Indian Contract Act, 1872 – Bailment and Pledge – CA Inter Law Notes

Indian Contract Act, 1872 – Bailment and Pledge – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Indian Contract Act, 1872 -Bailment and Pledge – CA Inter Law Notes

What is Bailment?

Meaning of Bailment:

• The term ‘bailment’ is derived from French word ‘bailer’, which means to deliver thing under contract.
• Bailment means delivery of goods by one person to another person for a specific purpose with a condition to return goods when the purpose is over or otherwise disposed of according to the direction of person.

Example:
Arun gives cloth to his tailor for stitch. It is bailment of cloth. As soon as cloth is stitched, it will be returned to the Arun.

Parties:

• The person who delivers the goods is known as ‘Bailor’.
• The person who receives the goods is known as ‘Bailee’ and the transaction is known as ‘Bailment’.

Essentials of Valid Bailment or Features of Bailment

Essential features of valid bailment are as under:

Delivery of Goods:

• Under the bailment, bailor delivers possession of goods to bailee.
• If the possession is not delivered, it is not bailment.
• If the ownership is not transferred to other person, it is not bailment.

Delivery of goods may take place in any of following ways:

• Actual delivery (handover physical possession of goods)
• Symbolic delivery (goods are not transferred physically but some act is done resulting in the transfer of possession. Example: Keys of car, Railway receipt etc.)
• Constructive delivery (third party who is in possession of goods acknowledges that he holds the goods on behalf of and at the disposal of buyer)
  • Bailment is not possible with immovable property.

Example:
Deposit of money in a bank is not bailment since the money returned by the bank would not be identical currency notes. Money is not goods.

Contract:

• There must be contract between parties.
• Contract must provide for transfer of possession of goods from one person to another. It may be expressed or implied.
• Sometime bailment may arise even without contract, i.e. finder of goods treated as bailee.

Delivery for Purpose:

• The delivery of goods must be for some purpose.
• Purpose could be safe custody of goods or transportation of goods.
• The purpose may be expressly specified in contract or may be implied from circumstances.

Return or Disposal of Goods:

• Goods must be delivered to bailee for some purpose and subject to the condition that when the purpose is achieved, goods shall be returned to bailor or disposed of according to his direction.
• Return of goods may be in original or altered form.

Types of Bailment

Bailment can be classified either:

• on the basis of reward; or
• on the basis of benefits

Bailment on Basis of Reward:
Bailment on the basis of reward can be classified as:

• gratuitous bailment; or
• non-gratuitous bailment

Gratuitous Bailment:

• It is bailment of goods without any charges or reward.
• Bailee is not required to pay any charges for bailment.
  Example:
  A lends his book to his friend.

Non-Gratuitous Bailment:

• It is bailment for some charges or reward.
• Bailee is required to pay some charges to bailor.
  Example:
  A gives his bike for repair to B. B is paid for work.

Bailment on the Basis of Benefits:
Bailment on the basis of benefit may be classified in the following three manners:

For the exclusive benefit of bailor: The bailor delivers the goods to bailee only for the exclusive benefit of bailor himself in bailment.
Example:
Neighbour of A, agrees to look after A’s pet while he is out. A (bailor) is benefited.

For the exclusive benefit of bailee: The bailor delivers the goods to bailee only for the exclusive benefit of bailee in bailment.
Example: A gives his book to B. B (bailee) is benefited.

For mutual benefit of bailor & bailee: The bailor delivers the goods to the bailee for the benefit of both parties in bailment.
Example: A hires car from B on payment of charges. Both, A and B are benefited.

Difference Between Gratuitous Bailment and Non-gratuitous Bailment

Gratuitous Bailment	Non-gratuitous Bailment
It is bailment without any: Hire-charges by bailee; or Custody charges by bailor	It is bailment where: hire charges are paid by the bailee; or custody charges are paid by bailor
Bailor is liable to pay both ordinary and extraordinary expenses on the goods.	Bailee is liable to pay ordinary expenses. Bailor pays extraordinary expenses.
The bailor is liable to disclose all faults known to him, which arc material for the USC of the goods and which may put the bailee to extraordinary risk.	The bailor is liable to disclose all the faults whether known to him or not.

