LAW OF CONTRACT-II Unit I:

PAPER – I:

LAW OF CONTRACT-II

Unit I:

📘 Indemnity and Guarantee (Sections 124-147 of Indian Contract Act, 1872)

Q.1. Define Contract of Indemnity. Discuss the rights of indemnity holder and the liability of the indemnifier under the Indian Contract Act, 1872.

📘 Introduction:

A contract of indemnity is a special kind of contract that is entered into to protect one party from loss or damage that may be caused by the conduct of the promisor or any other person. It is governed by Section 124 to 125 of the Indian Contract Act, 1872.

📖 Definition (Section 124):

“A contract of indemnity is a contract by which 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.”

Example:
A contracts to indemnify B against the consequences of any legal proceedings which C may initiate against B for the recovery of a loan. This is a contract of indemnity.

🧩 Essentials of a Valid Contract of Indemnity:

  1. Two parties – Indemnifier and Indemnity-holder (indemnified).
  2. Loss must be caused – by the conduct of indemnifier or any other person.
  3. Promise to compensate – must be clear.
  4. Must fulfill general essentials of a valid contract (consent, capacity, legality, etc.).

👤 Parties to a Contract of Indemnity:

  1. Indemnifier – The person who promises to compensate for the loss.
  2. Indemnity-holder / Indemnified – The person who is protected against the loss.

⚖️ Rights of Indemnity-Holder (Section 125):

When a suit is brought against the indemnity-holder and he acts within the scope of his authority, he is entitled to recover from the indemnifier:

  1. Damages:
    All damages which he may be compelled to pay in any suit relating to the matter of indemnity.
  2. Costs:
    All costs incurred in such suit, provided he acted prudently and within authority.
  3. Sums paid under compromise:
    All sums paid under any compromise of such suit, if the compromise was not contrary to the indemnifier’s orders and was prudent.

Example:
If B sues A and A is protected by C under indemnity, A can recover court costs and damages paid from C.

⚖️ Liability of Indemnifier:

Though Section 124 does not mention the exact time of indemnifier’s liability, it is settled through case laws that:

  • The indemnifier’s liability arises when the indemnity-holder suffers loss or becomes liable to pay, not necessarily after actual payment.

Case Law: 🔹 Osman Jamal & Sons Ltd. v. Gopal Purushottam (1928)
Held: Indemnity-holder can compel indemnifier to make good the loss even before actual payment is made, once liability becomes certain.

🧾 Nature of Liability:

  • The indemnifier’s liability is primary and absolute.
  • It is not dependent on any third-party action.
  • The contract may be express (written/oral) or implied from the conduct.

✅ Conclusion:

A contract of indemnity serves the purpose of risk-shifting from one party to another. It ensures that the indemnity-holder does not suffer due to actions that are covered under the contract. Section 125 provides statutory protection to the indemnity-holder, and Indian courts have expanded its interpretation to uphold the principles of justice and equity even beyond the strict wording of the Act.

Q.2. What is a Contract of Guarantee? Explain its essential elements and discuss how it differs from a contract of indemnity.

📘 Introduction:

A Contract of Guarantee is a contract in which one person gives assurance to another that they will fulfill the promise or discharge the liability of a third person if the third person fails to do so. It is governed by Sections 126 to 147 of the Indian Contract Act, 1872.

📖 Definition (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.”

In other words, a guarantee is a security provided to the creditor that the debt or obligation will be discharged either by the principal debtor or, failing that, by the surety.

👥 Parties to a Contract of Guarantee:

A contract of guarantee always involves three parties:

  1. Principal Debtor – The person who takes the loan or incurs the liability.
  2. Creditor – The person to whom the guarantee is given.
  3. Surety – The person who gives the guarantee (guarantor).

Example: A lends ₹10,000 to B. C promises A that if B fails to repay, C will pay. Here, A is creditor, B is principal debtor, and C is surety.

🧩 Essential Elements of a Valid Contract of Guarantee:

  1. Tripartite Agreement:
    • There must be three parties and consent of all three is necessary.
  2. Consideration:
    • The consideration received by the principal debtor is sufficient consideration for the surety.
  3. Liability Must Be Enforceable:
    • There must be a legally enforceable obligation on the part of the principal debtor.
  4. Existence of Default:
    • Surety’s liability arises only when the principal debtor defaults.
  5. Writing Not Mandatory:
    • A contract of guarantee may be oral or written, unless otherwise required by law.
  6. Free Consent:
    • Consent must not be obtained by misrepresentation or concealment of material facts.
  7. No Misrepresentation or Concealment:
    • The guarantee becomes invalid if it was obtained by concealment or misrepresentation.

