Special Contracts

Mod 2 -Topics
(a)Agency
(b)Guarantee & Indemnity
(c)Bailment & Pledge, Finder of Lost Good
 Law of agency
• Sections 182-238 of Indian Contract Act 1872 deal with the subject of agency. Law
of agency deals with a contractual relationship in which one person acts for
another in transaction with a third person.
• By section 182 of the act, an agent is defined as “a person employed to do any
act for another or to represent another in dealings with a third person.” That is,
a person who act on behalf of some other person is known as agent. The person
for whom an agent acts or represents is called principal.
• Thus, the employment of an agent by his/her principal, in order to bring the
principal into legal relationship with a third person is known as a contract of
agency.
• Example – A appointed B to sell his car on his behalf. Here, A is the principal and B
is the agent. Thus, B is the connecting link between principal (A) and a third
person (buyer).
 Creation of agency(Types of agency)
• Creation of relationship of principal and agent may take place in any
of the following ways
• 1. Agency by express agreement
• 2. Agency by implied agreement – 3 types
a. Agency by Estoppel
b. Agency by holding out
c. Agency by necessity
• 3. Agency by ratification
• 4. Agency by operation of law
• 1. Agency by express agreement
• Here, the agency is created by an express agreement between the
principal and agent, that is, agent is appointed by the principal by an
agreement in writing or by word of mouth.
• 2. Agency by implied agreement
• It arises from the conduct, situation or relationship of parties.
Example – A & B are brothers. A, with B’s knowledge, sells B’s car to C
and remit the amount to B. Here, A is the implied agent of B.
• It can be of three types,
• a. Agency by Estoppel
• The word “estoppel” means preventing a person from what he has
been done or claimed earlier. When a person has, by his conduct or
statement, induced others to believe that a certain person is his
agent, then he is prevented from denying the truth of the agency.
• Example – A said to B, in presence of C, that A was C’s agent. C
remained silent. Later, A sold the goods to B. This sale is binding on C,
because by remaining silent, C has accepted A as his agent.
• b. Agency by holding out
• Here, agency is created by the affirmative conduct of the principal.
• Example – A allowed his servant B, to purchase some goods on credit from
C. B usually purchased goods from C on credit, and A used to pay the price
to C. On one occasion, A gave cash to B to purchase goods, but B purchased
the goods on credit, pocketing the money. In this case, A is bound by his
prior conduct of holding out that B was his agent.
• c. Agency by necessity
• Agency is created by the necessity of a situation, which compels a person
to act as an agent of some person without requiring his consent.
• Example – a horse is sent by rail and at the destination, no one is taken the
delivery of it. The station master has to feed the horse. He has become the
agent by necessity and hence the owner of the horse must compensate
him.
• 3. Agency by ratification
• The term ‘ratification’ means confirmation of the acts already done.
Here, a person (A) does some act on behalf of another person(B)
without his knowledge and B later ratifies the acts done by A on his
behalf and thus a valid agency is created by ratification.
• It is also known as ‘ex post facto agency’(agency arising after the
event). This agency may be express or implied.
• Example – A had some money, which actually belonged to B. A,
without B’s consent, gave this money to C as loan. Later, B accepted
interest on this money from C. In this case, B’s conduct implies a
ratification of the loan given by his agent A.
• 4. Agency by operation of law
• Here, law treats one person as an agent of another.
• Example – according to Indian Partnership Act (1932), every partner
of the partner of the partnership firm is an agent of the firm for the
purpose of its business. Thus, a firm and its partners are bound by the
acts of one of its partners.
 Rights & Duties of Agent and Principal
Duties of Agent
• 1. Duty to follow the instructions of the principal
• If the agent fails to act according to the directions of principal, he is liable
to the principal for any loss suffered by the principal due to such act of the
agent.
• When any surplus is generated by not following principal’s instructions, it
must be accounted to the principal.
