K.

Yeshwanth Gowda

Unit-I
Contract of Indemnity- Nature and Scope of Indemnity- Rights of Indemnity
Holder- Commencement of the Indemnifier’s liability.
The term Indemnity means “Security against loss” that is the indemnifier
promises to compensate the other party that is the indemnified against the loss
suffered by the other.
Definition
As provisions made in section 124 of the Indian Contract Act 1872 says that,
whenever one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of the any other person, is
called a Contract of Indemnity.
Example
A contract to indemnify B against the consequences of any proceedings which C
may take against B in respect of a certain sum of 200 rupees. This is a contract
of indemnity.
Adamson v. Jarvis.
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 he had
suffered by acting on the defendant’s directions.
The court held that, the plaintiff having acted on the request of the defendant
was entitled to assume that, if he did turn out to be wrongful, he would be
indemnified by the defendant.
Sheffield Corporation v. Barklay
A corporation, having registered to transfer a stock on the request of a banker,
was held entitle to recover indemnity from the banker when the transfers were
discovered to be forged.
Indemnifier: The person who promises to make good the loss is called the
Indemnifier.
Indemnity holder: The person whose loss is to be made good is called Indemnity
holder.
 K. Yeshwanth Gowda

Nature of contract of Indemnity

Nature of contract of Indemnity a Contract of Indemnity may be express or
implied depending upon the circumstances of the case, though Section 124 of
the Indian Contract Act does not seem to cover the case of implied indemnity.
Case Law
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.
Essential Elements of Contract of Indemnity
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.
4. Contingency
5. Consideration
Modes of contract of Indemnity
Expressed
A contract of Indemnity is said to be express when a person expressly promises
to compensate the other from the loss.
Implied
A contract of Indemnity is said to be implied when it is to be inferred from the
conduct of the parties or from the circumstances of the case.

Right of the indemnity holder

Rights of Indemnity Holder When Sued
Right to recover damages - he is entitled to recover all damages which he might
have been compelled to pay in any suit in respect of any matter covered by the
contract.
 K. Yeshwanth Gowda

Right to recover costs – He is entitled to recover all costs incidental to the

institution and defending of the suit.
Right to recover sums paid under compromise – he is entitled to recover all
amounts which he had paid under the terms of the compromise of such suit.
However, the compensation must not be against the directions of the
indemnifier. It must be prudent and authorized by the indemnifier.
Right to sue for specific performance – he is entitled to sue for specific
performance if he has incurred absolute liability and the contract covers such
liability. The promise in a Contract of Indemnity, acting within the scope of his
authority, is entitled to recover from the promisor.
Right of recover Damages: - All the damages that he is compelled to pay in a
suit in respect of any mater to which the promise of indemnity applies.
Right of recover all Costs: - All the costs that he is compelled to pay in such suit
if in bringing or defending it he did not contravene the orders of the promisor
and has acted as it would have been prudent for him to act in the absence of the
contract of indemnity or if the promisor authorized him in bringing or defending
the suit.
Right of recovery all sums: - All the sums which he may have paid under the
terms of a compromise in any such suite if the compromise was not contrary to
the orders of the promisor and was one which would have been prudent for the
promise to make in the absence of the contract of indemnity.

Case Law
Mohit Kumar Saha v. New India Assurance Co.
It was held that the indemnifier must pay the full amount of the value of the
vehicle lost to theft as given by the surveyor. Any settlement at the lesser value
is arbitrary and unfair and violates Art.14 of the Constitution. All sums which
he may have paid under the terms of any compromise of any such suit.
Yeung v HSBC
It is important to note here that the right to indemnity cannot be claimed of
dishonesty, lack of good faith and contravention of the promisor’s request.
However, the right cannot be negatived in case of oversight.
 K. Yeshwanth Gowda

Rights of Indemnifier
Commencement Of Liability
When does the Indemnifier become liable to pay, or, when is the indemnity-
holder entitled to recover his indemnity?
The Indian Contract Act, 1872 is silent on the time of commencement of liability
of Indemnifier. On the basis of judicial pronouncement of courts, it can be said
that the liability of an indemnifier commences as soon as liability of the
indemnity holder absolute and certain. In other words, if the indemnity holder
has incurred an absolute liability even though he has himself paid nothing, he
is entitling to ask the indemnifier to indemnify him.
The original English rule was that indemnity was payable only after the
indemnity-holder had suffered actual loss by paying off the claim. The maxim of
law was: “you must be damnified before you can claim to be indemnified.” But
the law is different now.
Case Law
Gajanan Moreshwar Parlekar v. Moreshwar Madan Mantri, Chagla J
Explained the transformation of process. It is true that under English law no
action could be maintained until the actual loss had been incurred. It was
realized that indemnity might be worth very little indeed if the indemnified could
not enforce his indemnity till he had actually paid the loss. Therefore, the court
of equity held that if his liability had become absolute then he was entitled either
to get the indemnifier to pay off the claim or to pay into court sufficient money
which would constitute a fund for paying off the claim whenever it was made.
Case Law
Richardson Re, Ex Parte The Governors of St. Thomas’s Hospital and Osman
Jamal & Sons ltd. V. Gopal Purushottam observed that “Indemnity is not
necessarily given by repayment after payment. Indemnity requires that the party
to be indemnified shall never be called upon to pay.
Example:
➢ X promises to compensate Y for any loss that he may suffer by filing a suit
against Z.