⚖️ Difference Between Contract of Guarantee and Contract of Indemnity:

Basis Contract of Guarantee Contract of Indemnity
Definition A promise to discharge the liability of a third person in case of default. A promise to compensate for loss suffered by the other party.
Number of Parties Three – Principal Debtor, Creditor, and Surety. Two – Indemnifier and Indemnity-holder.
Liability Liability of surety is secondary. Liability of indemnifier is primary.
Default Arises only on default of principal debtor. Arises when indemnity-holder suffers loss.
Nature of Promise To discharge someone else’s liability. To save another from a loss.
Number of Contracts Three contracts involved. Only one contract.
Example A guarantees B’s loan to C. A promises to compensate B for loss caused by A’s act.

🧾 Legal Effects of Contract of Guarantee:

  • Surety’s liability is co-extensive with that of the principal debtor unless otherwise agreed (Section 128).
  • Surety can recover from principal debtor after payment.
  • Surety has several rights: Right of Subrogation, Right to Indemnity, and Right against Co-sureties.

✅ Conclusion:

A contract of guarantee is a tripartite agreement meant to give additional security to the creditor. It differs significantly from a contract of indemnity in terms of number of parties, nature of liability, and enforceability. The law ensures that a surety who pays the debt gets adequate protection and recovery rights against the principal debtor.

Q.3. Distinguish between a Contract of Indemnity and a Contract of Guarantee with suitable examples.

📘 Introduction:

The Indian Contract Act, 1872 classifies contracts into various types, among which Contract of Indemnity (Sections 124–125) and Contract of Guarantee (Sections 126–147) are two important kinds of contingent contracts. Though both serve the purpose of protection against loss or default, they are fundamentally different in nature, parties involved, and scope.

📖 Meaning and Definition:

🔹 Contract of Indemnity [Section 124]:

“A contract by which 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.”

✅ Example: A contracts to indemnify B against consequences of any act done by C. If B suffers loss due to C’s action, A will compensate.

🔹 Contract of Guarantee [Section 126]:

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

✅ Example: A lends money to B, and C promises to repay if B defaults. This is a contract of guarantee.

📊 Distinction Between Contract of Indemnity and Contract of Guarantee:

Basis of Difference Contract of Indemnity Contract of Guarantee
Definition Promise to compensate for loss. Promise to discharge the liability of a third person.
Number of Parties Only two parties – Indemnifier and Indemnity-holder. Involves three parties – Principal Debtor, Creditor, and Surety.
Number of Contracts Only one contract between the indemnifier and the indemnified. Three contracts: between creditor & principal debtor, creditor & surety, and surety & debtor (implied).
Nature of Liability Liability of indemnifier is primary and absolute. Liability of surety is secondary and conditional upon default.
Existence of Debt or Default No pre-existing debt or default is necessary. Exists only when the principal debtor defaults.
Right after Payment Indemnifier cannot sue third party unless subrogated. Surety gets right to recover from principal debtor.
Consideration Direct consideration between parties. Consideration given to principal debtor is sufficient for surety.
Examples Insurance contracts, risk protection agreements. Bank guarantees, loan sureties, etc.

🧾 Illustrative Examples:

✅ Contract of Indemnity:

Mr. A, an employer, enters into a contract with Mr. B, his employee, stating that if any third party files a suit against B for actions done in the course of employment, A will indemnify B for any losses. Here, A is indemnifier, and B is indemnified.

✅ Contract of Guarantee:

Mr. X takes a loan of ₹50,000 from Bank Y. Mr. Z signs as a surety, promising to pay if Mr. X fails to repay the loan. Here, X is the principal debtor, Y is the creditor, and Z is the surety.

⚖️ Legal Case Reference:

Punjab National Bank v. Bikram Cotton Mills (1970)
The Supreme Court clarified the distinction between indemnity and guarantee and held that in guarantee, the surety undertakes responsibility only if the principal debtor fails, whereas indemnity covers direct loss.

✅ Conclusion:

While both indemnity and guarantee provide a form of financial security, they operate under different legal frameworks. A contract of indemnity protects a person from loss, whereas a contract of guarantee ensures the performance of a third party’s obligation. Understanding this distinction is essential in determining rights, duties, and remedies of the parties involved under the Indian Contract Act, 1872.

Q.4. Discuss the kinds of guarantees. Explain the continuing guarantee and the modes of its revocation.

