Bailment and Pledge under the Indian Contract Act—FAQs

Definition of Bailment – According to provisions of section 148 of the Indian Contract Act, 1872, bailment is defined as the delivery of goods by one to another person 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’ and the person to whom the goods are delivered is called the ‘bailee.’

Essentials of Bailment –

1. Presence of Contract – Bailment arises out of a contract. The contract may be express, implied or quasi contract.
2. Goods – Bailment can be effected only in respect of goods. Goods means as defined under the Sale of Goods Act, 1930 i.e. movable property other than money and actionable claims. Thus bailment can never be effected in respect of immovable properties.
3. Delivery of Goods – For creation of rights under bailment, delivery of goods by one person to another is essentially required. The delivery of goods does not merely imply the transfer of physical custody but rather means the transfer of right of possession and control of goods. Thus when goods are transferred so as to confer the transferee with the possession and the right to exercise control over the goods but not the ownership, then delivery is said to have taken place. Delivery may be either actual, symbolic or constructive.
4. Purpose – Under the contract of bailment good are usually delivered for the accomplishment of a specific purpose. The purpose may either be safe custody, transportation, exercise of skill or use etc.
5. Return of goods – Bailee is under a duty to return the very specific goods delivered to him under bailment, when the purpose is accomplished. However, if the bailment was done for the purpose of exercise of skill and altering its form then the goods shall be returned in the altered form according to the instructions of the bailor.

Duties of a Bailee:

1. Duty to take care of the goods bailed (Secs. 151 – 152) – The bailee is under a duty to take as much care of the goods bailed as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. In case, bailee has taken the said care, then he shall not be responsible, for the loss, or deterioration of the bailed goods. However if by virtue of a contract to the contrary, the bailee is required to take extraordinary care of the goods bailed, then he shall be bound to take such extraordinary care and he cannot be absolved of his liability only by observing minimum/ordinary care. The duty of the bailee to observe the minimum standard of care imposed by law u/s 151 cannot be reduced by a contract to that effect. Further, where the loss has been caused due to the act of the bailee’s servant, he would be liable if the servant’s act is within the scope of his employment.
2. Duty not to make unauthorised/inconsistent use of goods (Sec. 154) – It is the duty of the bailee not to make any unauthorised use of goods i.e. not to use them in a way which is not in accordance with the conditions of the contract of bailment. If he does so, then he is liable to make compensation to the bailor for any damage arising to the bailed goods from or during such unauthorised/unwarranted use.
3. Duty not to mix the bailed goods with his own (Secs. 155-157) – If the bailee, without the consent of the bailor, mixes the bailed goods with his own goods, and the goods can be separated or divided, then the bailee shall be bound to bear the expenses of separation or division, along with any damages arising from such mixture. In case the goods are mixed in such a manner that it is impossible to separate the bailed goods from the other goods and deliver them back, then bailor is entitled to claim compensation from the bailee for the loss of goods. However, if the bailee mixes the bailed goods with his own goods with the consent of the bailor then both the bailor and the bailee shall have an interest in the mixture of goods, in proportion to their respective share of goods in the resulting mixture.
4. Duty to return the bailed goods (Secs. 160 -161) – It is the duty of the bailee to return, or deliver, according to the bailor’s directions, the goods bailed, without demand, as soon as the purpose for which they were bailed, has been accomplished or as soon as the time for which they were bailed has expired. In the event of failure on the part of the bailee to do so, he shall be liable to compensate the bailor for any damages arising due to such default/delay in the return of the bailed goods.
5. Duty to return any accretion to the bailed goods (Sec. 163) – 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.
6. Duty not to set up any adverse title – It is the duty of the bailee to hold the goods on behalf of the bailor so long as the purpose of bailment is not accomplished. He should not set up any adverse title on the goods.

