WHAT IS THE DIFFERENCE BETWEEN PLEDGE AND BAILMENT UNDER THE INDIAN CONTRACT ACT

This article has been written by Anushree Jha, University of Mumbai, Thane Sub-Campus.

Abstract:-

This comprehensive research article contains a detailed examination of the Indian Contract Act, 1872 in reference to relevant provisions regarding contracts of Bailment and Pledge respectively in order to ascertain and determine their varying specifications. This research article seeks to explain and analyse ‘bailment’ and ‘pledge’ along with references to relevant sections enshrined within the ICA. Additionally, it delves into the features, definition, rights and duties of the various parties, along with modes of termination in order to further shine a lens on the differing factors between ‘Pledge’ and ‘Bailment’.

It is imperative to note that both ‘Pledge’ and ‘Bailment’ agreements are similar in terms of transfer of possession, not ownership, They differ significantly in terms of their purpose, scope and legal specifications. Through a keen examination of the Indian Contract Act, This research endeavour seeks to provide a valuable source of knowledge for legal practitioners, law enthusiasts and students alike.

Keywords:- Indian Contract Act (1872), Bailment, Pledge, Contract Law, Indian Law, Transfer of Possession

WHAT IS THE DIFFERENCE BETWEEN PLEDGE AND BAILMENT UNDER THE INDIAN CONTRACT ACT.

Introduction:- 

The concepts of ‘bailment’ and pledge form integral parts of our lives. Delivering a watch for repair, and leaving a cycle, or car, at a stand are all familiar situations of daily life that create a relationship of bailment[1]. Simply put, bailment is a topic of great public interest and legal importance. It involves the delivery of possession of personal property of one person into the hands of another temporarily without intending to give up title. For this reason, “delivery of possession” is different from “custody” since “a person who has custody without possession, such as a servant or a visitor using his host’s property, is not a bailee”[2].

On the other hand, A Pledge is merely a unique form of bailment, and the primary factor that distinguishes it from bailment lies in its objective[3]. The object of a contract of pledge requires the existence of a bailment, albeit for the purposes of fulfilling an obligation, or to provide a security for a loan or debt. These vital concepts of legal importance are encountered by us in everyday life, and they are detailed under the Indian Contract Act, 1872.

The Indian Contract Act (or ICA) is a major law that governs the regulations relating to contracts in India, providing a comprehensive and uniform law with its succinct provisions.  It is one of the oldest acts in Indian law regime, passed by the legislature of pre-independence era. It falls within the ambit of private law. It contains a number of principles subject to which the parties may create rights and duties for themselves. Hence, a contract is voluntary and require an exercise of will by the parties[4]. It is essential to understand that ‘Bailment’ and ‘Pledge’ are not ambiguous concepts, as they have been described in great detail under ICA. In order to derive a keen understanding of the above-mentioned topics, we must observe the relevant sections under ICA to devise and determine the varying differences between the two. The concepts of ‘Bailment’ and ‘Pledge’ are described below:-

Bailment meaning;

Section 148 of the Indian Contract Act, 1872 defines ‘Bailment’.  According to ICA, “Bailment is a delivery of goods by one person to another for some purpose upon a contract such that when the purpose is accomplished; they shall be returned or otherwise disposed off; according to the directions given by the person delivering them”[5].

The ingredients of the definition include:- The delivery of goods (the transfer of possession), The Bailor (‘one person’), The Bailee (‘to another’), The existence of a contract,  performance defined (purpose), the return or disposal of the object or good according to the bailor’s directions, not as per the bailee[6].

Features of a contract of bailment includes[7]:-

1. Delivery of goods may be by an expressed or implied contract.
2. All essentials under Section 10 of the Indian Contract Act, 1872 for a valid contract must be fulfilled.
3. Safekeeping and safe return of goods.
4. Mode of delivery of the goods to the bailee. (Section 149)[8] ‘putting the effect of goods’
5. The detriment which the bailor suffers in parting with the possession of the goods is regarded as sufficient consideration[9].

The parties to a contract of bailment include the ‘Bailor’ (The person delivering the goods, the one who gives directions as to usage, return or disposal of it) and the ‘Bailee’ (The recipient of goods, to whom the above instructions are given)

Some examples of bailment include borrowing a pen or a pencil and giving a cloth to the tailor for stitching. Keeping goods in the Bank locker for safekeeping is NOT considered bailment.

Types of Bailment[10]:-

Bailment is categorised into two types- On the basis of benefit, and on the basis of reward[11]. Below is a detailed description of these types:-

1. On the Basis of Benefit: These include-

• Exclusive Benefit of the Bailor:- For example, A Security of gold/jewellery kept with the neighbours is the sole benefit of the bailor.
• Exclusive Benefit of the Bailee:- Any kind of lending or borrowing.
• Mutual Benefit of the Bailor and the Bailee:- Giving clothes for laundry wash or for the purpose of stitching to the tailor etc.