• 2. The agent should conduct the business with skill and diligence
• If the principal suffers some loss due to agent’s neglect or misconduct, then
agent must compensate his principal for such loss.
• Example- when a lawyer proceeds under a wrong section of law, and
thereby the case is lost, he shall be liable to his client for the loss.
• 3. Duty to render proper accounts
• Maintain proper accounts supported by vouchers and other source document.
• 4. Duty to communicate with the principal
• In case of any difficulty, agent is supposed to communicate it to the principal
• 5. Duty not to make any secret profit
• Agent should deliver to the principal all moneys including secret commission
received by him.
• 6. Duty not to set up adverse title
• When agent has obtained the goods belonging to his principal, he should not say
that the goods belong to himself. That is, he should not dispute the ownership of
the principal.
• 7. Duty to pass information to the principal
• He should not use the information against the interest of the principal.
• 8. Duty to protect the interest of the principal in case of his death or
insanity.
• On death of principal, the agency is terminated. In such case, it becomes
the duty of agent to protect the interest assigned to him by the late
principal.
• 9. Duty not to delegate his authority
• It is the duty of agent not to further delegate the work which has been
delegated to him by his principal
 Rights of an agent
• 1. Right to retain money due to the principal
• Until the agent’s claims in respect of remuneration or expense are
paid
• 2. Right to receive remuneration from principal
• 3. Right of lien
‘Lien’ means retain possession. Agent has the right to retain goods
and other property of the principal until his dues in respect of
remuneration and other charges are paid
• 4. Right to be indemnified
• ‘Indemnity’ means ‘protection against losses. Principal is bound to
indemnify agent against the consequences of all lawful acts done by
the agent. That is, all losses and expenses incurred by the agent by his
lawful acts must be given to him by the principal.
• 5. Right to compensation
• The agent has the right to claim compensation for the losses suffered
due to the principal’s negligence or lack of skill.
 Duties of Principal
• Rights of agent are the duties of principal
• 1. Principal is bound to indemnify the agent against the consequences of
all lawful acts done by the agent, in exercise of authority conferred upon
him.
• 2. Principal is bound to make compensation to the agent for the losses
suffered by him due to principal’s neglect or lack of skill.
• 3. The principal must pay to the agent the commission or remuneration
agreed
• 4. Principal is bound to indemnify agent against the consequences of an
act done in good faith and within authority, though it causes an injury to
the rights of 3rd person.
• Rights of Principal
• 1. Principal is entitled to receive proper accounts from the agent
• 2. He is entitled to get any profit agent makes by dealing with principal’s
goods or property
• 3. Right to give instructions to the agent for the conduct of business
• 4. He can revoke the authority of the agent under certain circumstances
• 5. He is entitled to compensation for any breach of duty by the agent.
• 6. He is entitled to receive all money received by the agent
• 7. Right to expect reasonable skill and diligence from agent in conducting
business.
Types of Agents
Agents may be classified as
• 1. Mercantile (Commercial Agent)
• 2. Non Mercantile(Non Commercial Agent)
• Another classification of agents as
• 1. Special Agent
• 2. General Agent
Mercantile or Commercial Agent
• An agent who has authority to sell or buy goods on the security of the
goods on behalf of his principle.
• Example – Broker, Factor, Commission Agent, Del credere agent,
Auctioneer, Banker etc
• Broker is an agent, who is appointed to negotiate and make contracts for
the sale or purchase of goods on behalf of principal. He has no possession
of goods.
• Broker makes contracts in the name of principal and he gets commission
called brokerage.
• Auctioneer : is a mercantile agent who is appointed to sell goods at public
auction.
• Factor: a mercantile agent who is entrusted with the possession of goods with an
authority to sell the same.
• He can sell goods on credit and receive payment of price in his own name.
• Commission agent : A commission agent is a mercantile agent who buys and sells
the goods on behalf of his principle and receives commission.
