What is Bailment?
Bailment and pledges are another class of special contracts. In our daily life, we enter into transactions of bailment\very often. For example, when we give a piece of cloth for stitching to a tailor or when we give our watch for repair, etc.
Table of Contents
- 1 What is Bailment?
- 2 Features of Bailment
- 3 Types of Bailment
- 4 Duties and Rights of Bailor and Bailee
- 5 What is Pledge?
- 6 Pledge by Non-owners
- 7 Rights and Duties of a Pledger and Pledgee
At one time or another, we enter into legal relationships, called bailment and pledge. Bailments are quite common in business also. Traders often store their surplus goods in warehouses; and utilise the services of cold storage for keeping their goods to be taken back as and when required, and factory owners often send machinery back to vendors for repairs.
Also, goods are pledged for securing loans. The sections quoted in this chapter refer to the Indian Contract Act, 1872 unless otherwise stated.
The law relating to bailment has been discussed in Secs. 148 to 181. These provisions are not exhaustive in as much as all types of bailments have not been discussed in the Act. Indian Contract Act deals only with the general 9rinciples of bailment.
There are separate Acts to deal with special kinds of bailment, e.g., the carriage of goods has been dealt with in the Carriers Act, 1865, the Railway Act, 1989 and the Carriage of Goods by Sea Act, 1925. According to See. 148, “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 over, be returned or otherwise disposed of according to the directions of the persons delivering them.”
The person delivering the goods is called the tailor’. The person to whom the goods are delivered is called the ‘bailee’ and the transaction is called ‘bailment’.
Features of Bailment
On analysing the above definition, we find the following characteristics or features of bailment:
- There Should Be a Contract
- Delivery of Goods by One Person to Another
- The Goods are Delivered for Certain Purpose
- The Same Goods Must Be Returned
- Consideration is Not Necessary in Case of Contract of Bailment
There Should Be a Contract
A bailment is based on a contract; i.e., it is created by a contract. The contract of bailment may be express or implied. In some cases e.g., in the case of the finder of goods, a contract of bailment can be implied by law.
Delivery of Goods by One Person to Another
In bailment, there must be the delivery of goods by one person to another. However, the word, ‘delivery’ is very wide. It may be actual or constructive. It should be noted that in bailment only possession of the goods passes from one person to another.
Possession means control of goods to the exclusion of others. Mere custody of goods as against possession is not sufficient: For example, a master while giving his goods to his servant retains the possession with him and parts only with the custody of the goods. Thus to create bailment there must be the delivery of goods.
The Goods are Delivered for Certain Purpose
The purpose may vary from safe-keeping or safe custody to repairing or changing the form of the goods.
- A leaves his suit-case with a Railway Cloak Room for safe custody.
- A gives his watch for repair to a watch-maker.
- A gives a piece of cloth to a tailor for stitching it into a shirt.
The Same Goods Must Be Returned
For a transaction of bailment, it is necessary that the same goods must be returned. Where money is deposited in a savings bank account or any other account, it is not a transaction of bailment because the bank is not going to return the same currency notes but will return only an equivalent amount.
However, where money or valuables are kept m safe custody, it will amount to a transaction of bailment as these will be returned in species. It should be noted that the return of goods in species does not mean that their form cannot change.
For example, old ornaments can be changed, into new ones. A piece of cloth can be stitched into a shirt.
Consideration is Not Necessary in Case of Contract of Bailment
In case of bailment for the mutual benefit of the bailor and bailee consideration is there for both the parties e. g., A gives his watch for repair to B for ₹10. For A, consideration is the repair of his watch and for B, consideration is ₹10.
However, in case of bailment either for the benefit of the bailor or bailee alone consideration in the form of something in return is not there. In such cases, the detriment suffered by the bailor in parting with the possession of goods is considered as sufficient consideration to support the promise on the part of the bailee to return the goods.
Types of Bailment
Following are the different types of bailment:
On the Basis of Benefit Derived by the Parties
- Bailment for the benefit of the bailor alone: Where a person delivers his goods for safe custody with his relatives or friends without any reward. For example, A while going out of station, leaves his scooter with his friend, B for safe custody.
- Bailment for the benefit of the bailee alone: Where goods are lent for the use of friends and relatives. For example, A borrows B’s books for a week.
- Bailment for the mutual benefit of both the bailor and the bailee: Where goods are bailed for reward or some consideration then the bailment is for the benefit of both the parties.
- A hires a taxi form B.
- A gives his radio for repair to a radio dealer.
On the Basis of Reward or Consideration
- Gratuitous Bailment: A bailment without any reward or consideration is called gratuitous bailment. For example, A while going out of station, leaves his cycle with his friend B. B is not to get any reward in this case.
- Non-gratuitous Bailment: A bailment for reward or hire is a non- gratuitous bailment. For example, A gives his watch for repair.
Duties and Rights of Bailor and Bailee
Before discussing duties and rights of bailor and bailee it may be pointed out that the duties of the bailor are more or less the rights of the bailee and vice-versa. The following are the duties and rights of bailor:
Duties of Bailor
- To Disclose Known Faults: It is the duty of the bailor to disclose known faults (defects) in the goods bailed so that bailee may not suffer any loss. Failure to disclose known defects will make the bailor liable to indemnify the bailee for any loss caused to the bailee directly due to such faults.
In case of bailment for hire the liability of the bailor is very strict. The bailor is responsible for losses caused even by unknown defects (Sec. 150).
- To Bear Extraordinary Expenses of Bailment: When the bailment is gratuitous, i. e., without reward, the bailor must bear all the necessary expenses. If the bailment is non-gratuitous then the bailor will bear extraordinary expenses, while ordinary expenses will be borne by the bailee himself (Sec. 158).
- To Indemnify the Bailee for Any Loss Due to Defect to Title: When the bailor has no right to bail the goods and bailee suffers any loss due to such bailment, the bailor is liable to indemnify the bailee for such loss (Sec. 164).
- To Bear Loss for Wrongful Refusal to Take Back the Goods: A bailor is liable to take back the goods when the purpose is over. In case he wrongfully refuses to take back the goods, he should compensate the bailee for any loss due to such refusal.
- To Bear Loss Due to Destruction or Deterioration of the Goods Bailed in Natural Course: Where the goods bailed are destroyed without any fault of the bailee, the bailor shall bear the loss.
Duties of Bailee
- To Take Reasonable Care of the Goods Bailed: It is the duty of the bailee to take reasonable care of the goods bailed as a man of ordinary prudence would, under similar circumstance, take of his own goods of the same bulk, quality and value as the goods bailed.
It should be noted that the degree of care will be the same whether the bailment is gratuitous or non-gratuitous, i. e., for reward or not for reward. If he has taken reasonable care he is no more liable (Sees. 151 and 152).
- Not to Make Any Unauthorised Use of Good Bailed: A bailee is under a duty to use the goods according to the terms of the agreement. In case he makes unauthorised use of the goods. lie will be liable to make good the loss. (Sec. 154).
It should be noted that if the bailee makes unauthorised use of the goods his liability is absolute. He will be liable even if he is not guilty of negligence or even if the loss is the result of an accident or Act or God (Sec. 154).
- Not to Mix the Goods With His Own Goods: The bailee should not mix the goods bailed with his own goods. He should keep these goods separately. If he mixes the goods.
- Not to Set Up an Adverse Title: The bailee holds the goods on behalf of the bailor. He is not entitled to deny the title of the bailor or set up an adverse title. However, in case any third party proves a better title than that of the bailor, the bailee may deliver the goods to that third party.
- To Return the Goods Bailed: A bailee is under a duty to return or dispose of the goods bailed according to the directions of the bailor as soon as, after the purpose is over or the time for which they were deposited has expired (Sec. 160).
Further, in case he fails to return the goods he will be responsible to the bailor for any loss, destruction or deterioration of the goods thereafter, even if he exercises reasonable care on his part (Sec. 161).
- To Return Any Accretion to the Goods: In the absence of a contract to the contrary, a bailee is bound to return any increase or accretion to the goods bailed.
Rights of Bailor
It may be reminded that the duties of the bailee are the rights of the bailor and vice-versa. As such all the rights of the bailor and bailee are not being discussed separately. In addition, the bailor has the following rights:
- To Take Back the Goods: The bailor has a right to take back the goods after the purpose is over. In gratuitous bailment he has a right to recover back the goods even before the purpose or specified period is over. However, in such a case, the loss to the bailee should not exceed the benefit derived by him (Sec. 159).
