UNIT I

Introduction
Contract of guarantee and contract of indemnity perform similar commercial functions in
providing compensation to the creditor for failure of a third party to perform their obligation.
However, there are some major differences between the two. In this article, the author will talk
about the differences between the contract of indemnity and contract of guarantee along with
relevant legal provisions of the Indian Contract Act, 1872.

Meaning

Indemnity

The dictionary meaning of the term ‘indemnity’ is protection against future loss. Indemnity is the
protection against loss in the form of a promise to pay for loss of money, goods, etc. It is security
against or compensation for loss incurred.

According to Halsbury, indemnity refers to an express or implied contract that protects a person
who has entered or is going to enter into a contract or incur any other duty from loss, irrespective
of the default incurred by a third person.

As per the Oxford Dictionary of Law, indemnity is an agreement by one person to pay to
another, a sum that is owed or which may be owed, to him by a third person. It is not conditional
on the third person defaulting on the payment.

Guarantee

Guarantee enables a person to get a loan, to get goods on credit, etc. Guarantee means to give
surety or assume responsibility. It is an agreement to answer for the debt of another in case he
makes default. 

The Oxford Dictionary of Law defines guarantee as a secondary agreement in which a person
(guarantor) is liable for a debt or default of another (principal debtor) who is the party primarily
liable for the debt. A guarantor who has paid out on his guarantee has a right to be indemnified
by the principal debtor.
Contract of Indemnity
Chapter VIII of the Indian Contract Act, 1872 contains the legal provisions governing a contract
of indemnity and a contract of guarantee in India.

Section 124: Contract of indemnity

Section 124 of the Act defines a contract of indemnity as a contract wherein one party promises
to save the other from loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person. 

A contract of indemnity can provide protection against loss caused—

1. By the conduct of promisor, or

2. By the conduct of any other person.
Under Indian law, a contract of indemnity can only provide for losses caused by human agency
whereas in England, it includes a promise to save the other person from loss caused whether by
acts of promisor or of any other person or any other event like fire, accident, etc. 

Indemnifier

The person who makes a promise to indemnify against the loss or to make good the loss
(promisor) is called an indemnifier.

Indemnity-holder

The person in whose favour such a promise to indemnify is made (promisee) is called indemnity-
holder.

For example, Anil enters into a contract with Swapnil to indemnify him against the consequences
of any proceedings which Mrinal may initiate against Swapnil in respect of a certain sum of Rs.
2000/-. In this contract, Anil is the indemnifier and Swapnil is the indemnity-holder.

Main features

1. It involves two parties i.e. promisor being the indemnifier and promisee being the
indemnity holder.
2. Object of the contract of indemnity is to protect from a loss.
 3. As per the Indian Contract Act, the contract of indemnity must be to indemnify
against a loss caused by any act or conduct of the promisor himself or by the conduct
of any other person.
4. It is not contingent on the default of some third person.

What are the rights of an indemnity holder

Section 125 of the Act covers ‘Rights of indemnity-holder when sued’. This Section provides for
the right of the indemnity holder to recover the damages and costs that he may have been
compelled to pay in a suit filed against him, in a case where the indemnity-holder has promised
such indemnity, i.e., where a contract of indemnity to that effect exists. The rights and duties of
the indemnity holder are-

1. Right to recover from the promisor, the damages that he may be compelled to pay in
any suit in respect of any matter to which the promise to indemnify applies.
2. Right to recover from the promisor all the costs that he may be compelled to pay in
any suit, provided—
1. that he did not contravene any of the orders of the promisor in filing or defending such
suit, and
2. that he acted in a manner as would have been prudent for him to act in the absence of
any such contract of indemnity, or 
3. that the promisor had authorised him to file or defend such a suit.
4. Right to recover from the promisor all such sums that he paid under the terms of any
compromise of any such suit, provided-
1. the compromise was not contrary to orders of the promisor, and
2. such compromise is one as the promisee would have made while acting in a prudent
manner even if such contract of indemnity did not exist, or
3. that the promisor had authorised the promisee to compromise the suit.

When liability commences

A pertinent question that arises with regard to a contract of indemnity is, ‘when does the liability
to indemnify commence/arise’. Originally, under English law, the rule was that the indemnity
holder cannot recover the amount unless he had suffered actual loss i.e. ‘you must be damnified
before you can claim to be indemnified’. However, this position of the law changed.
In Richardson Re, Ex parte the Governors of St. Thomas’s Hospital (1911), it was held that
indemnity is not necessarily given by repayment after payment, but it requires that the party to be
indemnified shall never have to pay. This principle was followed by the Calcutta High Court
in Osman Jamal & Sons Ltd. v. Gopal Purshottam (1928). 

As far as Indian position is concerned, the Bombay High Court in Gajanan Moreshwar v.
Moreshwar Madan (1942), held that the equitable principle applicable in England shall be
applicable in India too and therefore, where the indemnity holder has incurred a liability and that
liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and
pay it off. 

Contract of guarantee
Section 126 of the Indian Contract Act defines the term contract of guarantee, surety, principal
debtor and creditor. The purpose behind a contract of guarantee is to give additional security to
the creditor that his money will be paid back by the surety if the debtor makes a default.

Contract of guarantee : Section 126

A contract of guarantee is a contract to perform the promise or discharge the liability of a third
person in case of his default. 

The contract of guarantee has three parties involved, namely, the principal debtor, the creditor,
and the surety.

Surety

The person who gives the guarantee is called the Surety. The liability of the surety is secondary,
i.e., he has to pay only if the principal debtor fails to discharge his obligation to pay.

Principal debtor

The person in respect of whose default the guarantee is given is the Principal debtor. The
principal debtor has the primary liability to pay.

Creditor

The person to whom the guarantee is given is called the creditor.

For example, Anil orders certain goods of the value of Rs. 2000/- from Swapnil on credit. Mrinal
guarantees that, if Anil will not pay for the goods, she will. This is a contract of guarantee. Here,
Rs. 2000 is the principal debt, Anil is the principal debtor, Mrinal is surety and Swapnil is the
creditor.

Main features 

1. A contract of guarantee may be oral or written: According to Section 126, a contract

of guarantee may be oral or in writing. However, under English law, for a contract of
guarantee to be valid, it has to be in writing and signed. 
2. There must be a principal debt: The existence of a principal debt is necessary for a
contract of guarantee. If there is no principal debt, then there is no existing obligation
to pay. As a result of the absence of such obligation to pay, there cannot be any
promise/guarantee. If there is a promise to pay for compensating some loss without
there being any principal debt, such a contract will become a contract of indemnity. 
3. Contract of guarantee is tripartite in nature: There being three parties involved in a
contract of guarantee, three contracts take place in a contract of guarantee-
 The principal debtor promises to make payment to the creditor.

 Surety undertakes to pay the creditor in event of default of payment by the principal
debtor.
 An implied promise by the principal debtor in favour of surety to indemnify him in
case he discharges the liability of the principal debtor.
4. There is a promise to pay upon default of payment by the debtor: In a contract of
guarantee, the surety’s promise to pay is dependent on the default of the debtor i.e.
surety pays only when the debtor defaults. 
5. The consideration is the benefit to the debtor: As per Section 127, anything done or
promise made for the benefit of the principal debtor may be a sufficient consideration
to the surety for giving the guarantee. For example, Anil sells and delivers certain
goods worth Rs. 5000 to Swapnil. Mrinal afterward requests Anil to refrain from
suing Swapnil for a year and promises that if he does so, she will pay for the goods in
default of payment by Swapnil. Anil agrees. The forbearance by Anil txo sue is of
benefit to Swapnil (the debtor) and that constitutes sufficient consideration for Mrinal
(surety) for giving the guarantee.
6. The consent of the surety should not have been obtained by misrepresentation or
concealment of material facts: Section 142 of the ICA, 1872 provides that a guarantee
obtained using misrepresentation made by the creditor or with his knowledge or
assent, concerning a material part of the transaction is invalid.
Section 143 provides that a guarantee obtained by the creditor by keeping silent as to some
material circumstance is also invalid.
Difference between contract of indemnity and contract of guarantee

BASIS OF
CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE
DISTINCTION

There are two parties in a contract of There are three parties in a contract of
Parties indemnity, namely the indemnifier and the guarantee, namely the principal
indemnity holder. debtor, the creditor, and the surety.

