Bailment

Indian Contract Act, 1872 — Sections 148–181

The delivery of goods by one person to another for a specific purpose, with a condition to return them. In banking, hypothecation and pledge involve bailment-like relationships. Under a pledge, goods are physically delivered to the bank (bailment), giving the bank a right to sell on default without court order. Under hypothecation, goods remain with the borrower (no bailment).

In practice, whether a security arrangement is a bailment decides if a bank can sell on default without going to court. Under Sections 148 to 181 of the Indian Contract Act, 1872, bailment is the delivery of goods for a purpose with a duty to return them, and that delivery of possession is the dividing line between a pledge and a hypothecation. In a pledge the goods are physically handed to the bank, creating the bailment that gives the bank a self-help right to sell on default; in a hypothecation the borrower keeps possession, there is no bailment, and the bank must take possession first, typically under SARFAESI, before it can realise the asset. This shapes how lenders structure security against stock, shares, or commodities, and how quickly they can recover. Misclassifying the arrangement, or failing to perfect possession, undermines the very remedy the bank thought it had. Well-advised creditors confirm whether possession actually passed before relying on a self-help sale.