Taxmann's Special Contracts

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© All rights reserved Price : ` 895 First Published : June 2026 Published by : Taxmann Publications (P.) Ltd. Sales & Marketing : 59/32, New Rohtak Road, New Delhi-110 005 India Phone : +91-11-45562222 Website : www.taxmann.com E-mail : sales@taxmann.com Regd. Office : 21/35, West Punjabi Bagh, New Delhi-110 026 India Printed at : Tan Prints (India) Pvt. Ltd. 44 Km. Mile Stone, National Highway, Rohtak Road Village Rohad, Distt. Jhajjar (Haryana) India E-mail : sales@tanprints.com Disclaimer Every effort has been made to avoid errors or omissions in this publication. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. It is notified that neither the publisher nor the author or seller will be responsible for any damage or loss of action to any one, of any kind, in any manner, therefrom. It is suggested that to avoid any doubt the reader should cross-check all the facts, law and contents of the publication with original Government publication or notifications.

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2^]cT]cb PAGE

About the Authors

I-5

Preface

I-7

Acknowledgement

I-9

List of Cases

I-27

CHAPTER 1 CONTRACTS OF INDEMNITY 1.1

Introduction

1

1.2

Meaning of Contract of Indemnity

2

1.2.1

Essentials of a Contract of Indemnity

4

1.2.2

Indemnity against Loss and Liability

5

1.2.3

Implied Contracts of Indemnity

6

1.2.4

Whether Section 124 is exhaustive of the Law of Indemnity?

7

1.2.5

Insurance as a Contract of Indemnity

8

1.3

1.4

Rights of the indemnity-holder

8

1.3.1

When can an indemnifier be made liable?

10

1.3.2

Limits on the indemnifier’s liability

12

Conclusion

13

Summary

13

CHAPTER 2 CONTRACT OF GUARANTEE 2.1

Introduction

16 I-11

I-12

CONTENTS PAGE

2.2

Meaning of a Contract of Guarantee

17

2.3

Essential features of a Contract of Guarantee

19

2.3.1

Tripartite relationship

19

2.3.2

Secondary liability of the Surety

20

2.3.3

Existence of a recoverable debt or liability

21

2.3.4

Written or oral nature of a Guarantee

21

2.3.5

Free Consent: Misrepresentation and Concealment in Contracts of Guarantee

22

2.3.6

Competency of parties

25

2.3.7

Consideration in a Contract of Guarantee

26

2.4

2.5

2.6

2.7

Nature and Extent of Surety’s Liability

29

2.4.1

Effect of statutory takeover on liability of guarantor

30

2.4.2

Enforcement of guarantee pending determination of principal debt

31

2.4.3

Guarantor’s liability without prior exhaustion of securities

31

2.4.4

Effect of statutory scaling down on the co-extensive liability of the surety

32

2.4.5

Personal Guarantors not discharged by corporate insolvency

33

Types of Guarantees

33

2.5.1

On the basis of the nature of liability

34

2.5.2

On the basis of the conditions

36

2.5.3

Bank Guarantees as Independent contracts

37

Rights of the Surety

38

2.6.1

Right of the surety against the principal debtor

39

2.6.2

Right of the surety against the creditor

42

2.6.3

Right of the surety against co-sureties

44

Discharge of Surety

47

2.7.1

Revocation of continuing guarantee (Sections 130 & 131)

47

2.7.2

Variance in terms of the contract (Section 133)

51

2.7.3

Release or discharge of debtor by creditor (Section 134)

54

2.7.4

Composition with principal debtor (Section 135)

55

CONTENTS

I-13 PAGE

2.7.5

Creditor’s act or omission impairing surety’s remedy (Section 139)

58

2.8

Difference between Contract of Indemnity and Guarantee

60

2.9

Conclusion

61

Summary

62

CHAPTER 3 BAILMENT 3.1

Introduction

64

3.2

Meaning and Definition of Bailment

66

3.3

Essential Elements of Bailment

67

3.4

Types of Bailments

78

3.4.1

Classification Based on Purpose

78

3.4.2

Classification Based on Consideration

78

3.4.3

Pledge - A Special Type of Bailment

79

3.5

Duties of the Bailee and Rights of Bailor

80

3.6

Duties of the Bailor and Rights of the Bailee

88

3.7

Finder of Goods

104

3.8

Termination of Bailment

105

3.9

Conclusion

107

Summary

107

CHAPTER 4 PLEDGE 4.1

Introduction

110

4.2

Meaning and Essentials of a Valid Pledge

111

4.2.1

Bailment of Goods (Delivery of Goods)

111

4.2.2

Bailment by way of security

113

4.2.3

Security for payment of debt or performance of a promise

114

4.3

Nature of a Contract of Pledge

115

4.3.1

Possessory nature of security

115

4.3.2

Transfer of special property, not ownership

116

I-14

CONTENTS PAGE

4.4

4.5

4.3.3

No right of enjoyment or beneficial use

117

4.3.4

Right of sale upon default

118

4.3.5

Pledgor need not be the absolute owner

118

4.3.6

Distinction between pledge and hypothecation (Non-possessory security)

119

4.3.7

Distinction between pledge and mortgage of movable property

119

Rights of Pawnee

121

4.4.1

Pawnee’s right of retainer

121

4.4.2

Pawnee’s right to extraordinary expenses

122

4.4.3

Pawnee’s right to sue or sell on pawnor’s default

123

4.4.4

Pawnee’s right to sub-pledge

130

4.4.5

Right of the pawnee to sue third parties

131

Rights of Pawnor

131

4.5.1

Pawnor’s right of redemption

132

4.5.2

Right to receive the surplus after sale

134

4.5.3

Right to accretions to the pawned goods

134

4.6

Persons competent to create a valid pledge (Who can Pledge?)

