You are on page 1of 23

Contract 2nd

 Indemnity and guarantee


 Agency contracts
 Bailment and pledge

CONTRACTS OF INDEMNITY AND GUARNATEE CONTRACT OF INDEMNITY (Sec (124)):

A contract by which one party promises to save the other from the loss caused
to him by the conduct of the promisor himself or by the conduct of any other person is
called a “contract of indemnity”.
The person who agrees to compensate the loss is called the INDEMNIFIER and the
person whose loss is to be made good is called INDEMITY HODLER.

Ex – A promises to indemnify B, a banker, for any loss that he may sustain by reason of
the dishonesty of the cashier appointed by B, at the request of B. The contract between A
and B is a contract of indemnity. Here, A is the indemnifier and B is the indemnity holder.

CONTRACT OF GUARANTEE (Sec 126):


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

A contract of guarantee involved 3 parties –


 The person who gives the guarantee is called ‘surety’.
 The person in respect of whose default the guarantee is given is called the
“principal debtor”.
 The person to whom the guarantee is given is called the “creditor”.

Ex: P gives a loan of Rs.10000/- to Q, and R promises to P that if Q does not repay
the loan, R will do so. This is a contract of guarantee. Here, ‘Q’ is the principal
Debtor; ‘R’ is the surety, and ‘P’ is the creditor.

In order to create a contract of guarantee, there must be a creditor, a principal Debtor


and a surety. There must be a contract, first of all, between the principal Debtor and
creditor; then there must be a contract between the surety and the creditor; by which
the surety guarantees the debt. In addition to these 2 contracts, there must be a 3rd
contract, by which the principal Debtor, expressly or impliedly requests the surety to
act as surety.

43
Differences between Indemnity and Guarantee:
1) In a contract of Indemnity, the liability of indemnifier is primary in nature, while
in a contract of guarantee, the liability of the surety is secondary and arises only
on the default of the principal Debtor.
2) In a contract of indemnity, there are 2 parties to the contract, i.e., the indemnifier
and the indemnity holder. In a contract of guarantee, there are 3 parties. i.e., the
creditor, the principal Debtor and surety.
3) In a contract of indemnity, the liability of he indemnifier arises only on the
happening of a contingency, whereas in the case of a contract of guarantee, there
is an existing debt or duty, the performance of which is guaranteed by the surety.
4) In a contract of guarantee, where a surety discharges a debt payable by the
principal debtor to the creditor, he, on such payment can proceed against the
principal Debtor in his own right. But, in the case of a contract of indemnity, the
indemnifier cannot sue third parties in his own name, but must bring the suit in
the name of the indemnified.
5) A contract of indemnity is for the reimbursement of a loss, while a contract of
guarantee is for the security of the creditor.
6) In the case of a contract of indemnity, it is not necessary for the indemnifier to act
at the request by the indemnified, where as in the case of a contract of guarantee,
it is necessary that the surety should give the guarantee at the request of the
debtor.
7) In a contract of indemnity, there is only on original and independent contract
between the indemnifier and the indemnified, where as in a contract of guarantee,
there are 3 contracts. One – between the creditor and the principal debtor, second
– between the creditor and the surety, and the third – between the surety and the
principal debtor.

KINDS OF GUARANTEE:
 Absolute and conditional guarantee.
 General and special guarantee.
 Limited and unlimited guarantee.
 Continuing guarantee.

 Absolute and conditional guarantee: An absolute guarantee is one by


which the guarantor unconditionally promises payment of performance of
the contract on default of the principal debtor. A conditional guarantee is
one which is not enforceable immediately on the default of the principal
debtor, but some contingency other than such default must happen.
 General and special guarantee: A general guarantee is one for
acceptance by the public generally. It is a general promise to anyone
accepting it to be answerable for a debt in case of the failure of another
person. A special guarantee is one which is addressed to a particular
person who alone can take advantage of it and to whom alone, the
guarantor can be held responsible.
44
 Limited and unlimited guarantee: A limited guarantee is ordinarily one,
restricted to a single transaction and in this sense; it is different from a
continuing guarantee. An unlimited guarantee is one which is unlimited
either as to time or amount.
 Continuing guarantee: It means a guarantee which extends to a series of
transactions. It is not limited to a single transaction, but it is generally for
an indefinite time or until revoked. It is prospective in its operation.

1) Ex – A, in consideration that B will employ C in collection the rents of B’s


Zamindari, promises B to be, responsible, to the amount of Rs.5000/- for the due
collection and payment by C of those rents. This is a continuing guarantee.
2) Ex – A guarantees payment to B of the price of 5 sacks of hour to be delivered by
b to C to be paid for in a month. B delivers 5 sacks to C. C does not pay for. The
guarantee given by A was not a continuing guarantee and hence, he is not liable
for the price of 4 sacks.

REVOCATION OF CONTINUING GUARANTEE

A continuing guarantee is revoked under the following circumstances:


1) By notice of revocation by the surety.
2) By the death of surety.
3) By variation in contract.
4) Creditor’s act or omission.
5) Novation.

