Bailment and Pledge of Goods under Contract Act

Contracts of Bailment and Pledge are a special class of contracts. The Contract Act deals with the general principles underlying contracts of Bailment.

There are separate Acts like the Carriers Act, Railways Act, Carriage of Goods by Sea Act to deal with various specific types of Bailment. Pledge is a special kind of Bailment of goods (movable property) for the purpose of security for payment of a debt or performance of a promise.

Bailment of Goods under Contract Act

Bailment involves transfer of possession of movable goods from one person to another.

By Contract : Bailment occurs through delivery of goods (only movable property) by one person (called Bailor) to another (called Bailee), by mutual agreement (Contract) for some purpose (s.148). When the purpose is accomplished, the bailed goods are to be returned or otherwise disposed of according to the directions of the Bailor.
Without Contract : Sometimes bailment of movable goods may arise even without a contract. For example, when a person finds goods belonging to another, the original owner is bailor and the finder is bailee.

Rules of Valid Bailment of Goods under Contract Act

Contract. A bailment is created by agreement between the bailor and the bailee, (sometimes the agreement is implied).
Delivery of possession : A bailment involves delivery of possession of goods by bailor to bailee. Possession implies control and an intention to exclude others. Mere physical custody of goods does not amount to bailment. For example, an item delivered to servant by his master to take to a third party does not amount to bailment. Delivery of possession may be actual or constructive. (s. 149)
Actual delivery : Actual delivery may be made by physically handing over the goods to bailee (like delivery of a sack of rice).
Constructive Delivery : Constructive or symbolic delivery may be made by doing some thing which puts the goods in the possession of the bailee (e.g delivery of key of a Car, delivery of a Railway receipt of goods).
Purpose. The delivery of goods from bailor to bailee must be for some purpose. If goods are delivered by mistake to a person, there is no bailment.
Return of goods. The bailed goods shall be returned or disposed of according to the directions of the bailor. If the goods are not to be returned, there is no bailment (in some case, the goods may be altered, a piece of cloth is stitched into a garment).
No transfer of ownership : Only possession passes from the bailor to the bailee and not ownership. Thus if the property in goods is transferred for money consideration, it is a sale and not a bailment. Similarly where money is deposited in a banking’ account (not in a safe deposit vault), the relationship of debtor and creditor is created, there is no bailment.

Examples of Bailment of Goods

Hire Purchase contract. It has two components 1. Bailment – till the property is transferred, 2. Sale – when the property is transferred.
Seizure of goods by Govt Authorities. After seizure, the authority becomes bailee.
Goods held by carrier for transportation. The transporter becomes the bailee.

Classification of Bailment of Goods under Contract Act

According to the purpose, bailment may be classified as follows:

Gratuitous Bailment : Where no consideration passes between bailor & bailee. This type of bailment can be terminated by the bailor at any time even though the bailment was for a specified time or purpose.
Exclusive benefit of the bailor, e.g, delivery of some valuables to a neighbour for safe custody, without charge.
Exclusive benefit of the bailee, e.g, lending of a bicycle to a friend for his use, without charge.
Non-gratuitous Bailment : The bailment is for benefit of bailor, bailee or both like giving a car on hire, giving watch for repair. The consideration passes between the bailor and the bailee.

Termination of Bailment of Goods under Contract Act

A contract of bailment is terminated in the following cases :

On the expiry of the period. When the bailment is for a specific period, it terminates on the expiry of that period.
On the achievement of the object : When the bailment is for a specific purpose, it terminates as soon as the purpose is achieved.
Inconsistent use of goods : When the bailee uses the goods in a manner inconsistent with the terms of the contract, the bailment terminates.(s.154)
Destruction of the subject-matter : A bailment is terminated when the subject-matter of the bailment (a) is destroyed, (b) becomes incapable of use for purpose of the bailment due to change in its nature.
Gratuitous Bailment : It can be terminated any time.
Death of the bailor or bailee :A gratuitous bailment is terminated by the death either of the bailor or of the bailee (s. 162).
Premature termination by a bailor: In case of gratuitous bailment the bailor can terminate the bailment even before the expiry of such specified period. However, if the loss caused to the bailee due to such premature termination of bailment exceeds the benefits accrued to the bailee under the contract of bailment, then the bailor shall be liable to indemnify the bailee (s.159).

