C HA P T E R

Contract of Indemnity and

12 Guarantee

LEARNING OBJECTIVES ER
this chapter, you will be able to:
After going through
Explain the Contract of Indemnity
Discuss the Contract of Guarantee
State the Parties to a Contract of Guarantee
Describe the Essentials of a Contract of Guarantee
Discuss the Essentials of a Valid Contract
Explain Nature and Extent of Surety's Liability
Discuss the Rights of Surety
Describe the Kinds of Guarantee
Distinction between Contract of Indemnity and a Contract of Guarantee.
Make a a

CONTRACT OF INDEMNITY
from the loss makegood to the
Indemnity means an act to compensate or protect somebody
or

loss. For Example, X promises Y, that in case he (Y) suffers loss

from a business, he (X) will
compensate his loss.
According to Section 124, the term Indemnity' means
Indemnity is an act to compen
make good the loss compensate the party who
to Suffered some loss. "A tocontract,
or
sate or to protect somebody
by which one party
from the loss.
promises to save the other from loss caused to him by the
of the promisor himself, or by the conduct of any
onauct
olher person, is called a contract of indemnity.

AContract by which one partv promises to save the otherIrom loss caused to him by the
contract
is calleda "contractof indemnity".
nC promisor himself, or by the conduct of any other person,
indemnifier.
nitier A person who promises to bear the loss is known
as

Inde is known indemnified

ed: Aperson whose loss is covered or who is compensated
as
ror indemnity-holder.
Contract of Insurance (except life insurance) is an example of contract of indemnity where
ra e Company is the indemnifier and policy holder is the indemnified or indemnity-holder.
C

109
 1872
PART1:INDIAN
CONTRACT ACT,
110

Mr. B, I promise to
reimburse
Okay.
consequence

20000 against the C

which
of any proceeding
may
take against you.

Mr. B (indemnified)
Mr.C Mr. A (indemnifier)

EXAMPLE:
A enters into a contract with B 1o indemnify him against 1he consequences of an proceed:
1hich Cay take againstBin respectofa certain sumofRs. 20,000. This is a contract ofindemn
indemnited or indemnity-hold
A1IS the promisor and indemnifier and B is the promisee
or
lder.

ESSENTIALS FOR CONTRACT OF INDEMNITY

The contract of indemnity must have all the essentials of the valid contract (like free consent
consideration, object should be lawful etc.) and that the contract of indemnity can be expressed
or implied. Another essential of contract of
indemnity is that the loss should be caused to the
indemnity holder because of the conduct of the promisor or the third party. Further
promisor
must also promise to the
promisee (who is indemnity holder in this contract) to save him from
the loss. Thus the indemnifier must enter into the contract
with the indemnity holder to save him
from the loss. Meaning thereby,
back again in the same situation,
indemnity holder if suffers from some loss, he will be brought
of contract of indemnity:
making good to the loss. Following are the essential features
1. Two Parties: There must be two
parties, namely, promisor or indemnifier and the
isee or indemnified or
indemnity-holder prom-
2. Protection fromn loss: A contract of
indemnity is entered into for protecting the
from loss. The loss may be caused due n

of any other party or by the

to the
conduct of the promisor or the perso
occurrence ot any event by conau
3. Express or
Implied: A contract
or accident.
inferred from the circumstances of Indemnity
of the case. may
be express or
or Implied ie., verba
Essentials ofa valid contract Acontract of
4.
therefore; it must possess all indemnity is a species of the
lawful object, Iree consent etc.the essentials of a valid
he general contr
general
contract, e.g. capacity cies o
parties,

RIGHTS OF THE
Section 125 of the Act
INDEMNITY-HOLDER WHEN SUEDD
rights of the indemnity provides
the
following
are that indemnityrightsholder
to the can recover all damag
holder are
the indemnity
that indemnita. ne indemnity holder when suethThe he
holder has the
damages. He can also recover all cost
to third party, that cost can ie. if sufered. He has
nas got a
a
be
be recovered by
recovered indemnity
tthe holder incu
incurs right to
to recover a
recov
can be recovered
by the by
indemnity holder, if indemnity holder curs some cost in filinghe
s
tn semnifier. Thiscos

indemnity holder acts from indemnifier.

cts within
with the authc
g I v e n
 CH. 12:CONTRACT OF INDEMNITY AND GUARANTEE 111
The promisee
nisee (ind (indemnity holder) in a contract of indemnity, acting within the scope of
t oh i m

is entitled to recover from the promisor (indemnifier:

authority,
his
aa
damages which he
ges which may be compelled to pay in any suit in respect of any matter
1. All to
which the promise
to indemnify applies;
ncts which he may be compelled to pay in any such suit, in bringing or defending it, he
2.Atcontravene the orders of the promisor, and acted as it would have been
m act in the absence of any contract ot
prudent
to
or defend the suit;
indemnity, or if the promisor authorized
him to bring
All sums which he may have paid under the terms of any compromise of any such suit,
f the compromise does not contradict to the orders of the promisor, and was one which
it would have been prudent for the promisee to make in the absence of any contract of
indemnity, orif the promisor authorized him to compromise the suit.

4. The indemnity- holder is also entitled to sue for specific performance of contract of in-
demnity where he incurs absolute liability, provided the same is covered by the contract
of indemnity.

EXAMPLE
A and B went into a shop. B said to the shopkeeper Let A have the goods, I will see you paid'".
The contract is one of indemnity. The person who promises to make good the loss is called the
indemnifer'(promisor),and the person whose loss is to be made good is called the indemnified
or indemnity holder'(promisee)

EXAMPLE:
Xcontracts to indemnify Yagainst the consequences ofanyproceedings which Zmay take against
Yin respect of a certain sum of 5000. This is a contract of indemnity, X is the indemnifier
and Y is the indemnified.

CONTRACT OF GUARANTEE
Section 126 defined the contract of guarantee as follows:
ntract of guarantee contract to perfornm the
is a
Guarantee is a contract to per-
ofhi r discharge the liability of a third person in case form thepromise or discharge
theault".A contract of guarantee is entered into with the
in liabilities
case of hisof a third person
default.
he
object of enabling a person to get a loan or goods on
Credit or an
employment.
Okay, I
agree.
Mr C, let B have the
goods& if he does
not pay, I will.

Mr.B. Mr.C
Mr.A.
 1872
CONTRACT ACT,
INDIAN
PARTI:
112
have the g o o d e
EXAMPLE C, "letB if he does
shopkeeper is e n t e r e d i h e
said to the to to facili
a sho A
A and B went into ashop contract
of8uarantee
T guarantee. This
ISa contract of
basIs,
pay,Iuwill
c r e at

monev or
goods o1
to get
On ether to borrow

PARTIES TOA CONTRACT OF GUARANTEE

There are three parties to a contract of guarantee.
the guarantee is giues
in respect of whose default
Principal Debtor: The person
is the principal debtor. cale
tne principal debtor. In the above example B
L Creditor: The person to whom the guarantee is given is called the 'Creditor
or. Cis
creditor in the above example. the
ii Surety: The
person who gives the guarantee is called the 'surety'. A iss the
above example. suretyi the
ESSENTIALS OF A CONTRACT OF
GUARANTEE
Acontract of guarantee being a species of
of a valid contract. As contract general should compromise all the
such, it has the following special features: essentisl.
ntials
SURETY'S OBIGATION IS
Conditional liability of
DEPENDENT ON PRINCIPAL-DEBTOR'S DEFAULT
of surety is the first essentials of
guarantee the liability of the contract of
committed by the principal surety is conditional or guarantee. Under the contract
debtor. If the dependent. It arises
is absolute oronly when default is
cannot be a
of the contract of
guarantee. There
liability of the
surety
principal debtor. If the must be a
conditional promise to independent, there
guarantee but of
indemnity. promise is not
conditional on default, it pay on the detault
will not be a
EXAMPLES contract ot
(1) A asks B to
sell
failsils to pay."It is certain
a
goods on credit to C
contact
2) A asks a
shopkeeper
of
guarantee as thepromising "I will pay the
This is not a to sell
certain goods to promise is amount n cue ase C
on contract
default of the buyer.ofI guarantee as the C promising, contingent
"I
on the default of C
is a
contract of promise of the will see
that you aaid.
Separate indemnity. guarantee is 1ot corare l
For a
contract of
Consideration for Guarantee is
wowides that guarantee, like any Not
be a sufficier
sufficient anything done other
or
contract,
Necessary
consi
separate consideration
the deralion to
any
the promise made, forconsideration
Principal debtor is between thesurety for giving thethe benefit of is necessa
sufficient for Principal debtor
necessary.
the
. But Sec. 127
D
the
surety. andguarantee.
the Thus, principal there is no
surety. Conside n
ed fora

