Explained: Bailee-Bailor Relationship

Bailment and Pledge are two special contracts that are often confused. Every pledge is a bailment but every bailment is not a pledge. Bailment means the delivery of goods from one person to another for a special purpose. A  Pledge means the delivery of goods as security for the payment of a debt or the performance of a promise. Therefore, Bailment & Pledge are two different contracts. Pledge is a special kind of bailment.

Section 148 of the Indian Contract Act, of 1872, defines ‘Bailment’, ‘bailor’, and ‘bailee’.

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’.

Let us now discuss the duties and responsibilities of the bailee and bailor.

For example, when a customer (the bailor) deposits valuables in a bank’s safe deposit box, the bank (the bailee) assumes responsibility for those items. The relationship is predicated on trust and the bank’s legal obligation to safeguard the deposited items. The goods deposited are either returned to the bailor or disposed of according to the bailor’s instructions. Bailment thus necessitates a temporary transfer of possession but not ownership. The bailor-bailee relationship in banking is therefore a critical aspect of the banking industry’s fiduciary duties. Governed by the principles of the Indian Contract Act, this relationship imposes significant responsibilities on banks to safeguard customers’ valuables and adhere to strict standards of care.

Responsibility of bailee:

Reasonable care: As per section 151 of the Indian Contract Act, the primary duty of the bailee, is to take reasonable care of the goods bailed. The standard of care required is that which a man of ordinary prudence would take under similar circumstances.

The burden of Proof: Section 152 of the Indian Contract Act provides the burden of proof on the bailee to demonstrate that they took the requisite care. Thus, if a customer’s valuables are stolen or damaged, the bank must prove that it has implemented adequate security measures and protocols to protect those items. Failure to provide such proof can result in the bank being held liable for compensating the customer.

Redelivery of Goods: Section 160 of the Indian Contract Act, provides that the bailee must return or deliver the goods according to the bailor’s instructions. So the bailee has to return the goods to the bailor upon the fulfilment of the purpose for which they were bailed. Banks must take care that access to safe deposit boxes is granted only to the authorised customer or their designated representative after identifying the person claiming the items.

As such the Indian Contract Act, of 1872 does not provide for the Rights of a Bailor. But the Rights of a Bailor are the same as the Duties of the Bailee i.e. Rights of Bailor = Duties of Bailee.

Rights of of bailor:

1. Enforcement of Bailee’s Duty: Since the Right of the bailor is the same as the right of the Bailee, therefore on the fulfillment of all duties of the Bailee the bailor’s right is accomplished. For example, the Bailee must give the accretions and it is the right of the bailor to demand the same.

2. Right to claim damages: If the Bailee fails to take care of the goods, the bailor has the right to claim damages for such loss. (Section 151).

3. Right to Termination of the Contract: If the Bailee does not comply with the terms of the contract and acts negligently in such case the bailor has the right to rescind the Contract. (Section 153)

4. Right to claim compensation: Section 164 of the Indian Contract Act provides that if the bailee uses the goods inconsistently with the terms of the bailment or is negligent, the bailor is entitled to compensation for any loss arising from such actions. If the Bailee uses the goods for an unauthorized purpose or mixes the goods it causes a loss of goods. In such a case, the bailor has the right to claim compensation.

5. Section 153 of the Indian Contract Act, provides that, the Bailee shall not make any unauthorized use of goods bailed. In case he makes any unauthorized use, then the bailor can terminate the bailment. Bailor can also claim damages caused to goods bailed due to unauthorized use as per Section 154.

Rights of a Bailee:

1. Right to recover expenses: In the contract of Bailment, the Bailee incurs expenses to ensure the safety

 of goods. The Bailee has the right to recover such expenses from the bailor. (Section 158)

2. Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration for services rendered. But the Bailee is not awarded any remuneration in the case of gratuitous bailment. (Section 219)

3. Right to recover compensation: Sometimes, the bailor could not contract for bailment. Such a contract causes loss to Bailee, therefore Bailee has the right to recover such compensation from the bailor. (Section 168)

4. Right to Lien:  Bailee has the right over Lien. By this, we mean that if the bailor fails to make payment of remuneration or does not pay the amount due, the Bailee has the right to keep the goods bailed in his possession till the time debtor dues are cleared. Lien is of two types: particular lien and general lien. (Section 170-171)

5. Right to suit against a wrongdoer: After the goods have been bailed and any third party deprives the Bailee of the use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180)

Whenever a bank assumes the responsibility of bailee, it should draft clear and comprehensive agreements outlining the terms of the bailment, including the rights and responsibilities of both parties, to avoid disputes. These agreements should specify the standard of care expected and the procedures for accessing and retrieving the deposited items.

Related Posts: