Definition of Bailment

The Indian Contract Act, 1872, defines and governs the Contract of Bailment. This is a type of contract where goods are delivered by one person to another for a specific purpose.

Definition under Section 148

Section 148 defines "Bailment":

"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 accomplished, be returned or otherwise disposed of according to the directions of the person delivering them."

Explanation:

• Delivery of Goods: There must be a transfer of possession of movable goods. This delivery can be actual (physically handing over) or constructive (doing something that puts the goods in the possession of the other person, e.g., handing over the key to a godown).
• By One Person to Another: Involves two parties (Bailor and Bailee, defined below).
• For Some Purpose: The delivery is made for a specific reason or object (e.g., for repair, storage, transport, pledge).
• Upon a Contract: There must be a contract underlying the delivery. While a formal written contract is not always necessary, there must be an agreement (express or implied) regarding the purpose and the return/disposal of goods. The contract can be express or implied.
• Return or Disposal: The agreement must stipulate that when the purpose is accomplished, the goods will be returned to the person delivering them or dealt with according to their instructions. The ownership of the goods does not transfer in bailment; only possession is transferred for a temporary purpose.

Example: A gives his car to B for repair. A is the bailor, B is the bailee. The delivery of the car is for the purpose of repair, upon a contract (implied by the transaction) that the car will be returned after repair. This is a bailment.

Bailee and Bailor

Section 148 also defines the parties to a contract of bailment:

"The person delivering the goods is called the 'bailor'."

"The person to whom they are delivered is called the 'bailee'."

• Bailor: The owner of the goods (or the person in possession of the goods) who delivers them to another.
• Bailee: The person to whom the goods are delivered and who receives possession.

Bailment is distinguishable from a sale (where ownership transfers) and a license (where only permission to use premises is given, not possession of goods). The goods must be movable property.

Consideration is usually present in a contract of bailment (e.g., payment for repair, storage charges). However, bailment can also be gratuitous (without charge), such as lending a book to a friend. Even in gratuitous bailment, there is a valid contract of bailment, and the parties have certain rights and duties.

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Rights and Duties of Bailor and Bailee

The Indian Contract Act specifies various rights and duties for both the bailor and the bailee. These obligations arise from the contract of bailment and are primarily focused on the care of the goods and their eventual return.

Duties of Bailee:

• Duty to take Reasonable Care (Section 151, 152): The bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality, and value as the goods bailed. If he takes such care, he is not liable for any loss, destruction, or deterioration of the goods (Section 152). The standard of care is that of an 'ordinary prudent man'.
• Duty not to make Unauthorized Use of Goods (Section 153, 154): The bailee must use the goods strictly according to the terms of the bailment. 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. If the bailee mixes the goods with his own without consent, he is liable for any loss or cost of separation (Sections 155-157).
• Duty to Return the Goods (Section 160, 161): The bailee is bound to return or deliver the goods according to the bailor's directions, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. If he fails to do so, he is responsible to the bailor for any loss, destruction, or deterioration of the goods from that time.
• Duty to Deliver Increase or Profit (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 of profit which may have accrued from the goods bailed. Example: If cows were bailed, the bailee must return the cows and any calves born during the bailment.
• Duty not to set up Adverse Title: The bailee must not dispute the bailor's title to the goods.

Rights of Bailee:

• Right to Expenses (Sections 158, 171): If the bailment is gratuitous, the bailee may be required to bear necessary expenses incurred for the custody of the goods. If the bailment is non-gratuitous, the bailee is entitled to be compensated for the agreed remuneration. If no agreement, for reasonable charges. The bailee has a lien (right to retain possession) on the goods for lawful charges and expenses (General Lien - Section 171 for certain categories like bankers, factors, wharfingers, attorneys; Particular Lien - Section 170 for bailee who has exercised labor or skill in respect of the goods bailed).
• Right to Deliver to Joint Bailors (Section 165): If there are joint bailors, the bailee may deliver the goods to one of the joint owners without the consent of all, in the absence of any agreement to the contrary.
• Right to interplead (Section 166): If a person other than the bailor claims the goods bailed, the bailee may apply to the Court to stop any suit against him and to compel the claimants to interplead.
• Rights against wrong-doers (Sections 180, 181): If a third person wrongfully deprives the bailee of the use or possession of the goods, or causes injury to them, the bailee is entitled to use such remedies as the owner might have used in the like case (Section 180). Any compensation obtained shall be dealt with according to the rights of the bailor and bailee respectively (Section 181).

