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46512bosinterp2 Mod2 Cp1 U2
46512bosinterp2 Mod2 Cp1 U2
LEARNING OUTCOMES
After studying this unit, you would be able to :
r Understand the general principles underlying contracts of
bailment and pledge.
r Know duties and rights of the parties to the contracts.
UNIT OVERVIEW
1. WHAT IS BAILMENT ?
Bailment etymologically means ‘handing over’ or ‘change of possession’. As per Section
148 of the Act, bailment is the delivery of goods by one person to another for some
purpose, upon a contract, that the goods shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the “bailor”.The person to whom
they are delivered is called the “bailee”.
Example : Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the bailee.
Analysis :
The essential characteristics of bailment are—
(a) Bailment is based upon a contract. Sometimes it could be implied by law as it
happens in the case of finder of lost goods.
(b) It involves the delivery of goods from one person to another for some purposes.
(c) Delivery involves change of possession from one person to another, and not
change of ownership. In bailment, bailor continues to be the owner of goods as
there is no change of ownership.
(d) Bailment is only for moveable goods and never for immovable goods or money.
(e) In bailment, possession of goods changes. Change of possession can happen by
physical delivery or by any action which has the effect of placing the goods in the
possession of bailee.
(f) Bailee is obliged to return the goods physically to the bailor. The bailee cannot
deliver some other goods, even not those of higher value.
Essentials of Bailment
Contract
Delivery of goods
Specific purpose
Returns of goods
moveable goods
In bailment, both custody and possession must change but not the ownership. But
where a person is in custody without possession he does not became a bailee. For
example servants of a master who are in custody of goods of the master do not become
bailees.
Possession and custody do not however mean physical delivery of goods. Constructive
delivery could also create a bailor and bailee relationship. This arises in situations
where the bailee is already in possession of goods but agrees to be a bailee through
a contract.
© The Institute of Chartered Accountants of India
1.22 CORPORATE AND OTHER LAWS
Deposit of money in a bank is not bailment since the money returned by the bank
would not be identical currency notes.
Similarly depositing ornaments in a bank locker is not bailment, because ornaments
are kept in a locker whose key are still with the owner and not with the bank. The
ornaments are in possession of the owner though kept in a locker at the bank.
Different forms of Bailment : Following are the popular forms of bailment
(1) Delivery of goods by one person to another to be held for the bailor’s use.
(2) Goods given to a friend for his own use without any charge.
(3) Hiring of goods.
(4) Delivering goods to a creditor to serve as security for a loan.
(5) Delivering goods for repair with or without remuneration.
(6) Delivering goods for carriage.
Right to enforce the duties of the bailee and claim for damages
Act done
Period of Demand for
inconsistent with Death of
bailment return of
the condition of bailee
expires goods
bailment
(vi) Bailor entitled to increase or profit from goods balled [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.
Example : A leaves a cow in the custody of B to be taken care of. The cow has
a calf, B is bound to deliver the calf as well as the cow to A.
(vii) Gratuitous bailment : Bailor in the case of gratuitous bailment has a right to
demand the goods back even before the expiry of the period of bailment. If
in the process, loss is caused to the bailee, bailor is bound to compensate.
to return any
No No mixing of
Take care of Return the extra profit
unauthorized bailor's goods
goods bailed goods accruing from
use of goods with his own
goods bailed
(i) No unauthorized use of goods : Bailee has no right to make unauthorized use of
goods bailed.
(ii) No right to mix the goods bailed : Bailee has no right to mix the goods bailed
with his own goods without the consent of the bailor.
(iii) Return of goods bailed on expiration of time or accomplishment of purpose
[Section 160] : It is the duty of bailee to return, or deliver according to the bailor’s
directions, the goods bailed without demand, as soon as the time for which they
were bailed, has expired, or the purpo.se for which they were bailed has been
accomplished.
(iv) Bailee’s responsibility when goods are not duly returned [Section 161] : If,
by the default of the bailee, the goods are not returned, delivered or tendered
at the proper time, he is responsible to the bailor for any loss, destruction or
deterioration of the goods from that time.
(v) Bailment by several joint owners [Section 165] : If several joint owners of goods
bail them, the bailee may deliver them back to, or according to the directions of,
one joint owner without the consent of all, in the absence of any agreement to the
contrary.
(vi) Bailee has a duty to return any extra profit accruing from goods bailed. Where A
bails his cow to ‘B’ and if the cow gives birth to a calf, ‘B’ must return both the cow
and the calf to ‘A’
Rights of bailee : The bailee has the following rights [These rights are also the duties
of the bailor]—
(i) to claim compensation for any loss arising from non-dislosure of known defects in
the goods.
(ii) to claim indemnification for any loss or damage as a result of defective title.
(iii) to deliver back the goods to joint bailors according to the agreement or directions.
(iv) If the bailor has no title to the goods, and the bailee, in good faith, delivers them
back to, or according to the directions of, the bailor, the bailee is not responsible
to the owner in respect of such delivery. (Section 166)
(v) to exercise his ‘right of lien’. This right of lien is a right to retain the goods and is
exercisable where charges due in respect of goods retained have not been paid.
The right of lien is a particular lien for the reason that the bailee can retain only
these goods for which the bailee has to receive his fees/remuneration.
(vi) to take action against third parties if that party wrongfully denies the bailee of his
right to use the goods
Suit by bailor & bailee against wrong doers [Section 180] : If a third person
wrongfully deprives the bailee of the use or possession of the goods bailed, or does
them any injury, the bailee is entitled to use such remedies as the owner might have
used in the like case if no bailment had been made; and either the bailor or the bailee
may bring a suit against a third person for such deprivation or injury.
