LAW OF CONTRACT II

CONTRACT OF GUARANTEE

BAILOR’S DUTY

Duty to disclose defects: Section 150 of the Indian Contract Act, of 1872 bound the bailor with
certain duties to disclose the latent facts specifically about defects in goods. Bailor’s duties of
disclosure are:

• Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods that
he is aware of to Bailee that can interfere with the use of goods or expose him to
extraordinary risks. Failure to do the same will make the bailor liable for damages.

• Non-Gratuitous Bailment (Bailment for Reward): This duty particularly deals with the
goods given on hire. As per this provision, when the goods are bailed for hire, then in such a
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situation even if the bailor is aware of the defect in the goods or not will be held liable for the
injury that has been caused due to the existence of such defect.

CONTRACT OF GUARANTEE

Duty to indemnify the bailee: To indemnify the loss (Section 159) Indemnity means a promise
to pay for the loss suffered. According to Section 159 of the Indian Contract Act, 1872 bailor
must indemnify the loss suffered by the bailee under the contract of bailment.

Duty to bear risks: It is the duty of bailor to bear the risk of loss, deterioration and destruction,
of the things bailed, provided that bailee has taken reasonable care to protect the goods from
loss etc
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Duty to receive back the goods: It is the duty of the bailor that when the bailee, in accordance
with the terms of bailment, returns the goods to him that: bailor should receive them. If the
bailor, without any reasonable reasons refuses to take the goods back, when they are offered at a
proper time and at a proper place, the bailee can claim compensation from the bailor for all
necessary and incidental expenses, which the bailee undertakes to keep and protect the goods.

To pay damages for defect in bailor's title (Section 164)-The bailor is responsible to the
bailee for any loss which the bailee may sustain the reason that the bailor was not entitled to
make the bailment, or to receive back the goods, or to give directions, respecting them.

To put bailee into possession (Section 149)-The delivery to be bailee may be made by doing
anything which has the effect of putting the goods in the possession of the intended bailee or of
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any person authorised to hold them on his behalf. Kaliaperumal V. Visalakshmi (1938) In this
case Madras high court held that delivery is an essential element of bailment.

CONTRACT OF GUARANTEE

Receive back the goods- The bailor must receive back the goods when returned by the bailee.
If the bailor wrongfully refuses to receive back the goods, he shall be liable to pay ordinary
expenses of custody of goods incurred by the bailee.

In Ultzen v. Nichols, the plaintiff went to the defendant's restaurant for dining. When the
plaintiff went to the defendant's restaurant, a waiter took the plaintiff's coat from him without
being requested to do so and hung it on a hook behind the plaintiff. When the plaintiff wanted
to leave, he found that the coat was missing. It was held that the defendant was the bailee of the
coat as his servant had assumed the possession of the same and he was, therefore, liable for its
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loss which was because of the defendant's negligence. But if the owner maintains control over
the goods, there is no bailment. When a person keeps his goods on the premises of another
person but continues to have control over them, this is not sufficient delivery for being
considered to be bailment.

In Jagdish Chandra Trikha V. Punjab National Bank, the plaintiff's father had entrusted a
box containing 480 tolas, i.e., about 5600 grams of gold ornaments and jewelry to the defendant
Bank at Peshawar before the partition of the country. The jewelry box was locked, wrapped, and
sealed when delivered. The Bank gave a proper receipt describing the contents of the box.
From Peshawar, the box came to the Lahore branch of the Bank and thereafter to the Delhi
branch. It was found that when the jewelry box was delivered to the plaintiff in Delhi, it was not
in the same condition as at Peshawar. The Lahore branch of the bank had its wrapper on the box
and was not locked.
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The plaintiff thereafter claimed the gold ornaments and jewelry deposited with the bank or their
value amounting to Rs. 3,72,400. It was held that the position of the Bank was that of a bailee
and it failed in its duty to take care of the goods and return them to the plaintiff. The Bank was
held liable to pay the sum of Rs. 3,72,400 along with simple interest @ 12% p.a from the date of
the institution of the suit till the date of realization of the amount

CONTRACT OF GUARANTEE

In Ram Gulam v. Govt. of U.P, the Allahabad High Court expressed the view that obligations
of a bailee can arise only out of a contract of bailment and not otherwise. In this case, the
plaintiff's property was stolen.
The same was recovered by the police and was kept in the police Malkhana. From there, it was
again stolen and could not be traced. The plaintiff brought an action to recover the value of the
property. The state was not held liable, firstly, because it did not occupy the position of a bailee
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and, therefore, it was not liable as such, and secondly, the police, when it took and kept the
property in its possession, was acting in the discharge of the obligations imposed by law, rather
than in obedience to some executive orders.

