Legal Aspects of Business

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Legal Aspects of Business

  1. 1. Anurag Verma Roll No: 35413 Assignment Legal Aspects of Business Date of Submission: 12/05/2013 Symbiosis Institute of Business Management MBA [Ex. Edu.] Batch 2012-2014 Semester II – Division A
  2. 2. Page 2 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Table of Contents Q1: Write short notes on Indemnity and Guarantee............................................................................3 Indemnity..........................................................................................................................................3 Indemnity under Indian Contract Act 1872 ..............................................................................................3 Key Fundamentals.....................................................................................................................................3 Essential Elements of an Indemnity Contract...........................................................................................3 Rights Of An Indemnity Holder .................................................................................................................4 Conclusion.................................................................................................................................................4 Guarantee .........................................................................................................................................5 Essential Elements of Contract of Guarantee...........................................................................................5 Kinds of Guarantee ...................................................................................................................................6 Difference Between Contract of Indemnity and Contract of Guarantee................................................7 Examples on Indemnity and Guarantee ..............................................................................................7 Q2: Write short notes on Bailment and Pledge...................................................................................8 Bailment............................................................................................................................................8 Essential Elements of a Valid Bailment.....................................................................................................8 Types of Bailment .....................................................................................................................................9 Duties of a Bailee ......................................................................................................................................9 Duties of a Bailor.....................................................................................................................................10 Bailee Rights............................................................................................................................................11 Bailor’s Rights..........................................................................................................................................11 Termination of Bailment.........................................................................................................................12 Pledge .............................................................................................................................................13 Rights of a Pawnee..................................................................................................................................13 Rights of a Pawner ..................................................................................................................................13 Pledge By a Non-Owner..........................................................................................................................14 Difference Between a Bailment and a Pledge....................................................................................14 Examples on Bailment and Pledge....................................................................................................14
  3. 3. Page 3 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Q1: Write short notes on Indemnity and Guarantee Indemnity An indemnity contract arises when one individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual. As a legal concept, it has a more specific meaning. For instance, compensation connotes merely a sum paid to make good the loss of another without regard to the payer's identity, or their reasons for doing so. As the following paragraphs should explain, an indemnity is a sub-species of compensation, in the same way that damages and reparations are. An obligation to indemnity can also be distinguished from a guarantee granted by one party in regard to the potential debts of another. For example A might agree to stand guarantor (or surety) for her son C (an poor law student) so that if C cannot afford to pay his rent to B (his canny landlord), A will be obliged to pay for him. Here, C is the one primarily responsible for payment of the rent. A's liability is only ancillary. The liability of an indemnifier, properly so-called, is primary. Indemnity under Indian Contract Act 1872 As per section 124 of the Indian contract Act 1872 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, is called a "contract of indemnity". Key Fundamentals 1. It is a promise to compensate for or security against damager, loss or injury 2. In wider sense it includes all contracts of insurance, guarantee. It it not a collateral but an independent contract. 3. It is a tool for allocating risks contingent liability. Essential Elements of an Indemnity Contract All the essentials of a valid contract must also be present in the contract of indemnity. The contract of indemnity is possible by the express or implied manner. It is a class of contingent contract. Following are the essential elements of the indemnity contract 1. Loss to One Party A person can indemnify another person, only if such other person incurs some loss or is about to incur some loss. Therefore, a contract of indemnity can be performed only when the loss has incurred to the promisee or the loss to the promisee has become certain. 2. Indemnity by the Promisor The purpose of the contract of Indemnity is to protect the indemnity holder from any loss that may be caused to the indemnity holder in future (i.e. such a loss has not already been caused to the indemnity holder)
  4. 4. Page 4 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business 3. Reason for Loss The contract of indemnity may specify that the indemnity holder shall be protected from the loss caused due to the action of the promisor, or the action of any other person or any act, event of accident, which is not in the control of the parties. Rights Of An Indemnity Holder The indemnity holder has the right to recover the following from the indemnifier by the way of compensation. 1. Right to Recover Damages The indemnity holder is entitled to recover from indemnifier all the damages which he is compelled to pay in any suit in respect of any matter covered by the contract of indemnity. 2. Right To Recover Costs The indemnity holder is entitled recover from the indemnifier all the costs which he is compelled to pay in bringing or defending such suit. It may be noted that the indemnity holder must act within the scope of his authority and while bringing or defending the suit, he must as a prudent person. 3. Right to Recover Sums Paid in Compromise The indemnity holder is entitled to recover from the indemnifier all the amount which he has paid under the terms of a compromise of the suit. However, he must act within the scope of his authority, While in a compromise, he must act like a prudent man. Conclusion Indemnity is a legal exemption from the penalties or liabilities incurred by any course of action. An insurance payout is often called an in indemnity, or it can be insurance to avoid any expenses in case of a lawsuit. Indemnification is a promise, usually as contract provision, protecting one party from financial loss. This is something stated as a requirement that one party hold harmless the other. (Hold harmless does not imply indemnification. The first says I won’t make any claims against you and the second says I will pay the claims against and/or your costs, etc.) Indemnification is a type of insurance which protects the one party from the expenses of other. Indemnification clause cannot usually be enforced for intentional tortious conduct of the protected party. Corporate officers, board members and public officials often require an indemnity clause in their contracts before they perform any work. In addition indemnification provisions are common in intellectual properties. Licenses in which the licensor does not want to be liable for misdeeds of the licensee. A typical license would protect the licensor against product liability and patent infringement.
