Contract of Bailment and Pledge

August 10, 2018

Bailment and Pledge are two special contracts that are often confused. Every pledge is a bailment but every bailment is not pledge[1]. Bailment means a delivery of goods from one person to another for a special purpose. Whereas Pledge means delivery of goods as security for the payment of debt or performance of a promise. Therefore, Bailment & Pledge are two different contracts. Pledge is a special kind of bailment.

Bailment

A bailment is a special contract defined under section 148 of the Indian Contract Act, 1872. It is derived from a French word i.e. “bailer” which means “to deliver”[2]. The etymological meaning of bailment is “handing over”or “change of possession of goods”. By bailment, we mean delivery of goods from one person to another for a special purpose on the contract that they shall reimburse the goods on the fulfilment of the purpose or dispose of them as per the direction of the bailor. The person who delivers the goods is known as bailor. And the person to whom the goods are given is known as Bailee. And the property bailed is known as Bailed Property.

Essentials of Bailment

There shall be a contract between the parties for the delivery of goods,
The goods shall be delivered for a special purpose only,
Bailment can only be done for movable goods and not for immovable goods or money,
There shall be a transfer of possession of goods,
Ownership is not transferred to Bailee, therefore Bailor remains the owner,
Bailee is duty bound to deliver the same goods back and not any other goods.

Exception: The money deposited in the bank shall not account to bailment as the money returned by the bank would not be the same identical notes. And it is one of the essentials of the bailment that same goods are to be delivered back.

Duties of a Bailor

Section 150 of the Indian Contract Act, 1872 bound the bailor with certain duties to disclose the latent facts specifically pertaining to defect in goods. Bailor’s duty of disclosure are:

Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods that he is aware of to the Bailee that can interfere with the use of goods or can expose him to extraordinary risks. And failure to do the same will make bailor liable for damages.
Non Gratuitous Bailment (Bailment for Reward):This duty particularly deals with the goods given on hire. As per this provision, when the goods are bailed for hire, then in such a situation even if the bailor is aware of the defect in the goods or not will be held liable for the injury that has been caused due to the existence of such defect.

In Hyman v Nye & Sons[3], the plaintiff took a carriage on hire from the defendant but the carriage was not fit for the journey and subsequently, the plaintiff suffered injuries. The court held that even though the defendant was aware of such defect or not he shall be liable.

Duties of Bailee

Bailee has to fulfil several obligations as per Indian Contract Act, 1872. That is:

Duty to take reasonable care: It is the duty of the Bailee to take care of goods as his own goods. He shall ensure all safety measures that are necessary to protect the goods. The standard of care should be such as taken care by a prudent man. The goods shall be taken care of equally whether they are gratuitous or non-gratuitous. The Bailee shall be held liable for payment of compensation if he fails to take due care. But if the Bailee has taken due care and instead of that the goods are damaged then in such a situation Bailee will not be liable to pay compensation. The Bailee is not liable for the loss of goods due to destruction by fire[4]. (Section 151-152)
Duty not to make unauthorized use of the goods:Bailee is duty bound to use the goods for a specific purpose only and not otherwise. If he uses the goods for any other purpose than what is agreed for then the bailor has the right to terminate such bailment or is entitled with compensation for damage caused due to unauthorized use. (Section 153-154)
Duty not to mix bailor’s goods with his own goods: It is the duty of the Bailee not to mix bailor’s goods with his own. But if he wants to do the same then he shall seek consent from the bailor for mixing of goods. If the bailor agrees for the mixing of the goods then the interest in the mixed goods shall be shared in proportion. In case, Bailee without the consent of bailor mixes the goods with his own then two situations arise: goods can be separated and goods can’t be separated. In the former case the Bailee has to bear the cost of separation and in the latter case since there is the loss of the goods, therefore, bailor shall be entitled with damages of such loss. (Section 155-157)
Duty to return the goods on the fulfilment of purpose:Bailee is duty bound to return the goods once the purpose is achieved or on the expiry of the time period for which the goods were bailed. But if the Bailee makes default in returning the goods on proper time then he will be responsible with the loss, destruction or deterioration of the goods if any. (Section 160-161)

In the case of Bank of India v. Grains & Gunny Agencies[5] the court held that if the goods are lost or destroyed due to the negligence of servant of Bailee, then in such case as well Bailee shall be liable.