➢ The court orders Y to pay Z damages of Rupees 5000/. As the loss has
become certain, Y may claim the amount of loss from X and pass it on to
Z
 K. Yeshwanth Gowda

CONTRACT OF GUARANTEE
A “Contract of Guarantee” is a contract to perform the promise, or discharge the
liability, of a third person in case of his default.

A guarantee may be either oral or written.

Example
X and his friend Y enter a shop and X says to Z “Supply the goods required by
Y, and if he does not pay you, I will.” This is a contract of guarantee.
Parties to the contract of guarantee- Sec 126
Principal Debtor
The person in respect of whose default the guarantee is given is called the
'Principal debtor'.
Creditor
The person to whom the guarantee is given, is called the 'creditor'.
Surety
The person who gives the guarantee is called the 'Surety'.
ESSSENTIAL FEATURES OF CONTRACT OF GUARANTEE
(i) The principal debtor need not be competent to contract. In case the

principal debtor is not competent to contract, the surety would be

regarded as the principal debtor and would be personally liable to pay.

(ii) Surety need not be benefited. According to Section 127, "Anything

done, or any promise made, for the benefit of the principal debtor, may

be a sufficient consideration to the surety for giving the guarantee."

(iii) A guarantee need not be in writing. According to Section 126, a

guarantee may be either oral or written.

 K. Yeshwanth Gowda

Tripartite agreement
A contract of guarantee is a tripartite agreement between the principal debtor,
creditor and surety. There are three contracts as under:
(i) Contract between creditor and the principal debtor out of which the

guaranteed debt arises.

(ii) Contract between surety and the principal debtor by which the

principal debtor undertakes to indemnity the surety if surety is

required to pay.

(iii) Contract between surety and the creditor by which the surety

guarantees to pay the principal debtor's debt if the principal debtor

fails to pay.

Principal Debt

a. Recoverable Debt Necessary

For the purpose of valid guarantee and to secure payment of debt, the existence
of recoverable debt is necessary. There must be someone responsible or liable as
principal debtor and the surety must undertake to be liable on his default.
b. Guarantee for void Debt, When enforceable
Guarantee is for void debt may be still held enforceable.
Example, The Directors of a company guaranteed their company’s loan which
was void as being ultra vires, the directors were never the less held liable.
c. Guarantee of minor’s Debt
Where a minor’s debt has been knowingly guaranteed by the surety then he
should be liable as a principal debtor himself.
Consideration
As per Section 127 of the Act, “Anything done, or any promise made, for the
benefit of the principal debtor, may be a sufficient consideration to the surety.
 K. Yeshwanth Gowda

Illustrations
➢ B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises
to guarantee the payment in consideration of as promise to deliver the
goods. This is a sufficient consideration for C’s promise.

➢ A sold the goods and delivers them to B. C afterwards requests A to forbear

to sue B for the debt for a year, and promises that, if he does so, C will pay
for them in default of payment by B. A agrees to forbear as requested. This
is a sufficient consideration for C’s promise.

➢ A sold the goods and delivers them to B. C afterwards, without

consideration, agrees to pay for them in default of B. The agreement is
void.

