Indemnity

The dictionary meaning of the term ‘indemnity’ is protection against future loss.
Indemnity is the protection against loss in the form of a promise to pay for loss
of money, goods, etc. It is security against or compensation for loss incurred.

According to Halsbury, indemnity refers to an express or implied contract that

protects a person who has entered or is going to enter into a contract or incur
any other duty from loss, irrespective of the default incurred by a third person.

As per the Oxford Dictionary of Law, indemnity is an agreement by one person

to pay to another, a sum that is owed or which may be owed, to him by a third
person. It is not conditional on the third person defaulting on the payment.

Contract of Indemnity
Chapter VIII of the Indian Contract Act, 1872 contains the legal provisions
governing a contract of indemnity and a contract of guarantee in India.

Section 124 : Contract of indemnity

Section 124 of the Act defines a contract of indemnity as a contract wherein one
party promises to save the other from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person.

A contract of indemnity can provide protection against loss caused—

1. By the conduct of promisor, or

2. By the conduct of any other person.

Under Indian law, a contract of indemnity can only provide for losses caused by
human agency whereas in England, it includes a promise to save the other
person from loss caused whether by acts of promisor or of any other person or
any other event like fire, accident, etc.
Indemnifier
The person who makes a promise to indemnify against the loss or to make good
the loss (promisor) is called an indemnifier.

Indemnity-holder
The person in whose favour such a promise to indemnify is made (promisee) is
called indemnity-holder.

For example, Anil enters into a contract with Swapnil to indemnify him against
the consequences of any proceedings which Mrinal may initiate against Swapnil
in respect of a certain sum of Rs. 2000/-. In this contract, Anil is the indemnifier
and Swapnil is the indemnity-holder.

Main features
1. It involves two parties i.e. promisor being the indemnifier and promisee
being the indemnity holder.
2. Object of the contract of indemnity is to protect from a loss.
3. As per the Indian Contract Act, the contract of indemnity must be to
indemnify against a loss caused by any act or conduct of the promisor
himself or by the conduct of any other person.
4. It is not contingent on the default of some third person.

What are the rights of an indemnity holder

Section 125 of the Act covers ‘Rights of indemnity-holder when sued’. This
Section provides for the right of the indemnity holder to recover the damages
and costs that he may have been compelled to pay in a suit filed against him, in
a case where the indemnity-holder has promised such indemnity, i.e., where a
contract of indemnity to that effect exists. The rights of the indemnity holder
are-

1. Right to recover from the promisor, the damages that he may be

compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.
2. Right to recover from the promisor all the costs that he may be
compelled to pay in any suit, provided—
 1. that he did not contravene any of the orders of the promisor in filing or
defending such suit, and
2. that he acted in a manner as would have been prudent for him to act in
the absence of any such contract of indemnity, or
3. that the promisor had authorised him to file or defend such a suit.
4. Right to recover from the promisor all such sums that he paid under the
terms of any compromise of any such suit, provided-

1. the compromise was not contrary to orders of the promisor, and

2. such compromise is one as the promisee would have made while acting
in a prudent manner even if such contract of indemnity did not exist, or
3. that the promisor had authorised the promisee to compromise the suit.

When liability commences

A pertinent question that arises with regard to a contract of indemnity is, ‘when
does the liability to indemnify commence/arise’. Originally, under English law,
the rule was that the indemnity holder cannot recover the amount unless he had
suffered actual loss i.e. ‘you must be damnified before you can claim to be
indemnified’. However, this position of the law changed. In Richardson Re, Ex
parte the Governors of St. Thomas’s Hospital (1911), it was held that indemnity
is not necessarily given by repayment after payment, but it requires that the
party to be indemnified shall never have to pay. This principle was followed by
the Calcutta High Court in Osman Jamal & Sons Ltd. v. Gopal Purshottam
(1928).

As far as Indian position is concerned, the Bombay High Court in Gajanan

Moreshwar v. Moreshwar Madan (1942), held that the equitable principle
applicable in England shall be applicable in India too and therefore, where the
indemnity holder has incurred a liability and that liability is absolute, he is
entitled to call upon the indemnifier to save him from that liability and pay it off.

Guarantee
Guarantee enables a person to get a loan, to get goods on credit, etc.
Guarantee means to give surety or assume responsibility. It is an agreement to
answer for the debt of another in case he makes default.

The Oxford Dictionary of Law defines guarantee as a secondary agreement in

which a person (guarantor) is liable for a debt or default of another (principal
debtor) who is the party primarily liable for the debt. A guarantor who has paid
out on his guarantee has a right to be indemnified by the principal debtor.