- To Terminate Bailment: If the bailee does an act which is inconsistent with the terms of bailment, the bailor has a right to terminate the bailment (Sec 153).
- Right Against a Wrongdoer: If a third party wrongfully deprives the bailee of the use or possession of the goods bailed, the bailor orbai1ee is entitled to file a suit for such deprivation or injury (Sec. 180). Whatever is received by way of relief or compensation in any such suit, is divisible between the bailor and the bailee in accordance with their respective interest (Sec. 181).
Rights of Bailee
As pointed out earlier, the duties of the bailor are the rights of the bailee. A bailee has the following additional rights:
- Rights to Return Goods to One of the Joint Owners Without Consent of All: Where several joint owners of goods bail them, the bailee may deliver them back to, or dispose of them according to the directions of, one joint owner without the consent of all, in the absence of any agreement to the contrary (Sec. 165).
- Rights of Immunity Against Delivery of Goods to the Bailor if He Has No Title to the Goods: 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 is not responsible to the owner in respect of such delivery (Sec. 166).
- Right to Seek Directions of the Court Where a Third Person Claims the Goods Bailed: If a person other than the bailor, claims the goods bailed, the bailee may apply to the Court to stop the delivery of the goods to the bailor and to decide the title of the goods.
- Right of Lien: Where the bailee expends labour and 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 the remuneration for the services rendered in respect of such goods (Sec. 170).
- Right of Action Against Third Parties: If a third person wrongfully deprives the use or possession of the goods bailed, or injures them, the bailee is entitled to such remedies as the owner might have used in the like case if no bailment has been made (Sec. 180).
- Right to Share Compensation Obtained by Such Suits: Any compensation received from such suit shall be shared by the bailor and bailee in accordance with their interests.
What is Pledge?
A pledge is a special type of bailment for the mutual benefit of the bailor and bailee. According to Sec. 172, the bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. The bailor is called the ‘pawnor’ or ‘pledger’. The bailee is called the ‘pawnee’ or ‘pledgee’.
Example: A borrows 200 rupees by depositing his watch with B as security for repayment of the debt. Pledge is a special type of bailment. As such all the essentials of a valid bailment are necessary for the creation of a pledge .
Difference Between Bailment and Pledge
Following are the main points of difference between bailment and pledge:
Difference Between Bailment and Pledge
|1. Purpose||The purpose of bailment is very wide, e.g. safe custody, repair, etc.||The purpose of the pledge is limited i.e., repayment of a debt or performance of a promise.|
|2. Right to Sell||A bailee cannot sell the goods, he can only retain the goods or sue for his charges.||A pawnee can sell the goods after giving notice.|
|3. Lien||In case of bailment, lien can be exercised only for the labour and skill spent.||In the case of a pledge, a lien can be exercised even for non- payment of interest.|
|4. Right to Use Goods||A bailee can use the goods if the contract so provides.||A pawnee cannot use the goods pledged.|
Difference Between Pledge and Lien
Following are the main points difference between pledge and lien:
Difference Between Pledge and Lien
|1. Purpose||The purpose of the pledge is to secure repayment of a debt.||The purpose of a lien is to retain someone’s property to recover the remuneration.|
|2. Origin||Pledge arises out of an agreement.||Lien arises out of law.|
|3. Right to Sell Goods||In pledge, the pawnee can sell the goods if the loan is not repaid.||There is no right to sell the goods, only the goods can be retained.|
|4. Termination||A pledge is terminated when the goods are returned to the owner.||The right of lien is lost when the possession of goods is lost.|
Difference Between Pledge and Mortgage
Following are the main points difference between pledge and mortgage:
Difference Between Pledge and Mortgage
|1. Subject Matter||Only movable goods can be pledged.||Only immovable property can be mortgaged.|
|2. Transfer||In pledge, only the possession is transferred.||In mortgage transfer of ownership is made on certain conditions.|
|3. Form||A contract of the pledge can be made orally.||A mortgage must be made in writing and registered if it exceeds ₹100. It should also be witnessed by two persons.|
|4. Use of Goods||In pledge, the pawnee cannot use the goods.||In a mortgage, the mortgagee may use the property.|
|5. Number of Loans||In a pledge, only one loan can be taken.||In a mortgage subject to the value of the property, a number of mortgages can be created.|
|6. Right of Pawnee/Mortgagee||A pawnee has a right to sell the goods in case the loan is not paid.||First mortgagee has a prior right over subsequent mortgagees.|
|7. Right of Pawn or/Mortgagor to impose Restrictions||A pawnor cannot impose any conditions on the pawnee.||A mortgagor can impose restrictions on the mortgagee in certain cases.|
|8. Re-pledge or re-Mortgage||A pawnee cannot re-pledge the pledge of the goods.||A mortgagee can re-mortgage the property.|
Pledge by Non-owners
The general rule is that it is the owner of the goods who can ordinarily create a valid pledge. However, in the following cases, even a pledge by non-owners shall be valid:
- Pledge by a Mercantile Agent
- Pledge by Seller or Buyer in Possession After Sale
- Pledge by a Person in Possession Under a Voidable Contract (Section 178-A)
- Pledge by Co-owner in Possession
- Pledge by a Person Having Limited Interest (Section 179)
Pledge by a Mercantile Agent
Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same.
