Lecture notes Business Law Part II

Bailment and Pledge Contract
1. Meaning of Bailment
The term "bailment" is derived from a French word ' Baillier" which means to deliver or handing over.
Bailment means delivery or hand over of goods for a certain period of time or purpose.
Bailor- who deliver goods
Bailee- To whom the goods is delivered.
A bailment arises when one person ( the bailor) transfers possession of goods to another person (the bailee) on condition that the bailee will restore them to the bailor after the purpose for which they were delivered is accomplished.
Section 25 of the Nepalese Contract Act defines bailment contract as ' A contract relating to bailment shall be deemed to have been concluded in case any person delivers any property to another person on a returnable basis or for handing it over to any other person or selling it as ordered by him'
According to Section 148 of the Indian Contract Act, " 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 off according to the direction of the person delivering them"
From the above definition the bailment contract has following features:
1. There must be actual or constructive delivery.
2. The goods not immovable property
3. by the owner called bailor
4. to another person called bailee
5. for a specific purpose
6. on condition that the goods shall be returned either in their original or in an altered from or shall be disposed according to the direction of the bailor.
7. The delivery of possession from a bailor to a bailee
8. Possession without ownership.
Thus bailment is a process where one person delivers movable goods to another person for some specific purpose or a specific period of time and after completion of the purpose or after expiry of the time, changed goods bailed should be returned or disposed or sold according to the instruction of the bailor.
Some examples of Bailment
- A deposits goods in a cloakroom at railway station
- A is going out of house delivers a cow to B for care
- A lends B a horse for his riding
- A delivers animal to a doctor
- A delivers gold to goldsmith
Rights and Duties of Bailor and Bailee
Rights of Bailor
a. Right to demand return of goods
b. Right to claim damages in case of negligence
c. Right to claim compensation in case of unauthorized use
d. Right to claim compensation in case of unauthorized mixture of goods which can not be separated
e. Right to claim compensation in case of unauthorized retention of goods
f. Right to claim the separation of goods in case of unauthorized mixture.
g. Right to demand accretion of goods.
h. Right to termination of bailment if the bailee uses the goods wrongfully.
i. Right to return of goods at any time incase of gratuitous bailment.

Duties of Bailor
a. To disclose defects in the goods (sec. 27)
b. To take return of goods bailed (sec. 29.2)
c. To repay necessary expenses in case of gratuitous bailment
d. To pay any "extra ordinary" expenses in case of non-gratuitous bailment.
e. To pay indemnity to bailee (sec. 30)
f. To bear the risk of loss of goods
g. To pay indemnity to the bailee in case of premature termination of gratuitous bailment.
Rights and duties of Bailee
Rights of Bailee;
a. Right to claim indemnity
b. Right to claim reimbursement of expenses (vr{sf] ;f]wegf{)
c. Right to claim compensation if the bailor refused to receive back the goods after the term of baiment is over.
d. Right to recover lose in case of defective title (sec 30)
e. Right to receive remuneration (sec. 32.3)
f. Right to deliver goods to one of several joint bailors.
g. Right to deliver goods to bailor
h. Right to lien (a:t'dflysf] clysf/)
Duties of Bailee
a. To take reasonable care of goods delivered to him
b. Not to make unauthorized use of goods entrusted to him.
c. Not to mix goods bailed with his own goods (Sec. 28)
d. To return the goods (Sec 29)
e. To deliver any accretion to the goods
f. Not to set up any adverse title.
Pledge or Pawn Contract
(lwtf] jf w/f}6 ;DaGwL s/f/)
· Generally the term pledge is the goods to be deposited as security to repay the debt (loan) or to perform the promise.
· The word pawn is synonymous with the word pledge.
· The pledge is a special kind of contract. It is also regarded as a branch of bailment.
· The bailor is called the Pawnor and the bailee the pawnee.
· In Nepali it is called Dhito or Dharaut.
· In Nepalese context Pledge is also called Mortgage.
Section 35 (1) defines the term as " a contract by which a person receives some property from another as security for granting a loan or as guarantee for performing a job"
Property denotes all types of property whether movable or immovable
Section 172 of the Indian Contract Act defines the term pledge as" the bailment of goods as security for payment of a debt or performance of a promise is called pledge"
Basic Features of Pledge Contract
a. Two parties
b. Pledge can be given only by real or true owner of the property
c. Pledge can be both movable and immovable types of property
d. In case of joint ownership, only own property can be pledged
e. Property which are pledged can not be used by the pawnee
f. Equal position of all the creditors in case the pawner pledged the goods more than a person one at a time.
g. Return the surplus amount to the debtor after auction.
h. Return the pledge Property.

