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Bailment, Pledge and Hypothecation

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Shivani Sharma
Shivani Sharma

This document provides an overview of the contracts of bailment and pledge under Indian law. It defines bailment and pledge, distinguishes between the two, and outlines their essential elements. Bailment involves the delivery of goods for a specific purpose, while pledge is a type of bailment where goods are delivered as security for a debt. The document discusses the duties of bailors and bailees, as well as the rights of each party. It also covers related topics like finders of lost goods and provides illustrations of bailment and pledge.

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CONTRACT OF BAILMENT AND PLEDGE -SHIVANI SHARMA -ASSISTANT PROFESSOR -SARDAR PATEL SUBHARTI INSTITUTE OF LAW
INTRODUCTION • Bailment and Pledge are two special contracts that are often confused. • Every pledge is a bailment but every bailment is not pledge. • Bailment means a delivery of goods from one person to another for a special purpose. • Whereas Pledge means delivery of goods as security for the payment of debt or performance of a promise. • Therefore, Bailment & Pledge are two different contracts. Pledge is a special kind of bailment.
BAILMENT
INTRODUCTION • The Word is derived from a French word i.e. “bailer” which means “to deliver”. • The etymological meaning of bailment is “handing over” or “change of possession of goods”. • By bailment, we mean delivery of goods from one person to another for a special purpose on the contract that they shall reimburse the goods on the fulfilment of the purpose or dispose of them as per the direction of the bailor. • The person who delivers the goods is known as bailor. • And the person to whom the goods are given is known as Bailee. • And the property bailed is known as Bailed Property.
DEFINITION • A bailment is a special contract defined under section 148 of the Indian Contract Act, 1872 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’. The person to whom they are delivered is called the ‘bailee’.
ESSENTIALS OF BAILMENT 1. There shall be a contract between the parties for the delivery of goods, 2. The goods shall be delivered for a special purpose only, 3. Bailment can only be done for movable goods and not for immovable goods or money, 4. There shall be a transfer of possession of goods, 5. Ownership is not transferred to Bailee, therefore Bailor remains the owner, 6. Bailee is duty bound to deliver the same goods back and not any other goods. Exception: • The money deposited in the bank shall not account to bailment as the money returned by the bank would not be the same identical notes. • And it is one of the essentials of the bailment that same goods are to be delivered back.
DUTIES OF BAILOR
DUTIES OF A BAILOR Section 150 of the Indian Contract Act, 1872 bound the bailor with certain duties to disclose the latent facts specifically pertaining to defect in goods. “The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults. If such goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed.”
ILLUSTRATIONS: (a) A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained. (b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is injured. B is responsible to A for the injury.
CONT…. Bailor’s duty of disclosure are: • Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods that he is aware of to the Bailee that can interfere with the use of goods or can expose him to extraordinary risks. And failure to do the same will make bailor liable for damages. • Non Gratuitous Bailment (Bailment for Reward):This duty particularly deals with the goods given on hire. As per this provision, when the goods are bailed for hire, then in such a situation even if the bailor is aware of the defect in the goods or not will be held liable for the injury that has been caused due to the existence of such defect. In Hyman v Nye & Sons, the plaintiff took a carriage on hire from the defendant but the carriage was not fit for the journey and subsequently, the plaintiff suffered injuries. The court held that even though the defendant was aware of such defect or not he shall be liable.
DUTIES OF BAILEE
DUTIES OF BAILEE • Bailee has to fulfil several obligations as per Indian Contract Act, 1872. That is: 1. Duty to take reasonable care: (Section 151-152) It is the duty of the Bailee to take care of goods as his own goods. He shall ensure all safety measures that are necessary to protect the goods. The standard of care should be such as taken care by a prudent man. The goods shall be taken care of equally whether they are gratuitous or non-gratuitous. The Bailee shall be held liable for payment of compensation if he fails to take due care. But if the Bailee has taken due care and instead of that the goods are damaged then in such a situation Bailee will not be liable to pay compensation. The Bailee is not liable for the loss of goods due to destruction by fire.
CONT… 2. Duty not to make unauthorized use of the goods: (Section 153-154) Bailee is duty bound to use the goods for a specific purpose only and not otherwise. If he uses the goods for any other purpose than what is agreed for then the bailor has the right to terminate such bailment or is entitled with compensation for damage caused due to unauthorized use. 3. Duty to return the goods on the fulfilment of purpose: (Section 160- 161) Bailee is duty bound to return the goods once the purpose is achieved or on the expiry of the time period for which the goods were bailed. But if the Bailee makes default in returning the goods on proper time then he will be responsible with the loss, destruction or deterioration of the goods if any.