Example
When A requests B to lend `10,000 to C and guarantees that C will repay the
amount within the agreed time and that on C falling to do so, he will himself pay
to B, there is a contract of guarantee. Here, B is the creditor, C the principal
debtor and A the surety.
KINDS OF GUARANTEE
SPECIFIC GUAARANTEE
A guarantee which extends to a single debt or specific transaction is called a
specific guarantee. The liability of the surety comes to an end when the
guaranteed debt is duly discharged or the promise is duly performed.
Example:
X guarantees payment to Y of the price of the five bags of flour to be delivered by
Y to Z and to be paid for in a month. Y delivers five bags to Z; Z pays for them.
This is a contract of specific guarantee because X intended to guarantee only for
the payment of price of the first five bags of flour to be delivered at one time.
CONTINUING GUARANTEE
A Guarantee which extends to a series of transactions is called a 'continuing
guarantee'. A surety's liability continues until the revocation of the guarantee.
Example:
A guarantees payment to B, a tea-dealer to the extent of Rs 100, for any tea he
may supply to C from time to time. B supplies C with tea to the above value of
Rs 100, and C pays B for it. Afterwards, B supplies C with tea to the value of Rs
200. C fails to pay. The guarantee given by A was a continuing guarantee, and
he is accordingly liable to B to the extent of Rs 100.
 K. Yeshwanth Gowda

REVOCATION OF CONTINUING GUARANTEE

By Notice of revocation [Section 130]
A continuing guarantee may at any time be revoked by the surety as to the future
transactions by notice to the creditor. However, the surety remains liable for the
past transactions which have already taken place.
By Death of Surety [Section 131]
In the absence of any contract to the contrary, the death of surety operates as a
revocation of a continuing guarantee as to the future transactions taking place
after the death of surety. However, the surety's estate remains liable for the past
transactions which have already taken place before the death of surety.
Case Law
Durga Priya v/s Durga Pada
In this case it was held by the court that in each case the contract of guarantee
between the parties must be looked into to determine whether the contract has
been revoked due to the death of the surety or not. It there is a provision that
says that death does not cause the revocation then the contract of guarantee
must be held to continue even after the death of the surety.
By modes of discharging the surety
A continuing guarantee is also revoked in the same manner in which the surety
is discharged such as:
(i) Novation [Section 62]

(ii) Variance in terms of contract [Section 133]

(iii) Release or discharge of principal debtor [Section 134]

(iv) When the creditors enter into an arrangement with the principal debtor

[Section 135]

(v) Creditor's act or omission impairing surety's eventual remedy [Section

139]

(vi) Loss of security [Section 141]

 K. Yeshwanth Gowda

Rights of a Surety

1. RIGHTS OF A SURETY

• Right to Subrogation [Section 140] On payment of the guaranteed

debt or performance of the guaranteed duty; the surety acquires all
the rights which the creditor had against the principal debtor. Thus,
the surety steps into the shoes of creditor.
• Right to Indemnity [Section 145] In every contract of guarantee there
is an implied promise by the principal debtor to indemnify the
surety; and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but not
those sums which he had paid wrongfully.

2. RIGHTS OF AGAINST CREDITOR

a. Right to Securities [Section 141]

A surety is entitled to the benefit of every security which the creditor
has against the principal debtor at the time when the contract of
suretyship is entered into, whether the surety knows of the existence
of such security or not; and if the creditor loses, or, without the consent
of the surety, parts, with such security, the surety is discharged to the
extent of the value of the security.
b. Right to Claim Set Off
The surety has the right to claim set off or counterclaim, if any, which
the principal debtor had against the creditors in case the creditors sue
him for payment of liability of principal debtor.
3. RIGHTS AGAINST CO-SURETIES
CO-SURETIES
When the same debt or duty is guaranteed by two or more persons, such
persons are called as Co-Sureties.
 K. Yeshwanth Gowda

a. Co-sureties liable to contribute equally (Section 146): Equality of

burden is the basis of Co-suretyship

Example:

A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E, He

makes default in payment. A, B and C are liable, as between themselves,
to pay 1,00,000 rupees each.

b. Liability of co-sureties bound in different sums (Section 147): The

principal of equal contribution is, however, subject to the maximum
limit fixed by a surety to his liability. Co-sureties who are bound in
different sums are liable to pay equally as far as the limits of their
respective obligations permit.

Example:

A, B and C, as sureties for D, enter into three several bonds, each in a

different penalty, namely, A in the penalty of 1,00,000 rupees, B in that of
2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly
accounting to E. D makes default to the extent of 3,00,000 rupees. A, B
and C are each liable to pay 1,00,000 rupees.