It consists of three contracts-A

contract between principal debtor and
creditor wherein the debtor promises
to perform his obligation/make
payment. The contract between surety
It consists of only one contract between and creditor wherein the surety
the indemnifier and the indemnity holder. promises to perform the aforesaid
No. of contracts The indemnifier promises to indemnify the obligation/make the payment if the
indemnified/indemnity holder in event of a principal debtor makes a default. An
certain loss. implied contract between the surety
and the principal debtor. The
principal debtor bounds himself to
indemnify the surety for the sum that
he has paid under the guarantee
undertaken by him.

The liability of the surety is a

secondary one, i.e., his obligation to
pay arises only when the principal
debtor defaults. Liability in a contract
The liability of the indemnifier is
of guarantee is continuing in the sense
3. Nature of primary. The liability in a contract of
that once the guarantee has been acted
liability indemnity is contingent in the sense that it
upon, the liability of the surety
may or may not arise.
automatically arises. However, the
said liability remains in suspended
animation until the debtor makes
default.

Default of third The liability of an indemnifier is not Liability of surety is conditional on

person conditional on the default of somebody the default of the principal debtor. For
 else. For example, Mrinal promises the example, Anil buys goods from a
shopkeeper to pay, by telling him that, seller and Mrinal tells the seller that if
“Let Anil have the goods, I will be your Anil doesn’t pay you, I will. This is a
paymaster”. This is a contract of contract of guarantee. Thus, the
indemnity as the promise to pay by Mrinal liability of Mrinal is conditional on
is not conditional on default by Anil. non-payment by Anil.

Principal debt is necessary. (refer to

Principal debt No requirement of the principal debt.
the previous example)

After the surety has made the

Whether Once the indemnifier indemnifies the
payment, he steps into the shoes of
subsequent indemnity holder, he cannot recover that
the creditor and can recover the sums
recovery is possible amount from anybody else.
paid by him from the principal debtor.

Whether a contract
has to be in writing In India, contracts of indemnity may be In India, a contract of guarantee may
or can be oral as either oral or written. be either oral or written.
well

Conclusion
Both the contract of indemnity and contract of guarantee are similar in the sense that they
provide protection against loss. However, as mentioned above, there is an important distinction
between the two. Whether a contract is a contract of indemnity or a contract of guarantee is a
question of construction in each case. One of the ways to identify such a contract might be the
description of the agreement as to whether it is named as a contract of guarantee or indemnity
and if those terms are mentioned in the contract a few times or more. However, that cannot be
considered conclusive enough. Another way might be to see if under the contract, the liability of
a person exists irrespective of the default of the principal debtor or where such liability is for a
greater amount than the amount payable by principal debtor. In that case, the contract may be
construed as a contract of indemnity. Thus, it will depend on a case to case basis and while
analysing the facts/agreement, one must keep in mind the relevant points of distinction between
the two concepts.

UNIT II
Bailment and Pledge

Introduction
In law, the word bailment is used in its technical sense which means the change in the possession
of goods i.e. one person transfers the goods to another person. On the other hand, Pledge is a
kind of bailment in which one person bails his goods to another person as security against loans.
Both bailment and pledge are examples of specific contracts. The contract of bailment can be
classified into three categories:

1. For the exclusive benefit of the bailor.

2. For the exclusive benefit of the bailee.
3. For the mutual benefit of both.

Concept of Bailment
Section 148 of the Indian Contract Act deals with the concept of Bailment, Bailor and Bailee.

A bailment is a contract in which one person transfers goods to another person with a contract
that he will return the goods after completion of the purpose for which contract takes place.

The person who delivers goods to another person is known as Balior and the person to whom
bailor delivered goods, is known as Bailee.

The contract of bailment is different from the contract of sale of a property. In the contract of
sale of a property, after the completion of sale the ownership of the property gets transferred to
the buyer. But, in bailment, only the possession of the property is transferred to the bailee and
not the ownership and the possession of the property is transferred only for the period up to the
completion of the purpose. In order for bailment, the bailee must have the intention to possess
the property, i.e. actual possession of the property (not constructive). The bailor intends to
transfer the property to the bailee for the specific period of time and after the fulfilment of the
purpose, the property should be returned to the actual owner.

Kinds of Bailment

Gratuitous Bailment

Under this Bailment, anyone, either the bailor or the bailee gets the sole benefit.
For sole benefit of Bailor

In this concept, the bailor transfer the goods to the bailee for some specific purpose which result
in the benefit of bailor only i.e. bailee has no expectation in return.

Illustration

A and B are the neighbours. One fine day A gave his jewellery to B to keep it safe because A is
going out of town for some days. B return A’s jewellery to A when he came back. Here there is
no benefit of B in keeping those goods i.e. B does not get anything in return.  

For sole benefit of Bailee

In this concept, the bailor transfers the goods to the bailee for some specific purpose which result
in the benefit of bailee only i.e. bailor does not get anything in return. The bailor only gets his
goods back after completion of the purpose.

Illustration

A gave his bike to B for 3 hours, because B wants to go to his parents home. Here A does not get
anything in return by giving his bike to B, but he will get his bike back to him after the fulfilment
of the purpose.

Non Gratuitous Bailment

Under this concept, both the bailor and the bailee get some rewards in return i.e. mutual benefit
of both.

When bailor transfers his goods to the bailee for some specific purpose. After the completion of
that specific purpose, the bailee returns the goods back to the bailor and in return gets the
payment for his services.

Illustration

If A gives his car to B for repairing purpose. After the complete repair, B returns A’s car to him
and A will pay B for his service.
Essentials of Valid Bailment
1. Agreement
2. Delivery of Goods
3. Purpose
4. Return of Goods

Agreement

For a valid contract of bailment, both the bailor as well as bailee have to enter into an agreement
that the bailor will transfer goods to the bailee for a specific purpose and after the completion of
the purpose bailee will return the goods to the bailor and bailor will pay to the bailee for his
services.

Illustration

If A and B want to enter into the contract of bailment with the purpose that B will repair A’s car,
they have to enter into an agreement, which includes all the instruction and orders of A regarding
the repairs and usage of his property etc.

Delivery of Goods

For a valid bailment, it is necessary that the bailor will transfer i.e. deliver his goods to the bailee
so that bailee can act towards completion of the purpose. The possession should be voluntary i.e.
not by force, coercion, undue influence etc.

Delivery of possession of goods can be actual or constructive

Actual delivery means when the bailor transfer the goods to the bailee that transfer should be in
physical nature.

Illustration

If A wants B to repair his car, so A has to transfer the physical possession of the car to B,
because without the physical possession B is unable to complete the purpose for which bailment
took place.
Constructive delivery is the opposite of actual delivery. In constructive delivery, the document
which shows the title of goods gets transferred, due to which indirectly the possession gets
transferred.

Illustration

If A has a railways receipt i.e. document of title to goods, transfers the receipt to B, here B
indirectly has the possession of goods, as he has the document of title to goods.

Purpose
Bailment takes place when the bailor transfers constructive to the bailee, the main reason why
bailor transfer his goods is the performance of a specific purpose. And when that purpose gets
completed the bailor return the goods to the bailee.

Illustration

If A and B want to enter into the contract of bailment, A should transfer his goods and provide
some purpose to B, so that B can act to complete that purpose.

Return of Goods
The contract of bailment comes to an end when the bailee after fulfilment of the purpose return
the goods to the bailor or disposed of as per the direction of the bailor.

Illustration

If Ram transfers his gold to Shaam so that Shaam can make a ring from that gold. Shaam has to
return the gold ring to Ram after the purpose for which they enter into an agreement gets
accomplished.

Duties and Rights of Bailor

Duties of Bailor
Duty to disclose any defect

Section 150 of the Indian Contract Act states that, when the bailor transfers the possession of his
goods to the bailee, he has to disclose the defect in goods while transferring them to the bailee.
There are two conditions regarding the bailor’s duty to disclose the defect:

In the case of Gratuitous Bailment

In the case of gratuitous bailment, it is the duty of the bailor to disclose the defect which he
knows about the goods to bailee while delivering the goods. If he fails to disclose the defect to
the bailee and bailee suffered an injury due to that failure makes bailor liable. But if bailor was
also unaware of the defect, in that situation he will not be held liable.

