LEGAL AND

ETHICAL
BUSINESS UNIT I
ENVIRONMENT Dr.M.Manikandan,B.E.,MBA.,Ph.D
BAILMENT AND
PLEDGE
 BAILMENT
As per Section 148 of the Act, bailment is the delivery of goods by one

person to another for some purpose, upon a contract, that the

goods shall, when the purpose is accomplished, be returned or

otherwise disposed of according to the directions of the person

delivering them.
 BAILMENT

Example: X delivers a piece Bailor &

Bailee
of cloth to Y, a tailor, to be

stitched into a suit. It is The person delivering the goods is

contract for bailment. called the “bailor”. The person to

Example: Where ‘X’
whom they are delivered is called
delivers his car for repair to
the “bailee”.
‘Y’, ‘X’ is the bailor and ‘Y’ is

the bailee.
 ESSENTIAL ELEMENTS OF BAILMENT

Contract
Essentials of

Bailment is based upon a contract.

Bailment

The contract may be express or

implied. No consideration is

necessary to create a valid contract

of bailment.
 It involves the delivery of goods from one person to
another for some purposes. Bailment is only for
moveable goods and never for immovable
goods or money. The delivery of the possession
of goods is of the following kinds:

Actual Delivery: When goods are physically

handed over to the bailee by the bailor. Eg:
delivery of a car for repair to workshop

Constructive Delivery: Where delivery is made

by doing anything that has the effect of putting
DELIVERY goods in the possession of the bailee or of any

OF GOODS person authorized to hold them on his behalf. Eg:

Delivery of the key of a car to a workshop dealer
 ESSENTIAL ELEMENTS OF BAILMENT

PURPOSE: The goods are delivered for some purpose. The purpose
may be express or implied.
POSSESSION: In bailment, possession of goods changes. Change of
possession can happen by physical delivery or by any action which has
the effect of placing the goods in the possession of bailee. The change
of possession does not lead to change of ownership. In bailment,
bailor continues to be the owner of goods as there is no change of
ownership.
 Bailee is obliged to return the goods physically to

the bailor. The goods should be returned in the

same form as given or may be altered as per

bailor’s direction. It should be noted that exchange

of goods should not be allowed. The bailee cannot

deliver some other goods, even not those of higher

value.

RETURN OF Deposit of money in a bank is not bailment since

GOODS the money returned by the bank would not be

identical currency notes.

 DIFFERENT FORMS OF BAILMENT
 Delivery of goods by one person to another to be held for the
bailor’s use.
 Commodatum: Goods given to a friend for his own use
without any charge.
 Hiring of goods.

 Pawn: Delivering goods to a creditor to serve as security for a

loan.
 Delivering goods for repair with or without remuneration.

 Delivering goods for carriage.

 DIFFERENT FORMS OF BAILMENT
On the basis of reward, bailment can be classified into
two types:
 DIFFERENT FORMS OF BAILMENT
On the basis of reward, bailment can be classified into
two types:
Gratuitous Bailment:
Bailments That Benefit Only the Bailor
This is referred to as a gratuitous (free) bailment. Free valet service would be an
example of this because the valet service (in this case, the bailee) doesn’t
receive compensation for parking your car.
Bailments That Benefit Only the Bailee
These bailments are called constructive bailments. Checking a book out of the
library is a common example. When you check the book out, you become the
bailee while the library is the bailor, which gets no benefit from the relationship.
 DIFFERENT FORMS OF BAILMENT
On the basis of reward, bailment can be classified into
two types:
Non-Gratuitous Bailment:
Bailments That Benefit Both Bailor and Bailee
This type of bailment is referred to as a service agreement bailment. For instance,
parking your car in a paid parking lot benefits both parties, because the bailor is
able to park their car in a secure lot while the lot owner is paid for the service.
DUTIES OF A BAILOR

Disclose known facts

Bear necessary
expenses

Indemnify bailee

Bound to accept the

goods
 1. BAILOR’S DUTY TO DISCLOSE FAULTS IN GOODS
BAILED

The bailor is bound to disclose to the bailee faults in the goods

bailed, of which the bailor is aware, and which materially

interfere with the use of them, or expose the bailee to

extraordinary risks; and if he does not make such disclosure, he

is responsible for damage arising to the bailee directly from such

faults.
BAILOR’S DUTY TO DISCLOSE FAULTS IN GOODS BAILED

Example 1: A lends a horse, which he knows to be vicious, to B.

He does not disclose the fact that the horse is vicious. The horse

runs away. B is thrown and injured. A is responsible to B for

damage sustained.

Example 2: A hires a carriage of B. The carriage is unsafe,

though B is not aware of it, and A is injured. B is responsible to A

for the injury.

