Bailment and Pledge PDF

2.176 BUSINESS LAWS UNIT–8: BAILMENT AND PLEDGE LEARNING OUTCOMES After studying this unit, you would be able to understand: ♦ The general principles underlying contracts of bailment and pledge. ♦ Dutie...

2.176 BUSINESS LAWS UNIT–8: BAILMENT AND PLEDGE LEARNING OUTCOMES After studying this unit, you would be able to understand: ♦ The general principles underlying contracts of bailment and pledge. ♦ Duties and rights of the parties to the contracts. UNIT OVERVIEW Bailment and Pledge Bailment Pledge Distinction between bailment and pledge Duties General lien Duties and and Pledge by and Finder of Pawnee Pawnor Rights of Rights of particular Mercantile Goods Rights Rights Bailor lien Agent Bailee 8.1 WHAT IS BAILMENT? The word “Bailment” has been derived from the French word “ballier” which means “to deliver”. Bailment etymologically means ‘handing over’ or ‘change of possession’. As per Section 148 of the Act, bailment is the delivery of goods by one person to another for some purpose, upon a contract, that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.177 Parties to bailment: (a) Bailor: The person delivering the goods. (b) Bailee: The person to whom the goods are delivered. Example 1: Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the bailee. Example 2: X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. It is contract for bailment. Example 3: Goods given to a friend for his own use, without any charge. Example 4: X delivers goods to blue dart for carriage. Essential Elements: The essential elements of a contract of bailment are— (a) Contract: Bailment is based upon a contract. The contract may be express or implied. No consideration is necessary to create a valid contract of bailment. (b) Delivery of goods: It involves the delivery of goods from one person to another for some purposes. Bailment is only for moveable goods and never for immovable goods or money. The delivery of the possession of goods is of the following kinds: i. Actual Delivery: When goods are physically handed over to the bailee by the bailor. Eg: delivery of a car for repair to workshop ii. Constructive Delivery: Where delivery is made by doing anything that has the effect of putting goods in the possession of the bailee or of any person authorized to hold them on his behalf. Eg: Delivery of the key of car to a workshop dealer for repair of the car. (c) Purpose: The goods are delivered for some purpose. The purpose may be express or implied. (d) Possession: In bailment, possession of goods changes. Change of possession can happen by physical delivery or by any action which has the effect of placing the goods in the possession of bailee. The change of possession does not lead to change of ownership. In bailment, bailor continues to be the owner of goods. Where a person is in custody without possession he does not become a bailee. For example, servant of a master who is in custody of goods of the master does not become a bailee. Similarly, depositing ornaments in a bank locker is not bailment, because ornaments are kept in a locker whose key are still with the owner and not with the bank. The ornaments are in possession of the owner though kept in a locker at the bank. © The Institute of Chartered Accountants of India  2.178 BUSINESS LAWS (e) Return of goods: Bailee is obliged to return the goods physically to the bailor. The goods should be returned in the same form as given or may be altered as per bailor’s direction. It should be noted that exchange of goods should not be allowed. The bailee cannot deliver some other goods, even not those of higher value. Deposit of money in a bank is not bailment since the money returned by the bank would not be identical currency notes. Types of bailment 1. On the basis of benefit, bailment can be classified into three types: a. For the exclusive benefit of bailor: Example 5: The delivery of some valuables to a neighbour for safe custody, without charge. b. For the exclusive benefit of bailee: Example 6: The lending of a bicycle to a friend for his use, without charge. c. For mutual benefit of bailor and bailee: Example 7: Giving of a watch for repair. 2. On the basis of reward, bailment can be classified into two types: a. Gratuitous Bailment: The word gratuitous means free of charge. So, a gratuitous bailment is one when the provider of service does it gratuitously i.e. free of charge. Such bailment would be either for the exclusive benefits of bailor or bailee. b. Non-Gratuitous Bailment: Non gratuitous bailment means where both the parties get some benefit i.e. bailment for the benefit of both bailor & bailee 8.2 DUTIES OF A BAILOR Duties of Bailor: The duties of bailor are spelt out in a number of Sections [Section 150, 158, 159, 164]. These are categorized under the following headings: Disclose known facts Bear necessary expenses Duties of Indemnify bailee Bailor Bound to accept the goods © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.179 These are enumerated hereunder: (i) Bailor’s duty to disclose faults in goods bailed [Section 150]: a. In case of gratuitous 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. Example 8: 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. In case of non- gratuitous bailment: 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. Example 9: 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. In Hyman & Wife v. Nye & Sons (1881), A hired from B a carriage along with a pair of horses and a driver for a specific journey. During the journey a