Distinctions between Bailment and Pledge
Bailment
Pledge
The scope of bailment is wide. All the pledges fall under bailment.
The scope of pledge is limited one. Being a branch of bailment all bailment do not under pledge.
In bailment goods are bailed for different purposes such as safe custody, repair, hire etc.
In Pledge goods are pledged for a specific purpose such as to provide security of loan or promise.
No security is required at the time of bailment
Security is essential at the time of pledge
Goods are bailed either on offer/request of bailor to the bailee or on offer/ request of bailee to the bailor.
Goods are pledged only at request of the pledger to the pledge.
The bailor can use the goods bailed in accordance with the terms and conditions of the contract
Generally the pledgee can not use the goods pledged but can use them if the pledger allows the pledgee to do so.
The bailment may be both either gratuitous or non-gratuitous.
In Pledge contract consideration is available to either party. It means the pledger has to pay interest to pledgee.
Bailment incudes movable goods only
The pledge includes both types of movable and immovable goods.
In bailment no loan transaction exists
In pledge loan transaction may exists.
Bailee is not entitled to sell the goods bailed. He can retain them until he get remuneration.
Pledgee can sell the goods pledged to recover his amount after giving notice to pledger in case of default by the pledger.

Rights and duties of Pawner & Pawnee
Rights of Pawner
1. Right to receive back the goods pledged from the Pawnee (sec. 36.1)
2. Right to receive accretion to the goods pledged. (benefit, achievement and incensement)
3. Right to claim compensation against the pledge for any losses he suffers due to negligently handling, mixture, and unauthorized use of goods etc.
4. Right to receive a notice from the pawnee before sale or auction of the goods pledged.
5. Right to sue the pawnee in the court to recover the goods in case sale or auction took place without notice.
6. Right to have surplus or excess amount obtained by the sale or auction of the goods pledged.
7. Right to redeem the goods pledged before sale or transferred by repaying the debt, interest, fine and other expenses. (37.3)
Duties of Pawner
1. Pawner has the dutiy to disclose all the defects in the goods to be pledged.
2. Pledger or pawnee has the duty to repay his loan, interest, expenses if any within or at the specified time.
3. Pledger has to bear extra-ordinary expences for taking care of goods pldeged or has to bear additional liabilities due to default of repaying loan.
4. Not to pledge the goods which is not belongs to him.
Rights of Pawnee or Pledgee
1. Pledgee has right to retain the goods pledged until the pledger repay his debt, interest and other expenses if any. (37.1)
2. Pledgee has right to sell or auction the goods pledged if pledger is unable to repay within specified a time.
3. Pledgee has right to transfer the goods in his own name if the pledged loan is not recovered by selling or auctioning.
4. Pledgee has right to claim compensation against the pledger for any loss suffered by him due to default in payment of debt in time. (37.3)
5. If loan amount including interest and other expences is not recovered by selling or auctioning the pledged goods the pledgee can recover the due amount for other assets of the pledger. (37.2 and 4)
6. If the pledger pledged the goods obtained by him under viodable contract unknowingly, as soon as he aware about the fact he can rescind the contract. (38.1)
Duties of Pawnee or Pledgee
1. Pledgee has to take reasonable care of the goods pledged.
2. Pledgee should not make any unauthorized use of the goods pledged.
3. Pledgee should not mix the goods pledged with his own without consent of pledger.
4. Pledgee should return the goods pledged to the pledger after the payment of the debt or completion of work.
5. Pledgee has to return the accretion or increase or profit from the pledged goods.
6. Pledgee has to indemnify the pledger for any loss suffered by him if the good is lost, damaged, destroyed etc.
7. Pledgee has to refund the surplus amount to the pledger after selling or auctioning the pledged goods.
Finder of lost goods
Meaning
· Finder of goods means a person who has found goods not belonging to him and keeps them with him.
· Though there is no definition of the term provided in Nepalese Contract Act 2056, Sec. 11 of the Act has made the provision relating to responsibilities of the finder of goods as same as bailee.
· Sec. 11 of the Act reads," when any person keeps any property of another person he has to keep it as bailment"
· According to Sec.71 if the Indian Contract Act, " A person who finds goods belonging to another person and takes them into his custody, he is subject to the same responsibility as bailee"
Rights and Duties of Finder of lost goods
Rights of finder of lost goods
1. The finder of lost goods has right to possess the goods until the true owner of the goods is found. (Sec.31)
2. The finder of lost goods has right to reimburse all the expenses from the true owner. (Sec.31)
3. The finder of lost goods has right to lien. It means he can refuse to return the goods until he is reimbursed all the expenses to preserve the goods. (Sec.31)
4. The finder of the goods can file a suit against the true owner to recover any reward which was offered by the true owner for the return of goods lost.
5. Generally the finder of goods has no right to sell the goods found. However, Sec. 169 of the Indian Contract Act provides that the finder can sell the goods in any of the following cases.
a. Where the owner can not with reasonable diligence be found,
b. Where the owner when found, refuses to pay the expenses incurred by him.
c. Where the goods are of dangerous nature or in danger of losing the greater part of their value and
d. Where the expenses incurred by the finder amount to 2/3 of the value.
Duties of Finder of Goods
1. To take reasonable care of the goods found.
2. Not to use the goods found for personal purpose.
3. Not to mix with his own goods.
4. To inform the police
5. To find out the true owner
6. To return the good.

