This article is written by Jai Ilesh Sheth, a student of Government Law College, Mumbai. This article talks about the contract of bailment and pledge, discusses and analyzes the law governing them in detail and also discusses a few important case laws about the topic.

It has been published by Rachit Garg.

What is a contract of bailment

Bailment is defined in Section 148 of the Indian Contract Act, 1872 as, “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 who delivers the goods is called the ‘Bailor’ and the person who receives the goods for the specific purpose is called the ‘Bailee’. It is a special type of contract which is covered under Chapter IX(Sections 148-171) of the Indian Contract Act, 1872.

Essentials features of a contract of bailment

A valid contract

As mentioned above, bailment is a special type of contract. Hence, all the essential elements of a valid contract must be present in it. The essential elements such as offer, consideration, contractual capacity, intention, etc. must be a part of the bailment. Without the presence of these essential elements , the contract cannot be enforceable in a court of law. However, out of these, a contract of bailment can be valid without consideration. 

There are two types of bailment. 

  • Gratuitous Bailment: Bailment without any consideration.
  • Non-Gratuitous Bailment: Bailment with consideration.

Delivery of possession

If you read the definition of bailment, you will understand that the most essential element of a contract of bailment is the delivery of goods from one person to another. As per Section 149 of the Act, “the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf.” The delivery of the goods can be actual as well as constructive. Actual delivery means the goods are physically delivered by the bailor in the possession of bailee. Constructive delivery means that the goods are not expressly delivered but a few actions imply that the bailee is given the possession of the goods. It is important to note that the actual transfer of possession is necessary for bailment. Only giving the custody of the goods to a person does not make him the bailee.

Delivery upon contract

As mentioned above, the delivery of the goods from the bailor to the bailee must be after a contract is created between both the parties. The contract should have the details of the transfer of the goods and its return. However, the contract can either be “expressly signed by the parties” or “implied by the parties.

Exception: Lost goods found 

When lost goods are found by a third party, they act as the bailee of such goods. 

Duties of the finder:
  1. To keep the goods safe.
  2. Not use these goods for personal use.
  3. Take adequate efforts to find the real owner of the goods.
  4. Make sure that the goods are delivered to its real owner once found.
Rights of the finder:
  1. To be compensated for the expenses and trouble taken to keep the goods safe and find the owner. (Section 168)
  2. To sell the goods if:
  1. The goods are of perishing nature.
  2. The owner could not be found.

However, the proceeds from the sale must be transferred to the owner/bailor of the goods. (Section 169)

Purpose

There must be a specific purpose for which the goods are transferred from the bailor to the bailee. As per Section 153 & 154, the contract of bailment might be terminated if the bailee acts inconsistently or makes unauthorised use of the goods. Specific purpose is very important and the parties should abide by the contract.

Return of goods

After the purpose for which the goods were bailed is complete, the bailee will have to return the goods to the bailor. The method and the way of return will be as per the contract or bailor’s wish. As mentioned in Section 160, “It is the duty of the bailee to return, or deliver according to the bailor’s directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished.”

Duties of the bailor and the bailee

Duties of the bailor:

  1. To disclose faults in goods

It is the bailor’s responsibility to inform the bailee of all the faults in the goods. If the bailor fails to do so, he is liable to the bailee for any loss caused by that fault. 

For example: ‘X’ took a car from ‘Y’ to go for a vacation. ‘Y’ was aware that the brakes weren’t working properly. However, he didn’t inform ‘X’ about it. ‘X’ is involved in an accident due to the failure of brakes. ‘Y’ will be liable for all the losses ‘X’ faced in this accident.

  1. To cover necessary and extraordinary expenses

The bailor has to pay the bailee all the necessary and extraordinary expenses incurred by the bailee to safeguard the goods bailed.

