Legal Environment for Business in Nepal 26 March 2017 Bailment and Pledge Legal Environment for Business in Nepal 26 March 2017 Saroj Shrestha

Bailment What is Contract of Bailment ? Bailment is one of the commercial security measures like safe custody, pledge, repair, finding of lost goods etc. The term ‘bailment’ has been derived from a French word ‘baillior’. It denotes ‘to deliver’. Bailment is also a kind of special contract, caused by the delivery of goods for certain purpose. Bailment is the change of ‘possession of a goods’, not a ‘transfer of ownership’ of goods as in a safe.

Contract relating to Bailment : Contract Act, 2056 (Chapter 5, Section 25-34) Section 25 of Contract Act, 2056 has given a definition that ‘A contract relating to bailment shall be deemed to have been concluded in case any person delivers any property to another person on a returnable basis or for handing it over to any other person or selling it as ordered by him/her.’ The sec. 25 provided that ‘a deed must be execute while bailing any property worth more then Rs.5,000.00’. Explanation: For the purpose of this chapter, the term 'property' includes any movable property and title to such property.

Contract Act, 2056 ‘A bailment is the delivery of the thing entrusted for some special purpose upon a contract expressed or implied to conform to the purpose of the trust’ Indian Contract Act defines that ‘A bailment is the delivery of the 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’ (Sec. 148 of Indian Contract Act, 1872)

Bailment Examples: Mr. X delivers his laptop to Mr. Y for repair. It is the bailment of goods for repair. Mr. John has to go UK for one week holidays. He has delivered his mountain bike to Mr. Ram to take care of it in his absence. It is the bailment of safe custody. Mr. Shyam gives his car to Mr. Laxman for one month for Rs. 50,000 on hire. It is the bailment of a goods for hire.

Bailment.. A hires a set of tent and sires for a marriage ceremony from B, a tent house for Rs. 3000. After the completion of the purpose the goods are returned to B. Here A is bailee, B is bailor, the goods are called bailment. The person who delivers goods is called ‘bailor’ and the person to whom they are delivered is called the ‘bailee’. The process of bailment transaction is complete when bailee received the bailed goods and title to such goods.

Bailment.. In case any property is already being kept by any person or a person authorized by him/her under his/her custody or control, the concerned property shall be deemed to have been taken by him/her as a bailed property. (Sec. 26 of Contract Act, 2056) Where a movable property is delivered from one person to another for some certain purpose, after accomplishing the purpose it is to be returned or to be disposed according to the bailor, is contract of bailment.

Essentials of Contract of Bailment Delivery of movable goods: Delivery of movable goods involves a change of possession of goods from one person to another, but not a change of ownership of the goods. A mere custody of goods without a delivery of possession does not mean bailment. It must be made on the ground of free consent of the parties. A delivery of goods may be either actual or constructive. Actual delivery: Actual delivery is the real handover of goods from bailer to the bailee for any specific purpose. It is a change of physical possession of the goods bailed.

Essentials of contract of Bailment A gives his bicycle to B on hire for one day for Rs. 250. B takes it immediately and goes away riding. It is an actual delivery of a goods. Constructive delivery: A constructive delivery is not a change of the physical possession of goods. The goods remain in the same place but something is done that causes a change of its possession to the bailee, for instance the delivery of a document of title delivery of key of a store or vehicle.

Essentials of contract of Bailment 2. Delivery for some specific purpose: Delivery of goods must be made for some specific purpose (repair, security, making something etc.) by which the Bailee is bound to return the goods as the purpose is achieved. If goods are delivered by mistake there is no contract of bailment. 3. Contract: The relationship between a bailor and a bailee is the creation of a contract. In general, the bailment transaction is based on the contract. There must be a written document if delivery of goods is worth more than five thousand rupees. That is why both the parties must be competent to conclude a contract.

Essentials of contract of Bailment 4. The goods must be returned: The bailment goods must be returned to the bailor after the achievement of the purpose because bailment is the subject to the condition that when the purpose is achieved the goods will be returned to the bailor or disposed of according to the direction of the bailor. 5. No transfer of ownership: Only the possession of the goods is transferred from a bailor to a bailee in a contract of bailment. But ownership of the goods remains with the bailor. That is why in a contract of bailment the goods should be disposed off in accordance with the instruction of the bailor.

Essentials of contract of Bailment 6. Delivery of movable goods: Generally, movable goods and property can be transferred as a bailment. But keeping cash in a bank account cannot be called a bailment because the same coins and notes deposited in the account can not be returned, only amount is returnable. 7. Consideration is not necessary: The contract of bailment may be gratuitous and non- gratuitous. If bailment is made for the exclusive benefit of a bailor or of a bailee it is gratuitous e.g. A lets his bike just for 10 minutes. X’s giving to Y his pen just to make a note in a class is gratuitous bailment.

Difference between Bailment and Sale of Goods Differs in Bailment of goods Sale of Goods 1. Nature of delivery of goods It is only delivery of possession (physical) of goods from a bailor to a bailee It is a delivery of ownership (legal) of the goods from a seller to a buyer 2. Gratuitous and non gratuitous Bailment may be gratuitous or non-gratuitous Sale is never gratuitous price is necessary for the seller 3. Time of possession Possession of the goods is temporary and limited because it must be returned after accomplishment of the certain purpose Possession of goods is unlimited and permanent because it is a delivery of ownership

Difference between Bailment and Sale of Goods 4. Purpose of Contract The purpose of bailment is only to achieve some specific purpose Sale is to transfer of ownership over the delivery of goods 5. Return of goods Must be returned after the accomplishment of the objective or the expiry of certain time There is no question of returning goods because it is a transfer of ownership of the goods 6. Use of the goods A bailee can not make an authorized use and mix-up of the goods transferred by the bailor The buyer can use and mix-up of the goods transferred by the seller.

