Unit 8: Bailment and Pledge

Bailment is based on a contract. The contract may be written, oral or implied from conduct. Consideration is not compulsory, so even a free arrangement can create bailment.

There must be delivery of movable goods. Delivery may be actual, where goods are physically handed over, or constructive, where control is transferred without physically shifting the goods.

The goods must be given for a clear purpose such as repair, safe custody, transport, use or processing. The purpose may be expressly stated or understood from the situation.

The bailee gets possession, but ownership remains with the bailor. A person who merely has custody without independent possession does not become a bailee.

The bailee must return the same goods or dispose them according to the bailor's directions. Returning some other goods, even of equal or higher value, is not enough unless the contract permits it.

The bailor must disclose known faults that materially interfere with the use of goods or expose the bailee to unusual risk. In non-gratuitous bailment, the bailor's responsibility is wider because the goods are supplied for reward.

In gratuitous bailment, the bailor must repay necessary expenses incurred by the bailee for keeping, carrying or working upon the goods. In non-gratuitous bailment, ordinary expenses are usually covered by the reward, but extraordinary expenses must be borne by the bailor.

If the bailor takes back goods before the agreed time in a gratuitous bailment, and the bailee suffers loss more than the benefit received, the bailor must compensate the bailee.

The bailor must compensate the bailee if the bailor had no right to make the bailment, receive the goods back or give directions about them.

Once the time expires or the purpose is completed, the bailor must take the goods back. If he refuses, the bailee can claim necessary expenses for continued safe custody.

The bailee must take as much care as a person of ordinary prudence would take of his own goods of similar bulk, quality and value. If he takes such care, he is not liable for accidental loss unless there is a special contract.

The bailee must use the goods only as permitted. If he uses them differently, the bailor may terminate the bailment and the bailee must compensate for loss, even if the immediate loss happens accidentally.

The bailee should not mix the bailor's goods with his own without consent. The result depends on whether the bailor consented and whether the goods can be separated.

The bailee must return the goods when the agreed time expires or the purpose is completed. If he delays, he becomes liable for loss, destruction or deterioration from that time.

Any natural increase or profit from the goods belongs to the bailor unless there is a contract to the contrary.

The bailee cannot deny the bailor's title while holding the goods under bailment. He must hold the goods for the bailor and not claim ownership against him.

The finder must make reasonable efforts to find the true owner and return the goods.

The finder cannot sue merely for his trouble or voluntary expense in finding the owner. But he may have a right to retain goods for lawful expenses.

The finder may retain the goods until lawful expenses for preservation and finding the owner are paid.

If the owner has announced a specific reward, the finder can sue for that reward and retain the goods until it is paid.

The finder may sell only in limited cases: where the owner cannot be found or refuses lawful charges, and the goods are perishing or the finder's lawful charges amount to two-thirds of the value.

Pawnee may retain pledged goods not only for the principal debt or promise, but also for interest and necessary expenses incurred for possession or preservation.

The pawnee can retain pledged goods for later debts only if there is a contract allowing this. Without such contract, retention is limited to the original debt or promise.

Pawnee can recover extraordinary preservation expenses from the pawnor. However, unless agreed, he cannot retain the goods merely for these extraordinary expenses.

If the pawnor defaults, the pawnee has two choices: sue the pawnor and retain goods as collateral security, or sell the pledged goods after giving reasonable notice.

A mercantile agent in possession of goods or documents of title with the owner's consent can make a valid pledge in the ordinary course of business, if the pawnee acts in good faith and has no notice of lack of authority.

If the pawnor got goods under a voidable contract and the contract was not rescinded at the time of pledge, the pawnee gets good title if he acts in good faith and without notice of the defect.

If the pawnor has only a limited interest in the goods, the pledge is valid only to the extent of that interest. He cannot give better rights than what he has.

A co-owner who has possession of goods with the consent of other co-owners can make a valid pledge, provided the pawnee acts in good faith.

A seller left in possession after sale, or a buyer in possession before full sale, may create a valid pledge if the pawnee acts in good faith and has no knowledge of the defect in title.