Contract of guarantee
Section 126 of the Indian Contract Act defines the term contract of guarantee,
surety, principal debtor and creditor. The purpose behind a contract of
guarantee is to give additional security to the creditor that his money will be
paid back by the surety if the debtor makes a default.

Contract of guarantee : Section 126

A contract of guarantee is a contract to perform the promise or discharge the
liability of a third person in case of his default.

The contract of guarantee has three parties involved, namely, the principal
debtor, the creditor, and the surety.

Surety
The person who gives the guarantee is called the Surety. The liability of the
surety is secondary, i.e., he has to pay only if the principal debtor fails to
discharge his obligation to pay.

Principal debtor
The person in respect of whose default the guarantee is given is the Principal
debtor. The principal debtor has the primary liability to pay.

Creditor
The person to whom the guarantee is given is called the creditor.
For example, Anil orders certain goods of the value of Rs. 2000/- from Swapnil
on credit. Mrinal guarantees that, if Anil will not pay for the goods, she will. This
is a contract of guarantee. Here, Rs. 2000 is the principal debt, Anil is the
principal debtor, Mrinal is surety and Swapnil is the creditor.

Main features
1. A contract of guarantee may be oral or written: According to Section
126, a contract of guarantee may be oral or in writing. However, under
English law, for a contract of guarantee to be valid, it has to be in
writing and signed.
2. There must be a principal debt: The existence of a principal debt is
necessary for a contract of guarantee. If there is no principal debt, then
there is no existing obligation to pay. As a result of the absence of such
obligation to pay, there cannot be any promise/guarantee. If there is a
promise to pay for compensating some loss without there being any
principal debt, such a contract will become a contract of indemnity.
3. Contract of guarantee is tripartite in nature: There being three parties
involved in a contract of guarantee, three contracts take place in a
contract of guarantee-

 The principal debtor promises to make payment to the creditor.

 Surety undertakes to pay the creditor in event of default of payment by
the principal debtor.
 An implied promise by the principal debtor in favour of surety to
indemnify him in case he discharges the liability of the principal debtor.

4. There is a promise to pay upon default of payment by the debtor: In a

contract of guarantee, the surety’s promise to pay is dependent on the
default of the debtor i.e. surety pays only when the debtor defaults.
5. The consideration is the benefit to the debtor: As per Section 127,
anything done or promise made for the benefit of the principal debtor
may be a sufficient consideration to the surety for giving the
guarantee. For example, Anil sells and delivers certain goods worth Rs.
5000 to Swapnil. Mrinal afterward requests Anil to refrain from suing
Swapnil for a year and promises that if he does so, she will pay for the
goods in default of payment by Swapnil. Anil agrees. The forbearance
by Anil to sue is of benefit to Swapnil (the debtor) and that constitutes
sufficient consideration for Mrinal (surety) for giving the guarantee.
6. The consent of the surety should not have been obtained by
misrepresentation or concealment of material facts: Section 142 of the
ICA, 1872 provides that a guarantee obtained using misrepresentation
 made by the creditor or with his knowledge or assent, concerning a
material part of the transaction is invalid.

Section 143 provides that a guarantee obtained by the creditor by keeping silent
as to some material circumstance is also invalid.

Difference between contract of indemnity and contract of guarantee

BASIS OF
CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE
DISTINCTION

There are two parties in a contract of There are three parties in a contract of
Parties indemnity, namely the indemnifier and the guarantee, namely the principal debtor, the
indemnity holder. creditor, and the surety.

It consists of three contracts-A contract

between principal debtor and creditor
wherein the debtor promises to perform his
obligation/make payment. The contract
It consists of only one contract between the between surety and creditor wherein the
indemnifier and the indemnity holder. The surety promises to perform the aforesaid
No. of contracts indemnifier promises to indemnify the obligation/make the payment if the
indemnified/indemnity holder in event of a principal debtor makes a default. An implied
certain loss. contract between the surety and the
principal debtor. The principal debtor
bounds himself to indemnify the surety for
the sum that he has paid under the
guarantee undertaken by him.

The liability of the surety is a secondary one,

i.e., his obligation to pay arises only when
the principal debtor defaults. Liability in a
The liability of the indemnifier is primary. The
contract of guarantee is continuing in the
3. Nature of liability in a contract of indemnity is
sense that once the guarantee has been
liability contingent in the sense that it may or may not
acted upon, the liability of the surety
arise.
automatically arises. However, the said
liability remains in suspended animation
until the debtor makes default.

Default of third The liability of an indemnifier is not Liability of surety is conditional on the
 conditional on the default of somebody else. default of the principal debtor. For example,
For example, Mrinal promises the shopkeeper Anil buys goods from a seller and Mrinal
to pay, by telling him that, “Let Anil have the tells the seller that if Anil doesn’t pay you, I
person
goods, I will be your paymaster”. This is a will. This is a contract of guarantee. Thus,
contract of indemnity as the promise to pay the liability of Mrinal is conditional on non-
by Mrinal is not conditional on default by Anil. payment by Anil.

