Bailment and pledge

Legal Environment for Business in Nepal
19 December 2016
Saroj Shrestha 1

What is Contract of Bailment ?
 Bailment is one of the commercial security measures
like safe custody, pledge, repair, finding of lost goods
etc.
 The term ‘bailment’ has been derived from a French
word ‘baillior’. It denotes ‘to deliver’.
 Bailment is also a kind of special contract, caused by
the delivery of goods for certain purpose.
 Bailment is the change of ‘possession of a goods’,
not a ‘transfer of ownership’ of goods as in a safe.
2

 Section 25 of Contract Act, 2056 has given a definition
that ‘A contract relating to bailment shall be deemed to
have been concluded in case any person delivers any
property to another person on a returnable basis or for
handing it over to any other person or selling it as
ordered by him/her.’
 The sec. 25 provided that ‘a deed must be execute while
bailing any property worth more then Rs.5,000.00’.
 Explanation: For the purpose of this chapter,
the term 'property' includes any movable property
and title to such property.
3

 ‘A bailment is the delivery of the thing entrusted for
some special purpose upon a contract expressed or
implied to conform to the purpose of the trust’
 Indian Contract Act defines that ‘A bailment is the
delivery of the goods by one person to another for
some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person
delivering them’
(Sec. 148 of Indian Contract Act, 1872)
4

Examples:
 Mr. X delivers his laptop to Mr. Y for repair. It is the
bailment of goods for repair.
 Mr. John has to go UK for one week holidays. He has
delivered his mountain bike to Miss Luna to take care of
it in his absence. It is the bailment of safe custody.
 Mr. Shyam gives his car to Mr. Laxman for one month
for Rs. 50,000 on hire. It is the bailment of a goods for
hire.
5

 A hires a set of tent and sires for a marriage
ceremony from B, a tent house for Rs. 3000. After
the completion of the purpose the goods are returned
to B.
◦ Here A is bailee, B is bailor, the goods are called bailment.
 The person who delivers goods is called ‘bailor’ and
the person to whom they are delivered is called the
‘bailee’. The process of bailment transaction is
complete when bailee received the bailed goods and
title to such goods.
6

 In case any property is already being kept by any
person or a person authorized by him/her under his/her
custody or control, the concerned property shall be
deemed to have been taken by him/her as a bailed
property.
(Sec. 26 of Contract Act, 2056)
 Where a movable property is delivered from one person
to another for some certain purpose, after accomplishing
the purpose it is to be returned or to be disposed
according to the bailor, is contract of bailment.
7

1. Delivery of movable goods: Delivery of movable
goods involves a change of possession of goods from one
person to another, but not a change of ownership of the
goods. A mere custody of goods without a delivery of
possession does not mean bailment. It must be made on
the ground of free consent of the parties. A delivery of
goods may be either actual or constructive.
◦ Actual delivery: Actual delivery is the real handover of
goods from bailer to the bailee for any specific purpose. It is a
change of physical possession of the goods bailed.
8

A gives his bicycle to B on hire for one day for
Rs. 250. B takes it immediately and goes away
riding. It is an actual delivery of a goods.
◦ Constructive delivery: A constructive delivery is not a
change of the physical possession of goods. The goods remain
in the same place but something is done that causes a change
of its possession to the bailee, for instance the delivery of a
document of title delivery of key of a store or vehicle.
9

2. Delivery for some specific purpose: Delivery
of goods must be made for some specific purpose
(repair, security, making something etc.) by which the
Bailee is bound to return the goods as the purpose is
achieved. If goods are delivered by mistake there is no
contract of bailment.
3. Contract: The relationship between a bailor and a
bailee is the creation of a contract. In general, the
bailment transaction is based on the contract. There
must be a written document if delivery of goods is
worth more than five thousand rupees. That is why
both the parties must be competent to conclude a
contract.
10

4. The goods must be returned: The bailment
goods must be returned to the bailor after the
achievement of the purpose because bailment is the
subject to the condition that when the purpose is
achieved the goods will be returned to the bailor or
disposed of according to the direction of the bailor.
5. No transfer of ownership: Only the
possession of the goods is transferred from a bailor
to a bailee in a contract of bailment. But ownership
of the goods remains with the bailor. That is why in
a contract of bailment the goods should be disposed
off in accordance with the instruction of the bailor.
11

6. Delivery of movable goods: Generally, movable
goods and property can be transferred as a bailment.
But keeping cash in a bank account cannot be called a
bailment because the same coins and notes deposited
in the account can not be returned, only amount is
returnable.
7. Consideration is not necessary: The contract of
bailment may be gratuitous and non-gratuitous. If
bailment is made for the exclusive benefit of a bailor or
of a bailee it is gratuitous
e.g. A lets his bike just for 10 minutes. X’s giving to Y his
pen just to make a note in a class is gratuitous bailment.
12

Differs in Bailment of goods Sale of Goods
1. Nature of delivery
of goods
It is only delivery of possession
(physical) of goods from a bailor to
a bailee
It is a delivery of ownership
(legal) of the goods from a
seller to a buyer
2. Gratuitous and
non gratuitous
Bailment may be gratuitous or
non-gratuitous
Sale is never gratuitous
price is necessary for the
seller
3. Time of
possession
Possession of the goods is
temporary and limited because it
must be returned after
accomplishment of the certain
purpose
Possession of goods is
unlimited and permanent
because it is a delivery of
ownership
13

4. Purpose of
Contract
The purpose of
bailment is only to
achieve some
specific purpose
Sale is to transfer of
ownership over the
delivery of goods
5. Return of goods Must be returned after
the accomplishment of
the objective or the
expiry of certain time
There is no question of
returning goods because
it is a transfer of
ownership of the goods
6. Use of the goods A bailee can not make
an authorized use and
mix-up of the goods
transferred by the bailor
The buyer can use and
mix-up of the goods
transferred by the seller.
14

15
7. Consideration Consideration may be
or may not be there
on the bailment. The
tenderer has to give a
consideration to the
acceptor or it may be
gratuitous.
Consideration must
be there. The buyer
has to pay a price for
the goods as a
consideration to the
seller.
8. Pre-delivery Pre-delivery of the goods
is a must in bailment
Pre-delivery is not
compulsory in a sale. The
goods may be delivered
after sometimes of the
contract.