135

4.7

Conclusion

140

Summary

140

CHAPTER 5 AGENCY- MEANING, NATURE AND CREATION 5.1

Introduction

142

5.2

‘Procedure’ for Creation of Agency

143

5.3

Statutory requirements for contract of agency

145

5.4

Test to establish agency

147

5.4.1

Agency depends upon the substance than the form

148

5.4.2

Complexities of principal - Agent relationship

149

5.5

Distinguishing principal - Agent relationship from similar relations

152

5.6

Kinds of Agents

153

5.7

Appointment of Agent and Creation of Agency

156

5.7.1

156

Actual Authority

CONTENTS

I-15 PAGE

5.8

5.7.2

Apparent Authority/Ostensible Authority

158

5.7.3

Agency in Emergency

164

5.7.4

Agency by Ratification

165

Conclusion

171

Summary

172

CHAPTER 6 RELATIONSHIP BETWEEN PRINCIPAL AND AGENT 6.1

Introduction

173

6.2

Relation of Principal with Agent, Sub-agent and Substituted Agent

174

6.2.1

Appointment of sub-agent

175

6.2.2

Substituted agent

177

6.3

Difference between sub-agent and substituted agent

179

6.4

Duties of Agent

180

6.4.1

Duty not to delegate (Sections 190-193)

181

6.4.2

Duty to follow the directions (Section 211)

181

6.4.3

Duty to communicate (Section 214)

182

6.4.4

Exercise of skill and diligence (Section 212)

182

6.4.5

Duty to render accounts (Section 213)

185

6.4.6

Duty to remit sums (Section 218)

187

6.4.7

Duty of good faith (Sections 215 and 216)

188

6.5

Rights of Agent

193

6.6

Conclusion

200

Summary

200

CHAPTER 7 RELATIONSHIP OF PRINCIPAL AND AGENT WITH THIRD PARTY 7.1

Introduction

201

7.2

Relation of principal and third party

202

7.2.1

Effect of exceeding authority

203

7.2.2

Effect of notice

205

I-16

CONTENTS PAGE

7.3

7.4

7.5

7.2.3

Liability of principal in case of ostensible authority

207

7.2.4

Principal’s liability for agent’s misrepresentation and fraud

210

Relation of agent with third party

215

7.3.1

General rule about agent’s liability

215

7.3.2

Presumption of ‘contract to the contrary’

216

Personal Liability of Agent - Exceptions to the general rule

217

7.4.1

Agent undertaking liability by a contract to the contrary

218

7.4.2

Presumed liability under (Section 230)

222

7.4.3

Doctrine of Undisclosed Principal (Sections 230 -232)

225

7.4.4

Personal liability for unauthorised acts

228

Conclusion

230

Summary

230

CHAPTER 8 TERMINATION OF AGENCY 8.1

Introduction

232

8.2

Modes of termination

233

8.2.1

Termination by agreement

234

8.2.2

Revocation and renunciation of ‘authority’

234

8.2.3

Death or insanity of Principal or Agent

243

8.2.4

Insolvency of Principal

244

8.3

Effect of termination

244

8.4

Effect of death or unsoundness of mind (Section 209)

245

8.5

When does revocation become effective? (Section 208)

245

8.6

Conclusion

248

Summary

248

CHAPTER 9 FORMATION OF CONTRACT OF SALE 9.1

Introduction

251

9.2

Meaning and Essentials of a Contract of Sale (Section 4)

252

CONTENTS

I-17 PAGE

9.2.1

Two Distinct Parties - Seller and Buyer

253

9.2.2

Goods - The Subject Matter of Sale

254

9.2.3

Transfer or agreement to transfer property

271

9.2.4

Price: Consideration for a Sale

273

9.3

Statutory Sale: Is it a Sale under the Sale of Goods Act, 1930?

278

9.4

Sale distinguished from other contracts

279

9.4.1

Sale and Exchange (Barter)

280

9.4.2

Sale and Gift (Movable Property)

282

9.4.3

Sale and Bailment

283

9.4.4

Sale and Hire-Purchase

284

9.5

9.6

Auction Sales

286

9.5.1

Meaning and Nature of Auction Sales

286

9.5.2

Completion of Sale and Passing of Property

287

9.5.3

Seller’s Right to Bid and Reserve Price

288

9.5.4

Role and Liability of the Auctioneer

289

9.5.5

Validity of Knock-Out (Ring) Agreements in Public Auctions

289

Conclusion

290

Summary

290

CHAPTER 10 CONDITIONS AND WARRANTIES 10.1

Introduction

293

10.2

Conditions and Warranties

295

10.2.1

Meaning of Condition and Warranty (Section 12)

295

10.2.2

Legal consequences of breach of Condition and Warranty

297

10.3

Classification of Stipulations in a Contract of Sale

304

10.3.1

Express Stipulations

305

10.3.2

Implied Stipulations

306

10.4

Implied Conditions under the Sale of Goods Act, 1930

308

10.5

Implied Warranties under the Sale of Goods Act, 1930

331

10.6

Stipulations as to Time (Section 11)

334

I-18

CONTENTS PAGE

10.7

Conclusion

339

Summary

339

CHAPTER 11 TRANSFER OF PROPERTY IN GOODS 11.1

Introduction

341

11.2

Meaning of ‘Specific’ and ‘Unascertained’ Goods

343

11.3

Rules regarding transfer of property in Specific Goods

344

11.4

Rules regarding transfer of property in Unascertained Goods

360

11.5

Risk prima facie passes with property

370

11.6

Nemo Dat Quod Non Habet

375

11.6.1

379

11.7

Exceptions to the Rule of Nemo Dat Quod Non Habet

Conclusion

395

Summary

395

CHAPTER 12 PERFORMANCE OF THE CONTRACT 12.1

Introduction

397

12.2

Duties of Seller and Buyer (Section 31)

398

12.3

Payment and Delivery are concurrent conditions (Section 32)

400

12.4

Meaning and Modes of Delivery

403

12.5

Rules of Delivery

404

12.5.1

What constitutes delivery? (Section 33)