Principal debt is necessary. (refer to the

Principal debt No requirement of the principal debt.
previous example)

Whether After the surety has made the payment, he

Once the indemnifier indemnifies the
subsequent steps into the shoes of the creditor and can
indemnity holder, he cannot recover that
recovery is recover the sums paid by him from the
amount from anybody else.
possible principal debtor.

Whether a
contract has to
In India, contracts of indemnity may be either In India, a contract of guarantee may be
be in writing or
oral or written. either oral or written.
can be oral as
well

BAILMENT AND PLEDGE

In law, the word bailment is used in its technical sense which means the change
in the possession of goods i.e. one person transfers the goods to another
person. On the other hand, Pledge is a kind of bailment in which one person
bails his goods to another person as security against loans. Both bailment and
pledge are examples of specific contracts. The contract of bailment can be
classified into three categories:

1. For the exclusive benefit of the bailor.

2. For the exclusive benefit of the bailee.
3. For the mutual benefit of both.

Concept of Bailment
Section 148 of the Indian Contract Act deals with the concept of Bailment, Bailor
and Bailee.

A bailment is a contract in which one person transfers goods to another person

with a contract that he will return the goods after completion of the purpose for
which contract takes place.

The person who delivers goods to another person is known as Balior and the
person to whom bailor delivered goods, is known as Bailee.

The contract of bailment is different from the contract of sale of a property. In

the contract of sale of a property, after the completion of sale the ownership of
the property gets transferred to the buyer. But, in bailment, only the possession
of the property is transferred to the bailee and not the ownership and the
possession of the property is transferred only for the period up to the
completion of the purpose. In order for bailment, the bailee must have the
intention to possess the property, i.e. actual possession of the property. The
bailor intends to transfer the property to the bailee for the specific period of
time and after the fulfilment of the purpose, the property should be returned to
the actual owner.

Kinds of Bailment

Gratuitous Bailment
Under this Bailment, anyone, either the bailor or the bailee gets the sole benefit.
For sole benefit of Bailor
In this concept, the bailor transfer the goods to the bailee for some specific
purpose which result in the benefit of bailor only i.e. bailee has no expectation in
return.

Illustration

A and B are the neighbours. One fine day A gave his jewellery to B to keep it
safe because A is going out of town for some days. B return A’s jewellery to A
when he came back. Here there is no benefit of B in keeping those goods i.e. B
does not get anything in return.

For sole benefit of Bailee

In this concept, the bailor transfers the goods to the bailee for some specific
purpose which result in the benefit of bailee only i.e. bailor does not get
anything in return. The bailor only gets his goods back after completion of the
purpose.

Illustration

A gave his bike to B for 3 hours, because B wants to go to his parents home.
Here A does not get anything in return by giving his bike to B, but he will get his
bike back to him after the fulfilment of the purpose.

Non Gratuitous Bailment

Under this concept, both the bailor and the bailee get some rewards in return
i.e. mutual benefit of both.

When bailor transfers his goods to the bailee for some specific purpose. After
the completion of that specific purpose, the bailee returns the goods back to the
bailor and in return gets the payment for his services.

Illustration
If A gives his car to B for repairing purpose. After the complete repair, B returns
A’s car to him and A will pay B for his service.

Essentials of Valid Bailment

1. Agreement
2. Delivery of Goods
3. Purpose
4. Return of Goods

1.Agreement
For a valid contract of bailment, both the bailor as well as bailee have to enter
into an agreement that the bailor will transfer goods to the bailee for a specific
purpose and after the completion of the purpose bailee will return the goods to
the bailor and bailor will pay to the bailee for his services.

Illustration

If A and B want to enter into the contract of bailment with the purpose that B
will repair A’s car, they have to enter into an agreement, which includes all the
instruction and orders of A regarding the repairs and usage of his property etc.

2.Delivery of Goods
For a valid bailment, it is necessary that the bailor will transfer i.e. deliver his
goods to the bailee so that bailee can act towards completion of the purpose.
The possession should be voluntary i.e. not by force, coercion, undue influence
etc.

3.Delivery of possession of goods can be actual or constructive

Actual delivery means when the bailor transfer the goods to the bailee that
transfer should be in physical nature.

Illustration

If A wants B to repair his car, so A has to transfer the physical possession of the
car to B, because without the physical possession B is unable to complete the
purpose for which bailment took place.
Constructive delivery is the opposite of actual delivery. In constructive
delivery, the document which shows the title of goods gets transferred, due to
which indirectly the possession gets transferred.

