CONTRACT OF BAILMENT

Bailment implies a sort of relationship in which the personal property of one person temporarily
goes into the possession of another. The ownership of the article or goods is in one person but
possession is with another. -- Delivering a cycle, watch or any other article for repair; leaving a car at the
car park; depositing luggage in a cloakroom, delivering garments to a dry cleaner, delivering goods for
carriage are all situations which create the relation of bailment. Bailment is a subject of considerable
public importance.

WHAT IS BAILMENT? Definition

Sec. 148 “Bailment”, “bailor” and “bailee” defined. 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. The
person delivering the goods is called the “bailor”. The person to whom they are delivered is called the
“bailee”.

Explanation.—If a person already in possession of the goods of another contracts to hold them as a
bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods, although they
may not have been delivered by way of bailment.

ESSENTIAL FEATURES OF BAILMENT

1. Delivery of possession
2. Delivery should be upon contract
3. Delivery should be upon some purpose

DELIVERY OF POSSESSION

An important characteristic of bailment is “the delivery of possession” by one person to another.

Delivery of possession is different from custody. One may be in custody without possession. A servant
in custody of his master’s goods or a guest using his host’s goods. They are not bailees. Goods or article
should be handed over to the bailee for a purpose.

In Ultzen v. Nicols (1894) 1 QB 92, an old customer went into a restaurant for dining. When he
entered the room a waiter took his coat, without being asked, and hung it on a hook behind him. When
the customer rose to leave, the coat was gone. The act of the waiter was a voluntary courtesy towards
the customer. Yet the restaurant keeper was held liable as bailee.

If the customer had instructed the servant where and how the coat should be put, the result,
perhaps would have been otherwise. In Kaliperumal Pillai v. Visalakshmi, AIR 1938 Mad. 32, a lady
handed over to a goldsmith certain jewels for the purpose of being melted and utilized for making new
jewels. Every evening, after the gold-smith’s work was over, the lady used to receive half-made jewels
from the goldsmith and put them into a box in the goldsmith’s room and keep the key in her possession.
The jewels were lost one night. Her action against the gold-smith failed. The Court held delivery is
necessary to constitute bailment. The mere leaving of a box in a room in the defendant’s house, when
the plaintiff herself took away the key, cannot amount to delivery within the meaning of Sec. 149.

BANK LOCKER
Hiring of a Bank’s locker and storing things would not constitute a bailment. Things are put in a hired
portion of the premises and not entrusted to the bank. The court held in Atul Mehra v. Bank of
Maharashtra that there was no proof of the fact that at the time when the locker was robbed the
customer had some items of jewellery in the locker. The customer was not allowed to claim any
damages.

DELIVERY MAY BE ACTUAL OR CONSTRUCTIVE

Sec. 149 explains the meaning of delivery of possession

149. Delivery to bailee how made:-- The delivery to the bailee may be made by doing anything which
has the effect of putting the goods in the possession of the intended bailee or of any person authorized
to hold them on his behalf.

Explanation to Sec. 148 provides that “if a person already in possession of the goods of another
contracts to hold them as a bailee, he thereby becomes the bailee and the owner becomes the bailor
although they may not have been delivered by way of bailment”.

Delivery of possession may be actual delivery or constructive delivery. When the bailor hands over to
the bailee physical possession of the goods, that is called ‘actual delivery’. Constructive delivery takes
place when there is no change of physical possession, goods remaining where they are, but something is
done which has the effect of putting them in the possession of the bailee. Driver of the car being
entrusted to keep the car at the driver’s premises. – Delivery of a railway receipt amounts to delivery of
goods. In Fazal v. Salman Rai, (1928) 120 IC 421, the defendant was holding the plaintiff’s mare under
the execution of a decree. Plaintiff satisfied the decree and the court ordered redelivery of the mare to
the plaintiff. Defendant refused to do so unless the maintenance charges were also paid. The mare was
stolen from his custody. He was held liable. The Court said after the deliver order had been passed, the
relation of bailor and bailee was established by virtue of Explanation to Sec. 148.

In N.R. Srinivasa Iyer v. New India Assurance Co. Ltd. (1983) 3 SCC 458. Owner of a car involved
in an accident delivered it under the policy on behalf of the insurer to the nearest garage for repairs. In
a fire on the garage, the car was lost. The delivery was regarded as sufficient to constitute the insurance
company as a bailee and the garage as a sub bailee. They became responsible for the loss.

DELIVERY SHOULD BE UPON CONTRACT

Delivery of goods should be made for some purpose and upon a contract. When the purpose is
accomplished, the goods shall be returned to the bailor. When a person’s goods go into the possession
of another without a contract, there is no bailment. In Ram Gulam v. Govt. of U.P., AIR 1950 All 206, the
plaintiff’s ornaments, having been stolen, were recovered by the police and while in police custody,
were stolen again. Plaintiff action against the State for the loss was dismissed. Seth J. said “the
obligation of a bailee is a contractual obligation and springs only from the contract of bailment. It
cannot arise independent of contract. In that case, the ornaments were not handed over to Govt. under
any contract whatsoever. Govt. therefore never occupied the position of bailee and is not liable as such
to indemnify the plaintiffs”.

English law recognizes bailment without contract. Indian courts have also followed this view. In
State of Gujarat v. Meon Mohamed Haji Hasan, AIR 1967 SC 1885, certain motor vehicles and other
goods belonging to the plaintiffs were seized by the State in exercise of its powers under Sea Customs
Act. The goods while in the custody of the State remained totally uncared for. State contended that its
position was not that of a bailee. Shelat J. observed: “That contention is not sustainable. Bailment is
dealt with by the Contract Act only in cases where it arises from a contract, but it is not correct to say
that there cannot be a bailment without an enforceable contract… Nor is consent indispensable for such
a relationship to arise. A finder of goods of another has been held to be a bailee in certain
circumstances”.

The contract may be express or implied. In Governor General of India in Council v. Jubilee Mills
Ltd., AIR 1953 Bom. 46, with the consent of the station master, goods were stored on a railway
company’s platform. Wagons were not available. The goods were damaged in a fire caused by a spart
emitted by a passing engine. The railway company was held liable.

