CONTRACTS OF INDEMNITY

Adamson v. Jarvis (Cattle auctioneer)

The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock did not belong to the defendant, but to another
person, who made the auctioneer liable and the auctioneer in his turn, sued the defendant for
indemnity for the loss that he had thus suffered by acting on the defendant’s directions.

The Court laid down that the plaintiff, having acted on the request of the defendant, was entitled
to assume that, if, what he did, turned out to be wrongful, he would be indemnified by the
defendant.

INDEMNITY

Indemnity, in English law, means a promise to save a person harmless from the consequences
of an act. Such a promise may be express or implied.

INDIAN V. ENGLISH LAW OF INDEMNITY

The English definition of indemnity is wide enough to include a promise of indemnity against
loss arising from any cause whatsoever (loss caused by fire or some other accident). Every
contract of insurance, other than life insurance, is a contract of indemnity.

However, Section 124 of the Indian Contract Act of 1872 is narrower. It states:

S. 124. “Contract of Indemnity” defined. – A contract by which one party promises to save the
other from loss caused to him by the conduct of the promisor himself, or by the conduct of any
other person, is called a “contract of indemnity”.

As it is seen from the definition, the scope of indemnity is restricted to cases where there is a
promise to indemnify against loss caused by a person. The definition excludes from its
purview cases of loss arising from accidents like fire or perils of the sea. Loss must be
caused by some human agency.

Further, in situations like that of Adamson v. Jarvis, where cattle were sold under the instruction
of the wrongful owner, are outside the scope of this definition. The case of a loss arising from
an act done at the request of the promisor are covered by Section 223 of the Act which provides
for indemnity between principal and agent.

A promise of indemnity may be express or implied.

Secretary of State for India in Council v. Bank of India Ltd. (Forged indorsement)
A note with forged indorsement was given to a bank which received it for value and in good
faith. The bank sent it to the Public Debt Office for renewal in their name. the true owner of
the note recovered compensation from the State and the State was allowed to recover from the
bank on an implied promise of indemnity.
INSURANCE INDEMNITY
Commented [1]: Facts of Secretary of State v Bank of
India: A broker, in possession of a government promissory
note endorsed it to a bank with forged endorsement. The
bank acting in good faith applied for and got a renewed
promissory note from the Public Debt Office. Meanwhile the
true owner sued the Secretary of State for conversion who in
turn sued the bank on an implied indemnity. It was held that
– it is general principle of law when an act is done by one
person at the request of another which act is not in itself
manifestly tortious to the knowledge of the person doing it,
and such act turns to be injurious to the rights of a third
person, the person doing it is entitled to an indemnity from
him who requested that it should be done.

Almost all insurances other than life and personal accident insurance are contracts of
indemnity. The insurer’s promise to indemnify is absolute.

A suit can be filed immediately upon failure of performance, irrespective of actual loss.

EXTENT OF LIABILITY

S. 125 of the Indian Contract Act, 1872 lays down the extent of liability.

The indemnity-holder, acting within the scope of his authority, is entitled to recover the
following amounts–

(1) All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise of indemnity applies;
(2) All costs which he may be compelled to pay in such suits if, in bringing or defending
it, he did not contravene the order of the promisor, and acted as it would have been
prudent for him to act in the absence of any contract of indemnity, or, if the promisor
authorized him to bring or defend the suit;
(3) All sums which he may have paid under the terms of any compromise of any such suit,
if the compromise was not contrary to the orders of the promisor and was one which it
would have been prudent for the promise to make in the absence of any contract of
indemnity, or if the promisor authorized him to compromise the suit.

Mohit Kumar Saha v. New India Insurance Co. Ltd. (Truck case)

A motor vehicle (truck) was under indemnity insurance for Rs. 2,00,000. It was stolen and
there were no chances of recovery. It was held that the proper amount of indemnity was as
fixed by the surveyor at Rs. 1,87,492 and that it was payable with 18 per cent interest for the
delay period. The settlement of claim at a lesser amount by the insurance authorities was
arbitrary and unfair under Art. 14 of the Indian Constitution.
Gajanand Moreshwar v. Moreshwar Madan Commented [2]: implied indemnity; every insurance
contract except life insurance is indemnity; and liability
occurs when absolute loss has taken place.
The Plaintiff got a plot of land on lease from Municipal Corp. of Mumbai. The Plaintiff allowed
Defendant to erect building on that land. The Defendant, in this course, incurred debt of Rs.
5,000 from building material supplier (K), twice. On both the occasion, Plaintiff mortgaged
part of the land to K. The Plaintiff, on the Defendant’s request transferred the land to the Commented [3]: plaintiff mortgaged because the
defendant requested him to.
Defendant, on the consideration that the Plaintiff would be discharged of all the liabilities
arising out of that land. However, the Defendant failed to adhere to this consideration. The
Plaintiff filed a suit for discharge of liabilities on him, alleging the Defendant to be indemnifier.
The Court held that the Defendant was indeed liable to indemnify the Plaintiff.