Pledged by non-owner
· General rule is that only the true owner of the goods can pledge the goods but a non-owner of the goods.
· According to Sec. 38 (1) of the Nepalese Contract Act, " if a person pledge some goods not belonging to him as security for repayment of the loan or for performance of the work and the pledgee does not have knowledge about the fact he can ask the pledger to pledge other goods with him if the pledger is unable to do so the pledgee can rescind such pledge."
· This rule is based on Principle of "no one can give what he has not got."
· Exceptionally, non owner can also entitle to pledge the goods which are not under his ownership.
1. Pledge by Mercantile Agent; Sec. 178 of the ICA provided that the mercantile agent can pledge the goods under following condition.
i. The mercantile agent is in possession of goods or document of title to the goods.
ii. Such possession is with the consent of the owner.
iii. He has pledged such goods during the general course of agency business.
iv. The pledgee must have acted in good faith and
v. The pledge must have no notice of the mercantile agent's defective title.
2. Pledge by a person in possession under viodable contract.
3. Pledge by a person having a limited interest
4. Pledge by seller in possession of goods after sale
5. Pledge by buyer in possession of goods under an agreement to sell
6. Pledge by co-owner in possession
Agency
1. Introduction
· Modern business is becoming complex with the pace of time.
· Due to the vast expansion and globalization of the modern business it is not possible for a person to carry on all the business transaction himself.
· The changing circumstances require a businessman must necessarily depend on other for efficient running of the business.
· In the general course of conducting business, to employ a merchant to distribute the goods, ask the brokers to buy shares and so on are common phenomenon.
· In law;
o Agent: A person who acts on behalf of other is called an agent.
o Principal: The person on whose behalf an agent act is called the Principal.
· The contract which creates relationship between the principal and the agent is called a contract of agency or agency.
· It is special types of Contract.
· The Agency is regulated by :
o In England: Commercial Regulation Act, 1993
o In India : Contract Act, 1872
o In Nepal: Nepal Agency Act, 2014, Nepal Agency Regulation, 2019 and Contract Act 2056.
Meaning
Agency is a legal relationship between two persons whereby a person delegates his authority to do some work on behalf of him to another person.
Section 56 of the Nepalese Contract Act 2056 has defined the term Contract of Agency as " Every person appoints any other person as his representative to do anything on his behalf except the subject matter of his personal skill, or to conduct business or any transaction with a third person on his behalf or to represent himself to such person or to establish legal relations with principal person and a third person and in case the person is appointed in this way, it is deemed to have been concluded the contract of agency."
According to Section 182 of the Indian Contract Act, "A contract of agency is a contract by which a person employs another person to do any act for himself or to represent him in dealings with third person."
· The act of the agent binds his principal to third person. Similarly the act of the agent also gives right to third persons against the principal.
· The Function of the agent is to bring his principal into contractual relationship with the third parties. Therefore, the agent is merely a contracting link between the principal and the third party.
· The agent has the power to make the principal answerable to the third party for his conduct.
There are Two Rules regarding agency;
a. With certain exceptions, whatever a man competent to contract may lawfully do himself he may do by another.
b. The acts of the agent are the acts of the principal. In other words he who acts through an agent is himself acting.
Characteristics of Agency:
a. Appointment of Agent on the wish of principal.
b. Appointment may be either expressed or implied.
c. The Principal delegates his authority to his agent
d. The works of the agent binds the Principal to the third person.
e. No need of consideration, it is internal matter of principal and agent.
f. The Principal must be competent to contract but the agent may be incompetent to contract.
g. Agency is based on good faith. It means the agent has to inform his principal all the information as he know and the agent must not set up adverse title.
Modes of Creation of Agency
· The Contract of agency, like any other contract may be express or implied; but consideration is not an essential element in this contract.
· Agency may also arise by estoppels, holding out, necessity or subsequent ratification by the principal of the act done by the agent.
· The relationship of principal and agent may be created by statute.
· There are numbers of modes of creation of agency;
1. Agency by expressed agreement:
· The contract of agency, normally created by an expressed agreement with certain exception.
· Agreement may be writing and registration and may be made orally or in the writing.
· In fact in a large number of business dealings agencies are created by word of mouth.
· The usual form of a written contract of agency is the Power of Attorney which gives him the authority to act as agency on behalf of the principal in accordance with the terms and conditions mentioned therein.
· In Nepal agency must be created in a written form and it is necessary to register in the prescribed governmental office.
Power of Attorney may be different types;
a. General Power of Attorney: The agent is authorized to do all dealings, i.e. to act generally in the business of agency.
b. Special Power of Attorney: The agent is authorized to do a special transaction only i.e. selling land.
c. Particular power of Attorney: The agent is authorized to do a single act e.g. to present a document before the Registrar of registration.
2. Agency by implied agreement:
· Implied agency arises when there is no express agreement appointing a person as an agent.
· It happens from the conduct, situation or relationship of the parties.
· Partners, wives are usually regarded as agent by implications of their relationship.
· Implied agency would therefore, include agency by estoppels, agency by holding out and agency of necessity.
a. Agency by Estoppel:
· Estoppel is a legal doctrine which prevents a person from denying a fact or circumstance which he has accepted.
· Where a person by his words or conduct has willfully led another to believe that certain set of circumstances or facts exists and that other person has acted on that belief, he is estopped or prevent from denying the truth of such statement.
· A tells B in the presense and within the hearing of C that he "A" is C's agent and C does not contradict this statement and later on B enter into a transaction with A believing that A he is C's agent. C is bound by this transaction and in a suit between himself and B, cannot be permitted to say that A was not his agent.
b. Agency by Holding out:
· It is also a branch of estoppel but is something more than that.
· An agency by holding out requires some affirmative or positive act of conduct by the principal to establish agency.
· A who is domestic servent of B generally purchase goods on credit from C and pays them regularly. C can assume that A is B's implied agent.
c. Agency by necessity :
· In some cases the agency can be created because of the necessity where one may need to work being an agent of another even in the absence of express agreement.
· A person who has been entrusted with another's property, may have to incur unauthorized expenses to preserve it.
· Payment of expenses incurred on lost animals and child etc.
· Following conditions must be fulfilled;
i. It must be impossible to get the principal's instructions.
ii. The course taken only practicable one in the circumstances.
iii. The agent of necessity must act honestly in the interest of all party
iv. There must be real emergency and necessity to act on behalf of principal.
d. Agency by operation of law:
· A partner is the agent of the act of the partner to carry out the business as usual of its partners.