Duties of Bailee

Duties of bailee, in bailment are grouped as under:

To Take Reason-able Care – Sections 151-152

• The bailee should take reasonable care of the goods, which are in his possession.
• The degree of care required by the bailee is similar to that of a man of ordinary prudence would take of his own goods under similar circumstances.
• If he has taken such care, he is not liable even if goods are lost or damaged.
• He is also not liable for destruction or loss of goods due to act of god.

Example:
If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own locker at his house along with his own ornaments and if all the ornaments are lost/stolen in a riot, ‘Y’ will not be responsible for the loss to ‘X’.

Not to Make Un-authorised Use – Section 154:

• The bailee should not use the goods for unauthorized purpose. He can use the goods as per the terms of bailment.
• If the bailee makes any unauthorized use of goods, he shall be liable for any loss or destruction of goods even if he was
  not negligent.
• On any unauthorized use of goods, bailor may terminate contract of bailment. In other words, contract of bailment becomes voidable.

Not to Mix the Goods – Sections 155-157:

• The bailee should not mix bailor’s goods with his own goods.
• If the bailee mixes, his own goods with bailer’s goods with bailor’s consent the bailor and the bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.
• It must be remembered that if the mixture has taken place by an act of god the bailee is not liable for such mixture.
• When the bailee mix bailor’s goods with his own without consent and the goods are separable, bailee is required to pay cost of separation but if cannot be separated, bailor is entitled to be compensated.

Example:
A bails a barrel of Cape flour worth ₹ 45 to B. B, without A’s consent, mixes the flour with country flour of his own, worth only ₹ 25 a barrel. B must compensate A for the loss of his flour.

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

To Return Goods – Sections 160-161:

• On completion of the purpose or expiry of period, the bailee should return the goods to bailor.
• When bailor gives direction to the bailee for delivery of goods, in such case, bailee should delivery goods as per direction.
• Bailee should return goods without waiting for demand from bailor.
• If bailee fails to return goods to bailor, goods will be at his risk even though loss has created due to act of god.

To Return Increase or Profit – Section 163:

• Bailee is required to return any accretion or addition to goods.
• If some profit is arises from goods, bailee is bound to return the profit of bailor. This is however subject to any contract to contrary.

Example:
A leaves a cow in the custody of B to be taken care of. The cow has a calf, B is bound to deliver the calf as well as the cow to A.

Duty not to Setup Adverse Title:

• The bailee should not use the goods in such a way that it impairs the right of Bailor.
• The Bailee as such can apply the goods only for the purpose of bailment and thus he cannot create adverse title.

Duties of Bailor

Following are duties of bailor:

To Disclose Fault in Goods – Section 150:

• In case of gratuitous bailment, bailor is liable to disclose all faults known to him, which are material for the use of goods and which may put the bailee to extraordinary loss. If bailor fails to disclose such defects and bailee suffers from loss, bailor must compensate for such loss.
• In case of non-gratuitous bailment, bailor is liable to disclose all the faults whether known to him or not. If the bailee suffers, any loss due to any defect in the goods then bailor must compensate for such loss to him.

Example:
A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained.

To Pay Expenses – Section 158:

• In case of gratuitous bailment, bailor is liable to reimburse to bailee all necessary (i.e. ordinary) and extraordinary expenses incurred by the bailee.
• However, in case of non-gratuitous bailment, bailor is liable to reimburse extraordinary expenses incurred by bailee.

To Indemnify Loss for Permanent Termination – Section 159: In case of gratuitous bailment, the bailer may prematurely terminate the bailment. If the loss caused to bailee due to premature termination is more than the benefit obtained by bailee, it is the duty of bailer to compensate bailee for such excess loss.

To Indemnify the Bailee for any Loss – Section 164: The bailor shall indemnify the bailee for any loss caused due to defective title of the bailor.

To Receive Back the Goods – Section 164: If bailor wrongful refuse to take custody of goods, he is liable to pay to the bailee necessary expenses of custody.

To Bear Loss – Section 162: If the goods are destroyed or lost while in possession of bailee without his fault, bailor is required to bear loss.