Dane v. Mortgage Insurance Co.

Mrs. Dane held some deposits in an Australian Bank which the defendant company guaranteed
to pay her if the Bank defaulted. After the default, the creditors in Australia, acting under a
statutory provision, arranged for the setting up of a new bank against which they would have
certain rights, but Mrs. Dane neither voted nor consented to this. The judges held that the
contract was one of insurance and the company was liable.

DIFFERENCES BETWEEN DAMAGES AND INDEMNITY

DAMAGES
Claim only against the act of the promisor.
Contemplation of damages.
Duty to mitigate the loss caused.
Arises due to the breach of a contract.
Liquidated damages.
INDEMNITY
Can be third party claims.
Consequential, remote and unforeseen
damages can be claimed.
Claim for the debt and not damages.
Refers to the performance of a contract.
Capped indemnity.
GUARANTEE

S. 126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”–

A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a

third person in case of his default. The person who gives the guarantee is called the “surety”;
the person in respect of whose default the guarantee is given is called the “principal debtor”,
and the person to whom the guarantee is given is called the “creditor”. A guarantee may be
either oral or written.

In English law, a guarantee is defined as “a promise to answer for the debt, default or
miscarriage of another”. Essentially, in a contract of guarantee, there exists a conditional
promise in case of default.

DIFFERENCES BETWEEN INDEMNITY AND GUARANTEE

GUARANTEE
There exist three contracts.
Three parties are involved.
Contract exists as surety of creditor.
It is a consequential contract which comes
into force after a contract has been entered
into by the Creditor and Principal Debtor.
Guarantor’s liability is secondary.
Surety is not primarily or independently
liable.
Principal debt is already in existence.
Rights: S. 133-145
Strictissimi juris
INDEMNITY
There is only one contract.
Only two parties are involved.
Contract for reimbursement of loss only.
It is the original or direct contract.
Liability of indemnifier is primary.
The indemnifier is primarily and
independently liable.
Debt comes into existence, it is contingent.
Rights: S. 140 and 141
Uberrima fides

Birkmyr v. Darnell

If two come to a shop and one buys, and the other to give him credit, promises the seller, “If
he does not pay, I will” – this constitutes Guarantee.

Taylor v. Lee
If two go to a shop and one buys and the other says, “Let him have the goods, I will be your
pay master” – this is Independent liability and does not constitute Guarantee.

ESSENTIAL FEATURES OF GUARANTEE

1. Principal Debt

Recoverable debt necessary

The purpose of a guarantee being to secure the payment of a debt, the existence of a recoverable
debt is necessary. If there is no principal debt, there can be no valid guarantee.

Guarantee for void debt, when enforceable

Where the directors of a company guaranteed their company’s loan which was void as being
ultra vires, the directors were nevertheless held liable.

Guarantee of minor’s debt

Coutts & Co. v. Browne Lecky

A loan was given to an infant given by a bank. The Court held that the guarantor is not bound
to pay as there was no default (even though there was omission by the infant) – because he
himself was not bound to pay.

Kashiba v. Narshiv Shripat

In India, it has been held that, where a minor’s debt has been knowingly guaranteed, the surety
should be held liable as a principal debtor himself. Surety is liable to be sued, even though it
arises out of imperfect obligation.

If the debt is void, the contract of surety is not collateral, but a principal contract. He would be
liable as an indemnifier.

2. Consideration

A guarantee without consideration is void. But there need not be any direct consideration
between the surety and the creditor.

S. 127. Consideration for guarantee – Anything done, or any promise made, for the benefit
of the principal debtor, may be sufficient consideration to the surety for giving the guarantee.
Where a loan is given or goods sold on credit on the basis of a guarantee, that is sufficient
consideration. Similarly, where a credit has already been given and the payment having become
due, the creditor refrains from suing the principal debtor, that would be sufficient consideration
for giving guarantee.

Guarantee for past debt

M. Ghulam Husain Khan v. M. Faiyaz Ali Khan

A lessee agreed to pay the sum due under a lease by certain installments and after a few days a
person executed a surety bond binding himself to pay a certain amount in default of the payment
of installments. This past consideration is valid consideration.

Past as well as future debt

A guarantee for a past as well as a future debt is enforceable provided some further debt is
incurred after the guarantee. But there should be a clear undertaking to be liable for a past debt
and as soon as some fresh obligation is incurred, the liability for all the obligations is coupled
up.

EXTENT OF SURETY’S LIABILITY

S. 128. Surety’s liability – The liability of the surety is co-extensive with that of the principal
debtor, unless it is otherwise provided by the contract.

1. Co-extensive

The expression “co-extensive with that of the principal debtor” shows the maximum extent of
the surety’s liability. He is liable for the whole of the amount for which the principal debtor
liable and no more. Where the principal debtor acknowledges liability and this has the effect
of extending the period of limitation against him, the surety also becomes affected by it.

