BAILMENT AND PLEDGE

MODULE 2

DEFINITION
According to Section 148 of the Contract Act A bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Some of the examples of bailment are- A cloth given to a tailor for stitching, a watch given to a shop for repairing, a friend lending his bicycle to another friend for riding it and jewelry taken on rent for wearing it to party. The person delivering the goods is called the Bailor and the person to whom the goods are delivered is called the Bailee118.

 Illustration 1 Ram sends his car to the garage for repair. In this case Ram is the bailor and the garage owner is the bailee. The garage owner (bailee) has to repair the car and then hand it over to Ram (bailor).

The following are the essential features of Bailment:

Movable goods: The goods in bailment are goods as defined in section 2 (7) of the sale of goods Act, 1930, which means every kind of movable property other than money. Immovable property like land and buildings are not considered as goods. Delivery of goods: Section 149 of the Indian contract act 1872 explains the mode of delivery of goods. It states that there may be two modes of delivery. Actual delivery and constructive delivery. In actual delivery the bailor hands over physical possession of goods to the bailee and in constructive delivery the bailor does not hand over physical possession of goods but does something which has the same effect of putting the goods in possession of the bailee. Some purpose: The delivery of goods from bailor to bailee is done to accomplish some purpose. If goods are delivered by mistake without any purpose then there is no bailment. Return of goods: After the purpose for which the goods were bailed to the bailee has been fulfilled the goods have to be returned to the bailor.

RIGHTS AND DUTIES OF BAILOR AND BAILEE

(1) Duties of a Bailor To disclose known facts: The bailor should disclose the known faults about the goods, which he/she has bailed to the bailee. If the bailor does not disclose the defects then he/she is liable for any damage caused to the bailee due to such defects in the goods. To incur extraordinary expenses of bailment: The bailee is responsible to bear ordinary and reasonable expenses of the bailment but for any extraordinary expenses it is the bailor who is responsible. To indemnify bailee for loss in case of premature termination of gratuitous bailment: If the gratuitous bailment is terminated by the bailor before the specified time then any loss the bailee incurs due to such termination shall not be born by the bailor. However if the loss suffered by the bailee exceeds the benefit he/she has derived from bailment then in such a case the bailor shall indemnify the bailee. To receive back the goods: once the purpose has been fulfilled for which the goods were bailed out it becomes the duty of the bailor to receive back his/her goods from the bailee. He cannot refuse to take back the goods. However if the bailor refuses to take back the goods then the bailee is entitled to receive compensation for the expenses he/she incurs in custody of goods. To indemnify the bailee: If the title of the good is defective and due to that the bailee suffers a loss then the bailor is responsible to the bailee for the loss suffered by him/her (2)

(3)

(4)

(5)

 Duties of a Bailee (1) To take reasonable care of the goods: It is the duty of the bailee to take reasonable care of the goods bailed to him/her by the bailor. According to section 151 of the Indian Contract Act 1872 the bailee is to take care of the goods as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed. Section 152 states that if, in spite of taking all the reasonable care the goods are damaged or destroyed in any way then the bailee is not liable for the loss, destruction or the deterioration of the goods bailed. (2) Not to make any unauthorized use of goods: The bailee is not to use the goods in a manner, which is inconsistent with the terms of the contract. If he/she uses the goods in an inconsistent manner then he/she is liable for any loss or damage made to the goods bailed.

(3) Not to mix goods bailed with his/her own goods: The bailee is to keep the goods bailed to him/her separately from his/her own goods. If the bailee mixes the goods with his/her goods- With Bailors consent- in such a case both the bailor and the bailee shall have a proportionate interest in the mixture produced due to mixing of goods. (4) To return the goods: The bailee is bound to return the bailed goods to the bailor once the purpose for which the goods were bailed has been fulfilled. (5) To return any accretion to the goods: If during the period of bailment any profit or addition in value has accrued from the goods bailed then it is the duty of the bailee to return such profit or increase in value to the bailor.

