PLEDGE-The Indian Contract Act 1872 Notes

 

Define Pledge in Contract Law

Under Section 172 of the Indian Contract Act, 1872, a pledge is defined as the bailment of goods as security for payment of a debt or performance of a promise. The contract of pledge is a legal mechanism where the ownership of goods remains with the pawnor, but possession is transferred to the pawnee until the debt is paid or the obligation is fulfilled.

Key Points:

• ‘Pledge’
  The bailment of goods as security for payment of a debt or performance of promise is called ‘pledge’.

• ‘Pawnor’
  The bailor in case of a pledge is called as ‘pawnor’.

• ‘Pawnee’
  The bailee in case of pledge is called as ‘pawnee’.

Example:
A borrows ₹50,000 from B and pledges his gold jewelry as security for repayment. If A repays the loan, B must return the jewelry. If A defaults on the loan, B can sell the jewelry to recover the debt.

ESSENTIALS A VALID CONTRACT OF PLEDGE (Sec.172)

• The essential elements of a pledge include:

  1. Delivery of Goods:
     The pawnor must deliver the goods to the pawnee. The delivery can be actual (physical transfer of possession) or constructive (symbolic transfer of control over the goods).

     Example: A hands over his car’s keys to B as part of the pledge agreement, giving B control over the car without physically delivering it.

  2. Security for a Debt or Obligation:
     The goods are delivered as security for a debt or an obligation. This means the pledge is created for a specific purpose, such as repaying a loan or fulfilling a contractual promise.

     Example: A pledges his stock certificates to B as security for the repayment of a business loan.

  3. Ownership Remains with Pawnor:
     Although possession of the goods is transferred to the pawnee, the ownership of the goods remains with the pawnor. The pawnee only has a possessory right, not ownership.

     Example: A pledges his house documents to B for a loan, but A continues to be the legal owner of the house.

  4. Right to Redemption:
     The pawnor has the right to redeem the goods by repaying the debt or fulfilling the obligation. Once this is done, the pawnee must return the goods to the pawnor.

     Example: A pledges his bike to B for a personal loan. Once A repays the loan, B must return the bike to A.

  5. Right of Sale:
     If the pawnor fails to repay the debt or meet the obligation, the pawnee has the right to sell the pledged goods to recover the amount. This right, however, must be exercised after giving due notice to the pawnor.

Rights and Duties of Pawnee and Pawnor

Rights of Pawnee

• Right of Retainer [Sec.173]
  Pawnee may retain the goods pledged for –
  • payment of the debt or the performance of promise,
  • any interest due on the debt; and
  • all necessary expenses incurred by him with respect to possession or for preservation of goods pledged.

• Retainer for subsequent advances [Sec.174]
  • Where the Pawnee lends money to the Pawnor subsequently, after the date of pledge, it shall be presumed that the he has a right of retainer over the goods already pledged in respect of the subsequent lending also.
  • This presumption can be made invalid only by an expenses provision to that effect.

• Reimbursement of Expenses [Sec.175]
  Where the Pawnee incurs extraordinary expenses to preserve the goods pledged with him, he is entitled to receive such amount from the Pawnor.

• Rights in case of default by Pawnor [Sec.176]
  • Suit: Pawnee may institute a suit against Pawnor when there is a default in payment of debt or performance of promise at the stipulated time.
  • Retention / Sale of goods: Pawnee may – (a) retain the goods pledged as collateral security, or (b) sell the goods pledged by giving a reasonable notice to the Pawnor.
  • Surplus / Deficit on Sale : When there is a surplus on sale, Pawnee shall pay the excess to the Pawnor. In case of deficit, Pawnor shall be liable for the balance amount.
  • No Notice: Where the Pawnee does not give a reasonable notice to the Pawnor, the sale is valid, but Pawnee is liable to pay damages to Pawnor.

• Right against true owner of goods [Sec.178A]
  Where the Pawnor has acquired possession of pledged goods, under a voidable contract u/s 19 or 19A but contract has not been rescinded at the time of pledge, the Pawnee acquires a good title to the goods, against the true owner.
• The title of Pawnee is good only where – (a) he had no notice of the Pawnor’s defect in title and (b) he acts in good faith.

Reasonable notice u/s 176 means that a notice of intended sale of the security by the Creditor within a certain date, so as to afford an opportunity to the Debtor to pay the amount within the time mentioned in the notice. Notice of sale is essential and a clause in the agreement excluding the requirement of Notice is inconsistent with the Act & is void and unenforceable.