• Del credere agent : is a mercantile agent who guarantees his principal that if the
buyer to whom goods are sold on credit fails to pay the price, the agent will pay
the amount to principal. The extra commission as consideration demanded by
this agent is known as del credere commission.
• Banker – Generally the relationship between banker and customer is that of a
creditor and debtor.
• However, when the banker collects cheques, bill of exchange etc. of the
customer, banker becomes an agent of customer.
Non Mercantile Agent
• Non Mercantile Agent may be defined as an agent who does not deal
in the buying and selling of the goods.
• Example- wife as an agent of husband, Husband as an agent of wife,
Advocates, Insurance agent.
Special and General Agent
• Special agent – is an agent who is appointed to perform a special act
or some particular transaction.
• Example : an agent who is employed to sell or purchase a house
• General agent – an agent who is appointed to perform all acts
relating to a particular trade or business for which he is appointed,
on behalf of the principal.
• Example – General Manager of a company.
Sub Agent & Substituted agent
• Normally, an agent can not transfer his duties to another.(“a delegate
cannot further delegate”).
• However, sec.190 of the act deals with circumstances at which agent
can delegate his duties.
• Sec 190 states that if agent appoints another person in the matter of
agency, the other person may assume the position either as a sub-
agent or a substituted agent.
Sub agent
• Sec.191 states that a sub agent is a person employed by the original agent
for acting under control of the agent.
• There is no contract between principal and sub agent. Therefore, a sub
agent can not sue the principal for remuneration and the principal can not
sue the sub-agent for any money due from him.
• Both principal and sub agent can proceed against the agent for any
violations of terms of contract by the agent.
• When the sub agent is guilty of fraud, the principal has a concurrent right
to proceed against the agent and sub agent.
• Also, the principal is not responsible to the agent for the acts of sub-agent,
who has been appointed by the agent without the consent of principal
• A sub agent may be appointed by the agent in the following
circumstances
• 1. By the permission of principal
• 2. where the ordinary custom of the trade permits delegation
• 3. where the nature of the agency is such that it can’t be
accomplished without the appointment of a sub agent
• 4. where the job assigned is clerical
• 5.when an unforeseen emergency come
Substituted agent
• Sec.194 of the act deals with the formation of sub agent.
• When an agent appoints or name another person as agent in place,
such person is known as the substituted agent.
• Substituted agent must act under the direct control of principal, not
under the original agent.
• Example – A directs B, his agent, to sell his estate by auction and to
employee an auctioneer for the purpose. B directs C, an auctioneer,
to conduct the sale. Here C is not a sub agent, but A’s substituted
agent for the purpose of auction.
 Difference-Sub agent & Substituted agent
Sub-agent Substituted agent
A sub-agent is appointed by the original A substituted agent is also appointed by
agent and works under his control the agent, but he works under the control
of principal.
A sub-agent is the agent of the original Substituted agent is the agent of the
agent principal
A sub-agent is responsible to the original A substituted agent is responsible to the
agent principal
The original agent is responsible to the The original agent is not responsible to
principal for the acts of sub-agent the principal for all the acts of the
substituted agent.
Termination of agency
• Termination of agency may be defined as the end of the relationship of principal and his agent.
• Circumstances under which agency terminates or come to an end.
• On revocation by the principal
• Renunciation of agency by the agent.
• On the expiry of fixed period of time
• On the performance of specific purpose
• Insanity or death of the principal or agent.
• Insolvency of the principal
• When the subject matter is either destroyed or become unlawful
• Dissolution of company
• Agreement between principal and agent
• Completion of agency
• 1. On revocation by the principal
• Revocation means official cancellation of a promise.
• The principal may, by notice, revoke the authority of an agent at any time.
• If the agent is appointed for a single act, the authority can be revoked at
any time before the act is begun.
• In case of continuous agency, notice of revocation is essential to the agent
as well as to the third parties who have acted on the agency.
• When agency is for a fixed period of time and the contract of agency is
revoked without sufficient cause, compensation must be paid to the agent.
