Bailment is a legal relationship that arises when one person delivers movable goods to another person for a specific purpose under a contract that the goods will be returned or otherwise disposed of according to the directions of the person delivering them. The person who delivers the goods is known as the bailor, and the person to whom the goods are delivered is known as the bailee. The essential idea behind bailment is the transfer of possession, not ownership. The ownership remains with the bailor throughout the bailment. Bailment does not apply to immovable property.
According to Section 148 of the Indian 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.
For example, when a person deposits their luggage at a railway station’s cloakroom, this arrangement forms a contract of bailment. The person depositing the luggage is the bailor, and the railway administration becomes the bailee. Similarly, if a person gives their car to a mechanic for repair, the person is the bailor, and the mechanic is the bailee.
The explanation to Section 148 provides that if a person who is already in possession of goods belonging to another contracts to hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor, even though there may not have been a formal delivery by way of bailment. An example is when someone purchases a scooter but leaves it in the possession of the seller until other formalities are completed. Even though the seller originally owned the scooter, once the buyer becomes the owner and instructs the seller to hold the vehicle, a bailment relationship is created.
Essentials of Bailment
For a valid bailment to exist under Indian law, certain essential elements must be satisfied. These essentials define the nature and scope of the bailment relationship.
Specific Movable Property
Bailment only applies to specific movable goods. Immovable property, such as land or buildings, cannot be the subject matter of a bailment. The property involved in a bailment must be tangible and movable. The law does not extend the bailment concept to real estate or intangible rights.
Delivery of Goods for Change of Possession
A fundamental component of bailment is the delivery of goods, resulting in a change in possession. The ownership remains with the bailor, but legal possession must be transferred to the bailee. Section 149 of the Indian Contract Act explains that delivery to the bailee may be made in a manner that gives the bailee or any person authorized by him effective possession of the goods. Delivery may be actual, symbolic, or constructive.
Actual delivery involves physically handing over the goods. Symbolic delivery may involve giving the keys to a warehouse where goods are stored or transferring a document like a railway receipt that represents the goods. Constructive delivery occurs when a person already in possession of the goods agrees to hold them as a bailee. In each case, legal possession must change hands. Mere custody is not sufficient. For example, a servant or guest using the goods of the owner does not create a bailment since there is no legal change in possession.
In Indra Kumar vs. State of M.P., it was held that merely allowing a passenger to place luggage on a bus roof does not create a bailment because there is no entrustment of goods. Similarly, in Sri Hanuman Steel Rolling Mills vs. CESC Ltd., it was held that the supply of an electricity meter to a consumer does not amount to a bailment.
In Ultzen vs. Nicols, a restaurant waiter took the coat of a customer and placed it in a specific location. The coat was later stolen. The court held the restaurant liable, observing that the waiter had accepted the coat and taken responsibility for its safekeeping, thereby creating a bailment relationship.
Types of Delivery
Delivery in bailment is defined by how possession is transferred. There are three primary forms of delivery recognized in Indian law.
Actual delivery involves the physical handover of goods. For instance, if a person gives cloth to a tailor for stitching, that ian s the actual delivery.
Symbolic delivery occurs when the means of accessing the goods is transferred, such as giving the key to a warehouse or a railway receipt that represents the goods in transit.
Constructive delivery takes place when someone who already possesses the goods agrees to hold them as a bailee. For example, if someone stores goods with another person and later asks that person to keep them as a bailee, constructive delivery occurs even though the goods were already in that person’s possession.
In Kaliaperumal Pillai v. Visalakshmi, a woman entrusted her gold to a goldsmith who returned the half-made jewels to her each evening. She locked them in a box but left the box at the goldsmith’s premises while retaining the key. When the jewels were stolen, the court ruled that there was no bailment because she had retained possession by keeping the key. Delivery had not occurred under Section 149.
Another important clarification is that keeping valuables in a bank locker is not considered bailment, as there is no transfer of possession to the bank.
Delivery for a Specific Purpose
Delivery in a bailment must be for a specific purpose. The goods are usually given to be kept in custody, used, repaired, or transported. This purpose must be clear and form the basis of the arrangement. Although the Indian Contract Act typically requires a contract to form a bailment, courts have accepted the existence of a bailment even without an explicit contract.