Duty to deliver to the bailor increase or profit if any on the goods bailed:The Bailee has a duty to return the goods along with increase or profit subject to contract to the contrary. Accretion that has accrued from the bailed goods is the part of the bailed goods and therefore bailor has the right over such accretions if any. And such accretions shall be handed over to the bailor along with the goods bailed. For instance, A leaves a cow in the custody of B and cow gives birth to the calf. Then B is duty bound to hand over the bailed goods along with accretion to the bailor[6]. (Section 163)

Rights of a Bailor

As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a Bailor is same as Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee[7]. So the rights of bailor are:

Enforcement of Bailee’s Duty:Since Right of the bailor is same as the right of the Bailee, therefore on the fulfilment of all duties of Bailee the bailor’s right is accomplished. For example, it is the duty of the Bailee to give the accretions and it is the right of bailor to demand the same.
Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the right to claim damages for such loss. (Section 151)
Right to Termination the Contract: If the Bailee does not comply with the terms of the contract and acts in a negligent manner in such case the bailor has the right to rescind the contract. (Section 153)
Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or mixes the goods which cause loss of goods in such case bailor has the right to claim compensation.
Right to demand the return of goods: It is the duty of the Bailee to return the goods and the bailor has the right to demand the same.

Rights of a Bailee

Right to recover expenses:In the contract of Bailment, the Bailee incurs expenses to ensure the safety of goods. The Bailee has the right to recover such expenses from the bailor. (Section 158)
Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration for services that he has rendered. But in case of gratuitous bailment, the Bailee is not awarded any remuneration.
Right to recover compensation:At times a situation arises wherein bailor did not have the capacity to contract for bailment. Such a contract causing loss to the Bailee, therefore the Bailee has the right to recover such compensation from the bailor. (Section 168)
Right to Lien:Bailee has the right over Lien. By this, we mean that if the bailor fails to make payment of remuneration or does not pay the amount due, the Bailee has the right to keep the goods bailed in his possession till the time debtor dues are cleared. Lien is of two types: particular lien and general lien. (Section 170-171)

In the case of Surya Investment Co. v. S.T.C[8], the court held that expenses incurred by Bailee during preservation of goods under lien shall be borne by bailor.

Right to suit against a wrongdoer:After the goods have been bailed and any third party deprives the Bailee of use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180)

Pledge

Pledge is a kind of bailment. Pledge is also known as Pawn.It is defined under section 172 of the Indian Contract Act, 1892. By pledge, we mean bailment of goods as a security for the repayment of debt or loan advanced or performance of an obligation or promise. The person who pledges the goods as security is known as Pledger or Pawnor and the person in whose favour the goods are pledged is known as Pledgee or Pawnee.

Essentials 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 security against payment or performance of the promise,
The subject matter of pledge is goods,
Goods pledged for shall be in existence,
There shall be the delivery of goods from pledger to pledgee,
There is no transfer of ownership in case of the pledge.

Exception: In exception circumstances pledgee has the right to sell the movable goods or property that are been pledged.

Rights of Pawnor

As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. By this, we mean that on the repayment of the debt or the performance of the promise, the Pawnor can redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual sale. The right of redemption is extinguished once the actual sale is done by the Pawnee as per his right under section 176 of the Indian Contract Act, 1872[9].

Rights of a Pawnee

The rights of the Pawnee as per Indian Contract Act, 1872 are:

Right to retain the goods: If the Pawnor fails to make the payment of a debt or does not perform as per the promise made, the Pawnee has the right to retain the goods pledged as security. Moreover, Pawnee can also retain goods for non-payment of interest on debt or non-payment of expenses incurred. But Pawnee cannot retain goods for any other debt or promise other than that agreed for in the contract. (Section 173-174)
Right to recover extraordinary expenses: The expenses incurred by Pawnee on the preservation of goods pledged can be recovered from Pawnor. (Section 175)
The right of suit to procure debt and sale of pledged goods: On the failure to make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit proceedings against him or sell the goods. In the former case, the Pawnee retains the goods with himself as collateral security and initiate the court proceedings. He need not provide any notice of such proceedings to the Pawnor[10]. And in the latter case, the Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount received from the sale of goods is less than the amount due then the rest amount can be recovered from Pawnor. And if the Pawnee gets more amount than the due amount then such surplus is to be given back to Pawnor. (Section 176)

