Bailment Bailment", "ballot", and "bailee" defined.

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 "ballot." The person to whom they are delivered is called the "ballet." Explanation.---If a person already in possession of the goods of another contracts to hold them as a 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. Nature of the transaction.---"Bailment" is a technical term of the Common Law, though etymologically it might mean any kind of handing over (Fr. bailler). It involves change of possession. One who has custody without possession, like a servant, or a guest using his host's goods, is not a bailee. But constructive delivery will create the relation of bailor and bailee as well as actual, as stated in the Explanation. The bailee's duly to deal with the goods according to the bailor's orders is incidental to the contract of bailment, and arises on the delivery of the goods, although those orders may have already been given and accepted in such a manner as to constitute a prior special contract. As a matter of pleading this is no longer material in this country, but it might still be material with regard to the period of limitation. Bailment is necessarily dealt with by the Contract Act only so far as it is a kind of contract. It is not to be assumed that without an enforceable contract there cannot in any case be a bailment. The words. "otherwise disposed of" in the present section express the common law as now understood. "It seems clear that a bailee is not the less a bailee because he is clothed with authority to sell the thing which is bailed to him," e.g., a factor for sale. On the whole a bailment may be described as a delivery on condition, to which the law usually attaches an obligation to redeliver the goods, or otherwise deal with them as directed, when the condition is satisfied; but there may be, in particular cases, a bailment without an enforceable obligation. Where a chattel is delivered by mistake, the intention being to deliver another chattel either with or without conditions, the legal result, whatever it may be, is not a bailment; for there is no intention at all to deliver the chattel which is in fact delivered, and no contract with respect to it. In the converse case of a mistake on the part of the bailee, a bench of the Madras High Court has held that the same principles apply. No bailment where whole property transferred.---Obviously no transaction can be a bailment within the Act which does not satisfy the terms of this section. Accordingly there is not a bailment if the thing delivered is not to be specifically returned or accounted for: and so is the Common Law. A delivery of property on a contract for an equivalent in money or in other commodities (whether like the property delivered or not) is a sale or exchange and not a bailment, as where farmers deliver grain to a miller to be used by him in his trade, and are entitled to claim an equal quantity of corn of like quality or its market price. An agent authorised to receive payment, and bound to hand over to his principal an equivalent sum, but not necessarily the actual coin or instruments of credit received by him, is not a bailee. Similarly the delivery of Government promissory notes to a treasury for cancellation and consolidation into a single note is not a bailment, for there is no contract in such a case that the notes shall be returned or otherwise disposed of according to the directions of the owner. Again the relation between a indigenous banker and the person depositing money with him in the ordinary way of business is that of borrower and lender, and the money so lodged can be recovered only as "money lent" under art. 59 of the Limitation Act, and not as "money deposited" under an agreement that it shall be "payable on demand" under art. 60. In the former case the period of limitation runs from the date of the loan, and in the latter from the date

of demand. "The mere use of the term 'deposit' cannot alter the substance of the transaction". It is in each Case a question of fact whether a transaction amounts to a mere loan or a deposit under art. 60. Rights and duties of bailee---What are. The bailee has no right to dispose of or sell the property unless specifically authorised to do so. He has only a right to retain the goods bailed with him until he receives due remuneration for the service rendered in respect of the goods. He is responsible for the safe delivery of the goods bailed with him and in default is responsible to the bailor for any loss of the goods. Goods given to a person by bank on trust receipt---Person becomes a bailee---Liable for criminal breach of trust in case of non-accounting of goods. The execution of a trust receipt is a recognised mode of making a person bailee of the goods and in such circumstances the Bank must be deemed to be in possession or control of the goods. The validity and efficacy of such instruments of trust are now generally acknowledged. If a person who has signed such a trust receipt, fails to hand over to the Bank the sale-proceeds of the goods sold, the former would be liable for criminal breach of trust. Intentional wrong delivery by carrier---Carrier liable for damages.---Where the carrier has made intentional wrongful delivery of goods, he cannot escape liability to indemnify the plaintiff for the loss caused to him by wrongful deliveries of the consignments. Delivery of goods---Goods delivered into custody of Port Trust---Delivery order issued to Clearing Agent for taking delivery of goods---Clearing Agent found goods lying in damaged condition---Goods found short per Surety Report--Such survey taking-place after 20 days of arrival of goods at port---Condition of goods at time of survey was not necessarily condition of goods at time of discharge---Goods, held, were discharged and delivered to port trust in sound condition. Entrustment of money for purchase of property---Plaintiffs alleging entrustment of Rs. 200,000 to defendant for investment in business and for purchase of property in dispute---Plaintiffs and main defendant having business relations for long time and having running business dealings---Held, mere allegations in plaint of having deposit money in trust or mutual trust of parties does not create any trust---Party to show creation of trust must prove that money paid in confidence on express condition for specific purpose in trust---Held further, if such payment made money vests in payee for benefit of payer. 149. Delivery to bailee how made.---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. COMMENTS The bailor's part need not be very active. Mere assent, for example, of a guest at a place of public entertainment to a servants officious assumption of custody may be sufficient evidence of delivery to make the proprietor of the house a bailees and responsible for loss. The railway authorities were held liable as bailees where cotton was stacked on a station platform, with the consent of the station-master, no wagon being available, and was set on fire three days later by a spark from a passing train. Having regard to the course of dealing of a railway company, the mere fact that loading clerk in the employ of a railway company filled up a forwarding note and market a number on it has been held not to amount to delivery of goods to the company within the meaning of this section. It was further necessary that a number corresponding to the number of the forwarding note should be marked on the goods by a railway official. A lady employed a goldsmith for the purpose of melting old jewellery and making new jewels. Every evening she used to receive the half-made jewels from the goldsmith and put them into a box which was left in a room in the goldsmiths house, of which she retained the key. It was held that there was a redelivery of the jewels to the lady and that they were not in the possession of the goldsmith when during one night they were stolen. 150. Bailor's duty to disclose faults in goods bailed.---The bailer is bound to disclose to the bailee faults in the goods bailed, of which the bailer is aware, and which materially interfere with the use of them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults.

If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed. Illustrations (a) A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained. (b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is injured. B is responsible to A for the injury. COMMENTS There is no doubt that such is the Common Law, though there is not much positive authority. The rule of Roman Law is that if a man knowingly lends his neighbour foul or leaky vessels, whereby the wine or oil put into them perishes or is lost, he is liable for the damage. A person who delivers to a carrier goods which he knows to be of a dangerous character, such as explosives, and to require extraordinary care in handling, and omits to give warning of it (the nature of the goods not being apparent), is liable for any resulting damage. There is an implied warranty that the goods are not dangerous, so that the consignor is liable, whether or not he knows the goods are dangerous, for any resulting damage. If the goods of a third party are damaged through a breach of this warranty the carrier can recover from the consignor the amount of the damage whether or not the carrier is liable over to the third party. The language of the second paragraph of the present section is open to at least there constructions: (i) The bailer is under a duly to take reasonable care to make the goods reasonably safe for the purpose for which he knows they have been hired. (ii) The bailor is under a duty to supply goods that are reasonably safe, the only defence being that the defect is a latent one that could not be discovered by any care or skill. (iii) There is an absolute guarantee of fitness. In the common law, there is some authority for each of these views, but little to support view. With regard to illustration (b) there is some doubt whether the rule would apply to the case where A hires of B a specific carriage, not a carriage to be provided by B at his discretion. But the decisions upon the hiring of particular kinds of property turn rather on questions of implied warranty, or unexpressed terms of the contract, and must be used with great caution for the establishment of any general rules. It does not seem, at all events, that the quite positive language of the second paragraph of the present section would be qualified in India by any such exception. 151. Care to be taken by bailee. 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 would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. COMMENTS This section abolishes the distinctions in the amount of care required of various kinds of bailees which were established, or supposed to be established. The Privy Council has laid down the duty of a bailee for reward in English law as being to exercise the same degree of care towards the preservation of the goods entrusted to him from injury which might reasonably be expected from a skilled storekeeper, acquainted with the risk to be apprehended

either from the character of the storehouse itself or of its locality. It has, however, sometimes been held that there is liability only for gross negligence, or for failure to show such skill as the profession of the bailor implies. It is clearly not sufficient for a gratuitous bailee to show the same care as he bestowes upon his own goods. This is an objective standard similar to that of reasonable care, and was applied in A.I.R. 1955 V.P. 30. When goods are destroyed by a riotous mob, the bailee is not responsible for the loss. A special and higher responsibility, not being part of the ordinary law of bailment at all, was imposed by the law of England upon common carriers and innkeepers. How far this remains unaffected by the Contract Act must be separately considered. Common carriers.---The provisions of Ss. 151 and 152 of the Contract Act embody in effect the Common Law rule as to the liability of bailees other than common carriers and innkeepers. The measure of care required of these bailees in respect of goods entrusted to them was the same as a man of ordinary prudence would take of his own goods; in other. words, the liability was one for negligence only, in the absence of special contract Common carriers and innkeepers, on the other hand, were liable as insurers of goods; that is they were responsible for every injury to the goods occasioned by any means whatever, except only the act of God and the enemies. Therefore the mere proof of delivery of goods and injury thereto, unless caused by the act of God or the enemies, was sufficient to entitle the plaintiff to compensation without proof of negligence on the part of the defendant. The question whether the liability of common carriers was still further reduced by the enactment of Ss. 151 and 152 of the Contract Act, so as to render them liable for negligence only as in the case of other bailees, came up before the High Court of Bombay in 1878. The Court held that the definition of "bailment" in S. 148 was large enough to include bailment for carriage, and that the provisions of those sections, therefore, applied to common carriers. The High Court of Calcutta, on the other hand, held in a subsequent case that the liability of common carriers was hot affected by the Contract Act. The same point arose before the Privy Council in an appeal from the Court of the Recorder of Rangoon, where it was held, approving the Calcutta decision, that the duties and liabilities of a common carrier are governed by the principles of the English Common Law in conjunction with the provisions of the Carriers Act, and that, notwithstanding some general expressions in the chapter on Bailments, the responsibility of a common carrier is not within the Contract Act. Where the parties have expressly contracted to be bound by the provisions of the Carriage of Goods Act, 1925, the rights of the parties are governed by the terms of that Act. It may well be that in the absence of any contrary intention, a shipowner carrying goods from one port to another can be presumed to contract with reference to the Contract Act; but it by no means follows that the presumption is the same if the goods are to be carried to London or New York. Carriers by Railway.---The liability of carriers by railway is now governed by the Railways Act, 1890. S. 72 of that Act provides that the responsibility of a railway administration for injury to goods delivered to it to be carried by railway is, subject to the other provisions of the Act, that of a bailee under Ss. 151, 152 and 161 of the Contract Act, and that it shall not be affected by the Carriers Act, but that it may be limited by a special agreement between the parties, provided that it is in writing by or on behalf of the person sending the goods and is otherwise in a form approved by the Governor-General in Council. Several railway companies accordingly issued what is called "the risk note" in a form approved by the Govt., which is used when the sender elects to despatch at a "special reduced" or "owner's risk" rate articles for which an alternative "ordinary" or "railway risk" rate is quoted in the tariff. The "risk note" provides that, in consideration of the railway company carrying the goods at a special reduced rate, they shall be exempted by the sender from liability for loss or damage to the goods from any cause whatever before, during, or after transit over the railway or other railways working in connection therewith. Such a note signed by the sender constitutes a special contract within the meaning of S. 72, and a railway company cannot, therefore, be rendered liable on such a note, whatever may be the cause of injury to the goods. Where, however, there was no contract to the contrary, it was held that a passenger whose luggage deposited in the cloak-room was lost was entitled to the entire value of the goods, but not to any consequential damages. Innkeeper.---It has been held by the High Court of Allahabad that the liability of a guest in respect of goods belonging to a hotel-keeper and used by the guest is that of a bailee under Ss. 151 and 152 of this Act, so that the guest is not responsible for the loss, destruction, or deterioration of the furniture in his use if he has taken as much care of it as a man of ordinary prudence would, under similar circumstances, take of similar furniture of his own.

Burden of Proof---In cases governed by the provisions of Ss. 151 and 152, the loss or damage of goods entrusted to a bailee is prima facie evidence of negligence, and the burden of proof, therefore, to disprove negligence lies on the bailee. The same rule applies, by reason of S. 72 of the Railways Act, to a railway administration, unless the goods are consigned under a risk note under which the railway company are absolved from all liability for loss or damage except that due to willful negligence on the part of their servants, in which case the, burden lies in the first instance upon the company to prove that the loss was such as was contemplated by the contract, and when this has been done it shifts to the plaintiff to show that the loss was due to the willful neglect of the company or its servants. A railway company receiving goods for carriage is not bound to inquire into the apparent owner's title or to see that the risknote is read and understood by the person who delivers the goods. As regard goods delivered to a common carrier, he is liable even if there be no negligence on his part except in certain cases mentioned above (see note "common carriers," above). Under S. 6, however, of the Carriers Act he may by special contract limit his liability, but even then the burden lies on him, by reason of S. 9 of the Act, to disprove negligence. As regards bailments for hire, the rule is that if the damage caused were such that in the ordinary course of events it would not happen to goods of the kind in question if used with ordinary prudence. Thus where a person hires a horse for riding in a sound condition and the horse dies the same day while it is in his custody, it is for the hirer to prove that he had taken such care of the horse as a man of ordinary prudence would, under similar circumstances, have taken of his own. Similarly, where goods delivered for safe custody for reward are lost while in the possession of the bailee, the burden lies on the bailee to prove absence of negligence on his part. But where hotel furniture used by a guest while suffering from an infectious disease is destroyed by the hotel-keeper to prevent infection, it lies on the hotel-keeper, if he claims damages for the loss thereof, to prove that the guest did not take as such care of the goods as a person of ordinary prudence would have taken of his own goods under similar circumstances. Contract by bailee exempting himself from liability for negligence.---The learned authors considered that a contract by a bailee purporting to exempt himself wholly from liability for negligence was not valid. This opinion is based on the express provisions for contracting out in S. 152, and in fact throughout the Chapter on Bailments wherever a rule of law is to operate only in the absence of a contract to the contrary, it is expressly so stated in the section (see sections 163, 165, 170, 171, and 174). Carriage of Goods by Sea Act (XXVI of 1923), Sched., Art. 1 (c)---Carriage of goods by sea---Cargo carried on deck and at consignors risk short landing at destination---Liability for loss---Liability of carriers not governed by Ss. 151 & 152, Contract Act, 1872---Word "goods" in Art. 1 (e) of Sched. to Carriage of Goods by Sea Act--Connotation---Cargo not governed by provisions of said Act---Negligence alleged by substitute of consignor denied by carrier in written statement---Carrier bringing evidence to show that goods were damaged due to act of God--Contention that provisions of Ss. 151 & 152. Contract Act were applicable in instant case not tenable. Care to be taken by bailee----Theft of goods pledged with Bank---Document of pledge containing condition that during the continuance of pledge agreement the borrowers shall be responsible for all loss, damage, or deterioration of security caused by theft, fire, rain or any other cause whatsoever---There being. no discrepancy between provisions of S. 151, Contract Act, 1872 and condition of document of pledge, if loss had been caused by theft, fire, rain or any other cause, it would be the duty of the bailee to explain that he had taken care of the goods as a man of ordinary prudence would under similar circumstances take of his own goods and if in spite of that the goods pledged were lost in manner as recorded in the condition of document of pledge, liability of borrower could not be legally or equitably denied. Goods carried at risk of carrier---Carrier not proving due diligence in carrying goods---Carrier liable for loss. Where jute was carried at the risk of the railway and it caught fire when a porter went to seal the door with a lamp, which showed negligence of the Railway. Moreover the carrier failed to prove its diligence in dealing With the jute in question throughout the period it was in its care and custody. The Railway was held liable for the loss suffered by the consignor. Injury to goods in transit by Railway---Onus of proof as to negligence by carrier---How burden is to be discharged.---Where due to long delay in transit, goods carried by Railway were damaged. Held: Although the burden of establishing want of care on the pari of' the Railway lies on the consignor yet it is the duty of the railway to supply the entire material from which the amount of care that is taken is ascertained. The Railway pleaded that the delay was caused due to unavoidable circumstances but no material was supplied in support of this plea; Therefore