Duties of Bailor:

• Duty to Disclose Faults (Section 150): 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. If he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults. If the bailment is gratuitous, this duty is limited to known faults. If it is non-gratuitous, the bailor must disclose faults even if he is not aware of them (if he could have known with reasonable care).
• Duty to Repay Necessary Expenses: The bailor must repay to the bailee all necessary expenses properly incurred by the bailee for the purpose of the bailment (Section 158 for gratuitous bailment, or as per contract for non-gratuitous).
• Duty to indemnify Bailee: The bailor must indemnify the bailee for any loss caused to the bailee by reason that the bailor was not entitled to make the bailment, or to receive back the goods, or to give directions respecting them (Section 166 implies this).
• Duty to Receive Back Goods: The bailor is bound to receive back the goods when the bailee returns them after the purpose is accomplished. If the bailor refuses to receive them back, the bailee is entitled to compensation from the bailor for the necessary expenses of keeping the goods (Section 160).

Rights of Bailor:

• Right to enforce duties of Bailee: The bailor can sue the bailee for breach of any of the bailee's duties (e.g., failure to take care, unauthorized use, failure to return).
• Right to Terminate Bailment (Section 153): The bailor can terminate the bailment if the bailee makes unauthorized use of the goods.
• Right to Demand Return of Goods (Section 160): The bailor has the right to get the goods back upon the expiry of the time or accomplishment of the purpose of bailment.
• Right to Increase or Profit (Section 163): The bailor is entitled to any increase or profit from the goods.
• Rights against wrong-doers (Sections 180, 181): The bailor has similar rights as the bailee against third parties who cause damage to the goods.

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Termination of Bailment

A contract of bailment can be terminated or discharged under various circumstances, bringing the rights and obligations of the bailor and bailee to an end.

Modes of Termination:

• By Performance of Purpose/Expiry of Time (Section 160): If the bailment was for a specific purpose or for a fixed period, it terminates when the purpose is accomplished or the period expires. The bailee's duty is then to return the goods.
• By Agreement: The bailor and bailee can mutually agree to terminate the bailment at any time, even if the purpose is not accomplished or the time has not expired. This is discharge by agreement (Section 62).
• By Act of Bailee inconsistent with terms (Section 153): If the bailee makes unauthorized use of the goods bailed, the bailor can terminate the bailment.
• Gratuitous Bailment (Section 159): A gratuitous bailment (where neither the bailor nor the bailee receives remuneration) can be terminated by the bailor at any time, even before the specified time or purpose. However, if premature termination causes loss to the bailee exceeding the benefit received from the bailment, the bailor must indemnify the bailee for such loss.
• By Death of Either Party (Section 162): A gratuitous bailment is terminated by the death of either the bailor or the bailee. In the case of non-gratuitous bailment, the death of a party does not usually terminate the bailment; the rights and obligations pass to their legal representatives, unless the bailment was of a personal nature (e.g., giving something to a specific artist for painting).
• Destruction of Subject Matter: If the goods bailed are destroyed or perish, the bailment is terminated as performance becomes impossible (Section 56).

Upon termination, the primary duty of the bailee is to return the goods to the bailor or dispose of them as per the bailor's directions. If the bailee fails to return the goods upon termination, they become liable as if they made unauthorized use from that point onwards (Section 161), and their duty of care becomes stricter.

