing no authority, nevertheless acts for P. Is A liable to the third party for damages suffered because of his lack of authority?

Case study

T, by reason of an error on the part of A, an agent for P, overpays to the extent of some $300 his account with P. Before A pays the money over to P, T discovers the error and demands the excess from A. Is A under a duty to return the money to T or may he turn it over to P?