In State of Gujarat vs. Menon Mohammad Haji Hasan, vehicles and goods belonging to a person were seized by the government. The person was later found innocent, and the court ordered the return of the goods. However, they were not returned in their original condition due to negligence, and parts had been stolen. The Supreme Court held that bailment existed even though there was no contract, as the government had possession of the goods and was responsible for their safekeeping.
The purpose of the delivery gives rise to the legal duty of the bailee to safeguard the goods and return them upon completion of the task. Bailment does not arise if there is no such obligation to return or otherwise deal with the goods as instructed.
Obligation to Return or Dispose of the Goods
The core of a bailment is the obligation of the bailee to return the goods or deal with them as per the instructions of the bailor once the specific purpose has been fulfilled. Even if the contract does not explicitly state this, the obligation is implied in the arrangement. A bailee who receives goods must either return them in their original form or dispose of them in a manner agreed upon with the bailor.
If the bailee fails to return the goods or dispose of them as directed, he may be held liable for breach of duty. There must be a specific subject matter that is to be returned. If the bailee is not obligated to return the same goods or deal with them specifically, the arrangement is not a bailment.
For example, when a customer deposits money in a bank account, the bank is not expected to return the same currency notes and coins. The relationship here is not one of bailment but that of a debtor and creditor. Similarly, if a farmer gives grain to a miller for use in the miller’s trade, the miller is expected to return an equivalent quantity of grain or its value. This does not constitute a bailment because the same goods are not to be returned.
Classification of Bailment Based on Benefit
Bailment can be categorized based on who benefits from the arrangement. There are three types under this classification.
Bailment for the exclusive benefit of the bailor involves situations where only the bailor gains from the bailment. An example is when a person leaves goods with another without any expectation of compensation, such as gratuitous safekeeping.
Bailment for the exclusive benefit of the bailee occurs when only the bailee derives a benefit. A common instance is when a person lends an item to a friend without charging any fee. The bailee benefits by getting to use the goods for free.
Bailment for mutual benefit is the most common form. Here, both the bailor and bailee gain something. For instance, when goods are given for safekeeping for a fee, both parties benefit. The bailor receives a service, and the bailee earns a fee.
Classification of Bailment Based on Reward
Another way to classify bailment is based on whether the arrangement is gratuitous or involves a reward.
Gratuitous bailment does not involve any compensation. Neither the bailor nor the bailee charges or receives payment. For example, a person might leave a valuable item with a friend for safekeeping without expecting a fee.
Non-gratuitous bailment or bailment for reward involves compensation. Either the bailor or bailee is paid for their role. This includes situations such as leaving a car at a paid parking facility, giving goods for repair, or storing items with a warehouse for a fee.
Sub-Bailment
A sub-bailee is a person to whom goods are transferred by someone who is not the owner but has the right to possess them as a bailee. This situation commonly arises when the original bailee, with or without the bailor’s consent, transfers possession to a third party to fulfill the purpose of the bailment. This third party becomes a sub-bailee. For example, if a logistics company contracts with another carrier to assist in the transport of goods, the second carrier becomes a sub-bailee.
Whether the sub-bailee owes duties directly to the bailor depends on whether the sub-bailment was authorized. If the bailor had consented, express or implied, the sub-bailee also owes a duty of care toward the goods to the original bailor. If there is no consent, the original bailee may be liable for breach of duty.
Consideration about Gratuitous Bailment
Although the Indian Contract Act typically requires consideration for a valid contract, a gratuitous bailment does not necessarily involve the exchange of money or goods. In a gratuitous bailment, the consideration is usually the trust placed by the bailor in the bailee to safeguard the goods.
For example, when a person leaves a valuable item with another person for safekeeping without expecting a fee, the bailee still must return the goods in proper condition. The law recognizes the act of handing over possession as sufficient detriment to the bailor to support the bailee’s promise to return the item. Therefore, even though there is no monetary exchange, the bailment remains enforceable.
This principle was reinforced in several judgments, which hold that the existence of detriment to the bailor is enough to imply a valid promise on the part of the bailee. Hence, gratuitous bailments are not void for lack of consideration.
Difference Between Bailment and Sale
Bailment and sale are two fundamentally different legal relationships, although both may involve the transfer of goods.
