Contract of Bailment and Pledge

Bailment and Pledge are two distinct types of contracts that are frequently misunderstood. Every bailment is a pledge, but not every pledge is a bailment. Bailment refers to the transfer of goods from one person to another for a specific purpose. Pledge, on the other hand, refers to the delivery of goods as security for the payment of a debt or the fulfilment of a promise. As a result, bailment and pledge are two distinct contracts. A pledge is a type of bailment.

Bailment

What Is Contract Of Bailment And Who Are Bailee And Bailor ?

A bailment is a type of special contract defined in Section 148 of the Indian Contract Act of 1872. It derives from the French word “bailer,” which means “to deliver”. Bailment’s etymological meaning is “handing over” or “change of possession of goods.” By bailment, we mean the delivery of goods from one person to another for a specific purpose with the agreement that they will reimburse the goods upon completion of the purpose or dispose of them as directed by the bailor. The person who delivers the goods is referred to as the bailor. And the person to whom the goods are given is referred to as the Bailee. And the property that has been bailed is known as Bailed Property.

Essentials of Bailment

  • There shall be a contract between the parties for the delivery of goods,
  • The goods shall be delivered for a special purpose only,
  • Bailment can only be done for movable goods and not for immovable goods or money,
  • There shall be a transfer of possession of goods,
  • Ownership is not transferred to Bailee, therefore Bailor remains the owner,
  • Bailee is duty bound to deliver the same goods back and not any other goods.
  • Exception: The money deposited in the bank shall not account to bailment as the money returned by the bank would not be the same identical notes. And it is one of the essentials of the bailment that same goods are to be delivered back.

Rights of a Bailor

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

  • Enforcement of Bailee’s Duty:Since Right of the bailor is same as the right of the Bailee, therefore on the fulfilment of all duties of Bailee the bailor’s right is accomplished. For example, it is the duty of the Bailee to give the accretions and it is the right of bailor to demand the same.
  • 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)
  • Right to Termination the Contract: If the Bailee does not comply with the terms of the contract and acts in a negligent manner in such case the bailor has the right to rescind the contract. (Section 153)
  • Right to claim compensation: If the Bailee uses the goods for an unauthorized purpose or mixes the goods which cause loss of goods in such case bailor has the right to claim compensation.
  • Right to demand the return of goods: It is the duty of the Bailee to return the goods and the bailor has the right to demand the same.

Rights of a Bailee

  • 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)
  • Right to remuneration: When the goods are bailed to the Bailee he is entitled to receive certain remuneration for services that he has rendered. But in case of gratuitous bailment, the Bailee is not awarded any remuneration.
  • Right to recover compensation: At times a situation arises wherein bailor did not have the capacity to contract for bailment. Such a contract causing loss to the Bailee, therefore the Bailee has the right to recover such compensation from the bailor. (Section 168)
  • 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)
  • Right to suit against a wrongdoer: After the goods have been bailed and any third party deprives the Bailee of use of such goods, then the Bailee or bailor can bring an action against the third party. (Section 180)

Pledge

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Pledges are a type of bailment. Pledge, also known as pawn, is defined in Section 172 of the Indian Contract Act of 1892. By pledge, we mean the bailment of goods as security for the repayment of a debt or advance loan, or the performance of an obligation or promise. Pledger or Pawnor is the person who pledges the goods as security, and Pledgee or Pawnee is the person in whose favour the goods are pledged.

Essentials of Pledge

Because a pledge is a subset of a bailment, all of the essentials of a bailment are also essentials of a pledge. Aside from that, the pledge’s other requirements are as follows:

  • There shall be a bailment for security against payment or performance of the promise,
  • The subject matter of pledge is goods,
  • Goods pledged for shall be in existence,
  • There shall be the delivery of goods from pledger to pledgee,
  • There is no transfer of ownership in case of the pledge.
  • Exception: In exception circumstances pledgee has the right to sell the movable goods or property that are been pledged.

Rights of Pawnor

The Pawnor has the Right to Redeem under Section 177 of the Indian Contract Act of 1872. This means that the Pawnor can redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual sale upon repayment of the debt or performance of the promise. The right to redemption is lost once the Pawnee sells the property in accordance with his rights under Section 176 of the Indian Contract Act of 1872.

Rights of a Pawnee

The rights of the Pawnee as per Indian Contract Act, 1872 are:

  • Right to keep the items: If the Pawnor fails to pay a debt or fails to perform as promised, the Pawnee has the right to keep the goods given as security. Furthermore, Pawnee can keep items for non-payment of debt interest or non-payment of expenditures incurred. However, Pawnee cannot keep things for any other debt or commitment than the one specified in the contract. (Sections 173–174)
  • Right to recover extraordinary expenses: The expenses incurred by Pawnee on the preservation of goods pledged can be recovered from Pawnor. (Section 175)
  • The right of suit to procure debt and sale of pledged goods: On the failure to make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit proceedings against him or sell the goods. In the former case, the Pawnee retains the goods with himself as collateral security and initiate the court proceedings. He need not provide any notice of such proceedings to the Pawnor. And in the latter case, the Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount received from the sale of goods is less than the amount due then the rest amount can be recovered from Pawnor. And if the Pawnee gets more amount than the due amount then such surplus is to be given back to Pawnor. (Section 176)

Difference between Bailment and Pledge

BasisBailmentPledge
MeaningTransfer of goods from one person to another for a specific purpose is known as the bailment.Transfer of goods from one person to another as security for repayment of debt is known as the pledge.
Defined InIt is defined under section 148 of the Indian Contract Act, 1872.It is defined under section 172 of the Indian Contract Act, 1872.
PartiesThe person who delivers the bailed goods is known as Bailor and the person receiving such goods is known as Bailee.The person who delivers the pledged goods is known as Pledger or Pawnor and the person receiving such goods is known as Pledgee or Pawnee.
ConsiderationThe consideration may or may not be present.Consideration is always there.
Right to SellBailee has no right to sell the goods bailed.Pledgee or Pawnee has the right to sell the goods.
Use of GoodsBailee can use the goods only for a specific purpose only and not otherwise.Pledgee or Pawnee cannot use the goods pledged.
PurposeThe purpose of bailed goods is for safekeeping or repairs etc.The purpose of pledged goods is to act as security for repayment of debt or performance of the promise.

Illustrations

Illustration 1: Mr. A delivers his watch to Mr. B for repair. In this situation, Mr. A is the bailor, Mr. B is the bailee, and the commodities bailed are the watch.

Illustration 2: Harry bailed his bike to David so he could ride to college by himself. David put it to use for racing. David is now responsible for illegal usage of the bailed bike.

Illustration 3: Mr. X entrusted his cat to Mr. Y for a few days. During that time, the cat gave birth to kittens. Mr. Y is now likely to return the cat with the accretions.