405

12.5.2

Effect of part delivery (Section 34)

406

12.5.3

Buyer to apply for delivery (Section 35)

406

12.5.4

Place, time and other rules of delivery (Section 36)

408

12.5.5

Delivery of wrong quantity (Section 37)

413

12.5.6

Instalment deliveries (Section 38)

418

12.5.7

Delivery to carrier or wharfinger (Section 39)

421

12.5.8

Risk where goods are delivered at a distant place (Section 40)

424

12.5.9

Examination, acceptance and rejection of goods (Sections 41, 42 and 43)

427

CONTENTS

I-19 PAGE

12.6

Conclusion

435

Summary

435

CHAPTER 13 RIGHTS OF UNPAID SELLER 13.1

Introduction

438

13.2

Statutory Meaning of Unpaid Seller (Section 45)

439

13.3

Rights of the Unpaid Seller against the Goods (Section 46)

441

13.3.1

442

13.4

13.5

13.6

13.7

Position of the unpaid seller at different stages of the contract

Unpaid Seller’s Lien

445

13.4.1

Essentials of Seller’s Lien (Section 47)

446

13.4.2

Termination of Lien (Section 49)

451

13.4.3

Effect of decree for price on Unpaid Seller’s Lien (Section 49(2))

454

13.4.4

Effect of sub-sale or pledge by buyer (Section 53)

454

13.4.5

Seller’s right against pledgee (Section 53(2))

456

Stoppage in Transit

456

13.5.1

Essentials of Stoppage in Transit (Section 50)

458

13.5.2

Duration of Transit (Section 51)

459

13.5.3

When does Transit end?

460

13.5.4

How Stoppage in Transit is effected? (Section 52)

465

13.5.5

Position as between Seller and Carrier

466

Right of Resale

467

13.6.1

Essentials of Right of Resale (Section 54)

469

13.6.2

Scope of Right of Resale

469

13.6.3

Circumstances giving rise to the Right of Resale

472

13.6.4

Effects and Legal consequences of Resale

476

Conclusion

478

Summary

478

CHAPTER 14 SUITS FOR BREACH OF CONTRACT 14.1

Introduction

480

I-20

CONTENTS PAGE

14.2

14.3

Seller’s Remedies

481

14.2.1

Action for the price (Section 55)

482

14.2.2

Damages for non-acceptance (Section 56)

486

Buyer’s Remedies

491

14.3.1

Damages for non-delivery (Section 57)

491

14.3.2

Specific Performance (Section 58)

493

14.3.3

Remedies for Breach of Warranty (Section 59)

496

Repudiation of contract before the due date (Section 60)

500

14.4.1

Measure of Damages

501

14.4.2

Measure of Damages where goods are deliverable

by Instalments

501

14.5

Interest by way of damages and special damages (Section 61)

502

14.6

Conclusion

504

14.4

Summary

504

CHAPTER 15 EVOLUTION AND CONCEPTUAL FOUNDATIONS OF PARTNERSHIP LAW: MEANING, NATURE AND KINDS OF PARTNERSHIPS 15.1

Introduction

507

15.2

Historical Development of Partnership Law

507

15.3

Position under the Indian Contract Act, 1872

508

15.4

Need for a Separate Partnership Legislation

508

15.5

The Indian Partnership Act, 1932: Enactment and Enforcement

509

15.6

Relationship between the Indian Contract Act, 1872 and the Partnership Act, 1932

509

15.7

Conceptual Foundations of Partnership Law

510

15.7.1

Firm not a distinct legal entity

510

15.7.2

Mutual Agency

511

15.7.3

Joint and Several Liability

511

15.7.4

Restriction on the maximum number of partners

511

15.7.5

Retrospectivity and Transitional Provisions

511

15.8

Statutory Definitions - Introductory Overview

512

CONTENTS

I-21 PAGE

15.9

15.8.1

Act of a firm

512

15.8.2

Business

512

15.8.3

Third party

513

Contemporary Relevance of Partnership

15.10 Meaning and features of partnership

513 514

15.10.1 Agreement

514

15.10.2 Business

517

15.10.3 Profit sharing

518

15.10.4 Mutual Agency

519

15.11 Nature of partnership

520

15.11.1 Not a legal entity

520

15.11.2 Pooling of resources

520

15.11.3 Firm and Firm name

521

15.11.4 Partnership different from Hindu Undivided Family business

522

15.12 Test of partnership

525

15.12.1 Profit sharing - Not a conclusive proof of partnership

526

15.12.2 The real test - Substance of partnership

527

15.13 Classification of Partnerships

531

15.13.1 Partnership at will

532

15.13.2 Particular partnership

534

15.14 Conclusion

536

Summary

536

CHAPTER 16 RELATIONS OF PARTNERS 16.1

16.2

Introduction

541

16.1.1

Basis of partners’ relations inter se

541

16.1.2

Liberty to determine rights and duties by agreement

541

16.1.3

Agreement validating restraint of trade

542

16.1.4

Compulsory duties

542

Duties of the partners

543

16.2.1

544

Duty of good faith

I-22

CONTENTS PAGE

16.3

16.2.2

Duty of greatest common advantage

544

16.2.3

Fiduciary relation

545

16.2.4

The duty of full disclosure

546

16.2.5

Duty to render true accounts

547

16.2.6

Duty to Indemnify for fraud

547

16.2.7

Duty of due diligence

548

16.2.8

Duty to make proper use of firm property

548

16.2.9

Duty to account for personal profits

550

Rights of Partners

552

16.3.1

Right to take part in the conduct of business

552

16.3.2

Right of majority

553

16.3.3

Right to have access to books

555

16.3.4

No Right to remuneration unless agreed

555

16.3.5

Right to profits

556

16.3.6

Right to interest

557

16.3.7

Right to indemnity

559

16.4

Effect of continuance of partnership on rights and duties of partners

559

16.5

Property of the firm

562

16.5.1

No formalities required for bringing in personal property into common stock

563

16.5.2

Nature of partnership property

563

16.5.3

Personal property distinct from partnership property

563

16.5.4

Personal property does not become partnership property unless intended

564

16.5.5

Goodwill as partnership property

564

16.6

Conclusion

566

Summary

566

CHAPTER 17 RELATION OF PARTNERS TO THIRD PARTIES 17.1

Introduction

569

17.2

Partner’s position in the firm

570

CONTENTS

I-23 PAGE

17.2.1 17.3

Act of the firm

571

Acts of partners binding the firm

571

17.3.1

Acts done under implied authority (Section 19)