📘 Introduction:

A Contract of Guarantee is defined under Section 126 of the Indian Contract Act, 1872 as a contract to discharge the liability of a third person in case of his default. The person who gives the guarantee is called a surety, the person in respect of whose default the guarantee is given is the principal debtor, and the person to whom the guarantee is given is the creditor.

Guarantees can be classified into different types based on their nature, purpose, and extent.

📖 Kinds of Guarantees:

🔹 1. Specific Guarantee:

  • Also known as Simple Guarantee.
  • It is given for a single debt or transaction.
  • The liability of the surety ends when the specific transaction is completed.

✅ Example: A guarantees B’s repayment of a single loan of ₹10,000 taken from C. Once the loan is repaid, the guarantee is discharged.

🔹 2. Continuing Guarantee (Section 129):

  • It is a guarantee which extends to a series of transactions.
  • The surety’s liability continues until it is revoked.
  • It remains in force for future transactions between the principal debtor and creditor.

✅ Example: A guarantees payment to B for goods supplied to C from time to time. This is a continuing guarantee.

🔹 3. Retrospective Guarantee:

  • Guarantee given for an existing debt or obligation.

✅ Example: A guarantees repayment of a loan already taken by B from C.

🔹 4. Prospective Guarantee:

  • Guarantee given for a future debt or obligation.

✅ Example: A guarantees payment of future credit purchases to be made by B from C.

🔹 5. Limited Guarantee:

  • The surety limits his liability to a specific amount or period.

✅ Example: A guarantees only ₹50,000 of B’s debt to C, though B takes ₹1 lakh.

🔹 6. Unlimited Guarantee:

  • Surety is liable for the full amount of debt or obligation without any cap.

📘 Continuing Guarantee:

A continuing guarantee, as defined under Section 129, is a guarantee which applies to a series of transactions. It is not confined to a single transaction but covers future dealings.

✅ Essentials:

  • Extends to multiple transactions.
  • May be for a fixed time or until revoked.
  • Surety’s liability is co-extensive with each transaction covered under the guarantee.

✅ Example: A guarantees B that he will pay for all goods B supplies to C over the next six months up to ₹1 lakh. This is a continuing guarantee.

⚖️ Revocation of Continuing Guarantee (Section 130 & 131):

A continuing guarantee can be revoked in the following ways:

🔹 1. By Notice (Section 130):

  • The surety may revoke the continuing guarantee by giving notice to the creditor.
  • The revocation is applicable only to future transactions.
  • Liability for past transactions remains.

✅ Example: A gives a continuing guarantee to B. After two months, A gives notice to revoke the guarantee. A remains liable for goods supplied before notice.

🔹 2. By Death of Surety (Section 131):

  • Unless otherwise stated in the contract, the death of the surety automatically revokes the continuing guarantee.
  • It applies only to future transactions after the death.
  • Legal representatives are not liable for future dealings.

🔹 3. By Agreement:

  • The contract may contain a clause that allows revocation in a particular manner or on specific events.

🔹 4. By Novation or Change in Contract:

  • If the terms of the original contract are altered without the surety’s consent, the continuing guarantee stands revoked.

🔹 5. By Discharge of Principal Debtor:

  • If the principal debtor is released or discharged from the liability, the surety is also discharged.

⚖️ Case Law:

🔹 Offord v. Davies (1862):
The court held that a continuing guarantee can be revoked at any time before it is acted upon, unless it is supported by consideration to keep it irrevocable.

✅ Conclusion:

A contract of guarantee can take various forms based on the extent of liability and continuity of obligation. Among these, the continuing guarantee is most commonly used in commercial and financial dealings involving regular transactions. The Indian Contract Act gives both the surety and creditor certain rights and responsibilities regarding its revocation, which must be understood clearly to avoid future disputes.

Q.5. Explain the rights and liabilities of a surety in a contract of guarantee. Support your answer with relevant case law.

📘 Introduction:

A Contract of Guarantee is a tripartite agreement among the principal debtor, creditor, and surety, where the surety promises to discharge the liability of the principal debtor in case of default.
The Indian Contract Act, 1872, under Sections 126 to 147, governs such contracts and lays down the rights and liabilities of a surety.

🧾 I. Liabilities of a Surety:

As per Section 128, the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by the contract.

🔹 1. Co-extensive Liability:

  • Surety is liable to the same extent as the principal debtor.
  • The creditor can directly sue the surety without first suing the principal debtor.

✅ Case Law: Bank of Bihar v. Damodar Prasad (1969)
The Supreme Court held that the creditor is not bound to exhaust his remedies against the principal debtor before proceeding against the surety.

🔹 2. Conditional Liability:

  • Surety’s liability arises only on the default of the principal debtor.