CONT… 4. Duty not to mix bailor’s goods with his own goods: (Section 155-157) It is the duty of the Bailee not to mix bailor’s goods with his own. But if he wants to do the same then he shall seek consent from the bailor for mixing of goods. If the bailor agrees for the mixing of the goods then the interest in the mixed goods shall be shared in proportion. In case, Bailee without the consent of bailor mixes the goods with his own then two situations arise: goods can be separated and goods can’t be separated. In the former case the Bailee has to bear the cost of separation and in the latter case since there is the loss of the goods, therefore, bailor shall be entitled with damages of such loss. In the case of Bank of India v. Grains & Gunny Agencies the court held that if the goods are lost or destroyed due to the negligence of servant of Bailee, then in such case as well Bailee shall be liable.
CONT… 5. Duty to deliver to the bailor increase or profit if any on the goods bailed: (Section 163) The Bailee has a duty to return the goods along with increase or profit subject to contract to the contrary. Accretion that has accrued from the bailed goods is the part of the bailed goods and therefore bailor has the right over such accretions if any. And such accretions shall be handed over to the bailor along with the goods bailed. For instance, A leaves a cow in the custody of B and cow gives birth to the calf. Then B is duty bound to hand over the bailed goods along with accretion to the bailor.
RIGHTS OF BAILOR
RIGHTS OF BAILOR • As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a Bailor is same as Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee. So the rights of bailor are: 1.Enforcement of Bailee’s Duty: Since Right of the bailor is same as the right of the Bailee, therefore on the fulfilment of all duties of Bailee the bailor’s right is accomplished. For example, it is the duty of the Bailee to give the accretions and it is the right of bailor to demand the same. 2.Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the right to claim damages for such loss. (Section 151)
CONT… 3. Right to Termination the Contract: If the Bailee does not comply with the terms of the contract and acts in a negligent manner in such case the bailor has the right to rescind the contract. (Section 153) 4. Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or mixes the goods which cause loss of goods in such case bailor has the right to claim compensation. 5. Right to demand the return of goods: It is the duty of the Bailee to return the goods and the bailor has the right to demand the same.
RIGHTS OF BAILEE
RIGHTS OF BAILEE 1. Right to recover expenses: In the contract of Bailment, the Bailee incurs expenses to ensure the safety of goods. The Bailee has the right to recover such expenses from the bailor. (Section 158) 2. Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration for services that he has rendered. But in case of gratuitous bailment, the Bailee is not awarded any remuneration. 3. Right to recover compensation: At times a situation arises wherein bailor did not have the capacity to contract for bailment. Such a contract causing loss to the Bailee, therefore the Bailee has the right to recover such compensation from the bailor. (Section 168)
CONT… 4. Right to Lien: Bailee has the right over Lien. By this, we mean that if the bailor fails to make payment of remuneration or does not pay the amount due, the Bailee has the right to keep the goods bailed in his possession till the time debtor dues are cleared. Lien is of two types: particular lien and general lien. (Section 170-171) • In the case of Surya Investment Co. v. S.T.C, the court held that expenses incurred by Bailee during preservation of goods under lien shall be borne by bailor. 5. Right to suit against a wrongdoer: After the goods have been bailed and any third party deprives the Bailee of use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180)
FINDER OF GOODS • According to section 71 of the Indian Contract Act, 1872 by the finder of lost goods we mean a person who comes across the goods that are unclaimed or whose actual owner is not known. • Such a person has to take care of these lost goods as Bailee unless a true owner is found. • He has the same responsibility, rights and duties of that of a Bailee as per section 151 of the Indian Contract Act, 1872. • He is duty bound to return the goods to the actual owner. He has to take all measures to find actual owners. He cannot refuse the delivery of goods else he will be liable for non- delivery of goods.