571

17.3.2

Acts done in an emergency (Section 21)

584

17.3.3

Effect of notice (Section 24)

585

17.3.4

Joint and several liability of partners (Section 25)

586

17.3.5

Liability of the firm for wrongful acts of a partner (Sections 26 & 27)

587

17.3.6

Liability for misapplication (Section 27)

588

17.3.7

Liability of firm for holding out or estoppel (Section 28)

588

17.4

Rights of transferee of a partner’s interest

591

17.5

Position of minor in a partnership

594

17.6

Conclusion

602

Summary

603

CHAPTER 18 INCOMING AND OUTGOING PARTNERS 18.1

Introduction

608

18.2

Incoming of a partner

609

18.2.1

Consent of all partners to admit new partner

610

18.2.2

Commencement of liability from date of admission

610

18.2.3

New partner may admit old liability - By novation

610

18.2.4

No exemption from pre-existing liability in case of minor admitted to benefits of partnership

612

18.3

Outgoing partner

612

18.3.1

Modes of retirement of a partner

613

18.3.2

Effect of retirement

617

18.3.3

Effect of public notice

618

18.3.4

Rights of outgoing partner

621

18.3.5

Right to share subsequent profit

623

I-24

CONTENTS PAGE

18.3.6 18.4

Revocation of continuing guarantee

Conclusion

625 626

Summary

626

CHAPTER 19 DISSOLUTION OF A FIRM 19.1

Introduction

630

19.2

Dissolution of firm - Meaning

630

19.2.1

Dissolution - A mixed question of law and fact

631

19.2.2

Dissolution and reconstitution

631

19.3

19.4

Modes of dissolution

632

19.3.1

Dissolution by consent or agreement (Section 40)

633

19.3.2

Compulsory Dissolution (Section 41)

633

19.3.3

Dissolution on the happening of certain contingencies (Section 42)

634

19.3.4

Dissolution by notice of partnership at will (Section 43)

639

19.3.5

Dissolution by court (Section 44)

641

Consequences of dissolution

647

19.4.1

Liability of firm after dissolution (Section 45)

648

19.4.2

Right to sue for winding-up after dissolution

651

19.4.3

Mode of settlement of accounts between partners

652

19.4.4

Order for the application of property

654

19.4.5

Continuance of partnership post-dissolution for limited purposes

654

19.5

Personal Profits earned after Dissolution by Death

655

19.6

Right to Refund of Premium (Section 51)

656

19.7

Rights where Partnership Contract is rescinded for Fraud or Misrepresentation

659

19.8

Right to Restrain from use of Firm name or Firm Property (Section 53)

660

19.9

Agreement in Restraint of Trade (Section 54)

661

19.10 Sale of Goodwill

662

19.11 Conclusion

665

Summary

666

CONTENTS

I-25 PAGE

CHAPTER 20 REGISTRATION OF FIRMS 20.1 20.2

20.3

20.4

20.5

20.6

20.7

Introduction

672

20.1.1

673

Registration not compulsory

Registration of Firms

673

20.2.1

Powers of the State Government

673

20.2.2

Application for registration

675

20.2.3

Procedure for recording changes

678

Effect of non-registration under section 69 - Disability to sue

681

20.3.1

No compulsion for a partner to apply for registration

682

20.3.2

Registration as a pre-condition to filing a suit

683

20.3.3

Can registration of firm be subsequent to filing of suit?

684

20.3.4

Relevance of date of registration

684

Section 69(1) : Disability to file suit against firm or co-partners

685

20.4.1

Section 69(1): “Arising out of a contract” between partners

685

20.4.2

Effect of non-registration on declaratory suit

686

Suits by Firm against third parties (Section 69(2))

687

20.5.1

Section 69(2) : Applicability of bar against suing

688

20.5.2

Set-off and Other Proceedings (Section 69(3) & (4))

688

Exceptions to the bar of Section 69

692

20.6.1

Suits for dissolution and accounts

692

20.6.2

Invoking arbitration clause after dissolution

693

20.6.3

Recovery of insolvent’s share (Section 69(3)(b))

694

20.6.4

Suit below value of Rs. 100 (Section 69(4)(b))

694

20.6.5

Firms of notified area (Section 69(4)(b))

694

20.6.6

Statutory, non-contractual and common law rights

694

Conclusion

696

Summary

697

SUBJECT INDEX

701

C H A P T E R

5

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SYNOPSIS 5.1 Introduction 5.2 ‘Procedure’ for Creation of Agency 5.3 Statutory Requirements for contract of agency 5.4 Test to Establish agency 5.4.1 Agency depends upon the substance than the form 5.4.2 Complexities of Principal–Agent Relationship 5.5 Distinguishing principal - Agent relationship from similar relations 5.6 Kinds of Agents 5.7 Appointment of Agent and Creation of Agency 5.7.1 Actual Authority 5.7.2 Apparent Authority/Ostensible Authority 5.7.3 Agency in Emergency 5.7.4 Agency by Ratification 5.8 Conclusion Summary

5.1 INTRODUCTION ‘Agency’ is a comprehensive term which is used to describe the relationship that arises when one person is appointed to act as the representative of another to create legal relation with third parties.1 The person appointing another as his representative is the ‘principal’, and the person authorised to be his ‘representative in creating legal relation with the third person’ is the ‘agent’. An agent works for his principal within the ‘scope of authority’ given 1. CHESHIRE AND FIFOOT’S LAW OF CONTRACT 421 (M.P. Furmston, ed. 10th ed. 1981).