🔹 3. Limitation by Contract:

  • The surety may limit his liability to a specific amount, time, or transaction.

🔹 4. No Liability if Guarantee Obtained by Misrepresentation:

As per Section 142, a guarantee obtained by misrepresentation is invalid.

🔹 5. No Liability if Material Facts Concealed:

Under Section 143, guarantee obtained by concealment of material facts is void.

📘 II. Rights of a Surety:

Once the surety pays the amount due or fulfills the obligation, certain rights accrue to him under the law.

🟢 A. Rights Against Principal Debtor:

🔹 1. Right of Subrogation (Section 140):

After payment, the surety is entitled to all the rights which the creditor had against the principal debtor.

✅ Example: If creditor had right to mortgage security from debtor, surety can use that after repayment.

🔹 2. Right to Indemnity (Section 145):

The surety has a right to be indemnified by the principal debtor for all lawful payments made.

✅ Case Law:
Gurunath v. Chintaman (1936) – Surety was entitled to recover the amount paid to creditor from principal debtor.

🟢 B. Rights Against Creditor:

🔹 1. Right to Benefit of Securities (Section 141):

If the creditor holds any security from the principal debtor, the surety is entitled to the benefit of such security.

✅ Case Law: State Bank of India v. Indexport Registered (1992)
Held: If the creditor loses or parts with such security without surety’s consent, surety is discharged to that extent.

🔹 2. Right to be Discharged:

If creditor alters contract terms or releases principal debtor without surety’s consent, surety is discharged.

🟢 C. Rights Against Co-Sureties (Section 146-147):

If there are multiple sureties:

🔹 1. Right of Contribution (Section 146):

All co-sureties are liable to contribute equally, unless agreed otherwise.

🔹 2. Right Where Liability is Unequal (Section 147):

If sureties undertake liabilities in different amounts, they contribute in proportion.

✅ Example: If A and B are co-sureties for ₹1 lakh, A limits his liability to ₹40,000, and B to ₹60,000, then their contribution will be in the ratio 2:3.

🧾 Summary Chart:

Rights of Surety Liabilities of Surety
Against Principal Debtor: Subrogation, Indemnity Co-extensive with principal debtor
Against Creditor: Benefit of securities Arises on debtor’s default
Against Co-sureties: Contribution Bound unless guarantee obtained fraudulently

✅ Conclusion:

A surety plays a crucial role in a contract of guarantee and is legally protected under the Indian Contract Act. While his liability is secondary and conditional, his rights—particularly subrogation, indemnity, and benefit of securities—ensure he is not unfairly burdened. Courts have consistently upheld these rights to maintain commercial fairness and justice.

Q.6. Discuss the circumstances under which a surety is discharged from his liability.

📘 Introduction:

In a contract of guarantee, the surety undertakes to discharge the liability of the principal debtor in case of default. However, the liability of the surety is not absolute and can be discharged (i.e., brought to an end) under certain circumstances. The Indian Contract Act, 1872 under Sections 133 to 139 lays down various situations in which the surety is discharged from liability either fully or partially.

⚖️ Circumstances Under Which Surety is Discharged:

🟩 1. By Revocation of Guarantee (Section 130 & 131):

(a) By Notice:

  • A continuing guarantee may be revoked by the surety at any time for future transactions by giving a notice to the creditor.
  • Past transactions remain unaffected.

(b) By Death of Surety:

  • The death of the surety automatically revokes a continuing guarantee for future transactions, unless otherwise agreed.

🟩 2. By Variance in Terms of Contract (Section 133):

  • If the terms of the contract between the principal debtor and creditor are altered without the surety’s consent, the surety is discharged for all transactions subsequent to such change.

✅ Case Law: Bonar v. Macdonald (1850)
The surety was discharged as the terms of the loan were changed without his consent.

🟩 3. By Release or Discharge of Principal Debtor (Section 134):

  • If the creditor releases the principal debtor or discharges him from liability, the surety is also discharged.

✅ Example: If A guarantees B’s debt to C and C releases B, then A is also released.

🟩 4. By Compounding or Giving Time to Principal Debtor (Section 135):

  • If the creditor makes a compromise, grants extra time, or agrees not to sue the principal debtor without the surety’s consent, the surety is discharged.

✅ Example: A guarantees repayment of loan by B. C, the creditor, agrees to give more time to B without informing A. A is discharged.

🟩 5. By Creditor’s Act or Omission Impairing Surety’s Remedy (Section 139):

  • If the creditor does any act or omits to do something which impairs the surety’s right to recover from the principal debtor, the surety is discharged.