 By notice of revocation by the surety: Sec 130 provides that where a


guarantee is continuing, it is open to the surety to terminate the same after
due notice to the creditor in respect of any future transactions. However,
the surety is to be liable for the transactions entered into prior to the
notice.
 By death of surety: According to Sec 131, in the absence of a contract to
the contrary, the death of the surety operates as a revocation of a
continuing guarantee, so far, as regards future transactions. But, revocation
does not affect transactions which were executed prior to the death of the
surety.
 By variation in contract: If any variation has been made in the terms of
contract of guarantee between the creditor and the principal debtor,
without the knowledge of the surety, the contract of guarantee is revoked.
 Creditor’s act or omission: Any act or omission by the creditor which
repairs the eventual remedy of the surety against the debtor amounts to
revocation of the contract of guarantee.
 Novation: When the parties agree to substitute a new contract for the old
contract or alter the old contract of guarantee, it will amount to revocation.

45
DISCHARGE OF SURETY:
A surety is said to be discharged when his liability comes to an end. The liability of a
surety comes to an ender under the following circumstances:
1) Revocation by notice (Sec 130).
2) Discharge by death (Sec 131).
3) Discharge by variation in the terms of contract (Sec 133).
4) Discharge by release or discharge of principal of debtor (Sec 134).
5) Discharge of surety on composition or extension of time or promise not to sue (Sec
135).
6) Discharge by loss of security (Sec 141).
7) Discharge concealment or misrepresentation (Sec 142-143).
8) Discharge by the failure on the part of same person/persons to join the surety (Sec
144).
9) Discharge by credits act or omission impairing the surety’s eventual remedy (Sec 139).

 Revocation by notice (Sec 130): In case of continuing guarantee, a


surety is discharge by liability, when he gives due notice to the
creditors in respect of any future transactions. In such a case, the
surety would not be responsible for future transactions which may be
made by the principal debtor after the surety has revoked the contract
of guarantee. However, the surety shall continue to remain liable in
respect of transactions already entered into.

 Discharge by death (Sec 131): The death of the surety operates as a


revocation of the continuing guarantee in the absence of a contract to
the contrary, so far, as regards future transactions.

 Discharge by variation in terms of the contract (Sec 133): If a


variation is made in the terms of the contract between the principal
debtor and the creditor, without the surety’s consent, the surety is
discharged from liability as to transactions made after the variance.
But, the variation must be such as materially affects the position of the
surety. Surety is discharged from the contract even if the alteration is
innocently made for his benefit.
 Release or discharge of principal debtor (Sec 134): This section
provides for 2 kinds of discharge from liability.

 If the creditor makes any contract with the principal debtor by whom
the principal debtor is released, the surety is discharged. Release of the
principal debtor is a release of the surety also.
But, if the principal debtor is discharged in insolvency, this will not
operate as a discharge of surety.
 The surety is also discharged by an act or omission of the creditor, the
legal consequence of which is the discharge of the principal debtor.
46
 Discharge of surety on composition or extension of time or
promise not to sue (Sec 135): This section provides 3 modes of
discharge from liability:
 Composition with principal debtor.
 Promise to give time.
 Promise not to sue.

 Discharge by loss of security (Sec 141): Where the creditor loses


or parts with the securities without the consent of the surety, the
surety is discharged to the extent of the value of securities.
Ex – C advances to B, his tenant, Rs2000/- on the guarantee of A. C has also a
further security for a sum of Rs.2000/- by a mortgage of B’s furniture. C
cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A
is discharged from liability to the amount of the value of furniture.
 Discharge by concealment or misrepresentation (Sec 142-143):
Where a surety is induced to enter into a contract of guarantee by a
misrepresentation or concealment on the part of the creditor, such
misrepresentation or concealment operates discharge the surety
from hi liability on the guarantee.
Sec 142 and 143 will not apply if the misrepresentation or concealment is by
the debtor, and the creditor has no knowledge of it.
Ex – A engages B as a clerk to collect money for him. B fails to account for
some of his receipts and A, in consequence, calls upon him to provide security
of his dues. C gives his guarantee for B’s dues (duly accounting). A does not
acquaint C with B’s previous conduct. B afterwards makes default. The
guarantee is invalid and the surety is discharged.
 Discharge by the failure on the part of some person/persons to
join the surety (Sec 144): Where a person gives a guarantee upon a
contract that the creditors shall not act upon it until another person
has joined in it as co – surety, the guarantee is not valid, if that
other person does not join. A surety who has agreed to become so,
on the basis that he will be a co – surety with another, is wholly
released, if the intended co – surety does not join.
 Discharge by creditors act or omission impairing surety’s
eventual remedy (Sec 139): A surety is discharged if the creditor
does any act which is inconsistent with the rights of the surety or
omits to do any act which, his duty to the surety requires him to do
so, and the eventual remedy by the surety himself against the
principal debtor is thereby impaired.
It is the duty of the creditor not to do anything which is inconsistent with the
rights of the surety.
Ex – Where the integrity of a cashier is guaranteed and the employer agrees to
check his work once in a month, but neglects to do so, the cashier
misappropriates, the surety is not liable.
47
AGENCY CONTRACTS
The contract which creates the relationship of principal and agent is called an ‘Agency’.
The law of agency is based on the principal, “what a person does by another, he does by
himself”.
The person who acts on behalf of another or who has been delegated (representative) the
authority is called ‘Agent’. The person who authorizes another to act is called “principal”.
Agency is the relationship between 2 parties created by an agreement, either express or
implied.

Definition of an Agent (Sec 182):


To be an agent, “the person employed must be authorized to do any act for another or to
represent another in dealings with third persons”.

