Law of Bailment & Pledge - Special Contracts, Business Law | Business Law - B Com PDF Download

Introduction and Meaning
Bailment is a kind of activity in which the property of one person temporarily goes into the possession of another. The ownership of the property remains with the giver, while only the possession goes to another. Several situations in day to day life such as giving a vehicle for repair, or parking a scooter in a parking lot, giving a cloth to a tailor for stitching, are examples of bailment. Section 148 of Indian Contract Act 1872, defines bailment as follows – 
Section 148 –  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 person delivering the goods is called the bailor and the person to whom they are delivered is called the bailee.
 Explanation –  If a person is already in possession of the goods of another contracts to hold them as a baliee, he thereby becomes the bailee and the bailor becomes the bailor of such goods although they may not have been delivered by way of bailment.

Elements of Bailment

According to this definition the following are the essential elements of bailment

1. Delivery of goods: The possession of goods must transfer from one person to another. Delivery is not same as custody. For example, a servant holding his master’s umbrella is not a bailee but only a custodian. The goods must be handed over to the bailee for whatever is the purpose of the bailment. 

2. Delivery upon contract: For a valid bailment, the delivery must be done upon a contract that the goods will be returned when the purpose is accomplished. If the goods are given without any contract, there is no bailment.

3. Conditional Delivery: The delivery of goods is not permanent. The possession is given to the bailee only on the condition that he will either return the goods or dispose them according to the wishes of the bailer after the purpose for which the goods were given.

Duties of a Bailor

A bailor may give his property to the bailee either without any consideration or reward or for a consideration or reward. In the former case, he is called a gratuitous bailor, while in the latter, a bailor for reward. The duties in both the cases are slightly different. Section 150 specifies the duties for both kinds of bailor. It says that the bailor is bound to disclose any faults in the goods bailed that the bailor is aware of, and which materially interfere with the use of them or which expose the bailee to extraordinary risk. This means that if there is a fault with the goods which may cause harm to the bailee, the bailor must tell it to the bailee. For example, if a person bails his scooter to his friend and if the person knows that the brakes are loose, then he must tell this to the friend. Otherwise, the bailor will be responsible for damages arising directly out of the faults to the bailee. But the bailor is not bound to tell the bailee about the fault if the bailor himself does not know about it.
Section 150 imposes a bigger responsibility to the non-gratuitous bailor since he is making a profit out of the bailment. A non gratuitous bailor is responsible for any damage that happens to the bailee directly because of the fault of the goods irrespective of whether the bailor knew about it or not.

Duties/Responsibilities of a Bailee

1. Duty to take reasonable care: In English law the duties of a gratuitous and non-gratuitous bailee are different. However, in Indian law, Section 151 treats all kinds of bailees the same with respect to the duty. It says that in all cases of bailment, 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. The bailee must treat the goods as his own in terms of care. However, this does not mean that if the bailor is generally careless about his own goods, he can be careless about the bailed goods as well. He must take care of the goods as any person of ordinary prudence would of his things.

2. Bailee, when not liable for loss etc. for thing bailed – : As per section 152, in absence of a special contract, the bailee is not responsible for loss, destruction, or deterioration of the thing bailed, if he has taken the amount of care as described in section 151. This means that if the bailee has taken as much care of the goods as any owner of ordinary prudence would take of his goods, then the bailee will not be liable for the loss, destruction, or deterioration of the goods. No fixed rule regarding how much care is sufficient can be laid down and the nature, quality, and bulk of goods will be taken into consideration to find out if proper care was taken or not. In Gopal Singh vs Punjab National Bank, AIR 1976, Delhi HC held that on the account of partition of the country, when a bank had to flee along with mass exodus from Pakistan to India, the bank was not liable for the goods bailed to it in Pakistan.

3. Duty not to make unauthorized use (Section 154) : Section 154 says that 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. 

4. Duty not to mix (Section 155-157) : The bailee should maintain the separate identity of the bailor’s goods. He should not mix his goods with bailor’s good without bailor’s consent. If he does so, and if the goods are separable, he is responsible for separating them and if they are not separable, he will be liable to compensate the bailor for his loss.

5. Duty to return (Section 160) : Section 160 – It is the duty of the 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 purpose for which they were bailed has been accomplished.

6. Duty to return increase (Section 163) : As per Section 163, in 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.
Duty not to set up jus tertii (Section 166): As per Section 166 if the bailor has no title and the bailee, in good faith returns the goods back to the bailor or as per the directions of the bailor, he is not responsible to the owner in respect of such delivery.  Thus, once the bailee takes the goods from the bailor, he agrees that the goods belong to the bailor and he must return them only to the bailor. He cannot deny redelivery to the bailor on the ground that the bailor is not the owner.

Meaning and Introduction
A pledge is only a special kind of bailment, and chief basis of distinction is the object of the contract. Where the object of the delivery of goods is to provide a security for a loan or for the fulfilment of an obligation, that kind of bailment is pledge. Under Indian Contract Act, 1872 the ‘Pledge’ has been defined in section 172 as:
S 172. “Pledge”, “pawnor”, and “Pawnee” defined.-
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”.

Rights of a Pawnee

1. Right of retainer (Section 173- 174) – As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also 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. Further, as per section 174, in absence of any contract to the contrary, the pawner shall not retain the goods pledged for debt or promise other than the debt or promise for which they have been pledged. However, such contract shall be presumed in absence of any contract to the contrary with respect to any subsequent advances made by the pawnee.

2. Right to extra ordinary expenses (Section 175) – As per section 175,  the pawnee is entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have right to detain the goods.  Section 175 says that the pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged.

3. Right of sale (Section 176) – As per section 176 (Pawnee’s right where pawnor makes default) – 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 the promise and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

Pledge made by non-owner of the goods
Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge made by any other person is not valid. This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerces and so there are some situations where a person having the possession of the goods by owner’s consent, is entitled to pledge those goods even without owner’s consent for the pledge. These situations are discussed below – 

1. Pledge by Mercantile agent (Section 178): When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods.
The essential conditions of this rule are – he must be a mercantile agent, he must have possession of the goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.

2. Pledge by a person in possession under voidable contract (Section 178 A): When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge.

3. Pledge by person with limited interest (Section 179): Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.  

Difference Between Bailment and Pledge:-