UNDERSTANDING BAILMENT, PLEDGE , HYPOTHECATION AND MORTGAGE

INTRODUCTION

Let’s start with knowing what a Contract is. I, a law student, went to a law firm where I signed an agreement to work for 3 months, it is known as a contract. I have to work for 3 months, and if I breach it, I have to pay compensation to the other party if any damage is caused due to my action. In simple words, this is known as a contract. In daily life, we do many contracts with vendors, shopkeepers, etc but we are not aware that it is a contract. Contract is an umbrella term including various types of contract which are formed in various kinds of relationships and by different conduct. From many, there is the concept of bailment, pledge , hypothecation and mortgage. In this article, we will briefly know about the above concept and their importance.

EVOLUTION OF THE CONTRACT LAW

It is not that contract law has evolved recently, the existence of contract law is as earlier as British law. In Vedic and Medieval period, the source of contract was Dharmsastras, vedas , shrutis , smritis, but there was no code for contract. In the period of Chandragupta Reign, bilateral transactions (also known as Barter System) were prevalent. It means that there was an exchange of goods between parties. In this period there was a concept of void contract too. Here, contracts made at night , in the forest, in any secret place and many more were held as void contracts. In Hindu Period, Manusmriti was governing the contract where it was mentioned that the minor , intoxicated, as well as an old person is incompetent to make a contract. In Islamic Period, there was the Mohammedan Law of Contract ( known as Aqd in Arabic language) to govern contracts among people whose essential was proposal and acceptance and also the ground for dissolution was provided by the same law. Lastly, the British Era where the Indian Contract Bill of 1861 was passed to govern the conduct, rules and regulations in making a contract.

INTRODUCTION TO CONTRACT LAW

The current rules and regulations which we follow while making a contract is given in Indian Contract Act , 1872 which was made by Britishers. Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement which is enforceable by law. In addition to general contracts, the law also provides some specialized contracts like Bailment, Pledge, etc.

BAILMENT

Section 148 of the Indian Contract Act, 1872 defines Bailment as the delivery of goods by one person to another for some purpose and when that purpose is accomplished then the goods will be transferred to that person who had given that good. Here, the person who delivered goods is known as Bailor and the person to whom delivery is known as Bailee. The concept of Bailment is covered in Chapter IX which covers section 148 to 171.

Illustration:-

A gave his car for repair to B and when the car was repaired B delivered it to A.

IMPORTANT SECTIONS

There are various sections which are so important and give information about the essential conditions and rights as well as duties of Bailor and Bailee. We will discuss some of the important provisions briefly.

Section 151:- This section imposes a duty on Bailee to take care of the goods which are bailed to him and that much care is required which is generally required from an ordinary prudence man.

Section 152:- It provides relief to Bailee that if he has taken that much care which is mentioned in the above section, then he cannot be made liable for loss, destruction or deterioration provided that there is no special contract for the same.

Section 154:- It provides duty to Bailee if he uses the goods which are bailed to him not in accordance with the conditions of contract, then he is liable to make compensation to the Bailor if any damage arises out of it. Moreover, the contract of bailment is voidable at the option of the Bailor , if Bailee does not act which is inconsistent with the conditions of bailment. This right to Bailor is provided in section 153.

Section 161:- It is the duty of the Bailee to deliver the goods on time and in any case if goods are not duly returned at proper time, then he is responsible to compensate Bailor for any damage arising out of that.

Section 170:- This section provides Bailee right of particular lien. According to this provision, Bailee has the right to retain that good until he receives due remuneration in case where he puts his skill or labour.

Section 164:- This section provides responsibility to the bailor where Bailee sustains any loss because Bailor was not entitled to bail that good or to receive back or to give directions respecting that good.

PLEDGE

Pledge is a type of bailment. It is provided in Chapter IX from section 172 to section 179. Section 172 of the Indian Contract Act, 1872 provides the definition of pledge which says the delivery of goods to someone (as in bailment) for security of payment or debt or performance of promise is called pledge. It means that ‘Every Pledge is a Bailment but Every Bailment is Not a Pledge’. In this case, the person who delivers the goods as security is ‘Pawnor’ (same as Bailor) and the person to whom delivery is made is ‘Pawnee’ ( same as Bailee).