 Rights of Bailor (1) Duties of a Bailee: The duties of a bailee are the rights of a bailor. The bailor can enforce by suit all the duties of the bailee as his/her rights121. (2) Right to terminate the contract: According to section 153 of the Indian Contract Act the bailor can at anytime terminate the contract of bailment if he/she finds that the bailee has done an act, which is inconsistent with the terms of the contract of bailment. (3) Right to demand return of goods at any time in case of gratuitous bailment: According to section 159 of the Indian Contract Act in case the bailor has lent the goods gratuitously to the bailee the bailor has a right to terminate the contract anytime before the expiry of the period. However if the termination causes loss to the bailee and the loss is in excess of the benefit derived by him/her then the bailor has to indemnify the bailees loss. (4) Compensation from a wrongdoer: According to section 180 of the Indian Contract Act if a third person wrongfully deprives the bailee from the rightful use or possession of bailed goods or does them any injury or damage then the bailor or the bailee can bring a suit against that person for such deprivation or injury.

 Rights of Bailee 1 Duties of a Bailor: The duties of a bailor are the rights of a bailee. The bailee can enforce by suit all the duties of the bailor as his/her rights122. 2 Right to deliver goods to one of several joint bailors: According to section 165 of the Indian Contract Act if the goods have been bailed by several joint owners, the bailee has a right to deliver them to, or according to the directions of, one joint owner without the consent of all, in the absence of any agreement to the contrary.

3 Right to deliver goods, in good faith, to bailor without title: According to section 166 of the Indian Contract Act the bailee has a right to deliver the goods, in good faith, to the bailor without title, without incurring any liability towards the true owner. 4 Right of lien: Lien means the right to retain possession of the property or goods, which belongs to another person until that person pays the dues or claims. The bailee can exercise the right to lien only till the goods are in his/her custody. As soon as the bailee loses the possession of goods he/she loses the right to lien.

PLEDGE
Definition: According to section 172 of the Indian Contract Act when bailment of goods is done as security for payment of a debt or performance of a promise it is called pledge. In case of a contract of pledge the bailor is called the pledger or pawner and the bailee is called the pledgee or pawnee.

 Illustration: Ramnath a farmer took loan of rupees fifty thousand from the moneylender for his daughters wedding and he kept his cow with the moneylender as a security for payment of debt. In this case Ramnath is the pledger, moneylender is the pledgee and the cow is the good that has been pledged for the performance of the promise.

RIGHTS AND DUTIES OF PAWNOR AND PAWNEE

Rights of a Pawnee / Pledgee (1) Right of retainer: According to section 173 the Pawnee has the right to retain the goods pledged with him /her if the Pawnor / Pledger does not repay the dues or does not perform the promise. The Pawnee may also retain the goods till the Pawnor pays the interest due on the debt. (2) Right of retainer for subsequent advances: According to section 174 of the Indian Contract Act if the pawnee lends money to the same pawner after the date of the pledge then the pawnees right of retention of goods extends to subsequent advances.

(3) Right to extraordinary expenses: According to section 175 the Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the safe keeping of the goods pledged with him. Though he has no right to retain the goods for non-payment of such expenses but he/she can sue the Pawnor for the recovery of such expenses.

 (4) Right against true owner, when the Pawnors title is defective: According to section 178-A if the Pawnor has got the possession of goods which he /she has pledged with the Pawnee under a voidable contract (by fraud, misrepresentation, undue influence and coercion)126 and the contract has not been rescinded at the time of pledge, the pawnee acquires a good title to the goods. The pawnee gets a good title only when he acts in good faith and does not have the knowledge of the Pawnors defect of title.

 (5) Has a right to recover from the Pawnor any deficiency arising on the sale of the goods and is liable to the Pawnor to return any surplus, if any, realized on the sale of goods: In this case if the pawnor fails to repay within the due date then the pawnee has a right to sell the goods pawned and recover the money from it. In case the sale proceeds are more than the loan amount then the pawnee is liable to return the surplus to the pawnor and if the sale proceeds are less than the loan amount then the pawnee can recover the deficient amount from the pawnor.