RIGHTS OF FINDER OF LOST GOODS • The right of Lien: According to section 168 of the Indian Contract Act, 1872 finder of the lost goods can exercise his right of particular lien if the actual owner refuses to make the payment of the expenses incurred to preserve those goods or to find the actual owner. But finder of the lost goods cannot sue him for the same. • The right of Claiming the Award, if announced by the owner: According to section 168 of the Indian Contract Act, 1872 finder of lost goods cannot sue the actual owner for expenses incurred by him. But he can sue him for the award that is announced by the owner and he refuses to pay the same. For instance, X finds Z’s wallet and gives it to him. Z promises X to give him Rs. 100 for the same. This is a contract of bailment and Z is bound to pay the reward. • Right to sell the goods found: According to section 169 of the Indian Contract Act, 1872 finder of the lost goods also have the right to sell the goods on certain circumstances i.e. either he could not find the actual owner after taking all due diligence or the goods or of such nature that their value might perish
COMMERCIAL UTILITY OF BAILMENT • Ware houses; storage bailments - Warehousing has been called the “second oldest profession,” stemming from the biblical story of Joseph, who stored grain during the seven good years against the famine of the seven bad years. Whatever its origins, warehousing is today a big business, taking in billions of dollars to stockpile foods and other goods. • Trucks, trains, planes, ships, pipelines: transportation bailments • A lends a car to B for his driving only without charge. • A sells a horse to B who leaves the horse in the possession of A
ILLUSTRATIONS Illustration 1: Mr A gives his watch for repair to Mr B., In this case, Mr A is bailor, Mr B is Bailee and the goods bailed is watch. Illustration 2: Harry bailed his bike to David for riding for himself to go to college. David used it for racing purpose. Now David will be liable for unauthorized use of the bike bailed. Illustration 3: Mr X gave his cat to Mr Y for looking after over some days. Cat in that while gave birth to kittens. Now Mr Y is liable to return the cat along the accretions. Illustration 4: Mr A bailed his carriage for Mr B for hire for a few days. But there was a default in the carriage of which Mr A was not aware. And subsequently, Mr B suffered injuries because of the same. Now Mr A is liable to pay damages to Mr B. Illustration 5: Y mixes his sweets with that of Z without Z’s consent. Since the sweets can be separated so the cost to separate the sweets will be borne by Y.
IMPORTANT POINTS • If owner maintains control over the goods, there is no bailment- Kaliaporumal Pillai v Visalakshmi • Bailment without a contract- Ram Gulam v Govt of U.P. (No bailment without a contract except finder of goods) & in L.M. Co-operative Bank vs Prabhudas Hathibhai (Bailment can occur even without a contract) • Hiring a Locker- Not Bailment • Deposit of Money- Not Bailment (Atul Mehra vs Bank of Maharashtra)
PLEDGE
INTRODUCTION • Pledge is a kind of bailment. Pledge is also known as Pawn. • It is defined under Section 172 of the Indian Contract Act, 1892. “‘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 ‘pawnee’” • By pledge, we mean bailment of goods as a security for the repayment of debt or loan advanced or performance of an obligation or promise. • The person who pledges the goods as security is known as Pledger or Pawnor and the person in whose favour the goods are pledged is known as Pledgee or Pawnee.
PLEDGORPLEDGEE
ESSENTIALS OF PLEDGE Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the pledge. Apart from that, the other essentials of the pledge are: 1. There shall be a bailment for security against payment or performance of the promise, 2. The subject matter of pledge is goods, 3. Goods pledged for shall be in existence, 4. There shall be the delivery of goods from pledger to pledgee, 5. There is no transfer of ownership in case of the pledge. Exception: In exception circumstances pledgee has the right to sell the movable goods or property that are been pledged.
RIGHTS OF PAWNOR • As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. • By this, we mean that on the repayment of the debt or the performance of the promise, the Pawnor can redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual sale. • The right of redemption is extinguished once the actual sale is done by the Pawnee as per his right under section 176 of the Indian Contract Act, 1872
RIGHTS OF A PAWNEE 1. Right to retain the goods: If the Pawnor fails to make the payment of a debt or does not perform as per the promise made, the Pawnee has the right to retain the goods pledged as security. Moreover, Pawnee can also retain goods for non-payment of interest on debt or non-payment of expenses incurred. But Pawnee cannot retain goods for any other debt or promise other than that agreed for in the contract. (Section 173-174) 2. Right to recover extraordinary expenses: The expenses incurred by Pawnee on the preservation of goods pledged can be recovered from Pawnor. (Section 175)
CONT… 3. The right of suit to procure debt and sale of pledged goods: On the failure to make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit proceedings against him or sell the goods. In the former case, the Pawnee retains the goods with himself as collateral security and initiate the court proceedings. He need not provide any notice of such proceedings to the Pawnor. And in the latter case, the Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount received from the sale of goods is less than the amount due then the rest amount can be recovered from Pawnor. And if the Pawnee gets more amount than the due amount then such surplus is to be given back to Pawnor. (Section 176)
Illustration 1: Mark took a loan from the bank against a security of gold. In this case, Mark is a pledger, the bank is a pledgee and gold is the pledged goods. Illustration 2: Z pledged his goods with A. But now Z refuses to make the payment of the same. A now can either sell his goods or can initiate a suit proceeding against Z.