Illustration

 If A, the owner of the scooter allows B to use his scooter. A knows that brakes of the
scooter are not working, he does not disclose the information to B. B met with an
accident, A is liable to compensate B for the injury he suffered.
 If A was also unaware of the defect in the scooter that he gave to B, in this case, A is
not liable for the injury B suffered.

In case of Non-Gratuitous Bailment

This concept deals with the goods given on hire. Under this concept when the bailor gives his
goods on hire to the bailee and if he fails to disclose the defect in the goods to the bailee. The
bailor will be held liable, even if the bailor is also unaware of the defect. It is the duty of the
bailor to keep his goods fir and ready to use.

Illustration

If A hires a car from B, the gearbox of the car is not in good condition and suddenly the gear gets
stuck. Due to that, A met with an accident. Here, even though B also does not know about it, he
is liable.

In Hyman and wife v. Nye and sons

In this case, the plaintiff is the bailee and the defendant is the bailor. Plaintiff took the carriage
cart on hire from the bailor. While the journey the carriage met with an accident because the
carriage is not ready or fit for that journey. Here the defendant is held liable because it is his duty
to keep his good fit and should disclose the defect in the goods to the bailee i.e. plaintiff.
Duty to bear expenses

In the case of Gratuitous Bailment

It is the duty of the bailor to repay the amount which bailee incurred and paid in carrying and
keeping the goods safe.

Illustration

If A gives his horse to B for two days. A should pay to B all the expenses, like the expenses
incurred in feeding horse or any other expenses.

In case of non-gratuitous bailment

In the case of non-gratuitous bailment, the ordinary expenses incurred on goods should be paid
by the bailee only. But, the extraordinary expenses have to be paid by bailor

Illustration

If A hires a car from B. the expenses incurred in refuelling the tank of the car should be paid by
A only. But, If A paid any expenses like the fine if car’s papers are not there, or any expenses
paid like for repairs, B has to repay that amount to A.

Duty to indemnify bailee

If the bailee has suffered any loss because of the goods bailed by the bailor. It is the duty of the
bailor to indemnify bailee against that loss.

Illustration

If A, a friend of B asked B to give his cycle. Instead of giving his cycle, B gave C’s cycle to A.
while riding, C caught A and handovers A to police. A has to pay fine. Here B has to indemnify
i.e. to pay A against the loss incurred.
Rights of Bailor

Right to claim Damages

When the bailor transfers the possession of his goods to the bailee and if bailee fails to protect
the goods of the bailor, the bailor has the right to claim damages against bailee.

Illustration

If A gave his book to B for binding. If due to the fault of B, the book got damages i.e. some
pages were missing. Here B is liable and A has a right to claim damages.

In Sri Narasimhaswami, Namagiri Amman v. Muthukrishna Iyengar

In this case, the plaintiff has delivered valuable gold for decorating goddess to the defendant.
Due to the negligence of the defendant, the ornaments were lost. Here the plaintiff demanded the
compensation from the defendant. The court allowed the petition and as per section 151 of ICA,
held the defendant liable.

Right to terminate the bailment

According to Section 153 of the Indian Contract Act, when the bailor transfers his goods to the
bailee for some specific purpose and if bail4 ee does any act which is against the terms and
conditions on which bailor transfer his goods, the bailor has a right to terminate the contract of
bailment.

Illustration

If A gave his car to B for personal use. B started using it as a taxi. Here, A has a right to
terminate the bailment.

Right to get back the possession of the Goods

The bailor transfers his goods to the bailee for some specific purpose, when bailee complete that
purpose, the bailor has a right to get the possession of goods back from the bailee.

Illustration
If A went to a hotel and gave his key to the guard for valet parking. Here A has a right to demand
his car back when he wants to leave.

Duties and Rights of Bailee

Duties of Bailee

Duty to take reasonable care

According to Section 151 of the Indian Contract Act, when the bailor transfers his goods to the
bailee for some specific purpose. It is the duty of the bailee to keep those goods safe and
protected. He has to ensure to take standard care as a prudent man. If the bailee fails to keep the
goods safe and protected he is liable to pay compensation to the bailor.

Illustration

If A bailed his gold to B, B has a duty to take proper care and protect the gold of A, like his own
gold. If B fails to protect the gold or any damage occurred, B has to pay/ compensate A.

Pitt son and Badgery ltd. v Proulefco

A broker after the sale of wools retained it in his store with the consent of the buyer. The store
was wooden and surrounded by the fence having large gaps between them. An intruder enters the
shop through the gaps i.e. from between the fence, put fire in the store, all the wools gets
destroyed. Here, the broker as a bailee having the possession of goods of the bailor is liable to
pay compensation to the bailor because he fails to keep the goods safe.

Duty to not to make unauthorized use of goods

As per according to section 154 of the Indian Contract Act, 1872, when the bailor transfer the
possession of the goods to the bailee for some specific purpose, it is the duty of the bailee to not
to make unauthorized use of goods of bailor without his consent. If the bailee makes
unauthorized use of the goods, he will be held liable to pay compensation to the bailor and as per
section 153 of the contract act, the bailor can terminate the contract of bailment.

Illustration
If A gave his scooter to B for the purpose of repairing. B use that scooter for personal use. Here
B is liable for unauthorized use of the good. A is entitled to get compensation and has a right to
terminate the bailment contract.

Duty to not mix the goods

It is the duty of a bailee to not mix the bailor’s goods with his goods.

As per Section 155 of the Indian Contract Act, 1872, when the bailee mixes the goods of the
bailor with his goods with the consent of the bailor, then the interest in mixed goods shall be
shared in proportion.

Illustration

If A bails his goods to B. B with A’s consent mixed A’s goods with his goods. Here B will not
be liable, as he has A’s consent.

Section 156 and 157 of the Indian Contract Act, 1872, deal with the condition when bailee mixes
the goods without bailor’s consent.

There are two situations:

When goods can be separated (Section 156)

If goods mixed by the bailee can be separated, then the bailee has to bear the cost of separation.

Illustration

If A bails 100 packets of Lays chips to B. B without consent of A, mixed it with his 50 Diamond
chips packets. Here B will be held liable for the cost incurred in separating the goods.

When goods cannot be separated (Section 157)

If goods mixed by bailee cannot be separated, then the bailee has to compensate to the bailor.

Illustration

If A bails 2lts. of petrol to D. D without consent of A mixed petrol with oil. Here, it is impossible
to separate petrol from oil. B has to compensate A.
Duty to Return the goods

According to Section 160 of the Indian Contract Act, when the bailor transfers his goods to the
bailee for some specific purpose, after completion of that purpose, it is the duty of the bailee to
return goods to the bailor.

Illustration

If A gave his book to B for Binding. It is the duty of B as a bailee to return the book after
binding. If B fails to fulfil his duty, he will be held liable.

Duty to deliver the bailor increase or profit if any on the goods bailed

According to Section 163 of the Indian Contract Act, when the bailor transfer the goods to the
bailee for some specific purpose and during the bailee possession, any increment happens to
goods, it is the duty of the bailee to return that increment to the bailor.

Illustration

A leaves a cow in the custody of B and cow gives birth to a calf. Then B is duty bound to hand
over the bailed goods along with accretion to the bailor.

Rights of bailee

Right to claim damages

When the bailor transfers the possession of his goods to the bailee, he has to disclose the defect
in goods while transferring them to the bailee. If the bailor fails to disclose the defect to the
bailee and if bailee suffered an injury then the bailee has the right to claim damages from the
bailor.

Illustration

If A bails his car to B without disclosing the information that the brakes of the car are not
working well. B met with an accident. Here B has a right to claim damages from A.

J.N. Reed v Dean G. Parrack (1949) 1 KB 188

In this case, the plaintiff enjoying his holidays hire a motor launcher to enjoy the riverside from
the defendant. The motor launcher was not fit to use and caught fire, the plaintiff suffered an
injury. Here the defendant was held liable.

Right to claim Reimbursement

According to Section 158 of the Indian Contract Act, if the bailee suffered any expenses to keep
the goods of the bailor safe and protected, the bailee has a right to demand reimbursement from
the bailor.