the presumption of want of due Care would arise against the Railway. Loss to goods by negligence of ship-owner---Claim for damages against shipowner sustainable.---Held: The shipowner committed a breach of the obligation contained in the bill of lading and as such the consignee was entitled to recover damages. Damage to contents of parcel---Burden of proof is on consignor--Mere damage to containers does not prove damage to contents.---The burden of proof was on the plaintiff to show that the damage to the contents was caused by the negligence of the servants of the Carrier while the Crates were in its custody. No such evidence has been produced by the plaintiff and merely, because some of the wooden crates were externally broken and some cardboard cases torn, as stated in the Survey Report, it cannot be inferred, nor is there any evidence to show, that the external damage must have resulted in damage to the contents. Loss of goods in possession of bailee---Onus of proof as to negligence of bailee.---Where goods are lost or destroyed while in .possession of bailee the onus of placing all the materials in his possession or knowledge is on the bailee, while the onus of establishing negligence is on the plaintiff. Negligence of bailee---No evidence to show negligence---Bailee not required to prove precautionary measures taken against loss by fire, etc.---Held: The plaintiff has not suggested what were the steps which the Karachi Port Trust ought to have taken which it had failed to take, before an adverse inference of negligence can be drawn against them. It is not disputed that the cause of the fire was not known. Therefore, it was not incumbent on the K.P.T. to show that the fire originated from causes beyond its control. In the circumstances, it was enough for the Karachi Port Trust to place before the Court all the materials in its possession and to satisfy the Court that it had taken due care generally of the goods entrusted to its custody as statutory bailee and that it had taken all prompt and reasonable steps in its power to put out the fire and save whatever was possible of the goods. I am not satisfied that the plaintiff has discharged the burden of proving negligence on the part of the Karachi Port Trust. Carriage of goods by sea from foreign port to Pakistan---Damage to goods---Contract Act applies.---The provisions of the rules to the Carriage of Goods by Sea Act, 1925 do not apply in relation to carriage of goods by sea in a ship carrying goods from a foreign port to a port in Pakistan, as is the present case. Therefore, the rights and liabilities of the parties have to be ascertained by reference to the proper law of the contract which in this case, is the Pakistan law. Damaged goods not surveyed---Nothing to show quantum of damage---Vague estimate of damage---Damages not awarded. Held: The consignee did not apply for a survey of the damaged goods nor is there any evidence in the survey whether the dirt stains penetrated beyond the outer cover of the rolls and damaged the carpets inside. The value of the alleged damage is also not indicated in the survey report. It would, therefore, appear that the estimate of Rs. 4,675 claimed by the plaintiff as representating 5% damage to the 55 rolls of carpets can but be only a vague estimate. In this absence of material evidence as to value of damaged goods, the claim of the plaintiff cannot be accepted. Damage to goods noticed by M.D. of plaintiff--Delay in making request for appointment of surveyor--Carrier not bound by Survey report in absence of notice and survey.--- Held: The Managing Director of the plaintiff, in his deposition in Court admitted that he noticed the alleged damage at the time of the discharge of the goods on 6-8-1965, by which time the goods had been removed by the K.P.T. from Transit Shed to another warehouse, some four or five furlongs away. The first intimation of the particulars of the alleged damage was conveyed to the Carrier's Agent on 7-6-1966 just before the suit was filed, by the plaintiff's legal notice claiming an estimated loss of Rs. 1,28,385/-. In the absence of notice of survey, the carrier is not bound by the Survey Report. Therefore the carrier is not liable to pay damages. Buyer rejecting goods---If can sell them to recover ware-house charges for storing them.---The buyer rejected the goods and then disposed them of in order to recover the ware-house charges for having stored them. He contended that he as a bailee had the right to do so. Held: The buyer of the good. s having rejected them and thereafter selling them as the goods belonging to him, stands on a different footing than the bailee contemplated under sections 151 and 170 of the Contract Act. The

principle on Which a bailee is entitled to dispose of the goods or has lien on the goods bailed with him are entirely different and are not applicable to the case of the sale of goods. As discussed above, the buyer of the goods after rejecting them, has no lien on the goods in dispute and must place them at the disposal of the seller for dealing with them in any manner he likes. Due care---If onus lies on the bailee---How should the onus be discharged---Duty of the plaintiff in case of loss of goods.---Per Yakub Ali, J. Section 151 of the Contract Act subjects a bailee to the duty of taking as much care of the goods entrusted to him as a prudent man would take of his own goods of similar quality and bulk. That the bailee discharged his statutory duly in respect of the goods entrusted to him can obviously be proved the bailee and not by the bailor. The onus therefore, to prove what steps had been taken by the bailee in discharge of the duty imposed upon him by law would initially lie on him and not on the bailor. The loss of goods entrusted to a bailee is prima facie evidence of his negligence, and the question still remains to be answered whether inspite of such loss any onus remains on the plaintiff to prove negligence after the defendant bailee has failed to prove that he had discharged his duty as it bailee under section 151 of the Contract Act. It is obvious that if the defendant satisfies the Court that he took as much care of the goods entrusted to him as a man of ordinary prudence would take of his own goods of similar quality and bulk, there will be no scope for the plaintiff to prove any negligence on the part of the defendant to indemnify him for the loss of his goods. Vice versa, if the plaintiff succeeds in proving negligence on the part of the defendant bailee, it will not be open to the defendant to contend or show that in the discharge of his duty he had acted according to what he was enjoined upon to do under section 151 of the Contract Act. Per Akhlaq Hussain, J. In a suit against a railway company or administration the plaintiff has to prove that the defendant failed to take the care which, under section 151 on the Contract Act, it is the duty of a bailee to take. That section, be it noted, does not lay the onus on a ballet in a suit against him to prove that he took the care which it was his duty to take. It only defines the measures of his duty; and a plaintiff can succeed only by proving its absence. Therefore it would be entirely erroneous on the part of a Court to cost any burden on the defendant by framing an issue whether he took due care or ally care. Another point to note is that section 105 does not cast the burden of proving due care upon the defendant; it only makes it his duly to prove such facts relating to the care actually taken by him which are "especially within his knowledge." The burden of the issue whether loss has been occasioned by the failure of the defendant to take due care rests squarely upon the plaintiff throughout, under sections 101 and 102 of the Evidence Act; and while evidence is being led on that issue the plaintiff may be exonerated from proving certain relevant facts" but not the issue itself. Goods carried by railway by route other than the usual route---Goods damaged or deteriorated---Railway liable---Risk note is no protection.---A contract for the carriage of goods does always mention the place where the goods are booked, the place of destination, and impliedly also the route by which the goods are to be carried. Therefore, if without the knowledge and consent of the party concerned the railway choose to carry the goods by a route other than the route agreed upon or the usual route, they do so at their own risk and cannot fall back upon the terms contained in the Risk Note contrary to the terms on which they carry the goods by a different route, nor can they claim that they are absolved from the general statutory liability or a bailee. The Risk Note does not stand in the way of the claim of the plaintiff at all. Loss of goods during transit---Railway liable---Absence of brake---Negligence of railway.---Where goods were lost during transit and it was found that there was no vacuum or brake in the van of the guard so that the train could not be stopped in case of theft in the running train. Held: There ought to be a vacuum in a train in order that in case of theft while it is running it may be stopped. That a vacuum should be there in the brake of the guard is not denied and the failure to keep a vacuum against the rules would be negligence. Therefore the failure to provide brake should be considered a negligent act on the part of the Railway. Held further: That there is no satisfactory evidence from which it could be inferred that they had taken proper care

of the consignment as bailer of the goods consigned. Therefore, the railway was liable for the loss of goods. Railway---Liability while carrying goods---Similar to that of a bailee.---Held; The railway carries goods delivered to it by a party as a bailee under a contract and is bound to take such care of the goods as that taken by a man of ordinary prudence. It is only when it wants to limits its liability that it can enter into special contracts with the parties concerned. Short delivery of goods---Goods carried on shippers risk---Company liable for short delivery under the sections---Where the goods were carried on shipper's risk, and the shipping company made a short delivery of goods. Held: It cannot be said that the special contract between the shipping company and the plaintiff is of such a comprehensive nature as to absolve the shipping company from all liability so as to exclude sections 151, and 152, Contract Act, from coming into operation. The company was therefore liable for loss on account of the short delivery. Loss of pledged goods---Liability of pledgee not affected by agreement that pledgee would not be responsible for loss---Pledgee must prove that loss was in spite of due care by him.---The goods pledged to a Bank were stolen. The Bank took up the plea that it was not liable for the loss of goods in view of a term of agreement with the party by which the Bank was not to be held responsible for loss or damage to the goods. Held: The defendant Bank when seeking to rely on the terms of the agreement from being excused from any liability of the pledged goods lost by theft, must first prove satisfactorily that the theft was committed by a person or persons other than the agent or employees of the Bank and that the theft was committed in spite of the pledgee Bank having taken proper protection with regard to the safety of the goods. This, the pledgee Bank must do, as even when a special agreement of this nature is entered into between the parties, failure of the party seeking cover under special term must attract the provisions of the sections 151 and 152 of the Contract Act. Goods entrusted to bailee damage by act of his servant---Servant acting outside his authority---Bailee is liable for the loss. A bailer is liable to the bailor in respect of the goods bailed when the goods suffered from the negligence of the servant of the bailee even though the negligent act look place while the servant was dealing with the articles for his own purpose. Liability of common carrier by Sea---Not governed by Ss. 151, 152---Common carrier would be liable accordingly to terms of contract embodied in Bill of Lading---Carrier (shipper) would be immune from liability for any loss in a case where under terms of Bill of Lading goods were shipped on Deck and at consigner's risk. Carriage of Goods by Sea Act (XXVI of 1925), Sched., Art. 1 (c)---Carriage of goods by sea---Cargo carried on deek and at consignor's risk short landing at destination---Liability for loss---Liability of carriers not governed by Ss. 151 & 152, Contract Act, 1872---Word 'goods' in Art. 1 (e) of Sched. to Carriage of Goods by Sea Act--Connotation---Cargo not governed by provisions of said Act---Negligence alleged by substitute of consignor denied by carrier in written statement---Carrier bringing evidence to show that goods were damaged due to act of God--Contention that provisions of Ss. 151 & 152, Contract Act were applicable in instant case not tenable. Bailee's liability for damages---Damage to one Case caused by negligence of servants and/or agents of Stevedore Company engaged by Shipping Company---Shipping Company neither taking plea of having taken as much care as man of ordinary prudence would take of his own goods nor pleading special contract---Shipping Company, held, responsible to importer. Bailor and bailee, relationship of---Correspondence showing Bank from time to time informing plaintiff about stock of plaintiff in custody of Bank---F.I.R. about theft of goods also lodged by an officer of Bank---Chowkidar of Bank also deputed to guard goods in question---Deliveries of goods made by Bank on delivery orders issued by plaintiff--Rent for godown and salary of Chowkidar also recovered by Bank from plaintiff---Bank, held, bailee for reward of goods of plaintiff. 152. Bailee when not liable for loss, etc, of thing bailed.---The bailee, in the absence of any special contract, is not

responsible for the loss destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in Section 151. COMMENTS Care to be taken by bailee.---Since the standard of diligence required of a bailee is that of the average prudent man, a bailee of goods is not liable for loss of the goods by theft in this shop, if it is shown that he took as much care of the articles bailed as an ordinary prudent man would under similar circumstances, take of his own goods of the same quality and value. For the same reason if A sends jewels to B for repairs, asking B to return them after repair as a value payable parcel, and B does so, B is not liable for the loss of the jewels merely because he failed to insure the parcel. Failure to insure the jewels is not evidence of want of such care as a man of ordinary prudence would, under similar circumstances, take of his own goods, especially when the owner himself does not insure them when sending them out for repair. But it is negligence on the part of a carrier of goods to send jute in a boat with twenty or thirty leaks on its side, one or one and a half inches in length, and keep the goods in the hold of the boat for thirty hours. The bailee's duty does not necessarily come to an end when the. goods are lost or stolen. Liability of common carrier by Sea---Not governed by Ss. 151, 152---Common carrier would be liable accordingly to terms of contract embodied in Bill of Lading---Carrier (Shipper) would be immune from liability for any loss in a case whereunder terms of Bill of Lading goods were shipped on Deck and at consigner's risks. 153. Termination of bailment by bailee's act inconsistent with, conditions. A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment. Illustrations A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the option to A, a termination of the bailment. COMMENTS It is well settled law that a wrongful use or disposal of the goods by the bailee determines to bailment and remits the bailor to the right and remedies of a person entitled to possession; a wrongful act means, for this purpose, a dealing wholly inconsistent with the terms of the bailment. The English authorities go into refinements as to the precise kind of wrong committed and the precise form of action available which are almost as subtle as anything in either European or Hindu philosophy; but, as these are intimately connected with the old Common Law system of pleading, we have no occasion to consider them here. Merely irregular exercise of a right, such as a sub-pledge to a third person by a pledgee, or a premature sale by a pledgee with power of sale, has not the same effect. The present section has the merit of simplicity, and does not appear to have given rise to any litigation. 154. Liability of bailee making unauthorised use of goods bailed. If the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. Illustrations (a) A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury done to the horse. (b) A hires a horse in Karachi from B expressly to march to Hyderabad. A rides with due care, but marches to Khairpur instead. The horse accidentally falls and is injured. A is liable to make compensation to B for the injury to

the horse. Illustration (b) is apparently .suggested by the case put in old English books of a man borrowing a horse to ride to York and riding to Carlisle. Discussion of the old forms of action being here superfluous, no comment is required. 155. Effect of mixture, with bailor's consent, of his goods with bailee's. If the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the bailee shall have an interest in proportion to their respective shares, in the mixture thus produced. COMMENTS Performance bond---Awarding of amount claimed by plaintiff by way of refund of amounts paid to defendant--Jurisdiction of umpire---Such question having been raised in statement of claim before arbitrator---Umpire, held, had Jurisdiction to deal with refund of amount forfeited by defendant in terms of bank guarantee and to allow or disallow requisite claim---By such refund of amount umpire had impliedly found that defendant was not entitled to forfeit Performance Bond---Umpire is not required under law to give separate findings on each issue or point raised before him. 156. Effect of mixture without bailors consent, when the goods can be separated. If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expense of separation or division, and any damage arising from the mixture. Illustration A bails 100 bags of cotton marked with a particular mark to B. B without A's consent, mixes the 100 bales with other bales of his own bearing a different mark, A is entitled to have his 100 bales returned, and B is bound to bear all the expense incurred in the separation of the bales and any other incidental damage. The proposition is almost too obvious to need stating. Not only this, but any other difficulty caused by unauthorised acts of the bailee which may attend the return of the bailor's goods according to the contract must be at the bailee's risk and expense. 157. Effect of mixture, without bailor's consent, when the goods can be separated.---If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods; in such a manner that it is impossible to separate the goods, bailed from the other goods and deliver them back, the ballot is entitled to be compensated by the bailee for the loss of the goods. Illustration A bails a barrel of Cape flour, worth Rs. 45, to B.B, without As consent, mixes the flour with country flour of his own, worth only Rs. 25 a barrel. B must compensate A for the loss of his flour. By the Trusts act, 1882, S. 66, "where the trustee wrongfully mingles the trust-property with his own, the beneficiary is entitled to a charge on the whole fund for the amount due to him." 158. Repayment by bailor of necessary expenses. Where, by the conditions of the bailment, the goods are to be kept or to be carried, or to have work done upon them by the bailee for the bailor, and the bailee is to receive no remuneration, the bailor shall repay to the bailee the necessary expenses incurred by him for the purpose of the bailment. COMMENTS

This and the next two sections represent Storys opinion partly of what the law is and partly of what it should be. One does not quite see why in our law the bailees promise may not be limited to returning the goods at a certain date or on demand after a certain date, if such is the agreement of the parties. The bailor may intend to accept a promise so qualified as the consideration for parting with the possession of the goods, and there is no known rule of law to prevent effect from being given to that intention. Why not let the parties make their own terms instead of borrowing a fixed rule from a system which has no doctrine of consideration? But the truth is that gratuitous bailments, though very common in private life, are not matters of business and therefore do not come into court. 159. Restoration of goods lent gratuitously. The lender of a thing for use may at any time require its return, if the loan was gratuitous, even though he lent it for a specified time or purpose. But, if on the faith of such loan made for a specified time or purpose, the borrower has acted in such a manner that the return of the thing lent before the time agreed upon would cause him loss exceeding the benefit actually derived by him from the loan, the lender must, if he compels the return, indemnify the borrower for the amount in which the loss so occasioned exceeds the benefit so derived. COMMENTS No authority has been found for Storys view, which appears, as above stated, to be nedlessly complicated. On principal the question is what the terms of the contract were. Quaere whether an express contract not to recall a thing gratuitously lent before the expiration of a certain time would not be good in India notwithstanding this section. There is no difficulty about the consideration. 160. Return of goods bailed on expiration of time or accomplishment of purpose. It is the duly of the bailee to return, or deliver the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. COMMENTS Nothing is said here about the extent of the bailors remedies if the goods are not forthcoming. He can have an action for damages against the bailee, but also he has further equitable rights. "if the bailee sells the goods bailed, the bailor can in equity follow the proceeds, and can follow the proceeds wherever they can be distinguished either being actually kept separate, or being mixed up with other moneys". It has been established for a very long period.... that the principles relating to the following of trust property [compare the Trusts Act, Ss. 63-65] are equally applicable to the case of a trustee and to the case of factors, bailees, or other kinds of agents... wherever a specific chattel is entrusted by one man to another, either for the purpose of safe custody or for the purpose of being disposed of for the benefit of the person entrusting the chattel; then either the chattel itself, or the proceeds of that chattel, whether the chattel has been rightfully or wrongfully disposed of, may be followed at any time, although either the chattel itself, or the money constituting the proceeds of the chattel, may have been mixed and confounded in a mass of the like material. The development of this doctrine in cases of trust is not within our scope; it is connected with the special application and limitation of the rules as to appropriation of payments (S. 61, above). It is obvious that in a case where the goods are found unfit for the purpose for which they were hired the purpose for which they were bailed is not accomplished; but the consequences are not here declared. It seems that all the bailee is bound to do is to give notice to the bailor of the default. 161. Bailee's responsibility when goods are not duly returned. If, by the default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. COMMENTS Unexplained failure to return the thing bailed is presumed to be by the bailee's default. A bailee who refuses to give delivery except upon some unjust or unreasonable condition is in default.