DIFFERENCE BETWEEN BAILMENT AND PLEDGE Basis Bailment Pledge Meaning Transfer of goods from one person to another for a specific purpose is known as the bailment. Transfer of goods from one person to another as security for repayment of debt is known as the pledge. Defined In It is defined under section 148 of the Indian Contract Act, 1872. It is defined under section 172 of the Indian Contract Act, 1872. Parties The person who delivers the bailed goods is known as Bailor and the person receiving such goods is known as Bailee. The person who delivers the pledged goods is known as Pledger or Pawnor and the person receiving such goods is known as Pledgee or Pawnee. Consideration The consideration may or may not be present. Consideration is always there. Right to Sell Bailee has no right to sell the goods bailed. Pledgee or Pawnee has the right to sell the goods. Use of Goods Bailee can use the goods only for a specific purpose only and not otherwise. Pledgee or Pawnee cannot use the goods pledged. The purpose of bailed goods is for The purpose of pledged goods is to act as
CHARGE
INTRODUCTION • Section 100 of the Transfer of Property Act, 1882(henceforth referred as “the Act”) defines a charge. • “Where immoveable property of one person is by act of parties or operation of law made security for the payment of money to another; and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge.” • It says that where immovable property of one person is, by act of parties or operation of law, made security for the payment of money to another, and the transaction does not amount to mortgage, the latter person is said to have a charge on the property, and all the provisions hereinbefore contained which apply to simple mortgage shall, so far as may be, apply to such charge.
HYPOTHECATION
Bailment, Pledge and Hypothecation
INTRODUCTION • Hypothecation legally means providing something as collateral for any form of debt. • However, although a collateral security is provided the debtor usually does not have to turn over physical custody of the collateral although the lender is “hypothetically” in control of the collateral. • The Indian Contract Act does not define the term ‘hypothecation’ • However, section 2 (n) of Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002) defines Hypothecation as: “’Hypothecation’ means a charge in or upon any movable property, existing in future, created by a borrower in favour of a secured creditor, without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property”.
CONT… • Hypothecation is to be registered under Section 125 of the Indian Companies Act, 1956 before the Registrar of Companies by filing Form No. 8, when the hypothecator is a company. • Hypothecation is a way of creating a charge against the security of movable assets, which is quite similar to pledge. a) The assets remain in the custody of the borrower. b) Assets are not kept under the lock and key of the banker. c) The borrower has to submit a stock statement at prescribed intervals as per terms of sanction to the bank. d) Without Bank’s consent, no person can utilize the hypothecated assets for his own benefit or sale by the borrower or any person connected thereto.
DIFFERENCE BETWEEN PLEDGE & HYPOTHECATION • Hypothecation is a way of creating a charge against the security of movable assets, which is much similar to pledge. However, pledge is a charge, which is defined by law whereas it is not so in the case of hypothecation. Under Section 172 of the Indian Contract Act, 1872: “Pledge is a contract where, by way of deposit of goods a security for a debt is created and the right to property vests in the pawnee so far as it is necessary to secure the debt.” • In case of pledge, the assets are in the custody of the lender, real or constructive, whereas in the case of hypothecation the assets are in the custody of the borrower. • Hypothecation is to be registered under Section 125 of the Indian Companies Act, 1956 when the hypothecator is a company, whereas no such provision exists in case of charges by way of pledge.
CONT… • In hypothecation, goods are not kept under the lock and key of the banker. The borrower, however, will have to submit a stock statement at prescribed intervals as per terms of sanction to the bank. • In addition to the fact that the bank does not have the physical possession of the goods under hypothecation, the fact remains that no statutory status is given to a hypothecation transaction. • In this regard, it is, however, to be noted that hypothecation has a close link to floating charge. • It must be noted that without the consent of the Bank, no person can utilize the hypothecated goods for his own benefit or sale by the borrower or any person connected thereto.
In P. Ramanatha Aiyar’s Advanced Law Lexicon (Third (2005) Edition, Vol.2, Pages 2179 and 2180) are relevant: • “Hypothecation: It is the act of pledging an asset as security for borrowing, without parting with its possession or ownership. The borrower enters into an agreement with the lender to hand over the possession of the hypothecated asset whenever called upon to do so. The charge of hypothecation is then converted into that of a pledge and the lender enjoys the rights of a pledgee.” It was held in Indian Oil Corporation v. NEPC India Limited [(2006) 6 SCC 736] that: • “hypothecation does not mean ‘entrustment of the property’ or ‘entrustment of dominion over the property’ by the hypothecatee (creditor) to the hypothecator (debtor). When possession has remained with the debtor/owner and when the creditor has neither ownership nor beneficial interest, obviously there cannot be any entrustment by the creditor.”