Illustration

If A has a railways receipt i.e. document of title to goods, transfers the receipt to
B, here B indirectly has the possession of goods, as he has the document of title
to goods.

Purpose
Bailment takes place when the bailor transfers constructive to the bailee, the
main reason why bailor transfer his goods is the performance of a specific
purpose. And when that purpose gets completed the bailor return the goods to
the bailee.

Illustration

If A and B want to enter into the contract of bailment, A should transfer his
goods and provide some purpose to B, so that B can act to complete that
purpose.

4.Return of Goods
The contract of bailment comes to an end when the bailee after fulfilment of the
purpose return the goods to the bailor or disposed of as per the direction of the
bailor.

Illustration

If Ram transfers his gold to Shaam so that Shaam can make a ring from that
gold. Shaam has to return the gold ring to Ram after the purpose for which they
enter into an agreement gets accomplished.

Duties and Rights of Bailor

Duties of Bailor
1.Duty to disclose any defect
Section 150 of the Indian Contract Act states that, when the bailor transfers the
possession of his goods to the bailee, he has to disclose the defect in goods
while transferring them to the bailee. There are two conditions regarding the
bailor’s duty to disclose the defect:

In the case of Gratuitous Bailment

In the case of gratuitous bailment, it is the duty of the bailor to disclose the
defect which he knows about the goods to bailee while delivering the goods. If
he fails to disclose the defect to the bailee and bailee suffered an injury due to
that failure makes bailor liable. But if bailor was also unaware of the defect, in
that situation he will not be held liable.

Illustration

 If A, the owner of the scooter allows B to use his scooter. A knows that
brakes of the scooter are not working, he does not disclose the
information to B. B met with an accident, A is liable to compensate B
for the injury he suffered.
 If A was also unaware of the defect in the scooter that he gave to B, in
this case, A is not liable for the injury B suffered.
In case of Non-Gratuitous Bailment
This concept deals with the goods given on hire. Under this concept when the
bailor gives his goods on hire to the bailee and if he fails to disclose the defect
in the goods to the bailee. The bailor will be held liable, even if the bailor is also
unaware of the defect. It is the duty of the bailor to keep his goods fir and ready
to use.

Illustration
If A hires a car from B, the gearbox of the car is not in good condition and
suddenly the gear gets stuck. Due to that, A met with an accident. Here, even
though B also does not know about it, he is liable.

In Hyman and wife v. Nye and sons

In this case, the plaintiff is the bailee and the defendant is the bailor. Plaintiff
took the carriage cart on hire from the bailor. While the journey the carriage met
with an accident because the carriage is not ready or fit for that journey. Here
the defendant is held liable because it is his duty to keep his good fit and should
disclose the defect in the goods to the bailee i.e. plaintiff.

2.Duty to bear expenses

In the case of Gratuitous Bailment
It is the duty of the bailor to repay the amount which bailee incurred and paid in
carrying and keeping the goods safe.

Illustration
If A gives his horse to B for two days. A should pay to B all the expenses, like the
expenses incurred in feeding horse or any other expenses.
In case of non-gratuitous bailment
In the case of non-gratuitous bailment, the ordinary expenses incurred on goods
should be paid by the bailee only. But, the extraordinary expenses have to be
paid by bailor

Illustration
If A hires a car from B. the expenses incurred in refuelling the tank of the car
should be paid by A only. But, If A paid any expenses like the fine if car’s papers
are not there, or any expenses paid like for repairs, B has to repay that amount
to A.

3.Duty to indemnify bailee

If the bailee has suffered any loss because of the goods bailed by the bailor. It is
the duty of the bailor to indemnify bailee against that loss.

Illustration
If A, a friend of B asked B to give his cycle. Instead of giving his cycle, B gave
C’s cycle to A. while riding, C caught A and handovers A to police. A has to pay
fine. Here B has to indemnify i.e. to pay A against the loss incurred.

Rights of Bailor

1.Right to claim Damages

When the bailor transfers the possession of his goods to the bailee and if bailee
fails to protect the goods of the bailor, the bailor has the right to claim damages
against bailee.

Illustration
If A gave his book to B for binding. If due to the fault of B, the book got damages
i.e. some pages were missing. Here B is liable and A has a right to claim
damages.

In Sri Narasimhaswami, Namagiri Amman v. Muthukrishna Iyengar

In this case, the plaintiff has delivered valuable gold for decorating goddess to
the defendant. Due to the negligence of the defendant, the ornaments were
lost. Here the plaintiff demanded the compensation from the defendant. The
court allowed the petition and as per section 151 of ICA, held the defendant
liable.
2.Right to terminate the bailment

According to Section 153 of the Indian Contract Act, when the bailor transfers
his goods to the bailee for some specific purpose and if bailee does any act
which is against the terms and conditions on which bailor transfer his goods, the
bailor has a right to terminate the contract of bailment.