Conversely, if a bailor or consignee omits or refuses to take his goods at the proper time from a carrier (or, it would seem, any other kind of bailee) who is ready and willing to deliver them, he may be liable to compensate the bailee for any necessary expenses of and incidental to their safe custody. But the goods are not at the risk of the bailor, and the bailee will be liable for any breach of duty under S. 151. Bailee wrongfully converting goods kept with him---Liable for loss of bailor.---A bailee who either refused to give delivery of the goods under his custody or fails to return the goods to the bailor, is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. Delivery of pledged property---How may be made---When constructive delivery is sufficient. Delivery, either actual or constructive, of the articles pledged in consideration of the debt or advance is essential to the contract. Constructive delivery is where it is practically impossible to give physical possession, or where the pledge remains in the possession of the pledgor for a special purpose and the pledge is legally delivered though it does not actually pass from the hands of the pledgor to those of the pledgee. Delivery of a key of a warehouse in which goods are stored, or of a delivery order directing a warehouseman to deliver goods to the pledgee, is sufficient in law to form constructive delivery. It is not essential that the advance and the delivery should be contemporaneous. it is sufficient if possession be delivered within a reasonable time of the advance, in pursuance of the contract to pledge Pledgor and pledgee---Relationship of the parties discussed.---The general property in goods pledged remains in the pledgor, but a special property in them passes to the pledgee in order that he may be able to sell the pledge if his right to sell arises. This special property is such that if a bailee accepts, as security for goods brought, an object of value; he fraudulent retaking of the object by the bailor is larceny. By the bailment of goods by a debtor to his creditor in pledge, or as a security for a debt, the pledgee impliedly undertakes to deliver back the property to the pledgor, when the sum for which it was pledged is paid, and the pledgor impliedly undertakes that the property pledged is his own and may be safely returned to him. If the pledgor makes default in payment at the stipulated time, the pledgee may sell the pledge, even though there be not any express agreement to that effect, or he may sue the pledgor or his debt, retaining the pledge as a security. But if a time for payment has not been agreed upon, or if the time agreed upon has been extended indefinitely, the pledgee cannot sell the pledge until after demand and notice. 162. Termination of gratuitous bailment by death, A gratuitous bailment is terminated by the death either of the bailor or of the bailee. The executors of persons who have borrowed things, especially books, do not always remember this, as is shown by common experience. On the other hand, the executors of a lender may tacitly and discreetly, in many cases, treat the loan as a gift without fear of being Called to account for a davastavit. The problems hence arising, if any, seem to be rather ethical than legal, save so far as the law of limitation cures this amongst other irregularities. The present section does not, of course, exempt the bailees estate from liability for any default in his lifetime. 163. Bailor entitled to increase or profit from goods bailed.---In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed. 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 the cow to A. COMMENTS Good sense, and therefore, good law, seemingly without any previous reported authority. New shares allotted in respect of shares that have been pledged are an increase claimable by the pledger. 164. Bailor's responsibility to bailee.---The bailer is responsible to the bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods or to give

directions, respecting them. If the terms of the bailment are such that its natural determination as between the parties is delivery over to a third person, and there is a paramount title elsewhere, the bailee may be in difficulties, which, however, are mitigated by S. 166. 165. Bailment by several .joint owners.---If several joint owners of goods bail them, the bailee may deliver them back to, or according to the directions of, one joint owner without the consent of all, in the absence of any agreement to the contrary. "May," not "must". Even if there is an agreement to the contrary, one of several joint owners cannot, after having accepted redelivery from the bailee, sue him jointly with the other owners; for "one party to a contract cannot maintain an action for a breach occasioned by his own act, and neither can three parties maintain an action unless each party separately could." 166. Bailee not responsible on redelivery to bailer without title. If the bailer has no title to the goods, and the bailee, in good faith, delivers them back to, or according to the directions of, the bailer, the bailee is not responsible to the owner in respect of such delivery. COMMENTS Return of goods to or to the order of the bailor.---A bailee who in good faith returns the goods bailed to the bailor or his order is not liable to the true owner of goods. N. entrusted certain bales of cotton to L., a muccadam (warehouseman). L pledged the cotton with B (with whom he had dealings for several years) to secure advances made by B to L. Subsequently L redeemed the pledge, and the cotton was returned by B to or to the order of L.N sued B and L claiming delivery of the goods or their value. The Privy Council held that whether the pledge by L to B was or was not valid under S. 178, the return of the goods by B in good faith to L was a complete defence to the suit. The section really applicable was the present section, but the case was wrongly argued as under S. 178, which it was held unnecessary to consider. Estoppel of bailee.---Cp. the Evidence Act, 1872, S. 117.---"...Nor shall any bailee or licensee be permitted to deny that his bailor or licensor had, at the time when the bailment or license commenced, authority to make such bailment or grant such license...Expl. (2).---If a bailee delivers the goods bailed to a person other than the bailer, he rally prove that such person had a right to them as against the bailer." The rule of the Common Law is that generally a bailee is estopped from denying his bailor's title. He is not only justified in delivering to the bailer or according to his directions, but he is not justified in refusing to deliver to the bailer unless he is under the effective pressure of an adverse claim, and defends upon the right and title and by the authority of the third person so claiming. There must be something equivalent to an eviction by a paramount title, which if it actually took place would of course determine the bailment. But if the bailer has by his own act, as by mortgaging the thing bailed, made it impossible for the bailee to redeliver to him without being exposed to an action at the suit of a third person, then the bailee is excused. But if a man accepts a bailment with notice at the lime of an adverse claim, he must stand by the election he has made, and cannot afterwards rely on the adverse title against his bailer. A common carrier's position is not quito the same, as he must in any case accept goods offered him for carriage and cannot make inquiries as to the ownership. He may safely deliver in pursuance of his employment until he has notice of an adverse claim, but after notice he would so deliver at his peril, and therefore is justified in delivering to the real owner. If a warehouseman, or other such like person having the custody of goods, acknowledges that he holds them at the order of a certain person, he thereby makes himself that person's bailee, and is estopped from denying his title to the same extent as if he had actually accepted delivery from him.

167. Right of third person claiming goods bailed.---If a person, other than the bailor, claims goods bailed, he may apply to the Court to stop the delivery of the goods to the bailor, and to decide the title to the goods. The bailee's protection against conflicting claims appears to be left to the general directions of the Code of Civil Procedure. 168. Right of finder of goods; may sue for specific reward offered. The finder of goods has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him to preserve the goods and to find out the owner; but he may retain the goods against the owner until he receives such compensation; and, where the owner has offered a specific reward for the return of goods lost, the finder may sue for such reward, and may retain the goods until he receives it. COMMENTS By the Common Law a person who finds lost goods and holds them with the intention of saving them for the true owner is certainly not a trespasser, and has no higher duties than a bailee; but, the service being rendered without request from the owner, he does not seem entitled to any remuneration, unless a specific reward has been offered for the return of the goods, and the offer has come to his knowledge (see on S. 8, "General Offers", above); and if he cannot claim compensation there is no ground on which he can retain the goods. But it seems the Court would be astute to lay hold of any evidence which might constitute a cause of action for a meritorious finder who had been at substantial pains, and it is possible that in some cases he might have rights analogous to a salvor's. It appears to have been a current opinion as late as the seventeenth century that a finder could abandon the goods with impunity. The rule of the present section appears to be intended to satisfy natural justice. Presumably the compensation, if no specific reward has been offered and the parties cannot agree, is to be what the Court considers reasonable. If the parties do agree, the owner's promise of reward may be binding under S. 25, sub- S. 2 (ante). 169. When finder of firing commonly on sale may sell it.---When a thing which is commonly the subject of sale is lost, if the owner cannot with reasonable diligence be found, or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it--(1) When the thing is in danger of perishing or of losing the greater part of its value, or, (2) When the lawful charges of the finder, in respect of the thing found, amount to two thirds of its value. 170. Bailee's particular lien. Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them. Illustrations (a) A deliver a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is entitled to retain the stone till he is paid for the services he has rendered. (b) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished, and to give A three months credit for the price. B is not entitled to retain the coat until he is paid. COMMENTS Principle of bailees lien.---This section expresses the "Common Law principle that if a man has an article delivered to him, on the improvement of which he has to bestow trouble and expense, he has a right to detain it until his demand is paid. Where a bailee has expended his labour and skill in the improvement of a chattel delivered to him, he has a lien for

his charge in that respect. Thus the artificer to whom the goods are delivered for the purpose of being worked up into form, or the farrier by whose skill the animal is cured of a disease, or the horse-breaker by whose skill he is rendered manageable, have liens on the chattels in respect of their charges. An agister, who merely takes in an animal to feed it, is not entitled to a lien, as not coming within this principle, for he does not confer any additional value on the thing entrusted to him. A garage owner is not entitled to a lien merely for maintaining a motor car. A bailee's lien is lost if he surrenders possession of the goods, even though he subsequently regains possession. The line never arises unless the bailee has a right to continuing possession of the goods, so that if the bailor has the right to remove the goods from time to time, there is no lien, in the absence of an express agreement that the goods shall remain "in pawn" despite temporary removal by the bailor. Further, where a person does work on goods delivered to him under an entire contract, the fact that the deliveries arc at different times does not affect his right to a lien on all goods dealt with under that contract. Accordingly, where jute was delivered to a pressing company from time to time to be baled, but all under one contract, the lien was held to attach to all such goods. A bailee for reward cannot transfer his lien to a sub-contractor without the bailor's authority. But such authority may be implied. If H, who has hired a car from a car owner O, under a hire-purchase agreement, by the terms of which H has undertaken to keep the car in repair, delivers the car to a garage proprietor G for repair, G has a lien not only against H, but also against O: the express duty to repair leads to an implied authority to create a lien for repair. This implied authority is not removed by the fact that H is in arrear with the payments of the hire-purchase installments at the time the vehicle is delivered to G for repair, unless O has already terminated the agreement for such default before the car is left with G. Contract to the contrary.---A lien, good against the owner, arises in favour of a repairer, employed by a hirer, even though the contract of hire-purchase expressly forbids the creation of a lien, if this prohibition is unknown to the repairer. Where there is an express contract to do certain work for a specified sum of money, there is no room for a quantum meruit claim. A person, therefore, to whom an organ is delivered for repairs for a certain sum is not entitled to retain it as security for a sum of money claimed not under the contract, but for worked done. While the special contract is in force there is no other "due remuneration" than the sum expressly contracted for. Exaggerated claim made---Right to lien till payment of actual amount due is not lost. Goods under one contract delivered at different times---Lien is created on all goods.----Where a person does work on goods delivered to him under an entire contract, with reference to goods delivered at different times, such as to establish a lien, he is entitled to that lien on all goods dealt with under that contract. Lien created---Value of goods being disproportionate to actual amount due does not affect lien. Lien---Exists only Where there is right to continuous possession. The established practice is that without the right of continuing possession there can be no right of a lien. If the owner, therefore, has a right to assert the possession and to interrupt the possession of the party claiming the lien such a right of the owner would be inconsistent with a lien. Contract for packing jute---Advance payment of Rs. 30,000 made---Goods packed and found hypothecated to third party---Packer cannot have prior charge on goods to recover balance of packing charges. Where the plaintiff entered into a contract with defendant No. 1 for packing 30,000 pucca bales of jute and for this he received Rs. 30,000/- in advance. Defendant No. 1 left for India leaving behind 4,000 bales of jute when the outstanding charge still due to the plaintiff stood at Rs. 60,000/- So the plaintiff filed this stilt under the ordinary law of contract and equity for declaring a prior lein over the existing 4,000 bales of jute and also for a decree of Rs. 60,000. The suit was contested only by defendant No. 6 who claimed that by a written instrument dated 2-8-54 defendant No. 1 had hypothecated and created a first charge on all. its stock of jute and as such defendant No. 6 was entitled to take possession of the same jute.

Held: Equity can only come into play as and when it is found that the party is subject to some hardship for no fault of his. Since the plaintiff did not put any restriction, it cannot be said that the plaintiff is entitled to invoke principle of equity in the matter of realisation of any charge that may be due from defendant No. 1 for the jute stocked in his godown. Jute delivered to pressing company for pressing---Bales placed in godown of company with freedom to owner of bales to deal with them as he liked---Pressing company has no lien on goods in godown in case of nonpayment of bill.
Bailment :A bailment is a delivery of goods one person to another for some purpose upon a contract that they shall be returned or otherwise disposed of according to the directions of the person delivering. The person delivering the goods is called the "Bailor". The person to whom they are delivered is called "Bailee". Example :- Mr. Jhon enters into agreement with Miss. Sony to deliver her laptop to him on this condition that it shall be returned to her after one month. In this example Mr. Jhon is a Bailee and Miss. Sony is a Bailor. Laptop is good bailed. It is a contract of Bailment.

Essentials or Features of Bailment :Following are the important essential of bailment : 1. Contract :It is the basic essential for the bailment. For the delivery of goods contract between the two parties is necessary. Contract may be oral or written, implied or expressed. 2. Moveable Property :It is the main feature of bailment that it is only for the moveable property and not for the immoveable property. 3. Delivery of Goods :It is also necessary that goods should be delivered by one person to another. 4. Change of Possession :Bailment contract also brings change in the possessions of the goods. Only b without possession is not sufficient for this contract. 5. Purpose of Bailment :The object of bailment may be for the safety of goods or for hire or for the use. 6. Temporary Delivery :The delivery of the goods may not be for the permanent purpose. it is essential that delivery must be made for the temporary purpose. 7. Ownership :right of ownership remains with bailor and it does not change by the delivery of goods to other person. 8. Change In Shape :If bailed goods shape changes in the mean time even then it remains a contract of bailment. 9. Parties of the Contract :In the contract of bailment there are two parties, the bailor and the bailee.

10. Returnable :It is very important feature of the bailment. The bailee should return the goods to the bailor or disposed according the directions of the bailor . The main types of bailment are given below:

1. Gratuitous Bailment:
Where the bailee does not charge nay thing for the bailment it is called gratuitous bailment.

2. Bailment for Reward:

When the bailor charges any thing for his services it is called bailment for rewards.

3. Bailment for Use:

When the bailor delivers an article to the bailee for use by the later in any general or specific way, this is called a bailment for use.

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X delivers his watch to Y for the latter to use it for one month. Here bailment is bailment for used.

4. Bailment of safe custody:

If valueable goods or even coins or notes in box are deposited for protection, it is called bailment for safe custody

5. Bailment for Mutual Benefit:

When the bailor delivers his articles to another for repair or gives his goods to carrier for carriage, it is known as bailment for mutual benefit.

6. Bailment for Pledge:

It is a contract whereby an article is deposited with a lender as security for the payment of a loan or performance of a promise.

7. Bailment for Finding of lost Goods:

If a person already in possession of the lost goods of another, he thereby becomes the bailee and the owner becomes the bailor.
Types or Kinds of Bailment :Bailment has the following important kinds : 1. Bailment For Safe Custody :Sometimes an owner of the precious goods like ornaments delivers them to the bailee for the safe custody. 2. Bailment For Reward :If the bailor charges some reward for the services it is called bailment for reward.

Example :- Mr. Sean delivers the car on rent to Mr. Burg Rs. 25,00 per day. 3. Gratuitous Bailment :It is gratuitous bailment when bailor does not charge any reward for the bailment. 4. Bailment For Use :If any person delivers any article for the use to bailee it is called bailment for use. Example :- Mr. Carlos delivers a pen in the examination room to Miss. Rehana for three hours, it is a bailment for use. 5. Bailment For Lost Goods :If any person finds the goods of the other person, he will also be considered bailee. It will be called a bailment of lost goods. Real owner will be called bailor. 6. Bailment For Pledge :Sometimes an article is deposited with a lender as a security for the performance of a promise or the repayment of debt. 7. Bailment For Repair :Sometimes a bailor delivers an article like Car, T.V, Laptop for the repair to another person. It is known as bailment for repair. 8. Bailment For Carrier :Sometimes we deliver the goods to the transport companies for carriage. It is known as bailment of carrier. 9. Termination :A contract of bailment is being dissolved with the completion of purpose, expiry of time, death of the party or at the option of the bailor. Termination of bailment:
A contract of bailment is avoidable at the option of the bailor, if the bailee does any ad with regard to the goods bailed, inconsistent with the conditions of the bailment. Illustration A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the 'option of A, a termination of the bailment. The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults. If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed. Illustrations (a) A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained.

(b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is injured. B is responsible to A for the injury. If the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. Illustrations (a) A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury done to the horse. (b) A hires a horse in Calcutta from B expressly to march to Benares. A rides with clue care, but marches to Cuttack instead. The horse accidentally falls and is injured. A is liable to make compensation to B for the injury to the horse. If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods. Illustration A bails a barrel of Cape flour worth Rs. 45 to B. B, without A's consent, mixes the flour with country flour of his own, worth only Rs. 25 a barrel. B must compensate A for the loss of his flour. If, by the default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of. the goods from that time.

Definition Linguistically, 'Al-Luqatah' refers to anything that is found and picked up from the ground. Technically, as Imaam Ibn Qudaamah a Muslim scholar, defined it as: 'Property that the

owner loses and a person finds and takes away (to preserve it in trust).'

Legal Validity Muslim scholars vary about the ruling. The Hanafi and Shaafi'i jurists maintain that it is better to pick up a lost property because a Muslim is duty-bound to preserve his Muslim brother's property, as evidenced by the saying of the Prophet when he was asked about Al-Luqatah: "Remember

the description of its container and the string with which it is tied. Make a public announcement of it for one year. If nobody comes and claims it, then utilise the money but keep it as a trust with you. And if its owner comes back one day seeking it, then return it to him." [Al-Bukhaari and Muslim]

According to the Maaliki and Hanbali jurists, it is a Makrooh (disliked) act to take away such property. This is also the opinion of Ibn 'Umar and Ibn 'Abbaas . They argued that by taking

away such lost items, one is bound to use something that is deemed unlawful. They also argued that one may not be able to undertake his duty efficiently regarding it, in terms of advertising it, returning it to its lawful owner and preserving it.

Its Ruling in Terms of Liability Al-Luqatah remains a trust with the person who finds it and keeps it, and he is deemed liable for it only if he abuses it. He is also deemed liable for it if he gives it to somebody else without the permission of a judge. If it is damaged while still in the finder's possession, after publicly announcing that he has found it and asking people to refer its rightful owner to him, then he is not deemed liable for such damage because he volunteered to preserve it in trust. The Ahaadeeth (prophetic statements) on this issue are very clear. The Prophet Hadeeth: "...But keep it as a trust with you". Types of Al-Luqatah 1. If it is an animal, the finder should see if it is able to protect itself or not. If it is able to, then he is not allowed to take it away. When the Prophet was asked about the Islamic ruling said in the above-quoted

concerning a lost camel, he replied: "It is none of your concern. Leave it, for it has its feet and a water-container (reservoir), and it will reach water and eat from the trees until its owner finds it." [Al-Bukhaari] However, if the lost animal is not able to protect itself, such as a sheep, a sick camel or a horse with a broken leg, the finder is allowed to take it away. When the Prophet was asked about the

ruling concerning a lost sheep, he replied: "Take it, for it is either for you, or for your brother (i.e., its owner), or for the wolf." [Al-Bukhaari] 2. As for lost property that is not an animal, such as money of an unknown owner, one should consider the following rulings:

The Ruling Concerning Trivial Fallen Items For trivial items such as a loaf of bread, a whip, a date or anything that people generally do not claim when they lose, according to the predominant custom, the person who finds such an item is

allowed to claim it as his own without publicly announcing it. He is also allowed to utilise it. Jaabir bin 'Abdullaah who was one of the Prophet's companions, said: "The Messenger of Allaah

allowed us to utilise (such trivial objects as) a rod, a whip and a rope if we found it." [AlBukhaari and Muslim]

Announcing Lost Property Publicly a) If someone finds an object, he should acquaint himself with the features that distinguish it from all similar objects. This will allow him to identify the right owner if he comes to claim it and asks him about its distinguishing features. b) If he knows its distinguishing features, he should advertise it in public places, markets and outside Mosques, but not inside the Mosques, as this is deemed a Makrooh act. He should then wait for a year.