DELIVERY SHOULD BE UPON SOME PURPOSE

Bailment of goods is always made for some purpose and subject to the condition that when the
purpose is accomplished the goods will be returned to the bailor or disposed of according to his
mandate. If the person to whom the goods are delivered is not bound to restore them to the person
delivering them or to deal with them according to his directions, their relastionship will not be that of
bailor and bailee. In Secretary of State v. Sheo singh Rai (1875-80) 2 All 756, plaintiff delivered to the
Treasury Officer at Meerut nine Govt. promissory notes for cancellation and consolidation into a single
note of Rs. 48,000/-. The defendant’s servants misappropriated the notes. The plaintiff sued the State
to hold them responsible as bailees. His action failed. It was held that there can be no bailment unless
there is a delivery of goods and a promise to return. Govt. was not bound to return the same notes, nor
was it bound to dispose of the surrendered notes in accordance with the plaintiff’s directions.

DISTINCTION BETWEEN BAILMENT AND OTHER SIMILAR RELATIONS

 A deposit of money with a banker is not a bailment as he is not bound to return the same notes
and coins. (Ichha Dhanji v. Natha, ILR (1888) 13 Bom. 338. In Union Bank of India v. K.V.
Venugopalan, AIR 1990 Ker 223, bank was not allowed to exercise the right of lien as a bailee on
money held under a fixed deposit.
 An agent who has collected money on his principal’s behalf is not a bailee of the money for the
same reason. An important distinguishing feature between agency and bailment is that the
bailee does not represent the bailor. He merely exercises, with the leave of the bailor, certain
power of the bailor in respect of the property. Secondly, bailee has no power to make contracts
on behalf of the bailor; nor can he make the bailor liable, simply as bailee for any acts he does.
 Bailment is different from sale. In sale, not only mere possession ownership is also transferred.
The person buying is under no obligation to return. HIRE PURCHASE contract is a bailment. It
has two elements – bailment plus an element of sale – Instalment Supply Pvt.Ltd. v. Union of
India, AIR 1962 SC 53; Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178.
 Post office is a bailee of the articles of the sender.

DUTY OF BAILOR

According to Sec. 150: bailors are of two kinds:

1 Gratuitous bailor; and

2 Bailor for reward.

DUTY OF GRATUITOUS BAILOR

Sec. 150 BAILOR’S DUTY TO DISCLOSE FAULTS IN GOODS BAILED.—The bailor is bound to disclose
to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with
the use of them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he
is responsible for damage arising to the bailee directly from such faults.

If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or
was not aware of the existence of such faults in the goods bailed.

Illustrations

A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is
vicious. The horse runs away. B is thrown and injured. A is responsible for B for damage sustained.

A hires a carriage of B. The carriage is unsafe, though be is not aware of it, and A is injured. B is
responsible to A for the injury.

The conditions of bailor’s liability are:

 He should have knowledge of the defect and the bailee should not be aware. (Gratuitous bailor
not liable for defects not known to him)
 The defects in the goods must be such as exposes the bailee to extraordinary risks or materially
interferes in the use of the goods.

DUTY OF BAILOR FOR REWARD

The duty of bailor for consideration is much greater. He is making profit from his profession and
therefore it is his duty to see that the goods which he delivers are reasonably safe for the purpose of the
bailment. He cannot say that he was not aware of the defect. Sec. 150 says “if the goods are bailed for
hire, the bailor is responsible for such damage, whether he was or was not aware of such faults in the
goods bailed.”

In Hyman & Wife v. Nye & Sons, (1881) 6 QBD 685, plaintiff hired from the defendant for a
specific journey a carriage, a pair of horses and a driver. During the journey a bolt in the underpart of
the carriage broke, the splinter bar became displaced, the carriage was upset and the plaintiff injured.
Defendant was held liable. Justice Lindley said: “A person who lets out carriages is not responsible for
all defects discoverable or not; he is not an insurer against all defects. But he is an insurer against all the
defects which care and skill can guard against. His duty is to supply a carriage as fit for the purpose for
which it is hired as care and skill can render it”.

In Reed v. Dean, (1949) 1 KB 188, plaintiff hired a motor launch from defendant for a holiday on
the river Thames. The launch caught fire. Plaintiffs were unable to extinguish it, the fire-fighting
equipment was out of order. They were injured and suffered loss. Court held that there was an implied
undertaking that the launch was fit for the purpose for which it was hired as reasonable care and skill
could make it. Defendant was held liable.
 Where the bailor delivers goods to another for carriage or some other purpose and if the goods
are of dangerous nature, the fact should be disclosed to the bailee – Lyell v. Ganga Dai, ILR (1875-80) 1
All 60.

DUTIES OF BAILEE

The following are the duties of bailee:

1. Duty of reasonable care (151-152)

2. Duty not to make unauthorized use (154)
3. Duty not to mix (155-157)
4. Duty to return (160-161)
5. Duty not to set up jus tertii
6. Duty to return increase

DUTY OF REASONABLE CARE

151 CARE TO BE TAKEN BY BAILEE. In all cases of bailment the bailee is bound to take as much care
of the goods bailed to him as a man of ordinary prudence would, under similar circumstances take, of
his own goods of the same bulk, quality and value as the goods bailed.

S. 151 lays down a uniform standard of care for “all cases of bailment”. Under the original
English law, bailee’s “liability was absolute. It was no excuse for the bailee to say that the damage or
failure to return was due to no fault of his own; he was liable in any case”. But in R. Viscount Hertford,
(1681) shower 172, the court held that “if money be given to one to keep generally without
consideration and the person be robbed, he is discharged”. In Coggs v. Bernard”, absolute liability was
further reduced to bailees “who exercised a public calling” namely, public carriers and innkeepers. The
rest of the bailees owe only the duty of reasonable care. The Court of Appeal in Houghland v. R.R. Low
(Luxuary Coaches) Ltd., (1962) 1 QB 694 held that the standard of care was that of reasonable care and
was the same whether the bailment was gratuitous or for reward.

In Martin v. London County Council, 1047 KB 628, plaintiff was brought to a paid hospital as a
patient. On her entry, the hospital officials took charge of two pieces of jewellery and a gold cigarette-
case. They were subsequently stolen by a thief who broke into the room in which they were kept. It
was held that defendants were bailees for reward and were liable for the loss as they had failed to
exercise care which the nature and quality of the articles required.

S. 151 prescribes a uniform standard of care in all cases of bailment—degree of care which a
man of ordinary prudence would take of his own goods of the same type and under similar
circumstances. Bailee would be liable if the care devoted falls below this standard.

S. 152 BAILEE WHEN NOT LIABLE FOR LOSS, ETC. OF THING BAILED.-- The bailee, in the absence of any
special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has
taken the amount of care of it described in Sec. 151.

Nature, quality and bulk of the goods, bailed, the purpose of bailment, facilities reasonably
available for safe custody and the like will be taken into account for determining whether proper care
has been taken. Bailee was held not liable, where a part of the food grains stored at his godown were
damaged by floods unprecedented in the history of the place (Union of India v. Udha Ram and Son, AIR
1963 SC 422.

Loss by theft

Where the bailor’s goods are stolen from the custody of the bailee, he will be liable if there has
been negligence on his part. In Jan and Son v. A. Cameron, (1922) 4 All E R 735, the plaintiff stayed at a
hotel and his articles were stolen while he was away, the hotelier was held liable as the room was, to his
knowledge, in an insecure condition.

In Rampal Ramchand Agarwal v. Gourishankar Hanuman Prasad, AIR 1952 Nag. 8, bailor’s
ornaments were kept in a lock and the key was kept in a cash box in the same room. The room was in
the ground floor and easily accessible to burglars. The ornaments were stolen. The bailee was held
liable.

Burden of Proof

The burden of proof is on the bailee to show that he was exercising reasonable care. If the
bailee places before the court evidence to show that he had taken reasonable care to avoid damage,
which was reasonably forseeable or had taken all reasonable precautions to obviate risks which were
reasonably apprehended, he would be absolved of his liability. (Kuttappa v. State of Kerala, 1988 (2) KLT
54.

Loss due to bailee’s servant

Where the loss has been due to the act of the bailee’s servant, he would be liable if the
servant’s act is within the scope of his employment. In Sanderson v. Collins, (1904) 1 KB 628, the
defendant sent his carriage to the plaintiff for repairs. Plaintiff lent his own carriage to the defendant
while the repairs were going on. Defendant’s coachman, without his knowledge, took away the
carriage for his own purpose and damaged it. The defendant was held not liable as the coachman at the
time when the injury was done to the carriage not acting within the course of his employment.

But in Cooper (Lee) Ltd. v. C.H. Jeakins & Sons Ltd. (1967) 2 QB 1, the bailee’s driver left the
vehicle in which he was carrying the plaintiff’s goods unattended and half the goods were stolen, the
bailee was held liable.

Involuntary bailee

“A person who has come into possession of a chattel through no act of his own and without his consent”
is called an involuntary bailee. He is also liable to take reasonable care of the goods. In Newman v.
Bourne & Hollingsworth, (1951) 31 TLR 209, plaintiff went to the defendant’s shop to buy a coat. She
took the coat off, which she was wearing with a diamond brooch by its side. While leaving, she forgot
the brooch and it was handed by an assistant to the shopkeeper, who put it in his desk, from where it
was lost. The defendant was held liable.

If the involuntary bailee does something, without negligence, which results in the loss of the property,
he will not be liable for conversion.

CONTRACT TO THE CONTRARY

Sec. 152 opens with the remark “in the absence of any special contract. In SBI v. Quality Bread Factory,
AIR 1983 P&H 244, it was held that under Sec. 152 a bailee can contract himself out of the obligation
under Sec. 151. But the courts have interpreted that Sec. 152 has the effect of saying that unless the
standard of care is enhanced by special contract, the bailee will be liable only when he fails to observe
the requirement of Sec. 151. The words in Sec. 152 “in the absence of any special contract” would
permit the standard of duty to be revised upwards and not to be diluted. In Mahendra Kumar Chandulal
v. CBI, AIR 1984 Guj NOC 53, bales of cloth were lost from bank custody under circumstances showing
negligence. The banker was held liable irrespective of a clause which absolved him of all liability. In
Cochin Port Trust v. Associated Cotton Traders Ltd., 1983 KLT 562, the court held that the Port Trust
which is in the position of a bailee has a duty to take all proper measures for protection of the goods.
When goods entrusted to a bailee are lost or damaged, there is initial presumption of negligence on the
part of the bailee.

DUTY NOT TO MAKE UNAUTHORISED USE (S. 154)

154. LIABILITY OF BAILEE MAKING UNAUTHORISED USE OF GOODS BAILED. If the bailee makes any use
of the goods bailed which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods or during such use of them.

In Alias v. E.M. Patil, AIR 2004 Ker. 214, a vehicle was delivered to a workshop for repair and the
owner of the workshop allowed an unlicensed employee to drive the vehicle and he caused accident
resulting in the death of a person. It was held that the bailee was liable to compensate the deceased as
also the owner of the vehicle because it was unauthorized use and liability was absolute.

!53. TERMINATION OF BAILMENT BY BAILEE’S ACT INCONSISTENT WITH CONDITIONS. A contract of

bailment is avoidable at the option of the bailor, if the bailee does any act with regard to the goods
bailed inconsistent with the conditions of the bailment.

Illustration

A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the option of
A, a termination of the bailment.

DUTY NOT TO MIX (S. 155-157)

The bailee should maintain the separate identity of the bailor’s goods. He should not mix his
own goods with those of the bailor and without his consent. If the goods are mixed with the consent of
the bailor, both will have a proportionate interest in the mixture thus produced (S.155). If the mixture is
made without bailor’s consent, and if the goods can be separated, or divided, the bailee is bound to
bear the expenses of separation as well as any damaging arising from the mixture (156). But if the
mixture is beyond separation, the bailee must compensate the bailor for his loss.

155. EFFECT OF MIXTURE, WITH BAILOR’S CONSENT, OF HIS GOODS WITH BAILEE’S. If the bailee,
with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the
bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.

156. EFFECT OF MIXTURE, WITHOUT BAILOR’S CONSENT WHEN THE GOODS CAN BE SEPARATED.-- If
the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and the
goods can be separated or divided, the property in the goods remains in the parties respectively; but the
bailee is bound to bear the expense of separation or division, and any damage arising from the mixture.

Illustration

A bails 100 bales of cotton marked with a particular mark to B. B without A’s consent, mixes the 100
bales with other bales of his own, bearing a different mark; A is entitled to have his 100 bales returned,
and B is bound to bear all the expenses incurred in the separation of the bales, and any other incidental
damage.

157. EFFECT OF MIXTURE, WITHOUT BAILOR’S CONSENT, WHEN THE GOODS CANNOT BE SEPARATED.
If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, in such
a manner that it is impossible to separate the goods bailed from the other goods, and deliver them back,
the bailor is entitled to be compensated by the bailee for the loss of the goods.

Illustration

A bails a barrel of Cape flour worth Rs. 45 to B. B, without A’s consent, mixes the flour with country
flour of his own, worth only Rs. 25 a barrel. B must compensate A for the loss of his flour.

DUTY TO RETURN (160 – 161)

160. RETURN OF GOODS BAILED, ON EXPIRATION OF TIME OR ACCOMPLISHMENT OF PURPOSE. It is

the duty of the bailee to return, or deliver according to the bailor’s directions, the goods bailed, without
demand, as soon as the time for which they were bailed has expired, or the purpose for which they were
bailed has been accomplished.