Consideration
deration eiveddby
 CH. 12:CONTRACT OF INDEMNITY AND GUARANTEE 113
Not Be Competent to Contract
Debtor Need
prinetheditor aand
Principal

n d the surety must be capable of

though
creditor
entering into contract, yet, the principal-
be competent to contract. If the principal debtor is not competent to contract,
d e b t o rn e e d not.
incipal-debtor
the prin is not liable but the surety is liable as the principal- debtor.
a case,
in such
Kashiba v. Shripat)

Must Be Existing Debt or Promise Whose Performance is guaranteed

Must Be Exs
There
contract
of guarantee, there must be an existing debt or a promise whose performance
of,
For a anteed. In case there is no such debt or promise, there cannot be a valid guarantee. As a
5 offact, the debt or promise is the basis of guarantee, ie., it is the consideration received
matte

L the debtor. Hence, if there is no consideration, there is no contract of guarantee. However,

In that the the debt.
surety himself will be liable
the debt may even be void. case, to pay

No Misrepresentation or Concealment of Facts

is not a contract of uberrimae fidei, ie, a contract of good faith requiring
Acontract of guarantee
to affect the willingness of the guarantor. However, there
full disclosure of material facts likely
concealment of material facts by the creditor.
should not be any misrepresentation or active
must disclose all those facts to the surety which is likely
to
t is the duty of the creditor that he
affect the degree of his responsibility.

Essentials of A Valid Contract

contain all the essentials of a valid
The contractof guarantee is a special contract. It must
free consent etc.
contract, e.g, competency of parties, lawful object,

Concurrence of All the Three Parties

concurrence of all the
three parties of it, namely, the principal
AContract of guarantee requires
that the surety should give the guarantee only
Ebtor, the creditor, and surety. It is necessary
at the request of the principal debtor.

Mode of Creation of Contract

written. It may also be express or implied ie, may
guarantee may be either oral or
hC T eactdof concerned.
from the act or conduct of the parties

NATURE AND EXTENT OF SURETY s LLABILITY

Debtor (Sec. 128):
S
Liability is Coextensive with Liability of Principal
creditor. Accordingly,
urety is liable for all the debts payable by the principal the surety.the
debtor to
Exception: The
contract
nereable
interest,damages,
guarantaEs,
costs etc. may also be
from
recovered
is co-extensive with that of the
otherwise. The liability of the surety
PincipaldLdy provide contract (Sec. 128).
unless it is otherwise provided by the
O
 1872
CONTRACT ACT,
INDIAN
PARTI:
114
the acceptor. Buts
C;,the But s
subsequenh
ucceptor.

EXAMPLE exchange by se
billof theamount of t he bill but
guarantees
Bthe paymentofa liable not only
for
Suppose,A this c a s e A is

the bill is dishone by C n become due o .

which may have
interest and charges
or any
Principal-Debtor:
to that of
the
The Liability of The Surety is Equal
can neither be more
nor less. Howe.wever, bya
contrary it
absence of a contract to the ot the princinal
in
the
Special contract, the liability of
Dut it cannot be greater than
the surety
that of the
can be
liability
made less than that
of the principal
debtor. pal-debtor,
Surety's Liability May Be Conditional/Contingent/Dependent:
Until those conde
Ihe impose certain conditions in the contract of guarantee.
surety
are met, may
the surety shall not be liable. In a contract of guarantee the liability of the sura
contingent or dependent.
urety s

Surety's Liability is Secondary:

In contract of guarantee the
a
primary liability lies with the Principal debtor. The liability of the
surety is secondary. It arises only when there is a default by the principal debtor.

Surety's Liability May Be Continuous:

The surety may agree to become liable fora series of transactions
surety may fix a limit on his liability to which of continuous nature.
-

up the guarantee shall remain However,

period during which the guarantee shall remain effective; a time
liability of the surety is not confined to effective. In case of
over a period of time. single transaction, but extends continuing guarante, the
to a series of
transactions
Commencement of Surety's
The liability of
Liability:
surety arises immediately
required to: on
default by the
principal debtor. The creditor is
(a) Sue the principal
debtor, or no
(b) To give a notice to the
The liability of the principal debtor.
will not be liable suretytherearises
unless only on default by the
is a default
been committed, then by the principal debtor. Therefore,
the surety without immediately the
the liability principal-debtor.
liability of the
re, the sure
the h
suing the
principal-debtor. However, when
surety begins. A suitcan thefiled
althas
In some cases, the
debtor. In case the surety's liability can be [ieaeains again

guaranteeiis may be
when the
contingent upon
contingency has actually simultaneously
the with the
LIABILITY OF SURETY NHEN happened. [Subhanhappening of an liability of the p liab
principak

Khan v. Ali event, nt, the

the surety
su
Khanj
The law
regards
the surety is surety and PRINCIPAL-DEBTOR
ncipal-debtor
principal-debtor
independent of the IS NOT
distinct LIABLE
liability of the two distinet
as as

principal-debtor..
liability o'
per
persons. Therefore,
Thus, Therefore, a
if the
us, if
ntract

the original
o.
 CH. 12:CONTRACT OF INDEMNITY AND GUARANTEE 115

veen the principal- debtor and thee creditor is void, e.g, when the debtor is is aa minor
minor incapable
incapable
ntering into
into contract, then the surety is not
not discho
discharged fromne debtor
the liabilitv
liability but
ncapable
is liable as a
of entering contract, then s5urom
the
ncipal-debtor. Again, if the creditor does not
not file a suit against the principal-debtor within the
does
limitation although
period of
t discharged of his iability.
lial Infact,
the principal-debtor
he continues
is not
to be liable to
in such a case, yet the surety is
liable
the creditor under contract of
t
not
discharged of
guarantee Mahant
Singh v. Bayi
Even the operation of law will not discharge the surety from his liability.

EXAMPLE
Where the principal-debtor dies or becomes insotvent before paying the debt, the surely is liable
for the debt. Further any admission by the principal-debtor or judsgment obtained against the
the surety
principal-debtor will not be enforceable against the surety. A creditor cannot ask contract,
sum himself (creditor) has failed to carry out the terms of
when he the
to pay any
the property to the purchaser. A surety will be
e.g, has failed to transfer the ownership of
the contract withoui
discharged from his liability if there will be any variation in the terms of
his (surety's) consent.