How should the finder be compensated for announcing, publicising or maintenance expenditure? Hanafi and Hanbali jurists maintain that the finder should incur such expenses. Imaam Maalik maintained: "The owner is to be given two options: either to reclaim it from the person who has found it, by paying him back for what he has spent on it, or to give it to him in return for the expenses incurred." Shaafi'i jurists say that the judge takes the money from the public treasury of the Muslim state and gives it to the finder of the lost property to use it for advertising purposes, or the finder may borrow this money and would consider it as a loan to the owner.

Returning Lost Property to the Person Who Claims It If someone comes and claims that the lost property is his, its finder should ask him about its distinguishing characteristics. If the claimant adequately describes it and distinguishes it from similar items, or if he proves to him with clear evidence that it belongs to him - by describing its container or the string with which it is tied, for instance - then the finder should return it to him, as the Prophet said by way of example: "If its owner shows up and satisfactorily describes its

container, the string with which it is tied and the amount of money in it, then return it to him." [Muslim]

A question arises here: After the claimant provides a satisfactory description of the lost property, should the finder return the property to him or should he take him to a judge to establish the evidence and act upon the judge's decision? According to the Hanafi and Shaafi'i schools of Fiqh (jurisprudence), the finder of the lost property is not obliged to return it. The followers of the Maaliki and Hanbali schools of Fiqh have stated that he is obliged to return it to its owner if the latter gives a satisfactory description of it, in accordance with the dictates of the prophetic tradition mentioned above.

Claiming Lost Property as One's Own The finder of the lost property can claim such property as his own if he still has it, or he can claim its price as his own in case he sold it after advertising it for the required period of time. In such a case, he should give it or give its value to the owner should the latter come forward to claim it, as the Prophet said in this regard: "Advertise it for a year. If nobody claims it, then utilise it, and

keep it with you as a trust." One is not allowed to claim it as his own without advertising it for a full year. Some scholars argue that it is not permissible to consider lost property as one's own, and whoever finds it should, after advertising, give it in charity to the poor because it is considered other people's property, and it is not permissible to use it without its owner's consent, in accordance with prophetic textual evidence: the Prophet said: "A Muslim's property is not also said: "Lost property is

lawful (for another Muslim) without the former's own free will." He

not lawful. Whoever finds it should advertise it for a year. If its owner shows up and claims it, he (the finder) must return it to him; if he does not show up, he should give it in charity." [Al-Bazzaar and Ad-Daaraqutni]

Rights of finder of goods: The rights of finder of goods is given below: 1. Right to receive compensation: The finder of goods has right to recover compensation for the trouble and expenses incurred in preserving. 2. Right of lien: He can exercise his right of lien and may retain the goods until he receive the expenses incurred in preserving the property or for finding out the true owner. 3. Right to Sue:

He can file a suit against the owner for any reward that might have been offered to give him. 4. Right of legal Action: The finder may take necessary legal action against third party who wrongfully deprives him of the possession of the goods. 5. Right of Selling: The finder has a right to sell the thing of another found by him under the circumstances given below. (See 169) Duties of Finder of Goods: The duties of finder of goods are given below: 1. Finding out the real owner: It is the duty of the finder of the goods to make possible effort in order to find out the real owner of the goods. He may retain such goods until he finds true owner by advertisement in case of costly thing. 2. Care to be taken by the finder: The finder is bound to take as much care of the goods lost as a man of ordinary prudence would under similar circumstances take of his own goods of the same bulk, quality and value as the goods lost. 3. Returning of goods: It is the duty of finder to return the lost goods to real owner when he receives reasonable compensation for his services he has rendered in respect of them.

If you are a supplier of goods and operate your business on a credit system then it pays to protect your position in relation to your debtors. The following scenario depicts a common occurrence in the supplier/purchaser market leading to frustration and ultimately loss of moneys owning. The Scenario S is a supplier of building material in the construction industry. P is a small construction company that purchases various materials to use in the construction of homes and sources those materials from various suppliers. P and S enter into an agreement for S to supply certain materials to P. As a supplier in a tough market S wants to maintain good client relations and therefore instead of insisting that payment be made on delivery, S agrees to supply P on credit with payment to be made within 30 days of receiving an invoice. S supplies P with materials to the value of $30,000.00 in the first month and issues an invoice. After the expiry of the 30 day period S still has not received payment and begins making reminder calls. P assures S that payment will be made but needs to place an order for $40,000.00 worth of material for a large contract. S delivers the goods and issues the second invoice. After non-payment S decides to issue a letter of demand however those letters and subsequent phone calls have been ignored. After months of chasing, S soon discovers that P has gone into liquidation owing huge amounts of money to secured and non-secured creditors. S subsequently receives correspondence from the liquidator advising that after payment to secured creditors and liquidators fees unsecured creditors will receive less than 1c in the dollar. How to Protect Your Business As a supplier of goods, there are a few ways to protect your business. One way to effectively ensure that you can recover outstanding monies in the event of your client becoming insolvent is to see your lawyers to obtain a personal guarantee(s) from the director(s) of the company. If the director(s) refuse(s) to provide a personal guarantee then this is the best thing that can happen as it has assisted you to manage the risk. Business is all about risk management and more so during the Global Financial Crisis. You are not a bank and therefore you should not accept any risk associated with extending credit to any person or entity where there is the likelihood of default. A personal guarantee can be obtained from the director of the company or a third party. It is generally a good idea to conduct a search to find out what assets the guarantor owns as it would be a futile exercise to obtain a guarantee from someone who has no realisable assets. Do not forget you are just as much at risk with old clients just as you are with new ones. No one ever advertises they are going broke they just do. Where companies are involved in insolvent trading and you are at risk of losing money then you need to act immediately and retain a lawyer to assist you Where the asset position of the guarantor is obtained, any contract for the supply of goods would be drafted to include a guarantee clause. It is important to ensure that the guarantee clause be

drafted to provide adequate protection in the event the guarantee is required to be invoked. In all such cases phone LAC Lawyers on (02) 9904 6800 for an appointment for proper professional advice and assistance.
Indemnity and guarantee are two important ways to safeguard ones interests when entering into a contract. There are many similarities between the two concepts though they differ a lot also. This article will highlight the differences between Indemnity and guarantee to enable readers to choose one of the two depending upon circumstances and requirements. Indemnity When you agree to an indemnity agreement, you agree to assume all responsibility and liability for any injuries or damages to someone else. Whenever there is an indemnity contract and one party suffers any losses, the other has the liability to indemnify for the consequences. The common phrases that are included in indemnity contracts say that the person agrees to indemnify and hold harmless or to defend, indemnify and hold harmless. If there is a clause or obligation to defend, you should also get a clause included requiring the person who is being indemnified to tender the defense to you. At least you should get the clause of right to control defense. In the absence of these provisions, the party that you are indemnifying can cost you dearly by raking up huge attorney fees and other sundry expenses. But if you are controlling the defense, you can have a say in the selection of attorney thereby minimizing litigation costs. In general indemnity agreement covers damages, loss, costs, expenses and fees of attorneys. If there is no mention of attorney fees, the court may not require the person promising to indemnify to pay attorney fees. Guarantee In sharp contrast to an indemnity, a guarantee is a promise to answer for debt, default or other financial liability of another. You promise to pay for any damages or default in the event of the principal person refusing to do so or when he cannot do so. If you are a guarantor, once you have paid the principal obligation, your obligation is terminated. Guarantee clause is not the main agreement and is generally collateral to some other obligation or debt. You are held accountable or liable for this debt or obligation after you have fulfilled your obligation as a guarantor. It is therefore prudent to study all clauses or underlying contract before signing any guarantee contract. Difference between Indemnity and Guarantee A guarantee is a promise to someone that a third party will meet its obligation to them. If they do not pay you, I will pay you. An indemnity is a promise to be responsible for another persons loss and to agree to compensate them for any loss or damage on mutually agreed terms. For example, one agrees to pay the difference of repairs if they exceed a certain limit.

Year : 1872 Act : CHAPTER VIII

OF INDEMNITY AND GUARANTEE

124."Contract of indemnity" defined.

124."Contract of indemnity" defined.-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". 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 200 rupees. This is a contract of indemnity.

125.Rights of indemnityholder when sued.

125.Rights of indemnityholder when sued. The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies (2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit ; (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not

50

contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

126."Contract of guarantee", "surety", principal debtor" and "creditor".

126."Contract of guarantee", "surety", principal debtor" and "creditor".-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.

127.Consideration for guarantee.

127.Consideration for guarantee.-Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

Illustrations

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of As promise to deliver the goods. This is a sufficient consideration for Cs promise. (b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for Cs promise. (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.

128.Suretys liability.

128.Suretys liability.-The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract.

Illustration A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.

129."Continuing guarantee".

129."Continuing guarantee".-A guarantee which extends to a series series of transactions is called a "continuing guarantee".

Illustrations

(a) A, in consideration that B will employ C in collecting the rent of Bs 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. (b) A guarantees payment to B, a tea-dealer, to the amount of pound 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of pound 100, and C pays B for it. Afterwards B supplies C with tea to the value of pound 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of pound 100.

51.(c) 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 riot pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.

130.

Revocation of continuing guarantee.

130.Revocation of continuing guarantee.-A continuing guarantee may at any time be revoked by the surety,as to future transactions, by notice to the creditor. Illustrations

(a) A, in consideration of Bs discounting, at As request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C.

(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee.

131.Revocation of continuing guarantee by suretys death.

131.Revocation of continuing guarantee by suretys death.-The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

132.Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on others default.

132. Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on others default.Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence.

Illustration A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note.

133.Discharge of surety by variance in terms of contract.

133.Discharge of surety by variance in terms of contract.-Any variance, made without the suretys consent, in the terms of the contract between the principal 1[debtor] and the creditor, discharges the surety as to transactions subsequent to the variance. Illustrations

(a) A becomes surety to C for Bs conduct as a manager in Cs bank. Afterwards B and C contract, without As consent, that Bs 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 ---------------------------------------------------------------------

1 Ins. by Act 24 of 1917, s. 2 and Sch. I. ---------------------------------------------------------------------

52.discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss. (b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect ,of a duty not affected by the later Act. (c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon As becoming surety to C for Bs duly accounting for moneys received by him as such clerk. Afterwards, without As knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B. (d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payments shall be applied to the then existing debts between B and C. A is not liable on his guarantee for any goods supplied after :this new arrangement. (e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st January. A is discharged from his liability, as the contract has been varied, inasmuch as C might sue B for the money before the 1st of March.

134.Discharge of surety by release or discharge of principal debtor.

134.Discharge of surety by release or discharge of principal debtor.-The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

Illustrations (a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his suretyship. (b) A contracts with B to grow a crop of indigo an As land and to deliver it to B at a fixed rate, and C

guarantees As performance of this contract. B diverts a stream of water which is necessary for irrigation of As land and thereby prevents him from raising the indigo. C is no longer liable on his guarantee. (c) 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 As performance of the contract. B omits to supply the timber. C is discharged from his suretyship.

135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor.

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

53.136.Surety not discharged when agreement made with third person to give time to principal debtor.

136. Surety not discharged when agreement made with third person to give time to principal debtor. Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged. Illustration C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B. A is not discharged.

137.Creditors forbearance to sue does not discharge surety.

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

Illustration

B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship.

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

138.Release of one co-surety does not discharge others.-Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties1. 139.Discharge of surety by creditors act or omission impairing suretys eventual remedy.

139. Discharge of surety by creditors act or omission impairing suretys eventual 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 surety himself against the principal debtor is thereby impaired, the surety is discharged.

Illustrations

(a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for Bs due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this prepayment. (b) C lends money to B on the security of a joint and several promissory note made in Cs favour by B, and by A as surety for B, together with a bill of sale of Bs furniture, which gives power to C to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing to his misconduct and wilful negligence, only a small price is realized. A is discharged from liability on the note. (c) A puts M as apprentice to B, and gives a guarantee to B for Ms fidelity. B promises on his part that he will, at least once a month, see M make up the --------------------------------------------------------------------1 See s. 44, supra. ---------------------------------------------------------------------

54.cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee.

140.

Rights of surety on payment or performance.

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

141.Suretys right to benefit of creditors securities.

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

Illustrations (a)C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of Bs furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture. (b)C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes Bs goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged. (c)A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged.

142.Guarantee obtained by misrepresentation invalid.

142.Guarantee obtained by misrepresentation invalid. Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.

143.Guarantee obtained by concealment invalid.

143. Guarantee obtained by concealment invalid.-Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.

Illustrations

(a)A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for Bs duly accounting. A does not acquaint C with Bs previous conduct. B afterwards makes default. The guarantee is invalid. (b)A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.

55.144.Guarantee on contract that creditor shall not act on it until cosurety joins.

144. Guarantee on contract that creditor shall not act on it until co-surety joins.-Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.

145.implid promise to indemnify surety.

145.implid promise to indemnify surety.-In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.

Illustrations (a)B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt. (b)C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and, on As refusal to pay, sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover from B the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action. (c)A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2,000 rupees, but obtains from A payment of the sum of 2,000

rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.

146.Co-sureties liable to contribute equally.

146. Co-sureties liable to contribute equally. Where two or more persons are CO-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor1*.

Illustraticns (a)A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, la and C are liable, as between them selves, to pay 1,000 rupees each. (b)A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of onequarter, and C to the extent of --------------------------------------------------------------------1 See s. 43 supra. ---------------------------------------------------------------------

56.one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees.

147.Liability of co-sureties bound in different sums.

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

Illustrations (a)A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 30,000 rupees. A, B and C are liable to pay 10,000 rupees.

(b)A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A

in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupees each. (c)A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 70,000 rupees. A, B and C have to pay each the full penalty of his bond.

It is common practice throughout the construction industry that contractors are required to provide performance security in relation to their contractual obligations. The same requirement often applies to subcontractors and suppliers, as well as consultants to a lesser extent. Performance security generally falls into one of two types: bonds or guarantees. It can be required in respect of tenders, performance, advance payments, supply, maintenance and retentions. In my experience, although contractors and subcontractors must regularly provide such performance security, there is frequently an alarming lack of understanding of that which is provided. There is also, from time to time, a similar lack of understanding from those who request it. The terms bond' and guarantee' are synonymous. They are an irrevocable commitment by a bank acting on the instructions of its client to effect payment, provided the terms of the bond are met, if the client fails to comply with the contractual terms. In such event the named beneficiary can call' the bond and receive payment from the bank. Distinguishing bonds

All bonds contain certain basic information, including the names of the beneficiary and issuing bank; a description of the contract in respect of the which it is being issued; the bond value; the basis on which it is issued (on demand' or conditional'); the governing law; and its duration.

Of the two classes of bond - on demand and conditional - on demand bonds are usually those that are required from a contractor or subcontractor. The phrase on demand means exactly that, the beneficiary makes a written demand to the bank indicating that the contractor has failed to perform its obligations and demands payment of the bond value. Conditional bonds are those where payment is dependent upon proof that the contractor has failed to meet its contractual obligations. Such conditions may require, for example, the production of a court judgment or arbitration award. In each case it will take time to obtain such evidence, which rather reduces the effect of the bond as a form of performance security. Sometimes a bond will include a provision that the demand must be accompanied by a certificate or other evidence that confirms the persons signing it are duly authorised on behalf of the beneficiary. On other occasions a bond will provide that notice must be given to the contractor prior to a demand being made. A copy of the notice sent to the contractor must be submitted with the demand. The latter provision is intended to ensure that only proper demands are made. In reality it is often used as a ploy, in the event of a notice being given to the contractor for it to go to court to seek some relief and preventing the demand being made. Whether a bond requires the signatory to the demand to provide evidence of their authority or prior notice of it being given to the contractor, in neither case do these requirements make the bond conditional. Surety bonds Another type of bond is a surety bond, which is issued by an insurance company. This is fairly common and in the case of a performance bond, just as with a bank-issued bond, it similarly guarantees satisfactory completion of a project by the contractor. Surety bonds are seen by some as a cheap alternative to bank bonds. An insurance firm requires only a premium to be paid either for the life or for each year that the bond is in place. A bank, however, will make a charge for issuing the bond and depending upon the financial condition of its customer, may charge for a financing facility or even block funds to the bond value. Financial considerations aside, the difference between a bank and a surety bond are substantial. As we have seen earlier bonds issued by a bank can be on demand or conditional, but in either case once the demand is made, if it is in accordance with the bond terms then the bank must pay. A claim in respect of a surety bond issued by an insurance company is really no different to making a claim on an insurance policy. The claim is made then the insurance company will, often in the case of construction contracts, appoint a loss adjuster who will investigate it on behalf of the insurance company and determine its value. This means that there is no guarantee that the beneficiary under the surety bond will receive the full amount of their claim ie the bond value, unless supported by the loss adjuster. Whereas a bank bond is unaffected by any change construction contract terms, a surety bond like any other insurance policy, requires that the insurance company be advised of any change ie

anything that affects their risk. Examples include changes to the scope of works or programme. Such changes could have the effect of avoiding the surety bond, which would result in a claim from the beneficiary not being met. Forms of performance security should be considered with the same degree of care as all elements of the contract terms; if the documentation needed is not fully understood professional advice should be sought. Dennis Brand is senior legal advisor with Berrymans Lace Mawer. Tel: +971 4 359 9939 Bonds and guarantees in brief Performance security is generally given by a bond or guarantee and can be required in respect of tenders, performance, advance payments, supply, maintenance and retentions. Bonds and guarantees are an irrevocable commitment by a bank acting on the instructions of its client to effect payment if they fail to comply with their contractual terms, provided the terms of the bond are met. On demand bonds are usually those that are required from contractors. If they fail to meet their contract, the beneficiary can make a written demand to the bank for payment of the bond value. Conditional bonds are those where payment is dependent upon proof that the contractor has failed to meet its contractual obligations, this may require the production of a court judgment or arbitration award. A surety bond is issued by an insurance company and in the case of a performance bond it guarantees satisfactory completion of a project by the contractor. These require a premium to be paid either for the life or for each year the bond is in place. Forms of performance security should be considered with the same degree of care as any other element of the contract terms.