KINDS OF AGENTS”
 Express or Implied Agents.
 General, special or universal Agents.
 Sub – agent (mercantile agents and non – mercantile agents).

Mercantile agents:
I) factor ii) auctioneer iii) broker iv) commission agent v) delecredere agent vi) banker
vii) general and particular agents.

RIGHTS OF AN AGENT:
1) Right to Remuneration (Sec 219-220).
2) Right of retainer (Sec 217).
3) Right of lien (Sec 221).
4) Right to be indemnified against consequences of lawful acts (Sec 222).
5) Right to be indemnified against consequences of acts done in good faith (Sec 223).
6) Right to compensation (Sec 225).

 Right to Remuneration (Sec 219-220): Where an agent agrees to serve


for nothing, he cannot claim remuneration. But, where the services
rendered by the agent are not voluntary or gratuitous, the agent is entitled
to receive the agreed remuneration, or if nothing is agree, a reasonable
remuneration.

Ex – An agent was appointed to introduce a purchase willing to purchase B’s


property. He did introduce one and even the same was settled and earnest money was
paid, but it could not be completed through the purchaser’s inability to find money.
However, the agent was held entitled to his agreed commission.
48
 Right of Retainer (Sec 217): The agent has a right to retain his principal’s
money until his claims in respect of his remuneration or advances made or
expenses incurred in conducting the business are paid. But, he can exercise
his right of lien only when he is in possession f the principal’s goods or
money.

 Right of lien (Sec 221): An agent is entitled to retain the goods, papers
and other property of the principal, whether movable or immovable,
received by him until the amount due to him for commission has been
made. This right of lien of the agent is subject to a contract between the
principal and the agents. The agents can only retain the goods. He has no
power to sell them.

 Right to be indemnified against consequences of lawful acts (Sec 222):


A principal is bound to indemnify an agent against losses sustained by an
agent in the cause of the agency business. An agent can claim indemnity
only in respect of lawful acts done by him in exercise of the authority. If
the contract is illegal, the claim of agent against the principal cannot be
enforced.

 Right to be indemnified against consequences of acts done on good


faith (Sec 223): When an agent does the act in good faith, the employer is
liable to indemnify the agent and against the consequences of that act,
even though such act causes injury to the rights of the third person. But,
the agent cannot claim indemnity in respect of the acts which he knows to
be unlawful. Thus, where the agent buys smuggled goods for the principal,
the principal is not liable to pay.

 Right to compensation (Sec 225): The principal is liable to make


compensation to the agent for any loss or injury caused to him due to the
principal’s neglect or want of skill. Thus, where the principal keeps any
dangerous premises and the agent meets an accident, the principal is liable
to pay compensation to the agent.

49
SUB – AGENT AND SUBSTITUTED AGENT:

Sub – Agent (Sec 191): Sec 191 defines a sub – agent as “a person employed by and
acting under the control of the original agent in the business of agency”. Thus, a sub –
agent is an agent appointed by an agent. The relation of the sub – agent to the original
agent is as between themselves that of an agent to principal.

Substituted Agent (Sec 194): Sec 194 defines a substituted agent, according to
which, “where an agent holding an express or implied authority to name another person
to act for his principal names another person accordingly he is a substituted agent for the
principal.

Ex – A directs B, his solicitor, to sell his estate by auction and to employ an auctioneer
for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub – agent, but
he is A’s agent for the conduct of the sale. Hence, he can be a substituted agent.

Differences between sub – agent and substituted agent:

Both, a sub – agent and a substituted agent, are appointed by the agent. But,
however, the following distinctions are there between these two;
 A sub – agent does his work under the control of the agent, but a
substituted agent works under the instructions of the principal.
 The agent not only appoints a sub – agent, but also delegates him a part of
his own duties. The agent does not delegate any part of his task to a
substituted agent.
 Privity of contract is established between a principal and a substituted
agent. But there is no privity of contract between the principal and the sub
– agent.
 The sub – agent is responsible to the agent alone and is not generally
responsible to the principal. But, a substituted agent is responsible to the
principal and not to the original agent who appointed him.
 The agent is responsible to the principal for the acts of the sub – agent, but
he is not liable for those of the substituted agent, provided he has taken
due care in selecting him.
 In the case of a substituted agent, the agent duty ends, once he has named
him, but in the case of a sub – agent, the agent remains answerable for the
acts of the sub – agent as long as sub – agency continues.

50
CREATION OF AGENT
An agency may arise in different ways. It need not be created expressly by any writing
and may be inferred from the circumstances and the conduct of the parties. An agency
can be created in the following ways:
1) Agency by express agreements.
2) Agency by implication (Implied Agency).
a) Agency by Estoppels.
b) Agency by holding out.
c) Agency by necessity.
3) Agency by Ratification.

 Agency by Express Agreements: A contract of agency may be created by


an express agreement. When a principal appoints on agent, either by words
spoken or written, to represent and act for him, an express agency is
created. No particular form or set of words is required for appointing an
agent. When a person gives a power of Attorney to another, an express
agency is created.