Illustration
If A gave his car to B for personal use. B started using it as a taxi. Here, A has a
right to terminate the bailment.

3.Right to get back the possession of the Goods

The bailor transfers his goods to the bailee for some specific purpose, when
bailee complete that purpose, the bailor has a right to get the possession of
goods back from the bailee.

Illustration
If A went to a hotel and gave his key to the guard for valet parking. Here A has a
right to demand his car back when he wants to leave.

Duties and Rights of Bailee

Duties of Bailee
1.Duty to take reasonable care
According to Section 151 of the Indian Contract Act, when the bailor transfers
his goods to the bailee for some specific purpose. It is the duty of the bailee to
keep those goods safe and protected. He has to ensure to take standard care as
a prudent man. If the bailee fails to keep the goods safe and protected he is
liable to pay compensation to the bailor.

Illustration
If A bailed his gold to B, B has a duty to take proper care and protect the gold of
A, like his own gold. If B fails to protect the gold or any damage occurred, B has
to pay/ compensate A.

Pitt son and Badgery ltd. v Proulefco

A broker after the sale of wools retained it in his store with the consent of the
buyer. The store was wooden and surrounded by the fence having large gaps
between them. An intruder enters the shop through the gaps i.e. from between
the fence, put fire in the store, all the wools gets destroyed. Here, the broker as
a bailee having the possession of goods of the bailor is liable to pay
compensation to the bailor because he fails to keep the goods safe.

2.Duty to not to make unauthorized use of goods

As per according to section 154 of the Indian Contract Act, 1872, when the
bailor transfer the possession of the goods to the bailee for some specific
purpose, it is the duty of the bailee to not to make unauthorized use of goods of
bailor without his consent. If the bailee makes unauthorized use of the goods, he
will be held liable to pay compensation to the bailor and as per section 153 of
the contract act, the bailor can terminate the contract of bailment.

Illustration

If A gave his scooter to B for the purpose of repairing. B use that scooter for
personal use. Here B is liable for unauthorized use of the good. A is entitled to
get compensation and has a right to terminate the bailment contract.

3.Duty to not mix the goods

It is the duty of a bailee to not mix the bailor’s goods with his goods.

As per Section 155 of the Indian Contract Act, 1872, when the bailee mixes the
goods of the bailor with his goods with the consent of the bailor, then the
interest in mixed goods shall be shared in proportion.

Illustration
If A bails his goods to B. B with A’s consent mixed A’s goods with his goods.
Here B will not be liable, as he has A’s consent.

Section 156 and 157 of the Indian Contract Act, 1872, deal with the condition
when bailee mixes the goods without bailor’s consent.

There are two situations:

When goods can be separated (Section 156)

If goods mixed by the bailee can be separated, then the bailee has to bear the
cost of separation.
Illustration
If A bails 100 packets of Lays chips to B. B without consent of A, mixed it with
his 50 Diamond chips packets. Here B will be held liable for the cost incurred in
separating the goods.

4.When goods cannot be separated (Section 157)

If goods mixed by bailee cannot be separated, then the bailee has to
compensate to the bailor.

Illustration
If A bails 2lts. of petrol to D. D without consent of A mixed petrol with oil. Here, it
is impossible to separate petrol from oil. B has to compensate A.

5.Duty to Return the goods

According to Section 160 of the Indian Contract Act, when the bailor transfers
his goods to the bailee for some specific purpose, after completion of that
purpose, it is the duty of the bailee to return goods to the bailor.

Illustration
If A gave his book to B for Binding. It is the duty of B as a bailee to return the
book after binding. If B fails to fulfil his duty, he will be held liable.

6.Duty to deliver the bailor increase or profit if any on the goods

bailed
According to Section 163 of the Indian Contract Act, when the bailor transfer the
goods to the bailee for some specific purpose and during the bailee possession,
any increment happens to goods, it is the duty of the bailee to return that
increment to the bailor.

Illustration
A leaves a cow in the custody of B and cow gives birth to a calf. Then B is duty
bound to hand over the bailed goods along with accretion to the bailor.

Rights of bailee

1.Right to claim damages

When the bailor transfers the possession of his goods to the bailee, he has to
disclose the defect in goods while transferring them to the bailee. If the bailor
fails to disclose the defect to the bailee and if bailee suffered an injury then the
bailee has the right to claim damages from the bailor.
Illustration
If A bails his car to B without disclosing the information that the brakes of the
car are not working well. B met with an accident. Here B has a right to claim
damages from A.