  5. 5. Page 5 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Guarantee A contract of Guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the ‘surety’, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral, or written (Section 126). The contract of guarantee may be express, or implied, and may even be inferred from the course of conduct of the parties concerned. For Example : Ramesh request Mohan to lend Rs 2000 to Sunil and guarantees that if Sunil fails to pay the amount, he will pay. This is a contract of guarantee. Ramesh, in this case, is the surety, Mohan, the creditor and Sunil, the principal debtor. The contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditor, and the surety. Here, the following three collateral contracts may be distinguished. 1. As between the creditor and the principal debtor, there is a contract out of which the guaranteed debt arises. 2. As between the surety and the creditor, there is a contract by which the surety guarantees to pay to the creditor, the principal debtor’s debt, in case of his debtor’s default. 3. As between, the surety and the principal debtor, there is a contract that the debtor shall indemnify the surety, in case the surety pays, in the event of a default by the principal debtor. This contract if it is not expressed between the parties is always implied. Essential Elements of Contract of Guarantee The essential elemetns of the contract of guarantee are discussed as under : 1. Concurrence A contract of guarantee requires the concurrence of all the three parties to it viz., the principal debtor, the creditor and the surety 2. Primary Liability in Some person. There must be a primary liability in some person other than the surety. The word liability as used in the definition of guarantee, means a liability which is enforceable at law. If that liability does not exist, there cannot be a contract of guarantee. But a guarantee given for the debt of a minor is an exception to this rule. 3. Essentials of a Valid Contract A contract of guarantee must have all the essential elements of a valid contract like free consent, capacity of parties, lawful object and consideration. But the following two points should be noted. All the parties must be capable of entering into a valid contract though the principal debtor may be a person suffering from the incapacity to contract. In such a case, the surety is regarded as the principal debtor and is liable to pay personally, even though the principal debtor (e.g. a minor) is not liable to pay.
  6. 6. Page 6 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business A consideration received by the principal debtor is sufficient for the surety and it is not necessary that it must necessarily result in some benefit to the surety himself. It is sufficient if something is done or some promise is made for the benefit of the principal debtor. 4. Writing Not Necessary. A guarantee may be either oral or written. It may be express or implied. The implied guarantee may be inferred from the course of conduct of the parties concerned. Kinds of Guarantee A guarantee may either be prospective or retrospective guarantee: 1. Retrospective Guarantee A guarantee given for an existing debt or obligation is called the retrospective guarantee. 2. Prospective Guarantee A guarantee given for a future debt or obligation is called prospective guarantee. A guarantee may be classified either as a specific guarantee or a continuing guarantee 3. Specific Guarantee When a guarantee extends to a single transaction or debit, it is called the specific guarantee. The specific guarantee is also known as a simple guarantee. On the completion of a specific transaction, the guarantee is discharged. 4. Continuing Guarantee When a guarantee extends to a series of transactions, it is called the continuing guarantee. The continuing guarantee does not come to an end on the performance of a single transaction, or the discharge of debt but it will be enforceable for the subsequent transactions also. At the time of giving a continuing guarantee, the surety can either fix the amount of time. Examples A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be responsible to the amount of Rs 5000 for the due collection and payment by C of those rents. This is continuing guarantee. A becomes the surety of C for B’s conduct as manager in C’s bank, and B is appointed on the faith of this guarantee. A is precluded from annulling the guarantee so long as B acts as a manager in C’s bank. A guarantee for the faithful discharge of his duties by a person appointed to a place of trust in a bank is not a continuing guarantee. It is a guarantee of appointment. A guarantee for payment of a certain sum by installments, within a definite time, is not a continuing guarantee. It is a guarantee of loan.