Pledge Hypothecation Mortgage Type of Security Movable Movable/ Immovable Immovable Possession of the security Remains with lender (pledgee) Remains with Borrower Usually Remains with Borrower Examples of Loan where used Gold Loan, Advance against NSCs, Adv against goods (also given under hypothecation) Car / Vehilce Loans, Adv against stock and debtors DELIVERY OF LAND FOR MONEY

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Bailment, Pledge and Hypothecation

  • 2. INTRODUCTION • Bailment and Pledge are two special contracts that are often confused. • Every pledge is a bailment but every bailment is not pledge. • Bailment means a delivery of goods from one person to another for a special purpose. • Whereas Pledge means delivery of goods as security for the payment of debt or performance of a promise. • Therefore, Bailment & Pledge are two different contracts. Pledge is a special kind of bailment.
  • 4. INTRODUCTION • The Word is derived from a French word i.e. “bailer” which means “to deliver”. • The etymological meaning of bailment is “handing over” or “change of possession of goods”. • By bailment, we mean delivery of goods from one person to another for a special purpose on the contract that they shall reimburse the goods on the fulfilment of the purpose or dispose of them as per the direction of the bailor. • The person who delivers the goods is known as bailor. • And the person to whom the goods are given is known as Bailee. • And the property bailed is known as Bailed Property.
  • 5. DEFINITION • A bailment is a special contract defined under section 148 of the Indian Contract Act, 1872 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’. The person to whom they are delivered is called the ‘bailee’.
  • 6. ESSENTIALS OF BAILMENT 1. There shall be a contract between the parties for the delivery of goods, 2. The goods shall be delivered for a special purpose only, 3. Bailment can only be done for movable goods and not for immovable goods or money, 4. There shall be a transfer of possession of goods, 5. Ownership is not transferred to Bailee, therefore Bailor remains the owner, 6. Bailee is duty bound to deliver the same goods back and not any other goods. Exception: • The money deposited in the bank shall not account to bailment as the money returned by the bank would not be the same identical notes. • And it is one of the essentials of the bailment that same goods are to be delivered back.
  • 8. DUTIES OF A BAILOR Section 150 of the Indian Contract Act, 1872 bound the bailor with certain duties to disclose the latent facts specifically pertaining to defect in goods. “The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults. If such goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed.”
  • 9. ILLUSTRATIONS: (a) A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained. (b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is injured. B is responsible to A for the injury.
  • 10. CONT…. Bailor’s duty of disclosure are: • Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods that he is aware of to the Bailee that can interfere with the use of goods or can expose him to extraordinary risks. And failure to do the same will make bailor liable for damages. • Non Gratuitous Bailment (Bailment for Reward):This duty particularly deals with the goods given on hire. As per this provision, when the goods are bailed for hire, then in such a situation even if the bailor is aware of the defect in the goods or not will be held liable for the injury that has been caused due to the existence of such defect. In Hyman v Nye & Sons, the plaintiff took a carriage on hire from the defendant but the carriage was not fit for the journey and subsequently, the plaintiff suffered injuries. The court held that even though the defendant was aware of such defect or not he shall be liable.
  • 12. DUTIES OF BAILEE • Bailee has to fulfil several obligations as per Indian Contract Act, 1872. That is: 1. Duty to take reasonable care: (Section 151-152) It is the duty of the Bailee to take care of goods as his own goods. He shall ensure all safety measures that are necessary to protect the goods. The standard of care should be such as taken care by a prudent man. The goods shall be taken care of equally whether they are gratuitous or non-gratuitous. The Bailee shall be held liable for payment of compensation if he fails to take due care. But if the Bailee has taken due care and instead of that the goods are damaged then in such a situation Bailee will not be liable to pay compensation. The Bailee is not liable for the loss of goods due to destruction by fire.
  • 13. CONT… 2. Duty not to make unauthorized use of the goods: (Section 153-154) Bailee is duty bound to use the goods for a specific purpose only and not otherwise. If he uses the goods for any other purpose than what is agreed for then the bailor has the right to terminate such bailment or is entitled with compensation for damage caused due to unauthorized use. 3. Duty to return the goods on the fulfilment of purpose: (Section 160- 161) Bailee is duty bound to return the goods once the purpose is achieved or on the expiry of the time period for which the goods were bailed. But if the Bailee makes default in returning the goods on proper time then he will be responsible with the loss, destruction or deterioration of the goods if any.
  • 14. CONT… 4. Duty not to mix bailor’s goods with his own goods: (Section 155-157) It is the duty of the Bailee not to mix bailor’s goods with his own. But if he wants to do the same then he shall seek consent from the bailor for mixing of goods. If the bailor agrees for the mixing of the goods then the interest in the mixed goods shall be shared in proportion. In case, Bailee without the consent of bailor mixes the goods with his own then two situations arise: goods can be separated and goods can’t be separated. In the former case the Bailee has to bear the cost of separation and in the latter case since there is the loss of the goods, therefore, bailor shall be entitled with damages of such loss. In the case of Bank of India v. Grains & Gunny Agencies the court held that if the goods are lost or destroyed due to the negligence of servant of Bailee, then in such case as well Bailee shall be liable.
