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Bailment Contract and Pledge: A Complete Overview

by Samyukta Shankar
Bailment contract and Pledge Indian Contract Act Kanooniyat

Have you ever given your clothes for dry cleaning or delivered your car in a service station for repair or have you ever while travelling found somebody’s missing wallet and kept it with yourself to return it to the appropriate owner? Have you ever wondered if on delivering your car for repair or on keeping somebody’s wallet in your possession whether the other person/ you becomes the owner of the car or the wallet? Does he or do you now have the right to sell the car or the wallet?

The answer as you must have guessed is no, a big NO. The idea is in itself  absolutely absurd because merely delivering a car for service or keeping someone’s wallet in your possession does not make the other person or you the owner of the car/wallet. True, but has it ever occurred to you that when delivering your car or clothes you are actually entering into an agreement or how when keeping somebody’s lost and found article in your possession, there are certain duties that arise for you?  Let’s see and understand how that works.

WHAT IS BAILMENT?

The situations mentioned above are classic examples of Bailment. Bailment contract as defined under Section 148 of the Indian Contract Act (ICA), 1872 refers to “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 person who delivers the goods is called the bailor and the person to whom they are delivered is known as the bailee.

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Consider the earlier stated situations if for example A delivers his car at B’s service station then such delivery will be known as bailment and A will be the Bailor while B will be the Bailee.

As per the definition stated above it is clear that Bailment has two essentials per se.

  • The delivery of good for some purpose.
  • The return of the goods after the purpose is achieved, or the disposal according to the Bailor’s directions.

DELIVERY OF THE GOODS

Delivery of the goods with respect to bailment refers to the transfer of the possession of the goods. At this point it is very important to understand the difference between being in possession of a good and being the owner of the good. Let’s take an example

ILLUSTRATION

A owns a beautiful necklace. B, A’s best friend ask if she can borrow the necklace for her birthday party over the weekend. A lends the necklace to B. Now in this case while B is in possession of the necklace A still the owner of the necklace. Which is to say that ownership and possession need not always vest with the same person.

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Bailment Illustration
Bailment is not something that can only take place through hefty agreements in big offices, sometimes just lending your clothes or shoes or in this case your necklace, to a friend for a party can constitute bailment.

Delivery of the goods or transfer of the possession need not be actual. The same has been stated under Section 149 of the ICA, 1872, that 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 authorized to hold them on his behalf. An example of a symbolic delivery could be giving the keys of the car to the service station owner instead of actually delivery the car.

Sometimes it may so happen that the initial intention may not be to enter in a bailment agreement and subsequently the agreement of bailment is created.

ILLUSTRATION

A, the owner of a car sells the same to B i.e., B is now the owner of the car. B due to some reason is not able to get the car from A and thus asks A to keep it on his behalf for a month. In this case when earlier the agreement was entered into it was that of sale, however subsequently a Bailment contract also arose. Thus A will be deemed to be the Bailee of the car and B will be deemed to be the Bailor.

The above example depicts a situation in which the goods are not delivered by way of bailment.

As mentioned above delivery refers to the transfer of possession of a good. However, if the bailor after keeping the goods in the bailee’s possession continues to have control over them then in such a case delivery will not be sufficient to establish a bailment contract.

ILLUSTRATION

A has a locker in a bank XYZ. A has been given a key by the bank without which the locker cannot be opened b anyone including the bank. In such a case even though A’s goods are in possession of the bank XYX since A has complete control over the goods it will not be considered as bailment. Exclusive possession is a sine qua non ( essential condition) for bailment.

Bailment need not always take place with the help of a bailment contract. The Indian Contract Act,1872  deals with the concept of Bailment only when the same arises from a contract. However, that in no way means that Bailment cannot exist with an enforceable contract.

CASE LAW

In the case of State of Gujarat v. Memon Mahomed Haji Hasan, AIR 1967 SC 1885, the Supreme court held bailment is a relationship sue generis (of its own kind) and thus it doesn’t have to be mentioned in the contract.