Condition precedent

Where there is a condition precedent to the surety’s liability, he will not be liable unless that
condition is first fulfilled. A partial recognition of this principle is to be found in S. 144 of the
ICA 1872: When a person gives a guarantee upon a contract that the creditor 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.
National Provincial Bank of England v. Brackenbury

The defendant signed a guarantee which on the face of it was intended to be a joint and several
guarantee of three other persons with him. One of them did not sign. There being no agreement
between the bank and the go-guarantors to dispense with his signature, the defendant was held
not liable.

Narayan Singh v. Chattar Singh

The Principal debtor was an agriculturalist. His liability was reduced due to the Rajasthan
Relief of Agriculture Indebtedness Act, 1957. Since the Surety’s liability is co-extensive, his
liability is also scaled down as a result.

Proceeding against surety without exhausting remedies against debtor

Bank of Bihar Ltd. v. Damodar Prasad

The Defendant guaranteed a bank loan. A default having taken place, the defendant was sued.
The Trial Court decreed that the bank shall enforce the guarantee in question only after having
exhausted its remedies against the principal debtor. The Patna HC confirmed the decree.
However, the SC overruled it.

SBI v. Indexport Registered

In this case, a composite decree was passed against the surety, the borrower and the mortgaged
property and levy execution against the surety only for the balance. The decree-holder may at
his choice enforce the decree wither against the principal debtor or creditor.

Action against the Principal Debtor alone

The creditor can proceed against the principal debtor alone. His suit cannot be rejected on the
ground tat he has not joined the guarantor as a defendant to the suit. Dismissal of the suit against
the principal debtor does not of itself absolve the surety of his liability under the contract of
guarantee.

Suit against surety alone

A suit against the surety without even impleading the principal debtor has been held to be
maintainable.
CONTINUING GUARANTEE

S. 129. “Continuing guarantee” – A guarantee which extends to a series of transactions, is

called a “continuing guarantee”.

The essence of a continuing guarantee is that it applies not to a specific number of transactions,
but to any number of them and makes the surety liable for the unpaid balance at the end of the
guarantee. A guarantee for a cash-credit account has been held to be a continuing guarantee.

Joint debtors and suretyship [S. 132]

S. 132. Liability of two persons, primarily liable, not affected by arrangement between
them that one shall be surety in other’s default – Where two persons contract with a third
person to undertake a certain liability, and also contract with each other that one of them shall
be liable only on the default of the other, the third person not being party to such contract, the
liability of each of such two persons to the third person under the first contract is not affected
by the existence of the second contract, although such third person may have been aware of its
existence.

It is based on the principle that the liability of persons who are primarily liable as joint-debtors
is not affected by any arrangement between them as to the order of their liability.

DISCHARGE OF SURETY FROM LIABILITY

1. Revocation of Continuing Guarantee

S. 130. Revocation of continuing guarantee – A continuing guarantee may at any time be

revoked by the surety, as to future transactions, by notice to the creditor.

Offord v. Davies

The defendants guaranteed the repayment of bills to be discounted by the plaintiffs for Davies
& Co. for twelve months, not exceeding 600 pounds. The defendants revoked the guarantee
before any bill was discounted. But the plaintiffs discounted the bills which remained unpaid.
The question was whether the surety had a right to revoke. The Court said that the revocation
was valid and they were not liable.

2. Revocation by surety’s death

S. 131. Revocation of continuing guarantee by surety’s death – The death of the surety
operates, in the absence of any contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions.

The termination becomes effective only for the future transactions. The surety’s heirs can be
sued for liability already incurred (but only to the extent of the property inherited by them).

3. By variance

S. 133. Discharge of surety by variance in terms of contract. – Any variance, made without
the surety’s consent, in the terms of the contract between the Principal Debtor and Creditor,
discharges the surety as to the transactions subsequent to the variance.

Bonar v. Macdonald

The defendant guaranteed the conduct of a manager of a bank. The bank afterwards raised his
salary on the condition that he would be liable for one-fourth of the losses on discounts allowed
by him. No communication of this new arrangement was made to the surety. The manager
allowed a customer to overdraw his account and the bank lost a sum of money. It was held that
the surety could not be called on to make good the loss as the fresh agreement was a substitution
of a new agreement for the former which discharged the surety.

M.S. Anirudhan v. Thomco’s Bank Ltd.

The defendant guaranteed the repayment of a loan of Rs. 20,000 given by the plaintiff bank to
the principal debtor. The guarantee paper showed the loan to be Rs. 25,000. The bank refused
to accept. The principal then reduced the amount to Rs. 20,000 and without intimation to the
surety gave it to the bank which was then accepted. The principal debtor failed to pay and the
bank sued the surety. The question was whether the alteration had discharged him. The
Court held that the surety was not discharged. This is because the variance in contract had
accrued benefit to the surety.

Amrit Lal v. State Bank of Travencore

The maximum limit agreed upon by the surety was Rs. 1,00,000 for the credit. It was
subsequently reduced to Rs. 50,000 and then increased to Rs. 1,00,000. The Court held that the
surety is not discharged as the variance in the contract is unsubstantial.