  • 15. CONT… 5. Duty to deliver to the bailor increase or profit if any on the goods bailed: (Section 163) The Bailee has a duty to return the goods along with increase or profit subject to contract to the contrary. Accretion that has accrued from the bailed goods is the part of the bailed goods and therefore bailor has the right over such accretions if any. And such accretions shall be handed over to the bailor along with the goods bailed. For instance, A leaves a cow in the custody of B and cow gives birth to the calf. Then B is duty bound to hand over the bailed goods along with accretion to the bailor.
  • 17. RIGHTS OF BAILOR • As such Indian Contract Act, 1872 does not provide for Rights of a Bailor. But Rights of a Bailor is same as Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee. So the rights of bailor are: 1.Enforcement of Bailee’s Duty: Since Right of the bailor is same as the right of the Bailee, therefore on the fulfilment of all duties of Bailee the bailor’s right is accomplished. For example, it is the duty of the Bailee to give the accretions and it is the right of bailor to demand the same. 2.Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the right to claim damages for such loss. (Section 151)
  • 18. CONT… 3. Right to Termination the Contract: If the Bailee does not comply with the terms of the contract and acts in a negligent manner in such case the bailor has the right to rescind the contract. (Section 153) 4. Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or mixes the goods which cause loss of goods in such case bailor has the right to claim compensation. 5. Right to demand the return of goods: It is the duty of the Bailee to return the goods and the bailor has the right to demand the same.
  • 20. RIGHTS OF BAILEE 1. Right to recover expenses: In the contract of Bailment, the Bailee incurs expenses to ensure the safety of goods. The Bailee has the right to recover such expenses from the bailor. (Section 158) 2. Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration for services that he has rendered. But in case of gratuitous bailment, the Bailee is not awarded any remuneration. 3. Right to recover compensation: At times a situation arises wherein bailor did not have the capacity to contract for bailment. Such a contract causing loss to the Bailee, therefore the Bailee has the right to recover such compensation from the bailor. (Section 168)
  • 21. CONT… 4. Right to Lien: Bailee has the right over Lien. By this, we mean that if the bailor fails to make payment of remuneration or does not pay the amount due, the Bailee has the right to keep the goods bailed in his possession till the time debtor dues are cleared. Lien is of two types: particular lien and general lien. (Section 170-171) • In the case of Surya Investment Co. v. S.T.C, the court held that expenses incurred by Bailee during preservation of goods under lien shall be borne by bailor. 5. Right to suit against a wrongdoer: After the goods have been bailed and any third party deprives the Bailee of use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180)
  • 22. FINDER OF GOODS • According to section 71 of the Indian Contract Act, 1872 by the finder of lost goods we mean a person who comes across the goods that are unclaimed or whose actual owner is not known. • Such a person has to take care of these lost goods as Bailee unless a true owner is found. • He has the same responsibility, rights and duties of that of a Bailee as per section 151 of the Indian Contract Act, 1872. • He is duty bound to return the goods to the actual owner. He has to take all measures to find actual owners. He cannot refuse the delivery of goods else he will be liable for non- delivery of goods.
  • 23. RIGHTS OF FINDER OF LOST GOODS • The right of Lien: According to section 168 of the Indian Contract Act, 1872 finder of the lost goods can exercise his right of particular lien if the actual owner refuses to make the payment of the expenses incurred to preserve those goods or to find the actual owner. But finder of the lost goods cannot sue him for the same. • The right of Claiming the Award, if announced by the owner: According to section 168 of the Indian Contract Act, 1872 finder of lost goods cannot sue the actual owner for expenses incurred by him. But he can sue him for the award that is announced by the owner and he refuses to pay the same. For instance, X finds Z’s wallet and gives it to him. Z promises X to give him Rs. 100 for the same. This is a contract of bailment and Z is bound to pay the reward. • Right to sell the goods found: According to section 169 of the Indian Contract Act, 1872 finder of the lost goods also have the right to sell the goods on certain circumstances i.e. either he could not find the actual owner after taking all due diligence or the goods or of such nature that their value might perish
  • 24. COMMERCIAL UTILITY OF BAILMENT • Ware houses; storage bailments - Warehousing has been called the “second oldest profession,” stemming from the biblical story of Joseph, who stored grain during the seven good years against the famine of the seven bad years. Whatever its origins, warehousing is today a big business, taking in billions of dollars to stockpile foods and other goods. • Trucks, trains, planes, ships, pipelines: transportation bailments • A lends a car to B for his driving only without charge. • A sells a horse to B who leaves the horse in the possession of A
  • 25. ILLUSTRATIONS Illustration 1: Mr A gives his watch for repair to Mr B., In this case, Mr A is bailor, Mr B is Bailee and the goods bailed is watch. Illustration 2: Harry bailed his bike to David for riding for himself to go to college. David used it for racing purpose. Now David will be liable for unauthorized use of the bike bailed. Illustration 3: Mr X gave his cat to Mr Y for looking after over some days. Cat in that while gave birth to kittens. Now Mr Y is liable to return the cat along the accretions. Illustration 4: Mr A bailed his carriage for Mr B for hire for a few days. But there was a default in the carriage of which Mr A was not aware. And subsequently, Mr B suffered injuries because of the same. Now Mr A is liable to pay damages to Mr B. Illustration 5: Y mixes his sweets with that of Z without Z’s consent. Since the sweets can be separated so the cost to separate the sweets will be borne by Y.