For example: ‘A’ gave his cat to his friend ‘B’ when he had to travel for work. ‘A’ will have to pay the expenses incurred in the cat’s daily necessities such as food, shelter, etc. ‘A’ will also have to pay any extraordinary expense like doctor’s bill, daycare, etc. if it was necessary to keep the cat safe.

  1. To indemnify the bailee of all the losses

The bailor has to indemnify any loss incurred by the bailee if the bailor asks for his goods before the agreed time in the contract as per Section 159 of the Indian Contract Act. As per Section 164, the bailee can also claim losses from the bailor if the bailor intentionally bails goods with a defective title.

  1. To collect the bailed goods

The bailor must collect his goods once the time for which the goods were bailed is expired. If the bailor fails to collect the goods on the expiry of the bailment period, he will be liable to pay for any losses incurred by the bailee.

For example: ‘X’ bailed his dog with ‘Y’ for a week, and returned after 10 days  to get his dog back. ‘X’ will be liable to pay ‘Y’, the expenses incurred for the safekeeping of the dog for those 3 extra days.

Duties of the bailee:

To take proper care of the goods

As per Section 151 of the Indian Contract Act, 1872, “In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his goods of the same bulk, quantity and value as the goods bailed.” However, in Section 152, it is stated that “The bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in Section 151.”

For example: ‘A’ bailed his vehicle with ‘B’ for one week. If due to negligence of ‘B’, ‘A’s vehicle is damaged, ‘B’ will be liable to compensate for the same. However, if the vehicle is damaged due to some act of god such as an earthquake or a flood, ‘B’ will not be liable for such loss.

To use the goods for authorised purpose only

It is the bailee’s responsibility to use the goods only for the authorised purpose under a contract. If it is found that the goods are used for unauthorised purposes, the entire contract can be declared void by the bailor. As per Section 154, “If the bailee makes any use of the goods bailed which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them.”

Some examples:

(a) ‘A’ lends a horse to ‘B’ for his own riding only. ‘B’ allows ‘C’, a member of his family, to ride the horse. ‘C’ rides with care, but the horse accidentally falls and is injured. ‘B’ is liable to make compensation to ‘A’ for the injury caused to the horse.

(b) ‘A’ hires a horse in Calcutta from ‘B’ expressly to march to Banaras. A rides with due care, but marches to Cuttack instead. The horse accidentally falls and is injured. ‘A’ is liable to make compensation to ‘B’ for the injury caused to the horse.

To keep the bailed goods separate

All the goods bailed should be kept separately and safely by the bailee as it ensures the safe return of the goods. However, there are a few provisions related to the mixing of bailed goods.

  1. Section 155: If the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.
  2. Section 156: If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expense of separation or division, and any damage arising from the mixture.
  3. Section 157: If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.

To return any profits arised from the goods

If during the course of bailment, any profit has arisen from the bailed goods, the same should be transferred to the bailor by the bailee. 

Example: ‘A’ bails his cow with ‘B’ for a period of 7 days. The cow gives milk daily. ‘B’ sold this milk during the period of bailment. The profit earned by ‘B’ during the sale of milk must be returned to ‘A’ while returning the goods.

To return the goods

The bailee must return the goods to the bailor once the purpose of the bailment is accomplished or the term of the contract expires. This return must be as per the bailor’s discretion.

Rights of the bailor and the bailee

Rights of the bailor:

To be compensated against unauthorised use

If the bailee uses the goods for a purpose that isn’t authorised under the contract, he should be liable for any damage that arises from such use.

For example: ‘X’ bailed his vehicle to ‘Y’ for one month. In the contract, it was agreed that ‘Y’ can use the vehicle for his personal use. However, ‘Y’ let his brother ‘Z’ drive the vehicle, and ‘Z’ crashed the vehicle. Now, ‘Y’ will be liable for the damage done to the vehicle.

To terminate the contract 

As per Section 153 of the Act, “A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.”

