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Pledge is a special kind of bailment in which a person transfers the possession of his property to another for securing
the loan taken from the other. It only differs from bailment in the matter of purpose. When the purpose of the
bailment is to secure a loan or a promise, it is called a pledge. Section 172 of Indian Contract Act 1872 defines
Pledge as follows Section 172 - The bailment of goods as a security for the payment of a debt or performance of a promise is called
Pledge. The bailor in this case is called a Pawnor and the bailee is called Pawnee.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 observed that Pawn or pledge is a bailment of personal property
as a security for some debt or engagement.
The following are essential ingredients of a pledge 1. Delivery of possession - As in bailment, the delivery of possession is essential in a pledge. Thus, in Revenue
Authority vs Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money from a financier and
agreed to deliver the final prints of the film when ready. This was held not to be a pledge because there was no
delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has the possession of the property agrees
to hold it on behalf of the pledgee upon direction of the pledger.
Hypothecation - It is also possible to let the pawner keep the physical goods even though the legal possession is
transfered to the pawner. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a cinema hall equipment was pledged
to the bank but the bank allowed the hall owner to keep the equipment to show the movies. The hall owner then sold
the equipment to another party. It was held that the sale was subject to the pledge.
In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases where goods are hypothecated, other
creditors cannot claim right on them until the claim of the pledgee is satisfied.
2. In return of a loan or a promise - The delivery must be in return of a loan or of acceptance of a promise to
perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a simple bailment. However, if
A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge.
3. In pursuance of a contract - The delivery must be done under a contract though it is not necessary that the
delivery and the payment of loan be at the same time. Delivery can be made even after the loan is received.
Rights of a Pawnee
1. Right of retainer (Section 173- 174) - As per section 173, the pawnee may retain the goods
pledged, not only for a payment of a debt or the performance of the promise, but also for the interest of the debt, and
all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.
Further, as per section 174, in absence of any contract to the contrary, the pawner shall not retain the goods pledged
for debt or promise other than the debt or promise for which they have been pledged. However, such contract shall
be presumed in absence of any contract to the contrary with respect to any subsequent advances made by the
pawnee.
This means that if A pledges his gold watch with B for 1000 Rs and later on he promises to teach B's son for a month
and takes for 500Rs for this promise , and if he does not teach B's son, B cannot retain A's gold watch after A pays
1000Rs. Thus, the right of retainer is a sort of particular lien. The difference was pointed out in Bank of Bihar vs
State of Bihar 1972 by SC. It observed that a pawnee obtains a special interest in the pledged goods in the sense
that he can transfer or pledge that special interest to somebody else. The lien only gives the right to detain the goods
but not transfer. Thus, a pledgee get the first right to claim the goods before any other creditor can get them. The
pledgee's loan is secured by the goods.
the pawnee is
entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods
pledged. For such expenses, however, he does not have right to detain the goods. Section 175 says that the
pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the
goods pledged.
3. Right of sale (Section 176) - As per section 176 (Pawnee's right where pawnor makes default) - If
the pawnor makes default in payment of the debt or performance at the stipulated time, of the promise, in respect of
which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or the promise and
retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable
notice of the sale.
This right secures the debt for the pawnee up to the value of the goods pledged because it allows the pawnee to
either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged. If the value received
after selling the goods, the pawner is still liable for the difference and if the value of the sale is more than the amount
of debt, the pawnee is supposed to give the difference to the pawnor. However, if the pawnee has sold the goods, he
cannot sue for the debt.
In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note
and gave him aeroscrapes worth about 35000Rs, as a security for the loan. The plaintiff sued for repayment of the
loan but was unable to produce the security, having sold it. SC rejected his action. It held that pledgee cannot
maintain a suit for recovery of debt as well as retain the pledged property.
The pawner is required to give a reasonable notice to the pawnee about the sale. The notice is not a mere notice but
reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an agreement of a loan enabled the bank
to sell the securities upon default without notice. The pawnor defaulted in payment. The bank sent a reminder upon
which the pawnor asked for more time. The bank sold the securities. SC held that this was bad in law. The bank is
required to give a clear and specific notice of the impending sale. Pawner's request for more time cannot be
interpreted as a notice of sale.
When the goods are lost due to pawnee's negligence, the liability of the pawnor is reduced to the extent of value of
the goods.
consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good
faith and he must not have notice that the pawnor has no authority to pledge.
Difference between Bailment and Pledge Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true.
Bailment
Pledge