  • 26. IMPORTANT POINTS • If owner maintains control over the goods, there is no bailment- Kaliaporumal Pillai v Visalakshmi • Bailment without a contract- Ram Gulam v Govt of U.P. (No bailment without a contract except finder of goods) & in L.M. Co-operative Bank vs Prabhudas Hathibhai (Bailment can occur even without a contract) • Hiring a Locker- Not Bailment • Deposit of Money- Not Bailment (Atul Mehra vs Bank of Maharashtra)
  • 28. INTRODUCTION • Pledge is a kind of bailment. Pledge is also known as Pawn. • It is defined under Section 172 of the Indian Contract Act, 1892. “‘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 ‘pawnee’” • By pledge, we mean bailment of goods as a security for the repayment of debt or loan advanced or performance of an obligation or promise. • The person who pledges the goods as security is known as Pledger or Pawnor and the person in whose favour the goods are pledged is known as Pledgee or Pawnee.
  • 30. ESSENTIALS OF PLEDGE Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the essentials of the pledge. Apart from that, the other essentials of the pledge are: 1. There shall be a bailment for security against payment or performance of the promise, 2. The subject matter of pledge is goods, 3. Goods pledged for shall be in existence, 4. There shall be the delivery of goods from pledger to pledgee, 5. There is no transfer of ownership in case of the pledge. Exception: In exception circumstances pledgee has the right to sell the movable goods or property that are been pledged.
  • 31. RIGHTS OF PAWNOR • As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. • By this, we mean that on the repayment of the debt or the performance of the promise, the Pawnor can redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual sale. • The right of redemption is extinguished once the actual sale is done by the Pawnee as per his right under section 176 of the Indian Contract Act, 1872
  • 32. RIGHTS OF A PAWNEE 1. Right to retain the goods: If the Pawnor fails to make the payment of a debt or does not perform as per the promise made, the Pawnee has the right to retain the goods pledged as security. Moreover, Pawnee can also retain goods for non-payment of interest on debt or non-payment of expenses incurred. But Pawnee cannot retain goods for any other debt or promise other than that agreed for in the contract. (Section 173-174) 2. Right to recover extraordinary expenses: The expenses incurred by Pawnee on the preservation of goods pledged can be recovered from Pawnor. (Section 175)
  • 33. CONT… 3. The right of suit to procure debt and sale of pledged goods: On the failure to make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit proceedings against him or sell the goods. In the former case, the Pawnee retains the goods with himself as collateral security and initiate the court proceedings. He need not provide any notice of such proceedings to the Pawnor. And in the latter case, the Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount received from the sale of goods is less than the amount due then the rest amount can be recovered from Pawnor. And if the Pawnee gets more amount than the due amount then such surplus is to be given back to Pawnor. (Section 176)
  • 34. Illustration 1: Mark took a loan from the bank against a security of gold. In this case, Mark is a pledger, the bank is a pledgee and gold is the pledged goods. Illustration 2: Z pledged his goods with A. But now Z refuses to make the payment of the same. A now can either sell his goods or can initiate a suit proceeding against Z.