Rights of a Pawnor / Pledger

(1) Right to get back goods: After returning the debt or after performing the promise the pawnor is entitled to get back the goods. (2) Right to redeem debt: In case the pledger fails to repay the debt or does not perform the promise within the stipulated time then he/she may still redeem the goods pledged at any subsequent time before the actual sale of goods take place however the Pawnor has to pay any expenses which have arisen due to his / her default. (3) Right for preservation and maintenance of goods: The Pawnor has a right to see that his/ her goods are kept safely with the Pawnee that is that the Pawnee preserves the goods and properly maintains them. (4) Rights of an ordinary debtor: The Pawnor apart from having all the rights mentioned above also has the rights of a debtor127.

Law of Agency
It is important to know what exactly is agency? Agency is a relationship between two people where one is called the principal and the other is called the agent. DEFINITION According to Section 182 of the Indian Contract Act 1872 an agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal.

 Illustration: Sukrita a resident of Delhi wanted to buy a house in Shimla so she approached a property dealer and asked him to purchase a house for her. The property dealer bought a house from Mr Nagendra in Shimla according to the budget and the other specifications given by Sukrita. In this case Sukrita is the principal, the property dealer is the agent and Mr Nagendra is the third party.

Who can be an agent?

One can become an agent even without having the contractual capacity therefore even a minor or a person of unsound mind can become an agent. Whether the agent has the contractual capacity or does not have the contractual capacity it is the principal who would be held liable to the third party for the acts of the agent. However it is the agent with contractual capacity who would be responsible to the principal for his/her acts and not the agent without contractual capacity therefore it is in the interest of the principal to appoint only those agents who have the contractual capacity.

 Illustration 1: Badruddin a tailor sent his trainee Ramzan who was twenty one-year old to his customer Neeta to deliver a kurti. On the way Ramzan lost the Kurti. Hence it is Badruddin who is responsible to compensate Neeta for her lost Kurti and not Ramzan however Ramzan is responsible to Badruddin for losing the kurti thus Badruddin if he wants can deduct from amzans salary the cost of the Kurti or can take any other action to penalize Ramzan for his irresponsibility.

Characteristics of Agency
1 Agreement between principal and agent: It is important that there be an agreement as agency depends on agreement and not necessarily on contract. A contract cannot be formed with minor because an agreement with a minor is void but an agreement of agency with minor is possible because between the principal and the third person any person may be appointed as an agent whether it be a minor or a person of unsound mind.

 2 Intention of the agent to act on behalf of the principal: it is important that the person (agent) intends to act on behalf of another (principal) only then agency may arise. 3 Whatever the principal can do personally he/she can do it through his/her agent: The agent can perform all those activities which the principal is liable to perform however the agent cannot perform acts which are personal in character or are annexed to public office such as marriage and duty of a magistrate. 4 He who does an act through another does it by himself/ herself: The acts of an agent are the acts of the principal. The principal is liable to the third party for the acts done by the agent. 5 No consideration required for agency: According to section 185 of the Indian Contract Act no consideration is necessary to create an agency. The fact that the principal has agreed to be represented by the agent is a sufficient detriment to the principal to support the contract of agency.

CREATION OF AGENCY
Agency can be created in any of the following manner: The agent gets authority from the principal. The authority can be given in two ways. Either it can be expressly given or the authority can be implied. Section 187 of the Indian Contract Act defines express and implied authority as under:

 1 Express authority: An authority is said to be express when it is given by words spoken or written. The authority enables the agent to bind the principal by acts done within the scope of his/her authority. The written contract of agency is the power of attorney wherein one person empowers the other to represent him/her, or act in his/her stead for certain purposes.