✅ Case Law: State Bank of India v. Indexport Registered (1992)
Held: If the creditor loses or parts with the security given by the debtor without the surety’s consent, the surety is discharged to that extent.

🟩 6. By Loss of Security (Section 141):

  • If the creditor loses or deals with the security provided by the principal debtor without informing the surety, the surety is discharged to the extent of the value of such security.

🟩 7. By Invalid Guarantee:

  • A contract of guarantee obtained by fraud, misrepresentation, or concealment of material facts is void (Sections 142–143), and the surety is discharged.

✅ Example: If the creditor hides the financial condition of the debtor from the surety, and the surety agrees to guarantee based on incomplete information, he can later be discharged.

🟩 8. By Performance or Payment of Debt:

  • When the principal debtor repays the debt, or the surety pays the full amount, the surety is automatically discharged.

🟩 9. By Novation (Section 62):

  • If the original contract is substituted or replaced by a new contract between creditor and debtor without surety’s consent, the surety is discharged.

🧾 Summary Table:

Ground Provision / Section Effect
Notice by surety Section 130 Future transactions only
Death of surety Section 131 Revokes continuing guarantee
Change in contract Section 133 Discharge for future transactions
Discharge of debtor Section 134 Surety is discharged
Time/Compromise with debtor Section 135 Surety discharged if without consent
Impairing surety’s remedy Section 139 Surety discharged to that extent
Loss of security Section 141 Surety discharged proportionally
Fraud/Misrepresentation Sections 142–143 Contract void
Debt paid — Surety fully discharged

✅ Conclusion:

The liability of a surety, though serious in nature, is not unlimited or permanent. The Indian Contract Act ensures that the rights of the surety are protected, and that his liability ceases under fair and just circumstances. Courts have interpreted these provisions to safeguard sureties from unjust burden, especially where the creditor acts unilaterally or carelessly.

📘 Bailment and Pledge (Sections 148-181 of Indian Contract Act, 1872)

Q.7. Define Bailment. What are the essential features of a valid contract of bailment? Discuss the kinds of bailment.

📘 Introduction:

The concept of Bailment arises when goods are delivered from one person to another for a specific purpose, and the goods are to be returned once that purpose is accomplished. The contract of bailment is governed by Sections 148 to 171 of the Indian Contract Act, 1872.

📖 Definition of Bailment (Section 148):

“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 instructions of the person delivering them.”

👥 Parties to Bailment:

  1. Bailor: The person who delivers the goods.
  2. Bailee: The person to whom goods are delivered.

✅ Example: A delivers his watch to B, a watch repairer, for repair. A is the bailor, and B is the bailee.

🧩 Essential Features of a Valid Bailment:

  1. Delivery of Goods:
    • There must be actual or constructive delivery of goods from bailor to bailee.
  2. Purpose:
    • The goods must be delivered for a specific purpose, such as safekeeping, repair, or transport.
  3. Return of Goods:
    • The bailee must return the goods after the purpose is fulfilled or dispose of them as instructed.
  4. Movable Property Only:
    • Bailment applies only to movable goods, not immovable property or money.
  5. Existence of a Contract:
    • There must be a contract, express or implied, between bailor and bailee.
  6. No Transfer of Ownership:
    • Only possession, not ownership, of goods is transferred.
  7. Free Consent:
    • The contract must be made with the free consent of both parties.

📘 Kinds / Types of Bailment:

Bailments can be classified based on reward, purpose, or benefit.

🔹 A. Based on Benefit to the Parties:

1. Gratuitous Bailment:

  • Bailment without any reward or compensation.
  • Made for the benefit of either the bailor or bailee.

✅ Example: A lends his book to B to read without any charge.

2. Bailment for Reward (Bailment for Hire):

  • Bailment for mutual benefit, where the bailee is paid for safekeeping, repair, or other services.

✅ Example: A gives his car to B for repair and agrees to pay for the service.

🔹 B. Based on Purpose:

1. Pledged Bailment:

  • Where goods are delivered as security for repayment of a debt or performance of a promise.

✅ Example: A gives his gold chain to B as security for a loan of ₹10,000.

2. Bailment for Safe Custody:

  • Goods are delivered to the bailee for safekeeping.

3. Bailment for Transportation:

  • Bailment made for the transport of goods from one place to another.