bolt in the under-part of the carriage broke away. As a result of this, the carriage became upset and A was injured. It was held that B was liable to pay damages to A for the injury sustained by him. The court observed that it was the bailor’s duty to supply a carriage fit for the purpose for which it was hired. Sometimes, the goods bailed are of dangerous nature (e.g., explosives). In such cases it is the duty of the bailor to disclose the nature of goods. [Great Northern Ry’ case (1932)] (ii) Duty to pay necessary expenses [Section 158]: a. In case of Gratuitous bailment: 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 (gratuitous bailment), the bailor shall repay to the bailee the necessary expenses incurred by him and any extraordinary expenses incurred by him for the purpose of the bailment. b. In case of non-gratuitous bailment the bailor is liable to pay the extraordinary expenses incurred by the bailee. Example 10: A hired a taxi from B for the purpose of going to Gurgaon from Noida. During the journey, a major defect occurred in the engine. A had to pay ` 5000 as © The Institute of Chartered Accountants of India  2.180 BUSINESS LAWS repair charges. These are the extraordinary expenses and it is the bailor’s duty to bear such expenses. However, the usual and ordinary expenses for petrol, toll tax etc. are to be borne by the bailee itself. (iii) Duty to indemnify the Bailee for premature termination [Section 159]: The bailor must compensate the bailee for the loss or damage suffered by the bailee that is in excess of the benefit received, where he had lent the goods gratuitously and decides to terminate the bailment before the expiry of the period of bailment. (iv) Bailor’s responsibility to bailee [Section 164]: The bailor is responsible to the bailee for the following: a. Indemnify 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 (defective title in goods). b. It is the duty of the bailor to receive back the goods when the bailee returns them after the time of bailment has expired or the purpose of bailment has been accomplished. If the bailor refuses to take delivery of goods when it is offered at the proper time the bailee can claim compensation for all necessary expenses incurred for the safe custody. Example 11: X delivered his car to S for five days for safe keeping. However, X did not take back the car for one month. In this case, S can claim the necessary expenses incurred by him for the custody of the car. 8.3 DUTIES OF A BAILEE Take To return any No No mixing of reasonable Return the extra profit unauthorized bailor’s goods care of goods goods accruing from use of goods with his own bailed goods bailed. 1. Take reasonable care of the goods (Section 151 & 152): 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 care of his own goods of the same bulk, quality and value, as the goods bailed. © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.181 Example 12: If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own locker at his house along with his own ornaments and if all the ornaments are lost/stolen in a riot ‘Y’ will not be responsible for the loss to ‘X’. If on the other hand ‘X’ specifically instructs ‘Y’ to keep them in a bank, but ‘Y’ keeps them at his residence, then ‘Y’ would be responsible for the loss caused on account of riot. Example 13: A deposited his goods in B’s warehouse. On account of unprecedented floods, a part of the goods were damaged. It was held that, B is not liable for the loss (Shanti Lal V. Takechand). Exception: Bailee when not liable for loss, etc., of thing bailed [Section 152]: 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 reasonable care as required under section 151. 2. Not to make inconsistent use of goods (section 153 & 154): As per Section 154, if the bailee makes any use of the goods bailed, which is not according to the terms and conditions of the bailment, he is liable to compensate the bailor for any loss or destruction of goods. Example 14: 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. Example 15: ‘A’ hires a horse in Kolkata from B expressly to march to Varanasi. ‘A’ rides with due 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. As per Section 153, a contract of bailment is voidable at the option of the bailor, if the bailee does not use the goods according to the terms and conditions of bailment. Example 16: A lends to B, a horse for his own riding. B gives the horse to C for riding. This contract is voidable at the option of A, bailor. 3. Not to mix the goods (Section 155, 156 and 157): i. If the Bailee, mixes the goods bailed with his own goods, with the consent of the bailor, both the parties shall have an interest in proportion to their respective shares in the mixture thus produced (Section 155). ii. If the bailee, without the consent of the bailor, mixes the goods bailed 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 (Section 156). © The Institute of Chartered Accountants of India  2.182 BUSINESS LAWS Example 17: 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 the expenses incurred in the separation of the bales, and any other incidental damage. iii. 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 to deliver them back, the bailor is entitled to be compensated by the bailee for loss of the goods (Section 157). Example 18: A bails a barrel of Cape flour worth ` 4500 to B. B, without A’s consent, mixes the flour with country flour of his own, worth only ` 2500 a barrel. B must compensate A for the loss of his flour. 