142

AGENCY - MEANING, NATURE AND CREATION

143

to him by the principal. In his dealings with third party, the agent represents the principal. The contract thus made through the agent does not bind him, instead it binds the principal, since it is the principal’s contract. The doctrine underlying agency is that he who does an act through another is deemed in law to do himself.2 Even two principals (co-principals) can jointly appoint an agent for the matters in which both of them are jointly interested; while also two persons can be appointed as agents, where the principal shall be bound by the acts of either unless the contract of agency requires them to act jointly.3 Agent

Principal

Third Party

Agency, even in its simplest form, is triadic. It involves a third party, an agent, and a principal. The principal and agent interact directly, as do the agent and third party. The principal, however, does not interact directly with the third party; instead, the agent’s interaction with the third party, creates a binding contract between the principal and the third party. Once contract is made, the agent has no further role to play. The relationship of authority between principal and agent determines who is bound by the contract the agent enters.4 ‘Authority’ of an agent derived from principal signifies his ‘capacity to bind’ his principal.

The representative character and the derivative authority are essentials for establishing a principal-agent relationship. Acts of agent within the scope of authority derived from his principal, bind the principal; while acts beyond the scope of authority bind the agent as they are not the acts for which he can be said to be invested with legal power to alter his principal’s legal relations with third parties.5

5.2 ‘PROCEDURE’ FOR CREATION OF AGENCY Agency is founded upon contract- express or implied. There is no specific procedure prescribed by the Indian Contract Act, 1872 for the creation of 2. This principal is incorporated in section 226 of the Indian Contract Act, 1872; see also Municipal Corpn. of Delhi v. Jagdish Lal, (1969) 3 SCC 389.

3. Syed Abdul Khader v. Rami Reddy, (1979) 2 SCC 601.

4. Gabriel Rauterberg, The Essential Roles of Agency Law, 118 MICH. L. REV. 609, 626 (2020).

5. See CHESHIRE, supra note 1, at 421.

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agency. The Act lays down certain general principals in wide terms about agency which are not exhaustive. The question of agency is one of intention to be gathered from terms of contract and the surrounding circumstances. In general, a formal contract is not mandatory to establish an agency relationship,6 it may exist solely on the conduct of the parties involved.7 However, there may be requirements that need to be fulfilled as per provisions of law in specific situations. a. Specific requirements under different laws As per the Indian Contract Act, 1872, the appointment of an agent does not need to be in writing unless it is required by any specific law. For example, the appointment of a pleader to appear or act for a person must be in writing as prescribed by Order 3, Rule 4 of the Code of Civil Procedure, and cannot be revoked by the mere will of the client.

Likewise, according to the Powers of Attorney Act, 1882 authority by the appointer is to be given to the donee in writing, with his own name, signatures and seal, to act for and in the name of person executing it.8 According to Section 105, Companies Act, 2013 the appointment of a proxy to attend meetings and vote on behalf of a member has to be in writing and duly signed by the appointer. b. Appointment of agent under statutory powers An agent may be appointed by a person other than the principal. It may be appointment under statutory powers by a person appointed to represent an estate9 or appointment by a guardian10. c. Restrictions to be appointed as an agent Certain restrictions may be imposed on who may be appointed as an agent. For example, under the Advocates Act, 1961 only an advocate can represent a person in court.11

6.

7.

8.

9.

10.

11.

State of Bihar v. Dukhulal Das, AIR 1962 Patna 140.

Babulal Shah v. SS (Fixed Delivery) Merchants Assn, AIR 1960 Bom 548.

Section 2, the Powers of Attorney Act, 1882.

Sukumari Gupta v. Dhirendra Nath Roy Chowdhury, AIR 1941 Cal 643.

Ramlochan Ram Lakshmi Prasad v. Maikha Sethani, AIR 1960 Pat 271.

See Section 29, Advocates Act, 1961.

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5.3 STATUTORY REQUIREMENTS FOR CONTRACT OF AGENCY Features of agency

S. 183 Principal should be competent to contract

S. 182 Agent’s representative character

S. 185 S. 184 Agent may or may No consideration for creation of not be competent agency to contract

S. 186 Agent’s authority may be express or implied

a. Principal should be competent to contract (Section 183) Section 183. Who may employ agent.—Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent.

The principal who employs an agent has to be competent to contract. A person incompetent to contract cannot do something through someone what he cannot do himself. For instance, a power of attorney executed by a person of unsound mind or a minor is void and the deed of transfer executed on the authority of such power is a nullity.12 b. Agent’s representative character Section 182.“Agent” and “principal” defined.—An “agent” is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.

A person who is competent to contract may appoint anyone on his behalf to do something that he can do personally. According to Section 182 “an ‘agent’ is a person employed to do any act for another, or to represent another in dealings with third persons. The agent has the power to create privity between the principal and the third party. The representative character of ‘agent’ distinguishes principal-agent relationship from master-servant relation, or relationship between an employer and his independent contractor. c. Agent may or may not be competent to contract Section 184. Who may be an agent.—As between the principal and third persons, any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained.

Section 184 declares that any person may become an agent. This means that a person who is not competent to contract may be appointed as an agent.

12. Lakhwinder Singh v. Paramjit Kaur, AIR 2004 P&H 6: 2003 (4) R.C.R. (Civil) 26 (in this case the power of attorney was executed by a minor principal, hence void).

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However, such an agent who is either a minor or a person of unsound mind, will not be responsible to his principal for any loss caused by him in conducting the business of agency. The principal takes upon himself the risk of appointing an incompetent person to be his representative in his dealings with the third persons. d. No consideration for creation of agency Section 185. Consideration not necessary.—No consideration is necessary to create an agency.

