Law of Contract

(Part: II)

Unit II:
Contract of Bailment

- Jasuda Gurung, Lecturer (Prithivi Narayan Campus, Pokhara)

 2.1 Meaning of Bailment

 Bailment is a kind of special contract, caused by the delivery of

goods. However it’s not a transfer of ownership of goods rather it
is the delivery of goods on a returnable basis.
It’s a commercial security measures like safe custody, pledge,
repair, finding of lost goods etc.
Section 575 of Muluki Civil (Code) Act, 2074 has defines
bailment as “ 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.
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.’
Examples:
A gives his bike to B on a rent for Rs. 5,000 monthly; it is the
bailment of bike for hire.
X gives his car to repair to Z. It is the bailment of a goods for
repair.
A has to go somewhere for a week. He has delivered his dog to B
to take care of it in his absence. It is the bailment of safe custody.
The person who delivers goods is called the 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.
Thus, 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.
 2.2 Difference of Contract of Bailment
with Pledge, Hypothecation and Sale

1. Bailment vs Pledge:

In simple terms, bailment refers to hand over or assignment the goods,
which involves change in possession but not in the ownership of
goods. It is the transfer of goods from one party to another party for
some specific purpose. It is not same as pledge, which is just a variant
of bailment. Pledge implies a contract, in which an article is delivered
or say deposited with the money lender, as security for repayment of a
debt owed by him/her or performance of promise.
The main difference between pledge and bailment lies in the use of
goods, i.e. the use of goods is prohibited in pledge, whereas in the case
of bailment the party to whom the goods are being handed over can
use them.
 Comparison between Bailment and Pledge
Basis for Comparison Bailment Pledge
1. Meaning When the goods are When the goods are
temporarily handed over delivered to act as
from one person to another security against the debt
person for a specific owed by one person to
purpose, it is known as another person, it is
bailment. known as the pledge.

2. Defined in Section 575 of the Muluki Section 585 of the Muluki

Civil (Code) Act, 2074. Civil (Code) Act, 2074.

3. Parties The person who delivers the The person who delivers
goods is known as the the goods is known as
Bailor while the person to Pawnor while the person
whom the goods are to whom the goods are
delivered is known as delivered is known as
Bailee. Pawnee.
Basis for Comparison Bailment Pledge
4. Consideration May or may not be present. Always present.
5. Right to sell the goods The party whom goods are The party whom goods
being delivered has no right are being delivered as
to sell the goods. security has the right to
sell the goods if the party
who delivers the goods
fails to pay the debt.

6. Use of Goods The party whom goods are The party whom goods
being delivered can use the are being delivered has no
goods only, for the right to use the goods.
specified purpose.

7. Purpose Safe keeping or repairs, etc. As security against

payment of debt.
2. Bailment vs Hypothecation:
Hypothecation means a charge created on goods by the borrower,
without actually transferring the property or possession to the
creditor.
Hypothecation is the pledging of goods, against the debt without
delivering them to the lender.
In hypothecation borrower is owner (Hypothecator) and keeps
the possession of the security on behalf of the creditor
(Hypothecatee).
If the borrower fails to pay the loan, the creditor can take the
possession of the security goods with the consent of the
borrower (by giving notice).
If possession given to creditor, then creditor gets all the rights
including the right to sell the security (assets), without
intervention of court.
Where the creditor is unable to get the possession, the sale of
securities is possible through court only.

The best example of this type of arrangement are Car Loans.

In this case Car / Vehicle remains with the borrower but the same
is hypothecated to the bank / financer.   In case the borrower,
defaults, banks take possession of the vehicle after giving notice
and then sell the same and credit the proceeds to the loan account.
 
Other examples of these hypothecation are loans against stock and
debtors.  [Sometimes, borrowers cheat the banker by partly selling
goods hypothecated to bank and not keeping the desired amount of
stock of goods.   In such cases, if bank feels that borrower is trying
to cheat, then it can convert hypothecation to pledge i.e. it takes
over possession of the goods and keeps the same under lock and
key of the bank].
3. Bailment vs Sale:
Sale and Bailment are two different types of contracts.
A contract of sale is a straight forward contract where a person
may buy goods, services or property from a seller in exchange
for remuneration, usually in the form of money.
This amount is decided between the buyer and seller as
appropriate for the value of goods, services or property.
Bailment, on the other hand is slightly different than sale. The
definition of 'Bailment' states that it is “the contractual transfer of
possession of assets or property for a specific objective.
In bailment, the deliverer of the asset is the bailor, and the
receiver is the bailee. In a bailment transaction, ownership is
never transferred.
 • In Bailment the ownership does not change. The Bailor is the
owner of the goods before, during and after the period
of Bailment. In contract of sale, the Purchaser becomes owner.
The seller does not possess any connection with the property
sold.

Detailed comparison between Sale and Bailment

Sale Bailment
Possession of goods is Possession of goods is
1. Possession
transferred to the buyer. transferred to the bailee.