Duties of a Bailor:

1. Duty to disclose faults in the goods (Sec. 150) – In case of gratuitous bailment it is the duty of the bailor to disclose to the bailee the defects/faults in the bailed goods, of which the bailor is aware and which materially interfere with the use of them or expose the bailee to extraordinary risks. If he does not make such disclosure, he is responsible to compensate the bailee for the loss arising directly from such defects/faults. If the goods are bailed non-gratuitously, the bailor is responsible for the damage caused to the bailee due to the defects/faults in goods, whether he was or was not aware of the existence of such faults in goods bailed.
2. Duty to indemnify the bailee for loss due to defective title of bailed goods (Sec. 164) – The bailor is under a duty to indemnify the bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods or to give direction in respect of them.
3. Duty to bear expenses – In case of gratuitous bailment, where the bailed goods are held by the bailee for safe custody or for exercise of skill without consideration, it is the duty of the bailor to repay to the bailee all necessary expenses (whether ordinary or extraordinary) incurred by him for the purpose of bailment. In the case of non-gratuitous bailments, the bailor is under a duty to bear only extraordinary expenses paid by the bailee for the purpose of bailment. However, the ordinary expenses shall be borne by the bailee.
4. Duty to compensate the bailee on premature termination of gratuitous bailment – A gratuitous bailment may be terminated at any time by the bailor. However, if such a premature termination of bailment causes any loss/damage to the bailee, exceeding the benefit derived from the bailment, the bailor is under a duty to indemnify the bailee for such excess of loss.
5. Duty to receive back the goods after the expiry of time or accomplishment of purpose of bailment – It is the duty of the bailor to receive back the goods from the bailee, when he returns the same, upon the expiry of the time period of bailment or upon the accomplishment of the purpose of bailment. In the event of bailor’s refusal to do so, he will be liable to compensate the bailee for the necessary expenses incurred for safe custody until the actual return of the goods.

Rights of a bailee are as follows:

1. Right to deliver the goods to any one of the joint bailors (Sec. 165) – In case of bailment by several joint owners, the bailee has a right to deliver the bailed goods to any one of the joint owners upon the expiry of the time or upon accomplishment of the purpose of bailment, unless there is a specific stipulation in the contract to the contrary.
2. Right to indemnity for loss due to defect/absence of title to goods (Sec. 166) – Bailee is entitled to be indemnified by the bailor for any loss arising to him by reasons that the bailor was not entitled to make the bailment or to receive back the bailed goods or to give directions in respect of them. If the bailor has no title to the bailed goods, and the bailee delivers them back to, or according to the directions of the bailor, then the bailee shall not be responsible to the owner in respect of such delivery, provided the bailee acted in good faith without knowledge of the absence or defect in title of the bailor.
3. Right to claim compensation in case of defective goods (Sec. 150) – In case of gratuitous bailment, the bailee is entitled to claim compensation from the bailor for any loss sustained by him due to the failure on the part of the bailor to disclose any known defects/faults in the bailed goods. However, if the bailment is for consideration, i.e. non-gratuitous, the bailor will be liable to the bailee for any loss sustained by him due to the defect in bailed goods irrespective of whether the bailor was aware or not aware of the existence of such defects in bailed goods.
4. Right to claim expenses (Sec. 158) – In case of gratuitous bailment, the bailee shall have the right to claim from the bailor all the necessary expenses (including extraordinary expenses) incurred by him for the purpose of the bailment. However, in case of non-gratuitous bailment the bailee has the right to claim from the bailor, only the extraordinary expenses incurred by him, for the purpose of bailment. The ordinary expenses shall be borne by the bailee, himself.
5. Right to apply to Court to decide the title to the goods (Sec. 167) – If the bailed goods are claimed by any person other than the bailor, the bailee may apply to the court to stop its delivery and to decide the title to the goods.
6. Right of lien (Secs. 170-171) – Bailee has a right of lien in respect of the bailed goods for the recovery of his lawful charges or consideration under contract of bailment. Lien is a right in one person to retain that which is in his possession, belonging to another, until some debt or claim is paid. Bailee’s lien usually in the nature of particular lien but may also be general lien in some cases.

As per section 172, the bailment of goods as a security for payment of a debt or performance of a promise is called ‘Pledge’. The person who delivers the goods as security is called the ‘pledgor’ and the person to whom the goods are so delivered is called the ‘pledgee’.