4. Release or discharge of principal debtor [S. 134]

S. 134. Discharge of surety by release or discharge of principal debtor – The surety is
discharged by any contract between the creditor and the principal debtor, by which the principal
debtor is released, or by any act or omission of the creditor, the legal consequence of which is
the discharge of the principal debtor.

 This Section provides for two kinds of discharge from liability. If the creditor makes any
contract with the principal debtor by which the latter is released, then the surety is
discharged of his liability. Or, when the creditor does some act or omission, the legal
consequence of which is the release of the principal debtor, then even in that case the surety
is discharged.

5. Composition, Extension of Time and Promise not to Sue [S. 135]

This Section gives three modes of discharge of the Surety from liability:

1. Composition;
2. Promise to give time; and
3. Promise not to sue.

Composition: Composition involves the variation in the original contract. If a creditor makes
a composition with the principal debtor, without consulting the surety, the latter is discharged.

Promise to give time: When the time for the payment of the guaranteed debt comes, the surety
has the right to require the principal debtor to pay off the debt. Accordingly, it is one of the
duties of the creditor towards the surety not to allow the principal debtor more time for
payment.

Promise not to sue: If the creditor under an agreement with the principal debtor promises not
to sue him, the surety is discharged.

Mahant Singh v. U Ba Yi

A failure to sue the principal debtor until the recovery of debt is barred by the statutes of
limitation, does not operate as a discharge of the surety.

6. By impairing Surety’s remedy [S. 139]

S. 139. Discharge of Surety by creditor’s act or omission impairing surety’s eventual

remedy. – If the creditor does any act which is inconsistent with the right of the surety, or
omits to do any act which is his duty to the surety requires him to do, and the eventual remedy
of the surety himself against the principal debtor is thereby impaired, the surety is discharged.

 It is the plain duty of the creditor not to do anything inconsistent with the rights of the
surety. A surety is entitled, after he pays off the creditor, to be indemnified by the Principal
Debtor. If the creditor’s act or omission deprives him the benefit of this remedy, he is
discharged from his liability.

State of M.P. v. Kalu Ram

A bank granted a loan on the security of the stock in godown. The loan was also guaranteed by
a surety, the goods were lost from the godown on account of negligence of the bank officials.
The surety was discharged to the extent of the value of the stock so lost.

RIGHTS OF SURETY

Rights against the Principal Debtor

1. Right of Subrogation [S. 140]

When the surety has paid all that he is liable for under the contract of guarantee, the
surety steps into the shoes of the creditor. Thus, after payment, he possesses all the
rights that a creditor has against the principal debtor.
2. Right to Indemnity [S. 145]
In every contract of guarantee there exists an implied promise by the principal debtor
to indemnify the surety after the surety has rightfully paid the sum due.

Rights against the Creditor

1. Right to Securities [S. 141]

The surety is entitled to every remedy that a creditor is entitled to against the principal
debtor, including the enforcement of every security. A surety gets the right to sureties
as soon as he pays off the creditor.
Goverdhan Lalan v. Bank of Bengal
A car was delivered on hire-purchase, the payment of installments of hire was
guaranteed by the surety
Bhushayya v Suryanarayana

2. Right to share reduction

 Each guarantor is entitled to part of the amount bearing to the whole in the same
proportion.

3. Right to set-off
If the creditor sues the surety, the surety may have the benefit of the set-off, if any, that
the principal debtor had against the creditor. He is entitled to use the defenses that a
principal debtor can use against a creditor.

Rights against Co-sureties

1. Release of one is not discharge of others [S. 138]

The creditor may at his will release any one of the co-sureties from his liability.
However, this does not automatically discharge the other sureties from their liabilities.
The released co-surety will still be liable to others for contribution in the event of
default.
2. Right to Contribution [S. 146 and S. 147]
When the co-sureties are liable for equal amounts, then in case of default, each one pays
an equal share of the whole debt.
When the co-sureties are bound in different sums, they are liable to pay equally as far
as the limits of their respective obligations permit.
BAILMENT

Bailment is defined in S. 148 of the ICA, 1872.

S. 148. “Bailment”, “bailor” and “bailee” defined – 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”.

ESSENTIAL FEATURES

1. Delivery of possession
The first important characteristic in bailment is “the delivery of possession” by one
person to another. In this regard, it must be differentiated from mere “custody”. One
who has custody without possession, like a servant, or a guest using his host’s goods is
not a bailee. The goods must be handed over to the bailee for whatever is the purpose
of bailment. Once this is done, a bailment arises, irrespective of the manner in which
this happens.
Bank Locker
In order to constitute bailment within the meaning of Section 148, it is necessary to
show that actual and exclusive possession of the property was given by the hirer of the
locker to the bank. It is only then that the question of reasonable care and damages
would arise.
Actual or Constructive Delivery
S. 149. Delivery of bailee how made – The delivery to the bailee may be made by
doing anything which has the effect of putting the goods in the possession of the
intended bailee or of any person authorized to hold them on his behalf.
Delivery of possession is of two kinds–
1) Actual Delivery
2) Constructive Delivery

When the bailor hands over to the bailee physical possession of the goods, that is called
“actual delivery”. “Constructive delivery” takes place when there is no change of
physical possession, goods remaining where they are, but something is done which has
the effect of putting them in the possession of the bailee.
 Transfer of possession w/o formal arrangement: Ultzen v. Nicols

If owner maintains control over goods: Kaliaperumal v Visalakshmi

Bank locker – Bailment?