DUTIES OF THE BAILEE

1. Duty to take care (151)

The bailee is under obligation to take care of the goods bailed to him as an ordinarily prudent
man in his place would have taken under a similar situation. It is uniform in nature. It does not
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carry any exceptional situations; rather it covers all the contracts of bailment. Giblin v.
McMullen

a gratuitous bailee is bound to take the same care of property entrusted to him as a reasonable,
prudent, and careful man may fairly be expected to take his property of a similar description.
Hence, the bailee is bound to take reasonable care whether the bailment is gratuitous or
nongratuitous.
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Lakhichand Ramchand v. G.I.P. Rly. Co.

Additionally, the obligation of a bailee includes not only the duty to take all reasonable
precautions to obviate the risks but also the duty to take all proper measures for the protection of
the goods when such risks have already occurred. The parties are also given the liberty to insert
any special provisions increasing the responsibility of the bailee in respect of care to be taken
against the goods bailed, but they cannot decrease the standard of care.

Central Bank of India v. Grains and Gunny Agencies

The burden proof lies on the bailee to prove that he took as much care of the pledged goods as
an ordinary prudent man as required by section 151.
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Sheik Mohamed v. The British Indian Steam Navigation Co.Ltd

It was pointed out that a bailee’s liability cannot be reduced by any provision which is under the
limit provided in Section 151; also it was held that any such contract which results in complete
exclusion of bailee from liability in case of his negligent act is not valid.

Pitt Son and Badgery Ltd v. Proulefco SA

A wool broker sold wool but retained it in his store. The store was wooden, old and surrounded
by a fence with gaps large enough for a person to enter. The wool was destroyed in the fire
caused by an intruder who entered through the gaps, and set light to the store from outside. It
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was held that the broker, as a bailee, was responsible for the loss; he was in breach of duty
because the fence was insufficiently secure to keep out intruders.

Union of India V Udho Ram and Sons

Certain goods were consigned by M/s Radha Ram Sohan Lal from Calcutta to Delhi by rail.
Some of the articles out of this consignment, having been stolen during transit, the same were
not delivered to the plaintiffs. The plaintiffs brought an action to recover compensation for the
same. The trial court found that the wagon in which the goods were loaded was properly rivetted
and sealed when the train left Howrah at 1:30 am, but seals and rivets of one of the doors of the
wagon were found open when it reached Chandanpur station after 2 hours. The theft took place
at an in-between point when the train stopped there for the home signal at 2:05 am for about 15
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minutes. It was found that railway protection police were also there in the guard’s van. It was
held that the railway did not take due care. Firstly, they did not prove from the record that the
railway protection police who escorted the train were sufficient in strength. Secondly, unlike a
prudent man, the railway protection police did not keep an eye on wagons, particularly when the
train stopped, to prevent the theft of the goods. Hence, the defendants were held liable.

Calcutta credit corporation ltd v. Prince peter of Greece.

A car received for repairs by an automobile garage was damaged by fire. The garage was a
pucca structure, walled by wooden planks. In the garage were put not only vehicles containing
petrol but also other combustibles like thinners and paints. The garage was portioned by wooden
walls and a part of it was allowed to be used for cooking purposes. There was an inadequate
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arrangement for extinguishing the fire. The room in which the plaintiff’s car was kept could not
be opened for 15 minutes after the fire was noticed, as the keys of the rooms were not available.
The defendants had not taken due care and they were held liable.

In this case the defendant i.e., Bailee cannot be excused by pleading that he had taken similar
care of his goods or his goods have been lost or damaged along with those of the bailor or that
the bailor knew that his goods were being kept negligently. The court held that the bailee has to
take care as a man of prudence or reasonable care.