RIGHTS OF SURET
ereditor and
It includes the rights of the surety principal debtor, against principal
against the
circumstances
the surety's liability and under what
against co-sureties, nature and extent of of surety can be classified under the
the surety will be free from the responsibilities. Rights
following three headings:
L Rights against the Principal Debtor;
IL Rights against the creditor;
IL Rights against the Co-sureties.
L Rights against the Principal Debtor debtor
(Sec. 145): There is an implied promise by the principal
(a) Right of indemnity is entitled to claim from the principal
debtor
to indemnity the surety. The surety cannot recover such sums,
paid. The surety
all the sums which he has rightfully
which he has paid wrongfully.

EXAMPLE debt. B did not repay the a m o u n ,

CandA is the surety for the
B borrowed money from on his refusal
sues him for the
amount. A

A and
thus C demands payment from But he is compelled to pay
reasonable grounds for doing so.
defends the suit having can r e c o v e r from
B the a m o u n t paid by him for
He
the a m o u n t of the debt with
costs.
debt.
costs as well as the principal
shall be entitled
ofa debt, the surety
On payment Where
) Right of subrogatlon (Sec.140): could claim against the principal debtor.
which the creditor the guaranteed
to all the rightsdebtor has committed default and the surety pays
conferred to the
the debtor are
the principal the creditor had against
debt, all the rights which the shoes of creditor.
the surety steps into
creditor. In other words,
 116 PARTI: INDIAN CONTRACT ACT, 1872

(c) Right to insist the principal debtor to honour his obligations: The surety is als .

entitled to compel the principal debtor before making the payment to honor
0Digations by paying off the debt and relieve him from such obligations.
ir
his
(d) Rights to Securitles with the Creditor:The surety is proceed again
entitled to
st
debtor after he pays the guaranteed debt in case
he securities of the principal ase of
debtor's default.
II. Rights against the Creditor
(a) Right of subrogation: The surety can claim all the securities which the creditor had
at the time of giving of guarantee. It is immaterial as to whether the surety had
knowledge of such securities or not. If the securities are returned by the creditor to
the principal debtor, the surety is discharged to the extent of value of the securities
so returned.
(b) Right of set off: The term set-off means adjustment; counter claim and deduction
of the amount from the guaranteed amount. When the surety is called upon by
the creditor to pay, he is entitled to exercise the right of set-off which the principal
debtor had against the creditor. Any amount recoverable from the creditor by the
principal debtor can be claimed as deduction. Similarly, any amount recoverable
by the surety from the creditor can also be claimed as deduction.
(c) Rights to share reduction: After making the payment of guaranteed debt by the
surety, if the principal debtor is declared insolvent then the surety is entitled to
claim proportionate reduction of his liability. In such a case, the liability of the
surety will be reduced to that extent of dividend received by the creditor from the
official receiver of insolvent debtor. In other words, if the principal debtor becomes
insolvent, the surety may claim proportionate reduction in his liability to the extent
of dividend received by the creditor on behalf of the insolvent debtor.
IL Rights against Co-Sureties
When more than one person gives a guarantee for a debt or duty, they are known as
co-sureties. Co-sureties have joint as well as several liability under the contract of
antee.
guar
(a)Rights to contribution (Sec. 146): Where two or more persons are co-sureties for
the same debt eitherjointly or severally and the
principal debtor commits default,
each co-surety is liable to contribute equally towards the debt or part of the debt
which remain unpaid. All the co-sureties shall contribute
equally.
EXAMPLE
A, B and C are co-sureties to D for the sum of 30,000 lent to E who makes defuult "
payment. Thus A, B and Care liuble to pay Rs. 10,000 euch to D

Exceptions: Under the contract of guarantee, the co-sureties may fix limits on t eir
respective liabilities. Even in such a case, the co-sureties shall contribute equaly
SuDyect to the maximum limit fixed by the co-sureties. However as per the contrac
of guarantee the co0-sureties
may also contribute in some other proportion.
(b) Right to share benefit of securities: Where one of co-sureties has received a urity
from the principal debtor either at the time of entering into the contract or at tne
tme ot the payment of the debt, all the co- sureties are entitled to share theDea
 CH. 12:CONTRACT OF INDEMNITY AND GUARANTEE 117

t s of that security. Thus when any one of the co-sureties receives any security,
all the other co-sureties are also entitled to share the benefit of such security.
Effect of Release of a Surety (Sec. 138): Where there are co-sureties, release of
ne of them by the creditor from the liability does not mean release of the others.
Carther, the surety so released is not discharged from his liability to the other co
sureties.

KaNDS O F G U A R A N T E E

be class into four categories, namely,

Guarantee
may

Specific
Guarantee, 2)) Co
Continuing Guarantee, 3) Retrospective Guarantee and 4) Prospective
(1)
Guarantee.

(a) Speciftc Guarantee:

A guarantee
which extends to a single debt or
to
ific transaction is called a 'specific guarantee'. A guarantee which extends
single debtor a specifictransac-
end when the
to an
The liability of the surety
comes
tion is caled specificguarantee
debt is duly discharged or the promise
guaranteed
is duly discharged. For example, A buys computer makes the
Electronics. S gives the guarantee to the dealer. A
for Rs. 30,000 from Sargam
on the due date. S is discharged
from his liability.
payment
(6) Continuing Guarantee:
series of transactions
Aguarantee which extends to a
A guarantee that extends a
to
is called a 'continuing guarantee'.A surety's liability series of transactions is knowm,
continues until the revocation of
the guarantee. The
guarantee
as Continuing guarantee.
liability of surety in case of a continuing until the
extends toall the transactions contemplated
Whethera guarantee
revocation of the guarantee.
terms of the contract
of the guarantee, intention of
is a continuing o r not depends
on the revoked
guarantee may be
The continuing
circumstances.
the parties and surrounding
in the following two ways: creditor and the principal
the notice to both the
When the surety gives (Sec
.ByNotice: cancellation of the guarantee,
the continuing guarantee ceases.

debtor for to such notice

remains liable for
the transactions prior
130). However he
ceases death of the surety,
with the
The continuing guarantee is required
4 By death of Surety: 131). Nonotice of death
to the contrary (Sec transactions
liable for the
provided there is
nocontract

The estate of the surety is

to be given to the creditor.

undertaken prior to his death.

EXAMPLE: the guarantee of B's perfornnance

to A up to

the of C C gave Held, death of the C operates as a

t o lend B at
request

30.000 1o B and thereafter C died. iransactions. If B has not repaid

U.A had lent 7 with regard
to future
of a continuing g u a r a n t e e
the 7 to7 30,000.
C's estate:shall be liable up

trospective Guarantee: called by retrospective

guarantee.

If the guarantee debt, it is

e is given for the past
 PART I:INDIAN CONTRACT ACT, 1872
118

(d) Prospective Guarantee:

On the other hand, if the guarantee is given for future debt or obligation, it is called
spective guarantee. pro
DISCHARGE OF SURETY FROM LIABILITY
A surety is said to be discharged when his liability as surety comes to an end. A surety will
free from his obligation under a contract of
guarantee under any of the following circumstances.
(a) Notice of Revocation (Sec. 130): A specific guarantee cannot be revoked once it has been
acted upon. But a continuing guarantee may at any time, be revoked by the suretyast
future transactions by giving notice to the creditor. However, he remains
liable for the
transactions entered into by him prior to such notice.
(6) Death of Surety (Sec. 131): In case of a
continuing guarantee the death of a surety also
discharges him from liability as regards to the transactions after his death, unless
is a contract to the there
contrary. However, the estate of surety will be held liable for
transactions entered into prior to his death. the
() Variance in Terms of Contract
of contract between (Sec. 133): If any variance or change is made in terms
principal
consent, it discharges the
debtor and creditor without the
surety's knowledge or
surety as to transactions subsequent to the variance.
EXAMPLE
A contracts to lend
Rs.5,000 B on 1st March, C
to
Rs. 5,000 to B on 1st
January. gives guarantee for the
terms of the contract
C is
discharged from his liability due to the repayment. A paid
B for the
between A and B without the variation made in the
recovery of money lent before 1st consent of C
March. However, A is entitled to sue
(d) Release or
Discharge of Principal Debtor (Sec.
contract between the 134): The surety is
released, or by any act creditor and the
principal
of omissions of the debtor, by which the discharged by any
discharge of the debtor. The two creditor, the legal principal debtoris
under this Sectionprincipal modes of consequence of which is the
are:
(a) Firstly, where the
discharge of the
surety as provided
creditor and
principal debtor is released, thethe principal debtor enter into a
the surety also.
consequence of the same wouldcontract by whiC
be dischargedlof
(6) Secondly, where the creditor does
o

debtor is
released; the some act or
also. consequence of the sameomits to do an act
would be
by which principa
(e) discharged of the sure
Arrangement by Creditor with
Acontract between the Principal Debtor without
Sition (tacit creditor and Surety's Consent
onsent (Sec.
(Sec. 135)
debtor, understanding) with, principal debtor, by which
1*

this discharges
Section, the
the or
creditor
surety, unlesspromises to give time to, or not makes a co po-
the surety to sue the
() Makes a surety is discharged from his assents such contract.
to prin to
i) Promisescomposition with the liability
where the Accoraus
creditor:
to give
time to him forprincipal debtor; or
the
performance of his promise; or
 CH. 12:CONTRACT OF INDEMNITY AND GUARANTEE 119

es nof to sue the principal debtor provided the surety does not give his assent to
Promises not

such contract.

CASE LAW: Midland Motor Showrooms Ltd. v. Newman (1929)

C A S

chased a motor car from C under a hire purchase agreement. S gave guarantee to Cjor
theperformance
of the promise of ?.Cfor valuable consideration and without the consent of
cae more time to Pfor the payment of one of the instalments. Held, as C extended the time
P for the payment of one of the tmstalments, S was discharged from any further liability

under the
contract of guarantee

A Creditor's Act or Omission Impairing Surety's Eventual Remedy (Sec. 139): If a cred-
itor does any act which is inconsistent with the rights of the surety, or omits to do any
act, which is his duty, the eventual remedy of the surety against the principal debtor is
impaired, and the surety is discharged from his liability. In other words, if any acts or
omission of the creditor deprives the surety of the benefits of his eventual remedy, he is
discharged from his liability.
Loss ofSecurity (Sec. 141): f the creditor loses (by negligence or carelessness) or with-
out the consent of the surety, parts with security given to him, the surety is discharged
from liability to the extent of the value of security. However it may be noted that if the
creditor parts with the security which was acquired by him subsequent to the formation
of the contract, surety is not discharged from his liability.
(h) Invalidation of the Contract of Guarantee: (In between the creditor and the surety) A
urety is also discharged from liability when the contract of guarantee (in between the
creditor and the surety) is invalid. A contract of guarantee is invalid where such a con
tract has been obtained by means of misrepresentation or fraud or keeping silence as to
material part of the transaction, by the creditor or with creditor's knowledge or assent.
Faiure of co-surety to join a surety also makes the guarantee invalid. The contract of
arantee becomes invalid and the surety is discharged from his liability in the following
cases:

Where the guarantee is obtained by Misrepresentation (under section 142) made

by the creditor or with his knowledge or assent in respect of a material part of
the transaction, a contract of guarantee is invalid. In such a case, the surety is
discharged from his liability.
4Where the guarantee is obtained by the creditor on Concealment (Sec. 143) or by
eeping silence on material circumstances, a contract of guarantee is invalid and
therefore, the surety is discharged from his liability.
h e r e the contract of guarantee lacks one or more essential elements of a valid
contract, the surety is discharged from his liability
Distinction between
Btinction between a Contract of Indemnity and a Contract of Guarantee
Points of Distinction
Number of parties Indemnity
SSESS88888888888888888
Guarantee
There are two parties namely, the | There are three parties namely, the
indemnifier and the indemnity | creditor, the principal debtor and the
Object or purpose holder.
For the reimbursement ofloss.
surety.
For the security of a debt or good
conduct of an employee.
120 PARTI: INDIAN CONTRACT ACT, 1872

Polnts of Distinction Indemnity Guarantee

3. Number of contracts Only one contract between the | Three contracts - one betwa
en
indemnifier and the indemnified. principal debtor and creditor, he
second between creditor and he
surety, and the third between the
surety and the principal debtor, he
4. Nature of liability The liability of the indemnifier is Theliability of the suretyissecondan
dary,|
Le. the surety
primary in nature. is liable only on defau
of the principal debtor.
5.Request by thedebtor Theindemnifier acts independently It is necessary that the surety
without any request ot the indemnity | give the guarantee at the
shoud
holder or the third party.
request of
the debtor.
6. Existing debt orduty |In most cases, there is no
existing | There is an existing debt or duty, the
debt or duty.
performance of which is guaranteed
by the surety.
7. Right to sue The indemnifier cannot sue
the| The surety, after he discharges the
third party for loss in his own debt
| owingtothe creditor, can proceed
name, because there is no privity
of contract. He do
against the principal debtor in his
can so only, if | own right.
there is an assignment in his favour.

DISCUSSION QUESTIONS
1. What is a contract of
indemnity? Explain the essentials of a contract of
2. Make distinction between a contract of
a indemnity.
essentials of contract of indemnity and contract of guarantee.
Explain the
guarantee.
3. What is a continuing Guarantee? When it
can be revoked?
4. Discuss the
rights of a surety against:
(a) Creditor
(b) Principal Debtor
(c) Co-Sureties
5. Define contract of
of guarantee. guarantee. Explain the nature and extent of
surety's liability in a conu ct
6.
Explain the various circumstances in
contract of guarantee. which the surety is
7. Comment on
discharged from his liabih1y in a

the
following:
(a) Liability of the
surety is co-extensive with that
(b) Between of the
co-sureties there is principal debtor.
8.
What are the different kinds of equality of the burden and the benefits.
revoked? guarantee? When and how
9. What is contract
of
a
continuing guarantee can be
10.
Distinguish betweenindemnity? Discuss the rights of
Indemnity and indemnity-holder under section 125
Guarantee.
 CH. 12: CONTRACT OF INDEMNITY AND
GUARANTEE 121
ACTICALPROBLEMS

s Rs.
Rs. 600 to a minor on the
guarantee
of X. On
1. Z,
advances

dsminority.Can Z recover the amount from X? demand for repayment the borrower

2. Mr. Gupta is
.a
indebted to
Mr. Sharma and Mr. Malik
is the surety. When Mr.
Malik refused Mr. Sharma sued the Gupta and Mr.
surety (Mr. Malik) who paid the amount
orders of the court. Can the surety recover
and cost
as per the amount from Mr.
hir becomes guarantor for
Gupta?
Shaukat for the amount which be given to him by Shakeel
in six months. The maximum imit ot the said amount ismay Rs. 1 lakh. After two months
Chahbir withdraws his guarantee. up to the time of reconviction of guarantee, Shakeel had
Shaukat Rs. 20,000.
given to
Whether Shabbir is discharged from his liabilities to Shakeel or any subsequent loan.
Whether Shabbir is liable if Shaukat fails to pay the amount of Rs. 20,000 to Shakeel.
 C H A P T