 Agency by Implication: The relationship of principal and agents need not
be expressly constituted, and can arise by implication of law as well.
Authority to act as an agent can be inferred from the nature of business,
the circumstances of the case, the conduct of principal, etc. Thus, if a
person realizes rent and gives it to the landlord, he impliedly acts for the
landlord as an agent.
Ex – A owns a shop in serampur, living himself in Calcutta, and visiting the shop
occasionally. The shop is managed by B and he is in the habit of ordering goods
from C in the name of A, for the purpose of the shop, and of paying for them out
of A’s funds with A’s knowledge. B has implied authority from A to order from C,
in the name of A for the purpose of the shop.
Implied Agency includes:

 Agency by Estoppel: In many cases, an agency may be implied from the


conduct of the parties, though no express authority has been given. Thus,
where the principal knowingly permits a person to act in a certain
business in his name or on his behalf, such an estopppel from denying the
authority of the supposed agent to bind him.
For instance, where A has so acted by his conduct to lead B to believe
that he has appointed C as his agent, he will be estopped from disputing his agency.

 Agency by holding out: Where a person permits another by a long course


of conduct pledge his credit for certain purposes, he is bound by the act of
such person, in pledging his credit for similar purposes, though in some
cases without the previous permission of his master. This is a case of
Agency by holding out.
51
Similarly, where a husband holds out his wife as having his authority by words or
conduct and a third party advances money to the wife on the faith of such conduct, the
husband is liable for such debts.

 Agency by Necessity: A sometimes, extraordinary circumstances require


that a person who is not really an agent should act as agent of another. In
such a case, though there might not have been an express or implied
authority to do an act, the law implies such an authority in favor of that
person on account of the necessity that had arisen.
By necessity, it is meant that an unforeseen situation has arisen which carries with it.
Sudden danger to the property or similar interests of the persons on whose behalf the act
is done.
Ex – The captain of a ship finds himself in a distant part without money. The owner
cannot be communicated with. Now, the captain can pledge the ship for obtaining
money. He will be regarded as agent of the owner by necessity.

 Agency by Ratification (confirm): Ratification is an approval of a


previous act or contract. It implies the adoption by the principal of an act
made by an agent in his behalf, but without his authority. In case, the
principal adopts the act of the agent done without his authority, he is said
to have ratified the act. On ratification, the act of the agent becomes the
act of the principal and he becomes bound by the same, whether it is for
his loss or advantage.
Ex – ‘A’, without having any authority of B, acts as B’s agent, and enters into a
person contract with C. The contract will be binding on B, if he ratifies or
approves the act of A.

ESSENTIALS OF A VALID RATIFICATION:

1) The Act must have been done on behalf of the person ratifying.
2) The principal must be in existence at the time of the Act that is to be
ratified.
3) Ratifier should be competent to ratify the Act.
4) The transaction must have been subsiding at the time when it is ratified.
5) The principal must have signified his unconditional acceptance of the Act.
6) Ratification may be express or implied.
7) Ratification must have been made with full knowledge of all the material
facts.
8) Whole transaction must be ratified.
9) Ratification must be made with in a reasonable time.
10) The Act to be ratified should not be illegal or void.
11) Ratification must be communicated.

52
 Act must have been done on behalf of the person ratifying: A person
can ratify only that which is purported to have been done for him and
cannot ratify that which is purported to have been done for somebody else.
Act done by a person on his own account cannot be ratified. Only when an
act is done on behalf of the ratifier, such an act can be ratified
Thus, where the act of the president of the municipality was not on behalf
of the committee, but in his own right, the municipal committee cannot
ratify it.
HARSAN DAS (VS) EXECUTIVE OFFICER, MUNICIPAL BOARD, HARPUR,
 The principal must be in existence at the time of the Act that is to be
ratified: For a valid ratification, it is essential that the principal must have
been in existence at the time when the act was done. Nobody, as an agent
can bind by contract, a principal who does not exist at the date of the
contract.
 Ratifier should be competent to ratify the Act: The person on whose
behalf the act was done should have contractual capacity at the time when
it is done and also when it was ratified. A person, who is not competent to
authorities an act, cannot give its validity by ratifying it.
 The transaction must have been subsiding at the time when it is
ratified: Before any act can be ratified, it must exist at the date of
ratification. To constitute ratification, the approval of a transaction must
occur before the other party had withdrawn from it and before the
agreement has been terminated or discharged.
Ex – A enters into a contract with B, representing himself as the agent of C,
without C’s authority. But, before C ratifies it, B rescinds the contract. C cannot ratify it
after such recession.

 The principal must have signified his unconditional acceptance of the


Act: The principal must accept the act of the agent unconditionally, where
the acceptance is unqualified or conditional, ratification is invalid.
 Ratification may be express or implied: Ratification may be in express
words or in writing and it can also be implied from the conduct of the
person on whose behalf the act was done.
Ex – A, without B’s authority, lends B’s money to C. B accepts interest on the
money from C. B’s conduct implies a ratification of the loan.
 Ratification must have been made with full knowledge of all the
material facts: Valid ratification involved knowledge of all material facts
on the part of the rectifier. No valid ratification can be made by a person
whose knowledge of the facts of the case is materially defective. It is the
actual knowledge which is essential for a valid ratification.
Ex – A directed his agent B to purchase grain for him. But B, the agent, sold his
own grain to A at a price higher than the market rate. A ratified the purchase, not
knowing that the grain belonged to B and that the price was higher than the
market rate, such ratification was held invalid as the essential knowledge was
absent.
53
 Whole transaction must be ratified: A contract cannot be ratified in
parts. It ratified, the whole transaction must be ratified. Once a part is
accepted, it is an implied acceptance of the whole.
Ex – If an agent purchases without authority, 20 bonds, it is not open to the
principal to ratify 12 of them, without approving of the other 8 bonds.
 Ratification must be made with in a reasonable time: The ratification
of a contract must be made with in a reasonable time after the contract is
made. Where a time is expressly limited, ratification after the time has
expired will not serve.
 The act to be ratified should not be illegal or void: A contract which is
void in law cannot be ratified. An act which is void from the very
beginning cannot be ratified. An act consisting a criminal offence is
incapable of ratification. For instance, forgery of signatures, being a crime,
cannot be ratified.
 Ratification must be communicated: There can be valid ratification of
an act unless it is communicated to the other party. Ratifier cannot keep
his thoughts to himself.
MODES OR METHODS OF TERMINATION (END) OF AGENCY (Sec 201-210):