Ownership is transferred to Ownership resides with the

2. Ownership
the buyer. bailor.

A bailee can use the goods only

The buyer may use the
3. Usage according to the directions of
goods in any way he likes.
the bailor.
 Sale Bailment
The goods are returned after
There is no return of goods
the specified time or
4. Return from the buyer to the seller,
accomplishment of the
unless there is breach.
purpose.

The consideration is an
The consideration is the price undertaking to return the goods
5. Consideration
in terms of money. after the accomplishment of
the purpose.

The question of any charges The bailor has to repay the

to be paid by the seller to charges which the bailee has
6. Charges
buyer or vise versa does not incurred in keeping the goods
arise. safe.

Final. Once the sale is Temporary. The bailee has to

transacted, the seller keeps return the goods to the bailor
7. Duration
the goods until he decides to once the specified time is
sell them to another. passed.
 2.3 Basic Features of Bailment

1. Delivery of goods, (Physical, Symbolic and Constructive)

2. Goods must be moveable.
3. By one person (owner) bailor to another bailee.
4. By a Contract, (Express/Implied)
5. Delivery for some special Purpose, (Job work/Safe custody, Use etc.)
6. The good must be returned, (either in original/altered form/ disposed of
according to the instruction of bailor)
7. Transfer of possession without transfer of ownership,
8. Consideration is not necessary, (can be both gratuitous and non
gratuitous)
 2.4 Types of Bailment

On the basis of One the basis of

Consideration Benefits

Exclusive
Gratuitous
Benefit of
Bailment
Bailor

Exclusive
Non-
Benefit of
Gratuitous
Bailee

Mutual
Benefit
• Bailment may broadly be classified into
two categories, namely,
a) Gratuitous bailment,
b) Non-gratuitous bailment

Gratuitous Bailment:
A Bailment with no considerations is called a gratuitous
bailment. In this kind of bailment neither the bailor, nor
the bailee is entitled to any remuneration or reward. Such
a bailment may be for the exclusive benefit of either
party, i.e., the bailor or the bailee, discussed as below.
Bailment for the exclusive benefit of the bailor: In this case the
bailor delivers the goods for the exclusive benefits and the bailee
does not derive any benefit out of it.
For example: “A” leaves his pets with “B”, his neighbour to be
looked after during A’s physical absence. In this case, A alone is
being benefited by the bailment. Or, if you park your car in your
neighbour’s premises to be taken care in your absence, you as a
bailor derive the exclusive benefit from the bailment.
Bailment for the exclusive benefit of the bailee: This is the case
where a bailor delivers the goods to the bailee for the exclusive
benefits of the bailee and does not gain anything from the contract
himself.
For example: you lend your book to a friend of yours for a week
without any charge or favour. In this case the recipient of the book as
a bailee, is the sole beneficiary of this transaction of bailment.
Non-Gratuitous Bailment:

Contrary to gratuitous bailment, a non-gratuitous bailment or

bailment for reward is one that involve some consideration passing
between the bailor and the bailee. Obviously in this case the delivery
of goods takes place for the mutual benefit of both the parties.
For example:
“A” hires “B’s” car. Here B is the bailor and receives the hire
charges and A is the bailee and enjoys the use of the car.
Similarly, when you give your PC or laptop for repair to some
techie, both you and the computer techie are going to be benefited
by this contract – while you get your computer repaired, he gets his
fees or charges.
2.5 Rights and Duties of
Bailor and Bailee
 Rights and Duties of Bailor

Bailor is a party or person on who agree to deliver his goods to the bailee for
some purpose for some period of time on a condition that the bailee shall
ultimately return the goods to the bailor.
For example: If A delivers his car to B for a week, here A is bailor and the car may
be delivered gratuitously or non- gratuitously.
The Rights of Bailor:
1. Enforcement of a bailee’s duties: Bailor can enforce the duties of bailee as his
own right by suit in the following circumstances.
 To demand compensation, in case of damage of goods.
 To demand damage in case of an unauthorized use of goods or breach of the terms, and
unauthorized mixing of goods with other goods.
 To return goods in the prescribed time.
 To demand natural increment or profit in goods.
2. Right to avoid or terminate the contract: The bailor has a right to
terminate the contract at any time in the following circumstances:
 If the objectives of the contract cannot be fulfilled.
 If the contract has an illegal object.
 If the bailee breaches the terms of contract.
 If the bailment is gratuitous.
3. Restoration of goods lent gratuitously: Where goods are lent
gratuitously the bailor can demand their return at any time.
4. Right to receive compensation from wrongdoer.

The duties of bailor:

1. Duty to disclose the known defects of good: a bailor has to disclose
the known defects of the goods for bailment. If the bailor does not do
so, he will be responsible for the harm or the loss to bailee, but not for
unknown defects.
2. Duty to bear extraordinary expenses: The bailor is responsible to
bear the extraordinary expenses of goods eg: medical treatment of
sick animals, or the expenses made for keeping the good safe.
3. Duty to indemnify the bailee: the bailor is responsible to the
bailee for any loss due to his/ her imperfect or defective title of the
goods and premature termination of the contract.
4. Duty to receive backs the goods.
 The Right and Duties of Bailee

Bailee is the party of a bailment contract to whom goods is delivered by

bailor on the condition that after the completion of purpose of contract, or
some period of time the bailee should return the goods to the bailor.