Exclusive possession of Property: Atul Mehra v. Bank of Maharasthra

If one key with the bank? National Bank of Lahore v. Sohan Lal

How delivery is to be made:

• Fazal v. Salamat Rai

• N.R. Srinivas Iyer v. New India Assurance Co. Ltd
2. Delivery should be upon contract
Delivery of goods should be made for some purpose and upon a contract that when the
purpose is accomplished the goods shall be returned to the bailor. The contract may be
express or implied.
English law recognizes bailment without contract.
• Goods going into the possession of another without a Contract
• Ram Gulam v Govt of UP
• Non-Contractual bailments- English position
• Lasalgaon Co Bank Ltd v Prabhudas Hathibhai (Tobacco Case)
• State of Gujarat v Memom Muhammad (Motor vehicles seized)
• Bailment is relationship sui generis
• Basava KD Patil v State of Mysore (theft from court custody)

3. Delivery should be upon some purpose

Bailment of goods is always made for some purpose and is subject to the condition that
when the purpose is accomplished the goods will be returned to the bailor or disposed
of according to his mandate. If the person to whom the goods are delivered is not bound
to restore them to the person delivering them or to deal with them according to his
directions, their relationship will not be that of a bailor and bailee.

DUTY OF BAILOR

S. 150 deals with the duty of two kinds of bailors: 1. Gratuitous bailor; and 2. Bailor for reward.
A person who lends his articles or good without any charge is called a “gratuitous bailor”.

For a Gratuitous Bailor, there exists a duty to disclose the defects he was aware of, and if not
disclosed he is liable for loss caused due to such faults. The conditions for his liability are:

1. He should have knowledge of the defect and the bailee should not be aware.
2. The defect in the goods must be such as exposes the bailee to extraordinary risks or
materially interferes in the use of the goods.

Duty of bailor for reward

S. 150 makes it clear that “if the goods are bailed for hire, the bailor is responsible for such
damage, whether he was or was not aware of such faults in the goods bailed”. He has to examine
and remove such defects as reasonable examination would have disclosed.

Hyman v. Nye

The Plaintiff hired from the defendant for a specific journey a carriage, a pair of horses and a
driver. During the journey a bolt in the underpart of the carriage broke, the splinter bar became
displaced, the carriage was upset and the plaintiff injured. The defendant was held liable.

Reed v. Dean

The plaintiffs hired a motor launch from the defendant for a holiday on the river Thames. The
launch caught fire, and the plaintiffs were unable to extinguish it, the fire-fighting equipment
being out of order. They were injured and suffered loss. The Court held that there was an
implied undertaking that the launch was as fit for the purpose for which it was hired as
reasonable care and skill could make it. The defendant was held liable.

DUTIES OF BAILEE

There are six duties that a Bailee has:

1. Duty of reasonable care

2. Duty not to make unauthorized use
3. Duty not to mix
4. Duty to return
5. Duty not to set up jus tertii
6. Duty to return increase
1. Duty of reasonable care [S. 151 and S. 152]
The measure is “as a man of ordinary prudence would take care”.
Union of India v. Udho Ram & Sons
A man was transporting certain goods in the railways. The goods were lost. The man
filed a suit against the Railways being the bailee. The Court held that the Railways had
failed to take reasonable care and was thus liable.
Indian Airlines Corporation v. Madhuri Chowdhary

Liability of common carriers: It can limit its liability by way of contract. They are
bailees under S. 151 and S. 152, and insurers.
Indian Airlines Corporation v. Jothaji Maniram

2. Duty not to make unauthorized use [S. 154]

Goods must be used by the bailee strictly for the purpose for which they have been
bailed to him. Any unauthorized use of the goods bailed to him will make him
absolutely liable in case of damage to or loss of goods.
As per Section 153 of ICA, 1872, a bailor can terminate the bailment in case the bailee
acts inconsistent with the conditions of the contract.

3. Duty not to mix [S. 155 – 157]

The bailee should maintain the separate identity of the bailor’s goods. He should not
mix the goods of the bailor with his own goods, without his consent.
If the goods are mixed with the consent of the bailor, then both of them will have a
proportionate interest in the mix [S. 155].
If the goods are mixed without the consent of the bailor, and if the goods can be
separated, or divided, the bailee is bound to bear the expenses of separation as well as
any damage arising from the mixture [S. 156].
If the mixture is beyond separation, then the bailee must compensate the bailor for his
loss [S. 157].

