Difference Between Bailment And Pledge

Introduction

Bailment and Pledge are specified as distinct types of contracts under the Indian Contract Act of 1872. Although there may or may not be a consideration involved, bailments and pledges are considered as ‘valid’ contracts or quasi-contracts (where the finder of goods is treated as bailee). There is no prerequisite condition to enter into a contractual arrangement to constitute bailment per se. In State of Gujarat v. Memon Mahomed[1], the Apex court reiterated that there can be bailment even without a contract. In other words, exclusive possession is a sine qua non of bailment. Borrowing a book from a friend to read, for example, may not involve a consideration, but it is a bailment.

In our day-to-day affairs, we come across and voluntarily enter into various manifestations of bailment, though not by a contractual arrangement. For example, while dropping a watch for repairs, while delivering clothes for ironing or washing to the washermen,  while issuing a book from a library etc. Likewise, we also enter into arrangements which require us to pledge our goods, for example, we tend to deposit movable property such as jewellery as a collateral security to secure a loan. Thus, bailment is a subject of public importance.

Both Pledge and Bailment are applicable to movable property only. Pledge refers to the delivery of commodities as security for the payment of a debt or the fulfilment of a promise, whereas Bailment refers to the transfer of things from one person to another for a specific purpose. All pledges can be assumed to be bailments, but not all bailments are pledges. In other words, bailment is a wider term, which includes pledge. A pledge is thus a special type of bailment. This is because, in a contract of pledge, commodities are ‘bailed’ as a security for the payment of a debt or the performance of a promise.

Before looking at the concepts of Bailment and Pledge, we must note the difference between possession and ownership/ title over movable property. Possession is more of a physical control over a thing, whereas ownership entails absolute rights and legal claims to an object. Except for the owner, the possessor has a stronger claim to the object’s title than anybody else. Both bailment and Pledge aim to confer some sort of temporary possession over goods delivered or pledged for a particular purpose. The items are supplied under bailment for a specified reason and must be returned after that purpose is completed. The use of commodities is, however, limited by the pledge contract.

Bailment

Section 148 of the Indian Contract Act, 1872, defines bailment as under:

“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.”

In simple words, ‘bailment’ is a situation when some movable goods of the ‘bailor’ (the person delivering the goods) are handed over to the ‘bailee’ (the person to whom they are delivered) on lease for a specific purpose, and are required to be restored to the owner, or otherwise disposed of pursuant to the bailor’s directions after the fulfillment of such purpose. Bailment, thus involves the transfer of possession of goods to a person, who holds the goods either for or at the direction of their owner, to whom they will be returned.[2]

Bailment was protected under the tort of detinue in English common law before its evolution as a general contractual remedy. However, an action against a bailee can be initiated sui generis and not necessarily as an action in tort law or contract law, i.e., arising out the possession had by the bailee of the goods.[3]

The main provisions pertaining to bailment are covered in Chapter IX (Sections 148–181) of the Indian Contract Act, 1872. However, the laws do not cover all aspects of bailment. Other Acts, such as the Carriers Act of 1865, the Railways Act of 1890, and the Carriage of Goods by Sea Act of 1925, deal with other forms of bailment.

Essentials of Bailment

Following are the two main essentials to constitute a bailment:

1. Delivery of goods for some purpose – The items must be delivered physically or symbolically in the form of a transfer of possession from the bailor to the bailee. The term “possession” here refers to more than simply custody; it also refers to a temporary transfer of control over the items (not ownership). Such custody can also be assumed. As a result, mere possession of commodities does not establish a bailor-bailee relationship.

In Kaliaporumal Pillai v. Visalakshmi[4], a lady took her old jewels for being melted into new jewels to a goldsmith. She kept a box wherein she would put the new jewels that she received and locked the box, having the only key, within the premises of the goldsmith. The jewels were stolen one night. It was held that the goldsmith cannot be made liable as the ‘possession’ of the jewels was not handed over to him. Likewise, when some precious jewellery is kept in lockers with the bank, where the vault cannot be accessed without the owner’s key, there wouldn’t be any bailment technically.

Delivery can be actual or constructive. Anything which has the effect of conferring “possession” upon the bailor is treated as ‘delivery’. In Morvi Mercantile Bank Ltd. v. Union of India[5], the court opined that ‘handing over the key of a godown in which the goods are lying, or the transfer of a document of title, like a railway receipt, which represents particular goods amounts to the delivery of goods.’