Illustration: ‘A’ lets ‘B’, for hire, a horse for his own riding. ‘B’ drives the horse in his carriage. This is, at the option of ‘A’, a termination of the bailment.

To receive any profits arised from the goods

The bailor is entitled to any profit that arises from the goods when they are bailed. If the bailee refuses to pay such profits to the bailor, he may take appropriate action against the bailee to recover such an amount.

To get the goods returned on expiry of contract

The bailor has a right to receive the bailed goods upon expiry of contract. However, in case of a gratuitous bailment, the bailor can redeem the goods before the expiry of the contract. In any such situation, if the bailee incurs loss due to early return of the goods, the bailor is liable for the same.

Rights of the bailee:

To receive compensation

The bailee is entitled to receive compensation for losses suffered due to any defect in the goods. In case of gratuitous bailment, if the bailor asks for the goods to be returned before the expiry of contract and the bailee suffers loss because of this return, he can claim for compensation against those losses from the bailor.

To receive expenses incurred

The bailor has to pay the bailee all the expenses incurred for the caretaking of the goods bailed. The bailee is also entitled to receive any extraordinary expenses spent by him during the term of bailment of the goods.

To stop delivery of goods

The bailee is given the right to stop the delivery of goods if the bailee is of the knowledge that the bailor doesn’t have a title over the goods. The bailee can also stop the same if any third party claims their title over the goods.  

To lien the bailed goods

A lien is a legal right against the assets that are used as collateral to satisfy the debt. The bailee has been given the right to lien the bailed goods if the bailor has withheld any compensation or payment that he is liable to do.

Different types of lien are:

Particular lien:

As per Section 170 of the Indian Contract Act, 1872, “Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.”

For example: “A”delivers a rough diamond to “B”, a jeweller, to be cut and polished, which is accordingly done. “B” is entitled to retain the stone till he is paid for the services he has rendered. 

General lien:

As per Section 171 of the Indian Contract Act, 1872, “Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect.”

For example: “A” borrows Rs. 1000 from the bank without security. Later he takes one more loan of Rs 5000 from the same bank against a security of gold. “A” pays back Rs. 5000 but yet has not paid Rs 1000. So the bank can retain gold (general balance of the account) for the previous loan. 

Relevant case laws

Kaliaperumal Pillai v. Visalakshmi, AIR 1937 Mad 32

Facts of the case

In this case, the plaintiff hired the defendant to make new jewellery for her. Her old jewels had to be melted and the gold obtained from that was to be used to make this new jewellery. Every evening, the defendant would return the half-made jewellery to the plaintiff. Plaintiff would lock that jewellery in her box and leave it in the defendant’s room. However, the Plaintiff took the key to that box. One night, the jewels were stolen. The defendant was held liable by the plaintiff as he was the bailor of the goods.

Issues involved in the case

If the delivery was legally valid as bailment under Section 149 of the Indian Contract Act, 1872?

Judgement of the Court

It was held that the respondent was not liable as he did not have legal possession of the goods while they were stolen. The relationship was of bailment between both the parties but it ended as soon as the plaintiff locked the goods in the box and took the keys with herself. Merely leaving the box at the defendant’s house does not constitute bailment.

Atul Mehra v. Bank of Maharashtra, 2002

Facts of the case

In this case, the plaintiff had hired a locker in the respondent’s Bank on 15th January, 1986. The strong room in the bank was broken into by miscreants and the contents of the locker were stolen. The plaintiff claimed that jewellery worth Rs. 4,26,160 was deposited in the locker. On 9th January, 1989, an FIR was filled. The plaintiff pointed out that this loss was due to negligence and misconduct of the respondent. Also, it was alleged that the strong room was not made of adequate material and could be easily broken into.

Issues involved in the case

  1. Whether the loss suffered was due to misconduct and negligence of the respondent?
  2. Whether the respondent has a contractual liability to repay the losses?
  3. Would the relationship between the plaintiff and the respondent fall within the purview of bailment as defined in Section 148 of the Indian Contract Act, 1872?