4. Duty to return [S. 160 – 161]

When the purpose of the bailment is accomplished or the time for which the goods were
bailed has expired, the bailee should return the goods to the bailor without demand.
Shaw & Co v. Symmons & Sons
 The books were not duly returned. The books got burnt. Defendant was held absolutely
liable in this case.

JK Oil Mills v. Union of India

Oil was consigned with the Railways from Kanpur to Calcutta. It reached Calcutta
intact. The sender, however, instructed the Railways to bring it back to Kanpur. Before
this could be done, the oil was seized by a food inspector, who found it to be adulterated
and thus upon the order of the HC destroyed it.
Since the goods were taken away from the Railways, the bailee, by authority of law,
they weren’t held to be liable.

In case of a gratuitous bailment, a bailor can request the return of goods at any time.
However, in such a case if the loss caused to the bailee is more than the benefit derived,
then the bailor must do good such loss. A gratuitous bailment is terminated upon the
death of either the bailor or the bailee.

In the case of bailment by several joint owners, the bailee may return the goods to
any one of the joint owners unless there is contract to the contrary.

5. Duty not to set up jus tertii

A bailee is not entitled to set up, as against the bailor’s demand, the defence of jus tertii,
that is to say, that the goods belong to a third person. The bailee is estopped from
denying the right of the bailor to bail the goods and to receive them back.
If the bailee has already delivered the goods to a person other than the bailor who has
better title than the bailor, and yet the bailor sues him then he may prove that the person
he delivered to had a better title to the property than the bailor.

6. Duty to return increase [S. 163]

The bailee is bound to return to the bailor natural increases or profits accruing to the
good during the period of bailment.

FINDER OF GOODS

S. 71 states that a finder of goods is liable in the same way as a Bailee. The rights of a finder
of goods are enumerated in:
1. S. 168 – Right to sue for specific reward offered.

2. Right to lien

3. S. 169 – The right to dispose the goods if:

I. If the owner cannot be found with reasonable diligence

II. Owner refuses to pay the charges to the finder

III. Perishable goods/ losing greater part of value

IV. Lawful charges of goods amount to two-thirds of its value

RIGHTS OF THE BAILEE

The bailee has the following rights:

1. Right to compensation
2. Right to expenses or renumeration
3. Right of lien
4. Right to sue

1. Right to compensation [S. 164]

In case a bailor does not have the right to bail goods or receive them or give directions
about how the bailed goods need to be used, and consequently the bailee is exposed to some
loss, then the bailor is liable to compensate the loss.

2. Right to expenses or renumeration [S. 165]

Where in the contract of bailment there exists no reward to the bailee, then the bailee has
the right to ask the bailor for expenses or renumeration for the necessary expenses incurred
by him in the reservation or usage of the bailed goods.

3. Right of lien [S. 170 – 171]

The right to retain the goods until the charges due in respect of the property bailed are due
is called the right of lien.
Particular lien [S. 170]: Bailee is entitled only to particular lien, i.e., to retain only that
particular property in respect of which charge is due. But this right is subject to certain
 conditions: Exercise of labor or skill, in accordance with contract, Goods on which skill
rendered.

General lien [S. 171]: The right to hold the goods bailed as security for a general balance
of account. It extends to bankers, factors, wharfingers, attorneys and policy brokers.

4. Right to sue
S. 180 enables a bailee to sue any person who has wrongfully deprived him of the use or
possession of the goods bailed or has done them any injury. The bailee’s rights and
remedies against the wrongdoer are just as same as that of an owner.
[Purshottam Das v. UOI]
PLEDGE

S. 172 of the ICA 1872 defines what a pledge is.

S. 172. “Pledge”, “pawnor” and “pawnee” defined –

The bailment of goods as security for payment of debt or performance of a promise is called
“pledge”. The bailor is in this called the “pawnor”. The bailee is called the “pawnee”.

A pledge is a special kind of bailment. The chief basis of distinction is the object of the
contract. Where the object of the delivery of good is to provide a security for a loan or for
the fulfilment of an obligation, that kind of bailment is called pledge.

ESSENTIAL CHARACTERISTICS OF PLEDGE

1. Delivery of Possession
The property pledged must be delivered to the pawnee.
Constructive delivery: Delivery of the key of the godown where the goods are stored.
Delivery by attornment: Where the goods are in possession of a third person, who, on
the direction of the pledger, consents to hold them on the pledgee’s behalf.

Revenue Authority v. Sudarsanam Picture

The producer of a film borrowed a sum of money from a financier-distributor and
agreed to deliver the final prints of the film when ready. The agreement was held not
to amount to Pledge, as there was no transfer of possession.

Morvi Mercantile Bank Ltd. v. Union of India

Certain goods were consigned with the Railways to “self” from Bombay in transit to
Okhla. The consigner endorsed the railway receipts to the appellant bank against an
advance of Rs. 20,000. The goods having been lost in transit, the bank as an endorsee
of the railway receipts and pledgee of the goods sued the Railways for the loss of the
goods which were worth Rs. 35,500. The Trial Court rejected the action. The Bombay
HC allowed recovery up-to Rs. 20,000 only.
The SC was called upon to decide whether a railway receipt could be equated to with
the goods covered by the word “goods” for the purpose of constituting delivery of
goods. The Court held that the delivery of railway receipts was the same as the delivery
of the goods, and that the pledge was therefore valid and the pledgee was entitled to sue
 for the loss (full value). Delivery of documents of title which would enable the
pledgee to obtain possession is equally effective to create a pledge.