Contract of Bailment annd

13
w. wwwW IR re
Pledge
LEARNING OBJECTTVES
After going
through this chapter, you will be able to:
Explain meaning and features of Bailment
Describe the Kinds of
Bailment
Differentiate between 'Sale' and
Discuss the Duties
Bailment
of Bailee
Explain Duties of Bailor
the
Describe the Rights of
Bailee
Discuss the Rights of
Bailor
Describe the Right of Lien
Describe termination of Bailment
Explain Pledge or Pawn
Make a distinction between
Bailment and Pledge
Discuss Rights and Duties
of Pawnee
Describe Rights and Duties
of Pawnor
INTRODUCTION
A bailment'
is the
that they shall, when delivery of goods by one
person to another for some
directions of the the purpose is accomplished, be returned or purpose upon a cOn ract
delivering person delivering
to whom
the goods is
called the
them. The
person disposed of according o
the ballor' and the
examples of agoods are
delivered is called the person Balment is an act of entrusting
radio, mobile contract of bailment are: 'ballee'. The possession of goods to a
a phone
car two wheeleror atT.Va to a mechanicdelivering watch, for
a
for some purpose.
some purpose.
person
oldsmith
Smith for making
making parking stand;forrepair;leaving
leaving luggage in a cloak
bailment
be a is
bailment of
ornaments;
the transfer
of leaving garments with a dry room; delivering gold
to
a

possession.
immovable property. The cleaner
ownership remains with theandowner.
so on. The sence

re
e ot
annot
1nc
122
 CH. 13:CONTRACT OF BAILMENT AND PLEDGE
123
of goods
bailment
bailr
A 'pledge'
A
is aa
wherein the goods are delivered as a security for
o r Derformance of promise. The bailor is called the payment
a
debt
of
of a alled the 'pledgee' or 'pawnee. Thus, pledge is a special*pledgor
a
or
'pawnor' and the
kind of bailment. Pledge can
m
galy valid it is essential that
the pledgor has the legal right or title to retain the goods 6
MEANING OF BAILMENT
ormbailment is derived from a French word "Bailer" which
means to deliver or handing
goods under the contract.
over of

According to Section 148 of the Contract Act "A bailment is the delivery of goods by one person
ta another for some purpose, upon a contract that they shall, when the purpose is
accomplished,
be returned or otherwIse disposed or according to the direction of the person delivering them".
Section 148 lays down that the delivery of goods is not required where a person already in
nossession of the goods contracts to hold them as a bailee. In such a case, he becomes the
bailee and the owner becomes the bailor of goods. The person delivering the goods is called the
bailor'. The person to whom the goods are delivered is called the "bailee' and the transaction
between the two is called the "bailment'. A bailment is thus a delivery of goods on condition
that the recipient shall ultimately restore them to the bailor or dispose of them according to the
direction of the bailor.
Day to Day examples of bailment are hiring of goods, books, furniture or a cycle, delivering a
piece of cloth to a tailor for stitching a suit, delivery of watch, LCD, laptop or two wheelers to
a mechanic for
repairing.

ESSENTIAL FEATURES OF BAILMENT

A bailment has the
following features:
(a) Contract between the parties: Bailment as such may arise due to the contract between
two parties. However sometimes it may also arise without a contract, e.g, finder of goods.
A contract of bailment may be express or implied. A hires Innova car for his personal
trip from Delhi to Ajmer. This is an express contract of bailment. It may be noted that
the relationship of bailor and bailee may arise even without an enforceable contract. For
instance, where the goods are seized, there can be a bailment between the concerned
department of the government and the owner of the goods.
(0) of Possession of Goods: The possession of the goods must be delivered by the
Delivery
bailor to bailee. That means only the possession of goods is to be transferred and not
the ownership. In order to constitute a bailment, a change of possession of goods is a
must. Mere custody of goods must be distinguished from possesion of goods. One who
and he
Custody of goods without possession, like a servant using his master's goods
does not become a bailee. Thus, if there is no delivery of possession of goods, there 1S no
bailment.
h e goods are delivered for some purpose: The purpose may be lending. giving ordepos
of rorm
g the goods for safe custody, security for a debt, for repair, or for conversion
ACCOrding to Sec. 148, in a contract of bailment goods must be delivered for some
change
Purposes such as safe custody, security for the debt, lending, cleaning, repairing,
of form, carriage etc.
124 PARTI:INDIAN CONTRACT ACT, 1872

(d) Returm of goods or Disposal of Goods: The goods which form the subject matter.
bailment must be returned to the bailor or otherwise disposed of according to the d
tions of the bailor, after the accomplishment of purpose or after the expiry of peri
bailment. The relationship does not arise where goods are delivered by mistake. Gen
a contract. But sometimes bailment may be infe
the delivery of goods is the result of erred
from the act of the parties or the circumstances of the
case.

(e) No change of Ownership: The bailment does not result in change of ownership, In ha
ment, bailor continues to be the owner of goods even it the goods may be in the possesion
sion
of the bailee.

KINDS OF BAILMENTT
Bailment may be classified from the point of view of () benefit, and (i) reward to the
parties
A) From benefit"' point of view, bailment's may be grouped into three classes:
1. Ballment for the excluslve benefit of the ballor,
e.g, bailor leaves goods in the safe
custody of the bailee without any compensation to be paid.
2. Ballment for the exclusive benefit of the
bailee, e.g., Borrowing an article by the
bailee from the bailor for his own use. Thus where A borrows B's
pen to use in the
examination hal, the bailment is for the sole benefit of the bailee
ie. A.
3. Bailment for the mutual benefit of the
ballor and the ballee. It is the most
mon type of bailment. Contracts
for repair, hire, etc., fall within this com
the bailor receives the benefit of service and the class, where
bailee receives the benefit of the
agreed charge/price.
(B) On the basis of "reward' Bailment
may also be classified into:
1. Gratultous bailment. It is one in
which neither
the bailor nor the bailee is entitled to any Gratuitous bailment
is one
remuneration. Lending book to a friend,
a
where
depositing of goods for safe custody without neither bailor nor bailee
is entitled for any
any charge and lending car to a friend for remuneration
his personal use are some of the
features of gratuitous bailment.
The following are the main features
of gratuitous
(a) No consideration moves between the
bailment:
bailor and bailee.
(b) The bailment may be for the benefit
of either bailor or
(The bailor is responsible for bailee.
known defects in the damages suffered by the bailee due to th
goods bailed.
()Bailor is under obligation to repay
the purpose of
bailment. Bailee's necessary
expenses incurred r
(e)Bailor is entitled to terminate bailment
period or accomplishment of before the expiry of the cified
(Itis terminated by the death ofpurpose. specu
of the bailee or of the bailor. either
2.
Non-gratultous
as a
'bailment ballment: It is also called
Non-gratuitous bailment is one
for
bailor or the baileereward' Here, either the whereeitherthe
ee is
bailoror the bail
is entitled to remunera- entitled to remuneration.
 CH. 13: CONTRACT OF
BAILMENT AND PLEDGE 125
sian. Motorcar let out for hire,
the mechanic at service stationcloth
tor
given for stitching and
repair are some of the handing over the car to
bailment. examples gratuitous
of
ing a
The following r e the main elements of the
are
non-gratuitous bailment:
Consideration moves between the bailor and bailee.
(a) Conside

The bailment is for the mutual benefit of both parties.

(1 he
is responsible for the damages suffered
in the goods bailed. by the bailee due to known or unknown
defects
Railor is under no obligation to repay Bailee's necessary
ofbailment. The same are borne by the bailee expenses incurred for the purpose
a Bailor is not entitled to terminate the bailment before the expiry of the
or accomplishment of purpose. specified period
h Itis not terminated by the death of either of the bailor or of the
bailee.
Difference between "Sale' and Bailment"
Bases Sale
Balimen
Possession Possession of goods is transferred to the Possession of
goods is transferred to
buyer. the bailee.
Ownership Ownership is transferred to the buyer. Ownership resides with the bailor.
Usage The buyer may use the goods in any way | A bailee can use the goods only according
he likes. to the directions of the bailor

Duration Oncethe sale is transacted, the seller keeps The bailee has to return the goods to the
the goods until he decides to sell them to bailor once the
| specified time is passed/
another. over.