Judgement of the Court

It was held that exclusive possession of the goods is sine qua non(extremely essential) in the case of bailment. Therefore, mere hiring of a locker would not constitute bailment. It was also stated that reasonable care and damages come into question when the bailee is made aware of the contents of the locker and exclusive possession of the same is given to the bailee. Here, neither was done, and hence, the judgement was in the favour of the respondent(bank).

Taj Mahal Hotel v. United India Insurance Ltd., 2019

Facts of the case

In this case, on 01st August, 1998, a Maruti Suzuki Zen was parked in the respondent’s hotel and the owner gave his car for the valet parking service. When the owner returned to get his car back, he learned that his car was stolen. A complaint against the thief was lodged but the car was nowhere to be found. Respondent hotel’s valet parking service had stated that ‘parking of vehicles was at the owner’s own risk inside and outside the hotel premises and in case of theft, loss or damage the hotel will not be liable.’ The plaintiff company paid a sum of Rs 2,80,000 to the car owner in order to settle the insurance claimed by him. The plaintiff company sued the respondent hotel for negligence.

Issues involved in the case

  1. Whether this was a case of bailment?
  2. Was the hotel liable for negligence under the law of bailment?
  3. Was the car owner eligible for compensation due to the absence of consideration between both parties?

Judgement of the Court

It was held by the supreme court that the theft of the car was a result of the respondent’s negligence and the respondent would be liable. The supreme court stated that the respondent cannot exclude its liability for negligence towards the vehicle parked in the respondent’s parking. The consideration, in this case, would be free parking to the customer for using the respondent’s services. It can be inferred that if the general rule of bailment is applied, the bailee(hotel) will be liable if there is a loss of goods(vehicle) due to its negligence. 

New India Assurance Co. Ltd v. The Delhi Development Authority, 1991

Facts of the case

In this case, the defendant owns and runs a truck parking centre known as Idle Truck Parking Centre in Delhi. The owner of a truck had parked his truck at Idle Truck Parking Centre on 8th June, 1987. A receipt was issued for Rs 3 for the safekeeping of the truck for 24 hours. The truck owner had insured his truck with the plaintiff in this case. On the night of 8th June, the truck was stolen from the parking centre. The owner raised a claim with the plaintiff which was settled for Rs 2,91,500. The plaintiff now sued the defendant to recover that amount as the loss of the truck was due to negligence of the owner. The defendant claimed that they were not liable as the possession was not transferred to them as the driver of the truck slept inside the truck that night.

Issues involved in the case

  1. Was the vehicle’s possession transferred to the defendant?
  2. Is the defendant liable for the loss of the plaintiff?

Judgement of the Court

It was held that the defendant was liable to pay the plaintiff. The essential element here was the transfer of possession. The possession was said to be transferred when the plaintiff issued a receipt for safe-keeping of the vehicle for the said night. For the contracted period, the defendant should have shown reasonable care towards the vehicle which failed to do so. 

Tilendra Nath Mahanta v. United Bank Of India And Ors., 2001

Facts of the case

In this case, the petitioner was a retired school teacher. He had opened a Savings A/C at Naharkatia Branch of the United Bank of India(respondent) and had a few Fixed Deposits in that bank. His son was a clerk at the same bank. The petitioner also had a joint account with his son in the bank. It was found that the son was involved in a few fraudulent transactions. To recover the losses, the respondent froze the joint account. Along with that, the respondent also froze the petitioner’s savings A/C and stopped the returns on the FDRs. The respondent claimed that as per Section 171 of the Indian Contract Act, 1872 the respondent had a lien over the petitioner’s savings A/C and his deposits in the bank.

Issue involved in the case

Whether the Respondent has a lien over the FDR’s and the accounts of the person whose joint account is under investigation?