Section 185 declares that no consideration is necessary “to create an agency”. The section does not say that consideration is not required at all for a contract of agency. Unlike other contracts, principal-agent relationship may be created even if there was no consideration at the time of creation of agency. For example, law recognises agency in emergency, where no consideration is required to create agency. The absence of consideration does not invalidate the agency agreement. The authority of an agent to act on behalf of the principal remains intact even when no consideration is exchanged.13 The contract of agency is however, not without consideration. The agent is entitled to remuneration for all the business conducted by him.14 This remuneration is the consideration for his services. e. Agent’s authority may be express or implied Section 186. Agent’s authority may be expressed or implied.—The authority of an agent may be expressed or implied.

Section 187. Definitions of express and implied authority.—An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

A principal may appoint an agent by express words. But the authority of an agent may also be inferred from the facts and circumstances of the case, the ordinary course of dealing and communication between the parties- oral or written.

13. In every agency the commission of the agent is the consideration for his services. However, an agency may be created even without consideration. It is not uncommon for one person to act as an agent for another without consideration. Such a gratuitous agency may give rise to no different results than the more common contractual agency. For instance, X may ask for a favour from a boy living in his neighbourhood to buy grocery for him, or may send his driver to the market to buy something on credit for him. See THE LEGAL ENVIRONMENT AND BUSINESS LAW: EXECUTIVE MBA EDITION (v.1.0) Relationships between Principal and Agent, chapter 11).

14. See Section 219, the Indian Contract Act, 1872.

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5.4 TEST TO ESTABLISH AGENCY Agency relationships are not always created by formal agreements and may arise in different ways. There are various commercial relationships that resemble agency relationships in form but vary in substance. Therefore, it becomes essential to determine how their existence is established, and what legal tests courts apply to identify such relationships, and why the determination of agency is significant in fixing rights and liabilities among the parties involved.

In a significant judgment Bharti Cellular Ltd. (Now Bharti Airtel Limited) v.

Assistant Commissioner of Income Tax15, the Supreme Court elucidated the unique ‘triangular relationship’ between the principal, agent and the third party in agency relationships in determining the existence of a principal-agent or principal-principal relationship. It established a five factor test to qualify as an agent that must be examined: (a) Legal power to alter principal’s legal relationship: The most important criteria in determining whether someone is an agent is the legal power vested with the agent to alter his principal’s legal relationship with a third party and the principal’s co-relative liability to have his relations altered. (b) Degree of control : The second important test is to determine the degree of control exercised by the principal over the conduct of activities of the agent who acts on behalf of the principal. This degree of control is less than the control exercised by the master on the servant, and is different from the rights and obligations in case of principal to principal and independent contractor relationship. (c) Substance of relationship over nomenclature: Thirdly, the true nature of the relationship should be examined by reference to the functions, responsibility and obligations of the so-called agent to the principal and to the third parties.

The substance rather than the nomenclature of the relationship between the parties is of primary importance. (d) Fiduciary relationship: Fourthly, the task entrusted by the principal to the agent should result in a fiduciary relationship. The fiduciary relationship is the manifestation of consent by one person to another to act on his or her behalf and subject to his or her control, and the reciprocal consent by the other to do so. (e) Liability to render accounts: Lastly, the agent should be liable to render accounts for the business done on behalf of his principal’s account and should be entitled to remuneration from the principal for the work he performs for the principal.

The main criteria in determining whether someone is an agent, is the power of the agent to affect the principal’s position.16 The true factual position must be investigated to determine whether a relationship of agency has come into 15. [2024] 2 S.C.R. 1001: 2024 INSC 148.

16. Labreche v. Harasymiw, (1992) 89 DLR (4th) 95 at 107.

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existence between a set of parties or individuals. It is essential to examine each case in view of its unique facts and circumstances, and the nature, scope and extent of authority given to a person. In day to day life, the expression ‘agency’ is used to include a vast number of relationships, which are strictly, not relationships between a principal and agent.17

5.4.1 Agency Depends upon the Substance than the Form The agreement between the parties must be examined by the court to determine the true nature of relationship. Use of words like “agent” or “agency”, “buyer” or “seller” is not a conclusive proof that the said person is intended to be an agent, and thus it is not sufficient for the determination of existence of agency. As a matter of common practice the word agent is used in various trades as a suffix without any reference to the law relating to principal and agent, for example - placement agency, gas agency, motor agency, fashion agency etc.

The agency relationship must be clearly defined and not merely based on a superficial resemblance.18 The assessment of this relationship must be based on the true intention and the actual conduct of the parties involved, and not merely on the titles or labels used in agreements.19 Licensee not agent In A. Venkata Subba Rao v. State of Andhra Pradesh,20 the State of Madras under Essential Supplies (Temporary Powers) Act, 1946, appointed procurement agents (appellants) to procure rice from specified areas, at prices specified by the government. They had to deliver the foodgrains to the Government, or to persons nominated or to other licenced purchasers, with the purpose of regulation and control in the sale of foodgrains in order to deal with the scarcity of foodgrains.

These procurement agents (appellants) were solely responsible for managing the foodgrains. They held licences under the Licensing Order under the Madras Foodgrains Control Order, 1947 which referred foodgrains in their possession as their stocks. The procurement agents lacked the representative capacity in their dealings but acted only as a medium for the purchase and sale and were subjected to the directions and control of the government. The Government was authorised to direct the stock holders (licensees) to sell the commodity to the persons designated by the government under the relevant laws.

The Court held that there was no principal-agent relationship between the government and the procurement agents. The Court clarified that the description of the appellant in the Procurement Order and the agreement as “agent” was not decisive and it was rather essential to gather the real relationship by reference to the entire facts and circumstances.