For Example: If X gives his car on rent to Y. The Y is bailee.

The right of bailee:

1. Right to be indemnified for the loss caused by lack of information
about the goods, defective titles of good.
2. Right to deliver goods to one of the several(joint) owners: If the
bailment contract is concluded by several joint owner the bailee may
deliver the goods back to one of the joint owners, without consent of
other owner in the absence of any agreement to the contrary.
3. Right of special lien: Special right is the right of a bailee that can
keep the goods bailed in his/ her custody until the bailor does not
pay all the necessary charges. The bailee even can recover the
charge by selling the property.
4. Right to deliver the goods to bailor even though the real owner
of goods is not the bailor.
The duties of bailee:
1. Duty not to make unauthorized use of the good bailed.
2. Not to mix the bailed goods with other goods.
3. Duty to take reasonable care of the goods bailed.
4. Duty to return the goods to the bailor in time.
5. To return the goods with their natural profit or increments.
6. To follow the terms and the instruction of the bailor.
7. Duty to compensate the loss or damage caused by him/ her.
 2.6 Termination of Bailment

Termination means the end of a contract or a discharge of a contract.

The contract of bailment can be discharged in the following ways:
(1) On the expiry of the period: When the bailment of good is made for
a specific period and that period expires then the bailment also comes to
an end.
Example: Mr A took a bike from his neighbor B for two days as his bike
had gone for repair. He used the bike for two days and then returned the
bike to B. Thus the contract of bailment came to an end.
(2) On the completion of the task or the achievement of the objective:
When bailment of goods is made for a particular purpose and that
purpose gets accomplished then the bailment comes to an end.
Example: A takes B’s mobile to make a call. Once the call has been made
the bailment comes to an end and A has to return the mobile to B.
(3) Inconsistent uses of goods by the bailee: When bailment is made
and the bailee does an act which is inconsistent with the terms of
contract then the bailor can terminate the contract.
Example: A borrowed B’s Car to go to Kathmandu but instead he took the
car to Dharan. Hence B terminates the contract because of inconsistent
usage of the good borrowed.
(4) Destruction of the subject matter: When the subject matter of the
contract gets destroyed or becomes incapable of being used for the
purpose of bailment then the bailment ends.
Example: A agrees to give his car to B on hire for certain charges from
next Sunday. But the car meets an accident and is damaged before the due
date. The contract of bailment between A and B terminates automatically.
(5) Gratuitous Bailment: Where there is a contract of gratuitous
bailment, there is the right of the bailor to bring back his goods bailed
at any time, even though the purpose has not been fulfilled or the time
has not expired. Thus, a contract of gratuitous bailment is terminated.
But, the bailor must be responsible for any loss or harm to the bailee
caused from such an act of termination.
(6) Death of the bailor/bailee: In case any of the parties to the contract
of bailment expires, the contract terminates.
Example: A had given her saree to B for doing some embroidery work
on the border of the saree. B met with an accident and died the next day.
Hence the contract of bailment came to an end.
 2.7 Condition at which a contract of
bailment becomes void

a. Inconsistent uses of goods by the bailee

b. Destruction of the subject matter
c. Death of the bailor/bailee
d. Bailment without contract: For a valid bailment, the
delivery must be done upon a contract that the
goods will be returned when the purpose is
accomplished. If the goods are
given without any contract, there is no bailment.
 2.8 Finder of Lost Goods

Meaning:
Finder of lost goods is the person who finds and keeps the
lost goods of another person in his own possession; the law
implies that there is a contract of bailment between the
owner and finder of the lost goods.
By the law the finder is treated as the bailee who had
agreed to keep the goods of bailor (the person whose good
is lost) safely and promised to return back to the owner.
 Rights and Duties of Finder of Lost
Goods

Rights of Finder of Lost Goods:

i) Right of possession: a finder of lost goods has the right to
keep it in his possession until the true owner is found.
ii) Right of lien: the finder has the right to keep the goods in
his custody until the owner pays the expenses; incurred in
keeping them safe, in repairing the goods and in searching the
true owner.
iii) Right to sue for reward: The finder can sue for any
specific reward, which the owner has offered for the return of
the goods. He/She may also retain the goods until he received
such reward.
iv) Right to sell the goods:  A finder of lost good can sell
those goods in the following circumstance:
a. If the true owner cannot be found.
b. If the bailor does not pay the expenses within a reasonable
time.
c. If the goods naturally decrease or are destroyed within
specific time.
d. If the necessary expenses amount to more than 2/3 of the
price of goods.
When the finder sells the goods in the above circumstances, he
should return the surplus amount after subtracting the expenses
incurred.
Duties of Finder of Lost Goods:
a. To give notice to the police.
b. To take necessary care of the goods.
c. To search the real owner of the goods found.
d. Not to mix the found goods with other goods.
e. To return the goods to the real owner after receiving the necessary
expenses.
f. To take care of good and not to make an unauthorized use of such
goods.
Thank You