4. RIGHT TO CLAIM CONTRIBUTION:

If a co-surety pays more than his proportionate share of liability, he has a
right to claim contribution from the other co-surety or co-sureties.
Right to Share the Security: If a co-surety obtains any security of principal
debtor, the other co-surety (or co-sureties) has (or have) a right to share
such security.
Extent of Surety’s Liability Sec.128
In the absence of contract to the contrary the liability of the surety is
coextensive with that of the principal debtor. It means that the liability of
surety is equal to that of the principal debtor unless otherwise agreed.
 K. Yeshwanth Gowda

Important cases on Sureties liability

Bank of Bihar Ltd. v. Damodar Prasad
The Supreme Court held that the liability of the surety is immediate and
cannot be defended until the creditor has exhausted all his remedies
against the principal debtor.
Maharashtra Electricity Board Bombay v. Official Liquidator and
Another
Under a letter of guarantee the bank undertook to pay any amount not
exceeding Rs.50000/- to the Electricity Board. It was held that the bank
is bound to pay the amount due under the letter of guarantee given by it
to the Board.
Kellappan Nambiar v. Kanhi Raman
In this case that if the principal debtor happens to be a minor and the
agreement made by him is void, the surety too cannot be made liable in
respect of the same because the liability of the surety is co-extensive with
that of principal debtor. It has been held that the guarantee of the loan or
an overdraft to an infant is void because the loan to the infant itself is void
ab intio.
State Bank of India v. V.N. Anantha Krishnam
In view of the provision of section 128 of Act the Presiding officer was not
correct in giving directions to the bank to proceed against the property
because cash credit facility and the liability of surety was co-extensive with
that of principal debtor.
Industrial Financial Corporation of India v. Kannur Spinning &
Weaving Mills Ltd.
It was held that the liability of surety does not cease merely because of
discharge of the principal debtor from liability.
Hari Gobind Aggarwal v. State Bank of India
It was held that the principal debtor liability is reduced e.g., after the
creditor has recovered a part of the sum due from him out of his property
the liability of the surety is also reduced accordingly.
 K. Yeshwanth Gowda

DISCHARGE OF SURETY
1. BY REVOCATION OF CONTRACT OF GUARANTEE
➢ BY NOTICE [SECTION 130]
A specific guarantee may be revoked by a surety by notice to the
creditor if the liability of the surety has not yet accrued. A
continuing guarantee may at any time be revoked by the surety
as to future transactions by notice to the creditor.
➢ BY THE DEATH OF SURETY [SECTION 131]
In the absence of any contract to the contrary, the death of a
surety operates as a revocation of a continuing guarantee as to
future transactions taking place after the death of surety.
However, the deceased surety's estate remains liable for the past
transactions which have already taken place before the death of
the surety but will not be liable for the transactions taking place
after the death of surety even if the creditor has no notice of
surety's death.
➢ BY NOVATION [SECTION 62]
A contract of guarantee is said to be discharged by novation when
a fresh contract is entered into either between the same parties
or between other parties, the consideration being the mutual
discharge of the old contract. The original contract of guarantee
comes to an end and the surety under original contract is
discharged
2. BY CONDUCT OF CREDITOR
By Variance In Terms of Contract [Section 133] Any variance, made
without the surety's consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.
 K. Yeshwanth Gowda

3. BY RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR [SECTION

134]

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 omissions of the creditor, the legal consequence of which is the
discharge of the principal debtor.

4. BY ARRANGEMENT [SECTION 135]

A contract between the creditor and principal debtor, by which the

creditor makes a composition with, or promises to give time to, or not
to sue the principal debtor, discharges the surety, unless the surety
assents to such contract.

5. BY INVALIDATION OF CONTRACT

(a) Guarantee Obtained by Misrepresentation [Section 142]

Any guarantee which has been obtained by means of
misrepresentation made by a creditor or with his knowledge and
assent, concerning a material part of the transaction, is invalid.
(b) Guarantee Obtained by Concealment [Section 143]
Any guarantee which a creditor has obtained by means of keeping
silence to material circumstances is invalid Example: - X employs Y
as a clerk to collect money for him. Y fails to account for some of his
receipts and X, in consequence calls upon Z to furnish security for
his duly accounting. Z gives guarantee for Ys duly account. X does
not inform Z about Ys previous conduct. Y, afterwards, makes
default. 'z is not liable because the guarantee was obtained by
concealment of facts.
(c) Failure of Co-surety to Join a Surety [Section 144]
Where a person gives a guarantee upon a contract that a creditor
shall not act upon it until another person has joined in it as co-
surety.
 K. Yeshwanth Gowda

UNIT-II

BAILMENT

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".

Example:

A man drops off his clothes for dry cleaning. He is the bailor and the purpose of
bailment is to have the particular set of clothes cleaned. The dry cleaner is the
bailee – he is the temporary custodian of the clothes and is responsible for
keeping them safe and to return them to the bailor once they have been cleaned.

Bailment can also be described as ‘the delivery of goods to another person for a
particular use’. Only ‘goods’ can be bailed and thus, only movable goods can be
the subject matter of bailment.