Unless one wants increase or diminish the burdens of the bailee by virtue of the agreement of bailment. This in very simple words means that bailment can exist independently without a contract. A good example would be when one finds somebody’s lot wallet on the rod and picks it up to return it to the rightful owner. Under the ICA, 1872 such a person is known as the finder of goods. Here no contract has been entered into, however this will be considered as bailment.

RETURN OF THE GOOD AFTER THE PURPOSE IS ACHIEVED

The second condition or essential for bailment is the return of the good/goods after the purpose has been achieved. It is this element that separates bailment from say a contract of sale. In Bailment contracts the good/goods have to be returned either in the same form or in an altered form. So say for example

ILLUSTRATION

A gives her necklace to B, and B returns the same to A after use. That would be a case of return of the good in the same form. On the other hand if A gives her gold earrings to be melted and made into a bracelet and the same is returned by the jeweller. That would be a case of return of the good in an altered form.

It is important to note that in cases where there is no intention to take the goods back or to return the same and the exact cost of the goods has been payed, the transaction is considered to be one of sale and not bailment. For example most of us must have bought beverages which are poured into glass bottles, for which we not just pay the price of the contents but also the container and we also end up keeping the bottles with ourselves. In such situations retaining the bottles will not constitute bailment but rather sale. The same was held by the Supreme Court in the case of Kalyani Breweries Ltd. vs. State of West Bengal, AIR 1998 S.C. 70.

With Bailment of goods, arise certain duties for the Bailor and the Bailee.

DUTIES OF THE BAILOR AND THE BAILEE

DUTIES OF THE BAILOR

Section 150 mentions the duties of the Bailor and states that “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. 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.”

On reading the provision it is very evident that a distinction has been made between a gratuitous bailor i.e., a bailor who bails the goods without any reward and a bailor who bails the goods for a reward. If we were to break down the above-mentioned provision in simple words, what is being conveyed is that in cases where the bailor is a gratuitous bailor, he will be liable if he does not mention/ disclose any defect in the good that he is aware of. On the other hand if the bailor bails the goods for a reward he will be liable for the damage caused by the defective goods regardless of whether he was of the same of not.

DUTIES OF THE BAILEE

A Bailee has the following duties:

1. The Bailee should take as much care of the goods bailed to him as a man of ordinary prudence, under similar circumstances would take care of his own goods (Section 151). It is important to note that when one reads this section, amount of care or the extent of care required is based on reasonability.

In the case of Union of India vs. Udho Ram and Sons, AIR 1963 S.C. 422, the facts of the case were such where the Plaintiff had consigned certain good and delivered the same via rail (Defendants). However, during transit a few of the articles were stolen and not returned to the plaintiff. The Court held that since the railway protection police force had not taken reasonable amount of care when the goods were in transit, they were liable to pay damages. The High Courts in India through various judgements have also held that where in certain cases there exists an agreement between the bailor and the bailee to exempt the bailee for the liability arising in Section 151, the bailee will be exempted.

2. As per Section 152 the bailee will in the absence of any special contract, not be responsible for the loss, destruction or deterioration of the thing bailed if the bailee has taken reasonable care.

A and B are engaged in the sugar industry producing the same quality and type of sugar. A delivers sugar worth Rs.100 to B for a certain period for storage reasons. B mixes the sugar produced from his factory worth Rs. 90 with that of A’s, it is be impossible to separate or differentiate the two. Thus B will have to compensate A in accordance with A’s share in the mixed goods.

3. It is the duty of the Bailee to return or deliver the goods according to the Bailor’s directions (Section 160). If due to the default of the Bailee the goods are not returned or delivered at the proper time, then the bailee will be liable to pay for the loss, destruction, or deterioration of the goods (Section 161). For example A ends his watch to B for three days as B wanted to wear the same for an event. B’s servant by accident drop water on the watch as a result of which the watch stops working and B isn’t able to return the watch on time. In this case B will be liable to make good the damage caused to the watch.

It may so happen that one good is jointly owned by three people. In such a situation the Bailee can return the goods according to the directions of one of the joint owner without the consent of all, in the absence of an agreement to the contrary (Section 165).