• Agency is irrevocable when (a) the agent has an interest in the subject
matter of the contract, (b) the agent has partly exercised his authority
• 2. Renunciation of agency by the agent.
• Renunciation means giving up.
• Agent may renounce his agency by giving up sufficient notice.
• When agency is for a fixed period and agency is renounced without
sufficient cause, the principal must be compensated.
• 3. On the expiry of fixed period of time- for an agency for a particular
period, agency will be terminated on the expiry of that time.
• 4. On the performance of specific purpose.
• When the agent is appointed for a particular act, agency will be terminated
after the act is done or the performance becomes impossible.
• 5. Insanity or death of the principal or agent.
• Death or insanity of any party leads to termination of contract. If principal
dies, the agent should take care of all activities and assets on behalf of legal
representatives of principal.
• 6. Insolvency of the principal
• An insolvent is disqualified from entering a contract. Thus, when principal
become insolvent, agency will be terminated
• 7. When the subject matter is either destroyed or become unlawful
• When the agency was created, subject matter was lawful.
• When it becomes unlawful, the agency will be ended.
• 8. Dissolution of company. When a company is dissolved, the
contract of agency either with the company or by the company comes
to an end.
• 9. Agreement between principal and agent
• Agency may be terminated by the mutual agreement between the
principal and agent at any time and at any stage.
• 10. Completion of agency
• Agency relationship is automatically terminated on the completion of
agency business.
Contracts of Guarantee
• Example
• A company approaches a bank for availing a loan for its business expansion. All
directors including the managing director ‘M’ make a promissory note to the
bank for getting the loan. In addition to it, bank requires that the Managing
Director ‘M’ should promise to repay the loan when the company default in the
repayment of the loan.
• Here, the contractual relationship between ‘M’ and the bank resulting from the
unconditional promise of ‘M’ to repay the loan to the bank when the company
defaults in its payment, is called a guarantee or suretyship.
Definition of Guarantee
• The law relating to the contracts of guarantee is given in the Indian
Contract Act, 1872 from section 126 - 147
• (Sec.126)A contract of guarantee is defined as “ a contract to
perform the promise, or to discharge the liability of a third person in
case of his default.”
• It is a contract in which a person promises to discharge the liability of
a third person in case the third person fails to discharge his own
liability.
Definition of Guarantee
• There are 3 parties in a contract of guarantee
• The person who gives guarantee is called surety.
• The person on whose behalf the guarantee is given is called principal
debtor
• The person to whom the guarantee is given is called creditor
• Example – ‘A’ advanced a loan of Rs 5000 to ‘B’ at the request of ‘C’. C
promised to A that if B doesn’t repay the amount, then C will repay.
This is a contract of guarantee.
• In this case, A is the creditor, B is the principal debtor and C is the
surety.
Rights of Surety
• There are three rights for the surety,
• 1. Rights against the creditor
• 2. Rights against the principal debtor
• 3. Rights against co-sureties
Rights of surety
• 1. Rights against the creditor
• In certain guarantee, the surety can direct creditor/employer to
dismiss the employee (whose honesty he has guaranteed) , in the
event of proved dishonesty of the employee.
• The employer’s/creditors failure to do so will exonerate the surety
from his liability.
• 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.
• 2. Rights against the principal debtor
• a. Rights of subrogation
• Subrogate means substitute
• The surety is subrogated to all the rights which the creditor had against the
principal debtor.
• That means, when principal debtor defaults, surety will pay the guaranteed
debt. Thus the surety acquires all the rights which creditor had against the
principal debtor.
• b. Right to be indemnified
• The surety has a right to recover from the principal debtor the amounts
which he has paid under the contract of guarantee.
• 3. Rights against co-sureties
• When the same debt is guaranteed by more than one person, they
are called co-sureties.
• When a surety has paid more than his share, then he has a right of
contribution from other sureties who are equally bound to pay with
him.