Contract of bailment can be classified from the point of
view of benefit, reward and nature of the contract. They
are as follows:
1. Bailment from the point of view of the benefit to the
concerned parties:
 Bailment for the exclusive benefit of the bailor:
Where a bailor bails his goods with the Bailee for taking
care of it and for the protection of the goods bailed or for
his own benefit and he does not pay any consideration to
the bailee, such a bailment comes under the category.
16

 Bailment for the exclusive benefit of the
Bailee: If a Bailee receives some goods for his
need or his benefit for a certain period of time and
does not pay any reward or remuneration to the
bailor, such bailment comes under this category.
 Example: A lends his bike to his friend B for one
day, free of charge. B is the Bailee who alone is
benefited of the service from A. It is a bailment
that exclusively benefits the Bailee.
17

 Bailment for mutual benefit of the bailor and the
bailee: If both of the parties of the contract of bailment
are benefited reciprocally there is a bailment for mutual
benefit of the concerned parties. i.e. House Lease
Contract
2. Bailment from the point of view of reward: From
the point of view of reward, bailments are of two types:
Gratuitous and non-Gratuitous.
Gratuitous bailment: Where the bailee keeps the goods
in safety or provides services without any expectation of
remuneration, benefit or reward, there is gratuitous
bailment. “Naso” is popular in Nepalese society as a
gratuitous bailment. 18

 Non-gratuitous bailment: If the parties of a bailment
contract expect “something in consideration” it is a non-
gratuitous bailment or a bailment or reward. The reward
may be made from the side of the bailor or bailee.
3. Bailment from the point of view of expression:
• Expression or Voluntary Bailment: If two parties enter into a
contract of bailment expressly or voluntary, it is an expressed
bailment. It may be made verbally or in a written form. Such a
contract clarifies the rights and duties of the bailor and bailee by
its terms.
19

 Implied or involuntary bailment: If the
parties to a contact come into an agreement in an
implied way or by operation of law, there is an
implied or involuntary bailment. The bailor and
bailee have to fulfill their duties without any
expression. i.e. finder of lost goods
20

What is contract of Pawn/ Pledge ?
 A pledge is also a kind of special contract and a part of
bailment.
 It is a transfer of bailment of goods as a security for the
debt, or performance of a promise.
 That is why the contract, by which the possession of
goods (objects or documents movable or immovable) is
transferred as a security, is known as a ‘Pledge’.
 In this case, the person who gives goods as security is
called the ‘Pledger’ or ‘pawnor’ and the person whom
the goods is delivered as security is called the ‘pledgee’
or ‘pawnee’.
21

 The pledge is bound to return the pledged goods
on the satisfaction of his debt.
 Sec. 35 (1) of Contract Act, 2056 had defined the
contract relating to pledge thus “In case any
person has obtained a collateral while supplying
credit to anybody as a security for that credit, or
obtained any property as a deposit in the form of a
guarantee to perform the concerned work while
having any work performed a contract relating to
collateral or deposit shall be deemed to have been
concluded.”
22

 The Section explain that 'property' means any
movable or immovable property, and title or
document establishing title to that property. The
Act has included both the terms “collateral” and
“deposit” in the sense of a pledge, which is more
popular term in the business field. (Sec. 35 (2) of
CA, 2056)
 Indian Contract Act, defines that ‘the bailment of
goods as security for payment of debt of
performance of promise is called ‘pledge’. The
bailor is in this case called ‘pawner’ and the bailee
is called ‘pawnee”.
23

 Generally, shares of a company, government security
and movable properties can be delivered for a pledge.
 Essentials of Contract of Pledge.
1. Delivery of goods
2. Delivery of Security
3. Lawful purpose
4. Return of goods
5. The goods must be long lasting.
24

Differs in Bailment Pledge
1. Purpose Some special purpose:
Repair or lease or safe
custody
Pledge is provide as
security for repayment of
loan or fulfillment of an
obligation.
2. Right of using the
goods
There is no restriction. It
depends on the nature of
transaction or terms of
the contract
A pledgee has no right to
use the goods pledged
3. Right to sell the goods A bailee may either
retain the goods or sue
the bailor for the
performance
A pledgee has the right
to sell the goods
pledged, on the default
after giving notice to the
pledger
4. Consideration Consideration may or
may not be in a bailment
Consideration is
necessary for the
purpose of serurity for
the payment of debt 25

5. Guarantee There is no need to
guarantee of goods
in the contract of
bailment
A guarantee of
goods is necessary
for the purpose of
security for payment
of debt.
6. Nature of goods Goods must be movable
in bailment contract
The goods may be
movable or immovable
but must be long lasting.
26

27Saroj Shrestha
If you have any questions or concerns, please discuss ..
Thank you !

Bailment and pledge

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