 2. DUTY TO PAY NECESSARY EXPENSES

Where, by the conditions of the bailment, the goods are to be

kept or to be carried, or to have work done upon them by the

bailee for the bailor, and the bailee is to receive no remuneration

(gratuitous bailment), the bailor shall repay to the bailee the

necessary expenses incurred by him and any extraordinary

expenses incurred by him for the purpose of the bailment.

 DUTY TO PAY NECESSARY EXPENSES

Example: A hired a taxi from B for the purpose of going to

Gurgaon from Noida, during the journey, a major defect occurred

in the engine. A had to pay ` 5000 as repair charges. These are

the extraordinary expenses and it is the bailor’s duty to bear

such expenses. However, the usual and ordinary expenses for

petrol, toll tax, etc are to be borne by the bailee itself.

 3.DUTY TO INDEMNIFY THE BAILEE FOR PREMATURE
TERMINATION

The bailor must compensate the bailee for the loss or damage

suffered by the bailee that is in excess of the benefit received,

where he had lent the goods gratuitously and decides to

terminate the bailment before the expiry of the period of

bailment.
 DUTY TO INDEMNIFY THE BAILEE FOR PREMATURE
TERMINATION

Example

A lends his car to B, a friend for a week as B has to go out of town for a family

gathering. As B has not paid any charges for bailment, he fills 30 litres of

petrol in the car for the drive. Suddenly after 4 days, A calls B to give his car

back. So, B can demand from A value of petrol remaining in the car after 4

days.
4. DUTY OF THE BAILOR TO RECEIVE BACK THE GOODS

It is the duty of the bailor to receive back the goods when the

bailee returns them after the time of bailment has expired or the

purpose of bailment has been accomplished. If the bailor refuses

to take delivery of goods when it is offered at the proper time the

bailee can claim compensation for all necessary expenses

incurred for the safe custody.

 DUTY OF THE BAILOR TO RECEIVE BACK THE GOODS

Example:

X delivered his car to S for five days for safe keeping. However, X

did not take back the car for one month. In this case, S can claim

the necessary expenses incurred by him for the custody of the

car.
DUTIES OF A BAILEE

Take care of goods

bailed
No Authorized use of
goods
No mixing of bailor’s
goods with his own
Return the goods
To return any extra
profit accruing from
goods bailed
1. TAKE REASONABLE CARE OF THE GOODS (SECTION
151 & 152)

In all cases of bailment, the bailee is bound to take as much care

of the goods bailed to him 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.

 TAKE REASONABLE CARE OF THE GOODS
Example:

If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in

his own locker at his house along with his own ornaments and if

all the ornaments are lost/stolen in a riot ‘Y’ will not be

responsible for the loss to ‘X’. If on the other hand ‘X’ specifically

instructs ‘Y’ to keep them in a bank, but ‘Y’ keeps them at his

residence, then ‘Y’ would be responsible for the loss [caused on

 2. NOT TO MAKE INCONSISTENT USE OF GOODS
(SECTION 153 & 154):

As per Section 154, if the bailee makes any use of the goods

bailed, which is not according to the conditions of the bailment,

he is liable to make compensation to the bailor for any damage

arising to the goods from or during such use of them.

 NOT TO MAKE INCONSISTENT USE OF GOODS

Example:

A lends a horse to B for his own riding only. B allows C, a member

of his family, to ride the horse. C rides with care, but the horse

accidentally falls and is injured. B is liable to make compensation

to A for the injury done to the horse.

3. NOT TO MIX THE GOODS (SECTION 155, 156 AND
157):

Bailee is not entitled to mix up the goods bailed with his own

goods except with the consent of the bailor. If he, with the

consent of the bailor, mixes the goods bailed with his own

goods, both the parties shall have an interest in proportion to

their respective shares in the mixture thus produced (Sec. 155).

3. NOT TO MIX THE GOODS (SECTION 155, 156 AND
157):

If the bailee, without the consent of the bailor, mixes the

goods bailed with his own goods and the goods can be

separated or divided, the property in the goods remains in the

parties respectively bailee is bound to bear the expenses of

separation and division and any damage arising from the mixture

(Sec. 156).
NOT TO MIX THE GOODS (SECTION 155, 156 AND 157):

Example:

A bails 100 bales of cotton marked with a particular mark to B. B,

without A’s consent, mixes the 100 bales with other bales of his

own, bearing a different mark; A is entitled to have his 100 bales

returned, and B is bound to bear all the expenses incurred in the

separation of the bales, and any other incidental damage.

3. NOT TO MIX THE GOODS (SECTION 155, 156 AND
157):

If the bailee, without the consent of the bailor mixes the

goods of the bailor with his own goods in such a manner that it is

impossible to separate the goods bailed from the other

goods and to deliver them back, the bailor is entitled to

compensation by the bailee for loss of the goods (Sec. 157).