Gratuitous Bailment and non-Gratuitous Bailment

The distinction between gratuitous and non- gratuitous bailment are as follows:

	Gratuitous bailment	Non- gratuitous bailment
Consideration	No consideration exists.	Consideration is always present.
Termination	The bailor can terminate the contract of bailment at any time.	Unilateral termination of contract by the Bailor may amount to Breach of Contract.
Liability	The bailor must disclose all faults known to him which are material or may expose to extraordinary risk.	The bailor must disclose all faults, whether known to him or not.
Damages	Bailor shall be liable for damages for non-disclosure of fault, only if such faults were known to the bailor.	Bailor shall be liable for damages for non-disclosure of faults whether known to him or not.
Expenses	Bailor is liable to reimburse all necessary as well as extraordinary expenses relating to bailment.	Bailor is liable to reimburse only extraordinary expenses. Bailee should bear expenses which are necessary.
Death	Bailment comes to an end by death of bailor or bailee.	The contract continues irrespective of the death of bailor or bailee.

Sale of Goods and Bailment of Goods

	Sale	Bailment
Parties	The contract is between buyer and seller.	Contract is between bailor and bailee
Ownership	The ownership of goods is transferred from the seller to buyer.	No transfer of ownership takes place. Only delivery of goods take place for some purpose.
Return of Goods	The goods are not required to be returned to seller.	After the purpose is accomplished, the goods must be returned to Bailor or disposed off as per his direction
Applicability of law	Goods are covered under the Sale of Goods Act,1930.	Goods are covered under Contract Act 1872
Possession	The possession of goods is generally transferred in case of sale, but sale may take place without transfer of possession of goods, in some cases	Bailment is not possible without transfer of possession of goods.
Consideration	Consideration is essential for sale of goods.	In some cases, Bailment of goods may be made without any consideration (i.e., gratuitous bailment)

Duties of Bailor of Goods

Disclosure of faults. In case of gratuitous bailment, the bailor should disclose the known faults about the goods bailed to the bailee, else he becomes responsible for any damage caused to the bailee directly from such faults (s.150). In case of non-gratuitous bailment, (e.g. hire) the bailor is responsible even for those faults which are not known to him.
Expenses of bailment. The Bailee is bound to bear ordinary and reasonable expenses of the bailment. For any extraordinary expenses, the bailor is responsible.

In case of a gratuitous bailment, the bailor must reimburse to the bailee all the necessary expenses incurred by him for the purpose of the bailment. (s. 158)

To indemnify bailee for loss in gratuitous bailment (s.159). Agratuitous bailment can be terminated by the bailor at any time even though the bailment was for a specified time or purpose and the bailor must indemnify the bailee of any loss incurred by him out of the bailment.
To receive back the goods. It is the duty of the bailor to receive back the goods when the bailee returns them when the purpose of bailment is accomplished. If the bailor refuses to receive back the goods, the bailee is entitled to receive compensation from the bailor for the necessary expenses of custody.
To indemnify the bailee : Where the title of the bailor to the goods is defective and the bailee suffers any loss as a consequence, the bailor is responsible to the bailee for such loss (s.164).
Duties to bear the loss : It is duty of the bailor to bear the loss of goods, if the goods are destroyed or lost while in the possession of the bailee, without any fault of the bailee (s.152).

Duties of Bailee of Goods

To take reasonable care of the goods bailed: The bailee is bound to take care of the goods bailed to him like his own goods. If the bailee fails to return the goods in good condition, the onus of proof is on the bailee to show that there has been no negligence on his part. If he exercises such care, he shall not be responsible even if the goods are lost or damaged.
Not to make any unauthorised use of goods : If the bailee uses the goods bailed in a manner inconsistent with the terms of the contract, he shall be liable for any loss even though he is not guilty of negligence, even if the damage is the result of an accident. (s.154)
Not to mix bailed goods with his own goods. The bailee must keep the bailed goods separate from his own goods.
If he mixes the bailor’s goods with his own goods with the bailor’s consent, both shall have a proportionate interest in the mixture thus produced. (s. 155)
If he mixes without the bailor’s consent :
if the goods can be separated or divided, the bailee is bound to bear the expenses of separation or division, as well as damage arising from the mixture.(s. 156)
if the mixture is beyond separation, the bailor is entitled to be compensated by the bailee for the loss of the goods.(s. 157)
If the goods of the bailor get mixed up with the like goods of the bailee, by inadvertence, accident, act of God or by act of an unauthorised third party, the mixture belongs to the bailor and the bailee in proportion to their shares but the cost of separation will have to be borne by the bailee.
To return the goods. The bailee must return the goods bailed as per bailor’s directions, by the promised date or when the purpose of bailment has been accomplished.(s. 160). On failure to do so, the bailee is responsible to the bailor for any loss caused to him.(s. 161)
To return any accretion to the goods. In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, any increase or profit which may have accrued from the goods bailed (s. 163).