Judgement of the Court

It was held that the respondent could not freeze the accounts of the petitioner and hold his FDRs as a lien. It was stated that the money deposited in the banks is a loan to the bank by the depositors. The money returned to the depositor is never the same. Also, it was held that ‘money’ does not account as a good under bailment.

Contract of pledge

Contract of pledge is a subset of a contract of bailment. Here, the goods bailed are kept as a security for a debt or a performance of a promise. Pledge is defined in Section 172 of the Indian Contract Act,1872 as “The bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. The bailor is in this case called the ‘pawnor’. The bailee is called ‘pawnee’.” It is covered under Chapter IX (Section 172- Section 181) of the Indian Contract Act, 1872.

Essential features of a contract of pledge

A valid contract

Similar to the contract of bailment, all the basic essentials of a valid contract should be present in a contract of pledge. Without these elements, the contract will be void and won’t be enforceable in a court of law.

Delivery of possession

It is necessary that the possession of goods be delivered from the pawnor to the pawnee. As mentioned in the definition, pledge is a bailment and this is an essential element of bailment. The delivery can be either actual or constructive. However, there might be exceptions where the possession remains with the pawnor.

Ownership cannot be transferred

In the case of pledge, mere possession of the goods is transferred to the pawnee. The pawnor of the goods is still the owner. The pawnee has possession of the goods but has limited interest in the goods.

Security against debt

The goods must be pledged as security against an outstanding debt of the pawnor. This outstanding debt can also be a promise for specific performance. 

Return of goods on repayment

Once the debtor the specific performance against which goods are pledged as security is repaid or completed, the goods must be returned to the pawnor in the manner specified by him.

Duties of the pawnor and the pawnee

Duties of the pawnor:

To compensate expenses

The pawnor has the responsibility to compensate the pawnee for all the ordinary and extraordinary expenses made by the pawnee in order to ensure the well-being of the pledged goods.

To repay the entire amount due along with interest

The pawnor has to repay the amount which is due to the pawnee. This amount is the total of the principal amount as well as any interest accrued on that amount during the course of the contract. 

To disclose all the faults in the goods

The pawnor before entering into a contract has to disclose all the faults in the goods to the pawnee. If the pawnee incurs any loss later due to those faults, the pawnor will be liable for those.

Duties of the pawnee:

To take reasonable care of the goods

It is the pawnee’s responsibility to take care of the goods that are pledged. The care taken by the pawnee must be just, fair and reasonable. It should be as the pawnee took care of his personal belongings. If due to negligence of the pawnee, the goods are damaged, he will be liable to compensate the pawnor.

For example: If ‘A’ pledges his watch with ‘B’ for a sum of Rs. 100. Then ‘B’ must take reasonable care of A’s watch as if it is B’s own watch. The condition of the watch should not deteriorate or be worse than at the time when it was pledged.

To use the goods only for authorised purpose

The pawnee can use the goods pledged if only it is authorised by the pawnor. If the goods are used for any purpose that is not authorised, the pawnee will have to compensate the pawnor against the same. 

For example: ‘A’ pledges his car with ‘B’. ‘A’ authorises ‘B’ to use the car for his personal use. ‘B’ allows his cousin ‘C’ to drive the car and the car then gets damaged. ‘B’ will have to compensate ‘A’ for the damages

To return the goods

As per the contract, once the amount against which the goods are pledged is repaid, the goods must be returned to the pawnor. This return must be as mentioned in the contract or as per the pawnor’s directions.

To return any profits arised from the goods

If at any time during the contract, the pawnee earns profit from the pledged goods, the same shall be returned to the pawnor during the termination of the contract.

Example: ‘X’ pledged his property with ‘Y’. The property was given on rent to ‘Z’. The rent received on the property must be returned to ‘X’. 

To keep the goods separate

It is the pawnee’s duty to keep the pledged goods separate from his own goods. If he mixes the pledged goods, all expenses to separate them will be borne by the pawnee. If separating is not possible, the pawnee will be liable for all the damages.