 2 Implied authority: An implied authority arises from the conduct, situation or relationship of the parties. It is inferred from the circumstances of the case. The agency arises when the principal conducts himself / herself towards the person alleged to be the agent to the third parties in such a manner, as if the principal had conceded to the appointment of that person as agent. This form of agency can be formed in any of the following manner. (a) Agency in Emergency: According to section 189 of the Indian Contract Act an agent has authority in an emergency, to do all such acts for the purpose of protecting his / her principal from loss as would be done by a person of ordinary prudence in his /her own case, under similar circumstances. The agent while protecting the principal from loss may exceed his / her authority thus giving rise to agency of necessity provided (1) He / She was not in a position to communicate with the principal (2) Had taken all reasonable care and necessary steps to protect the interests of the principal. And (3) had acted bona fide.

 (b) Agency by Necessity: Sometimes in certain urgent circumstances the law confers an authority on a person to act as an agent for the benefit of another, there being no opportunity of communicating with that other. Such agency is called agency of necessity. 3 Agency by Estoppel: At times the principal by his / her conduct creates an impression in the mind of a third person that the agent has an authority to act on his/her behalf. In such case the principal is liable towards the third person for the acts done by the agent, on the ground of the application of the law of estoppel. The basis of the action is what appears to the third person to be an authority, i.e. apparent or ostensible authority conferred on the agent.

 4 Agency by Holding out: Such an agency is based on the doctrine of holding out which is a part of the law of estoppel. In this case also the alleged principal is bound by the acts of the supposed agent, if he / she has induced third persons to believe that they are done with his/her authority. But, unlike an agency by estoppel agency by holding out requires some affirmative or positive act or conduct by the principal to establish agency subsequently.

 3 Agency by Ratification: Sometimes a person may act as an agent of someone and does an act on his/her behalf for which he/she did not have the authority and that someone binds himself / herself for the acts done by the agent then it is called agency created by ratification.

RIGHTS AND DUTIES OF AN AGENT

Duties of an agent (1) Duty to follow principals directions or customs: According to Section 211 of the Indian Contract Act the first duty of every agent is to act within the scope of the authority conferred upon him/her and performs the agency according to the directions given by the principal. When the agent acts otherwise and loss is sustained the agent must make it good to the principal and if any profit accrues then the agent must account for it. (2) Duty to carry out the work with reasonable skill and diligence. According to Section 212 of the Indian Contract Act the agent must carry the work of agency with reasonable diligence and to the best of his/her skill. (3) Duty to render accounts: According to Section 213 of the Indian Contract Act it is the duty of an agent to keep proper accounts of his/her principals money or property and render them to him /her on demand, or periodically if so provided in the agreement.

(4) Duty to communicate: According to section 214 in case of any difficulty the agent should communicate with his/her principal and seek instructions from him/her before taking any steps in facing the difficulty or emergency. (5) Duty not to deal on his/her own account: According to Section 215 and 216 the agent must not deal on his /her own account that means that he must buy or sell goods only on behalf of his/her principal. If the agent violates this rule then the principal may repudiate the transaction and can also claim from the agent any benefit, which may have resulted to the agent from the transaction. (6) Duty not to make any profit out of his/her agency except his/her remuneration: According to section 217 and 218 an agent must not make any secret profit out of the agency. The agent must pay to his/her principal all money, which he/she may have received on principals account. (7) Duty on termination of agency by principals death or insanity: According to section 209 when an agency is terminated by the death of the principal or due to his/her mind becoming unsound, the agent must on behalf of the legal representatives of the principal take all reasonable steps for the protection and preservation of the interests entrusted to him/her. (8) Duty not to delegate authority: According to section 190 subject to certain exceptions150 an agent cannot delegate his/her authority to another person. He/she has to perform all the work himself / herself.