4. Return the goods (Section 160 & 161): It is the duty of bailee to return, or deliver according to the bailor’s directions, 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. [Section 160] 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. [Section 161] Example 19: X delivered books to Y to be bound. Y promised to return the books within a reasonable time. X pressed for the return of the book. But Y, failed to deliver them back even after the expiry of reasonable time. Subsequently the books were burnt in an accidental fire at the premises of Y. In this case Y was held liable for the loss. 5. Return an accretion from the Goods [Section 163]: 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. Example 20: A leaves a cow in the custody of B. The cow gives birth to a calf. B is bound to deliver the calf along with the cow, to A. 6. Not to setup Adverse Title: Bailee must not set up a title adverse to that of the bailor. He must hold the goods on behalf of and for the bailor. He cannot deny the title of the bailor. © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.183 8.4 RIGHTS OF A BAILOR Rights of Bailor: The following are the rights of bailor:- Right to terminate the bailment Right to demand back the goods at any time Right to file a suit against any wrong doer Right to file a suit for enformcement of duties imposed upon a bailee. Right to claim compensation (i) Right to terminate the bailment [Section 153]: 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. Termination of bailment has been discussed in next pages. (ii) Right to demand back the goods (Section 159): When the goods are lent gratuitously, the bailor can demand back the goods at any time even before the expiry of the time fixed or the achievement of the object. Example 21: A, while going out of station delivered his ornaments to B for safe custody for one month. But A returned to station after one week. He may demand the return of his ornaments even though the time of one month has not expired. However, due to the premature return of the goods, if the bailee suffers any loss, which is more than the benefit actually obtained by him from the use of the goods bailed, the bailor has to compensate the bailee. (iii) Right to file a suit against a wrong doer [Section 180 and section 181] (discussed in next pages) (iv) Right to sue the bailee: The bailor has a right to sue the bailee for enforcing all the liabilities and duties of him. (v) Right to compensation: If any damage is caused to the goods bailed because of the unauthorized use of the goods or unauthorized mixing of the goods, the bailor has a right to claim compensation for the same. © The Institute of Chartered Accountants of India  2.184 BUSINESS LAWS 8.5 RIGHTS OF A BAILEE Rights of bailee: The following are the rights of the bailee:- 1. Right to Deliver the Goods to any one of the joint bailors [Section 165] If several joint owners bailed the goods, the bailee has a right to deliver them to any one of the joint owners unless there was a contract to the contrary. Example 22: A, B and C are the joint owners of a harvesting combine. They delivered it on hire to D for one month. After the expiry of one month, D may return the “combine” to any one of the joint owners namely, A, B or C. 2. Right to indemnity (Section 166): Bailee is entitled to be indemnified by the bailor for any loss arising to him by reasons that the bailor was not entitled to make the bailment or to receive back the goods or to give directions in respect to them. If the bailor has no title to the goods, and the bailee in good faith, delivers them back to, or according to the directions of the bailor, the bailee shall not be responsible to the owner in respect of such delivery. Bailee can also claim all the necessary expenses incurred by him for the purpose of gratuitous bailment. 3. Right to claim compensation in case of faulty goods (Section 150): A bailee is entitled to receive compensation from the bailor or any loss caused to him due to the failure of the bailor to disclose any faults in the goods known to him. If the bailment is for hire, the bailor will be liable to compensate even though he was not aware of the existence of such faults. 4. Right to claim necessary expenses (Section 158): In case of gratuitous bailment, the bailor shall repay to the bailee the necessary expenses incurred by him and any extraordinary expenses incurred by him for the purpose of the bailment. 5. Right to Apply to Court to Decide the Title to the Goods [Section 167]: If the goods bailed are claimed by the person other than the bailor, the bailee may apply to the court to stop its delivery and to decide the title to the goods. Example 23: A, a dealer in T.V. delivered a T.V. to B for using in summer vacation. Subsequently, C claimed that the T.V. belonged to him as it was delivered only for repairs, to A and thus, B should deliver it to him. In this case, B may apply to the Court to decide the question of ownership of the T.V. so that he may deliver it to the right owner. 6. Right of particular lien for payment of services [Section 170]: (Discussed in next pages) 7. Right of general lien (Sec. 171): (Discussed in next pages) © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.185 8.6 RIGHTS OF BAILOR AND BAILEE AGAINST ANY WRONG DOER (THIRD PARTY) Suit by bailor & bailee against wrong doers [Section 180]: If a third person wrongfully deprives the bailee of the use or possession of the goods bailed, or does them any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made; and either the bailor or the bailee may bring a suit against a third person for such deprivation or injury. Apportionment of relief or compensation obtained by such suits [Section 181]: Whatever is obtained by way of relief or compensation in any such suit shall, as between the bailor and the bailee, be dealt with according to their respective interests. 