Contract Idemnity - types of guarantee Explain the meaning and nature of contract of indemnity. State the rights of indemnity holder and indemnifier. Contract of indemnity: 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 promises to compensate the loss is called the indemnifier and the person who is so promised is called the indemnity holder. According to the definition of indemnity, the loss to be made good must be caused either by the conduct of the promisor himself or by the conduct of any other person, and, so if the loss is caused by accident or by the conduct of the promisee (indemnity holder), there would be no indemnity. However, the Indian Courts have taken the view that this interpretation is not correct and that indemnity cannot exclude insurance.

A contract of indemnity being basically a contract, it has to possess all the essential elements of a valid contract such as free consent, lawful consideration and competence of parties to enter into contract etc. Further, a contract of indemnity can be either express or implied. An implied contract of indemnity can be inferred from the conduct of the parties or the circumstances of the case. Since the Contract Act has not stated the time of the commencement of the indemnifiers liability to indemnify and the word loss has been used in Section 124, doubt arises as to the commencement of the promisors liability. However, it is the settled position of law that the indemnified (promisee) does not have to wait till the time he has to actually sustain the loss. He can compel the indemnifier to place him in a position to meet the liability that may be cast upon him without waiting until the promisee has actually discharged it. Rights of indemnity holder : As we have already seen, contract of indemnity is a contract where the indemnifier promises the indemnity holder to save the latter from any loss that may be caused to him under the contract. From this, the rights of the indemnity holder can be stated as follows: 1. If the indemnity holder has to pay any compensation to any party in any suit in respect of any matter pertaining to which the indemnity applies, he can recover the same from the indemnifier; 2. He can recover from the indemnifier all costs of suit which he has to pay to such third party (provided he has acted in good faith, under the authority of the indemnifier and as per his instructions); 3. If any amount has been paid by the indemnity holder to any third party in any such suit by way of compromise, he can recover the same from the indemnifier, provided such compromise was not contrary to the orders of the indemnifier. Rights of indemnifier: The Act is silent as to the rights of the indemnifier. However, his

rights are similar to the rights of Surety under contract of guarantee. For example, he becomes entitled to all securities which the creditor has against the principal debtor. (Students are advised to refer to rights of Surety under the contract of guarantee.)
State the nature and features of contract of guarantee. Explain various types of guarantee. (b) Explain the rights and liabilities of Surety and co-Surety. When is Surety discharged from his liability? (a) Contract of guarantee and its types According to section 126, 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 and the person to whom the guarantee is given is called the creditor. A guarantee can be oral or written. In a contract of guarantee it is essential that there are three parties, viz. the Surety, the principal debtor and the creditor. It is also necessary that there is a liability, existing or future, enforceable by law. The moment there is a default on the part of the principal debtor, the Surety immediately becomes liable as if he were the principal debtor. He has no right to ask the creditor to first proceed against the principal debtor nor can he demand a notice from the creditor that the principal debtor has defaulted, because it is the Suretys duty to ensure that the principal debtor pays or performs his obligation. A contract of guarantee is like any other contract and therefore all the essential elements of valid contract, such as free consent, competence of parties etc. have to be present in the contract of guarantee also. However, so far as consideration is concerned, it is not separately needed for the Surety in the Contract of guarantee: Section 127 expressly provides that anything done or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the Surety for giving the guarantee. Types of Guarantee: A guarantee may be either specific guarantee or continuing guarantee. Specific Guarantee: It is given for single debt or obligation and comes to an end when the debt guaranteed has been paid or obligation guaranteed has been discharged. Thus, where A gives a loan to B for which C stands guarantee, it is a case of a specific guarantee. In this case, there is a specific debt and the guarantee shall come to an end the moment the loan is repaid. A specific guarantee cannot be revoked. Once the guarantee is given it cannot be withdrawn or revoked and even after the death of the Surety (guarantor), it continues to operate making his legal representatives liable for the same.Continuing Guarantee: On the other hand, a continuing guarantee is one where the guarantee given is not for a single or specific debt or obligation, but for a series of debts. (b) Rights and liabilities of Surety and co-Surety and discharge of Surety: The rights of Surety can be discussed under three heads: 1. Rights against the creditor; 2. Rights against Principal debtor; and 3. Rights against co-Surety Suretys rights against creditor 1. Right to benefit of creditors securities: At the time of entering into the contract of guarantee, the creditor may have certain securities in his possession given by the Principal debtor against the performance. The Surety is entitled to demand from the creditor, at the time of payment (or discharge of liability) all the securities, which the creditor has against the principal debtor at the time when the contract of Suretyship is entered into or subsequently acquired. It is

not necessary that the Surety should have knowledge of the existence of such securities. If the creditor loses or parts with the securities, which are acquired at the time of contract, the Surety is discharged to the extent of value of such securities lost. But if the securities are lost due to act of God or unavoidable accident, the Surety would not be discharged. Similarly, if the creditor parts with the securities, which he has acquired subsequent to the contract of Surety, the Suretys liability is not reduced. It should be noted that the right of Surety to benefit of the securities arises only after the payment in full of the debt of the principal debtor to the creditor. He cannot claim the benefit of the part of the securities merely because he has paid a part of the debt.2. Right to claim set-off, if any: The Surety is also entitled to the benefit of any set-off or counter claim, which the principal debtor might possess against the creditor in respect of the same transaction. In other words, the principal debtor may have certain claims against the creditor arising out of the same transaction. Upon default by the principal debtor in discharging his liability, the Surety may make use of the said counter claim in reducing his liability. Suretys rights against the Principal debtor: The Surety enjoys the following two rights against the Principal debtor. 1. Right of subrogation: When the Surety pays off the debt on default of the principal debtor, he is invested with all the rights, which the creditor had against the principal debtor. In other words, the Surety steps into the shoes of the creditor and will be able to exercise all those rights and remedies, which could be exercised by the creditor against the principal debtor. The Surety is subrogated to all rights, which the creditor had against the principal debtor. He is entitled to the securities held by the creditor and also can sue the principal debtor for recovery of the debt paid by the Surety. 2. Right to claim indemnity: In every contract of guarantee there is an implied promise by the Principal debtor to indemnify the Surety and the Surety is entitled to recover from the Principal debtor whatever sum he has rightfully paid under the guarantee. However, he cannot claim the amounts which he has paid wrongfully. Thus, a Surety is entitled to be indemnified by the Principal debtor for whatever amount he has rightfully paid to the creditor under the contract of guarantee.It should be noted that the Surety is entitled to recover from the Principal debtor only that amount which he has actually paid to the creditor and no more. Thus, where there is a compromise between the creditor and the Surety under which the Surety pays a lesser amount, he can get from the Principal debtor only the amount actually paid. Suretys right against the Co-sureties: Where a debt is guaranteed by two or more Sureties, they are called cosureties. In such a case, all the co-sureties are liable to contribute towards the payment of the guaranteed debt as per the agreement between them. But in the absence of any agreement, if one co-surety is compelled to pay the entire debt, he is entitled to contribution from the other co-surety or co-sureties. Discharge of Surety from liability: A Surety is freed from his obligation under the contract of guarantee under any of the following circumstances. 1. Notice of revocation: A guarantee given for a specific transaction or for a specific debt cannot be revoked. But a continuing guarantee may be revoked at anytime by the Surety as regards the future transactions. Thus, the liability of Surety comes to an end in respect of future transactions which may take place between the creditor and principal debtor. 2. Death of Surety: In case of continuing guarantee, the death of Surety discharges him from liability as regards the transactions after his death and the estate of the Surety shall not be liable. Death of the Surety acts as revocation and it is not necessary that the creditor should have knowledge of the death of the Surety. If the creditor enters into any fresh transactions after the Suretys death without the knowledge of the death of the Surety, the estate of the deceased Surety shall not be liable for such transactions. 3. Variance in terms of contract: Any variance made without the Suretys consent, in the terms of the contract between the principal debtor and the creditor, discharges the Surety as to the transactions subsequent to the variance. In other words, if there is any alteration in the terms of the contract, under which the Surety has undertaken the liability, without his consent, such alteration will discharge him from his liability. It is immaterial whether the variance is very small or even when it is to the benefit of the principal debtor. Strictly speaking, this rule is applicable to continuing guarantee, but the principle involved here is also applicable to specific guarantee. When there is any alteration in the terms of the contract of guarantee, even though it is for a specific debt, the Surety has a right to disown his obligation on the ground that the contract is no longer the same, which he had entered into. 4. Release or discharge of Principal debtor: The Contract Act provides for the following two ways in which the Surety will be discharged:a. A Surety will be discharged if the creditor makes a contract with the Principal debtor by which the Principal debtor is released. Any release of the Principal debtor is the release of the Surety also.b. The Surety is also discharged by any act or omission on the part of the creditor, the legal consequence of which is the discharge of the Principal debtor. 5. Arrangement by creditor with Principal debtor without the consent of Surety: Where the creditor, without the consent of the Surety, makes an arrangement with the Principal debtor for composition or promises to give time or not to sue him, the Surety will be discharged. However, mere forbearance on the part of the creditor to sue the Principal debtor does not discharge the Surety. For example, B owes to C a debt guaranteed by A. The debt becomes payable, but C does not sue B for a year. A is not discharged from the liability of suretyship. 6. Creditors act or omission impairing Suretys eventual 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 Surety himself against the Principal debtor is thereby impaired, the Surety is discharged. In other words, it is the duty of the creditor to do every act necessary for protection of the rights of Surety and if he fails in this duty, the Surety is discharged. Thus, where the integrity of a cashier is guaranteed, it is the duty of employer to give information to the Surety about any dishonest act done by the employee. If the employer continues to employ him

after an act of dishonesty, the Surety is discharged, if he is not informed withina reasonable time. In this case, the eventual remedy of the Surety to take appropriate action against the employee is lost. 7. Loss of security: If the creditor loses or without the consent of the Surety parts with any security given to him at the time of the contract of guarantee, the Surety is discharged from liability to the extent of the value of the security. This loss of the security however, should be due to the negligence of the creditor. If it is due to the act of God or unavoidable accident, the Surety is not discharged. If a loan, guaranteed by Surety is also secured with the mortgage of the property of the borrower and the creditor subsequently cancels the mortgage, thus parting with the security, the Surety is discharged. 8. Invalidation of contract of guarantee: A Surety is discharged from liability when contract of guarantee (in between creditor and Surety) is invalid. A contract of guarantee is invalid for the following reasons: a. Where the guarantee has been obtained by means of misrepresentation or fraud or by keeping silence as to the material facts of the transaction, by the creditor or with the knowledge of the creditor. However, it should be noted that if the misrepresentation or concealment is done by the debtor without the knowledge of the creditor, the Surety is not discharged. b. Where a person gives guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join. c.Where the

contract of guarantee does not possess any of the essential elements of a valid cont
Discharge of surety when creditor compounds with, gives time to, or agrees not to sue principal debtor.---A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor discharges the surety, unless the surety assents to such contract. Contract to give time to principal debtor.---A nominal giving of time may have the effect, in substance, of accelerating the creditor's remedy, as where, having commenced an action against the principal debtor, the creditor took a recorded acknowledgment of the debt, and undertook not to enforce it before a certain day, which, however, was earlier than the time at which he could have obtained judgment in the action in the ordinary course. In Such a case the surety, being manifestly not prejudiced, is not discharged. A contract whereby the creditor promises to give time to the principal debtor must be distinguished from an unconditional contract not to sue him. In the former case, the remedy of the creditor is merely suspended until the determination of the fixed period ; in the latter case the principal debtor is completely released from his obligation so as to entitle the surety to a discharge under S. 134, apart from the specific provisions of this section. In either case, the mere formation of the contract is sufficient to operate as a discharge of the surety irrespective of any forbearance that may be exercised under it. The reason of this rule appears 16 be that a surety has a right, immediately on the debtor becoming due, to insist upon proceedings being at once taken by the creditor against the principal debtor, and any contract that would prevent the creditor from suing him would be inconsistent with that right (S. 139). But the contract must be a binding one supported by consideration ; forbearance to sue, therefore, exercised in pursuance of an agreement without consideration, would not discharge the surety, as it does not amount to anything more than "mere forbearance" within the meaning of S. 137. A consent decree, made without the surety's consent, for payment by installments of the sum due from the principal debtor discharges the surety. It is not necessary that the contract should be express: a tacit or implied contract inferred from the acts of the parties is equally binding as an express one. Thus the acceptance of interest in advance by a creditor operates as a general rule as an agreement to give time to the principal debtor and consequently as a discharge to the surety; for the creditor is in that event precluded from suing the principal until the time covered by the payment in advance has expired. It has been said that in an ordinary surety bound under S. 55 (4), Civil Procedure Code, the principal creditor is not the decree-holder, but the Court, and it is really in the discretion of the Court to enforce the bond or not. Sections 133, 135 and 139 cannot in terms apply to transactions where the bond is given to the Court, in view of the fact that there is no creditor as required by S. 126, but the equitable principles underlying these sections can be applied, and if the Court to which the security has been given has itself been responsible for varying the terms, the surety is justified in applying to the Court to be relieved, and the Court will exonerate him if his position has been materially affected. If the effect of the compromise is to give time to the principal debtor, the surety is discharged unless he consented. Where surety not personally liable.---The general rule that a surety is discharged if any material alteration is made in the contract between the creditor and the principal debtor without reference to the surety applies to a surety who is under no personal liability but has merely deposited documents by way of security.

Part payment by surety.---If the surety has paid part of the debt, and subsequently there is a compromise between the principal debtor and the surety, the surety cannot recover such part payment from the creditor under S. 135, for as regards such payment he is no longer a surely but a principal creditor, as the effect of part payment is to transfer to him so much of the cause of action against the principal debtor. Contrary agreement.---The operation of the rule as to giving time to the principal debtor may be excluded by express agreement. If the instrument creating the debt and the suretyship declares, that the surety or sureties shall be taken, as between themselves and the creditor, to be principal debtors, and shall not be released by reason of time being given, or of any other forebearance, act, or omission of the creditor which, but for this provision, would discharge the sureties, then any defence on these grounds is effectually barred, and it is unnecessary to consider whether the facts would otherwise raise it. If the agreement creating the suretyship includes a terms that the guarantee is not to be avoided by the creditor giving time to the principal debtor, but the creditor must inform the surety if any payment is more than thirty days overdue, the surety is released if time is given by the creditor and the surety is not informed when the payment is more than thirty days overdue. Consent of surety is imperative for grant of extention of time to repay loan by creditor to debtor. Consent for extension not given by surety, guarantee, held, stands discharged. 136. Surety not discharged when agreement made with third person to give time to principal debtor.---Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged. Illustration C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B A is not discharged. COMMENTS It is clear that when the creditor enters into a binding contract with the principal debtor to give him time without the assent of the sureties, and without reserving his remedy against the sureties, such giving of time discharges the sureties. But, to produce this result, two things are necessary. There must be a binding contract to give time, capable of being enforced; and the contract must be with the principal debtor. If merely made with a third party it will not do. 137. Creditor's forbearance to sue does not discharge surety.---More forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not in the absence of any provision in the guarantee to the contrary, discharge the surety. Illustration B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship. COMMENTS "Mere forbearance."---S. 135 deals with the case in which a surety is discharged by a contract between the creditor and the principal debtor, entered into without the surety's consent, to give time to, or not to sue, the principal debtor. This section deals with the case of "more forbearance" to sue, as distinguished from forbearance springing from a contract, and provides that the surety shall not be discharged in such a case. Now the forbearance to sue, which does not arise from a contractual obligation, may be exercised for a period short of the period of limitation prescribed for the still, or it may continue until the expiration of the limitation period. The illustration to the section affords an instance of the former case, the limitation period for the suit being three years, and the forbearance exercised only for a year. The surety is not discharged in such a case, and it is equally clear that he would not be

discharged even if the forbearance continued for a longer period, provided it fell short of the period of limitation. It seems moreover, according to the weight of decision and English opinion, that it makes no difference if the forbearance continues until the period of limitation has elapsed. 138. Release of one cosurety does not discharge others---Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties. COMMENTS Release of one of several sureties.---This section is a necessary consequence of the principle laid down in S. 44, and must be taken as a deliberate extension of a rule which in the common law is limited to the case of co-sureties contracting severally and not jointly. Only where co-sureties have contracted jointly---that is, where the joint suretyship of the others was part of the consideration for the contract of each---does a release of one of them by the creditor discharge the others. The release of a surety discharges a joint co-surety, but not a co-surety severally bound. The present section appears to abolish this distinction. 139. Discharge of surety by creditor's act or omission impairing surety's eventual 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 surety himself against the principal debtor is thereby impaired, the surety is discharged. Illustrations (a) B contracts to build a ship for C for, a given sum, to be paid by installments as the work reaches certain stages. A becomes surety to C for B's due performance of the contract. C, without the knowledge of A, repays to B the last two installments. A is discharged by this prepayment. (b) C lends money to B on the security of a joint and several promissory note made in C's favour by B, and by A as surety for B, together with a bill of sale of B's furniture, which gives power to C to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing to his misconduct and willful negligence, only a small price is realised. A is discharged from liability on the note. (c) A puts M as apprentice to B, and gives a guarantee to B for M's fidelity. B promises on his part that he will, at least once a month, see M makes up the cash. B omits to set this done, as promised, and M embezzles. A is not liable to B on his guarantee. COMMENTS Act or omission of creditor tending to impair surety's remedy.---It may be observed that the injurious quality to be considered is tendency to diminish the surety's remedy or increase his liability. Transaction having an immediate tendency to cause or permit the principal debtor to make default are only one species of those to which the surety may object. In almost every case where the surety has been released either in consequence of time being given to the principal debtor, or of a compromise being made with him, it has been contended that what was done was beneficent to the surety, and the answer has always been that the surety himself was the proper judge of that, and that no arrangement different from that contained in his contract is to be forced upon him; and bearing in mind that the surety, if he pays the debt, ought to have the benefit of all the securities possessed by the creditor, the question always is whether what has been done lessens that security. But mere passive acquiescence by the creditor in irregularities on the part of the principal debtor such as laxity in the time and manner of rendering accounts by a collector of public moneys whose fidelity is guaranteed, will not of itself discharge the surety.