2. Return of the goods after the purpose is achieved, or their disposal according to the bailor’s directions– The bailment of goods is only for a specific purpose, for example, for repair, safe custody etc. When the purpose stands satisfied, the goods are required to be returned back in its original or altered form or disposed of as per the directions of the bailor. This essential feature differentiates bailment from sale and gift deeds.

Pledge

Pledge has been defined in Section 172 of the Indian Contract act as under:

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

It can be inferred from this definition that pledge is a kind of bailment of movable goods, the purpose of which is to serve as security for the payment of a debt or performance of a promise. In the arrangement of a pledge, also known as ‘pawn’, the bailor is referred to as the ‘pawnor’, and the bailee as ‘pawnee’.

In pledge, the pawnee owes a special right over the goods, somewhere in-between lien and mortgage, which allows the pawnee to retain the goods to compel the pawnor for repayment[6], demand extraordinary expenses (incurred for the preservation of goods)[7], or to sell the goods upon default of payment[8].

Thus, pledge can be understood to mean a security advanced to secure a loan from a creditor. In this case, the pawnee has the right to retain the goods till the repayment is made. Moreover, in the event of default by the pawnor in payment of the debt at the specified time, the goods can be rightfully sold by the pawnee to recover the amount, after giving a due notice of sale to the pawnor.

Essentials of Pledge

Following are the two main requirements to constitute a valid pledge, which are almost the same as that of Bailment:

  1. There should be a bailment of goods, i.e., the delivery of goods from one person to another.
  2. The purpose of such bailment is to make the goods bailed serve as security for the payment of a debt, or performance of a promise.

Difference Between Bailment And Pledge

A Comparative Chart of difference between Bailment And Pledge are as follows –

Basis for Comparison Bailment Pledge
Definition Chitty defines Bailment as “the delivery of goods to another, other than as a servant, for some purpose upon a condition, express or implied, that after the purpose has been fulfilled, they shall be redelivered to the bailor, or otherwise dealt with according to his directions, or kept till he reclaims them”.[9] As per Black’s Law Dictionary, “Pledge is a formal promise or undertaking; the act of providing something as security for a debt or obligation; a bailment or other deposit of personal property to a creditor as security for debt or obligation.”[10]
Provisions (as per the Indian Contract Act, 1872) General rules regarding Bailment are mentioned in Chapter IX (Sections 148-181). Sections 172-179 deal specifically with ‘Bailment of Pledges’.
Parties The person delivering the goods is called the ‘bailor’. The person to whom they are delivered is called the ‘bailee’. The bailor in a Pledge is referred to as the ‘pawnor’, and the bailee as ‘pawnee’.
Purpose For service, safekeeping, repair, etc. It is done either for profit (for example, by renting some goods), or non-profit (e.g., for safekeeping of some precious goods). For securing a loan, or performance of a promise. It is usually done with a profit-motive.
Right to use property The bailee can use the movable asset reasonably or for the specific purpose as a prudent person if he/she is authorized to do so. In this situation, the pawnee is prohibited from using the good(s) for any purpose. He/She doesn’t have the authority to do so; he/she simply has the right to hold the good/s until the debt is paid off.
Right to sell and Default of Payment The bailee is entrusted with the product/s for a specified reason, therefore the bailee has no right to sell the goods but is obligated to return it after the purpose has been fulfilled. If the bailed goods are sold, it would amount to conversion. However, a finder of goods is entitled to sell the founded goods under the following circumstances (according to Section 169):

· If the owner cannot be found with reasonable diligence;

· If the owner  refuses to pay the rightful charges (expenses incurred etc.) to the finder;

· If the good is perishable and its value might depreciate as a result; or

Thus, in the event of nonpayment of any consideration agreed upon, or rightful compensation[11] or expenses[12] incurred, the bailee has two options: retain the goods until payment is made or sue the bailor for his unpaid dues[13].