J.N. Reed v Dean G. Parrack (1949) 1 KB 188

In this case, the plaintiff enjoying his holidays hire a motor launcher to enjoy the
riverside from the defendant. The motor launcher was not fit to use and caught
fire, the plaintiff suffered an injury. Here the defendant was held liable.

2.Right to claim Reimbursement

According to Section 158 of the Indian Contract Act, if the bailee suffered any
expenses to keep the goods of the bailor safe and protected, the bailee has a
right to demand reimbursement from the bailor.

Illustration
If A bails his horse to B for some time. B suffers some expenses like food, shelter
etc to keep the horse safe. Here B has a right to get reimbursed for all the
expenses from A, which he suffered to keep the horse safe.

3.Right to particular lien

According to Section 170 of Indian Contract Act, when bailor fails to pay lawful
payment to the bailee for his services, the bailee has a right to lien/retain the
goods until the time he receives his payment.

Illustration
A bails a piece of cloth to B, a tailor, to make a coat for him. B as per the
conditions makes a coat, but A fails to pay B for his service, here B has a right to
lien/retain A’s coat.

4.Right of bailor and bailee against the wrongdoer

According to Section 180 of Indian Contract Act, when the goods of the bailor
are in the possession of the bailee and any third person wrongfully deprive the
bailee of using the goods, then the bailee has a right it uses remedies as the
bailor might have used.

Illustration
If A bails his T.V. to B for repairs. C forcefully takes the possession of T.V. from
B. here B is entitled to the remedies as similar to that of A.

Concept of Finder of Goods

When a person found some goods which do not belong to him, that person is
known as the finder of goods.it is the duty of the finder of goods to not to make
unauthorised use of the goods and to find the real owner and surrender him the
goods. He is lawfully entitled to get reimbursement of the expenses which he
incurred by him in the process of finding the owner.

Rights of Finder of Goods

1.Right to lien
According to Section 168 of the Indian Contract Act, 1872, the finder of goods
has a right to get reimbursement of the amount which he incurred during the
process of finding the owner of the goods. But if the owner denied to reimburse
him, he cannot sue the owner but he can retain goods till he gets paid for the
expenses incurred by him.

Illustration
If A finds a wallet of B, he incurred Rs 70 as an expense to reach B’s address to
return his wallet. A has the right to get paid his Rs 70. If B fails to pay him, A can
retain his wallet.

2.Right to Sell
A finder of goods has a right to sell the goods found by him under the following
circumstances

3.The goods are of perishing nature

Illustration
If A finds some tomatoes which belong to B. A tried hard to find B but was
unable to find him. A can legally sell those tomatoes, as tomatoes are of
perishing nature and the price he gets by the sale should be returned to B.
4.When the owner does not pay lawful charges incurred by the finder
Illustration
If A finds B’s Watch on the road. A, to find B’s address, incurred 80 Rs. if B
denied paying, A has a right to sell the watch of B and retain his payment and if
he gets the extra amount, it should be returned to B.

Duties of Finder of Goods

 It is the duty of the finder of the goods to keep goods safe.
Illustration
If A finds B’s Jacket. It is his duty to keep that jacket safe.

 It is the duty of the finder of the goods to not to use the goods for his
personal use
Illustration
If A finds B’s cycle. He has to keep that cycle safe and should not use it for his
personal use.

 It is the duty of finder of goods to find the real owner

Illustration

 If A finds a gold ring in a party, it is his duty to find the real owner of
the ring.

Concept of Pledge
In the pledge, the pawnor transfer/bailed his goods to the Pawnee as security
against the amount he takes from the Pawnee. The pawnor has a duty to pay
the amount back to the Pawnee and the Pawnee has a duty to return the goods
after pawnor pays the amount. The Pawnee should not make unauthorized use
of the goods bailed to him if he does he will be liable to pay compensation to the
pawnor. The Pawnee has a right to sell the goods after giving prior notice to the
pawnor if he fails to pay the amount back.

Illustration
A borrowed Rs.100 from B and gave his cycle as a security for the repayment of
the amount, in the condition that if A pays back to B he will get his cycle back. it
is called the contract of Pledge.

Rights and Duties of Pawnor

Rights of Pawnor

1.Right to redeem goods

It is the right of the pawnor to redeem his goods i.e. to get back from the
Pawnee after he paid the amount to the pawnee.

Illustration
If A bailed his watch as security and took Rs.800 as a loan from N. A return the
money to N. Here, A has a right to get his watch back.

2.Right to claim damages or compensation

It is the right of the pawnor to get the compensation if the Pawnee makes any
nauthorized use of the goods or fails to keep the goods safe.

Illustration
If A bailed his Car as security and took Rs.1,30,000 as a loan from C on the
terms that C will not use that car in any manner. C uses it as a taxi. Here A can
claim damages as C made unauthorized use of the goods.