2. On the Basis of Reward:- It includes two different kinds of Bailment- Gratuitous Bailment and Non-Gratuitous Bailment[12].

• Gratuitous Bailment is a non-monetary form of bailment. Its features include:
• Neither party is entitled to remuneration.
• There is an absence of a direct consideration.
• The Bailor is not liable for defective goods if he is not aware of the defect.
• Bailment can be terminated at any time.
• Bailment comes to an end with the death of either party.
• For example, borrowing a friend’s car.
• Non-Gratuitous Bailment is a monetary form of bailment. Its features include:
• Either of the parties is entitled to remuneration.
• There is the presence of a direct consideration.
• The Bailor is liable for defective goods even if he is not aware, as monetary consideration is involved.
• Bailment can only be terminated on the completion of the contract.
• Death of any party is not a mode of termination as it is not a personal contract.
• For example, borrowing a car on hire.

 The Duties of the Bailee[13]

Inevitably form the rights of the Bailor. Such duties include:-

1. To take reasonable care of goods (Section 151)
2. Not to make unauthorised use of goods (Section 154)
3. Not to mix the goods with his own (Section 157)
4. Duty to return the goods as soon as the purpose is accomplished or it is the end of the stipulated time (Section 160)
5. Not to do any act inconsistent with the terms of bailment (Section 153). Therefore, there is a right of the bailor to terminate the bailment if such an act occurs.
6. Returning of profits (Section 163) The Bailor has a right to claim. For example, if there is a bailment of a cow and a calf is birthed; then both have to be returned back after the termination of the bailment.

The Rights of the Bailee

These include:-

1. To disclose faults or defects in the goods and to compensate for any loss arising out of the undisclosed defects. (Section 150 and Section 164)
2. Right to receive necessary expenses (for maintenance etc.) (Section 158)
3. Right against premature termination (damages for breach and any loss suffered) (Section 159)
4. Right to compensation in case of defective title where the bailor is not the rightful owner (Section 166)[14]

Termination of Bailment[15]:- 

Termination of bailment can occur in the following modes:-

1. Doing any act inconsistent with the terms of the bailment, where it can be terminated by the bailor.
2. At the desire of the bailor.
3. At the Expiry of the period of bailment.
4. At the Accomplishment of the object.
5. Death of either party (only in case of gratuitous bailment).

Pledge meaning;

A contract of ‘Pledge’ is defined under Sections 172 till Section 179 of the Indian Contract Act, 1872[16]. It is defined as an ‘extension of Bailment’, as it possesses two parties and consideration.

According to Section 172 of ICA, It is a ‘bailment of goods- as a security or collateral for payment of debts or performance of a promise. Therefore, This definition possesses the following ingredients:- a valid bailment, tangible goods, security (collateral), the existence of a debt or the existence of a promise[17].

The parties to a contract of pledge include:-

• A Pledger/Pawner:- The ‘debtor’ or one who promises to perform.
• A Pledgee/Pawnee:- The ‘creditor’ or the person to whom the performance is promised.

Rights of a Pawnee:-

It is imperative to note that the rights of a pawnee form the inevitable duties of a pawner[18]. Some rights of a pawnee include:-

1. Right of retainment:- According to Section 173, The Pawnee can hold the goods till the dues are paid, till the performance is complete as well as till the interest on debt is duly received.
2. Right of reimbursement of extraordinary expenses:- According to Section 175, the pawnee possesses the right of reimbursement of extraordinary offences in light of any cost incurred for the safekeeping or maintenance of goods.
3. Right of the pledgee/pawnee in case of default by the pawner:- According to Section 176, The pawnee shall have the following rights:

• Right to file a suit.
• Right to Retain the goods.
• Sale with notice to the pawner.
• In case of a deficit in sale, for the payment of the balance.

On the other hand, rights of the Pledger/Pawner include:-

1. To get back the goods on performance or payment of debt.
2. Right to redeem the goods before sale[19].
3. Right to receive appropriate notice before sale.
4. Right to expect safe keeping of goods.
5. Goods to be returned back in proper condition.

Differences between Pledge and Bailment[20]:-

The major differences between pledge and bailment include:-

• On the basis of purpose:-
• Pledge:- There is existence of bailment for purpose of security and collateral.
• Bailment:- It is for any regular legal purpose which may consist of the purposes of repair, safekeeping, custody and maintenance.
• Right to sell the goods:- The Pledgee/Pawnee has the right to sell the goods if the debt isn’t repaid or if the performance isn’t performed in time. The Bailee doesn’t have the possession of the right of sale unless it is specifically implied within the contract of bailment.
• Right of Retainment:- In case of default by the bailor, the bailee may retain the goods or sue the bailor for non-payment of the dues but in case of default by the pledger, the pledgee may retain the goods and he may also sell the goods after giving reasonable notice of sale to pledger/pawner.
• Personal Use:- The Pledger/Pawner cannot utilize the goods for personal use as there is no right to usage but in bailment, the terms of usage are defined under the contract of bailment. Therefore, one can use the goods as per the terms of contract specified.
• The existence of a Debt:- A contract of pledge requires the existence of a debt. However, such is not true for a regular contract of bailment as the existence of a monetary debt is not necessary for the existence of valid bailment.