c. Agency by ratification:
· If the agent had no authority to contract on behalf of principal or exceed such authority as he had, afterwards confirms and adopt the contract is known as ratification.
· It is also known as ex post facto agency.
· Contract of agency only be valid if the following conditions are fulfilled.
i. The agent must act on behalf of the principal
ii. The principal must be in existence at the time of conduct.
i. The principal must have contractual capacity
ii. The principal must have full knowledge of material facts or rativication
iii. Whole transaction must be ratified.
iv. Ratification must be done within reasonable time
v. Act to be ratified should not be void or illegal
vi. Ratification must not injure a third party
vii. Act to be ratified must be within power of principal
viii. Ratification may be express or implied and
ix. Ratification must be communicated to the concerned party.
Rights and Duties of Agent
Rights of an Agent
1. Right to receive remuneration and commission
Where the services rendered by the agent were not voluntary or gratuitous, the agent is entitled to receive the agreed remuneration and commission.
2. Right to lien
According to Sec. 221 of the Indian Contract Act, an agent has the right to retain goods, papers and other property whether movable or immovable of the principal received by him until the amount due to himself for commission, disbursement and services in respect of the same has been paid.
3. Right to stoppage goods in transit
An agent has right to stop the goods where they are subscribed by him. This right is acquired by the agent in two cases;
a. Where he has purchased goods for his principal either with his own money or by incurring a personal liability for the price. (he stands towards the principal in the position of an unpaid seller)
b. Where the principal has become insolvent.
4. Right to indemnify against consequence of lawful acts
An agent has right to claim indemnity for any losses suffered by him in spite of all lawful acts done in exercise of his authority. But if the loses suffered by his unlawful and criminal acts are not covered under it.
5. Right to indemnify against the consequences of acts done in good faith
When acting according to the instruction of the principal, any injury to the agent is to be recovered by the principal as a result of such act.
6. Right to reasonable compensation in case of undue removal from the agency
Sec. 62.3 of the Nepalese Contract Act reads that an agent is entitled to reasonable compensation for the loss suffered by him if the principal removes the agent without any reasons before the specific period prescribed or before the completion of the work assigned to him or without prior notice stating reason.
Duties of an Agent
1. To carry out the work undertaken according to instructions and within the scope of authority conferred upon him by the principal.
2. To follow the custom prevailing in the same kind of business if the principal has not given any express instructions.
3. To carry out the works with reasonable care, skill and diligence.
4. To communicate with the principal in case of difficulty and get his instructions.
5. Not to make any profit of his agency other than his agreed or reasonable remuneration.
6. To keep true and correct account of all his transactions and to be always ready to produce them to his principal.
7. Not to deal on his own account and must not become a principal to the transaction against his principal.
8. Not to set up any adverse title.
9. Not to use information obtained in the course of the agency against the principal.
10. Not to delegate authority to another person but perform the work himself.