Pledge by Hypothecation
Sometimes goods are allowed to remain in the custody of the pledger for some special
purpose. But this does not militate against the effectiveness of the pledge.

Reeves v. Capper
The Captain of a ship pledged his chronometer with the shipowner who allowed him to
use the instrument for the purpose of a voyage. The Captain pledged it over again with
another person. The Court held that the first pledge is valid. In the same way a
constructive pledge comes into existence as soon as the pawnor, without actually
delivering the goods, agrees to hold them for the pawnee and promises to deliver to
them on demand.

Bank of Chittoor v. Narasimbulu

A cinema projector and accessories were pledged with a Bank. The Bank allowed the
property to remain with the pledgers, since they formed the equipment of a running
cinema. Subsequently, the pledgers sold the machinery. The Court held that the sale
was subject to the pledge [there was a constructive delivery or delivery by attornment
to the Bank].

2. In pursuance of contract
The delivery of property must be made by the pledger to the pledgee in pursuance of a
contract. Delivery may be made before or in contemplation of an advance, which turns
into a pledge as soon as advance is made. Delivery and advance need not be
simultaneous.

Blundell Leigh v. Attenborough

On November 1, 1919, the plaintiff handed her jewelry to one Miller to value it and let
her know what offer he could make as to lending her money: he was to keep the jewelry
as security if he made the advance. On the same day, Miller pledged the jewelry with
the defendants, a pawnbroker, who in good faith, advanced 1000 pounds on it. On
November 5, Miller advanced 500 pounds to the plaintiff. Miller died. The plaintiff
 came to know the facts. She paid the amount she had borrowed and sued the defendant
for the return of her jewelry.
She contended that Miller was merely acting as a gratuitous bailee and there was no
valid pledge created. However, the Court held that the pledge is valid. Delivery made
on November 1 was good delivery for the purpose of creating a pledge.

RIGHTS OF PAWNEE

1. Right of Retainer [S. 173 & S. 174]

S. 173. Pawnee’s right of retainer. – The pawnee may retain the good pledged not
only for a payment of the debt or the performance of the promise, but for the interest of
the debt, and all necessary expenses incurred by him in respect of the possession or for
the preservation of the goods pledged.

S. 174. Pawnee not to retain for debt or promise other than that for which goods
pledged: Presumption in case of subsequent advances. – The pawnee shall not, in
the absence of a contract to that effect, retain the goods pledged for any debt or promise
other than the debt or promise for which they are pledged; but such contract, in the
absence of anything to the contrary, shall be presumed in regard to subsequent advances
made by the pawnee.

 The right of the pawnee to retain the goods pledged exists until the dues are paid.
 The right to retain exists for the interest due on the debt and all necessary
expenses incurred for the preservation and possession of the pledged goods.
 The right to retain does not extend to the payment of those debts for which the goods
weren’t pledged, unless there is a contract to the contrary.
 However, if after a pledge is created, a subsequent advance is made without any
security, a contract to burden the same goods shall be presumed.

Bank of Bihar v. State of Bihar

The goods which were under the pledge of a Bank were seized by the State of Bihar.
The Court held that the seizure could not deprive the pledgee his right to realize the
amount for which the goods were pledged. Thus, the State was bound to indemnify
the Bank up to the amount which would have been realized from the goods.
 Central Bank of India v. Siriguppa Sugars and Chemicals Ltd.

A sugar manufacturing company had pledged its stock of sugar with a lending Bank. It
was held that the rights of the Bank over the pawned sugar had precedence over the
claims of the Cane Commissioner for the payment to cane growers and claims of
workmen.

In essence, the pawnee has a special interest in the pledged goods which takes
precedence over any other creditor.

2. Right to Extraordinary Expenses [S. 175]

The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by
him for the preservation of the goods pledged. For such expenses, however, he does not
have the right to retain the goods. He can only sue to recover them.

S. 175. Pawnee’s right as to extraordinary expenses incurred. – The pawnee is

entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged.

3. Right to Sell [S. 176]

S. 176. Pawnee’s right where pawnor makes default. – If the pawnor makes default
in payment of the debt, or performance, at the stipulated time, of the promise, in respect
of which the good are pledged, the pawnee may bring a suit against the pawnor upon
the debt or promise, and retain the goods pledged as collateral security; or he may sell
the thing pledged, on giving the pawnor a reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.

