Business Law: Bailment & Pledge Contracts

• These notes cover Business Law, specifically Unit 3 on Special Contracts, focusing on Contracts of Bailment and Pledge.

Bailment (Sec. 148-Sec. 181)

• Bailment involves delivering goods from one person to another for a specific purpose, based on a contract.
• The contract stipulates that the goods be returned or disposed of per the deliverer's instructions once the purpose is achieved.
• The deliverer is the bailor.
• The receiver is the bailee.
• The transaction is a bailment.
• Examples include hiring goods/furniture/cycles, giving cloth to a tailor for stitching, giving a watch/car/scooter to a mechanic for repair, and depositing goods for safekeeping.
• Depositing money in a bank does not constitute bailment because the money returned is not the exact currency deposited.
• Depositing ornaments in a bank locker is not bailment, due to the owner retaining the keys.
• Possession of ornaments is deemed to be with the owner.

Essentials of Bailment

• Delivery of movable goods from one person to another is required.
• Actual delivery is handing over physical possession, like giving a watch to a repairer.
• Constructive or symbolic delivery involves handing over the means to obtain physical possession, like giving car keys to a mechanic or handing over the keys to a godown where goods are stored.
• Goods must be delivered for a specific purpose; delivery by mistake without purpose does not constitute bailment.
• Upon accomplishing the purpose, goods are returned in their original or altered form.
• Goods will be disposed of as directed by the bailor.

Kinds of Bailment

From 'Benefit' Point of View

• Bailment for the exclusive benefit of the bailor: X gives ornaments to neighbor Y for safekeeping when X is away.
• Bailment for the exclusive benefit of the bailee: X borrows a pen from Y.
• Bailment for the mutual benefit of the bailor and bailee: contracts for repair, hire, where the bailee charges for service, and the bailor benefits from the service.

From 'Reward' Point of View

• Non-gratuitous bailment: Either the bailor or bailee is entitled to remuneration, e.g., giving goods for repair, or cloth to a tailor for stitching.
• Gratuitous bailment: Neither the bailor nor the bailee receives remuneration, e.g., lending a book to a friend, safekeeping goods without charge.
• Consideration in gratuitous bailment or bailment for the exclusive benefit of the bailor/bailee may not involve direct remuneration.
• Detriment suffered by the bailor in parting with the goods sufficiently supports the bailee's promise to return them.

Duties of Bailee

• A bailee must take reasonable care of the goods; taking as much care as one would of their own goods and not being negligent.
• A bailee is not liable if goods are lost, destroyed, or deteriorated despite reasonable care.
• A bailee is not liable for loss caused by state enemies or acts of God, such as riots or floods.
• A bailee should not make unauthorized use of the goods bailed.
• Goods must be used strictly as per the terms of bailment, otherwise, the bailor can terminate the bailment.
• The bailee is liable to compensate the bailor for losses from unauthorized use, even from inevitable accidents or acts of God.
• A bailee should not mix bailed goods with their own without the bailor's consent.
• With consent, there is no breach of duty, and both parties have an interest in the mixture in proportion to their shares.
• If mixed goods can be separated, the property remains with the parties respectively with the bailee bearing expenses of separation and loss from mixing.
• If mixed goods cannot be separated, the bailee must compensate the bailor for their loss.
• A bailee must return the goods without demand upon expiry of time or accomplishment of the purpose of bailment.
• Failure to return goods on time makes the bailee liable for loss or deterioration from that time onwards, even if the loss is not attributable to neglect or due to an act of God.
• A bailee must return any natural increase or profit accruing from the bailed goods to the bailor, e.g., returning a cow and its calf.

Duties of Bailor

• A bailor must disclose faults or dangerous aspects of the bailed goods to the bailee.
• A gratuitous bailor is responsible only for defects they are aware of.
• A bailor for reward is responsible for all defects, should they fail to disclose them.
• A bailor must repay necessary expenses in gratuitous bailment when the bailee is not receiving remuneration.
• This includes reimbursing usual expenses like feeding and cleaning, plus extraordinary expenses like medical costs.
• A bailor must pay extraordinary expenses in non-gratuitous bailment.
• A bailor isn't liable for usual expenses, but must repay medical expenses should the animal require treatment, as extraordinary expenses.
• A bailor must indemnify the bailee.
• This covers losses from defective title.
• For gratuitous bailment, the bailor can terminate the contract at any time.
• If this causes a loss exceeding benefit, the bailor must indemnify the bailee.
• A bailor must accept the return of goods when returned by the bailee upon expiry of the bailment period or accomplishment of its purpose.
• The bailor will be liable to reimburse the bailee for all expenses for custody of goods if goods are refused.