Rights of Bailee

Duties of bailor are the rights of bailee. In addition to these rights, bailee has following rights:

Return Goods – Section 165:

• Bailee has a right to return goods to anyone of the several joint bailors.
• It is not necessary that goods should be delivered in the presence of all bailors.
• However, if agreement provide contrary, then goods should be returned accordingly.
• Bailor is liable for loss, if he wrongfully refuses to accept the goods.

File Suit:

• If bailee gets ownership claims of goods from more than one person, he has a right to request the Court to decide real ownership of the goods. Until final decision comes, bailee can keep the goods with himself.
• If the third person or wrong doer prevent the bailee to use goods under bailment, he has right to ffle suit and can ask for compensation from third party.

To Recover Charges:

• Bailee has right to recover the charges as agreed.
• Bailee has right to recover the expenses incurred by him

Right of Lien:

• Bailee has right to retain goods until the charges due to him are paid by bailor.
• However, the bailee gets only particular lien and not the general lien.

Rights of Bailor

Duties of bailee are the rights of bailor. In addition, bailor has following rights:

Enforce Duties of Bailee:

• Bailor has a right to force the bailee to perform his duties.
• Bailor can compel bailee to take proper care of goods.
• If the bailee neglects in his duties, the bailor has right to enforce by filing suit to Court.

Termination of Bailment Section 153:

• If the bailee uses the goods in unauthorized manner, bail or may terminate the bailment (i.e. Contract of bailment becomes voidable).
• In such event, the bailee cannot suit bailor for breach of contract.

Example:
‘A’ lets on hire his horse to ‘B’ for his own riding but ‘B’ uses the horse for driving his carriage. ‘A’ has a right to terminate the contract of bailment.

File Suit Against Wrong Doer: To protect his goods the bailor has a right to take legal action against any person who has caused any loss or damage to goods.

Demand Goods at any Time – Section 159: In gratuitous bailment, bailor has a right to demand the return of goods even before time.

Termination of Bailment

The bailment is terminated in following circumstances:

Expiry of Time: If the bailment is made for specific period, it terminates on expiry of specific period.

Fulfilment of Purpose: If the bailment contract is made for specific purpose, it terminate as soon as purpose is achieved.

Unauthorized Use of Goods: If the bailee makes unauthorized use of goods, in such case, contract of bailment becomes voidable at the option of bailor.

Destruction of Goods: On the destruction of goods, which is subject matter, bailment is terminated.

Death: A gratuitous bailment is terminated on the death of bailor or bailee.

Termination by Bailor:

• Bailor may terminate a gratuitous bailment at any time.
• Bailor may terminate gratuitous bailment even if it was for specific purpose or for specified time.

Lien

What is Lien?:

• Lien means right to retain possession of goods until bailee is paid for his charges for services or any other amount.
• Lien of goods can be either general lien or particular lien.

General Lien:

• Certain bailee entitled to retain any goods for any amount due. It is known as general lien.
• Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may retain as a security for a general balance of account any goods bailed to them.

Example:
Chartered Accountants have a general lien against the books of their clients, which come into their possession against professional fees not paid to them by those clients.

Particular Lien:

• Particular lien gives right to retain only those goods in respect of which charges due remain unpaid.
• Particular lien is exercised only on particular goods on which charged remain unpaid (ie., some labour or skill has been utilized)
• Finder of goods, Pawnee’s lien, Agent’s lien, Unpaid-seller’s lien, etc. have particular lien.

Example:
A delivers a rough diamond to B, a jeweller, to cut and polish, which is accordingly done. B is entitled to retain the stone until he is paid for the services he has rendered.

Example:
A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished, and to give a three months’ credit for the price. B is not entitled to retain the coat until he is paid.

Difference Between Particular Lien and General Lien

Basis of comparison	Particular Lien	General Lien
Meaning	Particular lien is exercisable only on such goods in respect of which charges are due.	General lien is a right to retain any goods of the bailor for general balance of account outstanding.
Automatic	Particular lien is automatic.	A general lien is not automatic but it is recognized through an agreement. It is exercised by the bailee only bv name.
When it can be Exercised?	Particular lien comes into play only when there is some labour or skill is involved.	A general lien can be exercised against goods even without involvement of labour or skill.