Rights of the pawnor and the pawnee

Rights of the pawnor:

To redeem the goods

As per Section 177 of the Act, ”If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them, but he must, in that case, pay, in addition, any expenses which have arisen from his default.”

For example: ‘A’ gave his watch to ‘B’ as a security against INR 800 that is due. They agreed that the amount should be repaid within 1 month. If ‘A’ fails to do so, he can redeem his watch even after the expiry of the contract given that ‘B’ has not yet sold the watch. However, if ‘B’ had to incur any expenses to safekeep that watch, the same will have to be paid by ‘A’.

To get the goods back

Once the pawnor pays back the amount due along with the interest to the pawnee, he has the right to get the goods back. After clearing the entire due against which the goods were held as security, the pawnee cannot retain the pledged goods.

Rights of the pawnee:

To retain the goods

The pawnee has the right to retain the goods until the amount owed by the pawnor is paid in full or the promise is completely performed. This amount includes the expenses incurred by the pawnee as well as any interest accrued on that amount. This is mentioned in Section 173 of the Act. 

For example: ‘A’ pledged his house with a bank for a loan of INR 2,50,000. The interest on the same was INR 10,000. The bank can retain the pledged house until ‘A’ repays the entire amount along with the interest i.e. INR 2,60,000.

As per Section 174,”The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.’”

To get compensation for extraordinary expenses

It is implied that the pawnor will be liable to pay for all the necessary expenses needed for the safekeeping of the goods. As per Section 175, if any extraordinary expenses arise, the pawnor will only be liable for the same as well. However, the pawnee cannot retain the goods for non-payment of such expenses.

To sell the goods

As mentioned in Section 176, “If the pawnor makes default in payment of the debt, or performance; at the stipulated time or the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.” It is important to note that the pawnor must be given proper and enough notice before selling the goods. It is further mentioned, “If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.”

For example: ‘X’ pledged his watch with ‘Y’ as security against INR 10,000. ‘X’ defaulted the payment even after enough notices. ‘Y’ went to sell his watch. If the watch is sold above INR 10,000, the surplus amount must be returned to ‘Y’. However, if the watch is sold for less, ‘X’ will still be liable for the difference.

Relevant case laws

Lallan Prasad v. Rahmat Ali and Anr., 1996

Facts of the case

In this case, the plaintiff advanced INR 20,000 to the defendant against a promissory note and a receipt. An agreement was signed by both the parties where the defendant agreed to pledge his aeroscapes as collateral against his debt. As per their agreement, the defendant had to deliver the aeroscapes to the appellant and the goods would remain in his custody.

The plaintiff filed a lawsuit claiming that the above-mentioned goods were never delivered to be in his custody and therefore, this agreement cannot be considered as a contract of pledge. He claimed that he was entitled to recover the amount loaned by him.

Issue involved in the case

  1. Whether pledged goods were delivered in the plaintiff’s custody?
  2. Was the plaintiff entitled to any compensation as he claimed that there was no contract of pledge since the goods were not delivered?

Judgement of the Court

The judgement was in the favour of the defendant. It was held by the Supreme Court that the pledged goods were delivered to the plaintiff. This meant that this agreement did ripen into a contract of pledge. The Court also stated that the plaintiff was not entitled to any compensation on his stance that the goods were never pledged to him. 

The Morvi Mercantile Bank Ltd. And Anr. v. Union of India, 1965

Facts of the case

In this case, a firm operating in Mumbai entrusted their goods worth INR 35,500 to Railways for its delivery to Delhi. The firm got their receipt for these goods from the Railways. In order to get an advance of INR 20,000 from the plaintiff, the firm pledged these receipts as collateral for the same.