• When one surety becomes insolvent, then other solvent co-sureties
shall have to contribute the whole amount equally.
Nature of liability of Surety
• 1.Liability of the surety is co-extensive with that of the principle
debtor.
• That is, surety is liable for whole amount(loan amount, interest, etc)
for which the principle debtor is liable to the creditor.
• 2. Liability of a surety is called as secondary or contingent liability
• It means that his liability arises only when principal debtor defaults.
• Thus, the primary liability to pay money to creditor is to the principal
debtor.
Nature of liability of Surety
• 3. The liability of the surety can also be limited.
• Surety can limit his liability to a fixed amount. Here, surety’s liability
won’t be more than the amount fixed by him.
• Example- A gave loan of Rs 10000 to B, in C’s request and C gave a
guarantee to A for the loan upto Rs 7000. If B failed to repay the loan,
C is liable only to the extent of Rs 7000.
 Types of Guarantee
• Specific & Continuing Guarantee
• A guarantee is a specific guarantee, if it is intended to a particular
debt and thus comes to an end on its repayment. It is irrevocable.
• A guarantee which extends to a series of transaction is called a
continuing guarantee. It can be revoked for regarding further
transaction, not for the transaction that have already taken place.
• Example – A guarantees the cash transaction to to an amount of
Rs.10000 for the retailer B to the supplier C. When C supplies
products worth Rs 20000, and B fails to pay, A is liable to pay only
10000, as per the contract between A and C. It is a continuing
guarantee.
Discharge of Surety
• A surety is said to be discharged when his liability under the contract
comes to an end.
• The following are the various modes of discharge of surety.
• 1. By notice of revocation
• A surety can revoke(means cancel) the guarantee, at any time, by
giving a notice of revocation to the creditor.
• only continuing guarantee can be revoked by notice. Here, the
surety is responsible to the financial transaction of principle debtor
with creditor upto the date of revocation
Discharge of Surety
• 2. By death of surety
• In this case, revocation of guarantee is effective for future transactions only
and surety’s legal heir remains liable for the transactions already entered
into before the death of surety.
• 3. By variance in terms of contract –If creditor makes any change in the
terms of contract with the principal debtor without the consent of the
surety, the surety is discharged from liability
• 4. By release or discharge of the principal debtor
• If the creditor discharges the principle debtor from the liability, then the
surety is automatically discharged from his liability under guarantee.
• 5.By the settlement with principal debtor
• If the creditor makes amicable settlement with the principal debtor
(like giving more time, not to file suit against him etc.), without the
consent of the surety, then surety is discharged from his liability
• 6. By loss of security
• If the creditor loses or parts with any security given to him by the
principal debtor at the time of contract of guarantee was made, the
surety is discharged to the extent of the value of the security.
Contract of Indemnity
• The term ‘indemnity’ means an act to compensate or protect against loss.
• By section 124 of Indian Contract Act, “A contract of indemnity is a
contract by which one party promises to save the other from loss caused
to him(promisee) by the conduct of the promisor himself or by the
conduct of any other person.”
• Example – A contract of insurance
• Parties involved in a contract of indemnity are,
• 1. Indemnifier : The party who promises to compensate the loss.
• 2. Indemnity-holder/Indemnified : The party who is protected against loss.
• A contract of indemnity, like any other contract, must have all
essentials of a valid contract.
• This contract of indemnity may arises either by (a) an express promise
or by (b) the operation of law.
• For example, by the law of agency, it is the duty of a principal to
indemnify an agent from consequences of all lawful acts done by him
as an agent.
• Essentials of a valid contract of indemnity.
• 1. The contract of indemnity must satisfy all the essential elements of
a valid contract.
• 2. There must be a promise to save or protect the other party from
loss.
• 3. The loss may be due to the conduct of the promisor himself or any
other person.
• 4. Contract of indemnity may be express or implied.