Neither is the surety discharged from liability for the principal debtor's default in a manner within the terms of the guarantee. Because that default would not have happened if the creditor had exercised all the powers of superintending the performance of the debtor's duty which he could have exercised consistently with the contract. The employer of a servant whose due performance of work is guaranteed does not contract with the surety that he will use the utmost diligence in checking the servant's work. A surety cannot claim to be discharged on the ground that his position has been altered by the conduct of the person with whom he has contracted where that conduct has been caused by a fraudulent act or omission against which the surety by the contract of suretyship has guaranteed the employer. Act or omission impairing surety's eventual remedy.---The case in which a party is discharged by an act or omission of the creditor, of which the legal consequence is the discharge of the principal debtor, has been dealt with in S. 134, above. Under the present section a surety will be discharged by acts or (subject to the caution above given) omissions of the creditor specified therein which, though not having the legal consequence of discharging the principal, impair the eventual remedy of the surety against him. Where the liability of a surety guaranteeing payment by a judgment debtor of the amount of a decree by installments was expressly made dependent on the execution of the decree by the decree-holder on the occurrence of a single default, it was held that the omission to execute the decree on the happening of the default until execution had become time-barred discharged the surety under the provisions of this section. The decision was based on the ground that the decree-holder owed a duty to the surety under the terms of the guarantee, and that the failure to perform that duty until the decree became defunct by lapse of time must necessarily have impaired the "eventual remedy" of the surety against the judgment debtor. As to negotiable instruments, it is specially provided by the Negotiable Instruments Act, 1881, S. 40, that "when the holder of a negotiable instrument, without the contract of the indorser, destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from the liability to the holder to the same extent as if the instrument had been paid at maturity." Goods pledged as security with Bank---Security lost by act of Bank---Subsequent surety is discharged.--Where the earlier security by way of pledge of goods was lost by the Bank by its own act and as the value of the goods pledged was approximately Rs. 1,26,000, which greatly exceeded the outstanding loans due to the Bank, the failure of the Bank to pursue its remedy against that security completely discharged the liability of the surety who had provided security subsequently, and who could not pursue any remedy against the pledged goods which were no longer available. 140. Rights of surety on payment or performance.---Where a guaranteed debot has become due, or default of the. principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. COMMENTS This section lays down a general principle of which the most important practical application is to be found in S. 141. It seems that the intention of the Act is to keep alive for the surety's benefit any right of the creditor, under a security or otherwise, which would otherwise have been extinguished at law by the payment of the debt or performance of the duty. The whole doctrine of principal and surety, with all its consequences of contribution, etc. rests upon the established principles of a Court of Equity, not upon contract, except as it may be so represented upon the implied knowledge of those principles. There is no express contract for contribution, the bonds generally, if not universally, being joint and several, creating several obligations by each. The general reason of the equitable doctrines is that a surety is to be entitled to every remedy which the creditor has against the principal debtor; to enforce every security and all means of payment; to stand in the place of the creditor, not only through the medium of contract, but even by means of securities entered not without the knowledge of the surety, having a right to have those securities transferred to him, though there was no stipulation for that, and to avail himself of all those securities against the debtor. This right of a surety also stands not upon contract, but upon a principle of natural justice. On the same foundation stands the right of the surety who has paid the debt, or the portion of it which he guaranteed,

to stand in the creditor's place in the administration of the debtor's estate. The principle is undoubted, and the only difficulty is to be sure whether the surety has really guaranteed only a certain part of the debt, or is surety for the whole, but with a limit of liability. When a surety is only a surety for a part of the debt, and has paid that part of the debt, he is entitled to receive the dividend which the principal debtor pays in respect of that sum which the surety has discharged. In such a case it may be said that "the right of the surety arises merely by payment of the part, because that part, as between him and the principal creditor, is the: whole." But a surety who has become such, though with limited liability, in respect of the entire debt, has no rights by way of subrogation or in preference to the creditor until the creditor is fully paid. Moreover, the benefit of this principle is extended to persons who, though not actually sureties, are in an analogous position. The indorser of a bill of exchange is primarily liable as principal on the bill, and is not strictly a surety for the acceptor; but he has this in common with a surety for the acceptor, that after notice of dishonour "he is entitled to the benefit of all payments made by the acceptor, and is entitled, on paying the holder, to be put in a situation to have a right to sue the acceptor". 141. Surety's right to benefit of creditor's securities.---A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. Illustrations (a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B's furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture. (b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B's goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged. (c) A as surety for B makes a bond jointly with B to C to secure a loan from C to B. Afterwards C obtains from B a further security or the same debt. Subsequently, C gives up the further security. A is not discharged. COMMENTS One cannot help suspecting that this is not deliberate policy, but merely codification of equity some what out of date. The law here is, however, as stated in illustration (c). But it has been held that this section does not enable the creditor to withhold from the surety any security actually held by him at the time when the debt is paid by the surety: this section merely gives the creditor the right to surrender a security not held by him at the time of the contract provided he exercises that right before payment by the surety. The rule is not confined to securities in any technical sense. A surety is entitled to the benefit of the principal debtor's set-off against the creditor, if it arises out of the same transaction; this follows from the surety's right to be indemnified by his principal, combined with the equitable maxim of avoiding circuity of action. The High Court of Bombay has cited the reason of the present rule: "I take it to be, because as between the principal and surety, the principal is under an obligation to indemnify the surely; and it is, as I conceive, from this obligation that the right of the surety to the benefit of securities held by the creditor is derived." "To the extent of the value of the security."---Where a creditor sued the principal debtor and the surety on a mortgage bond, and in his plaint formally relinquished his claim against part of the mortgaged property which was worth the amount guaranteed by the surety, it was held that the surety was discharged. When surety becomes entitled to benefit of creditor's securities.---Under S. 140, a surety is invested with the

rights of the creditor as against the principal debtor upon payment or performance of all that he is liable for. The words last italicised are not repeated in the present section. The Act does not lay down at what point of time the surety is entitled to have the creditor's securities made over to him wholly or in part, whether it is when the debt of the creditor is paid off, or when the surety pays the amount of his guarantee. Joint promisors.---Joint promisors are not sureties under S. 126 and S. 141 has therefore no application if one of two joint promisors pays the entire debt. 142. Guarantee obtained by misrepresentation invalid.---Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid. The English authorities on the subject-matter of this and S. 143 will be dealt with together under that section. 143. Guarantee obtained by concealment invalid.---Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid. Illustrations (a) A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A, in consequence, calls upon him to furnish security for his duly accounting. C gives his guarantee for B's duly accounting. A does not acquaint C with B's previous conduct. B afterwards makes default. The guarantee is invalid. (b) A guarantee to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety. COMMENTS Guarantee obtained by misrepresentation or concealment---It, is settled law that, although the contract of suretyship is "one in which there is no universal obligation to make disclosure" that is, it is not, like a contract of insurance, liable to be avoided by the mere non-disclosure of any material fact whatever, still the surety is entitled to know so much as will tell him what is the transaction for which he is making himself answerable; and he will be discharged if there is either active misrepresentation of the matter by the creditor, or silence amounting in the circumstances to misrepresentation. Very little said which ought not to have been said, and very little not said which ought to have been said, would be sufficient to prevent the contract being valid. It is the duty of a party taking a guarantee to put the surety in possession of all the facts likely to affect the degree of his responsibility; and if he neglects to do so, it is at his peril. A surety ought to be acquainted with the whole contract entered into with his principal. Thus where a surety guarantees an agent's existing and future liabilities in account with his employer, and the agent is in fact already indebted to the employer for more than the full amount of the guarantee and the statements made about his position are calculated to mislead, though not false in terms, this is evidence of material misrepresentation on the crediors part. But it is not every disclosure that a surety can require. Where a customer's credit with his bankers is guaranteed, the fact that the new credit is to be applied to paying off an existing debt of the customer to the bank is not such as need be disclosed. For this is nothing out of the ordinary course of business, but rather to be expected. The test is whether there is anything that might not naturally be expected to take place between the parties who are concerned in the transaction, that is, whether there be a contract between the debtor and the creditor to the effect that his position shall be different from that which the surety might naturally expect". The creditor's description of the transaction to be undertaken, if it makes no mention of any such circumstance, implies a representation that there is none. Accordingly the creditor is not bound to tell the surety that the intended guarantee is to be in substitution for a

former one given by some one else. Where the solvency of a surety for a debt is guaranteed in turn, the terms of the loan as between the creditor and the original debtor are not material for the last-mentioned guarantor's risk, and nondisclosure of them is no defence to an action on his guarantee. The expression "keeping silence," clearly implies intentional concealment as distinguished from mere nondisclosure, which no doubt is of itself a fatal objection in insurance policies, and virtually, we think, expresses that the withholding must be fraudulent, which necessarily must be the case when a material circumstance is intentionally concealed. "Material circumstance."---As to what amounts to this, further illustrations are afforded by the following cases:--1. A becomes surety to a bank for B's conduct as khajanchi, whose duties are to examine, verify, and guarantee all native signatures or documents for money. Before his appointment as khajanchi B held the office of an ordinary clerk in the bank, and ,it was arranged between B and the bank that he should continue to fill that office also. The bank do not acquaint A with this part of the agreement. A is liable-as surety. 2. In the above case, after B assumes the office of Khajanchi, the bank discovers that the names on certain bills discounted with them are forged, and they make a claim upon B, but B repudiates his liability. The bank do not acquaint A with this fact, and B is allowed to continue in his office, and subsequently makes defalcations. A is liable as a surety, for it could not have been assumed that B was infallible in detecting forgeries, and the guarantee could not be said to be founded on that assumption. 3. A purchases an abkari farm from Government subject to his furnishing the required security for the due fulfillment of the conditions of the lease. A fails to furnish the security, and the farm is resold at his risk and on his account at a loss of Rs. 4,000, for which he becomes liable. A purchases the farm at the resale, and B stands surety for the performance of the conditions of the lease. B is not informed by Government of A's liability for Rs.4,000. B is liable as a surety, the guarantee not extending to the liability for Rs. 4,000. 4. A was appointed manager of a Society in 1929. From 1929 to 1931, A's conduct, if not dishonest, would have justified his dismissal. The Society considered that A's conduct entitled them to ask him for further security. B, who furnished the additional security, was not informed of A's past conduct. On A making defalcations, it was held that B was not liable. The language of these two sections, 142 and 143, is not very well fitted to exclude doubts whether they go beyond the English authorities or not. S. 143 might be read so as to impose on the creditor an unqualified duty of giving the surety full information of all material facts. But the words "obtained by means of keeping silence," appear to limit the operation of the section to cases of willful concealment which in fact amounts to a misrepresentation of what the surety is undertaking. 144. Guarantee on contract that creditor shall not act on it until co-surety joins.---Where a person gives a guarantee upon a contract that a creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join. COMMENTS A surety who entered into the obligation upon the understanding and faith that another person would also enter into it...has a right in equity to be relieved on the ground that the instrument has not been executed by the intended cosurety. Whether such a contract is to be inferred from the transaction as a whole is conceived (apart from the construction of any written document) to be purely a question of fact. The rule will not be extended to cases of joint and several obligation where the transaction is not really a guarantee, though that word may be used, but a primary undertaking. Overdraft---Goods pledged by party as security for over draft---Fixed deposit receipts. of wife pledged as additional security---Bank adjusting overdraft against F.D. receipts---Wife entitled to adjustment against pledged goods.---Where T pledged goods with the bank for overdraft and then as additional security deposited with

the Bank fixed deposit receipts of his wife and her minor daughter, and the Bank proceeded to satisfy the overdraft out of the receipts rather than the goods pledged. Held; the bank certainly showed preference for T in suggesting to the liquidation judge that the overdraft accounts of T should be satisfied against the additional security furnished by the fixed deposit receipts. We have no doubt that section 141, Contract Act, is fully applicable and that since the earlier security easily exceeded the overdraft accounts, the fixed deposit receipts belonging to Z and her minor daughter should not have been adjusted against those accounts. 145. Implied promise to indemnify surety.---In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully. Illustrations (a) B is indebted to C and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt. (b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and on A's refusal to pay, sues him upon the bill. A, not having reasonable ground for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover from B, the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action. (c) A guarantees to C to the extent of 2,000 rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2,000 rupees, but obtains from A payment of the sum of 2,000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied. COMMENTS Surety's right to indemnity.---The proposition that, as soon as his obligation to pay is become absolute, a surety has a right in equity to be exonerated by his principal. In the second clause of the section the words "rightfully" and "wrongfully" do not seem felicitous. There is nothing wrongful in paying money which one need not have paid, and for which therefore, one cannot have a remedy over against the principal debtor. One would rather have expected "reasonably" and "unreasonably". Here, again, a wider rule is applied it is special case of the contract of suretyship. Further it is settled law that a surety is entitled to come to the Court "to compel the principal debtor to pay what is due from him," provided that an ascertained debt is actually due; and this relief is not limited, as at one time supposed, to cases where the creditor has refused to sue the principal debtor, nor need the creditor even have demanded the sum from the principal debtor. It is not to be inferred from the language of this section that the surety might not, in an appropriate case, be entitled to recover for special damages beyond the sum he has actually been compelled to pay. His right is not merely a right to stand in the creditor's place, but is founded on an independent equity. On the other hand, the surety's only claim is to be fully indemnified. He cannot compound the debt for which he is liable, and then proceed as if he stood in the creditor's place for the full amount. "Where a surety gets rid of and discharges an obligation at a less sum than its full amount, he cannot, as against his principal, make himself a creditor for the whole amount; but can only claim, as against his principal, what he has actually paid in discharge of the common obligation. "Whatever sum he has rightfully paid."---This expression includes "not only coin, but also property, of whatever kind, which is parted with in lieu of money, but not the mere incurring of a pecuniary obligation of the creditor in lieu or discharge of the debt owing to him". The giving, therefore, by the surety of a promissory note jointly with a third party as his surety, though accepted by the creditor as payment of the debt and not as a more collateral security

therefore, cannot be treated as payment as between the surety and the principal debtor. The reason is that, the principal debtor being bound to indemnify the surety, the cause of action cannot be merely the procuring by the surety of the principal debtor's exoneration from liability to the creditor, but must also include the surety being himself damnified; and the surety cannot be said to be damnified unless the payment is actually made. Guarantee without concurrence of principal debtor.---Where a. person becomes a surety without the knowledge and consent of the principal debtor, the only rights which he acquires are those given by Ss. 140 and 141, and not those given by this section. There are conflicting opinions on the question whether a surety paying a debt which is barred by limitation can be said to have paid "rightfully" within the meaning of this section. The surety is liable to pay at the suit of the creditor, even though a suit against the debtor may be barred (see notes on S. 134, above);. and in these circumstances it would seem impossible to say that payment by the surety is anything but rightful. The rights given to the surety by S. 145 arise from the discharge of his own liability to the creditor and not from the liability of the debtor. 146. Co-sureties liable to contribute equally.---Where two or more persons are co-sureties for the same debt or duly, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor. Illustrations (a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each. (b) A, B and C are sureties to D for the sum or 1,000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter and C to the extent of one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees. COMMENTS Contribution by co-sureties.---This has long been elementary. The earliest case usually cited settled that the cosureties .need not be bound under the same contract and laid down that the right to contribution is independent of any agreement for that purpose. It must be observed that a surety has no claim against his co-sureties until he has paid more than his share of the debt to the principal creditor, for only then does it become certain that there is ultimately any case for contribution at all. But a judgment against the surety at the suit of the creditor for the full amount of the guarantee (or an equivalent process, such as the allowance of a claim for the sum in the administration of the surety's estate) will have the same effect as payment for this purpose, and entitle the surety or his representatives to a declaration of the right to contribution; it seems that this is a matter of purely equitable jurisdiction. The like principles apply to contribution among co-trustees. All the co-sureties are entitled to share in the benefit of any security or indemnity which any one of them has obtained from the principal debtor, and this whether they knew of it or not. The surety bringing in, under this rule, what he receives from his security, may resort again to that security for the liability to which he remains subject, and the co-sureties may again claim the benefit of participation and so on until the co-sureties have been fully reimbursed or the counter-security exhausted. There is no right of contribution between persons who become sureties not for the same debt, but by distinct and Separate obligations for different portions of a debt. Nor is there any such right between an ultimate surety for payment of a debt and a person who, though a surety as between himself and the principal debtor, has authorised the

creditor to treat him as a principal. Where B joined with A in a mortgage of A's property to Z, and agreed to be considered, as regards Z, as a principal debtor for the whole, though as between A and himself he was a surety, and the debt was insured with M, who knew the terms of B's engagement, in the name of Z. M undertaking to pay the debt on notice that Z's power of sale had become exercisable, it was held that M was n guarantor to Z against the default of both A and B, and was not a co-surety with B. An express contract between Z and M that M was to be a surety for, but not with, B by way of "collateral security," would have the same effect. 147. Liability of co-sureties bound in different sums.---Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit. Illustrations (a) A, B and C as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E.D. makes default to the extent of 30,000 rupees. A, B and C are each liable to pay 10,000 rupees. (b) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E.D makes default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupees each. (c) A, B and C as sureties for D enter into three several bonds each in a different penalty, namely, A in a penalty of 10,000 rupees, B, in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E.D makes default to the extent of 70,000 rupees. A, B and C have to pay each the full penalty of his bond.

