Difference between Bailment and Pledge

Two unique contracts that are frequently mixed up are bailment and pledge. While every pledge is a bailment, not every bailment is a pledge. Delivering goods from one person to another for a specific purpose is referred to as bailment. While a pledge is the delivery of goods for fulfilment of a promise or security for the payment of a debt. Bailment & Pledge are thus two distinct contracts. A specific type of bailment is a pledge. Although the Bailee in a contract of pledge does not acquire ownership, he is considered to have a particular property because he has possession and the legal right to possess. Pledge, which is effectively a bailment, obligates the Pawnee to treat the things bailed to him with the same care that a prudent man would under comparable circumstances, taking care of his goods of equal quantity, quality, and worth. The loss of the commodities would be the responsibility of the owner if the pawnee lost the items without any fault of his own and after exercising such ordinary care. Although the Pawnee now has possession of the goods, the Pawnor still retains ownership of the products' title. The prerequisite for the pledge is the delivery of the items to the Pawnee. Possession of goods may be actual or constructive. The Pawnee must take reasonable care of the goods pledged and must not use the Pawnor's property without authorization.

What is Bailment?

A short-term contract in which the goods are transferred from one party to another for a specific cause which is express or inferred. The individual delivering the moveable property is known as the bailor, and the one receiving them is known as the bailee. The Bailee is required to restore the goods to their rightful owner after the intended purpose of delivery is fulfilled. All transportable items / movables may be included in this definition of "goods," but property and money are not included. Only the temporary custody/possession of the commodities moves during the transfer ownership of the goods stays with the bailor. The recipient of the products must treat them with the same care as he does his own belongings and must only use them for the stated purposes with the owner's consent. The bailor is required to disclose any flaws in the goods. Actual delivery, symbolic delivery, and constructive delivery are the three ways in which items might be delivered. Two categories make up the bailment. One is Gratuitous bailment, where it is for the sole advantage of the bailee or the bailor. Second is Non-gratuitous Bailment, where it is in both parties' best Interests. An Example of bailment would be clothes given to dry cleaner for petrol-washing.

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The Basics of Bailment

1. Contract: The parties will enter into a contract for the delivery of the goods,

2. Specific Purpose: The products must only be delivered for a certain purpose.

3. Moveable Goods: Only moveable goods, not immovable items or money, may be subject to bail,

4. Ownership: Bailee does not acquire ownership as a result, Bailor continues to be the owner.

5. Possession: only possession of goods is transferred, not ownership.

6. Return of same goods: Bailee has a responsibility to return the same goods only and not any other goods as replacement. (Exception: Since the bank would not return the same notes, the money put there is exempt from accounting for bailment.)

Obligations of a Bailor

The Indian Contract Act, 1872's Section 150 imposed obligations on the bailor to reveal any latent facts, particularly those pertaining to product flaws. The disclosure obligations of Bailor are:

Gratuitous Bailment: The bailor is required to inform the bailee of all product flaws that could prevent him from using the products or put him in a dangerous situation. Furthermore, failing to comply will subject the bailor to liable for damages.

Non Gratuitous Bailment (Bailment for Reward): This obligation focuses specifically on the items provided on hire. According to this clause, when the goods are bailed for hire, regardless of whether the bailor is aware of the defect in the products or not, they will be held accountable for any harm produced as a result of the defect.

Obligations of a Bailee

According to the Indian Contract Act of 1872, Bailee is required to carry out a number of duties:

1. Reasonable care: The Bailee is responsible for the goods he owns. He is responsible for ensuring that all safety precautions are taken to protect the items. The standard of care should be that which a wise man would provide. Regardless whether the commodities are gratuitous or non-gratuitous , they must be treated equally. If the Bailee does not exercise reasonable caution, he will be held responsible for paying compensation. However, if Bailee exercised reasonable care and the items were nonetheless damaged despite that, Bailee would not be responsible for compensating. The Bailee is not responsible for the loss of commodities as a result of fire-related devastation (Sections 151 to 152).
    

2. Duty to use the goods only as intended: Bailee has a duty to use the items only as intended and in no other way. If he uses the goods for any other purpose than what was agreed upon, the bailor may cancel the bailment or may seek damages for any harm brought on by the illegal use (Sections 153 to 154).
    

3. Duty not to combine bailor's goods with own: The bailee has a responsibility to not combine the bailor's goods with his own. However, if he wants to mix the commodities, he must get the bailor's permission beforehand. The interest in the combined goods will be divided proportionally if the bailor consents to their mixing. There are two possibilities if the bailee combines the commodities with his own without the bailor's permission: the items can be separated, or they can't be separated. In the first scenario, the Bailee is responsible for paying the separation costs, however in the second, since the items were lost, the Bailor is entitled to damages for that loss. (Sections 155 to 157)
    

4. Duty to return the goods upon purpose completion: Bailee has a duty to return the goods upon completion of the intended purpose or upon the conclusion of the time for which the goods were bailed. However, if the Bailee fails to return the goods on schedule, he will be liable for any losses, ruins, or deterioration of the moveable property. (Sections 160 and 161). (In the case of Bank of India v. Grains & Gunny Agencies, the court determined that Bailee would also be responsible if the items were lost or damaged as a result of the servant's carelessness).
    

5. Subject to a contract to the contrary, the bailee is required to restore the commodities and any rise or profit on the goods that were bailed to the bailor. The bailor has the right to any accretions that have grown out of the bailed goods because they are considered to be a component of the bailed goods. And these additions must be given to the bailor with the goods being bailed. For instance, if A hands over control of a dog to B, the dog gives birth to puppies. The bailed items (dog) and any accretion (puppies) must then be delivered by B to the bailor. (163 Section).

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What are the Rights of a Bailor?