Illustration

If A bails his horse to B for some time. B suffers some expenses like food, shelter etc to keep the
horse safe. Here B has a right to get reimbursed for all the expenses from A, which he suffered to
keep the horse safe.

Right to particular lien

According to Section 170 of Indian Contract Act, when bailor fails to pay lawful payment to the
bailee for his services, the bailee has a right to lien/retain the goods until the time he receives his
payment.

Illustration

A bails a piece of cloth to B, a tailor, to make a coat for him. B as per the conditions makes a
coat, but A fails to pay B for his service, here B has a right to lien/retain A’s coat.

Right of bailor and bailee against the wrongdoer

According to Section 180 of Indian Contract Act, when the goods of the bailor are in the
possession of the bailee and any third person wrongfully deprive the bailee of using the goods,
then the bailee has a right it uses remedies as the bailor might have used.

Illustration

If A bails his T.V. to B for repairs. C forcefully takes the possession of T.V. from B. here B is
entitled to the remedies as similar to that of A.
Concept of Finder of Goods
When a person found some goods which do not belong to him, that person is known as the finder
of goods.it is the duty of the finder of goods to not to make unauthorised use of the goods and to
find the real owner and surrender him the goods. He is lawfully entitled to get reimbursement of
the expenses which he incurred by him in the process of finding the owner.

Rights of Finder of Goods

Right to lien

According to Section 168 of the Indian Contract Act, 1872, the finder of goods has a right to get
reimbursement of the amount which he incurred during the process of finding the owner of the
goods. But if the owner denied to reimburse him, he cannot sue the owner but he can retain
goods till he gets paid for the expenses incurred by him.

Illustration

If A finds a wallet of B, he incurred Rs 70 as an expense to reach B’s address to return his wallet.
A has the right to get paid his Rs 70. If B fails to pay him, A can retain his wallet.

Right to Sell

A finder of goods has a right to sell the goods found by him under the following circumstances

The goods are of perishing nature

Illustration

If A finds some tomatoes which belong to B. A tried hard to find B but was unable to find him.
A can legally sell those tomatoes, as tomatoes are of perishing nature and the price he gets by the
sale should be returned to B.

When the owner does not pay lawful charges incurred by the finder

Illustration
If A finds B’s Watch on the road. A, to find B’s address, incurred 80 Rs. if B denied paying, A
has a right to sell the watch of B and retain his payment and if he gets the extra amount, it should
be returned to B.

Duties of Finder of Goods

 It is the duty of the finder of the goods to keep goods safe.

Illustration

If A finds B’s Jacket. It is his duty to keep that jacket safe.

 It is the duty of the finder of the goods to not to use the goods for his personal use
Illustration

If A finds B’s cycle. He has to keep that cycle safe and should not use it for his personal use.

 It is the duty of finder of goods to find the real owner

Illustration

 If A finds a gold ring in a party, it is his duty to find the real owner of the ring.
Essentials features of a contract of bailment

A valid contract

As mentioned above, bailment is a special type of contract. Hence, all the essential elements of a
valid contract must be present in it. The essential elements such as offer, consideration,
contractual capacity, intention, etc. must be a part of the bailment. Without the presence of these
essential elements , the contract cannot be enforceable in a court of law. However, out of these, a
contract of bailment can be valid without consideration. 
There are two types of bailment. 
 Gratuitous Bailment: Bailment without any consideration.

 Non-Gratuitous Bailment: Bailment with consideration.

Delivery of possession

If you read the definition of bailment, you will understand that the most essential element of a
contract of bailment is the delivery of goods from one person to another. As per Section 149 of
the Act, “the delivery to the bailee may be made by doing anything which has the effect of
putting the goods in the possession of the intended bailee or of any person authorised to hold
them on his behalf.” The delivery of the goods can be actual as well as constructive. Actual
delivery means the goods are physically delivered by the bailor in the possession of bailee.
Constructive delivery means that the goods are not expressly delivered but a few actions imply
that the bailee is given the possession of the goods. It is important to note that the actual transfer
of possession is necessary for bailment. Only giving the custody of the goods to a person does
not make him the bailee.
Delivery upon contract

As mentioned above, the delivery of the goods from the bailor to the bailee must be after a
contract is created between both the parties. The contract should have the details of the transfer
of the goods and its return. However, the contract can either be “expressly signed by the parties”
or “implied by the parties.
Exception: Lost goods found 

When lost goods are found by a third party, they act as the bailee of such goods. 
Duties of the finder:

1. To keep the goods safe.

2. Not use these goods for personal use.

3. Take adequate efforts to find the real owner of the goods.

4. Make sure that the goods are delivered to its real owner once found.

Rights of the finder:

1. To be compensated for the expenses and trouble taken to keep the goods safe and find the
owner. (Section 168)

2. To sell the goods if:

1. The goods are of perishing nature.

2. The owner could not be found.

However, the proceeds from the sale must be transferred to the owner/bailor of the goods.
(Section 169)
Purpose
There must be a specific purpose for which the goods are transferred from the bailor to the
bailee. As per Section 153 & 154, the contract of bailment might be terminated if the bailee acts
inconsistently or makes unauthorised use of the goods. Specific purpose is very important and
the parties should abide by the contract.
Return of goods

After the purpose for which the goods were bailed is complete, the bailee will have to return the
goods to the bailor. The method and the way of return will be as per the contract or bailor’s wish.
As mentioned in 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.”
Duties of the bailor and the bailee

Duties of the bailor:

1. To disclose faults in goods

It is the bailor’s responsibility to inform the bailee of all the faults in the goods. If the bailor fails
to do so, he is liable to the bailee for any loss caused by that fault. 
For example: ‘X’ took a car from ‘Y’ to go for a vacation. ‘Y’ was aware that the brakes weren’t
working properly. However, he didn’t inform ‘X’ about it. ‘X’ is involved in an accident due to
the failure of brakes. ‘Y’ will be liable for all the losses ‘X’ faced in this accident.
2. To cover necessary and extraordinary expenses

The bailor has to pay the bailee all the necessary and extraordinary expenses incurred by the
bailee to safeguard the goods bailed.
For example: ‘A’ gave his cat to his friend ‘B’ when he had to travel for work. ‘A’ will have to
pay the expenses incurred in the cat’s daily necessities such as food, shelter, etc. ‘A’ will also
have to pay any extraordinary expense like doctor’s bill, daycare, etc. if it was necessary to keep
the cat safe.
3. To indemnify the bailee of all the losses

The bailor has to indemnify any loss incurred by the bailee if the bailor asks for his goods before
the agreed time in the contract as per Section 159 of the Indian Contract Act. As per Section 164,
the bailee can also claim losses from the bailor if the bailor intentionally bails goods with a
defective title.
4. To collect the bailed goods

The bailor must collect his goods once the time for which the goods were bailed is expired. If the
bailor fails to collect the goods on the expiry of the bailment period, he will be liable to pay for
any losses incurred by the bailee.
For example: ‘X’ bailed his dog with ‘Y’ for a week, and returned after 10 days  to get his dog
back. ‘X’ will be liable to pay ‘Y’, the expenses incurred for the safekeeping of the dog for those
3 extra days.
Duties of the bailee:

To take proper care of the goods

As per Section 151 of the Indian Contract Act, 1872, “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 goods of the same bulk, quantity and value as the goods
bailed.” However, in Section 152, it is stated that “The bailee, in the absence of any special
contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has
taken the amount of care of it described in Section 151.”
For example: ‘A’ bailed his vehicle with ‘B’ for one week. If due to negligence of ‘B’, ‘A’s
vehicle is damaged, ‘B’ will be liable to compensate for the same. However, if the vehicle is
damaged due to some act of god such as an earthquake or a flood, ‘B’ will not be liable for such
loss.
To use the goods for authorised purpose only

It is the bailee’s responsibility to use the goods only for the authorised purpose under a contract.
If it is found that the goods are used for unauthorised purposes, the entire contract can be
declared void by the bailor. As per Section 154, “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.”
Some examples:
(a) ‘A’ lends a horse to ‘B’ for his own riding only. ‘B’ allows ‘C’, a member of his family, to
ride the horse. ‘C’ rides with care, but the horse accidentally falls and is injured. ‘B’ is liable to
make compensation to ‘A’ for the injury caused to the horse.
(b) ‘A’ hires a horse in Calcutta from ‘B’ expressly to march to Banaras. A rides with due care,
but marches to Cuttack instead. The horse accidentally falls and is injured. ‘A’ is liable to make
compensation to ‘B’ for the injury caused to the horse.
To keep the bailed goods separate

All the goods bailed should be kept separately and safely by the bailee as it ensures the safe
return of the goods. However, there are a few provisions related to the mixing of bailed goods.
1. Section 155: If the bailee, with the consent of the bailor, mixes the goods of the bailor
with his own goods, the bailor and the bailee shall have an interest, in proportion to their
respective shares, in the mixture thus produced.