Duties of Pawnor
1.Duty to pay the loan
It is the duty of the pawnor to pay the amount back to the pawnee so that he
will get his goods back.

Illustration
If A bails his gold chain as security to B for a loan of Rs.3000 Here, A has a duty
to pay back the amount of loan to B.

2.Duty to pay extraordinary expenses incurred by Pawnee.

It is the duty of the pawnor to pay the extraordinary expenses to the pawnee,
which the Pawnee incurred in keeping the goods safe.

Illustration
If A bails his cow to B for Rs.8000. B paid all the expenses like food for cow,
shelter etc. Here A has a duty to pay the expenses back to B.

3.Duty to pay claims and damages or compensation to Pawnee

The pawnor has a duty to pay the compensation or damages to the Pawnee if
the Pawnee suffered any type of legal damages due to pawnor’s goods.

Illustration
If A bails his bike as security to B for the loan of Rs.50000 with the term that B
can use his bike. A, however, didn’t disclose the fact to B that the breaks of the
bike are not working well. B met with an accident and suffered damage. Here it
is the duty of A to compensate B for the damage he has suffered due to A’s
goods.

Rights and Duties of Pawnee

Rights of Pawnee
1.Right to retain Goods
As per Section 173 of the Indian Contract Act, if the pawnor fails to pay the
amount to the Pawnee, so the Pawnee has a right to retain the goods of the
pawnor.
Illustration

If A bails his watch as security to B for the loan amount of Rs.500. If A fails to
pay the amount or pays the amount after the time as per the terms and
conditions, B has a right to retain the watch.

2.Right to get compensation

In the case, where pawnee suffered because of the goods of the pawnor, the
Pawnee has a right to get the compensation against that damage from the
pawnor.

Illustration

If A bails his bike as security to B for the loan of Rs.50000 with the terms that B
can use his bike. A, however, didn’t disclose the fact to B that the brakes of the
bike were not working well. B met with an accident and suffered damage. Here,
B has a right to claim compensation from A.

3.Right to Sell
As per section 176 of the Indian Contract Act, if the pawnor fails to pay the
amount back to the Pawnee, the Pawnee has a right to sell the goods and
reimburse his amount.

Illustration
If A bails his gold ring to B as a security for the loan amount of Rs.7000 if A fails
to pay the amount back to B. B has a right to sale the ring and get his amount
back.

To get extraordinary expenses incurred by him

As per section 175 of the Indian Contract Act, if the pawnee has suffered any
extraordinary expenses with respect to pawnor’s goods then he has a right to
get paid back by the pawnor.

Illustration
If A bails his cow to B as security for Rs.18000 as a loan. B incurred expenses
like food expenses, shelter expense etc. B has a right to get all the amount back
from A.

Duties of Pawnee
1.Duty to take reasonable care
It is the duty of Pawnee to take reasonable care of the goods of pawnor, like his
own goods.
Illustration
If A bails his gold to B for the amount of Rs.80, 000 as loan security. B has a
duty to keep the gold of A safe and should take reasonable care.

State Bank of Saurastra v. Chitranjan Rangnath Raja and Anr.

In this case, the bank was the Pawnee and the defendant was the pawnor, the
pawnor bails his 5000 tins of groundnut oil as security against the amount of Rs.
75000. The defendant died. The bailed goods of the defendant were lost from
the possession of the bank. Later, after the given time limit bank files a case
against the defendant as ask for the repayment of the amount. The bank states
that, as the bank is the Pawnee, they have the right to get their money back,
but because they lost the goods of the plaintiff whose market value is Rs.
75000, that makes them not able to get their payment back, thus the petition
got dismissed

2.Duty to give back the goods after repayment of the loan

When the pawnor pays back the amount to the Pawnee, the Pawnee has a duty
to give back the goods back to the pawnor.

Illustration
If A bails his watch to B as security for Rs.2000 as a loan. It is the duty of B to
give back the watch to A when A repay Rs.200

3.Duty not to make unauthorized use of goods

It is the duty of the Pawnee to not to make any unauthorized use of pawnor’s
goods. If the Pawnee makes unauthorized use of goods he will be liable to pay
compensation to the pawnor.

Illustration
If A bails his car to B as a security against loan amount of Rs.90000. If B uses
the car as a taxi without A’s Consent. Here, B will be liable for unauthorized use
of the car.

4.Duty to give back the owner any increment in the goods

It is the duty of the Pawnee to give to the pawnor any increment in the goods
during his possession.

Illustration
If A bails his cow to B as a security against loan amount of Rs.80000. During B’s
possession cow gives birth to a calf. If A repays the amount, It is the duty of B to
give that calf and the cow back to A.

