Bailment & Pledge PDF

MERCANTILE LAW B.Com (302-18) TOPIC – LAW OF BAILMENT & PLEDGE Presented By :- Contract of Bailment  Meaning of Bailment According to Section 148 ✓ “The delivery of goods by one person to another for some purpose, ✓ upon a contract that when the pur...

MERCANTILE LAW B.Com (302-18) TOPIC – LAW OF BAILMENT & PLEDGE Presented By :- Contract of Bailment  Meaning of Bailment According to Section 148 ✓ “The delivery of goods by one person to another for some purpose, ✓ upon a contract that when the purpose is accomplished, ✓ the goods shall be returned back or ✓ disposed off according to the directions of the person delivering them.” Example: Delivering gold to goldsmith for making ornaments, creates the relationship of bailment  BAILOR:- The person delivering the goods or the owner of the goods. i.e. the 1st Person. BAILEE:- The person to whom goods are delivered i.e. the 2nd Person. The definition U/S 148 has evolved few important traits of bailment, that go in the flow of the definition: (i) when one person DELIVERS goods to the other; (ii) for a specific PURPOSE (iii) upon forming a CONTRACT; (iv) contract that states that when the PURPOSE IS ACCOMPLISHED: (v) the goods shall be RETURNED Back. This entire process is technically called as BAILMENT. Example : Delivering cloth to tailor for making dress Kinds of Bailment Kinds of Bailment Kinds of Bailment Essentials of Bailment 1. Delivery of goods Delivery of Delivery of goods involve possession of change of possession from goods one person to another but there is no change in the ownership of the goods. Actual Constructive CASE: KALIPERUMAL Vs. VISALAKASMI (1938) A lady employed a goldsmith for making new ornaments out of old jewellery. Every evening she received unfinished jewellery and put it into box kept at the goldsmith’s shop. She kept the key of that box with herself. One night the jewellery was stolen from the box. It was held that there was no bailment as the goldsmith had redelivered the jewellery to the lady.  Essentials of Bailment 2. Delivery of the Goods must be for some purpose :- Section 148 provides that delivery of goods under Bailment must be for some purpose contracted into and as soon as the purpose is fulfilled the goods must be returned to Bailor or disposed off as per his directions. 3. Contract :- Bailment is based upon creation of a contract between Bailor and the Bailee. A minor cannot enter into contract so he can’t be held liable as a Bailee if the goods are misused or there is some loss regarding those goods. 4. Return or dispose of Goods :- Bailment of goods is always for some purpose and subject to the condition that when the purpose is achieved the goods will be returned to the Bailor or disposed of according to his directions. NOTE: If there is no contract of returning the goods or otherwise disposing of them there is no bailment at all. Rights of Bailor 1. Enforcement of Duties Bailor has the right to enforce all the duties of Bailee:- i) Duty to take reasonable care of goods ii) Not to make un-authorized use of goods iii) Not to mix his goods with bailor’s goods iv) Duty to return goods 2. Restoration of goods lent gratuitously (Sec.159) :- When goods are lent gratuitously the Bailor can demand return of goods whenever he pleases, even though he lent the goods for a specified time or purpose. But if the premature return of goods causes the bailee loss in excess of benefit actually derived by him from the use of such goods, the bailor must indemnify the bailee for the amount in which the loss occasioned exceeds the benefit derived. Example: A lends his horse to B for riding and B acts in a way based on loan period, returning the horse early could cause B a loss. In this case A must compensate B Rights of Bailor 3. Right of Termination (Sec. 153) Bailor can terminate the contract of Bailment if Bailee does not act as per the conditions of the contract or as per directions of Bailor. Example: A gives on hire to B a horse for his own riding. B drives the horse in his carriage. This is at the option of A, to terminate the bailment contract. 4. Right against a Third Person (Sec. 180) : If a third person deprives the bailee of the use or possession of goods or does injury to the goods then the bailor has the right to sue such a third person Duties of Bailor 1. Duty to disclose known defects (Section 150) A Bailor is bound to disclose to the Bailee all those defects that are known to him and that can expose the Bailee to extraordinary risk. In such case the Bailor is responsible for damages arising to the Bailee from such defects. Example: A lends a horse, which he knows to be vicious to B. He doesn’t disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damages sustained. 2. Duty to Bear Extraordinary Expenses of Bailment (Sec.158) Where the bailment is gratuitous and the Bailee is to receive no remuneration the Bailor shall pay the Bailee all the necessary expenses incurred for the purpose of bailment. Eg: when a horse is bailed without reward for safe custody, it is the duty of the bailor to reimburse the bailee for usual feeding expenses of the horses as well as for the medical expenses, if any. DUTIES OF BAILOR 3. duty to repay any extraordinary expenses in case of non-gratuitous bailment When under the terms of the bailment, the bailee is to receive remuneration for his services, it is the duty of the bailor to bear extraordinary expenses, if any, incurred by the bailee in relation to the thing bailed. Eg : when a horse is bailed for safe custody and the bailee is to receive Rs:80 per day as custody charges, the bailor is not liable to repay the bailee the ordinary expenses. But if during the bailee’s custody the horse fell ill, it is the duty of bailor to incur those