DUTIES OF BAILEE
he duties of
Bailee are discussed below:
Duty to take reasonable care of goods delivered to him- (Section 151): in the case of
0ament the bailee is bound to take as much care of the goods bailed to him as a man of
unary prudence would, under similar circumstances, take of his own goods. In other
WOrds the bailee must take reasonable care of the goods bailed to him that an average
m a n can be expected to take care of his own goods in similar circumstances.

ASE LAW: Houghland v. RR Low (Luxury Coaches) Ltd. (1962)

his n e r of luxury coaches. A, was a passenger in one of his lhuxury coaches. A placea
Suitcase in the boot of the coach from
where it was stolen. A brought an action against B
for the breach
ofcontract of bailment. Held, since B was negligent in taking care of the goods,
which the ircumstan
ances of the case required, therefore, he was held liable to pay damages for
the loss
of goods.
(b) Duty nott
of the
to make
unauthorised use of goods entrusted to him (Section154): It is the duty
an
T O use the goods strictly as per the terms of the bailment. If he
makes
unauthorized use
d s e of the goods, he is liable to make compensation to the bailor for any
 1872
CONTRACT ACT,
PART I: INDIAN
126
uch
of them. Such liability is abse
liability absolh
from o r during such
use

damage arising to the goods negligence.

not guilty of any
lt arises e v e n if the bailee is

AEXAMPLE
hired a horse for the purpose of riding to the Exhibition ground On the Exhibition
this o.
cas A,
ditch and injured itself. Im round
horse was frightened by the crowd
and ran intoaaccident. He is not liable; the injury
the horse was not to be
blanned for the
the
bailee of the
caused to the horse.
is also the duty of ha
his goods (Sec.155): It
own
()Duty not to mix goods bailed with with those of the bail
not mix his own goods
that without bailer's consent he should
consent of the bailor,
there
is n o breach ofduty and the
the goods are mixed with the
If to their respective shares, in the
bailor and the bailee shall have an interest, proportion
in
without the consent of the bailor mixes up hi
mixture thus produced. But if the bailee,
own goods with those of the bailor,
bailee is liable to compensate for any loss incurred
by the bailor.

EXAMPLE:
A bails 100 bales of cottom marked with a particular mark to B. B, without A's consent, mixes A's
100 bales of cotton with of his own 100 bales of cotton, bearinga different mark. A is entitled to
have his 100 bales returned, and Bis bound to bear all the expenses incurred in the separation
of the bales, and any other incidental damage.

Where the bilee mires bailer's goods with his own goods without the bailor's consent
and the goods are separable (Sec. 150), in such a case the bailee must bear the cost of
separation and any damages arising from separation of mixture.
Where the mixture is not separable (Sec.
157): in such a case, the bailor is entitled to be
compensated by the bailee for the loss of the goods.
(d) Duty to return the goods (Sec.160): As soon as the time for
which goods were bailed has
expired, or the purpose for which they were bailed has
bailee to return, or deliver the
goods
accomplished it is the duty of the
fails to return the bailed, according the bailor's directions. If bailee
to
loss incurred
goods at the
proper time, he becomes responsible to the bailor for
by the bailor. any

EXAMPLE
Ahires a horse from B for one week but A
horse dies one day after the expiry of the defaults in returning the horse on the due date.
for the price of the horse to B, period of bailment without any 1ne
dies within one along with damnages for the fault of A. A is l1a0e
A is not liable week, ie., before the
expiry of the perioddelay.
Om the other
hand,
for the price. of bailment without A's if the noo
negigenee
CASE LAW: Juggilal
A of
Kanpur sent
Kamlapat Oil Mills v. Union
of India (1976)
consignment
a
consignment of oil
the meantime reached the Kolkata, A
to
Railways for transmission to B
the instructed
consignment of oil was seizedrailways of Kolkata.
it to be
adulterated. to bring
them back AJtn
theHigh Court. Held,Subsequently, the by the food to Kanpu:
tor of Kolkata who md
inspector
taken away railways
from them by the as
a consignment
bailee of oil was four
10
were not destroyed under te order of
authority of law. liable for returning the gooas as were
 CH. 13:CONTRACT OF BAILMENT AND PLEDGE 127

return accretions to the goods (Sec. 163): It is the duty of the bailee to deliver to
retui
to
(e)
Duty
natural iincrease or profit accruing from the goods bailed, unless there is
bailor any
the he contrary. For example, A leaves a cow in the custody of B to be taken
contract
to the
c o w has a calf. B is bound to deliver the calf as well as the cow to A.
aa

care
of. The
not to set up any adverse title against the bailor (Sec. 117): The Indian Evidence Act
Duty noti
(Dutyat the bailee is debarred from denying the bailer's authority to bail the goods and
ceive back. Where the bailor has not the title to the goods and the bailee returns the
ods to him in good faith, he shall not be iable to the owner in respect of such delivery
Sec. 166). Where a person other than the bailor claims the goods bailed, the bailee may
apnly to the court to stop the delivery of the goods to the bailor and to decide the title of
applyt
the goods ( Sec. 167)

DUTIES OF BAILOR

Railor is the person who delivers the goods to the bailee. The duties of bailor are as followS:
Duty to disclose faults in goods bailed (Section 150): These are the duties of 'gratuitous
bailor' and a bailor for reward' in case of faults in goods bailed:
gratuitous bailor is bound to disclose to the bailee all those faults in the goods
bailed, of which he is aware and if he fails to do so, he will be liable to pay such
damages to the bailee as may have resulted directly from the faults. A gratuitous
bailor will not be liable for damages arising to the bailee from defects of which he
was ignorant (Sec. 150). For example, A lends a horse to B, which he knows to be
vicious. But he does not disclose the fact to B that the horse is vicious. The horse
runs away. B is thrown and injured. A is liable to B for damage sustained.
2. A bailor for reward is responsible for all defects in the goods bailed whether he
s aware of the defects or not, if he does not disclose them to the bailee. Unlike a
gratuitous bailor, ignorance of the defects is no defense for him. (Sec.150). For
example, A hires a carriage of B, and the carriage is unsafe which B is not aware
of, and A is injured. B is responsible to A for the injury. On the other hand, if the
carriage were lent gratuitously, B would not be liable under the circumstances.
Similarly, had B told the fault to A, then also he would not be liable.