5.Duty not to mix the goods

It is the duty of the Pawnee to not to mix the pawnor’s goods with his own
goods.

Illustration
If A bails 100lt. of petrol to B against the loan of Rs.13000. It is the duty of the B
to not mix the goods of A with his goods.

Pledge by Non Owner

1.Pledge by Mercantile agent

Section 178 of the Indian Contract Act states that the pledge between the
mercantile agent and Pawnee can be valid if the agent has the possession of the
goods with the consent of the owner and the Pawnee acted good faith and does
not know about the original title of the goods.

Illustration
If A is a mercantile agent of B bails the bike of B which is in his possession to D.
D in good faith and does not know about the title of the bike accept as security.
Here the pledge is considered as valid. But if B knows about title, then the
pledge will not be held valid.

2.Pledge by the person in possession under voidable contract

As per section 178 ‘A’ of the Indian Contract Act, the pledge between the
pawnor having the possession of the goods under voidable contract and pawnee
can be valid, provided that during the pledge the contract has not been revoked
and the pawnee acted in good faith and does not have any idea about the title
of the goods.

Illustration
If A has possession of the watch under voidable contract, bails the watch to B. B
in good faith and does not know about the title of the watch, accepts it. That
pledge is considered as valid. But if B knows about the title, then that pledge is
not considered as valid.

3.Pledge where pledger has only a limited interest

As per Section 179 of the Indian Contract Act, the pledge between the pawnor
having limited interest and Pawnee can be valid, if during the pledge the
pawnee acted in good faith and does not know about the title of the goods.

Illustration
If A finds a defective watch and spent Rs.50 in repairing that watch. Here A can
have a limited interest on watch i.e. he can bail the watch in pledge for Rs.50 or
less.

4.Pledge by a co-owner in possession

The pledge between a co-owner and Pawnee can be valid if he has the consent
of other co-owner. But when the co-owner without the consent of other co-owner
enters the contract of pledge, that contract can be valid if the Pawnee acted in
good faith and does not know about the title of the goods.

Illustration

Situation 1: If A and B jointly owned a car. The car is in the possession of A.

One day A wants to bail the car for the purpose of the pledge, he has to take the
consent of B.

Situation 2: if A enters into the pledge with C and bails the car to C, without
the consent of B. That pledge is considered as valid only if C acts in good faith
and does not know anything about the title of the car.

4.Pledge by seller or buyer in possession

A seller, after selling his goods has the possession of the goods with the consent
of the buyer or the buyer before completion of the sale has the possession of
goods with the consent of the seller can enter into the valid pledge. But if the
party enter into a contract without the consent of the other party, that contract
can be valid, if the Pawnee acted in good faith and does not know about the title
of the goods.

Illustration

If A buys a cycle from B. A after purchase left the cycle in the possession of B. B
bails the cycle in a pledge with C. C act in good faith and does not know about
the title of the cycle. This is a valid pledge.

Relation Between Pledge and Bailment

Similarities
1. In Both, Pledge and Bailment only movable property delivered to the
Pawnee/bailee.
 2. In both cases, both the party enters into an agreement.
3. In both cases, bailee/pawnee has to return the goods to bailor/pawnor.
4. In both cases, bailor/pawnor has to pay any extraordinary expenses if
incurred by bailee/pawnee.
5. In both cases, the bailee/pawnee has to compensate bailor/pawnor for
any damage to goods or unauthorized use of goods.

Difference
1. The Pawnee cannot use the goods pawned, but in bailment, bailee can
use the goods bailed if the terms of bailment so provide.
2. In Bailment, goods are bailed for some specific purpose, but in pledge,
goods are bailed as a security for the loan.

Conclusion
When a person transfers the possession of his goods to another person for some
specific purpose, then it is called the contract of bailment. If there is a benefit of
one party through the bailment and other party does not get anything in return,
that bailment is called gratuitous bailment. And when the contract of bailment is
done which result in the mutual benefit of both i.e. bailor and bailee, is called
non-gratuitous bailment. The bailor has the duty to disclose the defect of the
goods and to repay the amount incurred by a bailee to keep goods safe and any
damages against the damage caused to bailee by the goods of the bailor.
similarly, the bailee has the duty to keep the goods of the bailor safe and to
return them to bailor after completion of the purpose for which the bailment
takes place.

In the pledge, the pawnor transfer/bailed his goods to the Pawnee as security
against the amount he takes from the Pawnee. The pawnor has a duty to pay
the amount back to the Pawnee and the Pawnee has a duty to return the goods
after pawnor pays the amount. The Pawnee should not makes unauthorized use
of the goods bailed to him if he does, he will be liable to pay compensation to
the pawnor.