Conclusion:- 

In conclusion, Bailment and Pledge are two essential concepts which are defined under the Indian Contract Act, 1872 under the respective sections (Bailment under Section 148 till Section 168 and Pledge under Section 172 till Section 179). Bailment and Pledge both require the exchange of possession of a tangible good from one person to another with a particular purpose, however, a contract of Pledge is considered as a ‘type of bailment’ which involved the goods being moved from one to another as a security or collateral until a payment of debt is completed or a performance of a promise is accomplished.

[1]  Avatar Singh, Contract & Specific Relief 660 (2004)

[2] Sir Maurice Gwyer, Pollock & Mulla: The Indian Contract and Specific Relief Acts (1944)

[3] Lalit Kishore Srivastava, Law of Bailment (Lucknow Univ., Faculty of Law, Jan. 4, 2025).

[4]  Yonjan, Yam Kumar, An Analysis on Major Elements of a Valid Contract Under Muluki Civil Code, 2074 (2019)

[5] Ind. Contract Act, 1872, § 148.

[6] Manupatra, Law of Contract and Specific Relief, MANUPATRA (last visited Jan. 5, 2025), http://student.manupatra.com/Academic/Abk/Law-of-Contract-and-Specific-Relief/Chapter10.htm.

[7]   GeeksforGeeks, Contract of Bailment – Meaning, Features, Duties and Rights, GEEKSFORGEEKS (last visited Jan. 5, 2025), https://www.geeksforgeeks.org/contract-of-bailment-meaning-features-duties-and-rights/.

[8]  Indian Contract Act, 1872, § 149.

[9]  Pen2Print.org, Bailment as per Indian Contract Act, 1872, PEN2PRINT.ORG (last visited Jan. 5, 2025), https://www.pen2print.org/2021/08/bailment-as-per-indian-contract-act1872.html

[10] Monika Arya, Associate Professor, Bharati College, Delhi University, Unit 3: Introduction to Special Contracts—Topic: Contracts of Bailment and Pledge (unpublished lecture, last visited Jan. 5, 2025), https://www.bharaticollege.du.ac.in/images/media/IM-9993-BC.pdf

[11] Aparna Shukla, Contract of Bailment and Contract of Pledge, LAWCTOPUS (last visited Jan. 6, 2025), https://www.lawctopus.com/clatalogue/legal-gk/contract-of-bailment-and-contract-of-pledge/#:~:text=Bailment%20is%20usually%20made%20for,Gratuitous%20and%20Non%2DGratuitous%20Bailment.

[12] Types of Bailment, LAW AIMERS (last visited Jan. 6, 2025), https://lawaimers.com/types-of-bailment/

[13] Avtar Singh, Law of Contract & Specific Relief 243 (2004).

[14] Avtar Singh, Law of Contract & Specific Relief 242 (2004).

[15] Shreya Patil, Bailment and Termination of Bailment, LEGAL SERVICE INDIA (last visited Jan. 6, 2025), https://www.legalserviceindia.com/legal/article-9083-bailment-and-termination-of-bailment.html#:~:text=A%20contract%20of%20bailment%20is%20terminated%20in%20the%20following%20cases%3A&text=On%20the%20Fulfilment%20of%20the%20Object%3A%20The%20bailment%20terminates%20as,the%20contract%2C%20the%20bailment%20terminates.

[16] Bailments of Pledges: Section 172-179, LAW WIRE (last visited Jan. 6, 2025), https://lawwire.in/academic-block/bare-acts/indian-contract-act-1872/chapter-ix-of-bailment/bailments-of-pledges-section-172-179/#:~:text=Section%20172%20%3A%20%E2%80%9CPledge%E2%80%9D%2C,is%20called%20the%20%E2%80%9Cpawnee%E2%80%9D.

[17] Indian Contract Act, § 172 (1872)

[18] Mukesh Kumar, Rights and Duties of Pawnor and Pawnee, TUTORIALSPOINT (last visited Jan. 6, 2025), https://www.tutorialspoint.com/rights-and-duties-of-pawnor-and-pawnee

[19]  Right of Redemption Under the Contract of Pledge, WHITE BLACK LEGAL (last visited Jan. 6, 2025), https://www.whiteblacklegal.co.in/details/right-of-redemption-under-the-contract-of-pledge-by—priyam-prakash

[20] A.K. Sharma, The Distinction Between Bailment and Pledge, Indian Journal of Law and Public Administration 1 (2024): 1-20, https://www.ijlpa.com/_files/ugd/006c7e_d536d31f7581461890d53307a8ec63d5.pdf?index=true#:~:text=Major%20Difference%20between%20Bailment%20and%20Pledge,-In%20the%20above&text=When%20the%20goods%20are%20temporarily,one%20person%20to%20another%20person.