  7. 7. Page 7 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Difference Between Contract of Indemnity and Contract of Guarantee Sr No. Contract of Indemnity Contract of Guarantee 1 There are two parties to the contract, the indemnifier (promisor) and the indemnified (promise) There are three parties to the contract, the creditor, the principal debtor and the surety. 2 Liability of the indemnifier to the indemnified is primary and independent Liability of the surety to the creditor is collateral or secondary, the primary liability being that of the principal debtor. 3 There is only one contract in the case of a contract of indemnity, i.e. between the indemnifier and the indemnified In a contract of guarantee, there are three contracts, between the principal debtor and the creditor, between the creditor and the surety, and between the surety and the principal debtor. 4 It is not necessary for the indemnifier to act at the request of the indemnified It is necessary that the surety should give the guarantee at the request of the debtor 5 The liability of the indemnifier arises only on the happening of a contingency There is usually an existing debt or duty, the performance of which is guaranteed by the surety. 6 An indemnifier cannot sue a third party for the loss in his own name because there is no privity contract. He can do so only if there is an assignment in his favour. A surety, on discharging the debt due by the principal debtor, steps into the shoes of the creditor. He can proceed against the principal debtor in his own right. Examples on Indemnity and Guarantee Indemnity Examples : A car insurance policy is an example of indemnification. If a purchaser of car insurance policy is involved in an accident wherein the liability for the accident is undisputedly of their insured driver, then the insurance carrier has the duty to indemnify their insured driver in very specific ways to "make them whole" again. Jack would like to enter into a contract with Jill to build a playground, but Jill is hesitant because of the potential future liability of such an endeavor. In this case, Jack could chose to indemnify Jill against future claims that may arise due to Jill’s participation in the contract. Jill is protected and Jack gets Jill’s participation. Guarantee Examples B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A's promise to deliver the goods. This is a sufficient consideration for C's promise.
  8. 8. Page 8 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Q2: Write short notes on Bailment and Pledge Bailment The term bailment is derived from the French word ‘bailer’ which means to deliver a thing under a contract. The delivery of goods by one person to another person for a specific purpose with a condition to return the goods when the purpose is over or otherwise disposed off according to the direction of the person. The Person who delivers the goods is known as the ‘Bailor’ and the person who receives the goods is known as the ‘Bailee’ and the transaction is known as ‘Bailment’ For Example : Salman gives a cloth to his tailor Shaukat for stitching. It is a bailment of the cloth. As soon as the cloth is stitched, it will be returned to Salman. Essential Elements of a Valid Bailment The essential features of a valid bailment are discussed as under : 1. Delivery of Possession Under the bailment, the possession of goods is delivered by the bailor to the bailee. If the possession is not delivered, it is not a bailment. If the ownership is not transferred to other person, it is not a bailment. The delivery of goods may take place either by a way of an actual delivery or by a constructive delivery. An actual delivery means, the bailor hands over the physical possession of goods to the bailee, A constructive delivery means some act on the part of the bailor, which has the effect of putting the goods in the possession of the bailee. The bailment is not possible with an immovable property. For Example : The deposit of money in a bank is not a bailment, since the money returned by the bank would not be the identical currency notes. Moreover, money is not goods. 2. Contract between the parties There must be a contract between the parties. The contract must be provided for the transfer of the possession of goods from one person to another. The contract may be expressed or implied. Sometimes the bailment may arise even without the contract, i.e. a finder of goods is treated as bailee. 3. Delivery for Some purpose The delivery of goods must be for some purpose. The purpose could be the safe custody of the goods or the transportation of goods. The purpose may be expressly specified in the contract or may be implied from the circumstances. 4. Return or Disposal of Goods The goods must be delivered to the bailee for some purpose and subject to the condition that when the purpose is achieved, the goods shall be returned to the bailor or disposed off according to his direction. The return of goods may be in the original or altered form.