8.7 TERMINATION OF BAILMENT A contract of bailment shall terminate in the following circumstances: 1. On expiry of stipulated period: If the goods were given for a stipulated period, the contract of bailment shall terminate after the expiry of such period. Example 24: X gives his motorcycle to Y for a month. The bailment terminates after 1 month. 2. On fulfillment of the purpose: If the goods were delivered for a specific purpose, a bailment shall terminate on the fulfillment of that purpose. Example 25: X hires certain tents and crockery on marriage of his daughter. The bailment terminates after marriage. 3. By Notice: (a) Where the bailee acts in a manner which is inconsistent with the terms of the bailment, the bailor can always terminate the contract of bailment by giving a notice to the bailee. (b) A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the bailee. However, the termination should not cause loss to the bailee in excess of the benefit derived by him. In case the loss exceeds the benefit derived by the bailee, the bailor must compensate the bailee for such a loss (Sec. 159). 4. By death: A gratuitous bailment terminates upon the death of either the bailor or the bailee. © The Institute of Chartered Accountants of India  2.186 BUSINESS LAWS 5. Destruction of the subject matter: A bailment is terminated if the subject matter of the bailment is destroyed or there is a change is in the nature of goods which makes it impossible to be used for the purpose of bailment. Example 26: X gives his cycle to Y on hire. Cycle damaged beyond repairs. Bailment ends. Destruction/ Expiry of By death Inconsistent modification Fulfilment of fixed of bailor use of of the the purpose period or bailee goods subject matter 8.8 FINDER OF LOST GOODS Right of finder of lost goods- may sue for specific reward offered [Section 168]: A person who finds some goods which do not belong to him, is called the finder of the goods. It is the duty of the finder of goods to find the true owner and surrender the goods to him. However, the finder of goods has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him in finding the owner and preserving the goods found. But he has a right to retain the goods against the owner until he receives such compensation; and, where the owner has offered a specific reward on the lost goods, the finder may sue the owner for such reward, and may retain the goods until then. When finder of thing commonly on sale may sell it [Section 169]: When a thing which is commonly the subject of sale if 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. 8.9 RIGHT OF LIEN RIGHT OF LIEN Lien is the right of a person  to retain the goods belonging to another © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.187  until his claim is satisfied or  some debt due to him is repaid. Types of Lien: Lien may be of two types: a. Particular Lien b. General Lien Particular Lien: It is a right to retain only the particular goods in respect of which the claim is due. Section 170 provides, 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. Example 27: ‘A’ gives cloth to ‘B’, a tailor, to make into a coat. ‘B’ is entitled to retain the coat until he is paid. Example 28: If in the above example, ‘B’ takes 15 days time to make the coat, right of lien will be applicable after 15 days. Example 29: A delivers 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. General Lien: It is a right to retain the goods not only for demands arising out of the goods retained but for a general balance of account in favour of certain persons (in the absence of a contract to the contrary). Section 171 provides this right is available to Bankers, factors, wharfingers, policy brokers and attorneys of law. Example 30: ‘A’ borrows ` 500/- from the bank without security and subsequently again borrows another ` 1000/- but with security of say certain jewellery. In this illustration, even where ‘A’ has returned ` 1000/- being the second loan, the banker can retain the jewellery given as security to the second loan towards the first loan which is yet to be repaid. Under the right of general lien the goods cannot be sold but can only be retained for dues. The right of lien can be waived through a contract. Difference between Bailee’s General and Particular Lien General lien Particular lien Section 171 of the Indian Contract Act, 1872 Section 170 of the Indian Contract Act, 1872 confer on Bailee the right of General Lien. confers on the Bailee, the right of particular lien. © The Institute of Chartered Accountants of India  2.188 BUSINESS LAWS General lien alludes to the right to keep Particular lien implies a right of the bailee to possession of goods belonging to other retain specific goods bailed for non-payment of against general balance of account. amount. A general lien is not automatic but is It is automatic. recognized through on agreement. It is exercised by the bailee only by name. It can be exercised against goods even It comes into play only when some labor or skill without involvement of labor or skill. is involved has been expended on the goods, resulting in an increase in value of goods. Only such