Such a pledge shall, however, be valid only if the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge (Section 178).
Pledge by Seller or Buyer in Possession After Sale
Under Section 30 of the Sale of Goods Act, a seller is left in possession of goods after-sale, and a buyer, who obtains possession of goods with the consent of the seller, before the sale, can create a valid pledge.
Once again, for the pledge to be valid the pledgee should have acted in good faith and without notice of the previous sale of goods to the buyer or of the lien of the seller over the goods.
Pledge by a Person in Possession Under a Voidable Contract (Section 178-A)
Where a person obtains possession of goods under a voidable contract the pledge created by him is valid provided: (a) the contract has not been rescinded before the contract of pledge and (b) the pawnee acts in good faith and without notice of the pawnor’s defect of title.
Pledge by Co-owner in Possession
One of several joint owners of goods in sole possession thereof with the consent of the rest may make a valid pledge of the goods.
Pledge by a Person Having Limited Interest (Section 179)
Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of the interest. Thus, a pledgee may further pledge goods to the extent of the amount advanced thereon.
Rights and Duties of a Pledger and Pledgee
According to Section176 in case the pledgor fails to pay his debt or complete the performance of obligation at the stipulated time, the pledgee can exercise any of the following right:
- Bring a suit against the pledgor upon the default in redemption of the debt or performance of promise and retain possession of goods pledged as a collateral security.
- Sell the goods pledged on giving the pledgor a reasonable notice of sale. In case the goods pledged when sold do not fully meet the amount of the debt, the pledgee can proceed for the balance. If, on the other hand, there is any surplus, that has to be accounted for to the pledgor.
- Before sale can be executed, a reasonable notice must be given to the pledgor so that: (a) the pledgor may meet his obligation as a last chance; (b) he can supervise the sale to see that it fetches the right price.
Duties of a Pledgee
- The pledgee is required to take as much care of the goods pledged to him as a person of ordinary prudence would, under similar circumstances, take of his own goods, of a similar nature.
- The pledgee must not put the goods to an unauthorised use.
- The pledgee is bound to return the goods on payment of the debt.
- Any accruals to the goods pledged belong to the pledgor and should be delivered accordingly. Thus, if the security consists of equity shares and the company issues bonus shares to the equity shareholders, the bonus shares are the property of the pledgor and not the pledgee.
Duties of a Pledgor
- He must disclose to the pledgee any material faults or extraordinary risks in the goods to which the pledgee may be exposed.
- He is responsible to meet any extraordinary expenditure incurred by the pledgee for the preservation of the goods.
- Where the pledgee has exercised his right of sale of goods, any shortfall has to be made good by the pledgor.
- He is liable for any loss caused to the pledgee because of defects in his (pledgor’s) title to the goods.
Rights of a Pledgor
- The pledgor has a right to claim back the security pledged on repayment of the debt with interest and other charges.
- He has a right to receive a reasonable notice in case the pledgee intends to sell the goods, and in case he does not receive the notice he has a right to claim any damages that may result.
- In case of sale, the pledgor is entitled to receive from the pledgee any surplus that may remain with him after the debt is completely paid off.
- The pledgor has a right to claim any accruals to the goods pledged.
- If arty loss is caused to the goods because of mishandling or negligence on the part of the pledgee, the pledgor has a right to claim the same.