📘 Examples Illustrating Types of Bailment:

Type Example
Gratuitous Bailment Lending a friend a bag for a trip, free of cost
Bailment for Reward Leaving clothes at a dry cleaner for paid service
Pledge Pledging gold to a bank for a loan
Bailment for Safe Custody Depositing documents in a locker for protection
Bailment for Transport Giving goods to a courier company for delivery

⚖️ Legal Case Reference:

Chandran v. State of Kerala (1983):
The court held that mere custody of goods does not amount to bailment unless delivery is made for a purpose and with an obligation to return.

✅ Conclusion:

A contract of bailment is essential in daily life and commercial dealings, especially where goods are entrusted temporarily for a specific purpose. It involves trust and responsibility, and the law provides a framework to ensure the interests of both the bailor and bailee are protected. The kinds of bailment further help in understanding the nature of relationship and rights involved in such transactions.

Q.8. What are the rights and duties of a Bailor and a Bailee under a contract of bailment?

📘 Introduction:

A contract of bailment is defined under Section 148 of the Indian Contract Act, 1872 as the delivery of goods by one person (bailor) to another (bailee) for a specific purpose, under a contract that the goods shall be returned or otherwise disposed of according to the directions of the bailor. Both the bailor and bailee have specific rights and duties under this contract.

👤 I. Rights and Duties of the Bailor:

🟢 A. Duties of the Bailor:

1. Duty to Disclose Known Faults (Section 150):

  • The bailor must disclose known faults or defects in the goods.
  • If the goods are dangerous or defective and the bailee is not informed, the bailor is liable for any loss.

✅ Example: If A bails a horse to B and knows the horse kicks but does not inform B, A is liable for B’s injury.

2. Duty to Bear Expenses in Gratuitous Bailment (Section 158):

  • In a gratuitous bailment (bailment without reward), the bailor must bear extraordinary expenses incurred by the bailee.

3. Duty to Receive Back Goods:

  • Once the purpose is achieved, the bailor must accept the goods back.

4. Duty to Indemnify the Bailee (Section 159 & 164):

  • If the bailor revokes a gratuitous bailment prematurely causing loss to the bailee, he must indemnify the bailee.
  • If bailee suffers loss due to defective title of the bailor, the bailor must compensate.

🔴 B. Rights of the Bailor:

1. Right to Demand Return of Goods (Section 160–161):

  • The bailor can demand the return of goods once the purpose is completed or on expiry of the time agreed.

2. Right to Terminate Bailment (Section 153):

  • The bailor may terminate the bailment if the bailee acts inconsistently with the terms.

3. Right to Compensation:

  • Bailor can claim compensation for unauthorized use, damage, or loss due to bailee’s negligence.

👤 II. Rights and Duties of the Bailee:

🟢 A. Duties of the Bailee:

1. Duty to Take Reasonable Care (Section 151–152):

  • The bailee must take as much care of the goods as a man of ordinary prudence would take of his own goods.

✅ Example: If B, a bailee, keeps A’s goods carelessly and they are stolen, B is liable.

2. Duty Not to Make Unauthorized Use (Section 153–154):

  • The bailee must use the goods only for the intended purpose.
  • Unauthorized use makes him liable for compensation and termination of bailment.

3. Duty Not to Mix Goods (Section 155–157):

  • Bailee must not mix bailor’s goods with his own.
    • If done with consent – proportional ownership.
    • Without consent and separable – cost of separation on bailee.
    • If inseparable – bailee is liable for full loss.

4. Duty to Return Goods (Section 160–161):

  • Must return the goods once the purpose is over or upon demand.
  • If bailee fails to return, he is liable for loss.

5. Duty to Deliver Accretion (Section 163):

  • If the goods produce any natural increase or profit (like offspring or interest), the bailee must return it with the goods.

✅ Example: If a cow given in bailment gives birth, the calf must also be returned.

🔴 B. Rights of the Bailee:

1. Right to Compensation (Section 158):

  • The bailee can claim extraordinary expenses from the bailor in gratuitous bailment.

2. Right of Lien (Section 170–171):

  • The bailee has the right to retain the goods until dues are paid.
    • Particular lien: For charges related to specific goods.
    • General lien: Only available to certain professionals like bankers, wharfingers, etc.

✅ Example: A gives clothes for stitching to B, a tailor. B can retain the clothes until payment is made.

3. Right to be Indemnified (Section 164):

  • Bailee can recover loss from the bailor if the bailor had no right to bail the goods.

🧾 Summary Table:

Duties of Bailor Rights of Bailor
Disclose faults Demand return of goods
Bear expenses (in gratuitous bailment) Terminate if misuse
Accept return of goods Claim compensation for negligence
Duties of Bailee Rights of Bailee
Take reasonable care Claim expenses incurred
Return goods after use Right of lien (retain until paid)
Not to mix goods Indemnity for defective title
Not to misuse goods Right to deliver accretions

⚖️ Case Law:

Ultzen v. Nicolls (1894):
A waiter took a customer’s coat but failed to keep it safely. The court held it to be a bailment, and the waiter (bailee) was liable for the loss.