Pyramid finance Ltd. V. Ramakrishna Iyer

Bailee will not be held liable for the loss caused due to the destruction of the fire.
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CONTRACT OF GUARANTEE

2. Duty not to make unauthorized use of the goods bailed (section 153-154) - When the goods
have been bailed for a particular purpose, the bailee is supposed to use them only for that
purpose and none else. If he makes unauthorized use of the goods bailed, there are two
remedies available to the bailor:

• The bailor may terminate the bailment - According to section 153 If the bailee make
unauthorize use of goods or uses the goods which is inconsistent with the conditions of
bailment, then the bailor has the option to terminate the bailment and claim back the goods.

Pyramid finance Ltd. V. Ramakrishna Iyer

Bailee will not be held liable for the loss caused due to the destruction of the fire.
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2. Duty not to make unauthorized use of the goods bailed (section 153-154) - When the
goods have been bailed for a particular purpose, the bailee is supposed to use them only for
that purpose and none else. If he makes unauthorized use of the goods bailed, there are two
remedies available to the bailor:

• The bailor may terminate the bailment - According to section 153 If the bailee makes
unauthorized use of goods or uses the goods which is inconsistent with the conditions of
bailment, then the bailor has the option to terminate the bailment and claim back the goods.

Illustration- A lets B, hire, a car for his use. B lends the car to C for commercial purposes. A can
terminate the bailment.
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CONTRACT OF GUARANTEE

• The bailor may recover compensation for the loss caused due to unauthorized use of goods –
According to section 154, If the bailee makes such use of goods which is contrary to the
conditions of bailment, and there happens any damage to the goods due to such unauthorized
use, the bailee is liable to compensate the bailor for such loss.

Illustration- A hires a car from B for traveling to Delhi but instead goes to Mumbai. The car met
with an accident. A is liable to compensate B for loss.

3. Duty not to mix the bailor’s goods with his goods. (section 155-157). Section 155- Mentions
that Bailee, with the consent of the bailor, can mix the bailor’s goods with his goods and in
such case, both shall have an interest in proportion to their respective shares, in the mixture
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produced. If the bailee without the bailor’s consent mixes the bailor’s goods with his goods,
there are two possibilities.

Section 156– When the goods can be separated;

When the mixed goods can be separated, both remain the owners by there respective shares. The
bailee has to bear the expenses of the separation of goods and also for any damage arising from
the mixture. same.

Section 157– When the goods cannot be separated;

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If the nature of the goods is such that the bailor’s goods cannot be separated from those of the
bailee, then it is deemed to be the loss of goods and the bailor can recover compensation for the
same.

4. Duty to return the goods on the fulfillment to the purpose (section 160, 161, 165 – 167)

The main duty of the bailee is to return the delivered goods or deliver them according to the
bailor’s directions.

Section 160– According to this section “The bailee must return, or deliver according to the
bailor’s directions, the goods bailed, without demand, as soon as the time for which they were
bailed has expired, or the purpose for which they were bailed has been accomplished.”
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Section 161– “If by the fault of the bailee, the goods are not returned, delivered or tendered at the
proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods
from that time.”

If the bailee is not in the position to return the goods bailed to him, for instance, when they are
lost due to the fault of his servants or anybody, then it is the bailee’s responsibility for such loss.

Section 165 says that in the cases involving more than one owner of the goods bailed, the bailee
is under obligation to return it to any one of the owners or as per directions given to him.

Isufalli v. Ibrahim - The bailee is under a duty to return the goods bailed on the expiration of the
period of bailment unless he can show good cause for not returning them
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CONTRACT OF GUARANTEE

Isufalli v. Ibrahim

The bailee is under a duty to return the goods bailed on the expiration of the period of bailment
unless he can show good cause for not returning them. Where an article is hired for use or a
purpose but such article is unfit for such use or purpose, this is treated as a breach of warranty,
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and the bailee is not bound to return it to the bailor because the purpose cannot be
accomplished.
In such a case, the bailee may give notice to the bailor who is then bound to take it back.

CONTRACT OF GUARANTEE

5. Duty to deliver increase or profit accrued from bailment:

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Section 163 of ICA states that “in the absence of any contract to the contrary, the bailee is bound
to deliver to the bailor, or according to his directions, any increase or profit which may have
accrued from the goods bailed.” This section provides that if there is any gain with regards to
the goods bailed, then such gain must be handed over to the bailor along with the goods and the
bailee is not entitled to keep it with him. But the bailor cannot claim profit or increase before the
completion of the purpose of bailment or before the expiry of time of bailment contract.