Illustration:-

A was in need of money and went to the shopkeeper and gave him his ring as security that if he did not return the money then he could take that ring for always.

IMPORTANT SECTIONS

There are various important sections from where we got to know about the rights and duties of pawnor and pawnee. Let’s discuss it briefly.

Section 173:- It provides that Pawnee has a right to retain the good pledged not only for the payment of debt or performance of the promise but he also has the right to retain that good for the interests of the debt and all necessary expenses incurred by him.

Section 174:- It puts restriction on the right of pawnee to retain goods. According to this section, pawnee can only retain that good for only that transaction not for the previous one.

Section 175:- If Pawnee has incurred extraordinary expenses which are required for the preservation of that pledged goods , then he is entitled to receive compensation from pawnor.

Section 176:- This section provides that if pawnor makes default in payment or performance at promised time, then pawnee has right either to retain that good or sell , giving a prior notice to pawnor.

Section 177:- Through this section, Pawnor has the right to redeem the goods which are retained or announced to be sold by the pawnee.

Section 178A:- This section provides protection to Bailee that if the goods which is pledged to him is voidable good under section 19 or section 19A then the pawnee acquires a good title to the goods provided that he acts in a good faith.

Section 179:- This section provides that if pawnor has a limited interest in the good which he desires to pledge, then pledge is valid only to that extent of interest.

HYPOTHECATION

This term seems new but we are not unaware of it. In daily life, everyone faces such circumstances where the basic need becomes to get money and to get that we mostly time approach the bank for a loan. In this case, the possession is left in our hands but the bank has the right to sell it in case of a default made by the party . The good or asset can be either immovable property or tangible movable property. In Indian Contract Act, 1872 the contract of hypothecation is not explicitly mentioned but implicitly it is provided in section 176 of the Act.

Illustration:-

A, took a loan from the B by providing security i.e, his watch. Here, A can use the watch but if A makes a default in payment of interest or payment then the B can sell it.

Definition

The term ‘Hypothecation’ is explicitly defined under section 2 (n) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act , 2002.

According to this section, the interest which is imposed on the movable property as a security of that transaction. Here, the parties are known as the lender and the borrower.

MORTGAGE

Let’s understand with an example of a situation where a contract is for a mortgage. Ram, due to financial emergency, approaches the bank to get a loan but the bank for its safety of that given amount demands security and Ram mortgage his property and signed loan agreement (mortgage deed) that if any case he makes default in payment of interest or money to bank then bank can sell the mortgaged property and recover its amount. This is known as a mortgage where immovable property is mortgaged as a security for payment. It is mentioned in section 58 of the Transfer of Property Act, 1882.

Definition

Section 58 of the Transfer of Property Act, 1882 states that there must be transfer of an interest in specific immovable property to secure money by way of loan, etc. The person who transfers the interest in the property in mortgage is known as mortgagor and the person to whom he transfers is known as mortgagee. Here, it is essential to know that mortgage done by minor is void.

Section 70 of the Transfer of Property Act, 1882 states that if the mortgagor enhance or make addition in the mortgaged property, then that enhancement will also be automatically included in the mortgage property.

There are various rights and liabilities of Mortgagor and Mortgagee and also there are various types of mortgage given in the said Act.

DIFFERENCE BETWEEN BAILMENT, PLEDGE, HYPOTHECATION AND MORTGAGE

Point of difference	Bailment	Pledge	Hypothecation	Mortgage
Name of Act and Section	Indian Contract Act, 1872 and Section 148	Indian Contract Act, 1872 and Section 172	Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act and Section 2(n)	Transfer of Property Act,1882 and Section 58
Parties	Bailor and Bailee	Pawnor and Pawnee	Hypothecator and Hypothecatee (Lender and Borrower)	Mortgagor and Mortgagee
Types of Property	Movable	Movable	Movable	Immovable

CONCLUSION

The above mentioned all four concepts are very important as it helps the parties to understand their liabilities properly. It is evident as it provides them their rights which initiated just after the formation of contract. It is essential as these rights are legal and statutory rights which cannot be encroached by the other party and if they do so they have to give compensation to the aggrieved party.

REFERENCES

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.