In a bailment, ownership of the goods remains with the bailor, and only possession is transferred to the bailee. In contrast, a sale involves the complete transfer of ownership from the seller to the buyer. The seller relinquishes all rights to the goods, and the buyer becomes the new owner.
In bailment, the bailee is required to return the goods or deal with them as per the instructions of the bailor. In a sale, there is no obligation to return the goods. Once ownership is transferred, the buyer has the right to use or dispose of the goods as they see fit.
A bailment may be gratuitous or involve a fee. However, a sale always requires payment. Another distinction is that bailment may sometimes exist without a formal contract, such as when goods are seized or found. However, a sale requires all elements of a valid contract to be present.
The statutes governing these two relationships are also different. Bailment is governed by the Indian Contract Act, 1872, whereas sales are governed by the Sale of Goods Act, 1930.
Bailment usually requires physical delivery of the goods at the start of the arrangement. In contrast, delivery in a sale may or may not occur at the time of the contract, depending on the agreement between the parties.
Difference Between Bailment and Licence
A licence is a personal right granted to a person to do something upon immovable property of the grantor, which would otherwise be unlawful. A contract of licence allows a person to use or enter premises owned by another, without transferring possession or ownership of any goods.
In bailment, there is delivery of movable goods to another person for a specific purpose. The bailee must safeguard the goods and return them to the bailor or dispose of them as instructed.
In a contract of licence, no goods are handed over, and the person authorized to use the premises does not have possession over any specific goods. The licensor allows the licensee to enter or use the premises, and there is no duty to safeguard goods because none are entrusted.
This distinction is especially relevant in situations involving parking lots or storage spaces. In Ashby vs. Tolhurst, the court held that a car parked in a private parking ground without handing over the keys or any goods did not constitute bailment. Instead, the relationship was one of licensor and licensee. The ticket issued at the entrance stated that the management was not liable for any loss or damage. Since the owner had not handed over the car or transferred possession, no bailment was created.
However, in other situations where a person hands over their car to a valet or attendant, courts have found that a bailment relationship is created. In such cases, the hotel or parking service assumes responsibility for the vehicle. The Supreme Court of India held in 2019 that a hotel cannot avoid liability for theft of a vehicle when a valet service is used, even if the hotel displays disclaimers such as “owner’s risk.” By taking control of the vehicle, the hotel becomes a bailee and is responsible for its safekeeping.
This distinction clarifies that bailment involves the transfer of possession of goods, whereas a licence only provides access or usage rights without transfer of possession.
Duties of Bailee
The bailee has several important duties under the Indian Contract Act. These duties are essential to maintain trust between the parties and ensure the safety of the goods delivered.
Duty to Take Reasonable Care of the Goods
Section 151 of the Indian Contract Act requires the bailee to take as much care of the goods bailed to him as a man of ordinary prudence would take of his goods of similar nature, under similar circumstances. This is a universal standard and applies to all kinds of bailments, whether gratuitous or for reward.
The bailee is not expected to exercise extraordinary care but must meet the standard of a reasonably careful person. The extent of care required depends on the nature of the goods, their value, and the surrounding circumstances. If the bailee meets this standard, he is not responsible for any loss or damage caused by natural events, theft, or accidents beyond his control.
In Houghland v. R.R. Low (Luxury Coaches) Ltd., the plaintiff placed her suitcase in the boot of a coach operated by the defendant. The suitcase was stolen. The court held the company liable because it had failed to take reasonable care of the passenger’s belongings. This case illustrates that failure to take basic precautions can render the bailee liable for loss or theft.
The bailee is not an insurer and is not liable if the goods are lost or destroyed due to events beyond his control, provided he exercised due care. Section 152 reinforces this by stating that a bailee, in the absence of a special contract, is not responsible for the loss, destruction, or deterioration of the goods if he has taken the level of care required by Section 151.
In Rampal vs. Gaurishankar, the bailee kept ornaments locked in a safe, but left the key in a cash box in the same room, which was easily accessible. Burglars entered, found the key, and stole the ornaments. The court held the bailee liable because he failed to take reasonable precautions.
In another case, Shantilal v. Tara Chand, the bailee stored food grains that were later damaged by a historic flood. The court held the bailee was not liable, as the event was an act of God, and he had taken adequate precautions.