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Definition of Pledge

Pledge is a specific type of bailment. It is a contract where goods are delivered by way of security. Sections 172 to 179 of the Indian Contract Act, 1872, deal with Pledges.

Definition under Section 172

Section 172 defines "Pledge", "Pawnor", and "Pawnee":

"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'."

Explanation:

• Specific Purpose of Bailment: Pledge is a bailment where the delivery of goods is specifically for the purpose of providing security.
• Security for Debt or Promise: The security is given either for the payment of a debt owed by the pawnor to the pawnee, or for the performance of a promise made by the pawnor to the pawnee.

Example: A borrows Rs. 50,000/- from a bank and deposits his gold ornaments with the bank as security for the loan. This is a pledge of the gold ornaments.

Example: A promises to deliver goods to B by a certain date. A delivers certain shares to B as security that he will perform his promise of delivery. This is a pledge of the shares.

Delivery of goods as security for a debt or performance of a promise

Key elements of a Pledge:

• Bailment: It must involve the delivery of goods (transfer of possession). Without delivery of possession, there is no pledge.
• Goods: The subject matter must be movable goods. Immovable property cannot be pledged (it is typically mortgaged).
• Purpose is Security: The delivery must be specifically for the purpose of securing a debt or the performance of a promise. This is the defining feature of a pledge, distinguishing it from other types of bailment (like bailment for repair or storage).

Distinction from Hypothecation and Mortgage:

• Pledge: Involves the transfer of possession of movable goods as security, while ownership remains with the pledgor.
• Hypothecation: A charge is created on movable goods as security, but the possession remains with the owner (hypothecator). This is common for vehicles or inventory financed by banks. Hypothecation is not defined in the Contract Act but recognized under other laws (like SARFAESI Act, 2002).
• Mortgage: A transfer of an interest in immovable property as security for a loan. Ownership is not transferred, but a right in the property is created in favour of the mortgagee. Governed by the Transfer of Property Act, 1882.

Thus, Pledge involves delivery of possession of movables, while Hypothecation allows possession of movables to remain with the borrower, and Mortgage deals with immovables.

Pledger (Pawnor) and Pledgee (Pawnee)

As per Section 172:

• Pledger (Pawnor): The person who delivers the goods as security (the debtor or the person promising performance). This person retains ownership of the goods but transfers possession.
• Pledgee (Pawnee): The person to whom the goods are delivered as security (the creditor or the person receiving the promise). This person receives possession but not ownership.

Example: A pledges his jewellery with a bank for a loan. A is the Pawnor, the Bank is the Pawnee. A owns the jewellery, the Bank has possession as security.

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Rights and Duties of Pawnee

The Pawnee (pledgee) has certain specific rights and duties concerning the goods pledged, which are distinct from those of an ordinary bailee due to the security aspect of the transaction. Sections 173 to 176 outline the rights of the pawnee.

Rights of Pawnee

• Right to Retain Goods (Section 173, 174): The pawnee has the right to retain the goods pledged, not only for the payment of the debt or the performance of the promise, but also for:
  • Interest on the debt (if agreed).
  • All necessary expenses incurred by the pawnee in respect of the possession or for the preservation of the goods pledged (Section 175).

  The pawnee cannot retain the goods for any debt or promise other than that for which they are pledged, unless there is an express contract to that effect (Section 174). However, bankers, factors, wharfingers, attorneys, and policy-brokers have a general lien for a general balance of account (Section 171), which might allow them to retain goods pledged even for other dues, provided the goods came into their possession in their professional capacity.

• Right to Extraordinary Expenses (Section 175): The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. Unlike necessary expenses (for which they have a lien), the pawnee cannot retain the goods for extraordinary expenses but can sue the pawnor to recover them.