17. Bharti Cellular Ltd. (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax, [2024] 2 S.C.R. 1001: 2024 INSC 148.

18. Laxminarayan Ram Gopal v. Government of Hyderabad, AIR 1954 SC 364.

19. Vijay Traders v. Bajaj Auto Ltd., (1995) 6 SCC 566.

20. AIR 1965 SC 1773.

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5.4.2 Complexities of Principal–Agent Relationship In the modern commercial world there are a number of situations where one person represents or acts for another, without creating principal-agent relationship. It is only when the representation or action on another’s behalf affects the latter’s legal position, that is to say his rights against, or his liability towards, other people, that the law of agency applies.21 For instance, a solicitor may start by giving advice (independent contractor), and then as a consequence make a contract for his employer with another person (as an agent). There could be another scenario, where two parties may be principal-agent in one capacity while employer-employee in another. For example, director of a company is an employee of the company, but in company’s dealings with the third parties, he acts as an agent.

The modern market practices have given rise to extremely complex and multi-dimensional commercial transactions. The relations that arise from such transactions cannot be simply described as principal-agent relationship.

The true nature of relationships needs to be examined on various parameters based on the facts of each case. This is important to fasten the liability arising from the transaction.

In Bhopal Sugar Industries Limited v. Sales Tax Officer22 the Supreme Court has acknowledged the evolving complexities of concept of sale, necessitated to meet the needs of the modern times. The relationship of the seller and buyer may be regulated through an agreement by imposing a number of restrictions on the buyer, e.g., fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidents of a sale.

In order to establish agency it is important to examine the followingone, whether the buyer sells on behalf of the seller or on his own behalf; two, whether the buyer sells his own property or that of the seller (means who owns the property); and three, whether loss by such sale is to be borne by the seller or the buyer.

The relationship may actually be of principal to principal, or independent contractors and not principal agent. The Court pointed out as follows: Law permits individuals to enter into complex contracts incorporating multiple rights and obligations. The relationships between contracting parties have become multi-dimensional, which may not strictly fall within an employer-employee, principal-agent or principal-principal relationship.

A singular contract may create different legal relationships and obligations.

Independent contractors on occasion act for themselves, and at other times may be creating legal relations between their employers and third persons.

21. Bharti Cellular Ltd. (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax, [2024] 2 S.C.R. 1001: 2024 INSC 148.

22. (1977) 3 SCC 147.

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A. Independent contractors and Franchise agreements The Supreme Court in Bharti Cellular Ltd.23 has elaborately analysed various commercial relationships resembling agency, which do not necessarily fall squarely within principal-agent relationship. The Court has cautioned that legal tests must be applied carefully to avoid the confusion arising from mere nomenclature, and emphasis should be placed on the real substance of the relationship. This is particularly important in situations where a buyer described as an ‘agent’, in reality functions only as a ‘middleman’, and the essential elements of a principal-agent relationship are absent. A two level commercial transaction may, in such cases, give rise to a tripartite arrangement with distinct rights and obligations among the parties, without necessarily establishing a principal-agent relationship between any two of them. All kinds of transactions with third parties or interested parties, resulting from the introduction of the third parties with one who wishes a particular undertaking to be performed, may not be a result of an agency.

For example the Court pointed out that – [A] retail dealer or supplier of goods, obtains goods from a wholesale supplier or a manufacturer for subsequent resale to retail customers or suppliers who, in turn, deals with retail dealers or shopkeepers. Such ‘middlemen’ are sometimes referred to as ‘agents’, when in fact they are franchisees of the manufacturer or supplier, or are distributors of the manufactures’ goods, perhaps with a ‘sole agency’ or special dealership for his goods. Such ‘agents’ can be real buyers, acting as principals on their own behalf. Consequently, they are not liable to the manufacturer or supplier in the way an agent might be for failure of duty, nor do their contracts with other parties – whether it be suppliers, retail dealers or individual customers – hold the party who sold to them, liable, for any breach including misrepresentation or sale of defective goods. 24

The Court further clarified that if the party is concerned about acting for himself and making the maximum profits possible, he is usually regarded as a buyer, or an independent contractor and not as an agent of the principal.

This would be true even when certain terms and conditions have been fixed relating to the manner in which the seller conducts his business.

In Vijay Traders v. Bajaj Auto Ltd.25 where the true nature of relationship between a distributor and a company was held to be of a vendor-purchaser and not a principal-agent on the basis of the facts. In Snow White Industrial Corp. v. Collector of Central Excise,26 the Court concluded that a sole selling agency agreement does not necessarily constitute an agency relationship but rather a sales agreement, emphasizing on the importance of contractual terms in defining the nature of the relationship. The determination of whether an 23. Bharti Cellular Ltd. (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax, [2024] 2 S.C.R. 1001: 2024 INSC 148.

24. Ibid.

25. (1995) 6 SCC 566.

26. (1989) 3 SCC 351.

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individual is an agent depends on their power to alter the principal’s legal standing with third parties.

Franchise agreement Franchise agreements provide a mechanism whereby goods and services may be distributed, and is similar to distributorship. In franchise agreements, the supplier or the manufacturer, i.e. a franchisor, appoints an independent enterprise as a franchisee through whom the franchisor supplies certain goods or services. There is a close relationship between a franchisor and a franchisee because a franchisee’s operations are closely regulated, and this possibly is a distinction between a franchise agreement and a distributorship agreement. Franchise agreements do not necessarily create agency relationship.

Despite the strict restrictions placed on the franchisees – which may require the franchisee to sell only the franchised goods, operate in a specific location, maintain premises which are required to comply with certain requirements, and even sell according to specified prices – the relationship may in a given case be that of an independent contractor. Facts of each case and the authority given by ‘principal’ to the franchisees matter and are determinative. 27 B. Principal to principal Where the sale between the manufacturer and the dealer is on principal to principal basis, the manufacturer is not liable for the sale effected by the dealer in his capacity as an independent contractor. In Indian Oil Corpn. v.

Consumer Protection Council Kerala,28 IOC and M/s Karthika Gas Agency signed a memorandum of understanding, expressly agreeing to create principal-to-principal relationship between both parties. Thus IOC could not be held liable for the actions of its distributor under principal-to-principal relationship. There was no privity of contract between IOC and the consumer for deficiency of service on the part of the gas agency.