extraordinary expenses. Duties of Bailor 4. Duty to Indemnify Bailee (Sec.164) A Bailor is bound to indemnify the bailee for any loss suffered by the bailee, by reason of fact that the bailor was not entitled to bail the goods of the defective title. Example: A gives B’s motorcycle to C for use without B’s knowledge. B sues C and receives compensation. C is entitled to recover his losses from A 5. Duty to receive back the goods. It is the duty of the bailor to receive back the goods bailed after the purpose of contract is accomplished or after the time so fixed for the contract gets expired. If the bailor does not receive back the goods and bailee suffers any loss for custody of goods, the bailor must compensate the bailee. Rights of Bailee 1. Enforcement of bailor's duties :- The duties of the bailor are the rights of the bailee. As such, the bailee can, by suit, enforce the duties of the bailor enumerated above. To recapitulate, the bailee has the following rights against the bailor (based on the bailor's duties discussed above): i) Right to claim damages for loss arising from the undisclosed faults in the goods bailed (Sec. 150). ii) Right to claim reimbursement for extraordinary expenses incurred in relation to the thing bailed (Sec. 158). iii) Right to indemnity for any loss suffered by him by reason of defective title of the bailor to the goods bailed (Sec. 164). (iv) Right to claim compensation for expenses incurred for the safe custody of the goods if the bailor has wrongfully refused to take delivery of them after the term of bailment is over.  Rights of Bailee 2. Right to recover necessary expenses (sec.158) :- When under a contract of bailment, some remuneration is to be paid to the bailee for services he renders in respect of them, he has a right to recover the same. Even when the bailment is gratuitous, i.e. the bailee is to receive no remuneration for the service rendered by him, he is entitled to recover from the bailor necessary expenses incurred by him for the purpose of the bailment. Example: A leaves his horse with his neighbor, B for safe custody for one week. B is entitled to recover the expenses incurred by him in feeding the horse. 3.Right to deliver goods, in good faith, to bailor without title (Sec. 166):- The bailee has a right to deliver the goods, in good faith, to the bailor without title, without incurring any liability towards the true owner. Rights of Bailee 4.Right to Lien (sec 170 & 171): Where the lawful charges of the bailee are not paid to him by the bailor, then the bailee has the right to retain such goods until his charges are paid to him. This right to retain the possession of goods by bailee is called as Right to lien. Lien is the right of the creditor to retain possession of goods of the debtor till the debt is satisfied. For exercising the right to lien, possession of goods is a must. If the bailee loses possession he cannot exercise the right to lien. Types of Lien Particular Lien General Lien (Section 170) (Section 171)  Particular Lien A particular lien is the right of Bailee to retain the goods in his custody until he receives due remuneration for the services rendered in respect of them. General Lien General lien is the right to retain goods of another as a security for a general balance of performance. Example: A deposited certain jewels with a bank to secure certain debt. After payment of this debt he demanded the return of these jewels from the Bank. He was still indebted to the Bank for certain other debts so it was held that the Bank could keep the jewels with itself against other debts due by A. Bailee has particular lien when following conditions are fulfilled  Bailee must have rendered some service in relation to the thing bailed and must be entitled to some remuneration for it, which must not have been paid.  The service rendered by the bailee must be one involving the exercise of labour or skills in respect of the goods bailed.  There must not be an agreement to perform the service on credit.  Goods must be in possession of baile Duties of Bailee 1. Duty of reasonable care (Sec. 151) Bailee must take reasonable care of the goods bailed to him but he is not the insurer of the goods. In spite of reasonable care, the goods get destroyed or deteriorated, without any negligence on his part, he is not liable in respect of any damage to the goods. Example: Silver was entrusted to a goldsmith for making ornaments. He kept it locked in an almirah and employed a watchman for the night. In spite of these precautions silver was stolen. The goldsmith had taken reasonable care of goods and was not liable for loss 2. Duty not to make unauthorized use of goods (Sec.154) It is the duty of the bailee to use the goods strictly in accordance with the terms of bailment. Example: 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 accidently falls and is injured. B is liable to make compensation for the injury done to the horse. 3. Duty not to mix Bailor’s goods with his own goods :- Example: (Section 156) A bails 100 bales 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 expense incurred in the separation of the bales. Example: (Section 157) A bails a barrel of Cape flour worth rupees 45 to B. B, without A’s consent mixes the flour with country flour of his own, worth only rupees 25 a barrel. B must compensate A for the loss of his flour. 4. Duty to return the goods (Section 160) CASE: SHAW AND CO. Vs. SYMMONS AND SONS (1917) P delivers certain goods to D, a book binder who promised to bind and return them within a reasonable time. It could not complete a job within a reasonable time. The books were subsequently burned in an accidental fire in these premises. D was held liable in damages for loss of the books and the plea that the fire was accidental or any act of God was of no avail. 