Duty Not to Deviate from the Terms of the Contract
Section 153 of the Indian Contract Act states that if the bailee does any act about the goods bailed that is inconsistent with the conditions of the bailment, the bailor may terminate the bailment contract. Any misuse or unauthorized handling of the goods gives the bailor the right to revoke the agreement and claim the goods back.
An example provided in the Act involves a person who hires a horse for riding but uses it to pull a cart. This is considered a breach of the bailment conditions, and the bailor may choose to terminate the contract.
Another instance might involve a bailee who is required to store goods at a particular location but instead stores them elsewhere. If the goods are lost or damaged due to this change, the bailee is held liable. The courts consider such deviation as an unauthorized act and a violation of the terms of bailment.
Bailee’s Responsibilities and Liabilities
The bailee, who receives the goods from the bailor, assumes a significant responsibility. The Indian Contract Act stipulates several duties and liabilities that the bailee must fulfill to maintain the trust and purpose of the bailment. A bailee is required to take reasonable care of the goods entrusted to them, and this care must be comparable to the care that an ordinary prudent person would take of their goods. This obligation is not absolute and does not require extraordinary care, but negligence or failure to exercise reasonable caution can make the bailee liable for loss or damage to the goods. For example, in the case of Shiv Narayan v. Emperor, a bailee who failed to keep goods safely and they were stolen was held liable for negligence. The bailee is also responsible for not using the goods for any unauthorized purpose. If the bailee uses the goods in a manner not agreed upon or beyond the scope of the bailment, they will be liable for any damages or loss caused thereby. Moreover, the bailee is obligated to return the goods to the bailor or deliver them according to the bailor’s instructions upon the completion of the bailment purpose or expiration of the bailment period. Failure to return the goods may amount to breach of contract, and the bailee can be held liable for any consequential losses suffered by the bailor.
Rights of a Bailee
The bailee is not without rights. They have the right to retain the goods until due remuneration or compensation is paid, a concept known as “particular lien.” For instance, if a mechanic repairs a car, they can retain the car until the repair charges are paid. However, if the bailee has the goods for multiple purposes under a general agreement and seeks to exercise a lien for a balance due from multiple transactions, this is referred to as a “general lien,” which is available only to specific professionals like bankers, factors, wharfingers, attorneys, and policy brokers. The bailee also has the right to recover necessary expenses incurred in the course of protecting or preserving the goods bailed. If such expenses are not reimbursed, the bailee can exercise a lien over the goods. Furthermore, under Section 180 of the Indian Contract Act, if any third party wrongfully deprives the bailee of the use or possession of the goods or causes damage to them, the bailee has the right to sue that third party in their name as if they were the owner.
Bailor’s Duties and Liabilities
The bailor has certain corresponding duties to ensure that the bailment operates smoothly and does not put the bailee at undue risk. First and foremost, the bailor must disclose all known faults in the goods bailed that could potentially cause danger or interfere with the use for which they are being bailed. If the bailor fails to inform the bailee about such defects and the bailee suffers any injury as a result, the bailor will be held liable. For example, if a person bails a horse knowing it is vicious and fails to inform the bailee, any injury caused by the horse could make the bailor liable. Additionally, the bailor must compensate the bailee for any loss suffered due to such undisclosed faults. When the bailment is for the benefit of the bailor and without consideration (gratuitous bailment), the bailor must compensate for any losses the bailee incurs due to the defects in the goods. The bailor is also responsible for accepting the goods back once the purpose of bailment is fulfilled or the agreed time is over. If the bailor refuses or neglects to accept the goods, they will be liable to compensate the bailee for expenses and any loss incurred due to the delay.
Bailor’s Rights
A bailor has the right to claim back the goods upon the fulfillment of the bailment purpose or after the expiration of the agreed time. If the bailee refuses to return the goods, the bailor can initiate legal proceedings for the recovery of goods and any damages. The bailor can also claim compensation from the bailee if the goods are used unauthorizedly or misappropriated. In gratuitous bailments, the bailor has the right to demand the return of the goods even before the time fixed or purpose accomplished, provided such return does not cause any loss greater than the benefit derived. Furthermore, the bailor can sue third parties who cause damage to or loss of the goods if the bailee has assigned such rights or the goods are still considered under the bailor’s ownership. The bailor retains the ownership of the goods during the bailment, which enables them to enforce rights against any interference with that ownership.