The goods were lost by the railways and they offered to compensate with certain parcels to the plaintiff. The plaintiff rejected this and claimed that those weren’t the goods that were pledged to them. The plaintiff, hence, sued the railways to recover INR 35,500 against the value of goods pledged to them including the damages.

Issues involved in the case

  1. Whether railway receipts can be considered as valid goods under contract of pledge?
  2. Whether the plaintiff was the pawnee of the goods or the documents of the good’s title?
  3. Whether the plaintiff could sue for the entire value of the goods or only what was advanced by him?

Judgement of the Court

The Supreme Court of India ruled in favour of the plaintiff. It was held that railway receipts can be valid as goods under a contract of pledge. It was also held that the plaintiff was the pawnee of the goods and not merely its documents of title. It was stated that since the pawnee in a contract of pledge has the authority as the owner of the goods, the plaintiff will be allowed to sue for the entire value of the goods and not just the amount he has advanced.

K. M. Hidayathulla v. the Bank of India, 2001

Facts of the case

In this case, on 10th December, 1993, the petitioner pledged certain gold jewels with the respondent. These jewels were pledged against a certain amount. The petitioner failed to repay the amount within the agreed time. The bank held an auction for the jewels on 20th May, 1997 to recover the debt. The petitioner claimed that as per Section 176, the bank had the right to either file a suit against him for recovery or sell the jewels via an auction after giving reasonable notice to the petitioner, however, it must have taken place within the prescribed time for filing the suit.

Issues involved in the case

  1. Whether any such condition was mentioned in Section 176 of the Act?
  2. Whether the pawnee could auction the goods after the prescribed period?

Judgement of the Court

The judgement passed by the Madras High Court was in the favour of the bank. It was held that the bank had two remedies; either to file a suit for recovering the debt or selling the goods after reasonable notices to the pawnor. It was found that there was no connection between the two remedies. Merely because the period for filing a suit had passed, it did not mean that the other alternatives could not be used. It was held that if the pawnee resorted to any alternate course of sale, the prescribed period should be extended for the same.

Difference between a contract of bailment and pledge

Contracts of bailment and pledge are special types of contracts that are regulated under the Indian Contract Act, 1872. 

Contract of BailmentPoint of differenceContract of Pledge
When certain goods are transferred from one party to another for a specific purpose, it is called a contract of bailment.
Meaning
When certain goods are transferred from one party to another as a security against a debt, it is called a contract of pledge.
It is covered under Sections 148-171 of the Indian Contract Act, 1872.ProvisionsIt is covered under Sections 172-179 of the Indian Contract Act, 1872.
The sole purpose for bailing the goods is for the safe custody of the goods or repairs, at most times. 
Purpose
The sole purpose to enter into a contract of pledge is for security against a debt.
The party which bails the goods is known as the ‘bailor’ and the party with whom the goods are bailed is known as the ‘bailee’.
Parties
The party which pledges their goods is known as the ‘pawnor’ or the ‘pledger’ and the party which receives the goods is known as the ‘pawnee’ or the ‘pledgee’.
The presence of consideration in a contract of bailment is mandatory.ConsiderationThe presence of consideration in a contract of pledge is mandatory.
The goods cannot be sold by the bailee in such contracts.Right to sellThe goods may be sold by the pawnee or the pledgee.
The goods can be used by the bailee only for specific purposes known to both the parties or not otherwise.
Right to use
The goods cannot be used by the pawnee or the pledgee.

Conclusion

It is true that we don’t even realise that we enter into these contracts in our life. Contracts of bailment is a field which has been entered by arguably the most number of people unknowingly. Even when we simply give our product to be serviced, we enter into a Contract of bailment with the other party. 

After analysing and understanding the essentials and differences between contracts of bailment and  contracts of pledge, I can conclude that the scope of bailment contracts is very wide. However, contracts of pledge are very limited in nature. After looking at the similarities between both, we can deduce that all the contracts of pledge are contracts of bailment but not all contracts of bailment are contracts of pledge.

References


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