Right of the indemnified
• Indemnity holder or the indemnified is entitled to recover the
following from the indemnifier,
• 1. All damages which he may be compelled to pay in any suit in
respect of any matter to which the promise to indemnify applies.
• 2. All costs/expenses which he may have to pay to third party
• 3. all sums which he paid in compromise of any suit.
Difference between Indemnity and Guarantee
• Example,
• A says to B , “If you lend Rs 2000 to C, I will see that your money
comes back”
– A contract of indemnity

• A says to B, “If you lend Rs 2000 to C and he does not pay you, I will”
- A contract of guarantee.
Difference -Indemnity and Guarantee
Contract of Indemnity Contract of Guarantee
1. There are only two parties – indemnifier and 1. There are three parties – creditor, principal
indemnity holder debtor and surety
2. Liability of the indemnifier is primary 2. Liability of the surety is secondary
3. There is no existing debt/loss. The possibility of 3. There is an existing debt, the performance of
any loss happening is a contingency against which which is guaranteed by the surety.
the indemnifier undertakes to indemnify.
4. After discharging the debt, the indemnifier cant 4. After discharging the debt, the surety is entitled
not proceed against third parties in his own name to proceed against the principal debtor in his own
name.
5. Liability of the indemnifier arises on the 5. The liability of the surety arises on the default
happening of some contingency of the principal debtor.
6. There is only one contract. 6. There are three contracts.
Bailment & Pledge
• Section 148 to 181 of the Indian Contract Act deals with some special
types of contracts known as Bailment and Pledge.
• The term ‘bailment’ means transfer of goods from one person to
another for some specific purpose.
• The term ‘pledge’ means the delivery of goods as security for a loan
or fulfillment of an obligation.
Bailment
• Bailment is defined as 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 dispersed of
according to the directions of person delivering them”(Sec.14)
• The person delivering the goods is called ‘bailor’, and the person to
whom goods are delivered for specific purpose is called the Bailee
• Example – A delivers some gold biscuits to B, a jeweller, for making
jewellery. Here A is the Bailor and B is the Bailee.
Essential elements of Bailment
• 1. Delivery of goods. The essence of bailment is the delivery of goods for
some temporary purposes.
• 2. Bailment is based on a contract. The delivery of goods to the bailee
should be made on the basis of some contract. When the purpose is
accomplished, they shall be returned to the bailor.
• 3. Delivery is for a specific purpose. Example – A watch is delivered for its
repairs.
• 4. Return of goods –Goods are given for a purpose. If the goods are not
specifically returned or disposed according to the directions of the bailor,
there is no bailment.
• 5. Ownership of goods-In bailment, it is only possession of goods which is
transferred, not the ownership.
Rights and Duties of Bailor
• Duties of Bailor
• 1.To disclose known faults about the goods bailed. If bailor does not
make such disclosure, he is responsible for the damage arising to the
bailee directly from such faults.
• 2. Duty to bear extraordinary expenses. Example- a car is lent for a
journey. The ordinary expenses like petrol etc. shall be borne by the
bailee but in case the car goes out of order, the money spent in its
repairs will be regarded as an extra-ordinary expense and borne by
the bailor.
• 3. To indemnify the bailee incase of his wrong title. Example – A
gives B’s car to C without B’s knowledge. B sues C and receive
compensation. A, the bailor, is responsible to compensate this loss to
C, the bailee.
• 4. Duty to receive back the goods when they are returned by the
bailee on the expiry of terms of bailment. If the bailor refuses to
receive back the goods, then he becomes liable to pay compensation
to the bailee for the necessary expenses of custody.
• Rights of Bailor
• 1. Rights to terminate the contract. If bailee acts against the terms of
bailment, then the bailor can terminate the contract of bailment.
• Example –A lets a horse to B for riding purpose. B uses the horse with
a carriage. A can terminate the bailment.
• 2. Rights to demand back the goods at any time in case of gratuitous
bailment(i.e, bailment without reward). If such an act of bailor
causes loss to the bailee, the bailor must indemnify him.