 Two distinct rights are given to the pledgee as per Section 176. Firstly, the pledgee
may sue upon the debt and retain the goods as collateral security. Secondly, he may
sell the goods after reasonable notice to the pledger.
 The two rights a disjunctive.
 The right of sale can be exercised even against a time-barred debt.
 Lallan Prasad v. Rahmat Ali

The defendant borrowed Rs. 20,000 from the plaintiff on a promissory note and gave
him aero scrapes worth Rs. 35,000 as security for the loan. The plaintiff sued for
repayment of the loan, but the but was unable to provide the security as he had sold it.
Therefore, his action for the loan was rejected.

Prabhat Bank v. Babu Ram

One of the terms in the loan agreement was that the Bank could sell off the securities
without any notice to the pawner. The pawner defaulted in payment. The Bank sent a
reminder, but the pawner asked for more time. The Bank then disposed off the
securities. The Court held this sale to be bad in law. The Court emphasized on the
reasonable nature of the notice required under S. 176.

K M Hidyatullah v. Bank of India

The petitioner appeared to have pledged certain gold jewels with the respondent for a
borrowing of certain amount on 10-12-1993; and that on the petitioner failing to repay
the borrowed amount within the stipulated period, the respondent Bank was obliged to
bring the jewels for auction after giving reasonable notice to the petitioner. The auction
is stated to have been held on 20-5-1997. The Court held that there is absolutely no
scope for holding that merely because there is a period prescribed for filing of the
suit, it should be held that in the event of the pawnee resorting to the alternate course
of sale also, the period prescribed for the suit should be extended.

A PLEDGEE CAN SELL THE GOODS TO HIMSELF

Dhani Ram and Sons v. Frontier Bank

Dhani Ram pledged his shares against the loan to a bank. Dhani ram committed default.
Bank transferred the shares to itself. The Court held that a sale to the pledgee himself
is not void. The pledger in this case may hold the pledgee liable in case of any loss that
he may have suffered by the reason that the goods have been given a value less than
their market price.
RIGHTS OF A PAWNOR

Right to Redeem [S. 177]

S. 177. Defaulting pawnor’s right to redeem. – If a time stipulated for the payment of the
debt, or performance of the promise, for which the pledge is made, and the pawnor makes
default in payment of the debt or performance of the promise at the stipulated time, he may
redeem the goods pledged at any subsequent time before the actual sale of them; but he must,
in that case, pay, in addition, any expenses which have arisen from his default.

 The right to redeem continues up to the time on the expiry of which the pawnee has notified
that the goods would be sold. But the right continues even longer according to S. 177, i.e.,
till the actual sale of the goods.

M R Dhawan v. Madan Mohan

Shares were pledged. The Company issued bonus and rights shares. The Court held that these
increases belonged to the pawnor. The pawnor has the right to take back with the goods the
increase, if any, that the goods have undergone during the period of pledge.

WHO CAN PLEDGE

Non-owners

Purushottam Das v. UOI

The Railway Company delivered goods on a forged railway receipt. The goods were thereafter
pledged. The defendants contented that the Railways were too negligent. But the Court held
that the pledge was not valid.

The only circumstances in which a non-owner can pledge is:

1. By Mercantile Agent
2. By person in possession under a voidable contract
3. By pledgee

1. By mercantile agent [S. 178]

A pledge by a mercantile agent is valid only if the goods are in possession with owner’s
consent and the pledge made must be in the ordinary course of business and such pledge
must be done in good faith.
2. By person in possession under voidable contract [S. 178-A]
Where goods are pledged by a person who has obtained possession under a voidable
contract, the pledge is valid, provided that the contract has not been rescinded at the time
of the pledge and the pledgee has acted in good faith and without notice of the pledger’s
defect of title.
Phillips v. Brooks Ltd.
On 15 April 1918, a man named North entered Phillip's jewelry shop and said, "I am Sir
George Bullough". He wrote a dud cheque for £3000 to pay for some pearls and a ring. He
said he lived in St. James's Square. Mr. Phillips checked the phone directory and found
there was someone there by that name. Mr. Phillips asked if he would like to take the
jewelry with him and Mr. North said he would leave the pearls but take the ring 'for his
wife's birthday tomorrow'. Mr. North then pawned the ring to Brooks Ltd for £350. When
the false cheque was dishonored, Phillips sued Brooks Ltd. to get the ring back. The Court
held that the pledge was valid, it being made by a person in possession under a voidable
contract.
3. By Pledgee [S. 179]
Where a person pledges goods in which he has only limited interest, the pledge is valid
only to the extent of that interest.
Jaswantrai Manilal v. State of Bombay
A Co-operative Bank had an overdraft account with the Exchange Bank, which was secured
by the deposit of certain securities. After many dealings and adjustments, the last position
of the account was that the overdraft limit was set at Rs. 66,105 and the securities under
the pledge of the Bank were worth Rs. 75,000. The Co-operative Bank did not, however,
make use of this overdraft facility for a very long time and when it attempted to sue the
Exchange Bank it was itself in financial straits and had pledged the securities first with the
Canara Bank and then having redeemed them, pledged them again with a private financier.
The Court held that the pledge was not valid. So long as there was no over-draft by the
pledger, the pledgee had no such interest as it would have enabled it to sub-pledge to a third
party.