NOT TO MIX THE GOODS (SECTION 155, 156 AND 157):

Example:

A bails a barrel of Cape flour worth ` 4500 to B. B, without A’s

consent, mixes the flour with country flour of his own, worth only

` 2500 a barrel. B must compensate A for the loss of his flour.

 4. RETURN THE GOODS (SECTION 160 & 161):

It is the duty of bailee to 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.

[Section 160]

If, by the default of the bailee, the goods are not returned,

delivered or tendered at the proper time, he is responsible to

 RETURN THE GOODS (SECTION 160 & 161):

Example:

X delivered books to Y to be bound. Y promised to return the

books within a reasonable time. X pressed for the return of the

book. But Y, failed to deliver them back even after the expiry of

reasonable time. Subsequently the books were burnt in an

accidental fire at the premises of Y. In this case Y was held liable

for the loss.

5. RETURN AN ACCRETION FROM THE GOODS [SECTION
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.

Example:

A leaves a cow in the custody of B. The cow gives birth a calf. B

RIGHTS OF A BAILOR RIGHTS OF A BAILEE

Delivery of goods to bailor

Enforcement of rights without title

Can apply to a court to stop

Avoidance of Contract delivery

Return of goods lent

Right against trespass
gratuitously
Compensation from a wrong-
Bailee’s lien
doer
 PLEDGE
As per Section 172 of the Act, The bailment of goods as security for

payment of a debt or performance of a promise is called “pledge”.

 PLEDGE

Example: A lends money to Pledgor &

Pledgee
B against the security of

jewellery deposited by B with The person who pledges [or bails] is

him i.e. A. This bailment of known as pledgor or also as pawnor,

jewellery is a pledge as
the bailee is known as pledgee or
security for lending the
also as pawnee.
money. B is a pawnor and A is

a pawnee.
 ESSENTIAL ELEMENTS OF PLEDGE
Since Pledge is a special kind of bailment,
therefore all the essentials of bailment are
also the essentials of the pledge. Apart from
Essentials of

that, the other essentials of the pledge are:

Pledge

 There shall be a bailment for security

against payment or performance of
the promise,
 The subject matter of pledge is goods,

 Goods pledged for shall be in existence,

 There shall be the delivery of goods

 DUTIES OF A PAWNOR

The pawnor is liable to pay the debt or perform the promise as the
case may be.
It is the duty of the pawnor to compensate the pawnee for any
extraordinary expenses incurred by him for preserving the goods
pawned.
It is the duty of the pawnor to disclose all the faults which may put
the pawnee under extraordinary risks.
If loss occurs to the pawnee due to defect in pawnors title to the
goods, the pawnor must indemnify the pawnee.
If the pawnee sells the good due to default by the pawnor, the
pawnor must pay the deficit.
 DUTIES OF A PAWNEE

Duty to take reasonable care of the pledged goods

Duty not to make unauthorized use of pledged goods

Duty to return the goods when the debt has been repaid or the
promise has been performed

Duty not to mix his own goods with goods pledged

Duty not to do any act which is inconsistent with the terms of the
pledge

Duty to return accretion to the goods, if any.

RIGHTS OF A PAWNOR
RIGHTS OF A
Enforcement of rights PAWNEE
Avoidance of Contract Right to retain the pledged goods

Return of goods lent Right to retention of subsequent

gratuitously debts
Compensation from a
wrong-doer Pawnee’s right to extraordinary
expenses Incurred
Right to redeem
Pawnee’s right where pawnor
makes default
 DISTINCTION BETWEEN BAILMENT AND PLEDGE
Basis of Pledge
Bailment
Distinction
Meaning
Transfer of goods by one person to Transfer of goods from one person
another for some specific purpose is to another as security for
known as bailment repayment of debt is known as the
pledge.
The person delivering the goods The person who delivers the good
under a contract of bailment is called as security is called the “Pawnor”.
as “Bailor”.
Terms Applicable
The person to whom the goods are The person to whom the goods are
delivered under a contract of delivered as security is called the
bailment is called as “Bailee” “pawnee”
Bailment may be made for any Pledge is made for the purpose of
purpose (as specified in the contract delivering the goods as security for
Purpose
of bailment, eg: for safe custody, for payment of a debt, or performance
 DISTINCTION BETWEEN BAILMENT AND PLEDGE
Basis of Pledge
Bailment
Distinction
The bailment may be made for Pledge is always made for a
Consideration
consideration or without consideration consideration.
The bailee has no right to sell the The pawnee has right to sell the
goods even if the charges of bailment goods if the pawnor fails to redeem
Right to sell the are not paid to him. The bailee’s the goods.
goods
rights are limited to suing the bailor
for his dues or to exercise lien on the
goods bailed
Bailee can use the goods only for a Pledgee or Pawnee cannot use the
Right to use of
goods purpose specified in the contract of goods pledged.
bailment and not otherwise.