161. BAILEE’S RESPONSIBILITY WHEN GOODS ARE NOT DULY RETURNED. If, by the default of the bailee,
the goods are not retured, delivered or tendered at the proper time, he is responsible to the bailor for
any loss, destruction or deterioration of the goods from that time.

In Shaw & Co. v. Symmons & Sons (1917) 1 KB 799, plaintiff entrusted books to the defendant, a
bookbinder, to be bound. The latter promised to return them within a reasonable time. Plaintiff having
required the defendant to deliver the whole of the books then bound, defendant failed to deliver them
within a reasonable time and they were subsequently burnt in an accidental fire on his premises.
Defendant was held liable in damages for the loss of the books.

159. RESTORATION OF GOODS LENT GRATUITOUSLY. The lender of a thing for use may at any time
require its return, if the loan was gratuitous, even though he lent it for a specified time or purpose. But,
if, on the faith of such loan made for a specified time or purpose, the borrower has acted in such a
manner that the return of the thing lent before the time agreed upon would cause him loss exceeding
the benefit actually derived by him from the loan, the lender must, if he compels the return, indemnify
the borrower for the amount in which the loss so occasioned exceeds the benefit so derived.

159. TERMINATION OF GRATUITOUS BAILMENT BY DEATH. A gratuitous bailment is terminated by the

death either of the bailor or of the bailee.

162. BAILMENT BY SEVERAL JOINT OWNERS. If several joint owners of goods bail them the bailee may
deliver them back to, or according to the directions of, one joint owner without the consent of all, in the
absence of any agreement to the contrary.
DUTY NOT TO SET UP JUS TERTII (166-167)

A bailee is not entitled to set up, as against the bailor’s demand, the demand of jus tertii, that is to say,
that the goods belong to a third person. (This is called the estoppel of bailee. He can return the goods
to the person bailed them even against the demands of the true owner unless he is under legal
pressure.) The bailee is estopped from denying the right of the bailor to bail the goods and to receive
them back. Even if there is a person who has a better title to the goods than that of the bailor or who
claims ownership of the goods, the bailee may safely return the goods to the bailor and he will not be
liable to the owner for conversion.

166. BAILEE NOT RESPONSIBLE ON RE-DELIVERY TO BAILOR WITHOUT TITLE. If the bailor has no title
to the goods, and the bailee, in good faith, delivers them back to, or according to the directions of the
bailor, the bailee is not responsible to the owner in respect of such delivery.

But the person who claims the ownership may apply to the court to prevent the bailee from the
returning the goods to the bailor and to have the question title decided. (Rogers Sons & Co. v. Lambert
& Co., (1891) 1 QB 318 (CA).

167. RIGHT OF THIRD PERSON CLAIMING GOODS BAILED. If a person other than the bailor, claims
goods bailed, he may apply to the Court to stop the delivery of the goods to the bailor, and to decide the
title to the goods.

Further, if the bailee has already delivered the goods to the person having a better title, and yet
the bailor sues him, he may prove that such person had a better right to receive the goods as against the
bailor – Explanation 2 to Sec. 117 of Evidence Act.

DUTY TO RETURN INCREASE

In the absence of any agreement to the contrary, the bailee is bound to return to the bailor
natural increases or profits accruing to the goods during the period of bailment.

S. 163 BAILOR ENTITLED TO INCREASE OR PROFIT FROM GOODS BAILED. In the absence of any
contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any
increase or profit which may have accrued from the goods bailed.

Illustration: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to
deliver the calf as well as the cow to A.

In Standard Chartered Bank v. Custodian, (2000) 6 SCC 427, shares and securities were pledged with a
bank and the bank received bonus shares and dividends and interest in respect thereof. It was held that
the bank could not be compelled to handover such increment unless the pledged securities were
redeemed.

FINDER (S. 168-169)

168. RIGHT OF FINDER OF GOODS: MAY SUE FOR SPECIFIC REWARD OFFERED. The finder of goods
has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him to
preserve the goods and to find out the owner; but he may retain the goods against the owner until he
receives such compensation; and where the owner has offered a specific reward for the return of goods
lost, the finder may sue for such reward, and may retain the goods until he receives it.
169. WHEN FINDER OF THING COMMONLY ON SALE MAY SELL IT. When a thing which is commonly the
subject of sale is lost, if the owner cannot with reasonable diligence be found, or if he refuses, upon
demand to pay the lawful charges of the finder, the finder may sell it—

1. when the thing is in danger of perishing or losing the greater part of its value, or

2. when the lawful charges of the finder, in respect of the thing found, amount to two-thirds of its value.

A finder of goods is a bailee thereof and as such bound by the duty of reasonable care. He does not
have the right to sue the owner for compensation for trouble and expense voluntarily incurred by him to
preserve the goods and to find the owner. He has the right to lien. He can sue for the reward
announced. He can also sell the goods in the circumstances stated in Sec. 169.

RIGHTS OF BAILEE

1. Right to compensation (S. 164)

2. Right to expenses or remuneration (S. 158)
3. Right to lien (170-171)
4. Right to sue (180-181)

RIGHT TO COMPENSATION

S. 164. BAILOR’S RESPONSIBILITY TO BAILEE. The bailor is responsible to the bailee for any loss which
the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive
back the goods, or to give directions respecting them.

If the bailor has no right to bail the goods, or to receive them back or to give directions
respecting them and consequently the bailee is exposed to some loss, the bailor is responsible for the
same.

RIGHT TO EXPENSES OR REMUNERATION

158. REPAYMENT BY BAILOR OF NECESSARY EXPENSES. Where, by the conditions of the bailment, the
goods are kept or to be carried, or to have work done upon them by the bailee for the bailor, and the
bailee is to receive no remuneration, the bailor shall repay to the bailee the necessary expenses incurred
by him for the purpose of the bailment.

A bailee is entitled to recover his agreed charges. But where there is no such agreement at all,
sec. 158 comes into play. Where the bailee is required by the terms of bailment to keep or carry the
goods or to do some work upon them for the benefit of the bailor, and the contract provides for no
reward, the bailee has a right to ask the bailor for payment of necessary expenses incurred by him for
the purpose of the bailment. The Calcutta High Court has laid down that this right is not linked with the
right of lien. Where the bailment is for the benefit of the bailee, if in using the thing, the borrower is put
to any expense, this must be borne by himself.