  9. 9. Page 9 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Types of Bailment A bailment can be classified either on the basis of reward or on the basis of benefits. The bailment on the basis of reward can be classified as  A Gratuitous Bailment  A Non-Gratuitous Bailment 1. A Gratuitous Bailment It is the bailment of goods without any charges or reward. The bailee is not required to pay any charges for the bailment. 2. A Non-Gratuitous Bailment It is the bailment for some charges or reward. The bailee is required to pay some charges to the bailor. The bailment on the basis of benefit may be classified in the following three manners Bailment for the Exclusive Benefit of a Bailor It is the bailment in which the goods are delivered by the bailor to the bailee only for the exclusive benefits of the bailor himself Bailment for the Exclusive Benefit of a Bailee It is the bailment in which the goods are delivered by the bailor to the bailee only for the exclusive benefit of the bailee Bailment for Mutual Benefit of Both Bailor and Bailee It is the bailment in which the goods are delivered by the bailor to the bailee for the benefit of both the parties. Duties of a Bailee Duties of a bailee in the bailment are grouped as under 1. Duty of Care – Sections 151 and 152 The bailee should take reasonable care of the goods which are in the possession. The degree of care required by the bailee is similar to that of a man of ordinary prudence would take of his own goods under the similar circumstances. If he has taken such care, he is not liable, even if the goods are lost or damaged. He is also not liable for the destruction or the loss of goods due to an act of God. For Example : If A bails her ornaments to B and B keeps these ornaments in her own locker at her house along with his own ornaments and if all the ornaments are lost or stolen then B will not be responsible for the loss to A 2. Compensation for an Unauthorized Use – Section 154 The bailee should not use the goods for an unauthorized purpose. He can use the goods as per the terms of the bailment. If the bailee makes any unauthorized use of goods, he shall be liable for any loss or destruction of the goods even if he was not negligent. On any unauthorized use of goods, the bailor may terminate the contract of bailment. In other words, the contract of bailment becomes voidable.
  10. 10. Page 10 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business 3. Duty Not to Mix - Sections 155 - 157 The bailee should not mix the bailor’s goods with his own goods. If the bailee mixes his own goods with the bailor’s goods with the bailor’s consent, the bailor and bailee shall have an interest in the proportion to their respective shares in the mixture thus produced. It must be remembered that if the mixture has taken place by an act of God, the bailee is not liable for such mixture. When the bailee mixes the bailor’s goods with his own without a consent and the goods are separable, the bailee is required to pay the cost of separation but if it cannot be separated, the bailor entitled to be compensated For Example : 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. 4. Duty to Return Goods - Sections 160 and 161 On the achievement of the object or completion of the purpose or expiry of the contract period, the bailee should return the goods to the bailor. When the bailor gives direction to the bailee for the return of the delivery of goods, in such as case, the bailee should deliver the goods as per the direction. The bailee should return or deliver the goods without waiting for the demand from the bailor. In case, if the bailee fails to return the goods to the bailor, the goods will be at his risk even though the loss as been created due to an act of God. 5. Duty to Return Increase or Profit - Sections 163 If the goods which are bailed due to any circumstances get an accretion, the goods should be returned back along with such addition. If some profit arises from the goods, the bailee is bound to return the profit of the bailor. This is however, subject to any contract to the contrary. For Example : A leaves a cow in the custody of B to be taken care of. The cow has a calf and B is bound to deliver the calf as well as the cow to A. 6. Duty Not to Setup Adverse Title The bailee should not use the goods in such a way that it impairs the right of the bailor. The bailee, as such, can apply the goods only for the purpose of bailment and thus he cannot create the adverse title. Duties of a Bailor Duties of a bailor in the bailment are grouped as under 1. Duty to Disclose Fault – Section 150 It is the duty of the bailor to disclose the known defects in the goods. The bailor should compensate the bailee for such a loss, if the bailer finds to disclose such defects and as a result, if the bailee suffers from any loss. But these provisions are applicable only for the known defects. However, it must be noted that a non-gratuitous bailer would be liable for known as well as unknown defects. For Example : 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 to B for the damage sustained.