persons as are specified under Bailee, finder of goods, pledgee, unpaid seller, section 171, e.g., Bankers, factors, agent, partner etc. are entitled to particular wharfingers, policy brokers etc. are entitled lien. to general lien. 8.10 PLEDGE “Pledge”, “pawnor” and “pawnee” defined [Section 172]: The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. Section 172 to 182 of the Indian Contract Act, 1872 deal with the contract of pledge. Example 31: A lends money to B against the security of jewellery deposited by B with him. This bailment of jewellery is a pledge as security for lending the money. B is a pawnor/ pledger and A is a pawnee/ pledgee. ESSENTIALS OF CONTRACT OF PLEDGE: Since pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the pledge. Apart from that, the other essentials of the pledge are: There shall be a bailment for The subject matter of pledge is security against payment or goods, performance of the promise, Goods pledged for shall be in There shall be the delivery of existence, goods from pledger to pledgee © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.189 RIGHTS OF A PAWNEE/ PLEDGEE: Rights of Pawnee can be classified as under the following headings: (a) Right to retain the pledged goods [Section 173]: The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest, of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Example 32: Where ‘M’ pledges stock of goods for certain loan from a bank, the bank has a right to retain the stock not only for adjustment of the loan but also for payment of interest. (b) Right to retention of subsequent debts [Section 174]: The Pawnee can retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged. But he can exercise this right only when there is a contract to this effect. i.e. a right to retain goods for subsequent debts can be exercised only when it has been provided for in a contract to this effect. (c) Pawnee’s right to extraordinary expenses incurred [Section 175]: The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have the right to retain the goods, but he can sue the pawnor for such expenses. (d) Pawnee’s right where pawnor makes default [Section 176]: If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee has the following rights: i. the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or ii. he may sell the thing pledged on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor. Rights of a pawnor As the bailor of goods, pawnor has all the rights of the bailor. Along with that he also has the right of redemption to the pledged goods which is enumerated under section 177 of the Act. © The Institute of Chartered Accountants of India  2.190 BUSINESS LAWS Right to redeem [Section 177]: If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expenses which have arisen from his default. Note: Redemption means to recover back the goods by making of the payment of debt or performance of promise. Duties of the Pawnee Pawnee has the following duties: a. Duty to take reasonable care of the pledged goods. b. Duty not to make unauthorized use of pledged goods. c. Duty to return the goods when the debt has been repaid or the promise has been performed. d. Duty not to mix his own goods with goods pledged. e. Duty not to do any act which is inconsistent with the terms of the pledge. f. Duty to return accretion to the goods, if any. Duties of a Pawnor Pawnor has the following duties: a. The pawnor is liable to pay the debt or perform the promise as the case may be. b. It is the duty of the pawnor to compensate the pawnee for any extraordinary expenses incurred by him for preserving the goods pawned. c. It is the duty of the pawnor to disclose all the faults which may put the pawnee under extraordinary risks. d. If loss occurs to the pawnee due to defect in pawnor’s title to the goods, the pawnor must indemnify the pawnee. e. If the pawnee sells the good due to default by the pawnor, the pawnor must pay the deficit. © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.191 8.11 PLEDGE BY NON-OWNERS Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf, who can pledge the goods. But in order to facilitate mercantile transactions, the law has recognised certain exceptions. These exceptions are for bonafide pledges made by those persons who are not the actual owners of the goods, but in whose possession the goods have been left. a. Pledge by mercantile agent [Section 178]: A mercantile agent, who is in the possession of goods or document of title, with the consent of owner, can pledge them while acting in the ordinary course of business as a Mercantile Agent. Such Pledge shall be valid as if were made with the authority of the owner of goods. Provided, Pawnee acted in good faith and had no notice that Pawnor has no authority to pledge. b. Pledge by person in possession under voidable contract [Section 178A]: When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A (contracts where consent has been obtained by fraud, coercion, misrepresentation, undue influence), but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title. c. Pledge where pawnor has only a limited interest [Section 179]: Where a person pledges goods in which he has only a limited interest i.e. pawnor is not the absolute owner of goods, the pledge is valid to the extent of that interest. Example 33: Mr. X finds a defective mobile phone lying on the road. He picks it up, gets it repaired for ` 5000. He later pledges the mobile phone for ` 2,000. The true owner can recover the mobile phone only on paying ` 