RIGHT OF LIEN

If the bailee’s lawful charges are not paid he may retain the goods. The right to retain any
property until the charges due in respect of the property are paid is called the right of lien. In Syndicate
Bank v. Vijay Kumar, (1992) 2 SCC 330, the nature of lien was explained by quoting from Halsbury’s laws
of England:

“Lien is in its primary sense a right in one man to retain that which is in his possession belonging to
another until certain demands of the person in possession are satisfied. In this primary sense it is given
by law and not by contract”.

LIENS ARE OF TWO KINDS: (1) Particular lien and (2) General Lien.

PARTICULAR LIEN (170)

As a general rule a bailee is entitled only particular lien, which means the right to retain only
that particular property in respect of which the charge is due. This right is provided in Sec. 170.

170. BAILEE’S PARTICULAR LIEN. Where the bailee has, in accordance with the purpose of the bailment,
rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the
absence of a contract to the contrary, a right to retain such goods, until he receives due remuneration
for the services he has rendered in respect of them.

Illustration: A delivers a rough diamond to B, a jeweler, to be cut and polished, which is accordingly
done. B is entitled to retain the stone till he is paid for the services he has rendered.

A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished
and to give a three month’s credit for the price. B is not entitled to retain the coat until he is paid.

RIGHT TO PARTICULAR LIEN is available subject to certain important conditions. The foremost is that
the bailee must have rendered some service involving exercise of labour or skill in respect of the goods
bailed. The labour or skill exercises by the bailee must be such as improve the goods.

Secondly, the labour or skill must have been exercised in accordance with the purpose of the bailment
and the terms of the contract. (Skinner v. Jager, ILR (1883) 6 All 139

Thirdly, only such goods can be retained on which the bailee has bestowed trouble and expense. He
cannot retain any other goods belonging to the bailor which are in his custody (Chase v. Westmore,
(1816) 15 M & S 180). It is this element of “particular lien” which distinguishes it from “general lien”.

Lastly, (Possessory right) the right depends on possession and is lost as soon as possession of the goods
is lost. In Eduljee v. Café John Bros., ILR 1944 Nag 37, plaintiff purchased an old refrigerator, the vendor
agreeing to repair it for a fixed charge. When the repair was over the condition of the machine was foud
satisfactory, it was delivered to the plaintiff but a part of the repair was still unpaid. The machine broke
down again and the vendor carried its engine and another part for further repairs and claimed lien on
these parts until the outstanding charges of repair were paid. The Court held that delivery of possession
after repair already effected puts an end to the lien for the charges of repairs and cannot be revived
because the repairer undertakes further repairs merely out of grace and not as a matter of fresh
contract.

Thus lien is a possessory right which continues only so long as the possessor holds the goods.
The right of lien may also be defeated or excluded by an agreement to the contrary.

GENERAL LIEN (171)

 Right of General lien means the right to hold the goods bailed as security for a general balance
of account. The right of particular lien entitles a bailee to detain only that particular property in respect
of which charges are due. General lien entitles the bailee to detain any goods bailed to him for any
amount due to him whether in respect of those goods or any other goods.

171. GENERAL LIEN OF BANKERS, FACTORS, WHARFINGERS, ATTORNEYS AND POLICY BROKERS.
Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a
contract to the contrary, retain as a security for a general balance of account, any goods bailed to them;
but no other persons have a right to retain, as security for such balance, goods bailed to them, unless
there an express contract to that effect.

THE RIGHT OF GENERAL LIEN is a privilege and is specially conferred by S. 171 on certain kinds of bailees
only. They are (1) Bankers (2) Factors (3) Wharfingers (4) Attorneys of a High Court, and (5) policy
brokers.

BANKERS

The general lien of bankers, as judicially recognized and dealt with Sec. 171 attaches to all goods
and securities deposited with them as bankers by a customer or third person on a customer’s account,
provided there is no contract, express or implied, inconsistent with such lien. A banker’s lien on
negotiable securities has been judicially defined as an ‘implied pledge’. A banker has, in the absence of
agreement to the contrary, a lien on all bills received from a customer in the ordinary course of banking
business in respect of any balance that may be due from such customer.

By mercantile custom the banker has a general lien over all forms of commercial paper
deposited by or on behalf of a customer in the ordinary course of banking business. The custom does
not extend to valuables lodged for the purpose of safe custody and may in any event be disposed by an
express agreement or circumstances which show an implied agreement inconsistent with the lien.

In K. Sita v. Corporation Bank, (1999) 3 An WR 393 (AP), certain gold ornaments were pledged with a
bank for raising a loan. The borrower paid back the loan. The bank retained the security because of
another loan subsequently taken by the borrower. The bank was held to be entitled to do so till the
satisfaction of the other loan also.

The lien extends only to goods which have been bailed to the banker as a bailee. Sec. 171 does
not apply to deposit of money in a bank. The bank cannot claim lien on such money. In cases of deposit
of money, the relationship of bailor and bailee is not established. There is a creditor and debtor
relationship. The money belongs to the Bank. Bank cannot claim lien on money which belongs to it.

Similarly, where goods are deposited with the bank for safe custody or some other special
purpose, they will not be under the spell of general lien. Where securities were given to a bank to get
them exchanged for fresh bills, the banker could not exercise lien on the new securities which were
delivered to them for a special purpose inconsistent with the existence of the lien claimed.. Brandao v.
Barnett 136 ER 207.

In Mercantile Bank of India Ltd. v. Rochaldas Gidumal & Co. AIR 1926 Sind 225, a customer gave
his banker a sum of money for transmission by telegraphic transfer to his own firm at another place.
The bank purported to hold the money for their balance of account against the firm. The court held that
the money given for telegraphic transfer is given for a special purpose inconsistent with the exercise of
the right of lien.

In K.S. Nagalambika v. Corporation Bank, AIR 2000 Kant 201, the Karnataka High Court has held
that the right would extend to the fixed deposits of the customer including those of his/her spouse. The
bank was entitled to adjust the amounts towards the loan account. Court relied upon the decision of the
Supreme Court in Syndicate Bank v. Vijay Kumar (1992) 2 SCC 330 which held that banker’s lien could be
exercised in respect of a joint account also.

In Firm Jai Kishan Das Jinda Ram v. Central Bank of India Ltd., AIR 1955 Punj. 250, one of two
firms gave a sum of money to the bank to remit the same to a sugar mill. The mill refused to accept the
amount when offered. The amount thus came back to the bank and it claimed lien on it for a balance
due against the other firm. The two firms have separate accounts in the bank and agreed to give the
bank a general lien over all monies of the two firms. The court held that the specific object for which
they money was given having failed, the money was no long bound by any incident of trust and,
therefore, the bank had a good lien in the terms of the firms’ agreement.