The difference between a guarantee and an indemnity

Introduction
Guarantees and indemnities are both long established forms of what the law terms suretyship. There are important legal distinctions between them.

What is what?

A guarantee is For example: An indemnity is

a promise to someone that a third party will meet its obligations to them if they dont pay you, I will a promise to be responsible for anothers loss, and to compensate them for that loss on an agreed basis if it costs you more than 250 to fix that, I will reimburse you the difference.

For example:

Section 4 of the venerable Statute of Frauds Act 1677 requires guarantees to be in

writing if they are to be enforceable. There is no such requirement in the case of an indemnity, although of course written agreement is always best as a matter of practice and for proof.

Further, a guarantee provides for a liability co-extensive with that of the principal. In other words, the guarantor cannot be liable for anything more than the client. The document will be construed as a guarantee if, on its true construction, the obligations of the surety are to stand behind the principal and only come to the fore once an obligation has been breached as between the principal and the financier. The obligation is a secondary one, reflexive in character.

An indemnity however, provides for concurrent liability with the principal throughout and there is no need to look first to the principal. In essence it is an agreement that the surety will hold the financier harmless against all losses arising from the contract between the principal and the financier.

It is not always obvious whether a clause or agreement is a guarantee or an indemnity.

And an example...
Some of the differences were highlighted by the Court of Appeal in the 2007 case Pitts and Ors v Jones.

The appellants bringing the claim were minority shareholders in a company of which the other party was managing director and majority shareholder.

The majority shareholder had negotiated the sale of the company to a purchaser who had agreed to buy the shares of the minority at the same price.

The appellants were summoned to the sale completion meeting and were told that as part of the terms agreed their shares would be purchased after a delay of six months.

On being made aware of the risk of the purchaser becoming insolvent within this period they declined to sign the documents but relented when the majority shareholder undertook verbally to pay if the purchaser failed to do so.

The purchaser did subsequently become insolvent and could not pay for the minority shareholders shares, so they sued the majority shareholder on his undertaking to pay them.

The Court of Appeal found that, while all the other necessary elements of a legally binding contract were present (offer, acceptance, consideration and the intention to create legal relations), the undertaking given to the minority shareholders was unenforceable since it was a guarantee and was not in writing.

The minority shareholders lost the value of their shares and were left with no recourse.

How to tell which is which

Whether the security document is a guarantee or an indemnity (or both) is a matter of construction. There is a mass of case law on the distinction, but ultimately it comes down to the document in question. Considerations are as follows: The words used; the fact that one label or another is used is not determinative but it may demonstrate what the parties were attempting to achieve; Whether the document purports to make the surety liable for a greater sum than could be demanded under the principal contract, in which case the inference is that he is undertaking an obligation to indemnify; Whether a demand upon the principal debtor is defined as a condition precedent to proceeding against the surety in which case the document may well best be read as a guarantee; An indemnity comprises only two parties- the indemnifier and the indemnity holder. A guarantee is a contract between three parties namely the surety, principal debtor and the creditor.

Summary
Case law iterates the need to seek proper legal advice and at bare minimum, use a written agreement clearly stating the parties intentions.
Relevant Partnership Laws of Pakistan
Partnership remains a common mode of business enterprise in Pakistan for small to medium business set-ups. Partnerships are normally formed where there is a desire to have some structural flexibility alongwith some formality of relationship between partners. There is no compulsory requirement for registration of a partnership in Pakistan . Nonetheless some litigation and tax related consequences and advantages

are linked to a registered partnership.

Legal regime for establishment and regulation of partnerships in Pakistan is stated in the Partnership Act, 1932 which defines a partnership in the following terms:

"as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all."

Any twenty or less persons desiring to carry out a lawA Partnership

in Pakistan is

a business entered into by a formal agreement between two or more persons or corporations carrying on a business in common. The capital for a Partnership is provided by the partners who are liable for the total debts of the firms and who share the profits and losses of the business concern according to the terms of the partnership agreement. Partnership in Pakistan (other than banking companies) are generally limited in size to twenty partners. The interest of a partner is transferable only with the prior consent of the other partner(s). However, a partners right to a share of the partnership income may be received in trust for another person. For taxation purposes in Pakistan, partnerships are classified into: Registered firms and Unregistered firms. The income of the registered firm is subject to super tax before distribution to the partners. Also the individual income of the partners is subject to income tax at the usual rates. For unregistered firms, income tax is levied on the firms income and the partners are not liable to pay tax on the shares of profit received from the unregistered firm(s).

AMLAW offers undermentioned services in the field of Partnership in Pakistan. Consultation on a business name for partnership

Search availability of partnership business name Drafting of partnership agreement Registration of partnership Drafting of deed of dissolution of partnership Registration of deed of dissolution of partnership Asked Questions (FAQs) about Partnership Law in

ful commerciFrequently

Pakistan: Q. What is the definition of partnership under Partnership Act, 1932? A. Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually partners and collectively a firm, and the name under which their business is carried on is called the firm name. Q. What are the rules framed under Partnership Act, 1932? A. By the Provincial Governments in exercise of powers conferred by section 71 of the Partnership Act, 1932 rules which framed are Punjab Partnership (Registration of Firms) Rules, 1932, North-West Frontier Province Partnership Rules, 1932 and Sindh Partnership Rules, 1932. Q. Is registration of partnership compulsory? A. No, registration of partnership is not compulsory by law but its better to do so. Q. Is a written partnership agreement required for partnership? A. Yes there must be an agreement between the partners. Q. What are different types of partnerships? A. Partnership Act, 1932 provides different types of partnership i.e. Partnership at-will and Particular partnership. Partnership at-will is a partnership where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership. It is a partnership for indefinite period but can be dissolve after

giving notices to all the partners. Particular Partnership is a partnership where a person may become a partner with another person in particular adventures or undertakings for a specified period. Particular partnership will be dissolved on the completion of particular business or undertaking. Q. What is a Partnership Deed or Partnership Agreement? A. Partnership deed or agreement is a document in which mutual rights and obligations of all the partners and conditions relating to partnership and the regulations governing its internal management and organizations are documented, the said deed should be signed by all the partners. Q. What is deed of dissolution? A. When the firm is dissolved by mutual consent of partners, deed of dissolution is executed. The dissolution deed provides for the valuation of assets including goodwill and distribution of the same amongst the partners. The deed of dissolution should clearly mentions debts, liabilities and obligations of the firm who will pay or discharge the same in the audit and accounts. Q. Is deed of dissolution should be registered? A. Yes deed should be registered. Q. What is the difference between dissolution of partnership and dissolution of firm? A. A firm can continue on dissolution of partnership, but on dissolution of firm, partnership will automatically end. Q. What is meant by firm? A. A firm is a relationship between two or more persons who have agreed to share profits of a business according to their participation. The partners are collectively called a firm and the name under which they do business is called the firm name. Any two or more persons but not more than twenty can form a partnership to do any one or more businesses through an agreement in writing. Q. What is meant by dissolution of firm?

A. The dissolution of partnership between all the partners of a firm is called the dissolution of firm. Q. How a firm can be dissolved? A. A firm can be dissolved by agreement, by compulsory dissolution, by happening of certain contingencies, by notice of partnership at-will or by order of the court. Q. Who can be a partner in a firm? A. Ordinarily, it is individuals who constitute partnerships. A lunatic can also be a partner through his guardian. Similarly, a minor can be admitted to the benefits of a partnership but he is not responsible for loss. Apart from the natural persons, a limited company can also enter into partnership not only with a natural person but also with another limited company. However, a firm cannot be a partner in another firm nor can be an Association of Persons (AOP). Q. Is it necessary to form a company or a partnership firm to start a new business? A. No, it is not necessary to form a company or a partnership to start new business. Business can be started as a sole proprietorship. Q. Are partners personally liable for business debts? A. Yes, partners are personally liable for business debts. A partner is also legally bound by business transactions made by him or by his partners and can be held personally liable for those transactions. The liabilities of partners are unlimited. Q. What happens if the number of partners falls below two? A. If the number of partners falls below two then partnership will be dissolved. Q. What is maximum number of partners in a firm? A. Number of partners in a firm shall not exceed twenty a partnership having more than twenty persons is illegal.

Q. Can I give any name to my partnership firm? A. A partnership can have any name it likes so long as it does not impinge any trademarks or trade name and a firm name shall not contain any words namely, Government, Jinnah, Quaid-i-Azam or words expressing or implying the sanction, approval or patronage of the Federal Government or any Provincial Government or of the Quaid-i-Azam, except when the Provincial Government signifies its consent to the use of such words as part of the firm name by order in writing. A firm name shall not contain the name of the United Nation or its abbreviations through the use of its initial letters or of any subsidiary body set up by that body unless it has obtained the previous authorization of the Secretary-General of the United Nations in writing. A firm name shall not contain the name of the World Health Organization or its abbreviations through the use of its initial letters unless it has obtained the previous authorization of the Director General in writing. A firm name shall not contain any word which may be declared by the Provincial Government, by notification in the official Gazette, to be undesirable. Q. Can a company be a partner? A. Yes, a company is a juristic person and therefore can become a partner in a partnership firm, if it is authorized by its memorandum and articles of association. Q. How a partner in a firm is retired? A. A partner may retire with the consent of all the other partners, in accordance with an express agreement by the partners and where the partnership is at will, by giving notice in writing to all the partners of his/her intention to retire. Q. What are the general duties of partners? A. Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. Q. How partners are taxed?

A. In partnership every partner pays tax on his individual share of profit. Q. Can a foreigner be a partner in firm? A. There is no restriction under the law but subject to certain conditions. Q. Is goodwill of a firm included in its assets? A. Yes, goodwill is included in the assets of the firm. Q. We want to sell goodwill of our firm but confused how we will share the price? A. Where the goodwill is sold value is divisible among the partners in the same manner as they share profits and losses, unless they agreed. Q. What is meant by Association of Persons (AOP)? A. Section 80 of Income Tax Ordinance, 2001 defines association of persons which includes a firm, a Hindu undivided family, any artificial juridical person and any body of persons formed under a foreign law, but does not include a company. Q. How association of person is different from associated person? A. Association of Persons (AOP) is defined under section 2(iii) of the Federal VAT (Value Added Tax) Bill, 2010 and associated person is defined under section 3 thereof. AOP refers to a group of persons, while the concept of associated persons defines relationship between two persons. Adoption of this concept is a result of harmonization of inland taxes laws & administration under the income tax ordinance. Q. How to wind up an association of persons? A. As in the case of Partnership Act, 1932. Q. We got registered a partnership firm do I need National Tax Number for our firm? A. Yes, every firm is assigned a national tax number without NTN firm cannot file its returns.

Q. Who has the authority to register partnership firm? A. District Registrar is Registrar of Firms in his District is the authority to register partnership firm. Q. Can a firm become partner of another firm? A. A firm cannot become partner of another firm. Q. What to include in Partnership agreement or Partnership Deed? A. While drafting a partnership agreement/deed there are some important points to be kept in view There must be at least two major contracting parties. Total number of partners should not exceed twenty. Name of the Firm under which the business is to be conducted. Nature of the business to be conducted by the partners. Location of the business where it is to be opened and branches, if any. List of partners, their names, addresses of the partners with Computer National Identity Card Nos. should also be placed in the agreement. The amount of any salary payable to the partners.. The division of work among the partners for the management of the firm. The name of the dealing bank. Provisions regarding the preparation, audit and signing by the partners of annual accounts. The duration of partnership whether at will or for a fixed period or a particular venture should be stated. The deed should indicate the share in which profits and losses are to be divided among partners. The amount that each partner shall be allowed to withdraw. Rules regarding to retirement, debt and admission of partners. How the value of good will of the firm will be determined. A provision regarding the partner who is to manage the affairs, sign cheques may be made. The date on which accounts are to be closed should be specified. Rights and duties of each partner should be mentioned. Settlement of accounts at the dissolution of the firm. In case of dispute provision should be made.

 How partnership will be dissolved. If the partners intend that the firm should not stand dissolved on death or retirement of a partner, a provision must be made in the deed. Q. My partner wants to open a bank account in his own name not in name of firm, can he? A. Implied authority of a partner does not empower him to open a bank account in his own name. Q. I am living in UK and invested huge amount as a sleeping partner in a firm, for some time received profit regularly but then stopped. Now the said firm is playing delaying tactics as I forced then they issued me cheques which were dishonored. Can you advise me what remedies do I have to get my money back as per Pakistan law? A. To get your money back you can avail both civil and criminal remedies at the same time, civil remedy is you can file a suit for the recovery of money from the said firm and criminal remedy is you can get registered a FIR (First Information Report) against the firm for the dishonoring of the cheques. Q. We are four partners in a firm one of partner did fraud with third party for his act is firm liable? A. Yes the firm and all partners are liable for the fraud committed by one partner on behalf of the firm which causes loss to third party. Any act done by any partner in the course of the ordinary partnership business will bind the other partners also. Q. One of our partners is going to retire, can we continue the partnership? A. If provisions have been made in the agreement; the partnership can be carried out even after the retirement of any of the partners. Otherwise as a general rule, the retirement of a partner changes the constitution of the partnership and the remaining partners cannot carry on the business. Q. One of our partner in a firm is going to retire do he need to give public notice?

A. Yes public notice is mandatory if the partnership is registered under Partnership Act, 1932. Q. Without giving public notice can a partner retire from partnership/firm? A. Only a sleeping partner can retire from the firm without giving any public notice to this effect. Q. There is no partnership agreement how partners should share the profit? A. According to section 13(b) of the Partnership Act, 1932 partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm subject to agreement between the parties. Q. In our firm one of partner wants to introduce a new partner can I stop him? A. Yes, according to Partnership Act, section 31 every partner is entitled to prevent the introduction of a new partner into the firm without their consent. Q. Can a partner on his own submit a dispute relating to the business of the firm to arbitration? A. No not without others partners permission. Q. Can I register my firms name as trademark? A. Yes firm name can be registered as a trademark. Q. Is suit filed by un-registered firm is maintainable? A. No. Q. I am entering into partnership business with my friend already there firm is working for many years I will be introduced as a new partner. My question is will I be liable for any debts which are on the firm before I entered? A. Section 31 of the Partnership Act, 1932 provides that an incoming partner does not become liable to the creditors of the firm for anything done before

he became a partner. He may, however, by an express agreement entered into at the time of admission, become liable to such debts. The operation on the account should not be stopped at the time of new admission, but a fresh mandate or partnership letter, duly signed by all the partners, should be obtained to cover the future operations on the account. In case the account has a debit balance, and the new partner has not got agreed to accept the debit balance of the old partners, the operation on the account should be stopped forthwith. Q. Is partnership law is different from province to province in Pakistan? A. Partnership in Pakistan is governed by Partnership Act, 1932 which extends to the whole of Pakistan. Q. Do I need permission to conduct business in Karachi when I already registered my firm in Lahore? A. No you can open office anywhere in Pakistan. Q. My partner is taking too high of a salary. What can I do in accordance with law? A. It depends on partnership agreement what does it say? Absent in agreement then partners cannot take any salary for their services, they must take profits from the partnership. Unless the agreement says otherwise, all partners are entitled to equal share in the profit. Q. Are all partners in a partnership are personally liable? A. Yes all the partners are personally liable for all business obligations and debts jointly and severally. Please contact AMLAW law firm for further details & professional business & legal consulting. You may contact AMLAW if you need any legal advise related to Partnerships. Disclaimer: The information available above is not intended to be comprehensive, and many details which may be relevant to particular circumstances have been omitted. Accordingly, it should not be regarded as

being complete source of partnership law information, and web users are advised to seek independent professional advice before acting on anything contained herein. AMLAW will not take any kind of responsibility for the consequences of errors or omissions.

al activity or a profession

BIM72505 - Partnership Act 1890

NATURE OF PARTNERSHIP
DEFINITION OF PARTNERSHIP 25 & 26 Vict.Ch.89 1

.(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. (2) But the relation between members of any company or association which is (a)Registered as a company under the Companies Act 1862, or any other Act of Parliament for the time being in force and relating to the registration of joint stock companies, or (b) Formed or incorporated by or in pursuance of any other Act of Parliament or letters patent, or Royal Charter, or (c) A company engaged in working mines within and subject to the jurisdiction of the Stannaries:
is not a partnership within the meaning of this Act. RULES FOR DETERMINING EXISTENCE OF PARTNERSHIP 2.