In Atul Mehra vs. Bank of Maharashtra [AIR 2003 P&H 11]

It was held that mere hiring of a bank’s locker and storing things in it would not
constitute a bailment. But the position changes completely if the locker in the
safe deposit vault of the bank can be operated even without the key of the
customer.

Example:

If a person delivers his damaged car to a garage for repair under his insurance
policy, the insurance company becomes a bailee and the garage a sub bailee. If
the car is stolen from the garage or destroyed by fire in the garage, both – the
insurance company and the garage will be liable to the owner of the car, the
bailor.
 K. Yeshwanth Gowda

ESSENTIAL ELEMENTS OF BAILMENT

The contract may be expressed or implied. This contract between the parties for
the delivery of goods. The goods shall be delivered for a special purpose only.
Goods-Bailment can be made of goods only. Bailment can only be done for
movable goods and not for immovable goods or money.

Delivery-There must be delivery of goods by one person to another person.

Purpose of delivery: The goods must be delivered for some purpose.

1. Delivery of possession of goods:

Delivery of goods from one person to another person for some purpose is
an essential element of bailment. According to Section 149 of the Indian
Contract Act, 1872 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. It
is necessary that the goods should be delivered to the bailee. It is the
essence of the contract of bailment. It follows that bailment can be of
movable goods only. It is further necessary that the possession of the goods
should be voluntarily transferred and is in accordance with the contract.
2. The purpose may be expressed or implied.
There shall be a transfer of possession of goods, the delivery of goods must
be conditional. The condition shall be that the goods shall be – returned
(either in original form or in any altered from); or disposed of according to
the directions of the bailor, when the purpose is accomplished. Ownership
is not transferred to Bailee; therefore, Bailor remains the owner, Bailee is
duty bound to deliver the same goods back and not any other goods.
3. Return or disposal of goods Exception:
The money deposited in the bank shall not account to bailment as the
money returned by the bank would not be the same identical notes. And
it is one of the essentials of the bailment that same goods are to be
delivered back.
 K. Yeshwanth Gowda

Case Law:
In Ultzen v. Nicols
An old customer went in to a restaurant for the purpose of dining there.
When he entered the room, a waiter took his coat, without being asked,
and hung it on a hook behind him. When the customer rose to leave the
coat was gone. What the waiter did might be no more than an act of
voluntary courtesy towards customer, yet the restaurant keeper was held
liable as a bailee.

MODES OF DELIVERY Sec.149

Delivery of possession may be actual or constructive

1. Actual delivery:
Transfer of physical possession of goods from one person to another. Here,
the bailor hands over the physical possession of the goods to the bailee.
Example:
A’s watch is broken. When he leaves his watch at the showroom for repair,
he has given actual delivery of possession of goods to the showroom.
2. Symbolic delivery
Physical possession of goods is not actually transferred. A person does
some act resulting in transfer of possession to any other person.
Examples:
Delivery of keys of a car to a friend, Delivery of a railway receipt.
Constructive delivery
If A person is already in possession of goods of owner. Such person
contracts to hold the goods as a bailee for a third person. Then such person
becomes the bailee, and the third person becomes the bailor. Constructive
delivery is an action that the law treats as the equivalent of actual delivery.
It can be difficult to deliver intangible.
 K. Yeshwanth Gowda

Case Law
Bank of Chittor vs. Narsimbulu [AIR 1966 AP 163]
A person pledged cinema projector with the bank but the bank allowed
him to keep the projector so as to keep the cinema hall functional. It was
held that there was constructive delivery because action on part of the
bailor had changed the legal character of the possession of the projector.
Even though the actual and physical possession was with the person, the
legal possession was with the bank, the bailee.

Duties of Bailor
1) Duty to disclose defects: Section 150 of the Indian Contract Act, 1872
bound the bailor with certain duties to disclose the latent facts
specifically pertaining to defect 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 the Bailee that can interfere
with the use of goods or can expose him to extraordinary risks. And
failure to do the same will make 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 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.

Case Law
In Hyman v Nye & Sons
The plaintiff took a carriage on hire from the defendant but the carriage
was not fit for the journey and subsequently, the plaintiff suffered
injuries. The court held that even though the defendant was aware of
such defect or not he shall be liable.
 K. Yeshwanth Gowda

2) Duty to bear expenses:

Section 158 of the Indian Contract Act says that, 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, the bailors shall repay to the bailee the
necessary expenses incurred by him for the purpose of the bailment.

Expenses of Bailment

In case of Gratuitous bailment Bailor shall repay to Bailee, all necessary

expenses incurred by him for the purpose of Bailment.

In case of Non – Gratuitous Bailment Bailor is liable to repay only extra – ordinary
expenses, and not the ordinary expenses.