5,000. Example 34: ‘A’ pledges his jewellery worth ` 1,00,000 with ‘B’ for a advance of ` 70,000. ‘B’ pledges the same for ` 90,000 with ‘C’. Now this pledge is valid upto ` 70,000 plus interest due thereon. d. Pledge by a co-owner in possession: Where the goods are owned by many person and with the consent of other owners, the goods are left in the possession of one of the co-owners. Such a co-owner may make a valid pledge of the goods in his possession. © The Institute of Chartered Accountants of India  2.192 BUSINESS LAWS e. Pledge by seller or buyer in possession: A seller, in whose possession, the goods have been left after sale or a buyer who with the consent of the seller, obtains possession of the goods, before sale, can make a valid pledge, provided the pawnee acts in good faith and he has no knowledge of the defect in title of the pawnor. Example 35: A buys a cycle from B. But leaves the cycle with the seller. B then pledges the cycle with C, who does not know of sale to A, and acted in good faith. This is valid pledge. 8.12 DISTINCTION BETWEEN BAILMENT AND PLEDGE Basis of Distinction Bailment Pledge Meaning Transfer of goods by one Transfer of goods from one person person to another for some to another as security for repayment specific purpose is known as of debt is known as the pledge. bailment. Parties The person delivering the The person who delivers the good as goods under a contract of security is called the “Pawnor”. bailment is called as “Bailor”. The person to whom the goods are The person to whom the goods delivered as security is called the are delivered under a contract “pawnee”. of bailment is called as “Bailee”. Purpose Bailment may be made for any Pledge is made for the purpose of purpose (as specified in the delivering the goods as security for contract of bailment, eg: for payment of a debt, or performance safe custody, for repairs, for of a promise. processing of goods). Consideration The bailment may be made for Pledge is always made for a consideration or without consideration. consideration. Right to sell the The bailee has no right to sell the The pawnee has right to sell the goods goods even if the charges of goods if the pawnor fails to redeem bailment are not paid to him. The the goods. bailee’s rights are limited to suing the bailor for his dues or to exercise lien on the goods bailed. Right to use of Bailee can use the goods only Pledgee or Pawnee cannot use the goods for a purpose specified in the goods pledged. contract of bailment and not otherwise. © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.193 SUMMARY ♦ Bailment-Delivery of goods by one person to another for some purpose upon a contract that they shall be returned after the purpose is over or disposed off according to the directions of the person delivering them. ♦ Bailor- Person who delivers the goods for bailment. ♦ Bailee- Person to whom goods are delivered under the contract of bailment. ♦ Depositing currency notes in a bank- It is not a bailment as currency notes or moneys are not goods as per the definition of goods given under the Sale of Goods Act, 1930 and also same currency notes are not returned to the depositor by the bank. ♦ Keeping of ornaments/valuables in a bank locker- It’s not a bailment as there is no transfer of possession of ornaments or valuables. ♦ Gratuitous bailment- No consideration passes between the bailor and the bailee and the bailor is not responsible for the damages in respect of the faults which were not known to him. ♦ Pledge- Bailment of goods as security for payment of a debt/performance of a promise. ♦ Pawnor- Person who pledges goods as security. ♦ Pawnee- Person who receives the goods as security. ♦ Some non-owners may also create a valid pledge of goods, such as- Mercantile agents, co-owner, by person having a limited interest, by person having a possession of goods under voidable contract. ♦ Basic distinction between bailment and pledge- All the pledges are bailments but all the bailments are not pledges. BAILMENT (SECTION 148-171) Meaning: 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, according to the directions of the person delivering them. Kinds of Bailment Parties Essentials Bailor: Who delivers; 1.Agreement, On the basis of benefit On the basis of consideration Bailee: Who receives; 2.Delivery of goods, 1. For the benefit of Bailor 1. Gratuitous – No consideration 3.For some purpose, 2. For the benefit of Bailee 2. Non-Gratuitous – For consideration 4. Return of goods 3. For the benefit of both Gratuitous Bailment : without Consideration, Bailor is liable for known faults Only. All expenses born by Bailor. Non-Gratuitous Bailment: With Consideration, Bailor is liable for all faults, Extra Ordinary expenses born by Bailor © The Institute of Chartered Accountants of India  2.194 BUSINESS LAWS Duties & Rights Duties of Bailor Rights of Bailor Duties of Bailee Rights of Bailee 1. Disclose known 1. Terminate bailment, 1. Take care of the goods bailed, 1. Delivery to any of joint bailors, faults, 2. Demand return of 2. No unauthorized use of goods, 2. Right to compensation, 2. Bear expenses, goods any time, 3. Not mix goods with own 3. Claim necessary expenses, 3. Indemnify Bailee, 3. Claim accretion, goods, 4. Action for wrongful deprivation of 4. Receive back 4. Right against third 4. Return the goods, goods, goods. party. 