Difference between Bailment and Pledge

Basis	Bailment	Pledge
Meaning	Transfer of goods from one person to another for a specific purpose is known as the bailment.	Transfer of goods from one person to another as security for repayment of debt is known as the pledge.
Defined In	It is defined under section 148 of the Indian Contract Act, 1872.	It is defined under section 172 of the Indian Contract Act, 1872.
Parties	The person who delivers the bailed goods is known as Bailor and the person receiving such goods is known as Bailee.	The person who delivers the pledged goods is known as Pledger or Pawnor and the person receiving such goods is known as Pledgee or Pawnee.
Consideration	The consideration may or may not be present.	Consideration is always there.
Right to Sell	Bailee has no right to sell the goods bailed.	Pledgee or Pawnee has the right to sell the goods.
Use of Goods	Bailee can use the goods only for a specific purpose only and not otherwise.	Pledgee or Pawnee cannot use the goods pledged.
Purpose	The purpose of bailed goods is for safekeeping or repairs etc.	The purpose of pledged goods is to act as security for repayment of debt or performance of the promise.

Illustrations

Illustration 1: Mr A gives his watch for repair to Mr B., In this case, Mr A is bailor, Mr B is Bailee and the goods bailed is watch.

Illustration 2: Harry bailed his bike to David for riding for himself to go to college. David used it for racing purpose. Now David will be liable for unauthorized use of the bike bailed.

Illustration 3: Mr X gave his cat to Mr Y for looking after over some days. Cat in that while gave birth to kittens. Now Mr Y is liable to return the cat along the accretions.

Illustration 4: Mr A bailed his carriage for Mr B for hire for a few days. But there was a default in the carriage of which Mr A was not aware. And subsequently, Mr B suffered injuries because of the same. Now Mr A is liable to pay damages to Mr B.

Illustration 5: Y mixes his sweets with that of Z without Z’s consent. Since the sweets can be separated so the cost to separate the sweets will be borne by Y.

Illustration 6: Mark took a loan from the bank against a security of gold. In this case, Mark is a pledger, the bank is a pledgee and gold is the pledged goods.

Illustration 7: Z pledged his goods with A. But now Z refuses to make the payment of the same. A now can either sell his goods or can initiate a suit proceeding against Z.

Frequently Asked Questions (FAQs)

Discuss the rights of a Finder of Lost Goods as a Bailee?

According to section 71 of the Indian Contract Act, 1872 by the finder of lost goods we mean a person who comes across the goods that are unclaimed or whose actual owner is not known. Such a person has to take care of these lost goods as Bailee unless a true owner is found. He has the same responsibility, rights and duties of that of a Bailee as per section 151 of the Indian Contract Act, 1872. He is duty bound to return the goods to the actual owner. He has to take all measures to find actual owners. He cannot refuse the delivery of goods else he will be liable for non- delivery of goods.

Rights of Finder of Lost Goods

The right of Lien: According to section 168 of the Indian Contract Act, 1872 finder of the lost goods can exercise his right of particular lien if the actual owner refuses to make the payment of the expenses incurred to preserve those goods or to find the actual owner. But finder of the lost goods cannot sue him for the same.
The right of Claiming the Award, if announced by the owner: According to section 168 of the Indian Contract Act, 1872 finder of lost goods cannot sue the actual owner for expenses incurred by him. But he can sue him for the award that is announced by the owner and he refuses to pay the same. For instance, X finds Z’s wallet and gives it to him. Z promises X to give him Rs. 100 for the same. This is a contract of bailment and Z is bound to pay the reward.
Right to sell the goods found: According to section 169 of the Indian Contract Act, 1872 finder of the lost goods also have the right to sell the goods on certain circumstances i.e. either he could not find the actual owner after taking all due diligence or the goods or of such nature that their value might perish.

What are types of Lien?