2. Section 156: If the bailee, without the consent of the bailor, mixes the goods of the bailor
with his own goods, and the goods can be separated or divided, the property in the goods
remains in the parties respectively; but the bailee is bound to bear the expense of
separation or division, and any damage arising from the mixture.
 3. Section 157: If the bailee, without the consent of the bailor, mixes the goods of the bailor
with his own goods in such a manner that it is impossible to separate the goods bailed
from the other goods and deliver them back, the bailor is entitled to be compensated by
the bailee for the loss of the goods.

To return any profits arised from the goods

If during the course of bailment, any profit has arisen from the bailed goods, the same should be
transferred to the bailor by the bailee. 
Example: ‘A’ bails his cow with ‘B’ for a period of 7 days. The cow gives milk daily. ‘B’ sold
this milk during the period of bailment. The profit earned by ‘B’ during the sale of milk must be
returned to ‘A’ while returning the goods.
To return the goods

The bailee must return the goods to the bailor once the purpose of the bailment is accomplished
or the term of the contract expires. This return must be as per the bailor’s discretion.
Rights of the bailor and the bailee

Rights of the bailor:

To be compensated against unauthorised use

If the bailee uses the goods for a purpose that isn’t authorised under the contract, he should be
liable for any damage that arises from such use.
For example: ‘X’ bailed his vehicle to ‘Y’ for one month. In the contract, it was agreed that ‘Y’
can use the vehicle for his personal use. However, ‘Y’ let his brother ‘Z’ drive the vehicle, and
‘Z’ crashed the vehicle. Now, ‘Y’ will be liable for the damage done to the vehicle.
To terminate the contract 

As per Section 153 of the Act, “A contract of bailment is voidable at the option of the bailor, if
the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the
bailment.”
Illustration: ‘A’ lets ‘B’, for hire, a horse for his own riding. ‘B’ drives the horse in his carriage.
This is, at the option of ‘A’, a termination of the bailment.
To receive any profits arised from the goods

The bailor is entitled to any profit that arises from the goods when they are bailed. If the bailee
refuses to pay such profits to the bailor, he may take appropriate action against the bailee to
recover such an amount.
To get the goods returned on expiry of contract
The bailor has a right to receive the bailed goods upon expiry of contract. However, in case of a
gratuitous bailment, the bailor can redeem the goods before the expiry of the contract. In any
such situation, if the bailee incurs loss due to early return of the goods, the bailor is liable for the
same.
Rights of the bailee:

To receive compensation

The bailee is entitled to receive compensation for losses suffered due to any defect in the goods.
In case of gratuitous bailment, if the bailor asks for the goods to be returned before the expiry of
contract and the bailee suffers loss because of this return, he can claim for compensation against
those losses from the bailor.
To receive expenses incurred

The bailor has to pay the bailee all the expenses incurred for the caretaking of the goods bailed.
The bailee is also entitled to receive any extraordinary expenses spent by him during the term of
bailment of the goods.
To stop delivery of goods

The bailee is given the right to stop the delivery of goods if the bailee is of the knowledge that
the bailor doesn’t have a title over the goods. The bailee can also stop the same if any third party
claims their title over the goods.  
To lien the bailed goods

A lien is a legal right against the assets that are used as collateral to satisfy the debt. The bailee
has been given the right to lien the bailed goods if the bailor has withheld any compensation or
payment that he is liable to do.
Different types of lien are:

Particular lien:

As per Section 170 of the Indian Contract Act, 1872, “Where the bailee has, in accordance with
the purpose of the bailment, rendered any service involving the exercise of labour or skill in
respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain
such goods until he receives due remuneration for the services he has rendered in respect of
them.”
For example: “A”delivers a rough diamond to “B”, a jeweller, to be cut and polished, which is
accordingly done. “B” is entitled to retain the stone till he is paid for the services he has
rendered. 
General lien:
As per Section 171 of the Indian Contract Act, 1872, “Bankers, factors, wharfingers, attorneys
of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a
security for a general balance of account, any goods bailed to them; but no other persons have a
right to retain, as a security for such balance, goods bailed to them, unless there is an express
contract to that effect.”
For example: “A” borrows Rs. 1000 from the bank without security. Later he takes one more
loan of Rs 5000 from the same bank against a security of gold. “A” pays back Rs. 5000 but yet
has not paid Rs 1000. So the bank can retain gold (general balance of the account) for the
previous loan. 
Relevant case laws

Kaliaperumal Pillai v. Visalakshmi, AIR 1937 Mad 32

Facts of the case

In this case, the plaintiff hired the defendant to make new jewellery for her. Her old jewels had to
be melted and the gold obtained from that was to be used to make this new jewellery. Every
evening, the defendant would return the half-made jewellery to the plaintiff. Plaintiff would lock
that jewellery in her box and leave it in the defendant’s room. However, the Plaintiff took the
key to that box. One night, the jewels were stolen. The defendant was held liable by the plaintiff
as he was the bailor of the goods.
Issues involved in the case

If the delivery was legally valid as bailment under Section 149 of the Indian Contract Act, 1872?
Judgement of the Court

It was held that the respondent was not liable as he did not have legal possession of the goods
while they were stolen. The relationship was of bailment between both the parties but it ended as
soon as the plaintiff locked the goods in the box and took the keys with herself. Merely leaving
the box at the defendant’s house does not constitute bailment.
Atul Mehra v. Bank of Maharashtra, 2002

Facts of the case

In this case, the plaintiff had hired a locker in the respondent’s Bank on 15th January, 1986. The
strong room in the bank was broken into by miscreants and the contents of the locker were
stolen. The plaintiff claimed that jewellery worth Rs. 4,26,160 was deposited in the locker. On
9th January, 1989, an FIR was filled. The plaintiff pointed out that this loss was due to
negligence and misconduct of the respondent. Also, it was alleged that the strong room was not
made of adequate material and could be easily broken into.
Issues involved in the case
 1. Whether the loss suffered was due to misconduct and negligence of the respondent?

2. Whether the respondent has a contractual liability to repay the losses?

3. Would the relationship between the plaintiff and the respondent fall within the purview of
bailment as defined in Section 148 of the Indian Contract Act, 1872?

Judgement of the Court

It was held that exclusive possession of the goods is sine qua non(extremely essential) in the case
of bailment. Therefore, mere hiring of a locker would not constitute bailment. It was also stated
that reasonable care and damages come into question when the bailee is made aware of the
contents of the locker and exclusive possession of the same is given to the bailee. Here, neither
was done, and hence, the judgement was in the favour of the respondent(bank).
Taj Mahal Hotel v. United India Insurance Ltd., 2019

Facts of the case

In this case, on 01st August, 1998, a Maruti Suzuki Zen was parked in the respondent’s hotel and
the owner gave his car for the valet parking service. When the owner returned to get his car back,
he learned that his car was stolen. A complaint against the thief was lodged but the car was
nowhere to be found. Respondent hotel’s valet parking service had stated that ‘parking of
vehicles was at the owner’s own risk inside and outside the hotel premises and in case of theft,
loss or damage the hotel will not be liable.’ The plaintiff company paid a sum of Rs 2,80,000 to
the car owner in order to settle the insurance claimed by him. The plaintiff company sued the
respondent hotel for negligence.
Issues involved in the case