Essentials of Pledge:

1. Bailment of goods – Since pledge is a special kind of bailment, of goods as security, a pledge is created only when the goods are delivered by the borrower to the lender or to someone on his behalf with the intention of their being treated as security against the advance. Delivery of goods may, however, be actual or constructive. Where the goods continue to remain in the borrower’s (pledgor’s) possession but are agreed to be held by him as a ‘bailee’ on behalf of the pledgee and subject to the pledgee’s order, it amounts to constructive delivery and therefore a valid pledge. Thus, a constructive pledge comes into existence as soon as the pledgor without actually delivering the goods, promises to deliver them unconditionally to the pledgee on demand.
2. Security – In case of pledge, the goods are delivered as a security for payment of debt or for performance of a promise. Thus, it is a bailment where the only purpose of bailment is that the goods are held as security.
3. Goods – Only goods (existing) can be pledged. Goods include shares, documents or valuable things. But money (currency notes, etc.) cannot be pledged.
4. Delivery of goods under a contract – Pledge involves delivery of goods as a security under a contract. Thus, presence of contract is essential for creation of valid pledge.
5. Transfer of interest – In a contract of pledge absolute ownership/property in goods is not transferred. An interest of a special nature (qualified interest), in the goods pledged, is transferred to the pledgee and is not lost with the mere loss of custody of pledged goods.
6. Priority of Claim – The purpose of pledge is to secure the payment of debt or performance of a promise. Thus, the pledgee is in the position of a secured creditor and enjoys a priority of claim of such a nature which is not lost even with the loss of possession of goods.

• Pledge by mercantile agent (Sec. 178) – A mercantile agent may make a valid pledge of the goods provided:

1. 1. he is in possession of the goods or documents of title to goods belonging to his principal;
   2. he has such possession of the goods or documents of title to goods with the consent of the owner/principal;
   3. he makes a pledge of the said goods/documents of title in the ordinary course of business of agency as a mercantile agent; and
   4. the pledgee acts in good faith and without any knowledge that the pledger, i.e., the mercantile agent, has no authority to pledge.

• Pledge by person in possession under voidable contract (Sec. 178A) – Where goods are pledged by a person who has obtained possession of goods under a voidable contract, the pledge is valid, provided that the contract has not been rescinded at the time of the pledge was made and the pledgee acted in good faith and without notice of the pledgor’s defect of title.
• Pledge by person having limited interest (Sec. 179) – Where the pledger is not the owner of goods but has limited interest in the goods which he pledges, e.g., where he is a pledgee or has lien with respect to those goods, the pledge will be valid to the extent of his interest. His interest is the amount for which the goods have been given to him as a security. If he pledges for a larger amount, the original pledger will still be entitled to his goods on paying the amount for which he himself pledged the goods.
• Pledge by co-owner in possession – When one of the joint owners is in sole possession of the goods with the consent of the other joint owners, then the pledge of such goods created by him shall be valid, provided the pledgee has acted in good faith (bona fide manner) without any knowledge that the pledgor (one of the joint owners in possession of goods) had no authority to pledge.
• Pledge by a buyer in possession before sale or by a seller in possession after sale – When a buyer who is in possession of goods before sale, or a seller who is in possession of goods after sale, pledges the goods with a third person, then the pledge so created will be treated as a valid pledge, provided the pledgee has acted in good faith and has no knowledge that the pledgor (buyer or seller, as the case may be) had no actual authority to pledge.