TERMINATION OF AGENCY

1) By the act of parties


a) By agreement between the parties.
b) By Revocation of authority by the principal.
c) By renunciation by the agent.

2) By operation of law

a) By completion of the business of agency.


b) By the death or insanity of the principal or agent.
c) By the efflux of time.
d) By the insolvency of the principal.
e) By the destruction of the subject – matter.
f) By subsequent event rendering the agency unlawful.
g) By dissolution of a company.

1) By the act of parties:

a) By agreement between the parties: An agency like any other contract may be
terminated by the mutual consent of the parties. Just as parties are at liberty to
cancel any contract that exists between them. Therefore, the authority of an agent
terminates, when the principal and the agent agree to terminate it.
54
b) By revocation of authority by the principal: A principal has a power to revoke the
authority of the agent, whenever he likes, unless the agent has an interest in the
subject – matter of the agency or unless the agent has exercised his authority so as
to bind his principal. Sec 203 empowers a principal to revoke the authority of an
agent at any time before it is executed.
c)
d) By renunciation by the agent: The agent may terminate the agency by expressly
renouncing it. The power of the agent to terminate the agency is co – extensive
with the right of the principal to revoke the authority. The agent may renounce after
giving the principal reasonable notice, except in cases, where the agency is for a
fixed period. An agent may renounce the agency:
 By tendering resignation.
 By ceasing to discharge his duties
 By mere abandonment of service
 By setting up adverse title to the principal.

2) By operation of law:
a) By compensation of the business of agency: When the business of agency
is completed, agency comes to and end. In the case of agency for a fixed
period, the agency termination on the expiry of the period, even though the
business of agency may not have been completed. When the agency is for
the sale of property, agency terminates on the completion of the sale and
does not continue until the payment of the price. Similarly, where a
pleader is appointed in a suit, the pleader’s authority is terminated with the
judgment.

b) By death or insanity of the principal or agent: Death or insanity of the


agent or principal termination the agency. On the death either the agent or
the principal, the agency is automatically terminated because a person
cannot act on behalf of no – existent person.
On the death or insanity of the principal, an agent has a duty to protect the estate of
the principal by taking reasonable steps (Sec 209)

c) By the efflux (lapse) of time: Where the agency is for a fixed period, it
ceases to function after that period is over. It is so, whether the purpose of
the agency is fulfilled or not. Where the principal discontinues the
business due to losses, the agency for a fixed period is by no means,
terminated.
d) By the insolvency of the principal: On the insolvency of the principal, the
agency terminates. But, since an agent is merely a connecting link with the
third parties, his insolvency may not terminate the agency.
e) By destruction of the subject – matter: where the subject – matter, for
which an agency was created, ceases to exist (destruction), the agency
cannot survive. Thus, if an agent is asked to sell a house, and the house is
destroyed by fire, there is a termination of the agency.
55
f) By subsequent event rendering the agencies unlawful: It may be that an act
is lawful when the agency was created, but if it is declared by law to be
unlawful subsequently, agency cannot continue as that would be unlawful.

g) By dissolution of a company: where a company is either principal or


agent, its dissolution would terminate the agency.

BAILMENT AND PLEDGE

BAILMENT: The term ‘bailment’ is delivered from a French word ‘Baillior’, which
means ‘to deliver’. It denotes a contract, resulting from delivery.

Definition (Sec - 148): Sec 148 of ICA defines bailment as – “The delivery of goods by
one person to another for some purpose, upon a contract, that when the purpose is
accomplished, the goods shall be returned back, according to the directions of the person
delivering them”.
The person who delivers the goods is called the ‘Bailor’, the person to
whom they are delivered is called ‘Bailee’.
Delivery of goods to the bailee must be for some purpose.

Ex –
1) Giving cloth to the tailor to make a dress.
2) Delivering a car for repair.
3) Delivering goods to a railway company for carriage, from one place to
another, etc.

Essentials of Bailment:
1) Delivery of goods
2) Delivery of goods must be for some purpose
3) Contract
4) Return of goods

 Delivery of goods: The first important feature of bailment is the delivery


of goods from one person to another. Delivery involves change of
possession from one person to another and not a change of ownership.
Mere custody without possession does not create bailment. Thus, a
servant having custody of the goods of his master; or a guest using the
goods of his host is not a bailee.
56
Ex – A lady employed a goldsmith for making ornaments out of old jewelers.
Every evening, she received the unfinished jewelers and put it into a box, kept at
the goldsmith’s shop. She kept the key of that box with herself. One night, the
jeweler was stolen from the box. It was held that – there was no bailment as the
goldsmith had re – delivered to the lady (bailor), the jewellery bailed with him

KALIPERUMAL (VS) VISALAKSHMI (1938)

Delivery of goods may be either actual or constructive. Actual delivery may be made by
handing over the goods to the bailee. Delivery of gold to a goldsmith for making jewels is
an instance of actual delivery. Constructive delivery, on the other hand, does not involve
change of physical possession, goods remain where they are, but something is done
which has effect of putting them in the possession of the bailee.