Rights and Duties of Principal
Rights:
1. Right to revoke or discharge the agency if the agent commit fraud or uses excess authority or deceives him.
2. Right to instruct the agent in respect of working procedures.
3. Right to claim compensation from agent if he does any work beyond the authority provided by principal or works negligently or carelessly.
4. Right to demand secret profit if the agent earned any profit concealing from principal.
5. Right to receive account of the transaction.
6. Right to reject any transactions done by the agents without having authority from the principal.
Duties:
1. To pay remuneration or commission as mentioned in the contract and if not mentioned in the contract reasonable remuneration or commission should be paid to the agent.
2. To reimburse or repay amount spent by the agent in the course of agency.
3. To provide indemnity to his agent against the consequences of lawful acts and against the consequences of the acts with good faith of the agent.
4. To provide the notice to the agent if any information he got from the third party.
5. Not to terminate the agency wrongfully.
6. To give reasonable compensation in case he removes the agent unduly without prior notice.
7. To be responsible for any loss or damage caused by the agent while executing the agency contract.

Delegation of Authority
· An agency is a delegation of authority of the principal.
· Delegation of authority means to give authority for conduct certain work to another person from a responsible person.
· Generally a delegated power or authority can not be delegated.
· It is based on the Latin Maxim "Delegatus nonpotest delegare" which means a delegate can not further delegate.
· An agent being himself a delegate of his principal can not pass on that delegated authority to someone else.
· Generally this is because of the confidence in a particular person is at the root of the contract of agency. And
· An agent usually selected in reliance upon some personal qualification so it would be unfair if the agent delegate to other and also harm to the principal.
· The main cause behind the birth of this principal is that the principal can trust the agent appointed by him much than the agent appointed by his agent.
· Section 190 of the Indian Contract Act has also adopted this principal. According to it "an agent can not lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally."
· Similarly Section 58 of the Nepalese Contract Act 2056 has required to get consent of the principal before delegating power to sub agent by the agent.
· But there are some exceptions of this rule where the agent also can delegate his authority to any other person by appointing sub agent.
Exception of the General Rule:
1. Where the principal has expressly permitted delegation of such power.
2. Where the custom of the trade permits delegation
3. Where the principal knows that the agent intends to delegate his authority
4. Where the nature of the authority is such that a deputy is necessary to complete the business
5. Where the act to be done is purely ministerial and does not involve the exercise of discretion e.g. clerical or routine work.
6. In an unforeseen emergency the agent can always delegate.