  11. 11. Page 11 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business 2. Duty to Bear Extraordinary Expenses – Section 158 The bailor is liable to reimburse, to the bailee, all the necessary and extraordinary expenses incurred by the bailee in case of a gratuitous bailment. But in case of non-gratuitous bailment, the bailor is liable to reimburse the extra-ordinary expenses incurred by the bailee. 3. Duty to Indemnify Loss for Permanent Termination of Bailment – Section 159 In case of a gratuitous bailment, the bailer may prematurely terminate the bailment. If the loss caused to the bailee due the premature termination is more than the benefit obtained by the bailee, it is the duty of the bailor to compensate the bailee for such an excess loss. 4. Duty to Indemnify the Bailee for Any Loss – Section 164 If the bailor does not have any title to deliver the goods on the bailment, he would be liable to indemnify to the bailee for any loss which the bailee has paid to the original owner. 5. Duty to Receive Back the Goods – Section 164 If the bailor wrongfully refuses to take the custody of the goods, he is liable to pay to the bailee, the necessary expenses of the custody. 6. Duty to Bear a Loss – Section 162 If the goods are destroyed or lost while in possession of the bailee without his fault, the bailor is required to bear the loss. Bailee Rights The duties of the bailor are the rights of the bailee. In addition to these rights, the bailee has the following rights: 1. Return or Delivery of Goods – Section 165 The bailee has a right to return the goods to anyone of the several joint bailors. It is not necessary that the goods should be delivered in the presence of all the bailors. However, if any agreement provides the contrary then the goods should be returned accordingly. 2. File Lawsuit to Court If the bailee gets the ownership claims of the goods, from more than one person, he has a right to request the court to decide the real ownership of the goods. Until the final decision comes, the bailee can keep the goods with himself. If the third person or the wrong does prevents the bailee to use the goods under the bailment, he has the right to file a lawsuit and can ask for compensation from the third party. 3. To Recover Charges The bailee has the right to recover the charges as agreed. The bailee has the right to recover the expenses incurred by him. 4. Right of Lien To recover his due, the bailee can exercise his right of lien. However, the bailee gets only a particular lien and not the general lien. Bailor’s Rights The duties of bailee are the rights of the bailor. In addition, the bailor has the following rights :
  12. 12. Page 12 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business 1. Enforcement The bailor has a right to force the bailee to perform his duties. The bailor can compel the bailee to take proper care of the goods. If the bailee neglect his duties, the bailor has the right to enforce by filing a suit to the court. 2. Termination of Bailment – Section 153 If the bailee uses the goods, in an unauthorized manner, the bailor can terminate the bailment before the completion of the bailment. A contract of bailment is regarded as a voidable contract. In such an event, the bailee cannot suit the bailor for a breach of contract. For Example : A lets on hire his horse to B for his own riding but B uses the horse for driving his carriage. A has a right to terminate the contract of bailment. 3. File Lawsuit Against a Wrong Doer To protect his goods, the bailor has a right to take a legal action against any person who has caused any loss or damage to the goods. 4. To Demand Goods at Any Time – Section 159 In Gratuitous bailment, the bailor has a right to demand the return of goods even before time. Termination of Bailment The bailment is terminated in the following circumstances: 1. Fulfillment of Purpose If the bailment contract is made for a specific purpose, it terminates as soon as the purpose is achieved. 2. Termination by a Bailor A gratuitous bailment may be terminated by the bailor at any time. The bailor may terminate the gratuitous bailment even it if was for a specific purpose or for a specified time. 3. Death of Any Party A Gratuitous bailment is terminated on the death of the bailor of the bailee. 4. Inconsistent use of Goods If the bailee makes unauthorized use of the goods, in such a case, the contract of bailment becomes voidable at the option of the bailor. If the bailor does so, the contract is terminated. 5. Time is Expired or End Time is reached. If the bailment contract is made for a specific period, it terminates on the expiry of the specify period. 6. Destruction of the Subject On the destruction of the goods which is the subject-matter, the bailment is terminated.