 Delivery of goods must be for some purpose: Sec 148 requires that
there must not only be a delivery of goods, but the delivery must be for
some purpose. Where some goods are delivered by mistake, there is no
bailment. Delivery of goods being for a purpose, the bailee is bound to
return the goods a soon as the purpose is achieved. Where a person takes a
jewel to wear it during a mela, he is only a bailee, as he is under an
obligation to return the jewel after the function.

 Contract: Bailment is based upon a contract between the parties. The


relationship of bailor and bailee is the creating of a contract. Since, a
minor cannot enter into a contract, he cannot be held liable as a bailee, if
he misuses the goods or incurs losses. However, he can be compelled, to
redeliver the goods to the bailor, if the goods are in his possession.

 Return of goods: Bailment of goods is always for some purpose and is


subject to the condition that when the purpose is achieved, the goods will
be returned to the bailor or disposed off according to his directions. If
there is no contract to deliver back or otherwise to dispose off the goods,
according to directions, there is no bailment at all.
A deposit of money with a banker is not a bailment, as he is not bound to
return the same notes and coins.

57
RIGHTS AND DUTIES OF BAILOR:

Right of Bailor:
1) Enforcement of duties
2) Right of termination (Sec 153)
3) Restoration of goods lent gratuitously (Sec - 159)

1) Enforcement of duties: The bailor can enforce by suit, all the liabilities or duties of
the bailee.

2) Right of termination (Sec - 153): A contract of bailment is voidable at the option


of the bailor, if the bailee does any act, regard to the goods bailed, which is against
the conditions of the bailment. In such a case, the bailor can terminate the bailment.
Ex – A hired his horse to B for B’s own riding. B uses the horse for his carriage.
Now, A can terminate the contract of bailment as B is acting against the terms and
conditions of the bailment.

3) Restoration of goods lent gratuitously (Sec - 159): Where the goods are lent
gratuitously, the bailor can demand them back, whenever he pleases, even though
he lent it for a specified time or purpose.
But, if the bailee is incurring any losses because of the return for goods before the
stipulated time, the bailor must indemnify (Protect or injure) the bailee for the loss.

Duties of Bailor:
1) Duty to disclose known defects (Sec - 150).
2) Duty to bear extra – ordinary expenses of bailment (Sec - 158).
3) Duty to indemnify bailee (Sec - 164).

1) Duty to disclose known defects (Sec - 150): Sec 150, clearly states that,
whenever there are defects in the goods, it is the responsibility of the bailor to
disclose to the bailee, all those defects of which he is aware.
If the bailor is not disclosing the defects, because of that, if the bilee is incurring any
losses or damages, it is the responsibility of the bailor to compensate the bailee for such
damages.
Sec 150 clearly says that, if the goods are bailed for hire, the bailor is responsible for
damage, whether he was aware or he was not aware of the existence of such faults in the
goods bailed.

58
Ex – A hires a carriage of B. The carriage is unsafe, even though B is unaware of it and A
is injured. B is responsible to A for the injury.

2) Duty to bear extra – ordinary expenses of bailment (Sec 158): Under the
contract of bailment, if at all the bailee incurs any necessary expenses for the
purpose of bailment; the bailor shall pay to the bailee, all those expenses.
Thus, where a bailee incurs medical expenses for a sick horse or expenses for the
recovery of the stolen horse, it is the duty of the bailor to re – imburse the bailee.

3) Duty to indemnify bailee (Sec 164): Under Sec 164, a bailor is responsible to the
bailee for any loss due to his imperfect title in the goods bailed. As such, the
bailee has a right to be indemnified by the bailor, when the bailor’s title is
defective.
Ex – A gives B’s motorcycle to C for use, without B’s knowledge or permission.
B sues C and receives compensation. C is entitled to recover his losses from A.

RIGHTS AND DUTIES OF BAILEE:

Duties of Bailee:
1) Duty of reasonable care (Sec 151)
2) Duty not to make unauthorized use of goods (Sec 154)
3) Duty not to mix bailor’s goods with his own goods (Sec 155 - 157)
4) Duty to return any accretion to the goods (Sec 163)
5) Duty not to set up any adverse title against the bailor
6) Duty to return the goods (Sec 160)

1) Duty of reasonable care (Sec 151): According to sec 151, a bailee is under a duty
to take as much care of the goods entrusted to him as a man of ordinary prudence
would take care of his own goods. The duty of the bailee starts as soon as the
bailee accepts delivery or receives property. Bailee cannot be held answerable for
any act of god like fire, war, floods, etc.
a) Ex – Silver was delivered to a goldsmith for making ornaments. He kept it
locked in an almirah and employed a watchmen for the night. In spite of these
precautions, the silver was stolen. The goldsmith had taken reasonable care of
the goods and was not liable for the loss.
SANTILAL (VS) TARACHAND
X deposited his goods in Y’s godown. On account of
unexpected floods, a part of the goods were damaged. It was held that – Y is not
liable for the loss.