5. Duty to deliver any accretion to the goods It is the duty of the bailee to deliver the bailor any natural increase or profit accruing from the goods bailed unless there is a contract to contrary. Eg 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 cow as well as the calf to A. Termination of Bailment 1) On the expiry of the period :- When the bailment is for specific period, it terminates on the expiry of that period. 2) On the accomplishment of the object:- When the bailment is for a specific purpose, it terminates as soon as the purpose is achieved. 3) Un-authorised use of goods:- When the bailee uses the goods in a manner inconsistent with the terms of the contract, the bailment terminates. 4) Destruction of the subject-matter:- A bailment is terminated when the subject-matter of the bailment (a) is destroyed, or (b) by reason of a change in its nature becomes incapable of use for the purpose of the bailment. 5) Gratuitous bailment :- It can be terminated any time subject to condition laid down in Sec.159 6) Death of the bailor or bailee :- U/S 162, a gratuitous bailment is terminated by the death either of the bailor or of the bailee.  Finder of Lost Goods (Section 71) The term “Finder of Goods” means an innocent finder. He is bound to exercise reasonable care in preserving the goods found. A finder of goods lost in a public place can claim right to hold goods against all except the true owner. Example:- Anushka finds a diamond ring, which does not belong to her, here she will be called as Finder of Goods, she can use it unless true owner does not approaches her. DUTIES OF FINDER  Duty to find the true owner.  Duty to take reasonable care of the goods of the bailee. RIGHTS OF FINDER Right to retain possession of the goods until the true owner is found. Right of lien over the goods for expenses. Right to sue for reward. Right of sale Pledge Pledge is a special kind of bailment. It is a transfer or bailment of goods as a security for the payment of debt or performance of a promise. Harsh borrows ₹2,00,000 from Ayush and provides the ownership papers of her car as security for the loan. The bailment of car as a security for the loan is a pledge. Essentials of Pledge Special kind of bailment Delivery of possession Purpose of pledge is security for payment of debt Pledge must satisfy all the essentials of a valid contract Return of goods and Return of any accretions to the goods Rights of Pledgee 1. Right to retain the goods (sec 173 & 174) Pledgee can retain the goods till he is paid not only the debt but also interest thereon and expenses incurred in respect of goods in the possession. 2. Right to extraordinary expenses A pledgee has lien for necessary expenses only. But he can also recover extraordinary expenses incurred by him for the preservation of the goods pledged. 3. Right to Sell (sec 176) Where the pledgor defaults in making the payment debt according to the stipulated time, the pledgee gets two distinct rights U/S 176 (i) The pledgee can sue for the debt and also can retain the goods as a collateral security (ii) He can also sell the goods after giving reasonable notice to the pledgor. DUTIES OF PLEDGEE 1. Duty to take reasonable care of goods 2. Duty not to mix goods 3. Duty not to use the goods – Pledgee is not allowed to use the goods 4. Duty to return the goods 5. Duty to return any accretion to goods [All these duties are same as that of duties of bailee, kindly refer the Duties of Bailee] Rights of Pledgor (1) Enforcement of Pledgee's duties. The pledgor can enforce the fulfilment of pledgee's duties as his first and foremost right. (2) Right to receive back the goods on payment of debt (3) Right to receive any addition to the goods as well. (4) Right to REDEEM (sec 177) - "So as long as the sale does not take place the pledgor is entitled to redeem the goods on the payment of the debt. The pawnor can redeem the pledge by full payment of the amount to the pledgee. Such redemption may be done: (i) at any time (if no period was fixed for redemption) (ii) at any time after the fixed date (such right continues until the pledged thing is being actually sold). Duties of Pledgor 1. Duty to reimburse ordinary expenses:- All the ordinary expenses incurred by pledgee in possession of goods and preservation of goods must be reimbursed by the pledgor (sec 173). 2. Duty to reimburse extra ordinary expenses incurred by the pledgee (sec 175) 3. Duty to repay the debt plus any interest due on the debt (sec 174). 4. Duty to ensure that the goods pledged are free from any charge.  Who can Pledge ? Or Pledge by non - owners The General rule is that pledgor should be OWNER of the goods only then it is a valid pledge. In other words, it is only the owner of the goods who has the right to pledge the goods. Hence where the pledgor was not the owner of goods, it is not a valid pledge. Exceptions to the Rule There are few cases where even non-owners can create a valid pledge i.e. A NON OWNER CAN create a valid pledge 1. Pledge by mercantile agent 2. Pledge by seller or buyer in possession after sale. 3. Pledge where pledgor has a limited interest. 4. Pledge by co-owner in possession. 5. Pledge by person to possession under a voidable contract. Difference Between Bailment V/S Pledge Previous year questions BBA  Jan 2021 2 marks- differentiate between bailment and pledge. 10 marks- define bailment. Briefly discuss duties and rights of bailor and bailee.  RD JAN 2021 2 marks- bailor 10 marks- explain pledge and bailment contract. Differentiate between both.  DEC 2022 No question in this year PREVIOUS YEAR QUESTION PAPER Bcom  DEC 2022 2 marks- pledge  JAN 2021 No question in this year  DEC 2020 2 marks- Is deposit of money bailment?