  • 35. DIFFERENCE BETWEEN BAILMENT AND PLEDGE Basis Bailment Pledge Meaning Transfer of goods from one person to another for a specific purpose is known as the bailment. Transfer of goods from one person to another as security for repayment of debt is known as the pledge. Defined In It is defined under section 148 of the Indian Contract Act, 1872. It is defined under section 172 of the Indian Contract Act, 1872. Parties The person who delivers the bailed goods is known as Bailor and the person receiving such goods is known as Bailee. The person who delivers the pledged goods is known as Pledger or Pawnor and the person receiving such goods is known as Pledgee or Pawnee. Consideration The consideration may or may not be present. Consideration is always there. Right to Sell Bailee has no right to sell the goods bailed. Pledgee or Pawnee has the right to sell the goods. Use of Goods Bailee can use the goods only for a specific purpose only and not otherwise. Pledgee or Pawnee cannot use the goods pledged. The purpose of bailed goods is for The purpose of pledged goods is to act as
  • 37. INTRODUCTION • Section 100 of the Transfer of Property Act, 1882(henceforth referred as “the Act”) defines a charge. • “Where immoveable property of one person is by act of parties or operation of law made security for the payment of money to another; and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge.” • It says that where immovable property of one person is, by act of parties or operation of law, made security for the payment of money to another, and the transaction does not amount to mortgage, the latter person is said to have a charge on the property, and all the provisions hereinbefore contained which apply to simple mortgage shall, so far as may be, apply to such charge.
  • 40. INTRODUCTION • Hypothecation legally means providing something as collateral for any form of debt. • However, although a collateral security is provided the debtor usually does not have to turn over physical custody of the collateral although the lender is “hypothetically” in control of the collateral. • The Indian Contract Act does not define the term ‘hypothecation’ • However, section 2 (n) of Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002) defines Hypothecation as: “’Hypothecation’ means a charge in or upon any movable property, existing in future, created by a borrower in favour of a secured creditor, without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property”.
  • 41. CONT… • Hypothecation is to be registered under Section 125 of the Indian Companies Act, 1956 before the Registrar of Companies by filing Form No. 8, when the hypothecator is a company. • Hypothecation is a way of creating a charge against the security of movable assets, which is quite similar to pledge. a) The assets remain in the custody of the borrower. b) Assets are not kept under the lock and key of the banker. c) The borrower has to submit a stock statement at prescribed intervals as per terms of sanction to the bank. d) Without Bank’s consent, no person can utilize the hypothecated assets for his own benefit or sale by the borrower or any person connected thereto.
  • 42. DIFFERENCE BETWEEN PLEDGE & HYPOTHECATION • Hypothecation is a way of creating a charge against the security of movable assets, which is much similar to pledge. However, pledge is a charge, which is defined by law whereas it is not so in the case of hypothecation. Under Section 172 of the Indian Contract Act, 1872: “Pledge is a contract where, by way of deposit of goods a security for a debt is created and the right to property vests in the pawnee so far as it is necessary to secure the debt.” • In case of pledge, the assets are in the custody of the lender, real or constructive, whereas in the case of hypothecation the assets are in the custody of the borrower. • Hypothecation is to be registered under Section 125 of the Indian Companies Act, 1956 when the hypothecator is a company, whereas no such provision exists in case of charges by way of pledge.
  • 43. CONT… • In hypothecation, goods are not kept under the lock and key of the banker. The borrower, however, will have to submit a stock statement at prescribed intervals as per terms of sanction to the bank. • In addition to the fact that the bank does not have the physical possession of the goods under hypothecation, the fact remains that no statutory status is given to a hypothecation transaction. • In this regard, it is, however, to be noted that hypothecation has a close link to floating charge. • It must be noted that without the consent of the Bank, no person can utilize the hypothecated goods for his own benefit or sale by the borrower or any person connected thereto.
  • 44. In P. Ramanatha Aiyar’s Advanced Law Lexicon (Third (2005) Edition, Vol.2, Pages 2179 and 2180) are relevant: • “Hypothecation: It is the act of pledging an asset as security for borrowing, without parting with its possession or ownership. The borrower enters into an agreement with the lender to hand over the possession of the hypothecated asset whenever called upon to do so. The charge of hypothecation is then converted into that of a pledge and the lender enjoys the rights of a pledgee.” It was held in Indian Oil Corporation v. NEPC India Limited [(2006) 6 SCC 736] that: • “hypothecation does not mean ‘entrustment of the property’ or ‘entrustment of dominion over the property’ by the hypothecatee (creditor) to the hypothecator (debtor). When possession has remained with the debtor/owner and when the creditor has neither ownership nor beneficial interest, obviously there cannot be any entrustment by the creditor.”
  • 45. Pledge Hypothecation Mortgage Type of Security Movable Movable/ Immovable Immovable Possession of the security Remains with lender (pledgee) Remains with Borrower Usually Remains with Borrower Examples of Loan where used Gold Loan, Advance against NSCs, Adv against goods (also given under hypothecation) Car / Vehilce Loans, Adv against stock and debtors DELIVERY OF LAND FOR MONEY