FACTORS

“Factor” means an agent entrusted with possession of goods for the purpose of selling them for his
principal. He is given possession of goods in the ordinary course of business for the purpose of sale. He
has a general lien on the goods of his principal for his balance of account against the principal. In E.H.
Parakh v. King Emperor, AIR 1926 Oudh 202, a motor car was delivered to an agent for sale. He was
entitled to retain the car until his charges were paid.

A factor, like a banker, will not have the right of lien on such goods as have come to his
possession for a specific purpose which impliedly excludes his right to lien. In Dixon v. Stansfield, 16 LT
150, a factor who used to have various dealings with his principal was instructed by the principal to
effect a policy of insurance on a ship. The principal sent the premium and he policy remained in the
possession of the agent, who claimed lien for the money which was owing to him in his capacity as a
factor. His claim was not allowed, as the policy of insurance had not come to his possession in his
capacity as a factor.

WHARFINGERS

“Wharf means a place contiguous to water, used for the purpose of loading and unloading
goods, and over which the goods pass in loading and unloading. It is essential to a wharf that goods
should be in transit over it. It is a place, not for storing goods, but in the process of their transit to or
from water. “Wharfinger” is he that owns or keeps a wharf, or hath the oversight or the management of
it”—Chatok v. Bellamy, (1895) 64 LJ QB 250. A wharfinger has general lien on the goods bailed to him
until his wharfage—charges due for the use of his wharf—are paid.

ATTORNEYS OF HIGH COURT

An attorney or a solicitor who is engaged by a client is entitled to general lien until the fee for
his professional service and other costs incurred by him are paid—General Share Trust Co. v. Chapman,
(1876) 1 CPD 771. The right extends to the proceeds of the action that come to the hands of the
attorney—Devkabai v. Jefferson, ILR (1886) 10 Bom. 248. He has a right of lien over funds which are
deposited with the court—Tyabji Dayabhai & Co. v. Jetha Devji & Co. AIR 1927 Bom 542. A solicitor who
is discharged by his clind, has the right to hold the papers entrusted to him subject to his lien for costs.

But if the attorney himself decides not to act for the client, he forfeits his lien and, therefore, he
must hand over the papers to the client, whether his costs are paid or not. The Andhra Pradesh High
Court has summarized the law on the point as follows:

1. The common law right of passive and retaining lien available to a solicitor in England is accepted
by courts in India as part of the law of this country.
2. The said common law right is not abrogated by Sec. 171, Contract Act.
3. Sec. 171 Contract Act, enacts a special rule of lien applicable exclusively to attorneys who are
also known as solicitors.
4. The other practitioners, who discharge the functions of solicitors, are entitled to invoke the
common law rights applicable to solicitors though Sec. 171 is inapplicable to them.
5. The practitioner forfeits the right of retaining lien the moment he discharges himself or by his
client for misconduct.

The Supreme Court has laid down in R.D. Saxena v. Balram Prasad Sharma, AIR 2000 SC 2912 that
advocates have no right of lien over clients’ papers for their unpaid fee. Court said that files containing
copies of the records including some original documents also, could not be equated with the word
‘goods’ referred in Sec. 171. Hence an advocate cannot place reliance upon Sec. 171.

POLICY BROKERS

An insurance agent who is employed to effect a policy of marine insurance is called a policy
broker. His lien extends to any balance on any insurance account due to him from the person who
employed him to effect the policy.

LIEN AGAINST TIME BARRED DEBT

One of the great advantages of the right of lien is that it can be exercised for the realization of a debt
even when an action for recovery of the debt would be time barred.

MARITIME LIEN

As explained by Supreme Court in M.V. Al Quamar v. Tsavliris Salvage (International) Ltd. AIR 2000 SC
2826, there are two attributes to maritime lien: (a) a right to a part of the property in the res; and (b) a
privileged claim upon a ship, aircraft or other maritime property in respect of services rendered to or
injury caused by that property. Maritime lien thus attaches to the property in the event of the cause of
action arising and remains attached. It is however inchoate and very little positive in value unless it is
enforced by an action. It is a right which stems from general maritime law and is based on the concept
as if the ship itself caused the harm, loss or damage to others or to their property and the ship itself
must make good that loss.

CARRIER’S LIEN

A Carrier has the right to retain goods until his dues are paid. A carrier cannot be forced to
deliver goods without payment of demurrage even if the detention order was issued by the Customs
Authorities. The detention order turned out to be illegal. Therefore, the Customs Authorities became
liable to pay the demurrage—Shipping Corporation of India Ltd. v. C.L. Jain Woollen Mills, (2001) 5 SCC
345.

TYPES OF LIEN COVERED BY THE CONTRACT ACT

1. Lien of finder of goods

2. Bailee’s lien: -- Particular and General lien
3. Lien of Pledgee or Pawnee
4. Lien of Agents.

RIGHT TO SUE

S. 180. SUIT BY BAILOR OR BAILEE AGAINST WRONGDOER. If a third person wrongfully deprives the
bailee of the use of possession of the goods bailed, or does them any injury, the bailee is entitled to use
such remedies as the owner might have used in the like case if no bailment had been made; and either
the bailor or the bailee may bring a suit against a third person for such deprivation or injury.

S. 181 APPORTIONMENT OF RELIEF OR COMPENSATION OBTAINED BY SUCH SUITS.—Whatever is

obtained by way of relief or compensation in any such suit shall, as between the bailor and the bailee,
be dealt with according to their interests.

Sec. 180 enables a bailee to sue any person who has wrongfully deprived him of the use or
possession of the goods bailed or has done them any injury. The bailee’s right and remedies against the
wrongdoer are just the same as those of the owner. An action may, therefore, be brought by the bailee
or the bailor. Whatever is obtained by way of relief or compensation in any such suit shall, as between
the bailor and the bailee, be dealt with according to their respective interests.

PLEDGE

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

The bailor is called ‘the pawner’ and the bailee ‘the pawnee’.

Thus pledge is only a special kind of bailment. The chief distinction is the object of the contract.
Where the object of delivery of goods is to provide security for a loan or for the fulfilment of an
obligation, that kind of bailment is called pledge. It is thus a bailment of personal property as security
for some debt or engagement.