5. Return accretions to goods, 5. Right of lien. 6. Not to set up adverse title Termination of Bailment Finder of Lost Lien Goods 1. On expiry of stipulated period, Meaning: To retain the goods belonging to another Duties: Same until his claim is satisfied or some debt due to him is 2. Accomplishment of Specified purpose, as of Bailee, repaid, 3. Doing anything inconsistent with conditions, Rights: Lien, General Lien: Right to retain any goods in respect of 4. Gratuitous Bailment (Any time), Sue for any debt. 5. By Death, Reward, Sale Particular Lien: Right to retain any goods in respect of of Goods, concerned debt only. 6. Destruction of subject-matter, PLEDGE (SECTION 171 – 181) Meaning: Bailment of goods as security for payment of a debt or performance of a promise. Pledge by Non-owner Parties: Bailor – Pawnor; Bailee – Pawnee 1. Pledge by Mercantile Duties & Rights Agent, 2. Pledge by Person in Duties of Pawnor Rights of Duties of Pawnee Rights of Pawnee Possession under 1. Pay Debt, Pawnor 1. Take care of the goods 1. Retain the voidable contract, 2. Indemnify Pawnee, Same as that of bailed, Pledged Goods, 3. Pledge where Pawnor 3. Disclose all the Bailor alongwith 2. No unauthorized use of 2. Retention for faults, goods, Subsequent Debts, has only a Limited right of 4. Pay extra ordinary 3. Not mix goods with own Interest, redemption (to 3. Recover expenses, recover back the goods, Extraordinary 4. Pledge by co-owner in 5. Pay deficit if goods by 4. Return the goods, Expenses, possession, Pawnee sells goods making of the 5. Return accretions to the 4. Right on Default due to default by payment of goods, by Pawnor 5. Pledge by buyer or Pawnor 6. Not to set up adverse title seller in possession debt) © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.195 TEST YOUR KNOWLEDGE Multiple Choice Questions 1. Bailment means ……….. (a) temporary delivery of goods. (b) permanent delivery of goods. (c) partly delivery of goods. (d) None 2. Which is not essential element of contract of bailment ……….. (a) doing contract. (b) Purchase of goods. (c) delivery of goods. (d) return of goods in specific time. 3. In the contract of bailment the person to whom goods is delivered, called ……….. (a) seller (b) bailee (c) bailor (d) agent 4. Bailee should care the goods as per ……… (a) as a man of ordinary prudence (b) as owner (c) as principal (d) as a servant 5. Lien means ……….. (a) to retain goods in his possession (b) rights to sell the goods. (c) right to purchase the goods. (d) right to destroy the goods. © The Institute of Chartered Accountants of India  2.196 BUSINESS LAWS 6. In case there are two or more joint owners of the goods, the Bailee has to deliver them back to _____ , in the absence of any agreement to the contrary : (a) Any of the Joint owners. (b) Such joint owner for which all the joint owners have consented. (c) All the Joint owners collectively. (d) None of these. 7. A finder of goods is subject to the same responsibility as that of a ……….. (a) bailee (b) bailor (c) surety (d) purchaser 8. The bailment of goods as security for payment of a debt is called ……….. (a) pledge (b) bailment (c) mortgage (d) none of these 9. What is an essential element of a valid pledge? (a) Delivery of goods (b) Delivery of bills (c) Price (d) None of these 10. The pledge is a contract of ……….. (a) bailment (b) agency (c) guarantee (d) mortgage Descriptive Questions 1. State the essential elements of a contract of bailment. 2. Give differences between Bailment and Pledge. © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.197 3. Examine whether the following constitute a contract of ‘Bailment’ under the provisions of the Indian Contract Act, 1872: (i) V parks his car at a parking lot, locks it, and keeps the keys with himself. (ii) Seizure of goods by customs authorities. 4. A hires a carriage from B and agrees to pay ` 500 as hire charges. The carriage is unsafe, though B is unaware of it. A is injured and claims compensation for injuries suffered by him. B refuses to pay. Discuss the liability of B. 5. A bails his jewellery with B on the condition to safeguard it in a bank’s safe locker. However, B kept it in safe locker at his residence, where he usually keeps his own jewellery. After a month all jewellery was lost in a religious riot. A filed a suit against B for recovery. Referring to provisions of the Indian Contract Act, 1872, state whether A will succeed. 6. R gives his umbrella to M during raining season to be used for two days during Examinations. M keeps the umbrella for a week. While going to R’s house to return the umbrella, M accidently slips and the umbrella is badly damaged. Who bear the loss and why? 7. Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising to give ` 200 at the time of taking back the bailed goods. Srijith's employee, unaware of this, mixed the 50 kg of sugar belonging to Amar with the sugar in the shop and packaged it for sale when Srijith was away. This came to light only when Amar came asking for the sugar he had bailed with Srijith, as the price of the specific quality of sugar had trebled. What is the remedy available to Amar? 8. Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of making new a silver bowl out of it. Every evening she used to receive the unfinished good (silver bowl) to put it into box kept at Mr. Y’s Shop. She kept the key of that box with herself. One night, the silver bowl was stolen from that box. Was there a contract of bailment? Whether the possession of the goods (actual or constructive) delivered, constitute contract of bailment or not? 9. Srushti acquired valuable diamond at a very low price by a voidable contract under the provisions of the Indian Contract Act, 1872. The voidable contract was not rescinded. Srushti pledged the diamond with Mr. VK. Is this a valid pledge under the Indian Contract Act, 1872? © The Institute of Chartered Accountants of India  2.198 BUSINESS LAWS ANSWERS/HINTS Answers to MCQs 1. (a) 2. (b) 3. (b) 4. (a) 5. (a) 6. (a) 7. (a) 8. (a) 9. (a) 10. (a) Answers to the Descriptive Questions 1. Essential elements of a contract of bailment: Section 148 of the Indian Contract Act, 1872 defines the term ‘Bailment’. 