Contracts of Bailment & Pledge | UGC NET Commerce Preparation Course PDF Download

Contract of Bailment and Pledge

Section 148 of the Indian Contract Act 1872 defines bailment as a legal relationship where one person entrusts goods to another for a specific purpose, with the understanding that the goods will be returned after that purpose is fulfilled. The individual handing over the goods is known as the 'Bailor,' while the recipient is termed the 'Bailee.' Goods are typically held as security for a debt or the performance of a promise outlined in the contract. Section 172 of the Indian Contract Act specifies that when goods are bailed for security or to fulfill a debt, it constitutes a pledge, which is a specific type of bailment.

Essential Features Of The Contract Of Bailment

• Valid Contract: A contract of bailment is a special type of agreement where certain essential elements must be present for it to be valid. These elements include offer and acceptance, lawful consideration, capacity of the parties, and their legal intentions. Without these components, the contract cannot be legally enforced. There are two main types of bailment: Gratuitous Bailment (without consideration) and Non-Gratuitous Bailment (with consideration).
• Delivery Of Possession: In a bailment contract, the delivery of goods can be either actual or constructive. Actual delivery involves the physical handover of goods from the bailor to the bailee. On the other hand, constructive delivery does not involve physical transfer but rather implies that the bailee has been entrusted with the goods.
• Delivery Upon Contract: Once a contract is established, the goods are transferred from the bailor to the bailee. The contract should clearly outline the terms of transfer and the subsequent return of the goods. This contract can be either explicitly signed by the parties or orally agreed upon.

Exception - Lost Goods Found

• The finder of the lost goods should make an effort to keep the goods safe.
• It is the duty of the finder to ensure that the lost goods are returned to the rightful owner.
• The finder is prohibited from using the found goods for personal benefit.
• Efforts must be made by the finder to locate the owner of the lost goods.

Rights Of The Finder Of Lost Goods
The rights that the finder of lost goods is entitled to are outlined below:

• The finder may be entitled to a reward if the owner reclaims the lost goods.
• If the owner does not claim the lost goods, the finder may have the right to keep them.
• The finder can claim a lien on the lost goods for any expenses incurred in preserving and finding the owner.
• If the owner refuses to pay the expenses, the finder may sell the goods after a reasonable period.

Duties Of The Bailor And The Bailee 

In the agreement of bailment, both the bailor and bailee have specific responsibilities that they must adhere to. Here are the key points:

• Transfer of Goods: The bailor needs to transfer the goods to the bailee for a specific purpose as agreed upon.
•  Care of Goods: The bailee is responsible for taking care of the goods as per the terms of the agreement and ensuring their safety.
•  Unauthorized Use: The bailee is not allowed to use the goods for any purpose other than what was agreed upon in the contract.
•  Return of Goods: Once the purpose of the bailment is fulfilled, the bailee must return the goods to the bailor without delay.

Duties Of The Bailor 
The responsibilities of the bailor are outlined below:

• To disclose any faults in the goods - It is the duty of the bailor to inform the bailee about any defects in the goods. Failure to do so makes the bailor accountable in case of loss.
• To cover all necessary and extraordinary expenses - The bailor is responsible for reimbursing the bailee for all expenses, whether regular or exceptional, that were incurred to safeguard the goods.
• To compensate the bailee for all losses - If the bailor demands the return of the goods before the agreed-upon time, they must compensate the bailee for any losses suffered.
• To retrieve the bailed goods - It is the bailor's duty to collect the goods once the specified time period has elapsed. Failure to do so holds the bailor liable for any losses incurred by the bailee.

Duties Of The Bailee 

Within the Contract of Bailment, the bailee must adhere to specific duties, some of which are highlighted below:

• To take proper care of the bailed goods - The bailee is entrusted with the responsibility of ensuring the safekeeping and proper maintenance of the bailed goods.
• To avoid any unauthorized use of the goods - The bailee must not utilize the bailed goods for any purpose other than what was agreed upon in the contract.
• To return the goods upon completion of the bailment - It is the bailee's obligation to return the goods to the bailor once the terms of the contract have been fulfilled.
• To follow any specific instructions from the bailor - If the bailor provides any specific directives regarding the bailed goods, the bailee is required to adhere to them diligently.

To Take Proper Care Of Goods

• According to Section 151 of the Indian Contract Act 1872, the bailee must care for the goods as if they were his own.
• In the absence of a special contract (as per Section 152), the bailee is not responsible for loss or damage if he has fulfilled the agreed care conditions.

To Use The Goods For The Authorized Purpose Only

• The bailee is obligated to use the goods solely for the purpose outlined in the contract.
• If the bailor discovers unauthorized use, they can terminate the contract.

To Keep The Bailed Goods Separate

The bailee must safely return the goods to the bailor and keep them distinct from his own possessions.

• Section 155: With the bailor's consent, the bailee can mix his own goods with the bailor's goods. Both parties must have an interest in the resulting mixture.
• Section 156: If the bailee mixes goods without consent and they can be separated, the bailee bears partition expenses or losses.
• Section 157: If the bailee mixes goods without consent and separation is impossible, the bailee must compensate the bailor for damages.

Return of Goods

• Once the purpose of bailment is fulfilled, the bailee is obligated to return the goods to the bailor.

Rights of the Bailor in a Contract of Bailment

• The bailor is entitled to reimbursement if the bailee misuses the goods.
• If the bailee breaches the terms or neglects the bailed goods, the bailor can terminate the contract.
• The bailor can claim any profits generated from the bailed goods.
• Upon the contract's expiry, the bailor has the right to reclaim the goods.