ESSENTIAL CHARACTERISTICS OR INGREDIENTS OF A PLEDGE

1. Delivery of possession.

Delivery of the chattel pawned is a necessary element in the making of a pawn. The property
pledged should be delivered to the pawnee. Delivery may be actual or constructive. Delivery of the key
of the godown where the goods are stored is an illustration of constructive delivery. Delivery of
documents of title which would enable to the pledgee to obtain possession is equally effective to create
a pledge.
 In Madras Official Assignee v. Mercantile Bank of India Ltd., 1935 AC 53, the producer of a film
borrowed a sum of money from a financier and agreed to deliver the final print of the film when ready.
The agreement was held not a pledge, because there was no delivery of possession.

In Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954, the Supreme Court held that
delivery of railway receipts was the same thing as delivery of goods. In that case, certain goods were
consigned with the Railways to “self” from Bombay for transit to Okhla. The consignor endorsed the
railway receipts to the appellant bank against an advance of Rs. 20,000/-. The goods having been lost in
transit, pledgee sued the bank for the loss of the goods (worth Rs. 35,500). The Bombay High Court
allowed recovery upto Rs. 20,000/. The Supreme Court held the pledgee was entitled to recover the full
value of the goods lost and not merely the amount of his advance.

PLEDGE BY HYPOTHECATION

Sometimes the goods are allowed to remain in the custody of the pledger for a special purpose.
That does not militate against the effectiveness of the pledge. In Reeve v. Capper, (1838) Bing NC 136,
captain of a ship pledged his chronometer with the shipowner who allowed him to use the instrument
for the purpose of a voyage. The captain pledged it over again with another person. The question was
whether the first pledge was valid. The court held that it was. A constructive pledge comes into
existence as soon as the pawner, without actually delivering the goods, agrees to hold them for the
pawnee and promises to deliver them on demand.

In Bank of Chittoor v. Narasimhulu, AIR 1966 AP 163, a cinema projector and accessories were
pledged with a bank. The bank allowed the property to remain with the pledgers, since they formed the
equipment of a running cinema. Subsequently the pledgers sold the machinery. The court held that the
sale was subject to the pledge. There was a constructive delivery or delivery by attornment to the bank.

2. PLEDGE IS A CONVEYANCE IN PURSUANCE OF CONTRACT

It is essential to a valid pledge that the chattel shall be made over by the pledger to be pledgee
in pursuance of the contract of pledge. It is not necessary that delivery of possession and the loan
should be contemporaneous. Delivery and advance need not be simultaneous and a pledge may be
perfected by delivery after the advance is made. Delivery may be made made before or in
contemplation of an advance. In Blundell Leigh v. Attenborough, (1921) 3 KB 235, on Nov 1, 1919,
plaintiff handed her jewellery to one Miller to value it and let her know what offer he could make as to
lending her money. He was to keep the jewellery as security if he was to advance the money. On the
same day, Miller pledged the jewellery with the defendants, who advanced 1000 pounds, in good faith.
On November 5, Miller advanced 500 pounds to the plaintiff on security of the ring. Plaintiff came to
know of the facts. She paid the amount she had borrowed and sued the defendant for return of the
jewellery. She contended that on Nov. 1, Miller became only a gratuitous bailee. Subsequently, when
he advanced the money, no valid pledge could arise as he had already parted with the possession of the
goods.

The court held that delivery made by plaintiff on November 1 was a good delivery for the
purpose of creating a pledge. It is clear that the plaintiff intended, when she handed over the jewellery
to Miller, to create a valid pledge as between him and her, by way of loan which she was prepared to
accept.
RIGHTS OF PAWNEE

1. Right of retainer (S. 173-174)

Sec. 173 The pawnee may retain the goods pledged, not only for a payment of the debt or the
performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him
in respect of the possession or for the preservations of the goods pledged; but

Sec. 174 The pawnee shall not, in the absence of a contract to that effect, retain the goods
pledged for any debt or promise other than the debt or promise for which they are pledged, but such
contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent
advances made by the pawnee.

The first important right of a pawnee is the right to retain the goods pledged until his dues are
paid. He has a right to retain the goods not only for payment of the debt or performance of the
promise, but for the interest due on the debt and all necessary expenses incurred by him in respect of
the possession or for the preservation of the goods pledged.

The pledgee can retain the goods only for the payment of that particular debt for which the
goods were pledged and not for any other debt or promise, unless there is a contract to the contrary.
Where, however, after a pledge is created, a subsequent advance is made without any other security, a
contract to burden the same goods shall be presumed—Cowasji Muncherji Banaji v. Official Assignee of
Bombay, AIR 1928 Bom. 507. The rights of retainer ends on proper tender of payment. If he refused,
pledger can resort to sections 160 and 161.

SPECIAL AND PARAMOUNT INTEREST OF PLEDGEE

The right of retainer is in the nature of a particular lien. Lien is different from pledge. A pawn or
pledge is an intermediate between a simple lien and a mortgage. The pawnee gets a special property in
the goods pledged. The general property remains in the pawner and wholly reverts to him on discharge
of the debt. The right to property vests in the pledgee only so far as is necessary to secure the debt. In
Bank of Bihar v. State of Bihar, (1972) 3 SCC 196, the Supreme Court observed. “This special property or
interest is to be distinguished from the mere right of detention which the holder of a lien possesses, in
that it is transferable in the sense that a pawnee may assign or pledge his special property or interest in
the goods. Thus, so long as the pawnee’s claim is not satisfied no other creditor of the pawner has any
right take away the goods or their price. In Bank of Bihar’s case, goods which were under pledge of the
bank were seized by the State. It was held that seizure could not deprive the pledgee of his right to
realize the amount for which the goods were pledged and therefore the State was bound to indemnify
it.

HYPOTHECATEE HAS NO DIRECT RIGHT OF SEIZURE

Where the pledge is by way of hypothecation, the creditor cannot directly seize the goods by
entering the premises or otherwise. He has to do so either with the consent of the borrower or through
a court order. In Union of India v. Shenthilnathan, (1977) 2 MLJ 499, it was held that “at best the right
the plaintiff had under the agreement was to file a suit on the debt and after obtaining a decree to
proceed against the property specified in realization of the decree.

2. RIGHT TO EXTRA ORDINARY EXPENSES

S. 175 Pawneee is entitled to receive from the pawner extraordinary expenses incurred by him for the
preservation of the goods pledged. He cannot retain the goods demanding extra ordinary expenses. He
can only sue to recover such expenses.

3. RIGHT TO SELL (176)

If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of
the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the
pawnor upon the debt or promise, and retain the goods pledged as a collateral security, or he may sell
the thing pledged, on giving the pawnor reasonable notice of the sale.

The right to sue is a personal action and rests upon the contract of loan. Until the money due is
recovered, the pledged goods may be retained. They have to be surrendered when the loan is realized.
If the pledgee is unable to return the goods, he cannot have a judgment for the debt.

In Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322, defendant borrowed Rs. 20,000 from the
plaintiff on a promissory note and gave him aeroscrapes worth about Rs. 35,000 as security for the loan.
The plaintiff sued for repayment of the loan, but was unable to produce the security, having sold it, and
therefore his action for the loan was rejected.

House of Lords in Trustees of the Property of Ellis & Co v. Dixon Johnson, 1925 AC 489 observed:

“If a creditor holding security sues for the debt, he is under an obligation on payment of the
debt to hand over the security, and that if, having improperly made away with the security he is unable
to return it to the debtor he cannot have judgment for the debt.”

Requirement of notice

Pledgee may sell the goods. But before making the sale, he is required to give to the pawner, a
reasonable notice of his intention to sell. Pawner’s right to redeem cannot be taken away, nor can he be
foreclosed from redeeming the pledge.

LOSS OF GOODS

Where goods are lost due to the negligence of the pledgee, the liability of the pledger is reduced
to the extent of the value of such goods.

PAWNER’S RIGHT TO REDEEM (177)

If a time is stipulated for the payment of the debt, or performance of the promise, for which the
pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at
the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of
them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.

Satisfaction of the debt or engagement extinguishes the pawn. The pawnee on such satisfaction
is bound to redeliver the property. The pawner has the absolute right to redeem the property pledged
upon tender of the amount advanced. The special interest of the pledgee comes to an end as soon as
the debt for which the goods were pledged is discharged. If no specific period is prescribed for
redemption, the pawnor may redeem the pledge at any time by payment of the amount for which the
pledge had been made. The right to redeem continues upto the time on the expiry of which the pawnee
has notified that the goods would be sold. Pawner may redeem the goods at any time before the actual
sale.

The pawner has the right to take back with the goods the increase, if any, that the goods have
undergone during the period of pledge. In M.R. Dhawan v. Madan Mohan, AIR 1969 Del 313, certain
shares of a company was under pledge. During the period of the pledge, the company issued bonus and
rights shares. It was held that these increases belonged to the pawnor.

WHO CAN PLEDGE

Pledge may be made by the owner or by any person with the owner’s authority. Pledge by any
other person may not be valid. In Biddomoy Dabee v. Sittaram, ILR 4 Cal 497, pledge by a servant in the
temporary absence of the owner was held to be invalid.

PLEDGE BY MERCANTILE AGENT (178)

The first exception to the above rule is found in Sec. 178. Where a mercantile against is, with the
consent of the owner, in possession of goods or documents of title to goods, any pledge made by him
while acting in the ordinary course of business shall be valid, provided that the pawnee acts in good
faith and has no notice of the fact that the agent has no authority to pledge. Necessary conditions of
validity under Sec. 178 are:

 Mercantile Agent
There should be a mercantile agent. Explanation to Sec. 178 says that “mercantile agent” has
the same meaning as in Sale of Goods Act, 1930. Under Sec. 2(9), mercantile agent means an
agent having in the customary course of business as such agent authority either to sell the
goods, or to consign goods for the purpose of sale, or to buy goods or to raise money on the
security of goods”.
 Possession with Owner’s Consent
The mercantile agent should be in possession of the goods or documents of title with the
consent of the owner. Consent means agreeing on the same thing in the same sense (Sec. 13
Contract Act). If consent is real, it is immaterial that it was obtained by fraud or
misrepresentation or with dishonest intention. These may make the person receiving
possession liable for some offence. But consent of the owner actually given is not annulled
thereby. In S. Sulaiman v. Ma Ywet, AIR 1934 Rang 198, a goldsmith obtained possession of
certain jewellery under the pretence that he had a customer and pledged the jewellery. The
pledgee was held to have obtained a good title.
 In the Course of business
Goods should have been entrusted in his capacity as a mercantile agent and he should be in
possession in that capacity. If the goods are entrusted to him in a different capacity, it is not
open to a third party who taken a pledge from him to say that they were in his possession as a
mercantile agent and therefore he had the power to create a pledge.
It is necessary that he should make the pledge in the ordinary course of his business as such
agent.
 Good faith
The last essential requirement is that the pawnee should act in good faith. At the time of
pledge, he should not have notice that the pawnor has no authority to pledge. According to the
General Clauses Act, 1895, a thing is said to be done in good faith when it is done honestly,
whether negligently or not. “Notice” will mean actual or constructive notice.
PLEDGE BY DOCUMENTS OF TITLE
Where a mercantile agent is in possession of the documents of title relating to his
principal’s goods and if he pledges the same, the pledgee gets a good title if he acts in good faith
and without notice. Explanation to Sec. 178 says that the expression “documents of title” shall
have the same meaning in Sale of Goods Act. According to Sec. 2(4) of Sale of Goods Act, 1930
“documents of title to goods” includes a bill of lading, dock warrant, warehouse keeper’s
certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods
and any other documents used in the ordinary couse of business as proof of the possession or
control of goods, or authority of the document to transfer or receive goods thereby
represented.
PERSON IN POSSESSION UNDER VOIDABLE CONTRACT (178-A)
178-A When the pawnor has obtained possession of the goods pledged by him under a
contract voidable under Sec. 19 or Sec. 19-A, but the contract has not been rescinded at the
time of the pledge, the pawnee acquires a good title to the goods provided he acts in good faith
and without notice of the pawnor’s defect of title.
In Phillips v. Brooks Ltd (1919) 2 KB 243, a fraudulent person, pretending to be a man of
credit, induced the plaintiff to give him a valuable ring in return for his cheque which proved
worthless. Before the fraud could be discovered, the ring was pledged with the defendants.
The pledge was held to be valid. Because it was made by a person in possession under a
voidable contract. Effect of fraud is to render the transaction voidable and not void. If an
innocent person has taken the goods under a pledge before the transaction is avoided, the true
owner cannot claim them back.
If the contract under which possession is obtained is void, the person in possession
cannot create a valid pledge.
PLEDGE BY PLEDGEE (179)
Where a person pledges goods in which he has only a limited interest, the pledge is valid
to the extent of that interest.
When a pledgee further pledges the goods, the pledge will be valid only to the extent of his
interest. His interest is the amount for which the goods have been given to him as a security. If
he pledges for a larger amount, the original pledger will still be entitled to his goods on paying
the amount for which he himself pledged the goods (Firm Thakur Das v. Mathura Prasad, AIR
1958 All 66). If an effective pledge in favour of the pledgee has not taken place, any repledge
made by him will be equally ineffective.