59
RAMPAL (VS) GOURI SHANKAR
A pawnee kept the pawned ornaments in a godrej safe along with his own
ornaments. The key of the safe was kept in a locked cash box in the same room,
which was also locked. The room was easily accessible to burglars. The ornaments
were lost by theft by using the key from the cash box.
It was held that – the pawnee had not taken reasonable care of the pawned
ornaments as a man of ordinary prudence would take of his own goods.

2) Duty not to make unauthorized use of goods (Sec 154): A bailee is under a
duty, not to use the goods, in a manner, which is not authorized by the bailor. An
unauthorized use of the goods is a breach of the bailment contract and makes the
bailee liable for the damages. Such a liability is absolute in nature and the bailee
would be liable even if the damage is the result of and accident.
i) Ex – A lends a horse to B for his own riding only. Allows C, a member of
his family, to ride the horse. C rides with care, but he horse accidentally falls
and is injured. B is liable to make compensation to A for the injury alone to
the hores.
ii) Ex – A hires a horse expressly in Calcutta from B to march to Banaras.
ARides with due care but marches to Cuttack. The horse accidentally falls and
is injured. A is liable to make compensation to B for the injury to the horse.

3) Duty not to mix the bailor’s goods with his own goods (Sec 155 - 157): A
bailee is under a duty not to mix the goods bailed with his own goods without the
consent of the bailor.
Sec 156 provides that, where the goods are mixed without the consent of the bailor
and if the goods can be separated or divided, the property in the goods will remain in
the parties respectively. The bailee is bound to bear the expenses of separation and
also any damage arising from such unauthorized mixing.
Ex – A bails 100 bales of cotton marked with a particular mark to B. B, without A’s
consent, mixes the 100 bales with other bales of his own.
A is entitled to have his 100 bales returned and B is bound to bear all the expenses
incurred in the separation of the cotton and any other damages.
Sec 157 – where the goods mixed cannot be separated, Sec 157 becomes applicable.
In such a case, the bailor is entitled to be compensated by the bailee for the loss of
goods.
Ex – A bails a barrel of cape flour worth of Rs.45/- to B. B, without A’s consent,
mixes the flour with country flour of his own worth only Rs.25/- a barrel. B must
compensate A for the loss of his flour.
4) Duty to return any accretion to the goods (Sec 163): A bailee is bound to
deliver to the bailor any increase or profit accruing from the goods bailed. Sec 163
provides that the bailor is entitled to the profits accruing from the goods bailed,
unless there is a contract to the contrary.

60
Ex – A leaves a cow in the custody of B to be taken care of. The cow has a calf. B
is bound to deliver the calf as well as the cow to A.

5. Duty not to set up any adverse title against the bailor: A bailee is not
authorized to set up the plea of justertil, i.e, to say that the goods belong to a third
person. The bailee is estopped rom challenging the right of the bailor to receive
the goods bailed. Even if there is a person who has better title to the goods than
that of the bailor, the baile may safety return the goods of the bailor, the bailee
may safety return the goods to the bailee and he will not be liable to the owner for
conversion.

6. Duty to return the goods (Sec - 160): Sec 160 imposes a duty on the bailee to
return or deliver the goods bailed. He must deliver back the goods as soon as the
time for which they were bailed has expired or the purpose for which they were
bailed has been accomplished
Ex – A hired an elephant from B for the period, 16th July, 1974 to 14th may, 1975.
But, A defaulted in delivering the elephant to B on 14th may. He had the animal in
his possession till 22nd may, 1975, when it died. It was held – A was liable for the
price of the elephant.

Rights of Bailee:
1) Enforcement of right.
2) Bailment by several joint owners (Sec 165).
3) Right to compensation (Sec 164).
4) Right remuneration (Sec 158).
5) Right to claim damages (Sec 150).
6) Right of third person claiming goods bailed (Sec 167).
7) Right of lien.

1) Enforcement of rights: The bailee can by suit, enforce the duties of the bailor.
2) Bailment by several joint owners (Sec 165): If several joint owners of goods
bail them, the bailee may deliver them back to or according to the directions of
one joint owner without the consent of all.
3) Right to compensation (Sec 164): If the bailor has no title to the goods or if the
bailor has no right to bail the goods or receive them back and consequently, the
bailee is exposed to some loss, the bailor is responsible for the loss of the bailee.
4) Right to remuneration (Sec 158): The bailee is entitled to lawful charges for
providing necessary services. Where the goods are bailed and some work is to be
carried on them by the bailee and the bailee is to receive no remuneration, the
bailee is entitled to claim necessary expenses incurred by him.
5) Right to claim damages (Sec 150): The bailee has a right to know the faults in
the goods bailed to him, of which the bailor is aware. A bailee is entitled to
receive compensation from the bailor for any loss or damages arising directly
from such faults in the goods bailed.
61
6) Right of third person claiming goods bailed (Sec 167): If a person, other than
the bailor, claims the goods bailed, the bailee may apply to the court to stop the
delivery of goods to the bailor and to decide the title to the goods.

7.Right of lien: The bailee enjoys the right of lien too. Lien signifies “the right of a
person who has the possession goods of another, to retain such possession until a debt due
to him has been satisfied”.