Rights of an agent:
(1) Right of retainer: According to section 217 of the Indian Contract Act the agent has the right to retain out of sums received on account of the principal for the money due to himself/ herself in respect of his /her remuneration or advances made or expenses properly incurred by him in conducting the business of agency. (2) Right to receive remuneration: According to section 219 and 220 the agent is entitled to receive his/her agreed remuneration and if nothing is agreed, to a reasonable remuneration, unless he/she agrees to act gratuitously. In the absence of any special contract the right to claim remuneration arises only when the agent has done what he/she had undertaken to do. The agent can claim remuneration once the work has been completed even though the contract is not executed on account of breach either by the principal or the third party.

 (3) Right of lien: According to section 221 of the Indian Contract Act an agent has the right to retain goods, papers and other property, whether movable or immovable, of the principal received by him/her until the amount due to himself/herself for commission, disbursements and services in respect of the same has been paid or accounted for to him / her. The lien is a particular lien but by a special contract the agent may have a general lien151. (4) Right to be indemnified: According to section 222 of the Indian Contract Act an agent has all the right to be indemnified against the consequences of all lawful acts done by him/her in exercise of the authority conferred upon him/her. The agent also has a right to be indemnified against the consequences of acts done in good faith. Though it turns out to be injurious to the rights of the third persons (section 223).

 (5) Right to compensation: According to section 225 the agent has the right to be compensated for injuries sustained by him/her due to the principals neglect or want of skill. (6) Right of stoppage of goods in transit: An agent has a right to stop the goods in transit to the principal if he/she has bought goods either with his/her own money or by incurring a personal liability for the price and the principal has become insolvent.

TERMINATION OF AGENCY
An agency can be terminated or can be brought to an end by any of the following ways: 1 By act of the parties 2 By operation of law Agency can be terminated by the act of the parties in the following ways: (1) By Revocation of Agents authority: According to section 203 the principal can revoke the authority of the agent at any time before the agent has exercised his/her authority so as to bind the principal, unless the agency is irrevocable (agency cannot be terminated). (2) By Agreement: An agency can be terminated at any time by mutual agreement between the principal and the agent. (3) By Renunciation by the agent: An agency can be terminated by an express renunciation by the agent because a person cannot be compelled to continue as agent against his/her will. According to section 206 the agent must give a reasonable notice of renunciation to the principal otherwise he/she will be liable to compensate the principal for any damage resulting thereby. If the agency is for a fixed period and the agent renounces it without sufficient cause before the expiry of the period, he/she will have to compensate the principal for the resulting loss, if any.

Agency can also be terminated by operation of law in the following circumstances:

(1) By the completion of the business of agency: According to section 201 an agency automatically terminates when the purpose for which agency was created is fulfilled. (2) By expiry of time: If the agency is for a fixed term, the expiration of the term puts an end to the agency, even though the business of the agency may not have been completed. (3) Death and insanity of the principal or the agent: According to section 201 an agency is terminated automatically on the death or insanity of the principal or the agent. After coming to know about the principals death or insanity although the agency terminates but the agent must take all reasonable steps for the protection of the interests of the principal. (4) By insolvency of the principal: According to section 201 of the Indian Contract Act agency terminates when the principal becomes insolvent. The section is silent on the point whether agency terminates or not when the Agent becomes insolvent. (5) By destruction of the subject matter: when the agency is created to deal with a subject matter and when that subject matter gets destroyed the agency automatically terminates. (6) By dissolution of a company: When the principal or the agent is an incorporated company, the agency automatically terminates after the company gets dissolved. (7) Principal or the agent becoming an alien enemy: If the principal and agent are nationals of two different countries and a war breaks out between the two countries the agency gets terminated. If they still continue the agency then they would be called alien enemies and their relationship of agency will be called unlawful.