In Tata Motors Ltd. v. Antonio Paulo Vaz29 the Supreme Court dealt with a case involving determination of liability of the manufacturer (appellant) in principal-agent framework. The case involves the sale of a car by the dealer [Vistar Goa (P) Ltd.] by allegedly misrepresenting a 2009 model used car as a 2011 model car.

The respondent (customer/buyer) refused to take delivery of 2009 model car and claimed either the refund of the price already paid, or the replacement of car with 2011 model, but could not succeed. After this failed attempt he brought action against both the manufacturer and the dealer.

27. Bharti Cellular Ltd. (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax, [2024] 2 S.C.R. 1001 : 2024 INSC 148.

28. (1993) 3 SCC 397.

29. AIR 2021 SC 1149.

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The question that came for consideration before the Court was whether the liability of a dealer’s deficiency of service could be fastened to the manufacturer?

This could be done only if there was principal-agent relationship between the manufacturer and the dealer.

The appellant (Tata Motors) argued that there was no representation from their side about the car, and unless there was any manufacturing defect, their liability would not arise for the misrepresentation given by the dealer about the model and the condition of the car. Also the appellant could not be expected to be aware of the physical condition of the car two years after its delivery to the dealer.

Taking all the facts and real possibilities into consideration, given the relationship between the dealer and the manufacturer to be that of principal-to-principal, as described in the dealership agreement, the dealer was held solely responsible for the deficiency in service and not the manufacturer.

On the basis of these judgments it can be concluded that although servants and independent contractors are parties to relationships in which one person acts for another, and thereby possesses the capacity to involve them in liability, yet the nature of the relationship and the kind of acts in question are sufficiently different to justify the exclusion of servants and independent contractors from the law relating to agency.

5.5 DISTINGUISHING PRINCIPAL- AGENT RELATIONSHIP FROM SIMILAR RELATIONS Principal-Agent

Independent Contractor

Master servant

Agent is subject to princi- Works independently and is Works under direct conpal’s control, but degree free from control except as trol of principal. per terms of contract. of control is less.

Fiduciary relationship Purely commercial relation- Convenience and need based relationship based to the extent of tasks ship. on employment. entrusted.

Paid remuneration in the Works for own benefit, even Paid salary for the work form of commission for when engaged to deal with done. the work done. third parties.

Has the power to affect the legal position of the principal by making contracts, or dealing with principal’s property.

Has no authority to bind the employer, though may incidentally affect legal relations of principal in other ways, other than contracts.

Is not competent to alter the legal position of the master, and is not his representative.

Must render accounts of Not required to render Not required to render the business to principal. accounts of the business, as accounts in the same the business belongs to him fiduciary sense. and not his employer.

Special Contracts AUTHOR : PUBLISHER : DATE OF PUBLICATION : EDITION : ISBN NO : No. of Pages : BINDING TYPE :

Shipra Gupta, Neelam Batra Taxmann June 2026 2026 Edition 9789375616160 808 Paperback

Rs. 895 DESCRIPTION Special Contracts is a comprehensive, contemporary treatise on the seven principal special contracts recognised under Indian law—Indemnity, Guarantee, Bailment, Pledge, Agency, Sale of Goods, and Partnership—bringing the three statutes that govern them (the Indian Contract Act 1872, the Sale of Goods Act 1930, and the Indian Partnership Act 1932) together in one cohesive volume.

It pairs doctrinal rigour with practical insight, tracing each subject from statutory text through case law to its presentday commercial application. The method is concept-based and example-led: principles are introduced through everyday situations, then reinforced with statutory provisions, illustrations, and decided cases—the aim being not merely to state the law, but to help the reader grasp the principles that shape it.

Running to roughly 800 pages across 20 chapters, it works equally as a study text and a reference—worked examples and illustrations, comparative tables, a Synopsis and Summary in every chapter, an exhaustive List of Cases, and a detailed Subject Index—all in clear, reader-friendly prose suited to first-time learners and professionals alike.

The book has been designed to serve a wide spectrum of readers: • Law Students Pursuing LL.B., B.A. LL.B., LL.M. and Other Programmes • Aspirants of Judicial Services and Competitive Examinations, and Students of Professional Courses • Academicians and Teachers • Researchers and Scholars • Judicial Officers • Practitioners and Advocates, together with Bankers, Corporate Professionals, and Business Managers The Present Publication is the 1st Edition, authored by Prof. (Dr) Shipra Gupta and Dr Neelam Batra, with the following noteworthy features: • [Comprehensive Coverage] All major Special Contracts in one volume: Indemnity, Guarantee, Bailment, Pledge, Agency, Sale of Goods, and Partnership • [Three Statutes, One Volume] The Indian Contract Act 1872, the Sale of Goods Act 1930, and the Indian Partnership Act 1932 treated together with their shared contractual foundations • [Up-to-Date Case Law] Recent Supreme Court decisions cited up to 2025 • [Extensive List of Cases] 50+ pages and well over 1,000 citations for strong precedential depth and easy navigation • [Concept-Based Approach] Emphasises genuine understanding over rote memorisation • [Example-Led Pedagogy] Worked examples and illustrations (including the statutory illustrations under the Contract Act) connect doctrine to real transactions • [Comparative Tables & Distinctions] Dozens of ‘difference/distinction between’ treatments (e.g., indemnity vs guarantee; pledge vs hypothecation and mortgage; sub-agent vs substituted agent) • [Chapter Synopsis & Summary] A Synopsis and a Summary in every one of the 20 chapters, for orientation and quick revision • [Detailed Subject Index] A full Subject Index for fast look-up and reference • [Section-Wise Analysis] Statutory provisions treated alongside their judicial interpretation • [Contemporary Commercial Focus] Attention to economic reform, globalisation, technology, and new business models • [Clear, Reader-Friendly Style] Lucid presentation that keeps a demanding subject accessible

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