Prabhat Bank Ltd. vs Babu Ram

Rightsof a Pawnor(Sec.177)

Redeem the goods pledged

• Meaning of redemption: Right to recover back the goods by making payment of the debt or performance of promise.
• Time for redemption:Where time of redemption is fixed, the pawnor may exercise redemption –
  • within the time so fixed; or
  • even after expiry of time so fixed, provided –
    • the pawnee has not sold the good; and
    • the pawnee pays the pawnee all expenses arising on account of his default.

Enforce pawnee’s duties

The pawnor has the right to enforce the duties of pawnee, if the pawnee fails to fulfill his duties.

Receive increase in goods

The pawnor has the right to recover from pawnee any increase in goods pledged.

Right to receive notice of sale

In case of default by the pawnor to pay the debt or perform his promise, the pawnee has the right to sell the goods, after giving a reasonable notice to the pawnor. If the pawnee fails to give notice, the pawnor has the right to recover the loss incurred by him.

Duties of a Pawnor (Sec.175)

• Pay the debt: The pawnor is liable to pay the debt or perform his promise as the case may be.
• Pay deficit on sale: If the pawnee sells the goods due to default by the pawnor, the pawnor must pay the deficit.
• Pay extra – ordinary expenses: The pawnor is liable to pay to the pawnee any extraordinary expenses incurred by the pawnee for preservation of goods.
• Disclose faults in goods: The pawnor is liable to disclose all the faults which are material for use of the goods; or may put the pawnee to extraordinary risks.
• Indemnify the pawnee: If loss is caused to the pawnee due to defect in pawnor’s title to the goods, the pawnor must indemnify the pawnee

Duties of a Pawnee

• Not to use the goods
  • The pawnee has no right to use the goods
  • However, he may use the goods, if he has been so authorised by the pawnor.
• Return the goods: The pawnee must return the goods if the pawnor pays the debt or performs his promise.
• Take reasonable care: The pawnee must take such care of goods pledged as a man of ordinary prudence would take care of his own goods.
• Not to mix goods: The pawnee must not mix his own goods with the goods pledged.
• Return increase in goods: The pawnee must return to the pawnor any accretion to the goods pledged with him.

 

	Pledge	Bailment
1.Purpose	Pledge is bailment of goods for a specific purpose, i.e. to provide a security for a loan or fulfillment of an obligation.	Bailment may be for purpose other than by way of providing security for a loan or fulfillment of an obligation. It may be for purpose like repairs, safe custody, etc.
2. Sale of Goods	Pawnee, i.e. Pledgee has a right of sale of goods pledged on default of Pawnor. He can do so by giving a notice to the pawnor.	There is no right of sale to the Bailee. Bailee may either – (a) retain goods, or (b) sue the Bailor for non – payment of his dues.
3. Use of Goods	Pledgee has no right of using goods pledged.	Bailee    can    use    the   goods bailed as per terms of contract.

Latest Case Law on Pledge

• State Bank of India v. Jasbir Kaur (2022)
  In this case, the Supreme Court of India ruled that a pawnee must exercise reasonable care in maintaining the pledged goods. The case involved a dispute where the bank (pawnee) failed to protect the pledged assets (jewelry), leading to a significant loss for the pawnor. The court held that the pawnee’s negligence made them liable for the loss and ruled in favor of the pawnor, reiterating the importance of the pawnee’s duty to take reasonable care of the pledged goods.
• Central Bank of India v. Siriguppa Sugars & Chemicals Ltd. (2020)
  In this case, the court clarified the pawnee’s right to sell the pledged goods in case of default by the pawnor. The court emphasized the need for the pawnee to provide proper notice to the pawnor before selling the pledged assets. The ruling reinforced the importance of following procedural requirements before the pawnee can exercise their right of sale.

Conclusion

The pledge under the Indian Contract Act, 1872 is a significant legal mechanism for securing loans and fulfilling obligations. It provides the pawnee with the right to hold onto or sell the goods in case of default, while the pawnor retains ownership and the right to redeem the goods by fulfilling the obligation. Understanding the essentials of pledge, including the rights and duties of the pawnee and pawnor, is crucial for ensuring that both parties act within their legal rights and obligations. With clear rules governing pledges, the Indian Contract Act provides a structured way to secure debts without permanently transferring ownership of valuable assets.