3) Duty to indemnify the bailee:

To indemnify the loss (Section159) Indemnity means promise to make
good the loss. According to Section 159 of the Indian Contract Act 1872
bailor has a duty to indemnify the loss suffered by the bailee under the
contract.
Example:
A asks his friend B to give him cycle for one hour. B instead of his own
cycle gives C's cycle to A. While A was riding, the true owner of the cycle
catches A and surrenders him to police custody. A is entitled to recover
iron Ball costs, which A had to pay in getting out of this situation.
4) 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.
5) 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
 K. Yeshwanth Gowda

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.
6) 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.
7) 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
any person authorized to hold them on his behalf.
Case Law
Kaliaperumal V. Visalakshmi (1938) AIR 1938 Mad 32, In this case
Madras high court held that delivery is an essential element of
bailment.
 K. Yeshwanth Gowda

Bailee’s Duties

1) Duty to take reasonable care of the goods bailed:

Section 151 of the Indian Contract Act lays down the degree of care, which
a bailee should take, in respect of goods bailed to him. The bailee is bound
to take as much care "if 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.
Duty to take reasonable care:
It is the duty of the Bailee to take care of goods as his own goods. He shall
ensure all safety measures that are necessary to protect the goods. The
standard of care should be such as taken care by a prudent man.
2) Not to make any Unauthorized use of goods:
The bailee is under a duty to use the bailed goods in accordance with the
terms of bailment. If bailee does any act with regard to the goods bailed,
which is not in accordance with the terms of bailment, the contract is
voidable at the option of the bailor. Besides it, the bailee is liable to
compensate the bailor for any damage caused to the goods. By an
inconsistent use of the goods bailed. If he makes unauthorized use of
goods, bailee would not be saved from his liability even if he has taken
reasonable care of the ordinary prudent man.
3) Duty not to mix bailor's goods with his own goods:
Next duty of the bailee is to keep the goods of the bailor separate from his
own. Sections- 155 to 157 of the Act lays down this duty in the following
ways:
i) If the bailee, with the consent of the bailor, mixes the goods of the
bailor with his own goods, the bailor and the bailee shall have an
interest, in proportion to their respective shares, in the mixture thus
produced (Section 1-76].
ii) If the bailee, without the consent of the bailor, mixes the goods of
the bailor with his goods, and the goods can be a separated or
 K. Yeshwanth Gowda

divided, the property in the goods remains in the parties

respectively; but the bailee is bound to bear the expense of
separation or division, and any damages arising from the mixture
(Section 156).
iii) If the bailee, without the consent of the bailor, mixes the goods of
the bailor with his goods, and the goods can be a separated or
divided, the property in the goods remains in the parties
respectively; but the bailee is bound to bear the expense of
separation or division, and any damages arising from the mixture
(Section 156).
4) Duty not to set up adverse title:
The bailee is duty bound not to do any act which is inconsistent which the
title of the bailor. He should not set up his own title or the title of a third
party on the goods bailed to him.
5) Duty to return the goods:
It is the duty of the bailee to return or to deliver the goods according to the
directions of bailor, without demand, on the expiry of the time fixed or
when the purpose is accomplished. If he does not return or deliver as
directed by the bailor, or tender the goods at the proper time, he becomes
liable to the bailor for any loss, destruction or deterioration of the goods
from that time. He is liable even without his negligence. For example, a
book-binder kept books beyond the time allowed to him for binding, and
they were lost in an accidental fire, the binder is liable.
Duty to return the goods on the fulfilment of purpose:
Bailee is duty bound to return the goods once the purpose is achieved or
on the expiry of the time period for which the goods were bailed.
Case Law
Bank of India v. Grains & Gunny Agencies
the court held that if the goods are lost or destroyed due to the negligence
of servant of Bailee, then in such case as well Bailee shall be liable.
 K. Yeshwanth Gowda

6) Duty to return accretions to the goods:

In the absence of any contract to the contrary, the bailee must deliver to
the bailor, or according to his directions, any increase or profit which have
accrued from the goods bailed. For example, A leaves a cow in the custody
of B to be taken care of. The cow has a calf. B is bound to deliver the calf
as well as the cow to A.
**********
Rights of Bailor
1) Enforcement of bailee's duties:
You have just now read the duties of the bailee. Duties of the bailee are
the rights of the bailor. Since Right of the bailor is same as the right of
the Bailee, therefore on the fulfilment of all duties of Bailee the bailor’s
right is accomplished.
2) Right to claim damages:
It is an inherent right of the bailor to claim damages for any loss that
might have been caused to the goods bailed, due to the bailee's
negligence (Section 151). If the Bailee fails to take care of the goods, the
bailor has the right to claim damages for such loss.
3) Right to avoid the contract:
If the bailee does any act, in respect of the goods bailed, which is
inconsistent with the terms of bailment, the bailor has a right to avoid
the contract.
4) Right to claim compensation:
If any damage is caused to the goods bailed because of the
unauthorized use of the goods. The bailor has a right to claim
compensation from the bailee.
5) Right to claim compensation:
If any damage is caused to the goods bailed because of the
unauthorized use of the goods. The bailor has a right to claim
compensation from the bailee.
 K. Yeshwanth Gowda