Apportionment of relief or compensation obtained by such suits [Section 181]:
Whatever is obtained by way of relief or compensation in any such suit shall, as between
the bailor and the bailee, be dealt with according to their respective interests.
8. PLEDGE
“Pledge”, “pawnor” and “pawnee” defined [Section 172] : 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”.
Analysis : Pledge is a variety or specie of bailment. It is bailment of goods as security
for payment of debt or performance of a promise. The person who pledges[or bails]
is known as pledgor or also as pawnor, the bailee is known as pledgee or also as
pawnee. In pledge, there is no change in ownership of the property. Under exceptional
circumstances, the pledgee has a right to sell the property pledged. Section 172 to 182
of the Indian Contract Act,1872 deal specifically with the bailment of pledge.
Example : A lends money to B against the security of jewellery deposited by B with
him i.e. A. This bailment of jewellery is a pledge as security for lending the money. B is
a pawnor and the A is a pawnee.
Essentials of contract of pledge :
Pawnee’s rights : Rights of Pawnee can be classified as under the following headings :
(a) Right of retainer [Section 173] : The pawnee may retain the goods pledged,
not only for payment of the debt or the performance of the promise, but for the
interest, of the debt, and all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
Example : Where ‘M’ pledges stock of goods for certain loan from a bank, the
bank has a right to retain the stock not only for adjustment of the loan but also for
payment of interest.
(b) Right to retention of subsequent debts [Section 174] : Pawnee has a right to
retain the goods pledged towards subsequent advances as well, however subject
to such right being specifically contemplated in the contract.
(c) Pawnee’s right as to extraordinary expenses Incurred [Section 175] : The
pawnee is entitled to receive from the pawnor extraordinary expenses incurred by
him for the preservation of the goods pledged.
(d) Pawnee’s right where pawnor makes default [Section 176] : If the pawnor
makes default in payment of the debt, or performance, at the stipulated time of
the promise, in respect of which the goods were pledged, the pawnee may bring a
suit against the pawnor upon the debt or promise, and retain the goods pledged
as a collateral security; or he may sell the thing pledged on giving the pawn or
reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt
or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale
are greater than the amount so due, the pawnee shall pay over the surplus to the
pawnor.
(e) Pledge by person in possession under voidable contract [Section 178A] : When
the pawnor has obtained possession of the goods pledged by him under a contract
voidable 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 notice of the pawnor’s defect of title.
Rights of a pawnor
Rights
of
pawnor Right to
redeem
limited
interest
(a) Right to redeem [Section 177] : If a time is stipulated for the payment of the debt,
or performance of the promise, for which the pledge is made, and the pawnor makes
default in payment of the debt or performance of the promise at the stipulated
time, he may redeem the goods pledged at any subsequent time before the actual
sale of them; but he must, in that case, pay, in addition, any expenses which have
arisen from his default.
(b) Pledge where pawnor has only a limited interest [Section 179] : Where a person
pledges goods in which he has only a limited interest, the pledge is valid to the
extent of that interest.
Distinctions
Bailment and
pledge
Mortgage and
pledge
However, the term also varies from the word Mortgage. It is a legal agreement by
which a bank, building society, etc. lends money at interest in exchange for taking title
of the debtor’s property, with the condition that the conveyance of title becomes void
upon the payment of the debt.
Mortgage is defined under the Transfer of Property Act, 1882.
SUMMARY
l Bailment-Delivery of goods by one person to another for some purpose upon
a contract that they shall be returned after the purpose is over or disposed off
according to the directions of the person delivering them.
l Bailor- Person who delivers goods for bailment.
l Bailee- Person to whom goods are delivered under the contract of bailment.
l Depositing currency notes in a bank- It is not a bailment as currency notes or
moneys are not goods as per the definition of goods given under the Sale of
Goods Act,1930 and also no same notes is returned to the depositor by the bank.
4. The delivery of goods by one person to another for some specific purpose and
time is known as:
(a) Mortgage
(b) Pledge
(c) Bailment
(d) Charge
Answer to MCQs
Answer
Referring to the Section 152 of the Indian Contract Act, 1872, B is liable to compensate
A for his negligence to keep jewelry at his resident. Here, A and B agreed to keep the
jewelry at the Bank’s safe locker and not at the latter’s residence.
Question 4
R gives his umbrella to M during raining season to be used for two days during
Examinations. M keeps the umbrella for a week. While going to R’s house to return the
umbrella, M accidently slips and the umbrella is badly damaged. Who bear the loss
and why ?
Answer
M shall have to bear the loss since he failed to return the umbrella within the stipulated
time and Section 161 clearly says that where a bailee fails to return the goods within
the agreed time, he shall be responsible to the bailor for any loss, destruction or
deterioration of the goods from that time notwithstanding the exercise of reasonable
care on his part.
Question 5
State the essential elements of a contract of bailment. Distinguish between the
‘contract of bailment’ and ‘contract of pledge’.
Answer
Essential elements of a contract of bailment: Section 148 of the Indian Contract Act,
1872 defines the term ‘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. The essential elements of the contract of the bailment are :
1. Delivery of goods—The essence of bailment is delivery of goods by one person to
another.
2. Bailment is a contract—In bailment, the delivery of goods is upon a contract that
when the purpose is accomplished, the goods shall be returned to the bailor.
3. Return of goods in specific—The goods are delivered for some purpose and it is
agreed that the specific goods shall be returned.
4. Ownership of goods—In a bailment, it is only the possession of goods which is
transferred and the bailor continues to be the owner of the goods.
5. Property must be movable—Bailment is only for movable goods and never for
immovable goods or money.