Bailee’s lien may be of 2 types:


a) General lien b) Particular ilen

FINDER OF LOST GOODS: (Sec 71)


The term “finder of goods” means an innocent fonder. A person, who
finds goods belonging to another and takes them into his custody, is subject to the same
responsibility as a bailee.
A finder of goods is bound to take a much care of the goods found, as a
man of ordinary prudence would take of his own goods, under similar circumstances. He
cannot appropriate the goods without taking proper steps to find out the owner and should
keep them for a reasonable time so that the owner may turn up and take them. The finder
of the goods is entitled to retain the goods against the owner until he receives
compensation from him. He is also entitled to the possession of the goods as against the
whole world except the true owner.

Sec 168 and 169 protect the interest of finder of goods. Sec 168 provides the following
rights to the finder of goods:

 He can retain the goods until compensation for trouble


and expense incurred by him in preserving the goods and
finding out the true owner. This right is known as the
finder’s lien on the goods. This lien extends till he is paid
compensation.
 In case, the owner has offered any specific reward for the
return of the goods, the finder may sue for which reward
and he may retain the goods until such reward is paid.
Sec 169: This section permits the finder to sell the goods in certain cases. Where the
goods found are commonly the subject of sale and the owner cannot be found after
reasonable search or refuses to pray the lawful charges of the binder, he may sell them if:
 They are about to perish or lose the greater part of their value.
 The lawful charges of the finder amount of 2/3rds of their value.

62
PLEDGE:
Pledge is a special kind of bailment. It is a transfer or bailment of goods as a security for
the payment of a debt or performance of a promise.
“Every contract by which the possession of goods is
transferred as security is deemed to be a pledge”.
The word ‘pawn’ is synonymous with the word pledge. The bailor
is called as ‘pledge’ or ‘pawnor’ and the bailee is called ‘pawnee’ or ‘pledgee’.

ESSENTIALS OF PLEDGE: (Sec 172)

1) Delivery of goods.
2) The delivery of goods should be by the way of security.
3) The security being for the payment of a debt or performance of a promise.

PLEDGE AND BAILMENT – DISTINCTION

In both the cases, there is a delivery of movable goods and obligations to return the
goods to the actual depositor. But, there are some points of distinction as under:

1) In a pledge, the bailment of goods is made as a security for the due discharge of
legal obligation. In ordinary bailments, this is not so.
2) In the case gratuitous bailment, the bailee is bound to return the goods on demand
by the bailor. On the other hand, pledge is not bound to deliver or return the goods
delivered as security on demand by the bailor, unless and until, the debt is repaid
or promise is performed.
3) On a bailment of goods, the bailee will get the right of possession of the goods
bailed, where as, in a pledge the pledge obtains a special property in the goods
pledged.
4) A bailee ha a right of lien on the goods bailed, but, no right of sale. But, a pledge
has a right of sale under certain circumstances.
5) In the case of bailment, the bailee may use the goods bailed as per the terms of the
contract. In case of pledge, the pawnee cannot use the goods.
RIGHTS AND DUTIES OF THE PAWNEE:

Rights of the pawnee:


1) Right of retainer (Sec 173)
2) Right of particular lien (Sec 174)
3) Right to extra ordinary expenses (Sec 175)
4) Right in case of default of the pawnor (Sec 176)

63
1) Right of retainer (Sec 173): Sec 173 entitles the pawnee to retain the goods
pledged till he is paid not only the debt but also the interest there on, and all
expenses incurred in respect of the possession or the preservation of the goods
pledged. This section gives only aright to retain the goods and does not confer the
power to sell.
Ex – A, in a large city, pledges his car to b as security for a debt. B stores the car
at a public garage. B is entitled to reimbursement for reasonable storage charges
and may hold the car for any such expenses as well as security for the debt.

2) Right of particular lien (Sec 174): A pownee cannot retain the goods for any
debt other than that for which the pledge was made. But, in the absence of
anything to the contrary, he can retain the goods pledged for subsequent advances
(Sec 174). This right does not extend to any previous debt due to the pawnee.

3) Right to extra – ordinary expenses (Sec 173): Under sec 173, a pawnee has a
lien for necessary expenses only. But, sec 175 entitles the pawnee to recover from
the pawnor, extra – ordinary expenses incurred by him for the preservation of the
goods pledged. But, he ha no right of lien over the goods for extraordinary
expenses. An example for extra ordinary expenses is the cost of curing a pledged
cow, if it develops a disease.

4) Right in case of default of the pawnor (Sec 176): Where a pawnor makes
default in the payment of the debt or performance of the promise, at the stipulated
time, Sec 176 provides the following rights to the pawnee:
a) He may bring a suit against the pawnor upon the debt or promise and may retain
the goods pledged as a collateral security; or
b) He may sell the property pledged on giving the pawnor, reasonable notice of the
sales.

Duties of the Pawnee:


A pawnee is under a duty to take reasonable care of the goods pledged
with him. Further, the pawnee is not permitted to use the goods pledged, and if he does
so, he will be responsible for damages for any loss caused due to such use. He is bound to
surrender the pledged goods on the payment of the debt.
RIGHTS AND DUTIES OF THE PAWNOR:
Where a pawnor defaults in payment of the pledge amount in the stipulated time, he can
yet pay it before the actual save is hold. The right of redemption can only be exercised
prior to actual sale. But, he is bound to pay expenses that may have arisen from his
default and which the pawne had to bear (Sec 177).

64