Sub-agent and Substituted agent
Meaning of Sub-agent:
· Where an agent under express or implied delegation of authority appoints another person to act in the matter of the agency is called sub-agent. So the agent appointed by the original agent for conducting principal's work is called sub-agent.
· Nepalese Contract has not defined the term sub-agent but has made provision regarding the appointment of sub-agent. According to the Section 58 provides " in case it is necessary to appoint a sub-agent according to the nature of any trade, business or transaction, of in case a sub-agent can be appointed according to the provision contained or practices followed in contracts relating to agency, the agent may, except when otherwise provided for in the contract, appoint a sub-agent with the consent of the principal."
· Section 191 of the Indian Contract Act has defined the term sub-agent as" A sub-agent is a person employed by and acting under the control of, the original agent in the business of agency."
· The relation if the sub-agent to the original agent is as between themselves, that of agent and principal
· Sub-agent acts under the control of the agent and there is no privity of contract between the principal and the sub-agent. Therefore the sub-agent can not use the principal for any money due although he may bind principal as third party.
· If the sub-agent is guilty of fraud or willful wrong the principal has right to proceed both against the agent and the sub-agent.
· In case where the sub-agent is appointed improperly or without authority of the principal the following consequences emerges;
a. The principal is not liable and not bound by the works of sub-agent.
b. The agent is fully responsible for principal, third party and the sub-agent.
c. The sub-agent is not liable with the principal in any including fraud or willful wrong committed by him.
According to the proviso of the Section 58 of the Nepalese Contract Act, it prohibited to appoint sub-agent for the work to which an agent has been appointed or to represent or work personally.

Chapter V
Indemnity and Guarantee
A. Indemnity
· Contract of Indemnity and Guarantee are special types of contract.
· It has very important role in the business community.
· Chapter 4 of the Nepalese Contract Act has tried to regulate the contract of indemnity and guarantee.
· Literally Indemnity means Compensation
· So the contract of indemnity means a compensation to be paid to the person who is victim of loss or any compensation to save him from the loss caused by different cause.
· A contract of Indemnity is a contract by which a person promises to other that he will indemnify that person from contingent loss.
· In the Contract of Indemnity, one party promises to save the other party from damage or loss caused to him by the conduct of the promisor or by the conduct of any third party.
Indemnifier: The person who promises to indemnify the loss.
Indemnified or Indemnity holder: The promise whose loss is indemnified.

Meaning :
Nepalese Contract Act has not defined the term Indemnity but has only some provisions.
It has just recognized as a contract of damage.
Indian Contract Act, 1872 has defined the contract of Indemnity. According to the Section 124 of ICA, "A contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any person is called a contract of Indemnity"
According to the English Law a contract of indemnity is ' a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor."
English Law in comparison to the Indian law is wider in relation to the definition of the term.
According to the Indian contract Act;
The loss must be caused either by the conduct of the promisor or any other person and if loss is caused by accident there would not be contract of indemnity.
But the According to English law seems wide than Indian law and also covers the loss caused by accident or natural causes etc.
Features of Contract of Indemnity:
1. The contract is made for protecting the promise against anticipated or contingent loss.
2. The liability of the indemnifier started as soon as the loss is occurred to the indemnified.
3. Indemnification is made for actual loss.
4. The event specified in the contract must be happen.
5. The Indemnified himself responsible for the loss if the loss is caused by his own misconduct.
6. Contract may be implied and expressed.