1. Whether this was a case of bailment?

2. Was the hotel liable for negligence under the law of bailment?

3. Was the car owner eligible for compensation due to the absence of consideration between
both parties?

Judgement of the Court

It was held by the supreme court that the theft of the car was a result of the respondent’s
negligence and the respondent would be liable. The supreme court stated that the respondent
cannot exclude its liability for negligence towards the vehicle parked in the respondent’s parking.
The consideration, in this case, would be free parking to the customer for using the respondent’s
services. It can be inferred that if the general rule of bailment is applied, the bailee(hotel) will be
liable if there is a loss of goods(vehicle) due to its negligence. 
New India Assurance Co. Ltd v. The Delhi Development Authority, 1991

Facts of the case

In this case, the defendant owns and runs a truck parking centre known as Idle Truck Parking
Centre in Delhi. The owner of a truck had parked his truck at Idle Truck Parking Centre on 8th
June, 1987. A receipt was issued for Rs 3 for the safekeeping of the truck for 24 hours. The truck
owner had insured his truck with the plaintiff in this case. On the night of 8th June, the truck was
stolen from the parking centre. The owner raised a claim with the plaintiff which was settled for
Rs 2,91,500. The plaintiff now sued the defendant to recover that amount as the loss of the truck
was due to negligence of the owner. The defendant claimed that they were not liable as the
possession was not transferred to them as the driver of the truck slept inside the truck that night.
Issues involved in the case

1. Was the vehicle’s possession transferred to the defendant?

2. Is the defendant liable for the loss of the plaintiff?

Judgement of the Court

It was held that the defendant was liable to pay the plaintiff. The essential element here was the
transfer of possession. The possession was said to be transferred when the plaintiff issued a
receipt for safe-keeping of the vehicle for the said night. For the contracted period, the defendant
should have shown reasonable care towards the vehicle which failed to do so. 
Tilendra Nath Mahanta v. United Bank Of India And Ors., 2001

Facts of the case

In this case, the petitioner was a retired school teacher. He had opened a Savings A/C at
Naharkatia Branch of the United Bank of India(respondent) and had a few Fixed Deposits in that
bank. His son was a clerk at the same bank. The petitioner also had a joint account with his son
in the bank. It was found that the son was involved in a few fraudulent transactions. To recover
the losses, the respondent froze the joint account. Along with that, the respondent also froze the
petitioner’s savings A/C and stopped the returns on the FDRs. The respondent claimed that as
per Section 171 of the Indian Contract Act, 1872 the respondent had a lien over the petitioner’s
savings A/C and his deposits in the bank.
Issue involved in the case

Whether the Respondent has a lien over the FDR’s and the accounts of the person whose joint
account is under investigation?
Judgement of the Court

It was held that the respondent could not freeze the accounts of the petitioner and hold his FDRs
as a lien. It was stated that the money deposited in the banks is a loan to the bank by the
depositors. The money returned to the depositor is never the same. Also, it was held that ‘money’
does not account as a good under bailment.
Contract of pledge

Contract of pledge is a subset of a contract of bailment. Here, the goods bailed are kept as a
security for a debt or a performance of a promise. Pledge is defined in Section 172 of the Indian
Contract Act,1872 as “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
‘pawnee’.” It is covered under Chapter IX (Section 172- Section 181) of the Indian Contract Act,
1872.

Concept of Pledge
In the pledge, the pawnor transfer/bailed his goods to the Pawnee as security against the amount
he takes from the Pawnee. The pawnor has a duty to pay the amount back to the Pawnee and the
Pawnee has a duty to return the goods after pawnor pays the amount. The Pawnee should not
make unauthorized use of the goods bailed to him if he does he will be liable to pay
compensation to the pawnor. The Pawnee has a right to sell the goods after giving prior notice to
the pawnor if he fails to pay the amount back.

Illustration

A borrowed Rs.100 from B and gave his cycle as a security for the repayment of the amount, in
the condition that if A pays back to B he will get his cycle back. it is called the contract of
Pledge.
Rights and Duties of Pawnor

Rights of Pawnor

Right to redeem goods

It is the right of the pawnor to redeem his goods i.e. to get back from the Pawnee after he paid
the amount to the pawnee.

Illustration

If A bailed his watch as security and took Rs.800 as a loan from N. A return the money to N.
Here, A has a right to get his watch back.

Right to claim damages or compensation 

It is the right of the pawnor to get the compensation if the Pawnee makes any unauthorised use of
the goods or fails to keep the goods safe.

Illustration

If A bailed his Car as security and took Rs.1,30,000 as a loan from C on the terms that C will not
use that car in any manner. C uses it as a taxi. Here A can claim damages as C made
unauthorized use of the goods.

Duties of Pawnor

Duty to pay the loan

It is the duty of the pawnor to pay the amount back to the pawnee so that he will get his goods
back.

Illustration  
If A bails his gold chain as security to B for a loan of Rs.3000 Here, A has a duty to pay back the
amount of loan to B.

Duty to pay extraordinary expenses incurred by Pawnee.

It is the duty of the pawnor to pay the extraordinary expenses to the pawnee, which the Pawnee
incurred in keeping the goods safe.

Illustration

If A bails his cow to B for Rs.8000. B paid all the expenses like food for cow, shelter etc. Here A
has a duty to pay the expenses back to B.

Duty to pay claims and damages or compensation to Pawnee

The pawnor has a duty to pay the compensation or damages to the Pawnee if the Pawnee
suffered any type of legal damages due to pawnor’s goods.

Illustration

If A bails his bike as security to B for the loan of Rs.50000 with the term that B can use his bike.
A, however, didn’t disclose the fact to B that the breaks of the bike are not working well. B met
with an accident and suffered damage. Here it is the duty of A to compensate B for the damage
he has suffered due to A’s goods.

Rights and Duties of Pawnee

Rights of Pawnee

Right to retain Goods

As per Section 173 of the Indian Contract Act, if the pawnor fails to pay the amount to the
Pawnee, so the Pawnee has a right to retain the goods of the pawnor.

Illustration
If A bails his watch as security to B for the loan amount of Rs.500. If A fails to pay the amount
or pays the amount after the time as per the terms and conditions, B has a right to retain the
watch.

Right to get compensation

In the case, where pawnee suffered because of the goods of the pawnor, the Pawnee has a right to
get the compensation against that damage from the pawnor.

Illustration

If A bails his bike as security to B for the loan of Rs.50000 with the terms that B can use his
bike. A, however, didn’t disclose the fact to B that the brakes of the bike were not working well.
B met with an accident and suffered damage. Here, B has a right to claim compensation from A.

Right to Sell

As per section 176 of the Indian Contract Act, if the pawnor fails to pay the amount back to the
Pawnee, the Pawnee has a right to sell the goods and reimburse his amount.

Illustration

If A bails his gold ring to B as a security for the loan amount of Rs.7000 if A fails to pay the
amount back to B. B has a right to sale the ring and get his amount back.

To get extraordinary expenses incurred by him

As per section 175 of the Indian Contract Act, if the pawnee has suffered any extraordinary
expenses with respect to pawnor’s goods then he has a right to get paid back by the pawnor.

Illustration

If A bails his cow to B as security for Rs.18000 as a loan. B incurred expenses like food
expenses, shelter expense etc. B has a right to get all the amount back from A.
Duties of Pawnee

Duty to take reasonable care

It is the duty of Pawnee to take reasonable care of the goods of pawnor, like his own goods.

Illustration

If A bails his gold to B for the amount of Rs.80, 000 as loan security. B has a duty to keep the
gold of A safe and should take reasonable care.

State Bank of Saurastra v. Chitranjan Rangnath Raja and Anr.

In this case, the bank was the Pawnee and the defendant was the pawnor, the pawnor bails his
5000 tins of groundnut oil as security against the amount of Rs. 75000. The defendant died. The
bailed goods of the defendant were lost from the possession of the bank. Later, after the given
time limit bank files a case against the defendant as ask for the repayment of the amount. The
bank states that, as the bank is the Pawnee, they have the right to get their money back, but
because they lost the goods of the plaintiff whose market value is Rs. 75000, that makes them
not able to get their payment back, thus the petition got dismissed  

Duty to give back the goods after repayment of the loan

When the pawnor pays back the amount to the Pawnee, the Pawnee has a duty to give back the
goods back to the pawnor.