Rights Of Bailee

• It is the right of the bailee to receive compensation due to the losses suffered due to the defect in the goods.
• The bailee has the right to receive back the great expenses made by him for the bailed goods.
• The bailee has the right to stop the delivery of the goods when he finds out that the bailor does not have the title.

Lien Rights of Bailee

If the bailor withholds compensation and refuses to cover any expenses he is liable to pay, the bailee has the right to lien the bailed goods. There are different types of lien, as mentioned below.

• Particular lien - a particular lien is on a specific property. The bailee can retain the goods until the charges on that property are paid.
• General lien - when the lien on a property is not specific but for the debts on the general account, it is called a general lien.

Contract Of Pledge-Introduction 

In the Contract of pledge, goods are held as security for a debt. According to Section 172 of the Indian Contract Act 1872, 'the bailment of goods as security for the payment of a debt or the performance of a promise is termed as pledge'. In this scenario, the person giving the goods is called the pawnor, while the recipient is referred to as the pawnee.
When the security is paid off, the pawnee must return the goods to the pawnor as specified in the agreement.

Essential Elements of a Contract Of Pledge 

There are several crucial elements in a contract of pledge that hold significant importance. Some key points include:

• It must encompass all the essential elements required for a valid contract.
• The possession of goods should be transferred from the pawnor to the pawnee, which can be actual or constructive.
• In a pledge contract, the possession of goods is handed over to the pawnee while the ownership remains with the pawnor.
• The goods are pledged as security against the pawnor's outstanding debt. Upon settlement of the debt, the pawnee is obligated to return the goods to the pawnor in the specified manner.

Duties Of The Pawnor

The responsibilities of a pawnor under a pledge contract are outlined below:

•  Compensation for Expenses: The pawnor must reimburse all regular and exceptional expenses borne by the pawnee to maintain the well-being of the pledged goods.
•  Repayment of Amount with Interest: It is the duty of the pawnor to repay the sum owed to the pawnee, which may include the principal amount and any accrued interest.
•  Disclosure of Goods' Faults: Prior to entering into the agreement, the pawnor must disclose all relevant facts and faults regarding the goods to the pawnee. Failure to do so, leading to losses for the pawnee, requires the pawnor to compensate for all damages incurred.

Study about Vitiating Free Consent

Vitiating free consent involves circumstances that undermine the genuine and voluntary agreement between parties. Here are the key points:

•  Misrepresentation: When false information is provided that influences the agreement, it vitiates free consent.
•  Coercion: If consent is obtained through coercion, it renders the agreement voidable.
•  Undue Influence: When one party dominates the will of the other, free consent is compromised.
•  Mistake: Mutual or unilateral mistakes regarding key aspects of the agreement can invalidate free consent.

Duties of the Pawnee 

A few of the important duties of the pawnee are stated below.

•  To take reasonable care of the goods under consideration:  The pawnee must take reasonable care of the pledged goods as if they were his own personal belongings. If any losses occur due to negligence or irresponsibility on the part of the pawnee, he is responsible for covering all damages.
•  To use the goods only for the authorized purpose:  The pawnee is obligated to use the goods solely for the purpose specified in the contract. Any unauthorized use requires the pawnee to compensate for resulting damages.
•  Return the goods:  Once the purpose of the pledge contract is fulfilled, the pawnee must return the goods to the pawnor following their instructions.
•  Return the profits arising from the goods:  If any profits are generated from the pledged goods during the contract period, the pawnee must return these profits to the pawnor.
•  To keep the goods separate:  The pawnee must ensure that the pledged goods are kept distinct from the pawnor's belongings. If the pawnee mixes the pledged goods with the pawnor's property, they are liable for the costs associated with separating the goods.

Rights Of The Pawnor 

The rights that the pawnor needs to follow in the Contract of the pledge are stated below.

• Right to Redeem the Goods: For instance, if Ram pledges a machine to Sushant as security for ₹1000, and they agree that Ram will repay the amount within 15 days, Ram still has the right to reclaim his machine even if he misses the deadline, provided Sushant hasn’t sold it yet. However, Ram must cover any costs Sushant incurred while keeping the machine safe.
• Right to Retrieve the Goods: Once the pawnor repays the borrowed amount along with any interest, they have the right to get their pledged goods back.

Rights of the Pawnee:

• Right to Retain: The pawnee can hold onto the pledged goods until the pawnor repays the debt in full.
• Right to Sell: If the pawnor fails to repay the debt within the agreed timeframe, the pawnee can sell the pledged goods after providing reasonable notice to the pawnor.
• Right to Extraordinary Expenses: The pawnee is entitled to reimbursement for any unusual expenses related to the safekeeping of the pledged goods.
• Right to Sue: If the pawnor doesn’t repay the debt, the pawnee has the right to sue for debt recovery.

Pawnor and Pawnee Rights

• To retain the goods: The pawnee has the right to keep the pledged goods until the pawnor repays the amount owed. This amount may include expenses incurred or any interest accumulated on the pledged item.
• To receive compensation for extraordinary expenses: The pawnor is responsible for covering both ordinary and extraordinary costs that the pawnee has faced while safeguarding the goods.
• To sell the goods: If the pawnor fails to repay the loan within a specified period, the pawnee can retain the goods as collateral and sell them after providing the pawnor with a reasonable notice of the sale.

Difference Between The Contract Of Bailment And Pledge

Here are some key distinctions between the contract of bailment and pledge:

Conclusion 

The concepts of bailment and pledge are fundamental in legal agreements. While all pledges are essentially bailments, not every bailment constitutes a pledge. These agreements serve to protect the rights of the parties involved, establishing clear guidelines for the pawnor & pawnee and the bailor & bailee. It is essential for these contracts to meet the criteria of a valid contract to ensure enforceability by law.