Termination of Bailment
A contract of bailment may be terminated in several circumstances. First, when the bailment is for a specific period or purpose, it automatically terminates upon the expiry of that period or accomplishment of that purpose. Second, in gratuitous bailments, the bailor can terminate the bailment at any time, although premature termination must not cause undue harm to the bailee beyond the advantage the bailee might have gained. Third, if the bailee breaches the conditions of bailment or misuses the goods, the bailor has the right to terminate the bailment contract. Another ground for termination is death in the case of gratuitous bailments, where the death of either the bailor or the bailee brings the contract to an end. Additionally, if the goods are destroyed or become incapable of being returned, the bailment contract comes to a natural end. Finally, mutual consent between the bailor and bailee can also bring the bailment to a close.
Pledge as a Special Kind of Bailment
A pledge is a special type of bailment where goods are delivered as security for the payment of a debt or performance of a promise. The person who pledges the goods is called the pawnor, and the one to whom the goods are pledged is known as the pawnee. The Indian Contract Act under Sections 172 to 179 elaborates on pledge-specific provisions. In a pledge, the pawnee has a right to retain the goods pledged until the payment of the debt or the performance of the promise. If the pawnor defaults, the pawnee can either sue for the debt or sell the pledged goods after giving reasonable notice. However, the pawnee must exercise care similar to that of a bailee, and unauthorized sale or misuse may attract liability. On the other hand, the pawnor has the right to redeem the goods before the actual sale by paying the debt and associated expenses. The pledge is governed by the same principles of bailment, but with additional conditions concerning the rights and remedies of the pledgee.
Bailment by Non-Owners
Although bailment typically arises from a contract between the owner (bailor) and the bailee, there are circumstances where a non-owner can create a valid bailment. If a person in possession of goods with the consent of the owner bails them to another party, the bailment can still be valid. For instance, an agent entrusted with goods by the principal can bail them to a third party. Similarly, a person who finds goods and takes them into their custody becomes a bailee under law and is expected to take reasonable care and return the goods to the true owner. This principle was affirmed in Hollins v. Fowler, where it was held that a person in possession of goods could be treated as a bailee even if they were not the actual owner. The essential requirement is lawful possession and delivery, even if the person is not the absolute owner. Such bailments are binding if the original owner consents or is not deprived of their rights.
Rights and Responsibilities in Gratuitous Bailment
Gratuitous bailments are those where one party delivers goods to another without any expectation of remuneration. These bailments usually arise out of courtesy, friendship, or familial obligation. In these cases, the bailee is not expected to bear the same level of liability as in commercial bailment. However, they are still required to exercise reasonable care over the goods. A gratuitous bailee is not liable for ordinary wear and tear or loss if reasonable care was taken. Nevertheless, if the bailee has acted in bad faith or used the goods beyond the purpose agreed upon, they may be held liable for any resulting damage. The bailor, on the other hand, must compensate the bailee for any expenses or losses incurred while taking care of the goods. The bailor may also reclaim the goods at any time but is liable for any harm caused to the bailee due to premature termination. The courts have maintained that even in the absence of consideration, the contract remains enforceable due to the presence of trust and responsibility.
Delivery of Goods in Bailment
Delivery is central to the concept of bailment. It involves the transfer of possession (not ownership) from the bailor to the bailee. Delivery can be actual, where the goods are physically handed over, or constructive, where some action or acknowledgment by the bailee indicates that they have taken possession of the goods. Constructive delivery includes scenarios like handing over the keys to a warehouse where the goods are stored or transferring a document of title. The Indian Contract Act recognizes both types of delivery. The essence lies in the bailee obtaining control over the goods with the consent of the bailor. A valid delivery implies that the bailee has voluntarily accepted the goods, as acceptance is critical to forming the contract. If a person receives goods without knowledge of the bailment or without agreeing to it, they are not considered a bailee. The law ensures that only willing parties who understand their responsibilities can be held accountable under bailment.