Another situation could be say where A steals a necklace from B’s house and thus has no title over the good. A then lends the same to C for a week. Now C isn’t aware that A does not have a title over the necklace and after a week in good faith returns it to A. C at no point can be held liable by B for returning the good to A. An extension of this is also that C can’t deny returning the necklace to A by pleading  jus tertii, i.e., the title of a third person being better than that of the bailor.

4. In cases where the goods have been lent gratuitously i.e., when the bailed without any renumeration for the bailor, the bailor can ask for the return of the goods from the bailee even before the date for return has expired. However, if the on good faith the borrower (Bailee) acted in such a manner that the return pf the goods lent would cause him/her a loss greater than the benefits. Then the bailor will the bailee for the amount. A gratuitous bailment is terminated by the death of either of the bailor or of the bailee.

5. As per 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.”  So say for example A lends his Chicken to B for a few months. The Chicken lays eggs and chicks are born. B will have to return the chicks and the Chicken to A.

RIGHTS OF THE BAILEE

With duties also arise certain rights. The bailee is entitled to the following rights:

1. The right of the Bailee to recover the necessary expenses from the bailor (Section 158)- In cases where the goods are bailed to have some work done on them or are to be kept or carried, the bailee is entitled to receive a certain repayment for the necessary expenses incurred by him. The same applies even in case of gratuitous bailment.

2. It may so happen sometimes that the bailor did not have the right to bail the good, or the receive back the goods. In such cases bailor has the responsibility to sustain any loss that the bailee may incur from such bailment (Section 164).

3. Right of lien on the goods bailed- Lien in simple words basically refers to the right of the bailee to retain the goods of the bailor, till the bailor provides the requisite renumeration due in respect of the goods bailed. If the bailee has however waived his right of lien, he cannot exercise the same.

The Indian Contract Act, 1872 primarily recognises two kinds of lien

(i) Particular Lien– As per Section 170 ‘Particular Lien’ refers to when the bailee has in accordance with the purpose of the bailment, rendered any service which involves the use of skill or the exercise of labour. In the absence of any contract to the contrary, in such a situation the bailee will have the right to retain the goods until he receive a due renumeration for the same.

To understand this provision you can take the example of say a tailor named B to whom A gives a piece of cloth to stitch into a suit. Since B has used his skill and labour to stitch the suit and there exists no contract to the contrary, he can retain the suit till A pays him the money.

The right of particular lien has not only been recognised in the case of the bailee but also in the case of finder of goods as stated under Section 168. Wherein the finder of goods can retain the goods against the owner until he receives such compensation or in case the owner of the goods has offered a reward the finder of the goods can retain the goods till he receives such a reward. Other instances where particular lien is applicable include agent’s right to lien, Pawnee’s right to lien which will be explained further in later articles and below respectively.

(ii) General Lien– General lien can be exercised by Bankers, factors, wharfingers, attorneys of a High Court and policy brokers. In the absence of an agreement to the contrary the above stated people can retain any goods bailed to them as security for a general balance account. What this means is that for example an attorney of a High Court can retain not only those goods of the bailor in respect of which services have been provided but any good of the bailor that the bailee has in his possession.

A banker thus has a lien over bills, cheques and money that has been given to him in his capacity as a banker. He can retain the goods in satisfaction of a debt rising from some other good.

To give the reader a bit of clarity bailment as a concept only applies to goods, and thus the right of lien arises in case of bailment of goods. Money strictly speaking is not considered a good. However, various High Courts have applied the interpretation of English law and come to the conclusion that a banker can exercise lien over the money deposited to him in the form securities, in his capacity as a banker. Please note that under the Sale of Goods Act, 1930 ‘money’ has been excluded from the definition of goods.

A ‘Factor’ is defined under Section 2(9) of  the Sale of Goods Act, 1930 as a mercantile agent, who is entrusted with the possession of the goods of his principal for selling them. A ‘Wharfinger’ refers to a person who owns or has the care of a wharf (Wharf is a loading stage alongside a sea or a river for the loading and unloading of vessels).

SUITS BY BAILEES OR BAILORS AGAINST WRONG DOERS

If a third person wrongfully deprives the bailee of the use of possession of the goods bailed or causes any injury, the Bailee can use the same remedies as the owner would have been entitled had there been no bailment. The Bailor or the Bailee can bring a suit against the third person and whatever compensation or relief obtained by the suit shall be dealt with by the bailor and the Bailee according to their interests. The same has been stated in Section 180 and Section 181.