CASE LAW Reed v. Dean (1949)

the plaintiff/) hired a motor launch from D (defendant) for a holiday on river Thames. The
nch caught fire and R failed to extinguish it as the fire- extinguishing equipment was non
Peralional As such R suffered personal injuries and lost all his belongings on board. Held, D
Was liable to indemnity R for damages.
repay necessary expenses in case of gratuitous bailment (Sec. 158): Where, as
of the bailment, the goods bailed are to be kept or to be or too
hasa onditions carried
remo done upon them by the bailee for the bailor, and the bailee is to receive no
neration, it is the duty of the bailor to repay all the necessary expenses incurred by
for e e tor the purpose of the bailment. Thus where a horse is bailed without reward
exn Custody, it is the duty of the bailor to reimburse the bailee for usual feeding
PEnSes of the horse as well as for the medical expenses, if any.
ii.
Duty to
repay any
epay of 'extraordinary'
the bailment, theexpenses
bailee isintocase of non-gratuitous bailment: Where
:
unde
Cterms receive remuneration for his services, it
 1872
128 PARTI: INDIAN CONTRACT ACT,

expenses, if
any, incurred by the haa
is the duty of the bailor to bear extraordinary
relation to the goods bailed. In such a bailment the bailor in addition to the usuale oalee n
has to bear the extraordinary expenses (if any)
incurred by the bailee during thes
of bailment. Thus where a horse is bailed for safe custody
and the bailee is to course
to receine
200 per day as custody charge; the bailor is not liable to pay the bailee the ord

expenses of feeding the horse. But if during

the bailee's custody the horse falls ill
any negligence on his part, the bailor must repay the bailee the medical expenses ineu
in connection with the treatment of the horse, these being extraordinary expenses curred
iv. Duty to indemnify bailee (Sec. 164): A bailor is also bound to indemnify the bailee i
any loss suffered by the bailee, by reason of the fact that the bailor was not entitla
led to
bail the goods because of the defective title. For example, A gives his neighbour's motr
cycle to Y for use without the neighbour's permission. The neighbour sues Y and receive
otor
compensation from him. X is bound to indemnify Y for his losses.
v. Duty to receive back the goods: It is the duty of the bailor to receive back the goods
the bailee returns them after the duration of bailment is over or the when
purpose of bailment
is accomplished. If the bailor refuses to take
delivery of goods when it is offered at the
proper time, the bailee claim compensation for all necessary
can
dental the safe custody of the
to
expenses ot, and inci
goods. For example, A left his car at the Jamia Metro
parking lot for two days and paid the charges to B the parking lot attendant. But
he did
-

not collect his car for 5

to B.
days. A is liable to pay the custody charges
for extra three days

RIGHTS OF BAILEE
The duties, which the bailor is
bound to perform, are the
the bailor are the rights of the rights of the bailee. Thus, the duties ot
bailee. As such, the bailee can
duties of the bailor. The bailee has the sue to enforce the
aforementioned
1. Right to claim
following rights against the bailor.
damages for loss arising from the
(Sec. 150): Bailee can sue the bailor undisclosed faults in the goods bailed
and recover the
non-disclosure of faults known or unknown to damages suffered by him due
or non-gratuitous bailment. the bailor
depending upon the gratuitous
2. Right to claim
reimbursement for
goods bailed (Sec. 158): Bailee can extraordinary expenses incurred
expenses in case of
sue the bailor
for the
in relation to the
gratuitous bailment and for reimbursement of
3.
ment is non-gratuitous.
extraordinary expenses wherenecessa
the oa"
Right of indemnification in case
(Sec. 159): If the loss caused of
by the premature termination of ilment
than the benefits premature gratuitous
derived, the bailee can claimtermination of gratuitous bailment is baua nore

4. Right to indemnity for any loss

to the suffered indemnification.
goods
the bailor, he bailed
by
(Sec. 164): If the bailee him by reason of defective bailor
can recover suffers title of the of
the loss from any loss due to the
5. Right to deliver goods to one the bailor. detecivc title
bailed by several of
joint owners, theseveral joint Bailers (Sec.
165): Where goods
directions of, one joint owner
to the contrary.
bailee has a
without the consentright to deliver them nathe
to, or
of all, in the accora
absence of any ag
ment
 CH. 13:CONTRACT OF BAILMENT AND PLEDGE 129

i c h t to deliver goods,
In good falth, to ballor without title
cht to deliver the goods, in good faith, to the bailor without(Sec. 166): The bailee has a
title and without
any liability towards the true owner, incurring
7 Diht to interplead (Sec. 167): If a person other than
hailee may apply to the court to stop the delivery of thethegoods
bailor claims goods bailed, the
to the bailor and to decide
the title to the goods.

8. Right to claim compensation for expenses Incurred for the safe

custody of the goods if
the bailor has wrongfully refused to take dellvery of them after the term of bailment is
over.

9. Right of Lien (Sec.170): The bailee can exercise the

Right of lien the right to retain the goods
is right of lien for recovery of his dues.
respect of goods are paid. belonging to another until the charges due in
10. Right to sue a wrongdoer (Sec. 180): If a wrongdoer deprives a bailee of the use of
session of goods bailed or causes them harm, he is entitled to pos-
sue the wrong doer and
recover damages from him.

RIGHTS OF BAILOR
1. Right to enforce Bailee's duties: The duties
of the bailee are the rights of the bailor. The
bailor can enforce by suit all the duties of the bailee as his
lowing rights against the bailee: rights. The bailor has the fol
() Right to claim damages for loss caused to the goods bailed
(Sec. 151). by Bailee's negligence
(i) Right to claim compensation for any damage arising from or
use of the goods bailed
during unauthorized
(Sec. 154).
(ii) Right to claim compensation for any loss caused by unauthorized
bailed with his own goods (Secs. 155-156). mixing of goods
(iv) Right to demand return of goods as soon as the time for which
has expired, or the purpose for which they were bailed has they were bailed
been accomplished
(Sec. 160).
() Right claim any natural accretion to the goods bailed (Sec.
to
.
163).
Right to terminate bailment if the bailee uses the goods wrongfully (Sec. 153): The bailor
has a right to
terminate the bailment, if the bailee does, with regard to the
any act which is inconsistent with the terms of the bailment, goods bailed,
a s not although the term of bailment
expired or the purpose of bailment has not been accomplished.
EXAMPLE
A
gives on hire to B a horse for his own riding. B drives the horse in his
of bailment is voidable at the option of A. carriage. The contract

ght to demand return of goods at any time in case of gratultous ballment

when the goods are lent gratuitously ie. Without reward, the bailor can (Sec. 159):
eturn whenever he wishes even though he lent them for a demand their
Purpose and the bailee is not guilty of wrongful use. But if the specified time or a
specific
the premature
causes bailee loss in excess of benefit actually derived by him from return of goodds
Oods, the bailor must indemnify the bailee the amount of loss which the use of such
derived. exceeds the benefit
130 PARTI: INDIAN CONTRACT ACT, 1872

Where a wrongdoer deprives the hu

4. Right to file a suit against wrongdoer (Sec. 180): bailor is entitled
of the use of possession of goods bailed or causes them harm, the
SUe
him and claim damages.

RIGHT OF LIEN
ww.w

retain possession of the property or goods belonging

to another until some d
The rightistopaid,
or claim is called the right of lien. This right depends on possession and is lost as s

as possession of the goods is lost. As such it is also called

as possessory lien. Liens may be of two types such
as Lien is a rightto retain posses
particular lien and general lien. 'Particular lien' means the
sion of the property or goods
right to retain only that particular property in respect of belongingto another until some
which the charge is due. "General lien' means the right to debt or claim is paid.
retain all the goods of the other party until all the claims
of the holder against the party are satisfied. In other words, this is a right to retain the goods of
another as a security for a general balance of account.
(A) Bailee's particular lien (Section 170): This right of particular lien can be exercised by a
bailee "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 services he has rendered in respect of them".
Conditions for Exercise of Lien:
Particular lien can be exercised subject to the following conditions:
(9 The bailee must have rendered some service in relation to the thing bailed and
must be entitled to some remuneration for it, which must not have been
paid.
(i) The service rendered by the bailee must be one involving the exercise of labour
or skill in respect of the goods bailed, so as to confer an additional value on the
article.