Rights of a Pledgee:

A pledgee has the following rights:

• Right to retain the pledged goods (Sec. 173) – A pledgee has the right to retain the goods pledged not only for payment of the debt or the performance of the promise, but for the interest on the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.
• Right to retain the pledged goods for subsequent advances (Sec. 174) – In the absence of a contract to the contrary the pledgee cannot retain the pledged goods, for any debt or promise other than the debt or promise for which they are delivered under contract of pledge. However, in the case the contract expressly provides then, the pledgee has a right to retain goods pledged earlier, in regard to subsequent advances made by him to the pledger.
• Right to extraordinary expenses incurred (Sec. 175) – The pledgee is entitled to recover from the pledger, any extraordinary expenses incurred by him for the preservation of the goods pledged.
• Pledgee’s rights where pledger makes default (Sec. 176) –In case the pledger make a default in repayment of his debt or in performance of obligation at the stipulated time, the pledgee has the right to:

1. 1. bring a suit against the pledger for the recovery of debt or performance of promise and has a right to retain the possession of the pledged goods as a collateral security; or
   2. he may sell the pledged goods, on giving the pledger, a reasonable notice of sale.

If on sale, the pledged goods, do not fully meet the amount of the debt/loss due to non-performance of promise, pledgee can proceed to sue the pledger for the balance. If, on the other hand, there is any surplus resulting from such sale, then the same has to be accounted for to the pledger.

• Right to receive damages due to non-disclosure of defects in goods – It is the duty of the pledger to disclose any known defects or faults in the goods pledged. In case the pledger fails to inform such faults or defects, then he shall be bound to compensate the pledgee for any damage that may result because of such non-disclosure. Similarly, a pledgee has a right to claim damages suffered by him because of any defect in the title to the pledged goods of the pledgor.
• Right in case of wrongful deprivation of goods by a third party – In the event of wrongful deprivation of the pledged goods or injury to the pledged goods, caused by a third party, the pledgee would have all such remedies that the owner (pledger) of the goods would have had against such a third party. However, the amount recovered by the pledgee over and above his interest must be held by him in trust for the pledgor.

Bailments may be classified on the basis of

(a) benefit, and

(b) reward.

(a) On the basis of benefit, the classification may be:

(i) Bailment which is made for the exclusive benefit of bailor;

(ii) Bailment for the exclusive benefit of bailee only; or

(iii) Bailment for the mutual benefit of bailor as well as bailee.

(b) On the basis of reward:

(i) Gratuitous bailment – It is a type of bailment where neither the bailor nor the bailee get any remuneration i.e. it is a bailment without consideration.

(ii) Non-gratuitous bailment – It is a type of bailment where the bailor or the bailee get remuneration/consideration.

Rights of the Bailor – The rights of the bailor are:

1. Right to terminate the bailment (Sec. 153) – A contract of bailment is voidable at the option of the bailor, if the bailee does any act in respect of the bailed goods which is inconsistent with the terms and conditions of the bailment.
2. Right to demand back the goods (Sec. 159) – In case of gratuitous bailment, the bailor can demand back the goods at any time even before the expiry of the time period of bailment or before the accomplishment of purpose of bailment. However, if the bailee suffers any loss, due to premature termination of bailment, which exceeds the benefit derived by him from the use of the bailed goods, the bailor has to compensate the bailee for such excess of loss suffered.
3. Right to sue the bailee – The bailor has a right to sue the bailee for enforcing all his liabilities and duties under the contract of bailment.
4. Right to compensation – Bailor has right to sue the bailee for any compensation resulting from any damage caused to the bailed goods on account of unauthorised use of the goods or unauthorised mixing of the goods.

1. General Lien – It is the right to retain goods not only for demands arising out of the goods retained but for a general balance of account in favour of certain persons (in the absence of contract to the contrary). As per the provisions of section 171 certain categories of bailees – bankers, factors, wharfingers, attorneys of law and policy brokers, are empowered to exercise general lien. These bailees can retain all goods of the bailor so long as anything is due to them, unless there is a contract to the contrary.
2. Particular Lien – Particular lien means the right to retain only the particular goods in respect of which the claim is due. A bailee is granted a right to exercise particular lien under the provisions of section 170. The section states that where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the service he has rendered in respect of them.

Right of bailor and bailee against the third party on wrongful deprivation of or injury to bailed goods (Sections 180-181) – If a third person wrongfully deprives the bailee of the use or possession of the goods bailed, or causes them any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made, and either the bailor or the bailee may bring a suit against a third person for such deprivation or injury (Sec. 180) .