Rights of Bailee

• A bailee can enforce bailor's duties by suing for undisclosed faults, expenses, indemnification for premature termination, or refusal to receive back goods.
• A bailee can deliver goods to one of several joint bailors if received from several joint holders.
• A bailee can deliver goods in good faith to a bailor without title, without liability to the true owner.
• A bailee has a particular lien if their service involving labor or skill on bailed goods increases the goods' value with the right to retain those goods until charges are met.
• This occurs in jewelry, as labor and services enhanced he value of the store.
• The bailee can retain the diamond till payment is rendered.
• Some special bailees, like bankers, factors, solicitors, policy brokers, and wharfingers, have a right of general lien, allowing them to retain any goods for amounts due, whether concerning those or other goods.
• A banker can detain both securities until the second loan is paid if two loans have been taken against two securities.

Rights of Bailor

• A bailor can enforce bailee's duties by suit, recovering damages for loss due to negligence or unauthorized use/mixing.
• A bailor can demand the return of goods upon expiry of bailment or accomplishment of purpose.
• A bailor can claim any natural accretion to the goods.
• A bailor can terminate bailment if the bailee uses the goods wrongfully.
• A bailor can terminate the bailment, even if the period has not expired, or the specified purpose has not been accomplished.
• A bailor can demand the return of goods in gratuitous bailment at any time, even if the bailee isn't guilty of wrongful use; but must indemnify the bailee for losses from premature return.

Termination of Bailment

• Termination occurs under the following conditions:
• Expiry of specified period.
• Fulfillment of specific purpose.
• Bailee's unauthorized use of goods.
• Any act inconsistent with terms of bailment.
• Gratuitous bailment can be terminated by the bailor at any time.
• Gratuitous bailment terminates upon the death of the bailor or bailee.
• If premature termination causes the bailee to gain less benefit, the bailor must indemnify.

Finder of Lost Goods

• Taking lost items into custody makes one responsible like a bailee in gratuitous bailment, with specific rights and duties, as per Section 71 of the Indian Contract Act, 1872.

Bailment vs. Sale

• In bailment, the parties are bailor and bailee; in sale, they are buyer and seller.
• Bailment transfers possession; sale transfers ownership.
• Bailee must return goods in original/altered form; the buyer need not return goods and has full control over them.

Bailment vs. Licence

• Bailment involves delivering goods; a license does not.
• A license merely permits the licensee to use the licenser's place for keeping the licensee's goods.
• The bailee is responsible for the safety of goods bailed.
• The licenser is not responsible for the safety of the licensee's goods.

Bailment vs Pledge

• A pledge is a special kind of bailment where goods are security for payment of debt or performance of promise.
• The bailor is the pawnor.
• The bailee is pawnee.
• Both bailment and pledge involve the transfer of possession of goods from one party to another, with the transferor retaining ownership.
• Both deal with movable goods only.
• Bailment can be for any specified purpose.
• A pledge is for the purpose of bailing goods as security.
• A bailee cannot sell the bailed goods but can retain them (lien).
• A pledgee has the right to sell pledged goods on default after notice to the pledger (pawnor).
• A bailee may use the goods, where it can be implied under the transaction.
• A pledgee has no right to use pledged goods.

Pledge

• A pledge is a special type of bailment where goods are security for payment of a debt or performance of a promise.
• The bailor is called the pawnor.
• The bailee is called the pawnee.

Rights of Pawnee

• The pawnee has the right to retain the pledged goods until all dues are settled.
• This includes the loan, interest, and preservation charges.
• The pawnee has the right to recover extraordinary expenses incurred in respect of the pledged goods.
• The pawnee has the right to file a suit in case of default by the pawnor.
• The pawnee has the right to sell goods after giving reasonable notice of sale.

Duties of Pawnee

• A pawnee must take reasonable care of pledged goods.
• A pawnee must not make unauthorized use of pledged goods.
• A pawnee must not mix goods pledged with his own goods.
• A pawnee must return goods along with accretion if any, to pawnor on payment of dues.

Rights of Pawnor

• A pawnor has the right of enforcement of the pawnee's duties.
• A pawnor can get back the pledged goods and accretion, should they pay the bailee's dues.
• A pawnor can sue the pawnee if they make unauthorized use, mix, or sell goods.
• A pawnor can redeem the goods pledged after actual sale after paying all the dues up to the date of payment.

Duties of Pawnor

• A pawnor must repay the loan.
• A pawnor must pay extraordinary expenses incurred by pawnee for preservation of pledged goods.
• Pledge by non-owners is similar to a sale by non-owners covered in the Sale of Goods Act.