Rights and Duties of Indemnifier and Indemnity Holder
A. Rights and duties of Indemnity Holder :
A. Rights of and Indemnity holder:
Nepalese Contract Act has some legal provisions regarding rights of the indemnity holder against the indemnifier but not mentioned the duties of indemnifier.
Section 22 (1) of the Act provides incase any person has concluded a contract relating to indemnity with a provision to pay to any party to a contract or a third person for any loss or damage that may result from his actions while working under the direction of that party to the contract, he may realize as compensation all or any of the following amounts subject to that contract.
a. Indemnity Amount : Indemnity amount mentioned in the contract
b. Amount to be paid or borne: In case any loss or damage has been caused to third person, the amount to be paid or borne in consideration thereof.
c. Amount of Expenses : The amount spent on the case filed or defended by him in connection with the contract relating to indemnity.
d. Amount spent in the suit: Due to non-payment of sum payable mentioned above, if the legal actions is to be taken, the amount to be spent in the suit.
But According to the Section 22 (2) of the Contract act in case a person while working under the direction of the other party, works negligently or with the intention of causing any loss or damage to that party or a third person, and in case the concerned party or the third person suffers a loan or damage as a result thereof, he shall himself be responsible for such loss or damage.
Duties of Indemnifier :
The Indian Contract Act and Nepalese Contract Act has no provisions regarding the rights of the Indemnifier.
Generally the Indemnifier has the duty to indemnify the indemnity holder in the following situation:
a. There must be damage or loss
b. Loss or damage must have been caused by an incident as mentioned in the contract.
c. The indemnity holder has to act carefully, prudently and according to the direction or with the authority of the indemnifier.
Contract of Guarantee
Meaning and Definition:
A person who seeks to borrow money or to undertake some obligation may be required to pledge some property with the creditor as security. But the creditor may be willing to lend money to a person if he can get some other person to assume personal liability as security for the payment of the loan or for the performance of the promised acts. In this case the creditor gives a loan to the debtor on the combined financial standing of the debtor and some third person, called surety.
A guarantee means a contract of a promise to be responsible for something to perform the promise or to discharge the liability of a third person, in case of default. Such a contract involves three parties ; the creditor, the surety and the principal debtor.
Creditor : The person to whom the guarantee is given
Surety: The person who gives the guarantee
Principal debtor: The person in respect of whose default, the guarantee is given.
· Contract of guarantee is most prevailing practice in the sector of Banking and financial institutions.
· Commercial Banks, Development Banks, Finance Companies, Co-operatives are mostly relied on the contract of guarantee for the security of their issued loan.
Section 15 (1) of the Nepalese Contract Act has defined contract of Guarantee as " a contract relation to a guarantee shall be deemed to have been concluded if it provides that ,if any person defaults in the repayment of loan obtained by him or fulfillment of the obligation accepted by him it will be repaid or fulfilled by a third person."

Section 126 of the ICA
· A contract of guarantee is a contract to perform the promise to discharge the liability of a third person in case of his default.

· A clear definition of guarantee was made by the English Court in the case of Brickyrs vs. Darmell (1703) - "A contract of guarantee is a contract by one person to discharge the debt, fault or miscarriage or another."

· A contract of guarantee is an agreement with the objective of enabling a person to get a loan or goods on credit or an employment.

· If 'A" advances a loan of Rs. 5000/- to 'B' and 'C' promises to 'A' that if 'B' does not repay the loan, 'C' will do so. This is a contract of Guarantee.

There are triangular relationship between the parties are as follows;
a. Between the creditor and debtor creating loan
b. Between the surety and the creditor creating liability of surety in case of debtor's default and
c. An implied contract between the surety and the debtor that the debtor will indemnify the surety the later has paid the creditor on the debtor's default.
Thus the contract of guarantee is the tripartite nature.

Debtor
Surety Section 15(3) of the NCA requires to be made the contract of guarantee in written form whereas ICA accepts both verbal and written contract.
Creditor
Implied relation of indemnity paid








Features of Contract of Guarantee

a. A tripartite agreement between creditor, surety and principal debtor.
b. No misrepresentation or concealment of the facts regarding the contract.
c. No direct consideration between the surety and the creditor. Consideration of the principal debtor is considered to be adequate for the surety.
d. Primary liability is of the principal debtor and secondary liability is of the surety.
e. The involvement of competent parties is a must along with the other essentials of a valid contract.
f. As a conditional contract, liability of the surety arises only when the principal debtor (primarily liable) defaults.
g. A contract relating to guarantee must be concluded in writing (In Nepal and England)

Distinctions between Indemnity and Guarantee


Indemnity

Guarantee
1
In indemnity a promisor is primarily and independently liable to the promise and therefore there are only two parties.
1
In Guarantee the liability of the surety is only secondary. the primarily principal debtor is liable for the contract hence here the concurrence of three persons is essentials.
2
In the case of contract of indemnity it is not necessary for the indemnifier to act at the request of the debtor.
2
Whereas, in the case of a contract of guarantee it is necessary that the surety should give the guarantee at the request of the debtor.
3
In the case of Indemnity, the possibility or risk of any loss happening is the only contingency against which the indemnifier undertakes to indemnify.
3
In the case of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety.
4
In the case of indemnity, the indemnifier can not sue third parties in his own name, unless there be assignment. He must bring the suit in the name of indemnifier.
4
In contract of guarantee where the surety discharges the debt payable by the principal debtor to the creditor, the surety, on such payment, is entitled in law to proceed against the principal debtor in his own right.
5
The person giving indemnity has some interest in the transaction apart from his indemnity.
5
While the surety is totally unconnected with the contract except by means of his promise to pay on debtor's default. In fact, surety must not have any financial interest in the contract.
6
Rights of indemnity may arise out of express or implied contract or out of obligation imposed by laws e.g. as between principal and agent or master and servant.
6
The liability of the surety arises only out of contract between him and the creditor. The surety undertakes an obligation at the express or implied request of the principal debtor.