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 essential elements of the contract of the bailment are: (i) Delivery of goods—The essence of bailment is delivery of goods by one person to another. (ii) Bailment is a contract—In bailment, the delivery of goods is upon a contract that when the purpose is accomplished, the goods shall be returned to the bailor. (iii) Return of goods in specific—The goods are delivered for some purpose and it is agreed that the specific goods shall be returned. (iv) Ownership of goods—In a bailment, it is only the possession of goods which is transferred, and the bailor continues to be the owner of the goods. (v) Property must be movable—Bailment is only for movable goods and never for immovable goods or money. 2. Distinction between bailment and pledge: The following are the distinction between bailment and pledge: (a) As to purpose: Pledge is a variety of bailment. Under pledge goods are bailed as a security for a loan or a performance of a promise. In regular bailment the goods are bailed for other purpose than the two referred above. The bailee takes them for repairs, safe custody etc. (b) As to right of sale: The pledgee enjoys the right to sell only on default by the pledgor to repay the debt or perform his promise, that too only after giving due notice. In bailment the bailee, generally, cannot sell the goods. He can either retain or sue for non-payment of dues. © The Institute of Chartered Accountants of India  THE INDIAN CONTRACT ACT, 1872 2.199 (c) As to right of using goods: Pledgee has no right to use goods. A bailee can, if the terms so provide, use the goods. (d) Consideration: In pledge there is always a consideration whereas in a bailment there may or may not be consideration. (e) Discharge of contract: Pledge is discharged on the payment of debt or performance of promise whereas bailment is discharged as the purpose is accomplished or after specified time. 3. As per Section 148 of the Act, bailment is the delivery of goods by one person to another for some purpose, upon a contract, that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. For a bailment to exist the bailor must give possession of the bailed property and the bailee must accept it. There must be a transfer in ownership of the goods. (i) No. Mere custody of goods does not mean possession. In the given case, since the keys of the car are with V, Section 148, of the Indian Contract Act, 1872 shall not applicable. (ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore, bailment exists and section 148 is applicable. 4. Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as contained in Section 150. The section provides that 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. Accordingly, applying the above provisions in the given case, B is responsible to compensate A for the injuries sustained even if he was not aware of the defect in the carriage. 5. According to section 152 of the Indian Contract Act, 1872, 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 reasonable care as required under section 151. Here, A and B agreed to keep the jewellery at the Bank’s safe locker and not at the latter’s residence (i.e. B’s residence). Thus, B is liable to compensate A for his negligence to keep jewellery at his (B’s) residence. 6. M shall have to bear the loss since he failed to return the umbrella within the stipulated time and Section 161 clearly says that where a bailee fails to return the goods within the agreed time, he shall be responsible to the bailor for any loss, destruction or deterioration of the goods from that time notwithstanding the exercise of reasonable care on his part. © The Institute of Chartered Accountants of India  2.200 BUSINESS LAWS 7. According to section 157 of the Contract Act, 1872, 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. In the given question, Srijith’s employee mixed high quality sugar bailed by Amar and then packaged it for sale. The sugars when mixed cannot be separated. As Srijith’s employee has mixed the two kinds of sugar, he (Srijith) must compensate Amar for the loss of his sugar. 8. Section 148 of Indian Contract Act 1872 defines 'Bailment' as 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 direction of the person delivering them. According to Section 149 of the Indian Contract Act, 1872, 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. Thus, delivery is necessary to constitute bailment. Thus, the mere keeping of the box at Y’s shop, when A herself took away the key cannot amount to delivery as per the meaning of delivery given in the provision in section 149. Therefore, in this case there is no contract of bailment as Mrs. A did not deliver the complete possession of the good by keeping the keys with herself. 9. Pledge by person in possession under voidable contract [Section 178A of the Indian Contract Act, 1872]: When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title. Therefore, the pledge of diamond by Srushti with Mr. VK is valid. © The Institute of Chartered Accountants of India