Difference between Bailment and Sale of Goods 7. Consideration Consideration may be or may not be there on the bailment. The tenderer has to give a consideration to the acceptor or it may be gratuitous. Consideration must be there. The buyer has to pay a price for the goods as a consideration to the seller. 8. Pre-delivery Pre-delivery of the goods is a must in bailment Pre-delivery is not compulsory in a sale. The goods may be delivered after sometimes of the contract.

Kind of Bailment Contract Contract of bailment can be classified from the point of view of benefit, reward and nature of the contract. They are as follows: Bailment from the point of view of the benefit to the concerned parties: Bailment for the exclusive benefit of the bailor: Where a bailor bails his goods with the bailee for taking care of it and for the protection of the goods bailed or for his own benefit and he does not pay any consideration to the bailee, such a bailment comes under the category.

Kind of Bailment Contract Bailment for the exclusive benefit of the Bailee: If a bailee receives some goods for his need or his benefit for a certain period of time and does not pay any reward or remuneration to the bailor, such bailment comes under this caterogy. Example: A lends his bile to his friend B for one day, free of charge. B is the bailee who alone is benefited of the service from A. It is a bailment that exclusively benefits the bailee.

Kind of Bailment Contract Bailment for mutual benefit of the bailor and the bailee: If both of the parties of the contract of bailment are benefited reciprocally there is a bailment for mutual benefit of the concerned parties. i.e. House Lease Contract 2. Bailment from the point of view of reward: From the point of view of reward, bailments are of two types: Gratuitous and non-Gratuitous. Gratuitous bailment: Where the bailee keeps the goods in safety or provides services without any expectation of remuneration, benefit or reward, there is gratuitous bailment. “Naso” is popular in Nepalese society as a gratuitous bailment.

Kind of Bailment Contract Non-gratuitous bailment: If the parties of a bailment contract expect “something in consideration” it is a non-gratuitous bailment or a bailment or reward. The reward may be made from the side of the bailor or bailee. 3. Bailment from the point of view of expression: Expression or Voluntary Bailment: If two parties enter into a contract of bailment expressly or voluntary, it is an expressed bailment. It may be made verbally or in a written form. Such a contract clarifies the rights and duties of the bailor and bailee by its terms.

Kind of Bailment Contract Implied or involuntary bailment: If the parties to a contact come into an agreement in an implied way or by operation of law, there is an implied or involuntary bailment. The bailor and bailee have to fulfill their duties without any expression. i.e. finder of lost goods

Pledge or Pawn What is contract of Pawn/ Pledge ? A pledge is also a kind of special contract and a part of bailment. It is a transfer of bailment of goods as a security for the of debt, or performance of a promise. That is why the contract, by which the possession of goods (objects or documents movable or immovable) is transferred as a security, is known as a ‘Pledge’. In this case, the person who gives goods as security is called the ‘Pledger’ or ‘pawnor’ and the person whom the goods is delivered as security is called the ‘pledgee’ or ‘pawnee’.

Pledge.. The pledge is bound to return the pledged goods on the satisfaction of his debt. Sec. 35 (1) of Contract Act, 2056 had defined the contract relating to pledge thus “In case any person has obtained a collateral while supplying credit to anybody as a security for that credit, or obtained any property as a deposit in the form of a guarantee to perform the concerned work while having any work performed a contract relating to collateral or deposit shall be deemed to have been concluded.”

Pleadge The Section explain that 'property' means any movable or immovable property, and title or document establishing title to that property. The Act has included both the terms “collateral” and “deposit” in the sense of a pledge, which is more popular term in the business field. (Sec. 35 (2) of CA, 2056) Indian Contract Act, defines that ‘the bailment of goods as security for payment of debt of performance of promise is called ‘pledge’. The bailor is in this case called ‘pawner’ and the bailee is called ‘pawnee”.

Generally, shares of a company, government security and movable properties can be delivered for a pledge. Essentials of Contract of Pledge. 1. Delivery of goods 2. Delivery of Security 3. Lawful purpose 4. Return of goods 5. The goods must be long lasting.

Distinction between Bailment and Pledge Differs in Bailment Pledge 1. Purpose Some special purpose: Repair or lease or safe custody Pledge is provide as security for repayment of loan or fulfillment of an obligation. 2. Right of using the goods There is no restriction. It depends on the nature of transaction or terms of the contract A pledgee has no right to use the goods pledged 3. Right to sell the goods A bailee may either retain the goods or sue the bailer for the performance A pledgee has the right to sell the goods pledged, on the default after giving notice to the pledger 4. Consideration Consideration may or may not be in a bailment Consideration is necessary for the purpose of security for the payment of debt

5. Guarantee There is no need to guarantee of goods in the contract of bailment A guarantee of goods is necessary for the purpose of security for payment of debt. 6. Nature of goods Goods must be movable in bailment contract The goods may be movable or immovable but must be long lasting.

If you have any questions or concerns, please discuss .. Thank you ! Saroj Shrestha