Rights of Bailor of Goods

Rights of Bailor to file a suit for enforcement of duties of bailee

If the bailee fails to perform any of his duties, the bailor has a right to file a suit to enforce such duties, as under:

Right to claim damages for loss caused to the goods bailed due to bailee’s negligence (s. 152).
Right to claim compensation for any damage arising from or during unauthorised use of the goods bailed (S. 154).
Right to claim separation of goods or to claim compensation for any loss caused by unauthorised mixing of goods bailed with his own goods (S. 156 and 157).
Right to demand back the goods on expiry of time of bailment, or the purpose of bailment accomplished (s. 160). If the goods are wrongfully retained by the bailee, the bailor has a right to claim compensation for any loss, destruction or deterioration of goods (s. 161).
Right to claim any natural accretion to the goods bailed (s. 163).

Rights of Bailor for pre-mature termination of bailment.

When bailment is made for a specified period:

The bailor cannot terminate the bailment before expiry of such specified period in a non-gratuitous bailment.
In gratuitous bailment, the bailor can terminate the bailment even before the expiry of such specified period.
However, if the loss caused to the bailee due to such premature termination of bailment exceeds the benefits accrued to the bailee under the contract of bailment, the bailor shall be liable to indemnify the bailee.

General Rights of Bailor of Goods

Termination of contract : The bailor can terminate the bailment if the bailee does any act inconsistent with the terms of the bailment. (s. 153)
Return of goods lent gratuitously : (s.159). When the goods are lent gratuitously, the bailor can demand their return at any time even it was bailed for a specified time or purpose. But if the bailee suffers any loss exceeding the benefit actually derived by use of such goods because of premature return of goods, the bailor shall have to indemnify the bailee.
Action against wrong-doer : A person shall be called as wrongdoer if he prevents or deprives the bailee from using the goods or injures or damages the goods. If a third person wrongfully deprives the bailee of the use or possession of the goods bailed, or causes any injury to the bailee, the bailor or the bailee may bring a suit against the third person for such deprivation or injury.(s.180)

The relief or compensation received in any such suit be dealt with according to their respective interests.(s.181)

Rights of Bailee of Goods

The duties of the bailor are the rights of the bailee. The bailee can, by suit, enforce such duties of the bailor.

Delivery of goods to Joint bailors : In case of goods bailed belonging to joint owners, the bailee may return the goods to any Joint owner without the consent of other joint owners, as per terms of bailment, unless there is any agreement to the contrary (s. 165)
Delivery of goods to bailor without title. If the bailor has no title to the goods, and the bailee returns them in good faith, or according to the directions of the bailor, the bailee is not responsible to the owner for such delivery (s. 166)
Right to apply to Court to stop delivery. If a person other than the bailor claims the goods bailed, the bailee may apply to the Court to stop the delivery of the goods to the bailor and to decide the title to the goods.(s.167)
Bailee’s lien. Where the lawful charges of the bailee are not paid, he may retain the goods (called ‘particular lien’).

Lien on Goods

‘Lien’ is right of a person to retain possession of some goods belonging to another until some debt or claim of the person in possession is satisfied. The lien can be exercised only when there is a rightful possession.

How lien arises : Right of lien may arise by 1. Statute, 2. Express or implied contract, 3. Dealing between the parties.
Howlien is extinguished : Alien is extinguished or lost by 1. Abandonment, 2. Payment or tender of the amount due, 3. Loss or surrender of possession of the goods.

Types of Lien on Goods

General Lien
A General lien is a right to retain all the goods or any property of another person held, until all the claims of the holder are satisfied (s.171). This is a right to retain the property of another for a general balance of account.
General lien is available to bankers, factors, wharfingers (loading or unloading vessels), attorneys of High Court and policy brokers. These persons are normally entitled to retain possession of the goods bailed to them as security until their claims are fully satisfied (unless there is a contract to the contrary).
Particular Lien : Particular lien means the right to retain only such goods in respect of which charges due remain unpaid. Particular lien can be exercised only when some labour or skill has been expended on the goods, resulting in an increase in value of goods. (s.170).

Particular lien and General lien on Goods

	Particular lien	General lien
Rights of Bailee	Right available to a bailee against only those goods in respect of which skill and labour have been applied.	Retain any property in the possession of the person exercising the right (belonging to the other party) in respect of any payment lawfully due.
Rights to retain	Right to retain the goods only for a charge for labour employed or expenses incurred upon the goods.	Right to retain any property belonging to the other party for a general balance of account.
Exercise of lien	Particular lien can be exercised only when some labour or skill has been expended on the goods, resulting in an increase in value of goods.	General lien may be exercised even though no labour or skill has been expended on the goods.
Persons entitled	Every bailee is entitled to particular lien.	General lien can be exercised by only by persons specified under section 171, e.g., bankers, factors, wharfingers, Attorneys of High Court, policy brokers. Other bailee may exercise general lien if there is an agreement to this effect.

