Bailment and Pledge under Indian Contract Act, 1872

Bailment and pledge are two very different kinds of contracts mostly mixed up with each other.

What is bailment?

Section 148 of the Indian Contract Act, 1872 defines “bailment” as ‘ the delivery of goods from 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’. 

Illustrations – A gives his laptop to B to repair.

X gives her blazer to Y for dry cleaning.

Here, in both the situations goods are delivered from person to another for a specific purpose and would be returned once the purpose is accomplished.

Parties to the contract

Bailor – The person delivering the goods is called the bailor.

Bailee – The person to whom the goods are delivered is called the bailee. 

Essentials of the contract of Bailment

• Delivery of possession – To constitute a bailment change of possession is necessary. In Kavita Trehan vs. Balsara Hygiene Products Ltd[1]. SC held that the delivery of possession to the bailee is sine quo non (an essential condition) of bailment.
• Delivery of goods should be upon a contract – In the State of Gujarat vs Memon Mahomed Haji Hasam[2], SC held that it can’t be said that bailment cannot originate without a contract. A bailment is governed by Contract act only if it arises from a contract. Bailment is a unique relationship between bailor and bailee, where bailor delivers the possession of goods to the bailee for a particular purpose.
• Delivery of goods should be for a specific purpose -Delivery of goods from bailor to bailee should be for a specific purpose. For example, A delivers his car to B’s garage for washing.
• Return of Goods– The bailee is duty-bound to return the goods on the expiration of time or accomplishment of purpose. (Section 160). The goods returned should be the same goods and not any other goods. Exception – Money deposited in the bank will not count as bailment as the money returned by the bank will not be the same notes. And it is one of the essentials that the same items be returned.

Duties and Liabilities of a bailor: 

Bailor should disclose to the bailee any fault in the goods bailed, of which he is aware.

Note: If bailor fails to disclose the material defaults, then he is responsible for any damage arising out of such faults. (Section 150)

Exception– When the goods are given on hire, then in such a case even if the bailor is aware of the defect in the goods or not will be held responsible for the damage that has been caused owing to the existence of such defect.

Case- Hymen vs. Nye & Sons[3] – The plaintiff rented (on hire) a vehicle from the defendant but the vehicle was not suitable for travel and the plaintiff was later injured. The court said that whether the defendant was aware of such shortcomings or not, he would be held liable.

In a situation, where some work is to be carried out on the goods by the bailee, then the bailor should repay the necessary expenses to bailee incurred by him. (Section 158)

Rights of a bailor

• Right to claim compensation – A bailor has a right to claim compensation in three cases:
  1. If the bailee fails to take care of the bailed goods and acts in a negligent manner.
  2. If the bailee uses the goods for an unauthorized purpose.
  3.  If the bailee mixes his goods with the bailed goods.
•  Right to claim the increase or profit in the goods – A bailor has a right to claim any increase or profit which may have accrued from the bailed goods. (Section 163)
• Right to Terminate – A bailor has a right to terminate the contract if the Bailee acts contrary to the conditions of bailment.
• Right to demand – A bailor has a right to demand the return of his goods from the bailee.

 Duties and Liabilities of Bailee:

• The bailee is duty-bound to take care of the pledged goods as a man of ordinary intelligence, in similar circumstances, takes of his goods of similar quantity and value. (It was held in Kavitra Tehran vs. Balsara Hygiene Products Ltd.)
• If the bailee utilizes the goods bailed which is not per the terms of bailment, then he is liable to pay compensation to the bailor for any damage caused during such use. (section 154)
• If the bailee mixes the goods of bailor with his own, without his consent,

1. When the goods can be separated – the bailee is liable to bear the expenses incurred to separate the goods or any damage caused due to the mixture of goods. (section 156)

Illustration – A bails 1000 masks marked with a particular mark to B. B, without A’s consent, mixes the 1000 masks with other masks of his own, bearing a different mark. A is entitled to have his 1000 masks back, and B is liable to bear all the expenses incurred in separation.

2. When the goods can’t be separated – The bailee is liable to pay compensation to the bailor for the loss of goods. (section 157)

Illustration – X bails a container of milk having 5L of milk to Y. Y without X’s consent mixes the milk with 2L water of his own. Y must compensate for the loss.