6) Right to get back the goods:

The bailor has a right to get back the goods bailed by him as soon as
the purpose of bailment is accomplished. If the bailee fails to do so, is
entitled to get reasonable compensation from the bailee.
7) Right to denial return of goods:
It is a right of the bailor to compel the bailee, to return the goods hailed,
when the time of bailment has expired or when that purpose for which
the goods were bailed has been accomplished.
8) Right to share profit:
The bailor has a right to share with bailee any profit earned from the
goods bailed if it is so provided by the contract.
9) Expenses of separation:
If the bailee has mixed the goods of bailor with someone other goods
not belonging to bailor without the consent of the bailor, the bailor has
a right to get from bailee the expenses which he has to bear for the
separation of his goods from others.
********

RIGHTS OF BAILEE

1) Right to claim damages:

If the bailor has bailed the goods, without disclosing the defects in goods,
and the bailee has suffered some loss, the bailee has a right to sue the
bailor for damages. A hired 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
(Section 150).
2) Right to claim reimbursement:
In case of non-gratuitous bailment, the bailee has a right to recover from
the bailor, all necessary expenses, which the bailee had incurred for
achieving the purpose of bailment. In case of a gratuitous bailment, bailee
has a right to Right to claim damages Right against wrongdoer
Reimbursement Recover losses Right to lien OF Recover compensation
 K. Yeshwanth Gowda

Deliver goods to anyone of the joint bailor Remuneration Deliver the goods
to bailor even his title is defective recover from the bailor, all extraordinary
expenses, borne by the bailee or the purposes of bailment (Section 158).
3) Right to recover losses:
It is a right of bailee to recover from the bailor, all losses suffered by him
by reason of the fact that the bailor was not entitled to make the bailment
of the goods or to receive back the goods, or to give directions regarding
them (Section 164). In the contract of Bailment, the Bailee incurs expenses
to ensure the safety of goods. The Bailee has the right to recover such
expenses from the bailor. (Section 158)
4) Right to deliver goods to any one of the joint bailors:
If the goods are owned and bailed by more than one person, the bailee has
a right, in the absence of a contrary contract, to deliver back the goods to
any one of the joint owners, or may deliver the goods back according to
the directions of one of the joint owners, without the consent of all. (Section
165).
5) Right to deliver the goods to bailor even if his title is defective:
If the title of bailor is defective and the bailee, in good faith returns the
goods to the bailor or according to the directions of bailor, the bailee is not
liable to the true owner in respect of such delivery (Section 166).
6) Right to remuneration:
When the goods are bailed to the Bailee, he is entitled to receive certain
remuneration for services that he has rendered. But in case of gratuitous
bailment, the Bailee is not awarded any remuneration.
7) Right to recover compensation:
At times a situation arises wherein bailor did not have the capacity to
contract for bailment. Such a contract causing loss to the Bailee; therefore,
the Bailee has the right to recover such compensation from the bailor.
(Section 168)
 K. Yeshwanth Gowda

8) Right to lien:
When the bailee, in accordance with the purpose of agreement has
rendered any service involving the exercise of labor or skill, to the goods
bailed, and his lawful payments are not made by the bailor, the bailee has
a right to retain unless there is a contract to the contrary, the goods bailed,
until he received his remuneration for the services rendered by him.
Particular Lien: A lien which can be exercised only on goods in respect of
which some payment is due is called particular lien. Where the bailee has,
in accordance with the purpose of the bailment, rendered any service
involving the exercises 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 received due remuneration for the services, he has rendered
in respect of them (Section 170).
General Lien: The right of general lien, as provided for in Section 171,
means the right to hold the goods bailed as security for a general balance
of account. Whereas right of particular lien entitles a bailee to detain only
that particular property in respect of which charges are due. Right of
general lien entitles the bailee to detain any, goods bailed to him for any
amount due to him whether in respect of these goods or any other goods.
The right of general lien is privilege and is specially conferred by Section
171 on certain kinds of bailees only. They are bankers, factors,
wharfingers, attorneys of a high court, and policy brokers.
9) Right to suit against a wrongdoer:
After the goods have been bailed and any third party deprives the Bailee
of use of such goods, then the Bailee or bailor can bring an action against
the third party. (Section 180).
 K. Yeshwanth Gowda

PLEDGE

Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under

section 172 of the Indian Contract Act, 1892. By pledge, we mean bailment of
goods as a security for the repayment of debt or loan advanced or performance
of an obligation or promise.