• 3. Right to file suit against any wrong doer(one who does some
wrongful act). If any wrong doer does injury to the goods bailed, then
bailor can file a suit against him and can recover compensation from
him.
• 4. Right to file a suit for the enforcement of the duties imposed
upon a bailee. If the bailee neglects his duty (to take care of the
goods, to return the goods on time etc.), the bailor has the right to
enforce these duties by filing a suit against the bailee.
• Duties of Bailee
• 1. To take care of goods bailed. If the bailee is negligent in taking care
of the goods bailed, then he is liable to pay damages for loss or
destruction of the goods to the bailor.
• 2. Not to make unauthorized use of the goods bailed. If the bailee
makes unauthorized use of the goods bailed to him, the contract of
bailment becomes voidable at the option of the bailor and the bailee
is also responsible to the bailor for any loss caused to the goods due
to unauthorized use of the goods.
• 3. Not to mix bailor’s goods with his own goods. If the bailee mixes
bailor’s goods with his own without the consent of the bailor, he is
liable to pay damages to the bailor which arise due to such mixing.
• 4. Duty to return the goods bailed without demand. Bailee is
supposed to return the goods bailed to bailor as soon as the time for
which they were bailed has been expired or the purpose for which
they were bailed has been accomplished. If the bailee fails to do so,
he is responsible to the bailor for any loss.
• 5. Duty to return the increase in the goods bailed. Bailee is bound to
return the bailor any increase or profit in the goods bailed.
• Example – A left a cow in the custody of B to be taken care of. The
cow gave birth to a calf. B is bound to deliver the cow and the calf.
• 6. Duty not to set up adverse title against the bailor. Bailee is not
supposed to set up an adverse title against the bailor. The bailee
holds the goods on behalf of the bailor.
• Rights of a Bailee
• 1. Right to compensation. The bailee can sue bailor for claiming
compensation for damages resulting from non-disclosure of faults in
the goods, for extra ordinary expenses and for loss due to defective
title of the bailor.
• 2. Right of lien . Lien means retain the goods in one’s custody.
• It is the right of bailee to retain the goods bailed, until some debts or
claim of the bailee is paid.
• Lien may be of two types – (a) General Lien and (b) Particular lien
• Particular Lien means the right to retain the particular goods in
respect of which claim is due. Bailee’s right of lien is particular in
certain cases in which he can retain the goods until he receives the
remuneration for the services he has rendered in respect of them.
• General Lien means the right to retain goods not only for demands
arising out of the goods retained, but for anything is due to the bailee
from bailor. Example – Bankers, Factors, policy brokers etc,
• 3. Right to recover agreed charges. The bailee has the right to
recover from the bailor the charges if agreed for the bailment.
• 4. Right against damage or loss to the goods by a third person. If a
third person causes any injury or loss to the goods or wrongfully
deprives the bailee of the use of the goods, then either bailor or
bailee may file a suit against the third person for such deprivation or
loss.
• 5. Right to file a suit to decide the title of the goods bailed. If a
person other than bailor, claims the goods from the bailee, then
bailee may suit a file to decide the title of the goods so that he may
deliver the goods to the right owner.
Finder of the Lost Goods
• If a person finds certain goods belonging to another person, it will not
become the property of the finder.
• Finding is not owning
• A finder of lost goods is treated as the bailee of the goods and is charged
with responsibilities of a bailee. Also he has the responsibility to find the
real owner
• Legal duties of the finder of lost goods
• 1. Finder must keep the goods with care as if it is his own
• 2. He must take steps to trace out the true owner
• 3. He can spend reasonable expense to trace out the true owner
• 4. When he traces out the true owner, he has to return the goods to
him if the expenses spent by him is reimbursed.
• 5. If the goods are of perishable in nature, finder can dispose of the
goods and must return the sale price to the true owner.
• 6. Finder should not use the goods for his personal use.