Finder Of Goods

Who is Finder of Goods?
The person who finds the goods belonging to some other Goods? person and takes them in his possession is known as finder of goods.

Duties of Finder of Goods:
Finder of goods is in position of bailee and therefore all duties of bailee are equally applicable to finder of goods.

Following are duties of finder of goods:

• Finder of goods must take reasonable care of goods.
• Finder of goods must return the goods to the owner when found.
• Finder of goods must not use goods for his own purpose.
• Finder of goods must not mix goods with his goods.
• Finder of goods must return any increase in goods along with goods.
• Finder of goods must make reasonable effort to find owner.

Rights of Finder of Goods – Sections 168-169:
A finder of goods stands in position of bailee. Hence, he has all rights available to bailee as per section 71. In addition, he has following rights:

Right to recover expenses and right of lien: Finder of goods can exercise lien over the goods for his expenses.

Right of reward: Finder of goods has right to receive reward which owner has offered for return of goods.

Right of resale:
Finder of goods can resale goods in following cases:

• When goods are perishable in nature
• When owner cannot be found out with reasonable efforts
• When owner refuses to pay lawful expenses
• When lawful charges incurred by finder in respect of goods found is equal to 2/3rd value of goods.

Pledge

What is pledge?

• A pledge is special kind of bailment.
• Here, goods are delivered as a security for the payment of debt or for the performance of a promise.

Parties:

• The person who delivers the goods is known as Pledger or Pawner.
• The person who receive the goods is known as Pledgee or Pawnee.
• In pledge, there is no change in ownership of the property.

Rights Of Pawnee

Following are rights of pawnee with reference to goods pledge:

Right of Retainer – Sections 173-174:

• The pawnee can retain goods pledged with him until he is paid:
  • Money advance by him,
  • Necessary expenses,
  • Interest paid on debt
• However, pawnee has no right to retain the goods even for subsequent advance.

Example:
Malav pledges stock of goods for certain loan from a bank, the bank has a right to retain the stock not only for adjustment of the loan but also for payment of interest.

Extraordinary Expenses – Section 175: Pawnee has a right to retain the extraordinary expenses related to the goods from the pawnor for the preservation of goods pledge with him.

When Pawnor Defaults – Section 176:

• If the pawnor makes default, pawnee has a right to sell the goods after giving notice of his intention to sell goods.
• Even if the title of pawnor is defective, pawnee gets valid title.
• If sale proceeds of goods by pawnee are less than amount of debt, the pawnee can recover such deficit from the pawnor.
• On default by pawnor, the pawnee has right to file recovery suit for recovery of money due, interest due on money lent, necessary expenses and extraordinary expenses.

To Sell Goods:

• Pawnee can sell goods if the pawnor makes default after giving reasonable notice. Contact may exclude this right.
• If the sale is made by pawnee without notice, it is void.

Rights of Pawnor – Section 177

Following are the rights of pawnor under the contract of pledge:

Redeem Goods Pledged:

• Pawner has a right to redeem his goods on payment of debt or other charges. Right to redeem means get back his goods.
• Pawner gets all the protection that are available to ordinary debtor under any law which is for the time being in force in India.
• Pawner has a right to recover the extraordinary expenses related to the goods from the pawnor.

Surplus on Sale:

• Pawnor has right to take back any increase alone with goods.
• However, pawnor can get it back only on payment of debt or other charges.

Pledge By Non-Owner
An owner of goods can create pledge. However, this is subject to certain exceptions as under:

Mercantile Agent – Section 178:

• Mercantile agent means an agent who has authority to sell goods in ordinary course of business.
• At the time of creation of pledge, pawnee has no notice of the fact that mercantile agent had no authority to pledge goods.

Possession Under Voidable Contract – Section 178A:
Person possessing the goods under voidable contract can make a valid pledge on satisfaction of following conditions:

• The voidable contract has not been declared as void.
• Pawnee must act in good faith. He should not have any notice of pawnor’s defective title.