Agents can be classified in various ways (kinds of agent)

Special Agents: Agent appointed for a particular task only. The agency in such cases lasts for a specific period of for a particular type of job or work. For example a property dealer appointed as an agent for a sale of a property is authorize his rights in regards to that property only and that too till its sale or revocation of agency by the principal. General Agents: As the name suggests, the agent has a general authority in such a case. To elaborate, we could say a general agent is one who has authority to do all the acts (usually related to business or Trade) in the interest of his principal. A general agent has a implied authority to bind his principal by doing various acts necessary for carrying on the business of his principal. Universal Agents: Universal agent is practically a general agent with very extensive rights. We can say that an universal agent is a substitute of principal for all those transactions where in principal cannot participate. We rarely find universal agents in business world today, however in personal life, a wife, son or a very close friend or relative could become a universal agent. For example: when a person leaves his country for a long time, he may appoint his son as his universal agent to act on his behalf in his absence. Co-Agents: This happens when a principal appoints two or more person as agents jointly. Their authority is joint when nothing is mentioned. It implies that all co-agents concur in the exercise of their authority unless their authority is fixed or unless circumstances reveal any intention to the contrary. But when their authority is several, any other of the co-agents can act without the concurrence of the other. Sub-Agents: In the language of law, a sub-agent would be a person employed and acting under the control of the original agent in the business of the agency . In simple words, sub-agent is an agent of the original agent. As far as third party is concerned, principal can be held liable for the acts of sub-agent in certain cases like fraud etc. however in general, agent is responsible to the principal for the acts of sub-agent. Substituted Agents: Substituted agent is almost same as a co-agent or sub-agent. Sections 194 and 195 deals with substituted agents. It states when an agent holding on express or implied authority to name another person to act for and on behalf of his principal in his business, such agent is know as substituted agent. There are certain differences between the two, which could be better understood by the way of following illustration: Mr. RR authorizes Mr. YY, who is a businessman in Pune, to recover the money due to RR from ABC Company. YY, in turn, instructs NN, a solicitor, to take necessary legal actions and recover the dues. Here, NN is not a sub-agent but a solicitor for R.

Other classification of agents is as follows:

Factor: As per the section 2 of sale of goods act, there is an agent known as Mercantile Agent. As the name suggest he is the one who works for the business (merchandize) of the principal. A Factor is one type of a mercantile agent who sells goods on behalf of his principal. He has wide authority and discretionary powers to sell goods upon such terms and conditions as he thinks proper. He in broader terms relieves his principal from the burden of his work. If a factor does any act which is beyond his authority, but which is within the scope of his apparent authority, then his principal is bound by such act. Broker: A broker is a special type of mercantile agent who acts as a middleman between the buyer and the seller. We can say that he is employed to bring about contractual relationship between the principal and the third party. He usually gets commission for the work performed. His function ends when he brings the two parties together. He is never in possession of the subject, therefore cannot exercise the right of lien. Auctioneer: Auction is usually a public sale of goods made in the highest of several bidders. An auctioneer is a mercantile agent who is appointed to sell goods on behalf of principal, compensated in terms of commission. Commission Agents: A commission agent is generally, appointed for selling or buying goods on behalf of his principal. Such types of agents belongs to a somewhat indefinite class of agents. He/She tries to secure buyer for a seller of a goods and sellers for a buyer of goods and receives a commission in return for his work on the actual sales price. Del Credere Agents: A Del Credere agent is a mercantile agent who is employed to sell goods on behalf of his principal. He undertakes to guarantee the payment of dues in consideration for an extra commission. We can say that besides being a mercantile agent a del credere agent finds himself into the shoes of a guarantor as well. Forwarding Agents: Forwarding agents render services of collecting goods from their principals and forwarding the same to shipping companies. As foreign trade procedures are more complex that the procedures of home trade, the service of forwarding agents hence helps the producers and exporters to a great extent. Clearing Agents: As forwarding agents help the exporters of goods, clearing agents help the importers of goods. They complete various complicated customs and exchange formalities on behalf of the importers who appoint them. Indenting Agents: An indenting agent is a commission agent who procures a sale or purchase on behalf of his principal with a merchant abroad for a commission at the rate mentioned in the indent. He is an important mercantile agent who facilitates the distribution of goods at international level.