✅ Conclusion:

The contract of bailment is based on mutual trust, responsibility, and cooperation. The law ensures that both the bailor and bailee perform their duties diligently and are given appropriate rights to protect their interests. These provisions are crucial for everyday transactions like repair, safekeeping, and transport of goods.

Q.9. What do you understand by Pledge? Explain the rights and duties of a pawnor and a pawnee.

📘 Introduction:

A Pledge is a special kind of bailment where goods are delivered by one person to another as security for the repayment of a debt or performance of a promise. It is governed by Sections 172 to 179 of the Indian Contract Act, 1872. The person who delivers the goods is called the pawnor, and the person to whom the goods are delivered is called the pawnee.

📖 Definition of Pledge (Section 172):

“The bailment of goods as security for the payment of a debt or performance of a promise is called a pledge.”

In a pledge, possession of goods is transferred, not ownership.

✅ Example: A borrows ₹10,000 from B and gives his gold chain as security. This is a pledge. A is the pawnor, B is the pawnee.

👤 I. Rights and Duties of Pawnor (Pledger):

🟩 A. Duties of Pawnor:

  1. Duty to Repay the Debt or Perform the Promise (Section 173):
    • The pawnor must pay the debt or fulfill the promise for which the pledge was made.
  2. Duty to Disclose Faults (Section 150):
    • The pawnor must inform the pawnee about any known defects in the goods pledged.
  3. Duty to Compensate for Losses (Section 174):
    • If the pawnee suffers loss due to defective title or misconduct by the pawnor, the pawnor must compensate.
  4. Duty to Take Back Goods:
    • After fulfilling the obligation, the pawnor must accept the return of pledged goods.

🟩 B. Rights of Pawnor:

  1. Right to Redeem Pledged Goods (Section 177):
    • The pawnor can redeem the goods any time before actual sale, even after default, by paying the debt and expenses.

    ✅ Example: A pledges his watch to B for ₹5,000. If A repays the amount even after the due date but before sale, he can get his watch back.

  2. Right to Receive Surplus from Sale (Section 176):
    • If the pawnee sells the goods and receives more than the debt, the pawnor has a right to get the surplus amount.

👤 II. Rights and Duties of Pawnee (Pledgee):

🟦 A. Duties of Pawnee:

  1. Duty to Take Reasonable Care (Section 151–152):
    • The pawnee must take reasonable care of the goods pledged.
  2. Duty Not to Use the Goods:
    • The pawnee cannot use the goods for personal use unless authorized by the pawnor.
  3. Duty to Return Goods:
    • After the debt is paid or the promise is fulfilled, the pawnee must return the goods to the pawnor.
  4. Duty to Return Accretions (Section 163):
    • If the goods earn any addition or profit, like interest or offspring, the pawnee must return it along with the goods.

🟦 B. Rights of Pawnee:

  1. Right of Retainer (Section 173–174):
    • Pawnee has the right to retain goods until full payment of:
      • Debt,
      • Interest,
      • Lawful charges.
  2. Right to Recover Expenses (Section 175):
    • Pawnee may recover extraordinary expenses incurred for preservation of goods.
  3. Right to Sell Pledged Goods (Section 176):
    • If the pawnor defaults, the pawnee may:
      • File a suit for recovery and retain the goods as collateral, or
      • Sell the goods after giving reasonable notice to the pawnor.
  4. Right to Sue for Debt and Retain Pledge:
    • Pawnee can sue for the debt without selling the goods and still retain them as security.

📚 Illustration:

A pledges his gold chain to B as security for a loan of ₹10,000.

  • If A defaults, B can either sue A or sell the chain after proper notice.
  • If B sells the chain for ₹12,000, he must return ₹2,000 to A.
  • If the chain is lost due to B’s negligence, B is liable to compensate A.

⚖️ Case Law:

Lallan Prasad v. Rahmat Ali (1967):
The Supreme Court held that the pawnee must return the goods if the pawnor repays the debt. If the pawnee wrongfully retains the goods or sells them without notice, he loses the right to recover the balance.

✅ Conclusion:

A pledge is a legally enforceable transaction where goods are given as security for a loan or obligation. The pawnor and pawnee have clearly defined rights and duties to ensure fairness and accountability. The law ensures that the pawnee is protected until the debt is cleared while safeguarding the pawnor’s right to redeem the goods.