• 7. Finder has a right to claim the reward, if any, offered by the true
owner for finding out the goods.
• 8. Finder must return the increase in the goods to the true owner.
• Rights of the finder of lost goods
• 1. Right to retain goods
• A finder of lost good may retain the goods until he receives the compensation for
money spent in preserving the goods or money spent in finding the true owner.
But he can not sue for such compensation unless a specific reward has been
offered by the owner.
• 2. Right to sell
• The finder can sell goods, when true owner can not be found out or true owner
refuses to pay lawful charges spent for tracing out the true owner subject to the
following conditions
• (a) when thing is in danger of perishing
• (b) when the lawful charges of the finder amounts to two-third of its value.
PLEDGE(PAWN)
• Pledge or Pawn is a special type of contract, where goods are delivered as a
security for a loan or for the fulfillment of an obligation.
• The person who delivers the goods as security, is called the ‘pledger’ or
‘pawner’
• The person to whom the goods are delivered as security is called ‘pledgee’
or ‘pawnee’.
• The ownership remains with the pledger
• Example – A borrowed Rs 5000 from B and delivered his gold ring as
security for repayment of the loan. In this case, the bailment of gold is
pledge. A is the pledger and B is pledgee.
• Sec.172 of the Indian Contract Act defines pledge as “ the bailment of
goods as security for payment of a debt or for performance of a promise”
Essential features of Pledge
• 1. Delivery of possession(not ownership). Only possession of the goods
are transferred from pledger to pledgee. The ownership remains with the
pledger
• 2. In case of borrower makes a default in payment, pledgee can dispose
the good pledged after a reasonable notice
• 3. Delivery should be for the purpose of security. The pawner or pledger
should deliver the goods to the pawnee or pledgee as a security for the
payment of loan.
• 4. Delivery should be upon a condition to return
• When pledger or pawner repays his loan to the pledgee, the latter should
return the pledged goods to the pledger
Rights and Duties of Pledger(Pawner)
Duties of pledger (Pawner)
• 1. Duty to disclose faults in goods to the pledgee or pawnee
• 2. Duty to bear extraordinary expenses
• 3. Duty to repay the loan for which the good is pledged
• 4. Duty to compensate or indemnify the pawnee(pledgee) due to the
defective title of the pawnor(pledger)
• Rights of pledger
• 1. The pledger has the right to claim back the security pledged on
repayment of the debt with interest and other charges.
• 2. The pledger has a right to receive a reasonable notice, in case the
pledgee intends to sell the goods.
• 3. He has a right receive from pledgee any surplus that may remain
with him after the debt is completely paid off.
• 4. He has the right to file suit for the enforcement of the duties
imposed upon a pawnee.
Rights and Duties of Pledgee(Pawnee)
• Duties of Pawnee
• 1. Duty to take reasonable care of the goods pledged.
• 2. Duty not to use the pledged goods.
• 3. Duty to return the goods on payment of the debt.
• 4. Duty to return the increase/surplus in the pledged goods to the
pledger
• Rights of Pawnee (Pledgee)
• 1. Pawnee has the right to retain the pledged good, until his dues are paid
by pawner
• 2. He has the right to get extra ordinary expenses, if any, from pledger
• 3. He has the right to sell the pledged good in case of default in the
payment of loan by pledger.
• 4. He has the right to claim damages due to the defective title of the
pledgor.
• 5. Right to file a suit to decide the title/ownership of the goods pledged.
Difference- Pledge Vs Bailment
Pledge Bailment
All pledges are bailment All bailment are not pledges
Pledge is for the security for the performance of Bailment is for a particular purpose such as repair,
one party to the other safe custody etc
In case of default by the pawner, the pawnee can The bailee may either retain the goods or sue for
sell the goods pledged with him. his charges.

Pawnee has no right to use the goods pledged with Bailee can use the goods bailed, if the terms of the
him. bailment provides it.