By right of Lien, we mean that the Bailee has the right to retain the property or goods until the Bailor makes the payment of expenses or remuneration. Lien is of two types:

Particular Lien: According to the section 170 of the Indian Contract Act, 1872 in the absence of any contract to the contrary if the Bailee uses his skills and renders his service to the Bailor on the goods bailed, he has the right to the particular lien if he fails to pay the remuneration for the same. But the Bailee cannot sue him for the non-payment of remuneration, he can only retain the goods.
General Lien:According to the section 171 of the Indian Contract Act, 1872 in the absence of any contract to the contrary the Bailee can retain possession of goods or property for non-payment of expenses or remuneration against the general balance of the account. For instance, A borrows Rs. 1000 from the bank without security. Later he takes one more loan of Rs 5000 from the same bank against a security of gold. A pays backs Rs. 5000 but yet has not paid Rs 1000. So the bank can retain gold (general balance of the account) for the previous loan. This is the general lien. The right of general lien has been conferred on the following kinds of Bailee:
- Bankers,
- Factors,
- Wharfingers,
- Attorney of a High Court,
- Policy Brokers.

What are the types of Bailment?

Bailment is of two types:

Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods that he is aware of to the Bailee that can interfere with the use of goods or can expose him to extraordinary risks. And failure to do the same will make bailor liable for damages.
Non – Gratuitous Bailment (Bailment for Reward): This duty particularly deals with the goods given on hire. As per this provision, when the goods are bailed for hire, then in such a situation even if the bailor is aware of the defect in the goods or not will be held liable for the injury that has been caused due to the existence of such defect.

When can bailment be terminated?

The Bailment can be terminated when the:

The time period of the bailment expires,
The purpose for which the bailment was done is achieved,
Bailor or Bailee dies,
Goods are used in an inconsistent manner,
Bailor himself terminates the same.

Who may Pledge?

Any of the following persons may make a valid pledge:

The owner, or his authorized agent, or
One of the several co-owners, who is in the sole possession of goods, with the consent of other owners, or
A mercantile agent, who is in possession of the goods with the consent of the real owner, or
A person in possession under a voidable contract, before the contract is rescinded, or
A seller, who is in possession of goods after the sale or a buyer who has obtained possession of the goods before the sale, or
A person who has a limited interest in the property. In such a case the pawn is valid only to the extent of such interest[11]

Discuss whether the pledge is a special type of contract of bailment?

It is right to say that pledge is a special type of bailment. Since all the essentials of the pledge are same as that of bailment. Both the contracts deal with movable property only. In both the contracts goods or property is transferred and repayment is also must. Like Bailment, the pledge is one of its special kind.

What are the differences Pledge and Hypothecation?

Basis	Pledge	Hypothecation
Defined	It is defined under Section 172 of the Indian Contract Act, 1872.	As such it is not defined in the Indian Contract Act, 1872 but has been recognized by the usage since very long.
Transfer of Property	Property is transferred from one person to another as security.	Property is not transferred, it stays with the owner.
Dealing in Property	Once the property is pledged, the owner loses the right to deal in that property.	Since the property stays with the owner, therefore he can deal in the property subject to certain condition.
Right of Lien	The right of lien can be exercised since the property is with the Pawnee.	The right of lien cannot be exercised since the property is not with the creditor.

[Reference]

[1] Key Differences, Difference between Bailment and Pledge, by Surbhi S, April 14, 2015. https://keydifferences.com/difference-between-bailment-and-pledge.html

[2]Retrieved from <http://egyankosh.ac.in/bitstream/123456789/13397/1/Unit-10.pdf>

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

[4]Pyramid Finance Ltd v RamkrishanIyer, 2007 Cri LJ 1767 (Bom.) (Goa Bench).

[5]A.I.R 1989 M.P. 28.

[6] Illustration to section 163.

[7]Retrieved from <https://drive.google.com/file/d/0B0EqEQKDAp5RTXIzbTJERDZzLXM/view>

[8] A.I.R 1987 Cal. 46.

[9]Lallan Prasad v Rahmat Ali, A.I.R 1969 Delhi 313,315.

[10] T.R.S Kotagi v. Tehsildar, Gadag, A.I.R 1985 Kant. 265.

[11]Retrieved from <http://egyankosh.ac.in/bitstream/123456789/13397/1/Unit-10.pdf>