Rights and Duties of the Bailee
The bailee has certain rights under the Indian Contract Act. The first is the right to compensation. According to Section 158, if the bailee suffers any loss due to a fault in the goods bailed (which the bailor did not disclose), the bailor must compensate for the loss. Second, the bailee has a right to claim reimbursement for expenses incurred while taking care of or preserving the goods. These expenses must be reasonable and necessary.
Another right is retaining the goods until the bailee receives due compensation or reimbursement. This is known as the bailee’s lien. The lien is of two types: particular lien and general lien. A particular lien can be exercised only over goods in connection with which the charges are due. A general lien allows retaining any goods in possession until the general balance due is paid. General lien is available to certain professionals like bankers, attorneys, and policy brokers as per Section 171.
The bailee also has a right to recover compensation from a third party who wrongfully deprives the bailee of possession of the goods or causes injury to them. Under Section 180, such a bailee can sue the third party in their name, as if the bailee was the owner.
Rights and Duties of the Bailor
The bailor has duties too. First, the bailor must disclose any faults in the goods bailed that could materially interfere with the use of goods or expose the bailee to extraordinary risks. Failure to disclose such defects makes the bailor liable for damages caused to the bailee due to such faults. This is provided in Section 150.
The bailor must compensate the bailee for any loss the bailee suffers due to the bailor’s defective title to the goods. This duty ensures the bailee is protected from third-party claims.
The bailor also has a right to receive the goods back once the purpose is completed or the time of bailment has expired. If the bailee refuses to return the goods, the bailor can file a suit for recovery and damages.
If the bailment is gratuitous (without reward), the bailor has the right to terminate the bailment at any time. However, if the bailee suffers loss due to premature termination, the bailor must compensate the bailee.
Termination of Bailment
A bailment is terminated in several ways. It can end when the purpose of the bailment is accomplished or when the agreed-upon time elapses. Bailment also ends if the goods are destroyed or become incapable of being delivered. The death of either the bailor or the bailee also terminates a gratuitous bailment.
A bailment can also be terminated if one party acts inconsistently with the terms of the bailment. For example, if the bailee uses the goods in an unauthorized manner, the bailor has the right to terminate the bailment.
Pledge: A Special Kind of Bailment
Pledge is a special kind of bailment where goods are delivered as security for a debt or performance of a promise. The bailor in such a case is known as the pawnor, and the bailee is the pawnee. Sections 172 to 179 of the Indian Contract Act deal with pledge.
The pawnee has rights such as the right of retainer until the debt is paid, the right to receive extraordinary expenses, and the right to sell the goods after giving due notice to the pawnor if the pawnor defaults.
The pawnor has the right to redeem the goods before the pawnee sells them. If the pawnor fails to pay, the pawnee can sue for the debt and retain the goods or sell them with reasonable notice.
A valid pledge must be made by the owner or a person with the authority to pledge. However, in certain circumstances, even non-owners can make a valid pledge, for example, a mercantile agent with possession and authority to pledge.
Important Legal Cases on Bailment
- Kaliaperumal Pillai v. Visalakshmi – This case explained that in bailment, delivery of possession is essential. Simply holding the goods on behalf of someone else does not create bailment unless actual delivery is made.
- UCO Bank v. Hem Chandra Sarkar – The court ruled that the bank had the right to exercise a general lien over securities held for a customer who owed it money, illustrating the scope of the bailee’s rights.
- Ultzen v. Nicols – The court held that when a customer entered a restaurant and gave his coat to a waiter, a bailment was created, and the restaurant was liable for the loss of the coat.
- Sita Bai v. Maharashtra State Road Transport Corporation – A woman’s luggage was stolen while she was a passenger. The court ruled that the transporter was a bailee and had failed to take reasonable care.
- M.S. & Co. v. Union of India – In this case, goods sent by rail were lost. The court held that the railway administration was a bailee and thus liable for negligence.
Conclusion
Bailment is a foundational concept in contract law that deals with the temporary transfer of possession of goods. It includes specific duties and rights for both the bailor and bailee and is supported by statutory provisions and case law. Understanding the legal implications of bailment is crucial for both individuals and businesses when engaging in transactions involving the transfer of movable property. Bailment also forms the basis of more complex arrangements like pledges, making it an essential area of study in commercial law.