Person with Limited Interest – Section 179: When a person pledges goods in which he has only limited interest, pledge is valid only to the extent of such limited interest.

Seller in Possession After Sale:

• When seller continues to be in possession of goods ever after sale, he can make a valid pledge of goods.
• Pledge is valid only if the pawnee acts in good faith and had no notice of previous sale.

Distinguish Between Bailment and Pledge

Basis of comparison	Bailment – Section 148	Pledge – Section 172
Meaning	When the goods are temporarily handed over from one person to another person for a specific purpose, it is known as bailment.	When the goods are delivered to act as security against the debt owed by one person to another person, it is known as the pledge.
Parties	The person who delivers the goods is known as the bailor while the person to whom the goods are delivered is known as bailee.	The person who delivers the goods is known as pawnor while the person to whom the goods are delivered is known as pawnee.
Consideration	May or may not be present.	Always present
Use of Goods	The party to whom goods are being delivered can use the goods only, for the specified purpose.	The party to whom goods are being delivered has no right to use the goods.
Purpose	Safe keeping or repairs, etc.	As security against payment of debt.
Right to Sell Goods	In bailment the bailee, generally, cannot sell the goods. He can either retain or sue for non-payment of dues.	The pledgee enjoys the right to sell only on default by the pledger to repay the debt or perform his promise after giving due notice.

Practice Questions

Question 1.
Mr. Saxena, a pledgee incurred extraordinary expense for preservation of goods pledged. Pledgee refused to return such goods until the payment is settled. Can he retain?
Answer:
Pledgee has to return the goods. He is entitled to receive amount of expenses. – Section 175

Question 2.
Mr. Roy gives Mr. Ghosh on hire, a horse for his own riding but Mr. Ghosh drives the horse in his carriage. What action Mr. Roy can take?
Answer:
Contract is voidable at the option of Mr. Roy. Mr. Roy can terminate bailment.- Section 153.

Question 3.
A lends his car to B for his own driving only. B allows C, an expert driver to drive the car. C drives the car with care but hits it with an electric pole. The car is damaged. A files a suit against B for claiming damages. Will A succeed? Give reasons.
Answer:
A will succeed in suit. – Section 154.

Question 4.
A hires a carriage of B. The carriage is unsafe though B does not know this. A is injured. Is B liable to A for the injury?
Answer:
B is liable to A. – Section 150

Question 5.
Ajay founds a defective video camera lying in a park. He pledged it with Vijay for ₹ 3000. Mohan, the real owner, came to know about it. Mohan sues Vijay to recover the camera. Vijay had incurred ₹ 500 on repair to make the camera operational. Can Mohan recover his camera?
Answer:
Mohan can recover his camera by paying ₹ 500. – Section 179.

Question 6.
Mr. X accepted certain goods of Mr. Y for delivery at Durgapur. When the driver of the truck, which was carrying the goods, went for lunch, the goods were stolen. There was no insurance. Does Mr. Y has any remedy available?
Answer:
Mr. Y is liable to bear the loss.-Section 152

Question 7.
A railway company refuses to deliver certain goods to the consignee except upon payment of ₹ 2000 being excess or illegal charge. The consignee paid the said amount in order to obtain the goods. Is there any remedy?
Answer:
Consignee can recover the amount, which was illegally excessive. The person to whom money is paid under coercion or by mistake must return it.

Question 8.
A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C rides with care, but the horse accidentally falls and is injured. Is B liable to make compensation? Why?
Answer:
Mr. B is liable to pay the loss. – Section 154.

Question 9.
A hires a horse in Calcutta from B expressly to march to Benares. A rides with due care, but marches to Cuttack instead. The horse accidentally falls and he is injured. Is A liable to make compensation to B?
Answer:
Mr. A is liable to pay loss. – Section 154.

Question 10.
A bails 100 bales of cotton marked with a particular mark to B. B, without A’s consent, mixes the 100 bales with other bales of his own, bearing a different mark. What will be consequences?
Answer:
A is entitled to have his 100 bales returned, and B is bound to bear all the expenses incurred in the separation of the bales, and any other incidental damage. – Section 156.