The pawnee has the right to sell the pledged goods to recover the outstanding debt in case of default, after giving the pawnor reasonable notice of the sale.
Right of Lien over property In exchange for his legitimate demands (e.g., service and labor charges), the bailee can only get a particular or general lien on the commodities.[14] The pawnee can exercise lien even upon the non-payment of interest.
Consideration Consideration may or may not be involved in the bailment contract. It is contingent on the conditions of the contract. Even when no consideration is involved, an exception is recognized to validate the contract of Bailment. Because the entire notion of a pledge is to serve as a security for an obligation, the presence of consideration is critical; otherwise, there will be no contract of pledge.
Who can undertake Bailment or Pledge There are no restrictions or particular requirements stating who can or cannot engage into bailment. Ordinarily, the owner of goods or his agent can pledge the goods. A servant, tenant, or someone who fraudulently acquires the goods cannot pledge it. However, exceptionally, the following persons who have the consent of the owner can also make a pledge and endow rights on the pledgee:

i. A Mercantile agent [15]

ii. A person in possession under voidable contract [16]

iii. A person with limited interest[17]

iv. A seller in possession after sale[18]

v. Buyer in possession after sale[19]

Liability According to section 152, the bailee cannot be held responsible for the loss, destruction or deterioration of the thing bailed, if he takes due care, acts as a prudent man[20] and  makes authorized use[21] of the property and does not mix the bailor’s property with his own[22]. If the pledged goods have been lost or damaged due to the fault or negligence of the pawnee, he/she will be held liable, and may lose his/she claim against the pawnor to that extent.

Conclusion

In comparison to bailment, the pledge has a restricted scope; many business people get a loan from a financial institution by pledging their stock as collateral. In a nutshell, every pledge is a bailment, but not every bailment is a pledge. Pledge is a special kind of Bailment, having its own characteristic features as discussed. As a result, both of them are extremely significant in their respective fields.

References

  • Difference between Bailment and Pledge, available at: https://lawrato.com/indian-kanoon/civil-law/difference-between-bailment-and-pledge-2867 (last visited on July 9, 2021).
  • Pledge and Bailment: Difference & Comparison, available at: https://www.legalbites.in/pledge-and-bailment-difference-comparison/ (last visited on July 9, 2021).
  • Difference between Bailment and Pledge, available at: https://whitecode.legal/more/NjU5/Difference-between-Bailment-and-Pledge (last visited on July 9, 2021).

[1] A.I.R. 1967 S.C. 1885

[2] Anson, Law of Contract, 2002, 456, quoting Palmer on Bailment, II, (1991); Chitty on Contracts, 28th Edn. 199 para 33-001  ff.

[3] Dr. R.K. Bangia, Contract-II (Allahabad Law Agency, Haryana, 7th edition, 2017).

[4] A.I.R. 1938 Mad. 32

[5] A.I.R. 1965 S.C. 1954

[6] See sections 173 and 174

[7] See section 175

[8] See section 176

[9] Chitty on Law of Contracts, 1947, 843

[10] Black’s Law Dictionary, 8th Edn., quoted in Maharashtra State Co-op Bank Ltd. v. Assistant P.F. Commissioner, A.I.R. 2010 S.C. 868.

[11] See section 164

[12] See section 158

[13] See section 180 and 181

[14] See section 170 and 171

[15] See section 178

[16] See section 178 A

[17] see Section 179

[18] See section 30(1), Sale of Goods Act

[19] See section 30(2), Sale of Goods Act

[20] See section 151

[21] See section 153 and 154

[22] See sections 155 to 157

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About Tazeen Ahmed

Tazeen Ahmed is a first-year law student at Jamia Millia Islamia, New Delhi, inquisitive about Constitutional Law, Family Law, Corporate Law, Human Rights Law, and Criminal Law. She is a proficient writer, skilled in conducting legal research and organizing her articulations on social-legal and political issues. She holds a sound academic record, having scored 93.80 % in AISSE and 95% in both Political Science and English Language in AISSCE. She has held prestigious positions in the Student Council and been adjudged the ‘Student of the Year 2016, Gurgaon’ by UnivQuest. She has formerly served as a legal intern at ubadvocate, where her performance was marked “outstanding” by the team and is an Editor at The Wall of Justice blog. She is also an avid reader, a poet, and a political enthusiast. Above all, she is a dedicated and dynamic soul, ever-prepared to undertake challenging roles in the legal battlefield, and treats constructive criticisms as stepping stones towards progress.

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