LAW OF CONTRACT - II

CONTRACT OF BAILMENT AND PLEDGE

BY- SHRADHA BARANWALASSISTANT PROF.

COLS, UPESsbaranwal@ddn.upes.ac.in

BAILMENT AND PLEDGE (148-181)Section 148. Defines Bailment, Bailee and BailorEssentials of bailment –• Delivery of goods • One person to another• For a purpose• Upon a contract• Delivery or disposal of the goods• Change of possession and not mere custody

Pre-existing possession of goods not delivered under contract of bailment – constructive delivery

Bailor – who delivers the goodsBailee – who receives the goods

Implied contract to follow the directions of the bailor

No contract of bailment without an obligation to return or dispose of

Non contractual bailment - egFinder of the goodsProperty seized wrongfully

CASE LAWS ON THE NATURE OF BAILMENT

• State of Gujarat v. Menon Mohammad, AIR 1967 SC 1885

• Mohammad Murad v. Govt. of U.P. AIR 1956 All 75

• Ram Gulam v. U.P. Govt. AIR 1950 All 206

• National Bank of Lahore v Sohan Lal AIR 1962 Pun 534

• Lasalgaon Merchants Cooperative Bank Ltd. v Prabhudas Hathibhai AIR 1966 Bom 134

• Trustee of the Port of Bombay v Premier Automobiles Ltd. AIR 1981 SC 1982

CLASSIFICATION OF PURPOSES FOR BAILMENT

For hire (Sec. 150) For Custody (Sec. 158) For Carriage (Sec. 158) To work on by putting labour and skill (Sec.

158, 170) For Loan (Sec. 159) Gratuitous Bailment (Sec. 159, 162) For security and repayment of debt (Sec.

172) For security for performance of promise

(Sec. 172)

DUTIES OF THE BAILOR (SEC. 149, 150)

Sec. 149 – Delivery by doing anything which has the effect of putting the goods in possession of the intended bailee

Actual and constructive delivery of goods

Gov. General of India in Council v. Jubilee Mills AIR 1953 Bom 46

Kaliaperumal v. Visalakshmi AIR1938 Mad 32

N.R. Srinivasa Iyer v New India Insurance Co. AIR 1983 SC 899

Section 150. Bailor’s Duty to disclose faults in goods bailed

Duty to disclosure of a gratuitous bailorLiability in case of knowledge

Duty to disclose of a bailor for reward/ HireLiability absolute

DUTIES OF BAILEE Duty to reasonable care (section 151-152)

Duty to act as per the conditions of the bailment (Sec. 153)

Duty not to make unauthorized use (Section 153-154)

Duty not to mix with own goods (Sections 155-157)

Duty to return (Section 159, 160)

Duty not to set up title in third person (sections 166-167)

DUTY TO REASONABLE CARE (SECTION 151-152

Section 151. test of a prudent manSection 152. not liable if has taken due careExceptions under Laws of Carriage – limited

liability

• Calcutta Credit Corporation Ltd. v Prince Peter of Greece AIR 1964 Cal 374

• Dwarkanath v. River Steam Navigation Co. Ltd. AIR 1917 PC 173

• Cochin Port Trust v Associated Cotton Traders AIR 1983 Ker 154

Burden of proof on BaileeSection 151 – 152 to be read together

DUTY NOT TO MAKE UNAUTHORIZED USE

Sec. 153 Duty to act as per conditions of bailment

Includes only wholly inconsistent terms not the irregular exercise of a right such as sub pledge.

SEC. 154 Bailee is supposed to use the goods only for the agreed purpose.

Use of goods otherwise than the agreed purpose and remedies –

1. Option of termination of the bailment (Sec. 153)

2. Recovery of compensation in case of loss (Sec. 153)

DUTY NOT TO MIX THE GOODS –SECTIONS 155-157

Bailee is under a duty to maintain separate identity of the goods by the Bailor

Mixture of goods with the Bailor’s consent – Section 155

Would result into proportionate share and interest

Mixture of the goods without the Bailor’s consent – Sections 156-157

Where goods can be separated (Sec. 156)Where goods cannot be separated (Sec. 157)

DUTY TO RETURN THE GOODS (SEC. 160-161)Sec.160 Duty to return even without any demand as

soon as the purpose is overSec. 161 Absolute liability in case of default in return

of the goods.Exception to absolute liability Goods are not fit for the purpose of use Seizure of goods by Government

JK Oil Mills v Union of India AIR 1976 SC 227

Gratuitous bailment –Required to be returned at the demand (Sec. 159)Also terminated with the death of the Bailor or Bailee

(Sec. 162)

DUTY NOT TO SET UP TITLE IN THIRD PERSON (SEC. 166-167)

Bank of Bombay v. Nandlal Thackerseydass (1913) 15 BOMLR 1

RIGHTS OF BAILOR Right to damage for wrongful use (Sec.

154) Right to claim return or their loss (Sec.

159, 160, 161) Claim of proportionate share in mixed

goods with consent (Sec. 155) Claim damages for mixing of goods

without consent (Sec. 156, 157)

RIGHTS OF BAILEE

To claim possession of goods (Sec. 149) To know material faults in the goods (Sec.

150) To Claim proportionate share in mixed goods

(Sec. 155) To claim damages due to defect in Bailor’s

title or fault in goods (Sec. 150, 164) To claim expenses of bailment (Sec. 158) To claim indemnity To claim lien for remuneration (sec. 170, 171) Right to sue wrongdoers (Sec. 180)

LIABILITY OF BAILEE

Duty to return increase and accretion (Sec. 163)Standard chartered Bank v. Custodian (2000) 6

SCC 427 To pay damage under sec. 152, 154, 156, 157, 161 To return bailed goods

LIABILITY OF BAILOR

To pay expenses of bailment (Sec. 158) To pay damages for non disclosure of material

defects (Sec. 150) To pay damages for defect in bailor’s title (Sec. 164) To indemnity gratuitous bailee (Sec. 159)

Termination of gratuitous bailment by death (Sec. 162)

Bailment by several joint owners (Sec. 165)

Third person’s claim over the goods bailed (Sec. 166, 167)

Finder of the goods (Section 168-169)

Apportionment of relief (Sec. 181)

Right to lien (Sec. 170, 171)

Particular lien (Section 170) Applies only to a particular property In the absence of a contract to the contrary Bailee must have rendered some services or skill Right to lien continues only till the time goods are in

possession of the bailee Rule of quantum meruit No transfer of lien

General lien (Section 171) Bailee can retain any goods. For general accounts Only specified persons (banker, factor, attorney,

wharfingers) Contract to the contrary Overriding effect – other statutes not to affect – unless

specifically excluded

BankersSubject to contract to the contraryGoods must have been received as baileeDeposit of money is excludedLien also does not extend to goods in custody, locker

facility etc.

Notice of defect in title of the goods – no right to lien

State Bank of India v. M.P. Iron & Steel Works Ltd. AIR 1998 MP 93

Money does not maintain its identity unless earmarked for some specific purpose. The money in customers account belongs to the bank and hence the relationship of bailor bailee does not arise.

FactorsFactor is an agent entrusted with

possession of goods for selling the same for principal. Goods should have been received in the capacity of bailee and not otherwise.

Wharfingers ‘owner or keeper of wharf’ – a person in charge of handling of freight, loading, unloading, storage, removal of goods at the port or wharf.

The charge is available only against seller not against buyer.

Attorney of a High CourtRD Saxena v. Balram Prasad Sharma (2000) 7 SCC

264No right over litigation papers.Overruled earlier judgments allowing claim on

papers

Kinds of lien – summarization Finder of the goods (Sec. 168)Particular lien of bailee (sec. 170)General lien of bankers, factors, wharfingers, high

court attorneys, policy breakers (Sec. 171)Lien of pawnees (sec. 173, 174)Lien of agents (Sec. 221)

PLEDGESection 172. ‘Pledge’, ‘’Pawnor, and

‘Pawnee’ defined –The bailment of goods as security for payment of a

debt of performance of a promise is called ‘pledge’. The bailor is in this case called the ‘Pawnor’. The bailee is called ‘Pawnee’

General rules regarding delivery in bailment applySubject of pledge – only valuables (money excluded)

Object of pledgeNature of pledgeThe rights of the pledgee are wider than a bailee.

Essential features of Pledge

Delivery of possession In pursuance of contract of pledge For the purpose of security Return of articles

Hypothecation , mortgage and Pledge

Possession remains with the owner only constructive charge is created.

No right to lien. Right to seize the goods in case of default.

RIGHTS AND LIABILITIES OF PLEDGEE• Right to claim payment of debt, promise, interest on

debt, within the time stipulated• When time is not stipulated – no default till notice • Expenses (necessary + extraordinary Sec 173 & 175)• In case of necessary expenses – right to lien• In case of extraordinary expenses – only right to

receive hence no lien• Sell the goods after reasonable notice (notice to

guarantor- not mandatory but advisable) (Sec 176)• Sale without notice - void• Excess of sale is to be returned (Sec. 176)• Can not retain goods for any other promise (Sec 174)• Period of limitation for recovering pledged goods – 30

years (Art. 70 Limitation Act, 1963)

WHO CAN BE A PAWNOROnly the owner of the goods can be a pawnorExceptions• Pledge by mercantile agent• Pledge of goods obtained under a voidable

contract• Pledge of goods by seller or buyer of the goods

Sec. 178 – pledge by mercantile agent Possession of goods, possession of title with the

consent of owner (either express or implied) Acting in ordinary course of business Pawnee to act in good faith Has no notice of defective authority

Sec. 2(9) Mercantile agent –“mercantile agent” means a mercantile agent having in the customary course of business as such agent authority either to sell the goods or to consign goods for the purpose of sale or to buy goods or to raise money on the security of goods.

Possession with owner’s consentMorvi Mercantile Bank v. UOI AIR 1965 SC 1954Central National Bank v. United Industrial Bank

AIR 1954 SC 181Good faith

Acting in ordinary course of businessExcludes transactions outside business premises after

business hours

Sec. 178A - Pledge by person in possession under a voidable contract

Goods under a voidable contract Before the contract has been rescinded Pawnee acting in good faith and without the

notice of defect in title.Sale of Goods Act

section 30(1) - Pledge by person in possession after sale (when possession has not been given in spite of receiving the payment)

Section 30 (2) - Pledge by Buyer in possession before sale (when possession has been given without payment)

Pledge by a person with a limited interest (Sec. 179)

Right only up to the interest irrespective of the fact that the pawnee was not aware of the limited interest.

CASE LAWS ON PLEDGEBank of Chittoor v. Narasimhulu AIR 1966 AP

163Bailor of cinema projector to the Bank kept goods in his possession in trust. Held there was constructive delivery.

State Bank of India v. Smt. Neelu Ashok Naik AIR 2000 Bom 151It was held that the bank was allowed to retain an

FDR and file a suit in lieu of due amount of loan.