The person who pledges the goods as security is known as Pledger or Pawnor

The person in whose favour the goods are pledged is known as Pledgee or
Pawnee.

A borrowed Rs.100 from B and gave his cycle as a security for the repayment of
the amount, in the condition that if A pays back to B, he will get his cycle back.
it is called the contract of Pledge.

Case Law

Lallan Prasad v. Rahmat Ali

Supreme Court of India defined Pledge as: “Pawn or pledge is a bailment of

personal property as a security for some debt or engagement. A Pawnor is one
who being liable to an engagement gives to the person to whom he is liable a
thing to be held as security for payment of his debt or the fulfilment of his
liability”.

Examples:

1. Mr. A gives his watch for repair to Mr. B., In this case, Mr. A is bailor, Mr.
B is Bailee and the goods bailed is watch.
2. Harry bailed his bike to David for riding for himself to go to college. David
used it for racing purpose. Now David will be liable for unauthorized use
of the bike bailed.
3. Z pledged his goods with A. But now Z refuses to make the payment of the
same. A now can either sell his goods or can initiate a suit proceeding
against Z.
 K. Yeshwanth Gowda

WHO MAY PLEDGE:

1. The owner, or his authorized agent

2. One of the several co-owners, who is in the sole possession of goods, with
the consent of other owners
3. A Mercantile agent, who is in possession of the goods with the consent of
real owner, or (Sec. 178)
4. A person in possession under a voidable contract, before the contract is
rescinded, or (Sec. 178 A)
5. A seller, who is in possession of goods after sale [Sec. 30(1)] or a buyer who
has obtained possession of the goods before sale [Sec.30 (2)]
6. A person who has a limited interest in the property. In such a case the
pawn is valid only to the extent of such interest. (Sec. 179)

Rights of Pawnor

As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to
Redeem. By this, we mean that on the repayment of the debt or the performance
of the promise, the Pawnor can redeem the goods or property pledged from the
Pawnee before the Pawnee makes the actual sale. The right of redemption is
extinguished once the actual sale is done by the Pawnee as per his right under
section 176 of the Indian Contract Act, 1872.

1) It is the duty of Pawnor to comply with the terms of pledge and repay the debt
on the stipulated date or to perform the promise at the stipulated time.

2) It is the duty of Pawnor to compensate the Pawnee for any extraordinary

expenses incurred by him for preserving the goods pawned.

Rights of a Pawnee (Sec.173 and 176)

1. Right to retain the goods

2. Right of Retainer
3. Retainer for subsequent advances
4. Reimbursement of Expenses
 K. Yeshwanth Gowda

5. Right to Sale
6. Rights in case of default by Pawnor
7. Right against true owner of goods

Duties of a Pawnor (Sec.175)

Pay the debt: The Pawnor is liable to pay the debt or perform his promise
as the case may be.
Pay extra-ordinary expenses: The Pawnor is liable to pay to the Pawnee
any extraordinary expenses incurred by the Pawnee for preservation of
goods.
Disclose faults in goods: The Pawnor is liable to disclose all the faults
which (a) Are material for use of the goods; or (b) May put the Pawnee to
extraordinary risks. Indemnify the Pawnee: If loss is caused to the Pawnee
due to defect in Pawnor’ s title to the goods, the Pawnor must indemnify
the Pawnee.
Duties of a Pawnee
Not to use the goods: The Pawnee has no right to use the goods However,
he may use the goods, if he has been so authorized by the Pawnor. Duty
not to make unauthorized use of goods pledged.
Return the goods: The Pawnee must return the goods if the Pawnor pays
the debt or performs his promise. Duty to return the goods when the debt
has been repaid or the promise has been performed.
Take reasonable care: The Pawnee must take such care of goods pledged
as a man of ordinary prudence would take care of his own goods. Duty to
take reasonable care of the pledged goods.
Not to mix goods: The Pawnee must not mix his own goods with the goods
pledged. Duty not to mix his own goods with the goods pledged.
Return increase in goods: The Pawnee must return to the Pawnor any
accretion to the goods pledged with him. Duty to deliver increase to the
goods pledged.