• If the bailee fails to return the goods on time, then he is liable to pay for any loss or damage caused to the bailor owing to the delay. (section 161)
• A bailee is liable to deliver to the bailor any increase or profit which may have accrued from the bailed goods. (section 163)

Illustration – C leaves a dog in the care of D. The dog has a pup. D is liable to deliver the pup as well as the dog to C.

FAQ – What if the goods get lost by the fault of bailee?

In case goods are lost by the bailee and not returned at the appropriate time, then he is liable to compensate to the bailor for the loss caused.

Rights of Bailee:

• Right to know the defects – A bailee has full right to know the material defects in the goods bailed, which can expose him to any risk or damage. (Section 150)
• Right to claim expenses – In a situation, where some work is to be carried out on the goods by the bailee, then the bailee has the right to claim the necessary expenses incurred by him for the purpose of bailment. (Section 158)
• Right to lien – When the bailee has provided any service involving the use of his labour and skill in respect of goods bailed, he has a right to retain such goods until he is paid for his services. (Section 170 – 171). It is of two types:

1. Particular lien

2. General lien

In Surya Investment Co. v. S.T.C[4] it was held that if any expenses are incurred by the bailee for the protection and maintenance of goods, then it should be borne by the bailor. Bailee is entitled to retain the goods till he is paid for his services.

Termination of bailment

Bailment can be terminated in two situations:

• As per section 153 of the Indian Contract Act – A Contract of bailment is voidable at the option of bailor if:Bailee does any act with the goods that is contrary to the conditions of bailment. Illustration – A gave his blazer to B for dry cleaning but on the contrary B gave his Blazer to C, so that C can wear it on his fresher’s party. This is an unauthorized use of the blazer bailed.

• As per section 162 Bailment can also be terminated by the death either of the bailor or of the bailee.

What is Pledge?

It is a kind of bailment defined in section 172 of the Indian Contract Act. It implies bailment of goods as security for payment of a debt or performance of a promise.

Illustration – Y took a loan from the bank against the security of his house property papers. Here, Y is a pawnor, the bank is a Pawnee and documents are the pledged goods.

Parties to the contract:

Pawnor – The bailor, in this case, is the Pawnor.

Pawnee – The bailee, in this case, is the Pawnee.

Essential elements of Pledge:

• Delivery of goods – The goods should be delivered from pawnor to Pawnee. ( there is a change in possession of goods)
• Purpose of delivery is always security for payment of a debt – The goods should be bailed as security against the payment of debts or performance of a promise.

Illustration – Like in the above case Y (Pawnor) delivered his valuable documents to the Bank (Pawnee) as security against the debts (purpose).

• Property pledged should be movable.

Rights of Pawnee-

• Right to retain– Pawnee has the right to retain the goods for the interest of the debt and all the expenses incurred by him on the goods pledged.
• Right to expenses – Pawnee has the right to receive any extraordinary expense incurred by him on the maintenance and protection of the goods pledged. (section 175)
• Right to sue or sell – In case when the pawnor makes default in the payment, then the pawnee has the right to:

1. Institute a suit against the pawnor and retain the goods pledged as collateral security.
2. Sell the goods on giving a notice of sale to the pawnor.

In Sunderlal saraf vs. Subas Chand Jain[5], it was held that “It is not essential that the notice under this section should state the date, time or place of the planned sale. The only thing needed is, sending a reasonable notice of sale.

FAQ – What if the amount received against the sale is less than the amount of debt?

The pawnor is liable to pay the balance and if the reverse happens, then the Pawnee is liable to pay the surplus to the pawnor.

Conclusion for Bailment and Pledge

‘Every pledge is a bailment but every bailment is not a pledge’. It implies that pledge is a unique kind of bailment in which the goods are pledged for one single purpose i.e. as a security against the payment of debts. The pledge has a very little reach in comparison to the bailment. In a nutshell it can be said that ‘If bailment is a universe then pledge is one of its planets’.

References:

Ø Universal’s Indian Contract Act, 1872 Bare Act

Ø Avatar Singh’s Law of Contract and Specific Relief

Ø Lawtimesjournal.in

Ø Keydifferences.com

Ø Srdlawnotes.com

Ø Indiankanoon.org

Ø Casemine.com

End Notes:

[1] AIR 1992 Del 103

[2] 1967 SCR (3) 938

[3] (1881) 6 Q.B.D 685

[4] AIR 1986 Cal 46

[5] AIR 2006 MP 35

Author Details: Nishant Gulyani (School of Law, UPES – Dehradun)