This article is written by Rishabh Soni, law student, Amity law school Delhi. He discusses the contract of bailment and pledge.
What is bailment?
Bailment as defined in section 148 of the Indian contract act 1872 is the delivery of goods by one person to another for some specific purpose, upon a contract that these goods are to be returned when the specific purpose is complete. For example, A delivering his car for Service at the service center is an example of bailment. The person delivering the goods is known as bailor and the person to whom goods are delivered is known as bailee. However, if the owner continues to maintain control over the goods, there is no bailment
Illustration If A gives his car to B his neighbor for 10 days, but at the same time he keeps one key with himself and during this period of 10 days he used to take the car. Now this will not be a case of bailment as A is keeping control over the property bailed.
Essentials of Contract of Bailment
- The existence of a valid contract:- The existence of a valid contract is a foremost condition in bailment which implies that goods are to be returned when the purpose is fulfilled. Finder of lost goods is also known as bailee although there may not be any existing contract between him and the actual owner.
- Temporary delivery of goods:- The whole concept of bailment revolves around the fact that the goods are delivered for a temporary period and bailee cannot have permanent possession. Delivery of goods can be done through actual delivery or through constructive delivery which means that doing something which has the effect of putting the goods in possession of bailee or any other person authorized by him.
- Return of specific goods:- The bailee is bound to return the goods to bailor after the purpose for which it was taken is over. If the person is not returning the goods then it will not be bailment.
Types of Bailments
Deposit:- It is the simple bailment of goods by one man to another for a particular use.
For example, A gives his computer to B for 7 days, it will be a case of a deposit
Hire:- It includes goods delivered to the bailee for hire.
For example, A gives his car to B for 7 days on rent of Rs. 700 per day, it will be a case of a hire
Pawn/ Pledge:- when goods are delivered to another person by way of security for money borrowed.
For example, A takes a loan from the Bank and keeps his papers of the house with a bank as security, it will be a case of pledge
Duties and liabilities of a bailor
- The bailor is bound to disclose to the bailee, the faults in the goods bailed. which he knows and if he does not make such disclosures, he is directly responsible for damage arising to the bailee directly from such faults.
Illustrations:- A delivers a car to B knowing that the brakes of the car very less. Now if any accident happens A will be liable for the same.
- Bailor is also responsible to the bailee for any loss which the bailee may sustain by reason of the fact that bailor was not entitled to make EXPLAIN
- To make the bailment
- To receive the goods
- To give directions respecting them Section 164
- Duty to indemnify the bailee:- The bailor is duty bound to make good the loss
suffered by the bailee where he was compelled to return the goods before the expiry of the period of bailment
- Duty to claim back the goods:- The bailor is bound to accept the goods upon being returned by the bailee in accordance with the terms of the agreement. If he refuses to accept it at a proper time, without any reasonable ground then he will be liable for any loss which may happen to the goods.
Particular lien Section 170 of Indian contracts act 1872
Lien is basically a right in one person to retain the property which is in his possession, belonging to another, until certain demands are satisfied. It includes those things where the bailee, in accordance with the purpose of bailment, rendered any service involving the exercise of labor or skill in respect of the goods bailed.
Illustration: If A gives a piece of cloth to tailor for stitching a suit. Then Taylor is entitled to keep the suit with him until A pays him for the cost of stitching.
For exercising this particular lien following factors are to be considered:
- The bailee must have rendered some service involving labor or skill
- The service must be in accordance with the purpose of the bailment.
- This service must be with regard to the thing bailed.
- There must be no contract to the contrary.
Section 171 of the Indian contract act 1872 deals with the general lien. A general lien is the right to retain the property of another for a general balance of accounts. It entitles a person in possession of goods to retain them until all claims or accounts of the person in possession against the owner of goods are satisfied.
An example of general lien can be Banker who is entitled to retain the goods until the person satisfies his debt with the bank.
A bailee is having a definite right if he suffers an injury with respect to goods bailed from bailor. Moreover, if a third person wrongfully deprives the bailee of the use or possession of goods bailed he is entitled to such remedies as the owner might have in such a situation.
Care to be taken by the bailee –(Section 151 and 152)
The bailee is bound to take as much care of goods bailed to him as a man of ordinary prudence would have under similar circumstances and therefore he will not be liable for any loss, destruction or deterioration of the thing bailed if he has taken care. In the case of Calcutta Credit Corporation Ltd v. Prince Peter of Greece, it was held by Calcutta high court that the defendant has not taken reasonable care to prevent plaintiffs car from burning.
Bailee is under the duty to return or deliver goods according to the bailor’s direction as soon as the time for which goods were bailed has expired.
Bailee’s duty to deliver increase profit from the bailed goods to the bailor
In the absence of any agreement, bailee is bound to deliver to the bailor any increase in profit or any benefit which may have accrued from the goods bailed ( Section 161). In the case of Standard Chartered Bank v. Custodian, it was held by Supreme court that if Shares and debentures are pledged, bonus shares and dividend are also regarded as Part of it.
Pledge Section 172-179
The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailor in case of a pledge is known as pawner and bailee as Pawnee.
A pledge is very likely as a bailment, but the characteristic feature of a pledge is that there is a delivery of the goods as security for a debt or promise.
For example, If A hands over his papers of the car to Y a bank as surety for the loan given, it is a case of a pledge. The most important element of a pledge is the actual or constructive delivery of goods pledged
Essentials of pledge
Delivery of goods/ Title:-
Pledge is like a bailment and it also involves the delivery of goods from the pawnor to Pawnee. Delivery of goods also results in delivery of possession. For example, Delivery includes transferring of a document to the bank for taking a loan. This transaction will involve the delivery of goods. Morvi Mercantile Bank v. Union of India.
Purpose of Pledge is always security for payment of debt:-
The purpose for which goods are bailed is that bailed goods should serve as security for the payment of debt or performance of a price. When goods are pledged, the Pawnee becomes a secured creditor.
Persons entitled to pledge
In normal cases, goods can be pledged by the owner or the person authorized by him, but in some exceptional cases, a person who is neither the owner nor have any authority from the owner of pledged goods, but having possession with the owner’s consent can make a pledge. These exceptions are
- Pledge by a mercantile agent Section 178
- Pledge by a person in possession under a voidable contract Section 178A
- Pledge by a seller in possession after sale Section 30(1), Sale of goods act
- Pledge by a buyer in possession after sale Section 30(2) Sale of goods act.
Rights of Pawnee
- Right to retain the goods pledged Section 173 and 174
- Right to recover extraordinary expenses incurred by pawnee Section 175
- Rights of the suit to procure the debt, and sale of the pledged goods Section 176
Another important scenario may arise if the pledged goods are lost or damaged due to the fault of the Pawnee, for instance, he fails to take due care of the goods, then he will lose his claim against the pawner to that extent. For example, If A takes a loan of Rs 5,00,000 from B and gives his car worth Rs2,00,000 to B for a period of 5 years. Now during this time period if any damage is caused to the car then B will be liable for the same and he will be entitled to his money back based on this condition.
Now after analyzing the provisions of bailment and pledge in detail we have seen that the concept of bailment involves handing over the goods to another for a specific purpose whereas in pledge also goods are transferred, but not to fulfill a specific purpose but also to keep them as a security for repayment of debt.