Rights of a Bailor are not directly covered under the Indian Contract Act, however, Bailee's duties are taken as Bailor's Rights. These are discussed below:

1. Enforcement of Bailee's Duty: Because the bailor's rights and the bailee's duties are identical, the bailor's right is realised after all of the bailee's obligations have been met. For instance, the bailee must provide the accretions, and the bailor has the right to request the same.

2. Right to sue for damages: The bailor has the right to sue for damages if the bailee neglects to take care of the goods.

3. Right to Terminate the Contract: If the Bailee breaches the contract's provisions and acts irresponsibly/negligently in doing so, the bailor may repudiate or cancel the agreement. (153 Section)

4. Right to sue for compensation: The bailor has the right to sue if the bailee uses the products for an improper purpose or mixes them together in a way that results in the loss of goods.

5. Right to request the return of goods: The bailor has the right to request that the bailee return the items.

What are Bailee's Rights?

1. Right to recoup expenses: Under the terms of the bailment agreement, the bailee must pay to protect the items/goods and keep them safe. The bailee is entitled to recover from the bailor for these costs. (Section 158)

2. Right to payment: The bailee is entitled to remuneration for the services he has provided when the items are bailed to him. But when a gratuitous bailment is given, the bailee is not given any compensation.

3. Right to compensation: On occasion, the bailor is unable to enter into a bailment agreement. Given that such a contract results in loss for the bailee, the bailee is entitled to reimbursement from the bailor. (Section 168 )

4. Bailee has the right to Lien: Bailee has the right to keep the items bailed in his possession until the time the dues are paid or if the bailor fails to make payment of compensation or does not pay the amount due. (Section 170& ndash 171)

5. Right to sue a wrongdoer: If a third party denies the bailee access to the goods after they have been released on bail, the bailee or bailor may file a lawsuit against the offending party. (Section 180)

What is Pledge?

In a pledge, goods are transferred from one person to another as security for the payment of debts owed by him. Pledges are different forms of bailment. The individual who delivers the items is referred to as the Pawnor, and the person who receives them as the Pawnee. Once the goal of the transfer is achieved, that is, when the debt for which the commodities are pledged is paid, the receiver must restore the goods to their rightful owner. However, the receiver has the authority to sell the goods after properly notifying the owner if he fails to redeem them within a reasonable amount of time. The Pawnee must treat the items with the same care that he does his own, and he must not use them without the owner's consent. Additionally, the Pawnor is required to disclose all product flaws.

Basics of Pledge

Due to the fact that a pledge is a unique type of bailment, all bailment requirements also apply to a pledge. In addition, the pledge must include the following:

1. A bailment is required as collateral or security against the payment or performance of a promise.

2. Goods are the subject matter of pledge.

3. The goods to be pledged should actually exist,

4. Deliveries of goods/commodities from the pledger to the pledgee must occur.

5. In the event of the pledge, there is no transfer of ownership. However, under exceptional circumstances, the pledgee may sell the tangible property or assets that have been pledged.
    

Pawnor's Rights

The Pawnor has the Right to Redeem in accordance with Section 177 of the Indian Contract Act of 1872. By this, it means that before the Pawnee makes the real sale, the Pawnor may redeem the goods or property pledged from the Pawnee upon the payment of the debt or the fulfilment of the promise. Once the Pawnee actually sells the property in accordance with his entitlement under section 176 of the Indian Contract Act of 1872, the right of redemption is forfeited.
 

Pawnees' Rights

The Indian Contract Act of 1872 specifies the following as the Pawnee's rights:

1. Right to keep the goods: The Pawnee has the right to retain the goods offered as security if the Pawnor fails to pay a debt or fails to keep a commitment made. Additionally, Pawnee has the right to keep goods in case a debt's interest or expenditures are not paid. However, Pawnee is not permitted to keep goods as collateral for any other promise or debt than those specified in the contract. (Sections 173& ndash 174)

2. Right to collect unusual costs: The Pawnee has the right to claim reimbursement from the Pawnor for any extra expenses related to maintaining/preservation of the goods that were pledged (Section 175)

3. The right to sue to collect debt and sell pledged goods: Pawnee has two options if the debt is not repaid: either to file a lawsuit against the debtor or to sell the collateral. In the former situation, the Pawnee maintains the items as collateral security and starts legal action. He is not required to provide the Pawnor any notice of such actions. Additionally, in the latter scenario, the Pawnee may sell the goods after giving the Pawnor the required notice of sale. If the proceeds from the sale of the commodities fall short of the balance owed, the Pawnor may be held liable for the difference. And if the Pawnee receives more money than is required, the extra must be returned to the Pawnor (Section 176).

Distinctions between Bailment and Pledge

Section 148 of the Indian Contract Act of 1872 defines a bailment, while Section 172 defines a pledge. The main distinctions between bailment and pledge are as follows:

1. Bailment and Pledge are both Contracts. Bailment is a contract in which moveable property is temporarily transferred from one party to another for a predetermined purpose. A form of bailment known as the pledge involves the pledge of goods as collateral for the repayment of debt.

2. Consideration is always present in Pledge, however, consideration might or might not be present in a bailment.

3. The purpose of a bailment is the safekeeping or repair of given goods. Contrarily, in pledge, the only reason for delivering the products is to provide as security/collateral for the debt.

4. In the case of a bailment, the receiver does not have any right to sell the goods/moveable property, but if the pawnor does not redeem the goods within a reasonable amount of time, the pawnee may, after giving notice, may sell the pledged goods.

5. The moveable property/goods are only to be utilised for the stated/decided purpose, by the bailee when they are in bailment. In contrast, the pawnee is not permitted to use the products at all under pledge.

Advocate Chikirsha Mohanty

Greater Kailash - 1, Delhi
5 years

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