Question 11.
A gives cloth to B, a tailor to make into a coat. B promises A to deliver the coat as soon as it is finished, and to give a three months’ credit for the price. Now B wants to exercise his right of lien. Can he do so?
Answer:
Mr. B is not entitled to retain the coat until he is paid. – Section 170

Question 12.
On 1st November, 2017, Mr. Barun kept his cow under the custody of Mr. Tarun for one month and paid ₹ 1000 for maintenance. On 15th November 2017, the cow gave birth of a calf. On 30th November 2017, ‘ Tarun returned the cow retaining the calf. Decide.
Answer:
Barun is bound to deliver the cow as well as calf – Section 163.

Past Examination Questions

Question 1.
What is the status of a ‘finder of goods’ under the Indian Contract Act, 1872? What are his rights? (CA May 2003)
Answer:

Question 2.
Sunil delivered his car to Mahesh for repairs. Mahesh completed the work, but did not return the car to Sunil within reasonable time, though Sunil repeatedly reminded Mahesh for the return of car. In the meantime, a big fire occurred in the neighbourhood and the car was destroyed. Decide whether Mahesh can be held liable under the provisions of the Indian Contract Act, 1872. (CA November 2003)
Answer:
It is duty of bailee to return goods as per direction of bailor when purpose of bailment has fulfilled or time specified has been expired. In these situations, bailee is required to return goods without demand from bailor. – Section 160

Bailee is responsible for any loss, destruction or damage to goods if bailee makes default in return of goods within specified time or after fulfilment of purpose of bailment. – Section 161
In the given case, Mahesh is liable to loss although he was not negligent. He fails to deliver car to Sunil within reasonable time.

Question 3.
A hire a carriage of B and agrees to pay ? 500 as hire charges. The carriage is unsafe, though B is unaware of it. A is injured and claims compensation for injuries suffered by him. B refuses to pay. Discuss the liability of B. (CA May 2005)
Answer:
If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed. – Section 150
Accordingly, B is responsible to compensate A for the injuries sustained even if he was not aware of the defect in the carriage.

Question 4.
Examine whether the following constitute a contract of ‘Bailment’ under the provisions of the Indian Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities (CA May 2007)
Answer:
(i) No. Mere custody of goods does not mean possession. For a valid bailment, bailor must give possession of goods and it must be accepted by bailee. V has parked his car and kept key with himself.
(ii) Yes, the possession of the goods is transferred to the custom authorities. It is case of bailment. – Section 148

Question 5.
Ravi sent a consignment of goods worth ₹ 60,000 by railway and got railway receipt. He obtained an advance of ₹ 30,000 from the bank, en
Answer:
dorsed, and delivered the railway receipt in favour of the bank by way of security. The railway failed to deliver the goods at the destination. The bank filed a suit against the railway for ₹ 60,000. Decide in the light of provisions of the Indian Contract Act, 1872, whether the bank would succeed in the said suit? (CA May 2008)
Or
X sent a consignment of mobile phones worth ₹ 60,000 to Y and obtained a railway receipt therefor. Later, he borrowed a loan of ₹ 40,000 from Star Bank and endorsed the railway receipt in favour of the Bank as security. In transit, the consignment of mobile phones was lost. The Bank files a suit against the railway for a claim of ₹ 60,000, the value of the consignment. The railway contended that the Bank is entitled to recover the amount of loan i.e. ₹ 40,000 only. Examining the provisions of the Indian Contract Act, 1872, decide, whether the contention of the railway is valid. (CA November 2010)
Or
X sent a consignment of goods worth ₹ 2,90,000 by railway and got railway receipt for the same. He obtained an advance of ₹ 2,60,000 from the bank and endorsed and delivered the railway receipt in favour of the bank by way of security for the advance. The railway failed to deliver the goods at the destination. The bank filed a suit against the railway for ₹ 2,90,000. Decide in the light of provisions of the Indian Contract Act, 1872, whether the bank would succeed in the said suit? (CA November 2014)
Answer:
As per sections 178 and 178A of the Indian Contract Act, 1872 the deposit of title deeds with the bank as security against an advance constitutes a pledge. As a pledgee, a banker’s rights are not limited to his interest in the goods pledged. In case of injury to the goods or their deprivation by a third party, the pledgee would have all such remedies that the owner of the goods would have against them.