Rights and Duties of Finder of Goods

Finder of Goods

When a person finds some goods, he is not duly bound to take possession of them, he can ignore the goods and pass by. However, if he takes the possession of goods, he becomes a finder of goods.

Duties of Finder of goods

The finder of goods shall have duties of bailee (s 71), like: 1. Duty to take reasonable care of the goods. 2. Duty not to use the goods for his own purpose. 3. Duty not to mix the goods with his own goods.

Additional duties of a finder of goods : In addition to the duties of bailee, a finder of goods has the following duties:

Duty to find the true owner. A finder of goods must take all reasonable steps for searching the true owner of goods.
Duty to preserve the goods. A finder of goods must take all reasonable steps for preservation of goods (i.e., preventing the loss or destruction of goods).

Rights of finder of goods

A finder of goods has all the rights available to a bailee. In addition, he has the following rights:

Right to recover expenses (s. 168)
A finder of goods has a right to recover the expenses voluntarily incurred by him for the purpose of finding the true owner and preservation of goods.
Until the finder of goods is paid such expenses, he can retain the goods found by him. He cannot sue for recovery of expenses.
Right to recover the reward (s 168)
In case the true owner of goods has declared a reward for anyone who returns the goods to the true owner, the finder of goods can recover such reward, provided the announcement of reward came to his knowledge before the goods were found by him.
Until the finder of goods is paid the reward, he can retain the goods found by him and sue the true owner of goods for recovery of the reward.
Right to sell the goods (s. 169). The finder of goods has a right to sell the goods found by him in the following circumstances:
The true owner cannot, with reasonable diligence, be found (or if found, he refuses to pay the lawful charges incurred by the finder of goods).
The goods are in danger of perishing or losing the greater part of its value.
The lawful charges of the finder, in respect of the goods found, amounts to 2/3rd of value of goods.
Right to keep the goods. A finder of goods has a right to keep the goods found by him against the whole world except the true owner.

Position of Finder of Goods vs. Bailee of Goods

The position of finder of goods is similar to bailee, but there are subtle differences as follows:
The bailee can sue bailor for any defective title of the goods or for any extraordinary charges, whereas the finder of goods cannot sue the owner for expenses incurred for finding him (i.e. the owner). He can, however retain the goods unless he is reimbursed such expenses incurred.
The finder can sell the goods if, it is in danger of perishing or if the lawful charges of the finder, amounting up to 2/3rd of the value of the article found remains unpaid, where as the bailee has no right to sell the goods bailed.
It becomes the responsibility of the finder to find the owner of the goods, but the bailee before hand knows the bailor and so, no such responsibility arises.
- Both bailee and the finder of goods can retain the goods until expenses incurred by them are reimbursed, but they do not share the same position.

Pledge of Goods

Pledge is a special kind of bailment of goods (movable property) for the purpose of security for payment of a debt or performance of a promise. In pledge, the bailor is called the ‘pledger’ or ‘pawnor’ and the bailee is called the ‘pledgee’ or ‘pawnee’. (s. 172)
The goods must be delivered in a pledge. Any kind of movable property (goods, documents, valuables, or even Savings Bank Pass Book) may be pledged. The delivery may be actual, constructive or symbolic (like delivery of key of a car), amounting to transfer of possession. [Revenue Authority v. Sudarshan Pictures]
The contract must provide that the pawnee shall return or dispose off the goods according to the directions of the pawnor, when the debt is paid, or the promise performed.

Pledge of Goods by non-owners

Normally, only the owner of the goods can pledge. However, in certain cases, even a non-owner can create a valid pledge, like :

Mercantile Agent : A mercantile agent, acting in the ordinary course of business of a mercantile agent, and in possession of goods or the documents of title to goods through the consent of the owner, may make a pledge (s.178).
Pawnor having limited interest. Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest (s. 179)
Co-owner. Any of the co-owners of goods in possession of the goods may create a valid pledge with the consent of the other co-owners.
Possessor of goods under voidable contract. A person holding possession of goods under a voidable contract may create a valid pledge if the contract has not been rescinded before the contract of pledge and the pawnee acts in good faith and without notice of the pawnor’s defect of title (s. 178A)