  13. 13. Page 13 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Pledge A Pledge is a special kind of bailment. Here the goods are delivered as a security for the payment of debt or for the performance of a promise. The person who delivers the goods is known as the Pledger or Pawner and the person who receives the goods is known as the Pledgee or Pawnee. In the Pledge, there is no change in the ownership of the property Rights of a Pawnee Following are the rights of a Pawnee with reference to the goods pledged: 1. Right of a Retainer – Sections 173 and 174 The pawnee can retain goods pledged with him until he is paid: a. Money in Advance by him. b. Necessary Expenses c. Interest Paid on Debt But the Pawnee has no right to retain the goods even for the subsequent advance. For Example : Ramesh pledges stock of goods for certain loan from a bank, the bank has right to retain the stock not only for adjustment of the loan but also for payment of interest. 2. Extraordinary Expenses – Section 175 The Pawnee has a right to retain the extra ordinary expenses related to the goods from the Pawner for the preservation of the goods pledged with him. 3. When a Pawner Defaults – Section 176 If the Pawner makes a default, the Pawnee has a right to sell the goods after giving notice of his intention to sell goods. Even if the title of the Pawner is defective, the Pawnee gets valid title. If sale proceeds of the goods by the Pawnee are less than the amount of debt, the Pawnee can recover such deficit from the Pawner. On Default by the Pawner, the Pawnee has the right to file a recovery suit for the recovery of money due, interest due on the money lent, the necessary expenses and the extraordinary expenses. 4. To Sell Goods The Pawnee can sell the goods, if the Pawner makes a default after giving a reasonable notice. The contract may exclude this right. If the sale is made by the Pawnee without notice is void. Rights of a Pawner Following are the rights of the Pawner under the Contract of Pledge: 1. Redeem Goods Pledged The Pawner has a right to redeem his goods on the payment of debt or other charges. The right to redeem means get back his goods. The Pawner gets all the protection that is available to the ordinary debtor under any law, which is for the time being enforced in India. The Pawner has a right to recover the extraordinary expenses related to the goods from the Pawnee. 2. Surplus on Sale The Pawner has the right to take back any increase alone with the goods. But the Pawner can get it back only on the payment of debt or other charges.
  14. 14. Page 14 of 14 Anurag Verma MBA [Ex. Edu.] Batch 2012-2014, Semester – II Assignment – Legal Aspects of Business Pledge By a Non-Owner Following are the rights of the Pawner under the Contract of Pledge: 1. Mercantile Agent A mercantile agent means an agent who has the authority to sell the goods in the ordinary course of business. At the time of creation of Pledge, the Pawnee has no notice of the fact that the mercantile agent had no authority to pledge the goods. 2. Possession Under a Voidable Contract The person possessing the goods under a voidable contract can make a valid pledge on the satisfaction of following condition: 1. The voidable contract has not been declared as void. 2. The Pawnee must act in good faith. He should not have any notice of Pawner’s defective title. 3. Person with Limited Interest When a person pledges the goods in which he has only limited interest, the pledge is valid only to the extent of such limited interest. 4. Seller in Possession After Sale When the seller continues to be in possession of goods even after sale, he can make a valid pledge of goods. The pledge is valid only if the Pawnee acts in good faith and had not choice or previous sale. Difference Between a Bailment and a Pledge The main distinction between a bailment and a pledge are as under: 1. The Pledge is a variety of bailment. Under a Pledge, the goods are bailed as a security for a loan or performance of a promise. In a regular bailment, the goods are bailed for other purpose than the two referred above. The bailee takes them for repairs and safe custody. 2. The Pledge enjoys the right to sell only on default by the Pledger to repay the debt or perform his promise after giving due notice. In a bailment, the bailee, generally, cannot sell the goods. He can either retain or sue for the non-payment of the dues. 3. The Pledgee has a right to use the goods. A bailee can, if the terms so provide to use the goods. Examples on Bailment and Pledge 1. X delivers his car to Y for repair. It is the case of a Bailment 2. X delivers his car to Y for repair. Here X is a Bailor 3. X delivers his car to Y for repair. Here Y is a Bailee 4. Immovable Goods and Money does not come under Contract of Bailment 5. Depositing of Ornaments in a bank locker cannot come under Contract of Bailment because the ornaments are still under the possession of the owner. 6. Any increase of profit from the goods bailed belongs to Bailor. 7. X borrows Rs 10000 from Y and keeps his bike as security. It comes under Contract of Pledge

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