In Morvi Mercantile Bank Ltd. vs. Union of India, the Supreme Court held that the bank (pledgee) was entitled to recover not only the amount of the advance due to it, but the full value of the consignment. However, the amount over and above his interest is to be held by him in trust for the pledger. Thus, the bank will succeed in this claim of ₹ 60,000 (₹ 2,90,000 for alternative question asked in November 2014) against Railway.

Question 6.
State whether following statement is correct: A pledge of documents of title of goods by a mercantile agent is a valid pledge. (CA May 2008)
Answer:
Statement is correct. A pledge by mercantile agent is valid if the agent is in possession of goods or documents of title of goods and if such possession is with the opinion of the owner.

Question 7.
M lends a sum of 15,000 to B, on the security of two shares of a Limited Company on 1st April 2017. On 15th June 2017, the company issued two bonus shares. B returns the loan amount of ₹ 5,000 with interest but M returns only two shares, which were pledged, and refuses to give the two bonus shares. Advise B in the light of the provisions of the Indian Contract Act, 1872. (CA November 2008)
Answer:
The bailee is bound to deliver to the bailor, any increase or profit, which may have accrued from the goods bailed. – Section 163
Applying the provisions to the given case, the bonus shares are an increase on the shares pledged by B to M. Therefore, M is liable to return the shares along with the bonus shares and hence B, the bailor, is entitled to them.

Question 8.
A, the bailor, pledges cinema projector and other accessories with Cine Association Co-operative Bank Limited, the bailee, for loan. A requests the bank to allow the pledged goods to remain in his possession and promises to hold the same in trust for the bailee and further promises to handover the possession of the same to bank whenever demanded. Examining the provisions of Indian Contract Act, 1872 decide, whether a valid contract of pledge has been made between A, the bailor and Bank, the Bailee? (CA May 2009)
Or
Ram, the bailor, pledges a cinema projector and other accessories with Movie Association Co-operative Bank Limited, the bailee, for a loan. Ram requests the bank to allow the pledged goods to remain in his possession and promises to hold the same in trust for the bailee and further promises to handover the possession of the same to the bank whenever demanded. Examining the provisions of the Indian Contract Act, 1872 decide, whether a valid contract of pledge has been made between Ram, the bailor and Bank, the bailee? (CA May 2017)
Answer:
Transaction is valid pledge. Section 149 of Indian Contract Act, 1872 provides that goods can be delivered actually or by constructive delivery to the bailee. In case of constructive delivery of goods, legal character of possession of goods changes but it does not affect actual custody of goods. In the case of constructive delivery of goods, bailor continues to be in possession of goods.

When Ram (Bailor) pledges a cinema projector and other accessories with Bank (Bailee) for loan and request bank to allow pledged goods to remain in his possession with promise to hold it trust for bank and also promise to handover possession of the same to bank whenever demanded, it create pledge by constructive delivery.

Question 9.
State whether following statement is correct: If the pawnor makes a ‘ default in the payment of debt, or performance of duty, as agreed, the pawnee has a right to sell the thing pledged for which no reasonable notice of the sale is required. (CA November 2009)
Answer:
Statement is incorrect. If pawnor makes any default in payment of debt or performance of duty as agreed, the pawnee has right to sell pledged goods after giving reasonable notice of sale. If notice is not given, sale will be void.

Question 10.
State the essential elements of a contract of bailment. Distinguish between the ‘contract of bailment’ and ‘contract of pledge’. (CA November 2012)
Answer:

Question 11.
State whether following statement is correct: Bailee has no right to mix the goods bailed with his own goods without the consent of bailor. (CA November 2014)
Answer:
Statement is correct.

Question 12.
State whether following statement is correct: Depositing of ornaments in a bank locker is a bailment. (CA May 1998, 2015)
Answer:
Statement is incorrect. The ornaments (goods) were never delivered to bank. The locker key is always remain with the customer and as result of which it cannot be said that goods were delivered to bank.