Further, whatever is obtained by way of relief or compensation in any such suit shall, as between the bailor and the bailee, be dealt with according to their respective interests (Sec. 181).

A contract of bailment terminates in the following circumstances:

• On the expiry of the stipulated period – Where bailment is for specific time period, it comes to an end on the expiry of such stipulated time period.
• On the accomplishment of specified purpose – In case bailment is made for a specific purpose, it shall terminate on the accomplishment of the specified purpose.
• By Notice –

1. 1. Where the bailee acts in a manner which is inconsistent with the terms & conditions of bailment, the bailor can always terminate the contract of bailment by giving a notice to the bailee.
   2. A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the bailee. However, if such termination causes loss to the bailee in excess of the benefit derived by him from bailment, the bailor is bound compensate the bailee for such a loss.

• By death – Death of the bailor or bailee results in termination of gratuitous bailment.
• Destruction of the bailed goods – If the subject matter of the bailment i.e. bailed goods are destroyed or there is a change in the nature of bailed goods such that it makes it impossible for the goods to be used for the purpose of bailment, then the bailment stands terminated.

A finder of lost goods is treated as the bailee of the goods found by him and is therefore, not only charged with the duties of a bailee, but also has the duty to exercise reasonable efforts in finding the real owner of those goods. The following are the duties of the finder of lost goods:

1. Duty to find the true owner – It is the duty of the finder of lost goods to exercise reasonable efforts in finding the true owner of the goods found by him. What is reasonable shall be determined by the facts and circumstances of the case.
2. Duties of bailee – Since the finder of lost goods is regarded at law as a bailee (under quasi contract), it is his duty to care reasonable care of such goods as a man of ordinary prudence would take under similar circumstances, of his own goods, of same bulk, quality and value. Further finder will also be under a duty not to make any unauthorised use of goods, not to mix the goods and to return the same promptly once the true owner is found.

The following are the rights of a finder of lost goods:

1. Right to retain the goods (Sec. 168) – A finder of lost goods has a right to exercise lien i.e. retain the goods until he receives the compensation for the amount of money spent by him in preserving the goods and/or in finding the true owner. A finder, however, has no right to sue the true owner for such compensation. But, if the true owner has offered a specific reward for the return of lost goods, the finder may sue for such reward, and may retain the goods until he receives the same.
2. Right to sell the goods (Sec. 169) – When a thing which is commonly the subject of sale is lost, if the owner cannot, with reasonable diligence, be found or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it:

• • When the thing is in danger of perishing or of losing the greater part of its value or
  • When the lawful charges of the finder in respect of the thing found, amount to 2/3 of its value.

1. Pledge is defined as per section 172, and is a special kind of bailment under which goods are delivered as a security for payment of debt or performance of a promise. Bailment is defined under section 148 and is evidently a broader expression than pledge.
2. In the event of default, pledgee has a right to not only exercise lien over the pledged goods and sue for his dues, but he also has a right to effect the sale of goods after giving a reasonable notice of sale to the pledger. Bailee has no right to effect the sale of bailed goods for recovery of his dues. Bailee can only exercise his right of lien in respect of the bailed goods and may file suit for recovery of his dues.
3. A pledgee has a right to make a further pledge of the pledged goods upto the value of his interest therein. Bailee does not have a right to pledge the bailed goods.
4. A pledgee has no right to make use of the goods pledged. However, in case of bailment, where it has been made for the purpose of use of goods by the bailee i.e. for the benefit of the bailee, then he may use it as per the terms of contract of bailment.
5. Pledge is always made for consideration. However bailment may be gratuitous i.e. without consideration or non-gratituous i.e. with consideration. 

1. To get back the goods – The pledgor has a right to receive back the goods on repayment of debt or performance of promise. He also has a duty to pay interest and necessary expenses before claiming back the goods.
2. To redeem the goods – In case the pledgor makes a default in paying the debt or performing the promise at the stipulated time, he may still redeem the goods pledged at any subsequent time before their sale is effected, by paying the dues and lawful charges.