EXAMPLE
A, delivers a rough diamond to B, a jeweller, to be cut and polished which is accordingly
is entitled to retain the stone till he
is paid for the
services he has rendered ie. Jeweller's
doned
and skill which have enhanced the
value of the diamond. It is to be labour
no lien if the labour and skill exercised by the bailee does emphasised that there B
not improve the value of
bailed. Thus a person who takes a horse for feeding and keeping at his stable has nothelien
gooo
his charges because no
additional value has been added to the horse his
by labou
) The services must be performed in accordance
within the agreed time or a with the directions of the bai
reasonable time.
(1) There must not be
an
agreement to perform the service on
( The goods must be in credit
lost. possession of the bailee. If possession is lost, the ien is
also

h e r e must not be
a contract to
the contrary.
trary. If all the above mentioned conditi
itions
are satistied,
his services.
the bailee can
exercise his right of conA ffor
or
particular
lien isuntil he paa
 CH. 13:CONTRACT OF BAILMENT AND PLEDGE 131

The following points must also be noted in connection with the bailee's particular lien:
(The bailee retaining the article to enforce his lien cannot charge for keeping it.
( The bailee cannot exercise his lien for the
non-payment of them.
incurred in relation to the thing bailed. He should sue for extraordinary expenses

CASE LAW Eduljeev. CaféJohn Bros (1944),

A purchased an old refrigerator from B. Bagreed to repair it of fixed charges. After carrying out
the repair work B delivered the refrigerator to A. Brut a part of the purchase money and repair
charges was still unpaid. After few days, the refrigerator broke down again and it was taken to
B for repair. B claimed lien on the refrigerator until the earlier unpaid repair charges are paid
Held, the delivery of the possession after carrying out the repair resulted in termination of lien,
which B had for earlier unpaid charges. Due to break in the continuity of possession B was not
entuled 1o exercise right of lien. On regaining the similar goods, right of lien cannot be revived.
(B) Bailee's General Lien (Section 171): -A general lien is a right which entitles the bailee to
retain all the goods and properties of another until all his claims are satistied.
As such general lien is available to bankers, factors, wharfinger, and attorneys of High
Court and policy brokers. In the absence of contract to the contrary, these persons are
entitled to retain the possession of goods bailed to them as security until their claims are
fully satisfied.
However, any other person other than aforementioned persons may be conferred the
right of lien provided there is express contract to the effect.
A general lien is a right to retain the goods of another as a security for a general balance
of account. In simple words, this right entitles a person to retain possession of any goods
belonging to another for any amount due to him whether in respect of those goods or
any other goods. For example, if two loans have been taken against two securities from a
banker and the borrower repays one of these loans, the banker may detain both securities
until his other loan is repaid.

TERMINATION OF BAILMENT
A contract of bailment terminates under the following circumstances:
1. Ifthe bailment is fora 'specified period, the bailment terminates as soon as the stipulated
period expires. It means bailment terminates on the expiry of the specified period of time.
2. If the bailment is for a 'specific purpose, the bailment terminates as soon as the purpose is
fulfilled. A contract of bailment terminates on the accomplishment of specified objective.
. If the bailee does any act with regard to the goods bailed, which is inconsistent with the

terms of bailment, the bailment may be terminated by the bailor even though the term
Or bailment has not expired or the purpose of bailment
has not been accomplished (Sec.
153).
Agratuitous bailment can be terminated by the bailor at any time, even before the specified
time or before the purpose is aclived. However, where such termination causes loss in
excess of benefit actually derived by the bailee, the bailor must indemniky the amount of
1OSS OCcasioned which exceeds the benefit derived (Sec. 159).
5.
gratuitous bailment is terminated by the death either of the bailor or of the bailee (Sec.
162).
 1872
132 PARTI:INDIAN CONTRACT ACT,

PLEDGEOR PAWN
The bailment of goods as security for payment of a debt
called pledge'. The bailor
The bailment of goods asse
or performance of a promise is Curty for the payment of a debt
the ballee
in this case is called the 'pawner' or pledger and
is called the "pawnee' or pledgee (Sec. 172). orperfomance ofa promise
is
called pledge.
lustration:

I want to borrow 100

from you & keep my watch Okay. I will
as security. lend you 100

Mr.A Mr.B
wwwww
EXAMPLE
A borrows 100 fromm B and keeps his watch as security for
payment of the debt. The bailment
of watch is called a pledge.

Thus apledge is only aspecial kind of bailment. Here

as security for the
goods are deposited with a lender or promisee
repayment of a loan or performance of a promise. Otherwise, like bailment,
pledge also involves only a transter of possession of goods pledged. The a
the pledgor. The pledgee or Pawnee has ownership remains
only a special interest in the goods pledged. The witn
interest remains in the pawnor and wholly reverts to him genera
ailment, a pledge is concerned with
on
discharge of the debt. Further, ike
of goods, valuables and documents ofonly
movable goods. The movable
title, e.g, railway receipt, bill of goods include any kina
lading, etc.
DISTINCTION BETWEEN BAILMENT AND PLEDGE
B Bailment
Meaning When the goods are temporarily handed Pledge
over from one
When the goods are elivered to act
person to another person as
for speciic
a
purpose, it is known as security against the debt owed o
bailment. one person to another perso t is
Right to sell the The party whom known as the pledge.
goods delivered has no goods are
being | The party whom
right to sell the goods. goods
delivered as security has arioht
the righa
to sell the goods if the party who
delivers the goods fails to pay the
Use of Goods The party whom debt.
delivered can use the goods are being | The
party whom goods ar being
goods only, for the | delivered the
specified purpose. has no right to
u
e

gOods.
 CH. 13:cONTRACT OF BAILMENT AND PLEDGE 133

Bases Bailment Pledge

The person who delivers the goods is The person vho delivers the goods is
Partles
known as the Bailor while the person to | known as Pawnor while the
person
whom the goods are delivered is known to whom the goods are delivered is
as Bailee.
known as Pawnee.

RIGHTS OF PAWNEE
1. Right of retainer (Sec. 1783) - The Pawnee has the right to retain the goods pledged until
his dues are He has the right to retain the
paid. goods pledged, not only for payment
of the debt or pertormance of the promise, but for the interest due on the debt and all
necessary expenses incurred by him in respect of the possession or for the preservation
of the goods pledged. Thus this right is termed as Pawnee's right of particular lien.
2. Right of retainer for subsequent advances (Sec. 174) When the Pawnee lends money
the same debtor after the date of the pledge without any further security, it shall be
presumed that the right of retainer over the pledged goods extends even to subsequent
advances.
3. Right to extraordinary expenses (Sec. 175) The Pawnee also has the right to recover
from the pawnor extraordinary expenses incurred by him for the preservation of the
goods pledged. But he cannot retain the goods, if such expenses are not paid. He has only
a right to sue the pawnor for recovery of such extraordinary expenses.
4. Right to sue the pawnor or sell the goods on default of the pawnor. (Sec. 176) - Where
a pawnor makes default in the payment of the debt or performance of the promise, the
pawnee may exercise either of the following rights:
() he may bring a suit against the pawnor for the recovery of the amount due to him
and retain the goods pledged as a collateral security; or
(i) he may himself sell the goods pledged, after giving to the pawnor a reasonable
notice of his intention to sell.

DUTIES OF PAWNEE
Pledge is a special kind of bailment, thus the duties of a Pawnee are just like of a bailee. The
duties of a Pawnee are as follows:
.Totake reasonable care of the goods pledged.
. Not to make
any unauthorised use of the goods pledged.
3. Not to mix the pledged goods with his own goods.
4. Not to do any act in violation of the terms of the contract of pledge and of the provisions
of the Contract Act. For example, he should not sell the goods pledged without a reason-
able notice to the pawnor.
. 1o return the goods pledged on receipt of his ful dues.
o deliver any accretion to the goods pledged, e.g., the accretion remains the property of
the pawnor.