Illustration

If A bails his watch to B as security for Rs.2000 as a loan. It is the duty of B to give back the
watch to A when A repay Rs.200

Duty not to make unauthorized use of goods

It is the duty of the Pawnee to not to make any unauthorized use of pawnor’s goods. If the
Pawnee makes unauthorized use of goods he will be liable to pay compensation to the pawnor.

Illustration
If A bails his car to B as a security against loan amount of Rs.90000. If B uses the car as a taxi
without A’s Consent. Here, B will be liable for unauthorized use of the car.

Duty to give back the owner any increment in the goods

It is the duty of the Pawnee to give to the pawnor any increment in the goods during his
possession.

Illustration

If A bails his cow to B as a security against loan amount of Rs.80000. During B’s possession
cow gives birth to a calf. If A repays the amount, It is the duty of B to give that calf and the cow
back to A.

Duty not to mix the goods

It is the duty of the Pawnee to not to mix the pawnor’s goods with his own goods.

Illustration

If A bails 100lt. of petrol to B against the loan of Rs.13000. It is the duty of the B to not mix the
goods of A with his goods.  

Pledge by Non Owner

Pledge by Mercantile agent

Section 178 of the Indian Contract Act states that the pledge between the mercantile agent and
Pawnee can be valid if the agent has the possession of the goods with the consent of the owner
and the Pawnee acted good faith and does not know about the original title of the goods.

Illustration

If A is a mercantile agent of B bails the bike of B which is in his possession to D. D in good faith
and does not know about the title of the bike accept as security. Here the pledge is considered as
valid. But if B knows about title, then the pledge will not be held valid.
Pledge by the person in possession under voidable contract

As per section 178 ‘A’ of the Indian Contract Act, the pledge between the pawnor having the
possession of the goods under voidable contract and pawnee can be valid, provided that during
the pledge the contract has not been revoked and the pawnee acted in good faith and does not
have any idea about the title of the goods.

Illustration  

If A has possession of the watch under voidable contract, bails the watch to B. B in good faith
and does not know about the title of the watch, accepts it. That pledge is considered as valid. But
if B knows about the title, then that pledge is not considered as valid.

Pledge where pledger has only a limited interest

As per Section 179 of the Indian Contract Act, the pledge between the pawnor having limited
interest and Pawnee can be valid, if during the pledge the pawnee acted in good faith and does
not know about the title of the goods.

Illustration

If A finds a defective watch and spent Rs.50 in repairing that watch. Here A can have a limited
interest on watch i.e. he can bail the watch in pledge for Rs.50 or less.

Pledge by a co-owner in possession

The pledge between a co-owner and Pawnee can be valid if he has the consent of other co-owner.
But when the co-owner without the consent of other co-owner enters the contract of pledge, that
contract can be valid if the Pawnee acted in good faith and does not know about the title of the
goods.

Illustration

Situation 1: If A and B jointly owned a car. The car is in the possession of A. One day A wants
to bail the car for the purpose of the pledge, he has to take the consent of B.

Situation 2: if A enters into the pledge with C and bails the car to C, without the consent of B.
That pledge is considered as valid only if C acts in good faith and does not know anything about
the title of the car.
Pledge by seller or buyer in possession

A seller, after selling his goods has the possession of the goods with the consent of the buyer or
the buyer before completion of the sale has the possession of goods with the consent of the seller
can enter into the valid pledge. But if the party enter into a contract without the consent of the
other party, that contract can be valid, if the Pawnee acted in good faith and does not know about
the title of the goods.

Illustration

If A buys a cycle from B. A after purchase left the cycle in the possession of B. B bails the cycle
in a pledge with C. C act in good faith and does not know about the title of the cycle. This is a
valid pledge.

Relation Between Pledge and Bailment

Similarities

1. In Both, Pledge and Bailment only movable property delivered to the Pawnee/bailee.
2. In both cases, both the party enters into an agreement.
3. In both cases, bailee/pawnee has to return the goods to bailor/pawnor.
4. In both cases, bailor/pawnor has to pay any extraordinary expenses if incurred by
bailee/pawnee.
5. In both cases, the bailee/pawnee has to compensate bailor/pawnor for any damage to
goods or unauthorized use of goods.

Difference
1. The Pawnee cannot use the goods pawned, but in bailment, bailee can use the goods
bailed if the terms of bailment so provide.
2. In Bailment, goods are bailed for some specific purpose, but in pledge, goods are
bailed as a security for the loan.

Conclusion
When a person transfers the possession of his goods to another person for some specific purpose,
then it is called the contract of bailment. If there is a benefit of one party through the bailment
and other party does not get anything in return, that bailment is called gratuitous bailment. And
when the contract of bailment is done which result in the mutual benefit of both i.e. bailor and
bailee, is called non-gratuitous bailment. The bailor has the duty to disclose the defect of the
goods and to repay the amount incurred by a bailee to keep goods safe and any damages against
the damage caused to bailee by the goods of the bailor. similarly, the bailee has the duty to keep
the goods of the bailor safe and to return them to bailor after completion of the purpose for which
the bailment takes place.

In the pledge, the pawnor transfer/bailed his goods to the Pawnee as security against the amount
he takes from the Pawnee. The pawnor has a duty to pay the amount back to the Pawnee and the
Pawnee has a duty to return the goods after pawnor pays the amount. The Pawnee should not
makes unauthorized use of the goods bailed to him if he does, he will be liable to pay
compensation to the pawnor.  

Essential features of a contract of pledge

A valid contract

Similar to the contract of bailment, all the basic essentials of a valid contract should be present in
a contract of pledge. Without these elements, the contract will be void and won’t be enforceable
in a court of law.
Delivery of possession

It is necessary that the possession of goods be delivered from the pawnor to the pawnee. As
mentioned in the definition, pledge is a bailment and this is an essential element of bailment. The
delivery can be either actual or constructive. However, there might be exceptions where the
possession remains with the pawnor.
Ownership cannot be transferred

In the case of pledge, mere possession of the goods is transferred to the pawnee. The pawnor of
the goods is still the owner. The pawnee has possession of the goods but has limited interest in
the goods.
Security against debt

The goods must be pledged as security against an outstanding debt of the pawnor. This
outstanding debt can also be a promise for specific performance. 
Return of goods on repayment

Once the debtor the specific performance against which goods are pledged as security is repaid
or completed, the goods must be returned to the pawnor in the manner specified by him.
Duties of the pawnor and the pawnee

Duties of the pawnor:

To compensate expenses

The pawnor has the responsibility to compensate the pawnee for all the ordinary and
extraordinary expenses made by the pawnee in order to ensure the well-being of the pledged
goods.
To repay the entire amount due along with interest

The pawnor has to repay the amount which is due to the pawnee. This amount is the total of the
principal amount as well as any interest accrued on that amount during the course of the
contract. 
To disclose all the faults in the goods

The pawnor before entering into a contract has to disclose all the faults in the goods to the
pawnee. If the pawnee incurs any loss later due to those faults, the pawnor will be liable for
those.
Duties of the pawnee:

To take reasonable care of the goods

It is the pawnee’s responsibility to take care of the goods that are pledged. The care taken by the
pawnee must be just, fair and reasonable. It should be as the pawnee took care of his personal
belongings. If due to negligence of the pawnee, the goods are damaged, he will be liable to
compensate the pawnor.
For example: If ‘A’ pledges his watch with ‘B’ for a sum of Rs. 100. Then ‘B’ must take
reasonable care of A’s watch as if it is B’s own watch. The condition of the watch should not
deteriorate or be worse than at the time when it was pledged.
To use the goods only for authorised purpose

The pawnee can use the goods pledged if only it is authorised by the pawnor. If the goods are
used for any purpose that is not authorised, the pawnee will have to compensate the pawnor
against the same. 
For example: ‘A’ pledges his car with ‘B’. ‘A’ authorises ‘B’ to use the car for his personal use.
‘B’ allows his cousin ‘C’ to drive the car and the car then gets damaged. ‘B’ will have to
compensate ‘A’ for the damages
To return the goods

As per the contract, once the amount against which the goods are pledged is repaid, the goods
must be returned to the pawnor. This return must be as mentioned in the contract or as per the
pawnor’s directions.
To return any profits arised from the goods
If at any time during the contract, the pawnee earns profit from the pledged goods, the same shall
be returned to the pawnor during the termination of the contract.
Example: ‘X’ pledged his property with ‘Y’. The property was given on rent to ‘Z’. The rent
received on the property must be returned to ‘X’. 
To keep the goods separate