Right to sell goods (Section 176)

This is a crucial right of the pawnee, distinguishing pledge from other bailments. If the pawnor makes default in the payment of the debt, or performance of the promise, at the stipulated time, the pawnee has two options:

• Sue the pawnor: The pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; OR
• Sell the pledged goods: The pawnee may sell the goods pledged, on giving the pawnor reasonable notice of the sale.

Key points about the right to sell:

• Requires Default: The right to sell arises only upon default by the pawnor.
• Reasonable Notice: The pawnee must give reasonable notice of the intended sale to the pawnor. The notice must specify the intention to sell, the date, time, and place of sale (if possible), and the amount due. The purpose is to give the pawnor an opportunity to pay and prevent the sale. Sale without reasonable notice is unlawful.
• Sale Proceeds: If the proceeds of the sale are less than the amount due, the pawnor is still liable to pay the balance. If the proceeds are greater than the amount due, the pawnee must pay the surplus to the pawnor.
• Lawful Sale: If the sale is conducted lawfully (after reasonable notice), the pawnor's right of redemption (right to get back the goods) is extinguished, and the buyer gets good title to the goods. If the sale is unlawful (e.g., without notice), the pawnor can sue the pawnee for conversion (wrongful interference with goods) or for damages.
• Pawnee as Buyer: The pawnee themselves can purchase the goods at a public auction, provided the sale is conducted fairly and with notice.

Duties of Pawnee:

As a bailee, the pawnee has the general duties of a bailee (Section 148 reads "The bailor is in this case called the 'pawnor'. The bailee is called the 'pawnee'."), including:

• Duty to take reasonable care of the pledged goods (Section 151, 152).
• Duty not to make unauthorized use of the goods (Section 153).
• Duty to return the goods upon payment of debt/performance of promise (Section 160).
• Duty to deliver any increase or profit from the goods (Section 163).

Additionally, the pawnee must account for the sale proceeds if they sell the goods (Section 176).

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Rights and Duties of Pawnor

The Pawnor (pledger) also has certain rights and duties related to the pledged goods. While the goods are with the pawnee, the pawnor retains ownership and other rights.

Rights of Pawnor:

• Right of Redemption (Section 177): The pawnor has the right to redeem the pledged goods at any time before the actual sale of the goods by the pawnee. This right exists even if the pawnor has defaulted in payment of the debt or performance of the promise. To redeem, the pawnor must pay the debt or perform the promise, and also pay any expenses which have arisen from their default. If the pawnee sells the goods unlawfully (e.g., without notice), the pawnor's right of redemption is not extinguished, although the buyer gets good title if they bought in good faith at a lawful sale.
• Right to Receive Back Goods: Upon payment of the debt or performance of the promise and any charges, the pawnor has the right to receive the pledged goods back from the pawnee.
• Right to Increase or Profit: The pawnor is entitled to any increase or profit that may have accrued from the pledged goods (Section 163, applies to bailment in general).
• Right upon Unlawful Sale (Section 176): If the pawnee sells the goods unlawfully (e.g., without reasonable notice), the pawnor can sue for damages for conversion or claim the goods back (subject to buyer's title in case of a lawful sale followed by procedural irregularity).
• Right to Surplus (Section 176): If the pawnee sells the goods lawfully, the pawnor is entitled to receive any surplus amount remaining after deducting the debt, interest, and expenses from the sale proceeds.

Duties of Pawnor:

• Duty to repay Debt/Perform Promise: The primary duty of the pawnor is to repay the debt or perform the promise for which the goods were pledged as security.
• Duty to Pay Expenses: The pawnor must pay necessary expenses incurred by the pawnee for the preservation of the goods (Section 175).
• Duty to Disclose Faults: The pawnor should disclose any known faults in the goods that could affect the pawnee's safety or the preservation of the goods (analogous to Section 150 for bailment).

The relationship between the pawnor and pawnee is one of debtor-creditor with the added element of the pledged goods as security, giving the pawnee specific rights over the goods upon default, while retaining the pawnor's right of ownership and redemption.

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