In determining whether a partnership does or does not exist, regard shall be had to the following rules(1) Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof. (2) The sharing of gross returns does not of itself create a partnership,

whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived. (3) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business; and in particular(a) The receipt by a person of a debt or other liquidated amount by instalments, or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such (b) A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such (c) A person being the widow or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such (d) The advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such. Provided that the contract is in writing, and signed by or on behalf of all the parties thereto (e) A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such. POSTPONEMENT OF PERSON LENDING OR SELLING IN CONSIDERATION OF SHARE OFPROFITS IN CASE OF INSOLVENCY 3.In the event of any person to whom money has been advanced by way of loan upon such a contract as is mentioned in the last foregoing section, or of any buyer of a goodwill in consideration of a share of the profits of the business, being adjudged a bankrupt, entering into an arrangement to pay his creditors less than one hundred pence in the pound, or dying in insolvent circumstances, the lender of the loan shall not be entitled to recover anything

in respect of his loan, and the seller of the goodwill shall not be entitled to recover anything in respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer for valuable consideration in money or money's worth have been satisfied. MEANING OF 'FIRM' 4.(1) Persons who have entered into partnership with one another are for the purposes of this Act called collectively a firm, and the name under which their business is carried on is called the firm-name. (2) In Scotland a firm is a legal person distinct from the partners of whom it is composed, but an individual partner may be charged on a decree or diligence directed against the firm, and on payment of the debts is entitled to relief pro rata from the firm and its other members. RELATIONS OF PARTNERS TO PERSONS DEALING WITH THEM POWER OF PARTNER TO BIND THE FIRM 5.Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner. PARTNERS BOUND BY ACTS ON BEHALF OF FIRM 6.An act or instrument relating to the business of the firm and done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners. Provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments. PARTNER USING CREDIT OF FIRM FOR PRIVATE PURPOSES 7.Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm's ordinary course of business, the firm is not bound, unless he is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner.

EFFECT OF NOTICE THAT FIRM WILL NOT BE BOUND BY ACTS OF PARTNER 8.If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement. LIABILITY OF PARTNERS 9.Every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied, but subject in England or Ireland to the prior payment of his separate debts. LIABILITY OF THE FIRM FOR WRONGS 10.Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his copartners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act. MISAPPLICATION OF MONEY OR PROPERTY RECEIVED FOR OR IN CUSTODY OF THEFIRM 11.In the following cases, namely (a) Where one partner acting within the scope of his apparent authority receives the money or property of a third person and misapplies it, and (b) Where a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm; the firm is liable to make good the loss. LIABILITY FOR WRONGS JOINT AND SEVERAL 12.Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the two last preceding sections.

IMPROPER EMPLOYMENT OF TRUST PROPERTY FOR PARTNERSHIP PURPOSES 13.If a partner, being a trustee, improperly employs trust-property in the business or on the account of the partnership, no other partner is liable for the trust-property to the persons beneficially interested therein. Provided as follows(1) This section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust, and (2) Nothing in this section shall prevent trust money from being followed and recovered from the firm if still in its possession or under its control. PERSON LIABLE BY HOLDING OUT 14.(1) Every one who by words spoken or written or by conduct represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to any one who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made. (2) Provided that where after a partner's death the partnership business is continued in the old firm-name, the continued use of that name or of the deceased partner's name as part thereof shall not of itself make his executors or administrators estate or effects liable for any partnership debts contracted after his death ADMISSIONS AND REPRESENTATIONS OF PARTNERS 15.An admission or representation made by any partner concerning the partnership affairs, and in the ordinary course of its business, is evidence against the firm. NOTICE TO ACTING PARTNER TO BE NOTICE TO THE FIRM 16.Notice to any partner who habitually acts in the partnership business of any matter relating to partnership affairs operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner. LIABILITIES OF INCOMING AND OUTGOINGS PARTNERS

17.(1) A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner. (2) A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement. (3) A retiring partner may be discharged from any existing liabilities, by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted. REVOCATION OF CONTINUING GUARANTY BY CHANGE IN FIRM 18.A continuing guaranty or cautionary obligation given either to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm to which, or of the firm in respect of the transactions of which, the guaranty or obligation was given. RELATIONS OF PARTNERS TO ONE ANOTHER VARIATION BY CONSENT OF TERMS OF PARTNERSHIP 19.The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing. PARTNERSHIP PROPERTY 20. (1) All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement. (2) Provided that the legal estate or interest in any land, or in Scotland the title to and interest in any heritable estate, which belongs to the partnership shall devolve according to the nature and tenure thereof, and the general rules of law thereto applicable, but in trust, so far as necessary, for the persons beneficially interested in the land under this section.

(3) Where co-owners of an estate or interest in any land, or in Scotland of any heritable estate, not being itself partnership property, are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them, in the absence of an agreement to the contrary, not as partners but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of the purchase. PROPERTY BROUGHT WITH PARTNERSHIP MONEY 21.Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm. CONVERSION INTO PERSONAL ESTATE OF LAND HELD AS PARTNERSHIP PROPERTY 22.Where land or any heritable interest therein has become partnership property, it shall, unless the contrary intention appears, be treated as between the partners (including the representatives of a deceased partner), and also as between the heirs of a deceased partner and his executors or administrators, as personal or movable and not real or heritable estate. PROCEDURE AGAINST PARTNERSHIP PROPERTY FOR A PARTNER'S SEPARATEJUDGMENT DEBT 23. (1) A writ of execution shall not issue against any partnership property except on a judgment against the firm. (2) The High Court, or a judge thereof, or a county court, may, on the application by summons of any judgment creditor of a partner, make an order charging that partner's interest in the partnership property and profits with payment of the amount of the judgment debt and interest thereon, and may by the same or a subsequent order appoint a receiver of that partner's share of profits (whether already declared or accruing), and of any other money which may be coming to him in respect of the partnership, and direct all accounts and inquiries, and give all other orders and directions which might have been directed or given if the charge had been made in favour of the judgment creditor by the partner, or which the circumstances of the case may require. (3) The other partner or partners shall be at liberty at any time to redeem the interest charged, or in case of a sale being directed, to purchase the same. (4) This section shall apply in the case of a cost-book company as if the company were a partnership within the meaning of this Act.

(5) This section shall not apply to Scotland. RULES AS TO INTEREST AND DUTIES OF PARTNERS SUBJECT TO SPECIALAGREEMENT 24. The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners by the following rules(1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm. (2) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him (a) In the ordinary and proper conduct of the business of the firm, or (b) In or about anything necessarily done for the preservation of the business or property of the firm. (3) A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital that he has agreed to subscribe, is entitled to interest at the rate of five per cent per annum from the date of the payment or advance. (4) A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him. (5) Every partner may take part in the management of the partnership business. (6) No partner shall be entitled to remuneration for acting in the partnership business. (7) No person may be introduced as a partner without the consent of all existing partners. (8) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners. (9) The partnership books are to be kept at the place of business of the partnership (or the principal place, if there is more than one), and every

partner may, when he thinks fit, have access to and inspect and copy any of them. EXPULSION OF PARTNER 25. No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. RETIREMENT FROM PARTNERSHIP AT WILL 26. (1) Where no fixed term has been agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving notice of his intention so to do to all the other partners. (2) Where the partnership has originally been constituted by deed, a notice in writing, signed by the partner giving it, shall be sufficient for this purpose. WHERE PARTNERSHIP FOR TERM IS CONTINUED OVER, CONTINUANCE ON OLD TERMSPRESUMED 27. (1) Where a partnership entered into for a fixed term is continued after the term has expired, and without any express new agreement, the rights and duties of the partners remain the same as they were at the expiration of the term, so far as is consistent with the incidents of a partnership at will. (2) A continuance of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is presumed to be a continuance of the partnership. DUTY OF PARTNERS TO RENDER ACCOUNTS 28.Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives. ACCOUNTABILITY OF PARTNERS FOR PRIVATE PROFITS 29. (1) Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property name or business connection. (2) This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner, and before the affairs thereof have been completely wound up, either by any surviving partner or by the representatives of the deceased partner.

DUTY OF PARTNER NOT TO COMPETE WITH FIRM 30.If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business. RIGHTS OF ASSIGNEE OF SHARE IN PARTNERSHIP 31. (1) An assignment by any partner of his share in the partnership, either absolute or by way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions, or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by the partners. (2) In case of a dissolution of the partnership, whether as respects all the partners or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners, and, for the purpose of ascertaining that share, to an account as from the date the dissolution. DISSOLUTION OF PARTNERSHIP AND ITS CONSEQUENCES DISSOLUTION BY EXPIRATION OR NOTICE 32. Subject to any agreement between the partners a partnership is dissolved (a) If entered into for a fixed term, by the expiration of that term (b) If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking (c) If entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership. In the last-mentioned case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice. DISSOLUTION BY BANKRUPTCY, DEATH OR CHARGE 33. (1) Subject to any agreement between the partners, every partnership is

dissolved as regards all the partners by the death or bankruptcy of any partner. (2) A partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt. DISSOLUTION BY ILLEGALITY OF PARTNERSHIP 34.A partnership is in every case dissolved by the happening of any event that makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry on in partnership. DISSOLUTION BY THE COURT 35. On application by a partner the Court may decree dissolution of the partnership in any of the following cases (a) Repealed (b) When a partner, other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract (c) When a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the Court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business (d) When a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him (e) When the business of the partnership can only be carried on at a loss (f) Whenever in any case circumstances have arisen which, in the opinion of the Court, render it just and equitable that the partnership be dissolved. RIGHTS OF PERSONS DEALING WITH FIRM AGAINST APPARENT MEMBERS OF FIRM 36. (1) Where a person deals with a firm after a change in its constitution he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change. (2) An advertisement in the London Gazette as to a firm whose principal

place of business is in England or Wales, in the Edinburgh Gazette as to a firm whose principal place of business is in Scotland, and in the Dublin Gazette as to a firm whose principal place of business is in Ireland, shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised. (3) The estate of a partner who dies, or who becomes bankrupt, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, bankruptcy, or retirement respectively. RIGHT OF PARTNERS TO NOTIFY DISSOLUTION 37.On the dissolution of a partnership or retirement of a partner any partner may publicly notify the same, and may require the other partner or partners to concur for that purpose in all necessary or proper acts, if any, which cannot be done without his or their concurrence. CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP 38.After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. Provided that the firm is in no case bound by the acts of a partner who has become bankrupt; but this proviso does not affect the liability of any person who has after the bankruptcy represented himself or knowingly suffered himself to be represented as a partner of the bankrupt. RIGHTS OF PARTNERS AS TO APPLICATION OF PARTNERSHIP PROPERTY 39.On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or his representatives may on the termination of the partnership apply to the Court to wind up the business and affairs of the firm. APPORTIONMENT OF PREMIUM WHERE PARTNERSHIP

PREMATURELY DISSOLVED 40.Where one partner has paid a premium to another on entering into a partnership for a fixed term, and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the Court may order the repayment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract and to the length of time during which the partnership has continued; unlessa) the dissolution is, in the judgment of the Court, wholly or chiefly due to the misconduct of the partner who paid the premium, or b) the partnership has been dissolved by an agreement containing no provision for a return of any part of the premium. RIGHTS WHERE PARTNERSHIP DISSOLVED FOR FRAUD OR MISREPRESENTATION 41.Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled(a) to a lien on, or right of retention of, the surplus of the partnership assets, after satisfying the partnership liabilities, for any sum of money paid by him for the purchase of a share in the partnership and for any capital contributed by him, and is (b) to stand in the place of the creditors of the firm for any payments made by him in respect of the partnership liabilities, and (c) to be indemnified by the person guilty of the fraud or making the representation against all the debts and liabilities of the firm. RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE PROFITS MADE AFTERDISSOLUTION 42. (1) Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent per annum on the amount of his share of the partnership assets.

(2) Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section. RETIRING OR DECEASED PARTNER'S SHARE TO BE A DEBT 43. Subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner's share is a debt accruing at the date of the dissolution or death. RULE FOR DISTRIBUTION OF ASSETS ON FINAL SETTLEMENT OF ACCOUNTS 44.In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed(a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits(b) The assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following order 1.In paying the debts and liabilities of the firm to persons who are not partners therein 2.In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital 3.In paying to each partner rateably what is due from the firm to him in respect of capital 4.The ultimate residue, if any, shall be divided among the partners in the proportion in which the profits are divisible. DEFINITIONS OF COURT AND BUSINESS 45.In this Act, unless the contrary intention appears

The expression `Court' includes every Court and judge having jurisdiction in the case; The expression `business' includes every trade, occupation, or profession. SAVING FOR RULES OF EQUITY AND COMMON LAW 46.The rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act. PROVISION AS TO BANKRUPTCY IN SCOTLAND 47. (1) In the application of this Act to Scotland the bankruptcy of a firm or of an individual shall mean sequestration under the Bankruptcy (Scotland) Acts, and also in the case of an individual the issue against him of a degree of cessio bonorum. (2) Nothing in this Act shall alter the rules of the law of Scotland relating to the bankruptcy of a firm or of the individual partners thereof.
may form a partnership ex

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Kinds of Partners
Wednesday, September 2, 2009

The following are the major classification of the partners:

1.

Active Partner (Managing or Working Partner)

A person who takes active part, in the affairs and management of the business is called active partner. He contributes his shares in the capital and is also liable to pay the obligations of firm.

2.

Nominal Partner

He is not in reality a partner of firm but his name is used as if he is a member of the firm. He is not entitled in the profit or loss of the business but he is liable to all the acts of the firm. The person who has good prestige and status is given, the position of nominal partner.

3.

Sub-Partner

The person who receives a share of profit from one of the regular partners is called the Sub-Partner. He is not liable to pay the debt is of the firm. He has no rights and privileges against the firm.

4.

Silent Partner (Silent form managing point of view)

He is that kind of partner who does not participate in the affairs of the business but is known to outsiders as a partner of the firm. He is liable to pay the debts of the firm like other partner.

5.

Secret Partner (Secret from public point of view)

He is active in the running life of the firm but public does not know him as partner of the firm. He pays his share in the capital and is liable to settle the creditors of the firm.

6.

Sleeping Partner or Dormant Partner (Sleeping From Both Points of View i.e. public and managing)

A person who (a) does not conduct the management of the firm personally (b) is not known to the outsiders as a partner of the firm, is called sleeping partner. But he invests his amount in the business and is liable to clear the debts of the firm. He is also called dormant partner.

7.

Minor Partner

There is no restriction to join the minor in the partnership by law. Although he may become partner but with the consent of all existing partners. In this case, he can be admitted to the profits of the firm only but not losses. He is not personally liable for the obligations of the firm. But minor has the right to inspect and copy .the accounts of the firm. Within six months of his attaining maturity, he has to give public notice whether he wants to remain partner or not. After his decision, he will deemed as full fledged partner.

8.

Quasi Partner

A person who has retired from the running management life of the firm but he does not withdraw his capital from the business is know as quasipartner. So his capital is considered as a loan and he receives interest at the rate varying with the profit. Really he is not a partner but he is a Deferred Creditor.

9.

Senior Partner

A person who brings large portion of capital in the business is called senior partner. He has prominent position in the firm due to his experience, skill, energy, age and other abilities.

10.

Junior Partner

He invests minor portion of capital in the business and so he has small share in the profits. He is junior to an other partner in the firm due to his age, experience and other factors.

11.

Holding Out Partner (Estoppels partner)

A person who declares by word of mouth as partner of the firm is called holding out partner. In reality he is not a regular partner so he is not entitled to receive share of profit. Such persons are liable to those parties who have given credit on the faith of such representation.

12.

Salaried Partner

An individual who does not bring anything i.e. amount or goods in the firm but has right to receive salary or share in the profit or both is named as salaried partner. He is known to the outside world as a partner and is liable for all the acts of the firm like other partners.

13.

Incoming Partner

A person who is newly admitted to the firm with the consent of all the parties is called incoming partner. He is not liable for any act of the firm

done before he became a partner unless he agrees;

14.

Retired Partner (Outgoing Partner)

A person who goes out of a firm due to certain event or reason is known as retired or out going partner. In this situation the remaining partners continue to carry on the business. Retiring partner is liable for all the obligations and debts incurred before the retirement. But he will also be liable to third parties even for future transaction, if he does not give public notice of his retirement..

15.

partners in Profit Only

He is an individual who gets a share of the profits only without being liable for the losses. He does not participate in the management of the business. He will be liable to outsiders for all acts of the firm.

16.

Limited Partner

A person who has not to pay any obligation more than the share he holds in the firm is called limited partner. He can not take part in the management of the firm. This kind of partner exists in limited partnership. But this organization is rare in our country.

cept in certain cases e.g. where twenty or more persons may form partnership to undertake practice as lawyers or accountants or any other practice which cannot be carried out as a limited liability company under the provisions of law. In all other cases where the number of intended partners increases beyond the figure of twenty a company should be incorporated.

A partnership may be registered with the Registrar of Firms of an area where the office of the firm is situated or proposed to be situated. A statement in prescribed form must be delivered to the relevant Registrar stating:

Firm name Place or principal place of business of the firm

Names of any other places where the firm carries on business Date when each partner joined the firm Names in full and permanent addresses of the partners Duration of the firm

The aforestated statement must be signed by all the partners of the firm for the time being or any authorized agent on their behalf. Furthermore, the statement must be verified by the persons signing it. Once Registrar is satisfied that the abovementioned requirements have been complied with he records entry of the statement in Register of Firms and files the statement.

Formation of Statutory Corporations in Pakistan

Statutory corporations or bodies are creation of a statute. They are formed by the Central Government or a Provincial Government through a Central Statute or a Provincial statute, as the case may be. The purpose, functions, powers, duties, liabilities, rights, management and legal status of any such statutory corporation is governed by each individual enactment under which such statutory corporation has come into existence. Administration of such statutory corporations is vested in a governing body, chairman etc. as envisaged under the enabling statute. Circumstances or pre-conditions of winding-up of any statutory corporation are also provided under the relevant statute.

Statutory Corporations do not require any registration.

Relevant Joint Venture Related Laws of Pakistan

Law Regarding Joint Ventures in Pakistan: Joint ventures are an appropriate vehicle of carrying out a business in Pakistan in cases where two or more parties do not intend to form a separate entity to deal with a

venture, however, they merely agree to act together in a specific manner and under certain terms and conditions. In such a case each party retains its own individual identity which may be in the form of a company or a partnership. In a joint venture, therefore, these parties agree to enter into a consortium or a joint venture agreement. Relationship between the parties is created on the terms and conditions as stated in this agreement and no relationship that is beyond the ambit of this agreement comes into existence. Rights, liabilities etc. of each contracting party are also determined according to the terms and conditions of the agreement.

There is no requirement under the law of Pakistan for registration of such Agreements. However, the entities which form Joint Venture may themselves be required to be registered under the relevant law.