It is the pawnee’s duty to keep the pledged goods separate from his own goods. If he mixes the
pledged goods, all expenses to separate them will be borne by the pawnee. If separating is not
possible, the pawnee will be liable for all the damages.
Rights of the pawnor and the pawnee

Rights of the pawnor:

To redeem the goods

As per Section 177 of the Act, ”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.”
For example: ‘A’ gave his watch to ‘B’ as a security against INR 800 that is due. They agreed
that the amount should be repaid within 1 month. If ‘A’ fails to do so, he can redeem his watch
even after the expiry of the contract given that ‘B’ has not yet sold the watch. However, if ‘B’
had to incur any expenses to safekeep that watch, the same will have to be paid by ‘A’.
To get the goods back

Once the pawnor pays back the amount due along with the interest to the pawnee, he has the
right to get the goods back. After clearing the entire due against which the goods were held as
security, the pawnee cannot retain the pledged goods.
Rights of the pawnee:

To retain the goods

The pawnee has the right to retain the goods until the amount owed by the pawnor is paid in full
or the promise is completely performed. This amount includes the expenses incurred by the
pawnee as well as any interest accrued on that amount. This is mentioned in Section 173 of the
Act. 
For example: ‘A’ pledged his house with a bank for a loan of INR 2,50,000. The interest on the
same was INR 10,000. The bank can retain the pledged house until ‘A’ repays the entire amount
along with the interest i.e. INR 2,60,000.
As per Section 174,”The pawnee shall not, in the absence of a contract to that effect, retain the
goods pledged for any debt or promise other than the debt or promise for which they are
pledged; but such contract, in the absence of anything to the contrary, shall be presumed in
regard to subsequent advances made by the pawnee.’”
To get compensation for extraordinary expenses

It is implied that the pawnor will be liable to pay for all the necessary expenses needed for the
safekeeping of the goods. As per Section 175, if any extraordinary expenses arise, the pawnor
will only be liable for the same as well. However, the pawnee cannot retain the goods for non-
payment of such expenses.
To sell the goods

As mentioned in Section 176, “If the pawnor makes default in payment of the debt, or
performance; at the stipulated time or 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 pawnor
reasonable notice of the sale.” It is important to note that the pawnor must be given proper and
enough notice before selling the goods. It is further mentioned, “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.”
For example: ‘X’ pledged his watch with ‘Y’ as security against INR 10,000. ‘X’ defaulted the
payment even after enough notices. ‘Y’ went to sell his watch. If the watch is sold above INR
10,000, the surplus amount must be returned to ‘Y’. However, if the watch is sold for less, ‘X’
will still be liable for the difference.
Relevant case laws

Lallan Prasad v. Rahmat Ali and Anr., 1996

Facts of the case

In this case, the plaintiff advanced INR 20,000 to the defendant against a promissory note and a
receipt. An agreement was signed by both the parties where the defendant agreed to pledge his
aeroscapes as collateral against his debt. As per their agreement, the defendant had to deliver the
aeroscapes to the appellant and the goods would remain in his custody.
The plaintiff filed a lawsuit claiming that the above-mentioned goods were never delivered to be
in his custody and therefore, this agreement cannot be considered as a contract of pledge. He
claimed that he was entitled to recover the amount loaned by him.
Issue involved in the case

1. Whether pledged goods were delivered in the plaintiff’s custody?

2. Was the plaintiff entitled to any compensation as he claimed that there was no contract of
pledge since the goods were not delivered?
Judgement of the Court

The judgement was in the favour of the defendant. It was held by the Supreme Court that the
pledged goods were delivered to the plaintiff. This meant that this agreement did ripen into a
contract of pledge. The Court also stated that the plaintiff was not entitled to any compensation
on his stance that the goods were never pledged to him. 
The Morvi Mercantile Bank Ltd. And Anr. v. Union of India, 1965

Facts of the case

In this case, a firm operating in Mumbai entrusted their goods worth INR 35,500 to Railways for
its delivery to Delhi. The firm got their receipt for these goods from the Railways. In order to get
an advance of INR 20,000 from the plaintiff, the firm pledged these receipts as collateral for the
same.
The goods were lost by the railways and they offered to compensate with certain parcels to the
plaintiff. The plaintiff rejected this and claimed that those weren’t the goods that were pledged to
them. The plaintiff, hence, sued the railways to recover INR 35,500 against the value of goods
pledged to them including the damages.
Issues involved in the case

1. Whether railway receipts can be considered as valid goods under contract of pledge?

2. Whether the plaintiff was the pawnee of the goods or the documents of the good’s title?

3. Whether the plaintiff could sue for the entire value of the goods or only what was
advanced by him?

Judgement of the Court

The Supreme Court of India ruled in favour of the plaintiff. It was held that railway receipts can
be valid as goods under a contract of pledge. It was also held that the plaintiff was the pawnee of
the goods and not merely its documents of title. It was stated that since the pawnee in a contract
of pledge has the authority as the owner of the goods, the plaintiff will be allowed to sue for the
entire value of the goods and not just the amount he has advanced.
K. M. Hidayathulla v. the Bank of India, 2001

Facts of the case

In this case, on 10th December, 1993, the petitioner pledged certain gold jewels with the
respondent. These jewels were pledged against a certain amount. The petitioner failed to repay
the amount within the agreed time. The bank held an auction for the jewels on 20th May, 1997 to
recover the debt. The petitioner claimed that as per Section 176, the bank had the right to either
file a suit against him for recovery or sell the jewels via an auction after giving reasonable notice
to the petitioner, however, it must have taken place within the prescribed time for filing the suit.
Issues involved in the case

1. Whether any such condition was mentioned in Section 176 of the Act?

2. Whether the pawnee could auction the goods after the prescribed period?

Judgement of the Court

The judgement passed by the Madras High Court was in the favour of the bank. It was held that
the bank had two remedies; either to file a suit for recovering the debt or selling the goods after
reasonable notices to the pawnor. It was found that there was no connection between the two
remedies. Merely because the period for filing a suit had passed, it did not mean that the other
alternatives could not be used. It was held that if the pawnee resorted to any alternate course of
sale, the prescribed period should be extended for the same.
Difference between a contract of bailment and pledge

Contracts of bailment and pledge are special types of contracts that are regulated under the
Indian Contract Act, 1872. 
Point of
Contract of Bailment Contract of Pledge
difference

When certain goods are transferred

When certain goods are transferred from one
from one party to another for a
party to another as a security against a debt, it
specific purpose, it is called a contract Meaning
is called a contract of pledge.
of bailment.

It is covered under Sections 148-171 It is covered under Sections 172-179 of the

Provisions
of the Indian Contract Act, 1872. Indian Contract Act, 1872.

The sole purpose for bailing the goods

The sole purpose to enter into a contract of
is for the safe custody of the goods or
Purpose pledge is for security against a debt.
repairs, at most times.

The party which bails the goods is The party which pledges their goods is known
known as the ‘bailor’ and the party as the ‘pawnor’ or the ‘pledger’ and the party
with whom the goods are bailed is Parties which receives the goods is known as the
known as the ‘bailee’. ‘pawnee’ or the ‘pledgee’.
 The presence of consideration in a The presence of consideration in a contract of
Consideration
contract of bailment is mandatory. pledge is mandatory.

The goods cannot be sold by the bailee The goods may be sold by the pawnee or the
Right to sell
in such contracts. pledgee.

The goods can be used by the bailee

The goods cannot be used by the pawnee or
only for specific purposes known to
Right to use the pledgee.
both the parties or not otherwise.

Conclusion

It is true that we don’t even realise that we enter into these contracts in our life. Contracts of
bailment is a field which has been entered by arguably the most number of people unknowingly.
Even when we simply give our product to be serviced, we enter into a Contract of bailment with
the other party. 
After analysing and understanding the essentials and differences between contracts of bailment
and  contracts of pledge, I can conclude that the scope of bailment contracts is very wide.
However, contracts of pledge are very limited in nature. After looking at the similarities between
both, we can deduce that all the contracts of pledge are contracts of bailment but not all contracts
of bailment are contracts of pledge.