Q.10. Discuss the validity and effect of pledge made by a non-owner. When can a pledge by a person other than the owner be considered valid?

📘 Introduction:

As a general rule of law, only the owner of goods has the right to pledge them. However, the Indian Contract Act, 1872 recognizes certain exceptions under which a non-owner can make a valid pledge, provided specific conditions are satisfied.

This principle is an exception to the Latin maxim:

“Nemo dat quod non habet” — i.e., no one can give what he does not have.

But in commercial interest and to protect good faith transactions, Sections 178 and 178A allow certain non-owners to pledge goods validly.

📖 General Rule:

A pledge is usually valid only when made by a person who has ownership or authority over the goods.

✅ Example: A pledges his gold watch to B as security for a loan. This is valid as A is the owner.

But if C, a stranger, pledges A’s watch without permission, it is not valid.

📜 Exceptions: When Pledge by Non-Owner is Valid (Sec. 178 & 178A):

🟦 1. Pledge by Mercantile Agent (Section 178):

A mercantile agent is a person who is entrusted with possession of goods in the usual course of business (e.g., broker, commission agent).

✅ Conditions for Valid Pledge:

  • The agent must be in possession with the owner’s consent.
  • The pledge must be made in the ordinary course of business.
  • The pawnee must act in good faith and without notice that the agent had no authority.

✅ Example: A gives his gold to M, a jeweler (agent), to display. M pledges it to B for money. If B acted in good faith, the pledge is valid.

✅ Case Law:
Folkes v. King (1923) – Pledge by a mercantile agent was held valid as the pawnee had no notice of the agent’s lack of authority.

🟦 2. Pledge by a Person in Possession under Voidable Contract (Section 178A):

If a person obtains possession under a voidable contract (e.g., by fraud, misrepresentation), and pledges the goods before the contract is rescinded, the pledge is valid if the pawnee acts in good faith and without knowledge of the defect.

✅ Conditions:

  • The contract must be voidable but not rescinded.
  • The person must be in lawful possession.
  • The pledgee must act in good faith.

✅ Example: A is tricked by B into selling him a diamond ring. B pledges it to C. If C accepts it in good faith, the pledge is valid until A rescinds the sale.

✅ Case Law:
Phillips v. Brooks (1919) – Person obtained goods by fraud and pledged them. The pledge was valid as the contract had not been rescinded at the time of pledge.

🟦 3. Pledge by a Seller in Possession (Section 30, Sale of Goods Act):

A seller who continues possession of goods after sale may make a valid pledge if the pawnee acts in good faith.

✅ Example: A sells a bike to B but still holds possession. A pledges it to C. If C acts in good faith, pledge is valid.

🟦 4. Pledge by a Buyer in Possession:

If the buyer has obtained possession with seller’s consent but ownership hasn’t transferred (e.g., under an agreement to buy), then a pledge by buyer can be valid.

✅ Example: A agrees to sell goods to B. B receives the goods but hasn’t paid yet. If B pledges them to C, and C acts in good faith, the pledge is valid.

🟦 5. Pledge by Co-owner in Possession with Consent:

If one co-owner, who is in possession with the consent of others, pledges the goods, the pledge is valid.

✅ Example: A and B are co-owners of a painting. A has it in his house and pledges it to C. If C acts in good faith, pledge is valid.

📘 Effect of Valid Pledge by Non-owner:

  1. Creates valid rights for the pawnee, who can:
    • Retain the goods until payment,
    • Sell the goods after default and notice.
  2. The true owner cannot recover the goods from the pawnee without repaying the loan.
  3. Ensures security in commercial transactions by protecting innocent third parties.

🧾 Summary Table:

Situation Legal Provision Conditions Valid Pledge?
Mercantile agent in possession Section 178, ICA With owner’s consent, good faith of pledgee Yes
Person under voidable contract Section 178A, ICA Possession before rescission, pledgee in good faith Yes
Seller in possession after sale Sec. 30, Sale of Goods Act Pledgee has no knowledge of sale Yes
Buyer in possession before ownership passes Sec. 30(2), Sale of Goods Act Possession with consent, good faith of pawnee Yes
Co-owner in possession Common law With other co-owner’s consent, pledgee in good faith Yes

✅ Conclusion:

Though ownership is a key element in creating a valid pledge, the law recognizes that in certain commercial and practical situations, a non-owner may validly pledge goods if the pawnee acts in good faith and without notice of the defect. These provisions balance protection for true owners and security for innocent third parties, thus promoting fair trade and commerce.