Pledge of Goods and Bailment of Goods

	Pledge	Bailment
Delivery	Delivery of goods as security for payment of a debt or performance of a promise.	Delivery of goods by one person to another for some purpose, upon a contract that after the purpose is accomplished, the goods be returned or otherwise disposed of according to the directions of the person delivering them.
Nature	Pledge is a special kind of Bailment.	So, every bailment is not a pledge, but every pledge is a bailment.
Purpose	Pledge is bailment of goods as a security for the performance of a specific promise, i.e., the payment of a debt or performance of a promise.	Bailment may be for a purpose of any kind.
Payment Default	In case of default by the pawnor to repay the debt, the pawnee may, after giving notice to the pawnor, sell the goods pledged.	The bailee may either retain the goods or sue for his charges.
Rights	The pawnee has no right to use the goods pledged.	The bailee may do so if the terms of bailment so provide.
Benefits	Pledge is made for the mutual benefit of pawnor and pawnee. Thus, consideration is always present in case of pledge.	The bailment may be for the mutual of bailor or bailee. Bailment may be made without consideration.

Rights & Duties of Pawnee

Rights of Pawnee of Goods

Lien on good:. The pawnee may retain the goods pledged not only for debt or the performance of the promise, but also for interest due and other expenses incurred by him for possession / preservation of the goods pledged, until his dues are paid. He can however exercise only a particular lien over the goods (s. 173).
Subsequent Payments: When the pawnee lends money to the same pawnor after the date of the pledge, the pledge extends to subsequent advances also (unless any contract to the contrary).(s.174)
Extraordinary expenses.: The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for preservation of the goods (but no right to retain the goods). He can only sue to recover them (s. 175).
Voidable Contract : When the pawnor has obtained possession of the goods pledged by him under a voidable contract (by fraud, undue influence, coercion, etc.) but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, if he acted in good faith and without knowledge of the pawnor’s defective title.
Pawnor in default.Where the pawnor fails to redeem his pledge, the pawnee can exercise the following rights (s. 176):
pawnee may file a suit against the pawnor upon the debt or promise (including interest and all related expenses) and may retain the goods pledged as a collateral security.
pawnee may sell the goods pledged after giving the pawnor a reasonable notice of the sale.
The pawnee cannot exercise the right to retain or sell simultaneously, he may sue and at the same time retain the goods as security or sell them after giving reasonable notice of the sale to the pawnor.
Sale : On sale, Pawnee can recover any deficiency arising on the sale of the pledged goods from the pawnor. Similarly, he should hand over the surplus, if any, to the pawnor.

Duties of Pawnee of Goods

Not to use the goods. It is the duty of pawnee not to use the goods unless or otherwise specifically authorized by the pawner, since the purpose of transfer of possession of goods is to provide security and not to give any facility to pawnee to use the goods.
Return the goods. When the pawnor fulfils his obligation (i.e., the pawnor repays the debt or performs the promise), the pawnee must return the goods to the pawner.

Rights & Duties of Pawnor of Goods

Rights of Pawnor of Goods

Right to get back goods : On the performance of promise or repayment of loan with interest, if any, the pawnor is entitled to get back the goods pledged.
Right to redeem debt : Where pawnor makes default in payment of the debt or performance of the promise within the stipulated time, he may still redeem the goods pledged at any subsequent time before the actual sale of them. In that case, he should also pay any expenses arising out of his default (s.177)
Preservation and maintenance of the goods: The pawnor has a right to ensure that the pawnee, like bailee, properly preserves the goods pledged.
Rights of Unpaid debtor: The pawnor has further rights of an unpaid debtor which are conferred on him by various statutes meant for the protection of debtors.
Redeem the goods pledged. The pawnor has the right to get back the goods by repaying the debt or performance of the promise. Where the time for repayment of debt or performance of promise is fixed, the pawnee should redeem the goods before expiry of the period so fixed. However, pawnor can exercise his right to get back the goods even after expiry of the time so fixed, until the pawnee has sold the goods.
Right to sue : If the pawnee fails to perform any of his duties, the pawnor has a right to file a suit to enforce such duties.

Duties of Pawnor of Goods

Repay the loan or perform the promise: The most Important duty of the pawnor is to fulfill his obligation as specified in the contract of pledge.
Pay expenses in case of default : In case of non- fulfillment of his obligation, the pawnor must compensate the pawnee with the expenses incurred by the pawnee for preservation of goods. Such expenses shall be calculated from the date of default to the date of actual payment of debt or performance of promise (s. 175).

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Indian Contract Act – Bailment and Pledge