Types of Guarantee

Fro the viewpoint of nature objective and the act, the guarantee may be classified as follows;
1. Absolute and conditional guarantee :
An absolute guarantee is one by which the guarantor unconditionally promises to pay the debt, on the default of the principal debtor. But, if some contingency other than the default of the principal debtor arises then is a conditional guarantee.
2. General and special Guarantee
The guarantee that can be accepted by the general public is a general guarantee and the one that can be accepted only by the particular person is special guarantee.
3. Limited and unlimited guarantee
When a guarantee is limited there is a liability by time and amount that is limited, whereas if a guarantee is not limited there is a liability for the surety by time amount and transaction there is an unlimited guarantee.
4. Prospective and retrospective guarantee
A guarantee that is given for future transactions that ay be one or more transactions is a prospective guarantee and if it is given for the past or existing transactions it is called a retrospective.
5. Specific and continuing guarantee
· When a guarantee is extended to a single transaction or debt, it is called a specific guarantee. Such a guarantee comes to an end when the transaction stops or is duly discharged or the promise is duly performed.
· But if a guarantee extends to a series of transactions continuously it is a continuing guarantee.
· There is no water-tight demarcation of the continuing guarantee with specific guarantee; however it is determined by the intention of the parties and or terms and conditions and or subject matter and or circumstances of the transactions. A continuing guarantee may be given for a fixed amount. It only speaks of continuing transaction and not of the period of such transaction. Because of the uncertain nature of time, a continuing guarantee will be continued until the revocation by the surety.
Features of Continuing Guarantee
· The Continuing Guarantor is not exhausted by the first advance
· It can always be revoked by a notice to the creditor.
· A revocation of the guarantee is possible for future transaction
· Death of the surety terminates the contract.

Revocation of Contract of a Continuing Guarantee

1. By notice of the revocation by surety: A guarantor (surety) may revoke a continuing guarantee at any time by a notice as to the future transactions. But he is liable for the transactions until the date of revocation.
2. By death of surety: The death of surety automatically terminates the contract of guarantee so far as regards future transactions unless there is a contract to the contrary. It is not necessary that the creditor must have notice of the death. The state of the surety is free after death although the creditor might have entered into a transaction with out knowledge of the death of surety.
3. By other modes;
a. By variance in the terms of contract (Alteration)
b. By novation of the contract.
c. By release or discharge of principal debtor
d. By a loss of security
e. By arrangement with principal debtor
f. By the creditor's act impairing the surety's eventual remedy.

Rights Duties and liabilities of Surety
Rights of Surety
1. Rights against the Creditor
a. Right to securities :
The surety is entitled to demand from the creditor, at the time of payment, all the securities which the creditor may have against the principal debtor. Creditor must handover to the surety the securities in the same condition as they formerly stood in his hand. If the creditor loss or without consent of the surety, parts with such security, the surety is discharged to the extent of the value of security.
b. Right to Exoneration (Pity, pardon)
In the case of fidelity guarantee the surety can call upon the creditor or the employer to dismiss the employee whose honesty he has guaranteed in the event of proved dishonesty of the servant. He may also file a suit for a declaration that the principal debtor is the person pay the amount. In such a case the surety is exonerated.
c. Right to Share Reduction
If there are more than one surety exists for the same principal debtor. If any default made by the principal, all the sureties have the rights to divide the default to the extent of their guarantee.
d. Right to set off:
Set off means to counter a claim. The surety is also entitled to the benefit of any set of or counter claim, which the principal debtor might possess against the creditor in respect of the same transaction. For example if the creditor owes the debtor something, or has his hand something belonging to the debtor for which the debtor could have counter claimed , the surety can also put that counter claim.
2. Rights against principal debtor
a. Right to subrogation
When the surety has paid the guaranteed debt on the default of the principal debtor, he become the creditor and will be able to exercise as against the principal debtor all these rights and remedies which could be exercised by the creditor.
b. Right to 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 demand from the principal debtor whatever he has paid under the guarantee.
3. Right against Co sureties
a. Right to contribution
Where a debt is guaranteed by more than one sureties, they are called co-sureties. In such a case all the co-sureties are liable to contribute towards the payment of the guaranteed debt as per the agreement among them. But in the absence of any such agreement if one of the co-securities is compelled to pay entire debt, he has a right to contribution from others.