PLEDGE

To all of you who have made it this far, I admire your patience and respect your time. I understand that for somebody who is new to Contract Law a lot of these terms and concepts might seem daunting and to be honest tiring especially after six pages! But please hang in there, one of the reasons that I like contract law apart from the fact that it is pervasive is that most of the concepts are interrelated and relatable, which makes understanding so much easier. Now I hope I have given you a breather with this paragraph (jokes) and probably convinced you to read further, so let’s start with understanding what does pledge mean.

In common parlance ‘pledge’ refers to a solemn promise. Under the Indian Contract Act, 1872 a pledge in essence refers to the same thing with a few tweaks here and there.

Section 172 of the ICA, 1872 defines pledge as “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’.” So basically pledge or pawn is a kind of bailment for a specific purpose. A pledge is an undertaking or a formal promise.

In the case of Maharashtra State Co-op Bank Ltd. vs. Assistant P.F. Commissioner, AIR 2010 S.C. 868, the Supreme Court stated that “ A pawn or pledge is the bailment of the personal property as a security for some debt or engagement. The two ingredients of a pawn or a pledge are one the property to be pledged must be actually or constructively delivered and two that the pawnee only has a special property in the goods pledged but the general property in the pledge remain with the pawner.”

This special property exists so that the Pawnee can compel the payment of the debt or can sell the goods when the right to do so arises. It is this point that also differentiates a Bailment from a Pledge. In a bailment the bailee has the lien over the goods bailed but he can’t sell the goods of the bailor (except in the case of finder of goods, remember?). However in the case of  Pledge, the pawnee can not only retain the goods but can also sell the same by giving a prior notice.

RIGHTS OF THE PAWNEE

1. The right of retainer that the pawnee has is stated in Section 173 and 174. Which states that the pawnee can exercise lien not over the goods not only for the payment of the debt, or the performance of the promise but also for the payment of the interests n the debt and other necessary expenses incurred by him in respect of goods.

2. The pawnee also has the right to recover the extraordinary expenses incurred by him in the preservation of the gods as per Section 175.

For example A pledges his diamond ring to B as a security for a debt. B in order to ensure that the diamond ring is safe, buys a locker to keep the diamond ring. B will be entitled to recover the expenses incurred in buying the locker from A.

3. If the pawnor makes a default in the payment of the debt or performance  at the stipulated time the pawnee can either retain the good pledged as security and file for a suit or sell the thing pledged on giving the pawnor a notice (Section 176). Please note that if the proceeds from such a sale are less than the amount due the Pawnor will be liable to pay the balance. If the proceeds are however greater than the amount due the Pawnee will pay the excess to the Pawnor.

The two avenues available to the Pawnee as stated above are disjunctive in nature. Which is to say that merely because the Limitation act prescribes a time limit for filing the suit, if the pawnee resorts to selling the goods he will not be governed within the same time frame.

RIGHTS OF THE PAWNOR

The pawnor under Section 177 has the right to redeem the goods pledged i.e., take back the goods from the pawnee on the payment of the agreed debt, before the actual sale of them, even if he commits a default in paying the debt at the stipulated time.

If the Pawnor has obtained the possession of the goods under a voidable contract 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 any knowledge of the pawnor’s defective title.

ATTEMPT THIS QUIZ TO TEST YOUR KNOWLEDGE ON THE SUBJECT

Q. A is the owner of a jewellery shop. He lends to B a very close friend of his, a diamond brooch, to wear in a party over the weekend (three days). A had earlier borrowed some money from C another friend of his and given a diamond necklace as a security for the debt, till the debt is repaid.

Results

#1. Which one is the bailed good?

#2. Which one is the pledged good?

#3. Can the Pawnee retain or sell the goods?

#4. Can the Bailee retain and sell the goods?

finish


[1] “A contract of bailment is avoidable 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.”

[2] “If the bailee makes any use of the goods bailed which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them.”

This article has been written by:

Samyukta Content Writer at Kanooniyat.com

To connect with Samyukta on LinkedIn, click here

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