In commercial law, possession often trumps ownership when it comes to liabilities, obligations, and remedies. This fundamental principle is embedded in two key contractual relationships under the Indian Contract Act, 1872: bailment and pledge. While both arise from a transfer of possession, their objectives, remedies, and commercial consequences are sharply distinct.
This article revisits these doctrines through a practical lens, explaining their significance in lending, warehousing, transport, and service contracts — and why getting them right matters more than ever.
Bailment: Liability Through Custody
Bailment is governed by “Sections 148 to 171 of the Indian Contract Act”. Under Section 148, a bailment occurs when one party (the bailor) delivers goods to another (the bailee) for a specific purpose, with the understanding that the goods will be returned or otherwise disposed of as directed.
The essential feature of bailment is possession without ownership. It does not require consideration. Even in gratuitous arrangements, the bailee is still under a “duty to take reasonable care” of the goods and return them in good condition. What matters is the transfer of custody and control, not whether money exchanged hands.
In “Taj Mahal Hotel v. United India Insurance Co. Ltd. (2020)”, the Supreme Court held the hotel liable for a car stolen from its valet parking. Despite being a complimentary service, the Court ruled that the valet arrangement constituted a contract of bailment, triggering duties of reasonable care and responsibility for loss. The hotel could not contractually exclude this liability by mere signage or disclaimers.
The ruling in “Atul Mehra v. Bank of Maharashtra (2002)” draws a contrast. Here, the Court found that locker services do not create a bailment, since banks “do not have exclusive possession or knowledge of what is stored inside”. Without knowing the contents or assuming responsibility for them, the bank could not be considered a bailee.
Similarly, in “New India Assurance v. DDA (1991)”, a parking authority was held liable when a truck was stolen from its facility. Although the driver had stayed overnight in the truck, the issuance of a parking receipt demonstrated the transfer of legal possession, establishing a bailment and corresponding duty of care. The Court reaffirmed that issuance of a receipt or token of safekeeping, even with nominal payment, can create a legal bailment — regardless of whether the vehicle owner retains partial control.
Pledge: Possession as Security
A pledge, as defined under Section 172, is a special kind of bailment where goods are delivered by a pawnor to a pawnee as “security for repayment of a debt or the performance of a promise”. While the basic features of bailment apply, a pledge introduces two critical distinctions:
First, consideration is always present — there must be an underlying debt or obligation.
Second, the “pawnee has a right to sell the goods” if the pawnor defaults, subject to giving reasonable notice. This remedy allows the pledgee to enforce their security without court intervention, which makes pledge a particularly powerful commercial tool.
In “Lallan Prasad v. Rahmat Ali (1967)”, the Supreme Court held that a pledgee who sells pledged goods without following the statutory process (including notice and accounting) forfeits the right to recover the remaining debt. The Court reaffirmed that a pledge is a security interest, not a right of ownership, and must be enforced within the contours of the law.
The decision in Morvi Mercantile Bank Ltd. v. Union of India (1965) further clarified that delivery of a railway receipt can amount to symbolic delivery of goods, making the pledge valid. The bank, as pledgee, was entitled to recover the full value of the goods, not just the amount it had advanced. This judgment remains a cornerstone for secured lenders who accept “documents of title (like bills of lading or warehouse receipts)” in lieu of physical delivery.
Key Differences: Function, Remedies, and Risk Allocation
Despite overlapping in structure, bailment and pledge differ fundamentally in purpose, risk, and enforcement.
- A bailment exists for the safekeeping, repair, transport, or temporary use of goods. It may be gratuitous and is not necessarily tied to financial obligations. The bailee has no right to use the goods beyond what is agreed and cannot dispose of them under any circumstances. Their duty is to take reasonable care and return the goods.
- A pledge, in contrast, is a tool of secured finance. It always arises from a loan or promise, and gives the pledgee a legal right to sell the goods if the debt is not paid. The relationship is inherently commercial and risk-bearing. The pawnee’s remedies are more aggressive — they can sell the pledged goods after giving notice, without initiating litigation.
- While all pledges are bailments, not all bailments qualify as pledges. The critical additions in a pledge are the intent to create security, and the presence of enforceable consideration.
Clarifying the Law on Banker’s Lien
The decision in “Tilendra Nath Mahanta v. United Bank of India (2001)” addressed whether a bank could freeze a depositor’s funds to offset losses caused by a third party (his son). The Court ruled that banker’s lien under Section 171 does not permit such action unless there is mutual indebtedness or a clear contractual right.
Crucially, the Court emphasised that deposits in bank accounts are not ‘goods’, and thus, cannot be the subject of bailment. This clarified the legal distinction between custody of goods and debtor-creditor relationships, which often get blurred in financial institutions’ practices.
Why These Distinctions Matter in Legal Practice
Understanding the differences between bailment and pledge is critical for both transactional and litigation lawyers. Here’s why:
1.Loan Structuring and Security Perfection: When drafting security documents, especially in asset-backed lending or inventory finance, the distinction can determine whether a lender has a legally enforceable interest. A poorly worded or informal pledge can collapse into a mere bailment — leaving the lender without recourse.
2. Warehouse Receipts and Digital Assets: With India’s adoption of e-NWRs (electronic Negotiable Warehouse Receipts) under WDRA, understanding symbolic delivery and pledge of title documents is key to enabling secured digital transactions.
3. Risk Exposure in Service Agreements: Legal teams in hospitality, logistics, transportation, or banking must recognise when operational activities give rise to bailment. Even an unsigned valet ticket or a Rs. 3 parking receipt, as seen in case law, can trigger liability.
4. Dispute Strategy: In litigation, correctly characterising a relationship as bailment or pledge can determine who bears the burden of proof, the extent of liability, and the available remedies.
5. Insurability and Indemnity Clauses: Since bailees are often liable without negligence, contracts must clearly define custody terms and allocate risk, especially when insuring against loss or damage.
Conclusion: Getting Possession Right
The line between bailment and pledge may seem narrow, but its legal and commercial consequences are profound. Whether a party is liable for a stolen vehicle, or entitled to sell warehouse stock, depends not on ownership — but on who had possession, why they had it, and what their obligations were.
For practitioners, clarity on these doctrines enables more secure transactions, more defensible contracts, and more successful enforcement. As the economy continues to digitise and decentralise, doctrines like bailment and pledge remain foundational — not relics of the past, but pillars of enforceable commerce.
As Indian commerce continues to digitise, the legal understanding of possession-based rights becomes more relevant than ever. For lawyers and clients alike, revisiting these doctrines is not just useful — it’s essential.
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