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MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

School of Law, Mumbai
A Project
On

PLEDGE V. MORTGAGE
In compliance to the partial fulfilment of the marking scheme,
For Trimester III of 2014-2015, in
The subject of LAW OF CONTRACTS - I
Submitted
To
Faculty

Mr. Sunil George
For evaluation.
`
SUBMITTED BY:
MUDIT SINGH CHAUHAN
B.B.A. L.LB (Hons.)
ROLL NO – A061
RECEIVED BY: ____________________________
ON DATE: __________ TIME: _________

1

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

INDEX:
SR. NO.

TOPIC

PAGE NO

1

Abbreviations

3

2

Table Of Cases/Statutes

4

3

Research Methodology

5

4

Introduction

7

5

Legal Analysis

9

6

Role of Judiciary

15

7

Comparative Study

18

8

Conclusion

19

9

References

21

2

MUDIT SINGH CHAUHAN LAW OF CONTRACTS. : Page para : paragraph .I ABBREVIATIONS:          vs. : Versus AIR : All India Reporter SC : Supreme Court HC: High Court edn. : Edition pg.org : organization SCR : Supreme Court Reports  3 .

which stipulate they own the 4 . When borrowers apply. NAVIR SINGH AND ANR.I TABLE OF CASES/ STATUTES: CASES:  STATE OF HARYANA AND ORS. they need to present property documents.MUDIT SINGH CHAUHAN LAW OF CONTRACTS.1 RELEVANCE: Mortgage loans refer to secured loans where the collateral is a house or an apartment. RAHMAT ALI AND ANR. 1 RESEARCH METHODOLOGY 1. VS.  MARDIA CHEMICAL CASE  LALLAN PRASAD V.

It also throws light on the differences between Pledge and Mortgage.5 LIMITATION OF THE STUDY: The research is restricted to secondary research.2 OBJECTIVES OF THE STUDY:  To understand the meaning of Pledge and Mortgage  To get an overview about the essentials of Pledge and Mortgage  To analyse the legal provisions related to Pledge and Mortgage in India  To study the difference between Pledge and Mortgage  To see the landmark judgements related to Pledge and Mortgage 1. Due to the constraints of time and scope of the project it was not possible to conduct a primary research.4 HYPOTHESIS: The study gives an overview about Pledge and Mortgage. The study being critical in nature. 1.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. The higher the value of the house is. Mortgages come with better interest rates and additional advantages for the borrower. the larger the loan borrowers have access to. 1.I space. 5 . This raises the minimum amount of money they can take out and increases the number of years in which they have to pay the money back. doctrinal methods have been adopted for the purpose of research because it is not possible to study the subject by experimental method.

MUDIT SINGH CHAUHAN LAW OF CONTRACTS.I 6 .

principal and interest amount). In case there is default by the borrower. the pledgee has a right to sell the goods in his possession and adjust its proceeds towards the amount due (i. It is the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced by way of loan. Advance against goods. buildings or anything that is attached to the earth or permanently fastened to anything attached to the earth (However. certificates. Advances against National Saving Certificates etc. 7 . The best example when mortgage is created is when someone takes a Housing Loan / Home Loan./stock. Some examples of pledge are Gold /Jewellery Loans. it does not include growing crops or grass as they can be easily detached from the earth). goods).MUDIT SINGH CHAUHAN LAW OF CONTRACTS. MORTGAGE: Mortgage is used for creating charge against immovable property which includes land.1 MEANING: PLEDGE: Pledge is used when the lender (pledgee) takes actual possession of assets (i. In this case the pledgee retains the possession of the goods until the pledger (i. Mortgage : is defined in Section 58 of the "Transfer of Property Act 1882". borrower) repays the entire debt amount.I 2 INTRODUCTION 2.e. Such securities or goods are movable securities. In this case house is mortgaged in favour of the bank / financer but remains in possession of the borrower.e.e. which he uses for himself or even may give on rent.

who is the great jurist. succinctly explained how the word mortgage was come from Old French words ‘’ mort’’. If mortgagor does pay the debt.I ORIGIN AND HISTORICAL PERSPECTIVE: MORTGAGE: During 1552-1634.’’ Pledge’’.MUDIT SINGH CHAUHAN 2. PLEDGE: Section 172 of the Indian Contract Act defines pledge as "The bailment of goods as a security for the payment of a debt or performance of a promise" The bailor in this case is called a Pawnor and the bailee is called Pawnee. 8 . it is dead to him upon condition. If mortgagor does not pay the debt forever. Sir Edward explained. then the pledge/ mortgage is dead with regard to mortgagee. ‘’gage’’ and ‘’ dead’’.2 LAW OF CONTRACTS.

9 . forming consideration for each other. An agreement. in order to form an agreement there must be a proposal or an offer by one party and its acceptance by other party. Therefore. Thus all contracts are agreements but all agreements are not necessarily contracts. Therefore. it states that ‘a contract is an agreement enforceable by law’. Thus an agreement is an accepted proposal. When a proposal is accepted it becomes a promise.I 3 LEGAL ANALYSIS 3.1 STUDY IN THE LIGHT OF THE LEGAL FRAMEWORK: MORTGAGE: Under the Indian Contract Act of 1872.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. a Contract = Agreement + Enforceability. however. contract consists two elements1. or the performance of an engagement which may give rise to pecuniary liability. Mortgage The term mortgage means the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan. Thus a contract is an agreement made between two or more parties which the law will enforce. 2. an existing or future debt. out of their free consent and for lawful object and consideration. An agreement means ‘every promise and every set of promises. Its enforceability by law An agreement is enforceable if it is made by competent parties.

Kinds of Mortgages There are in all six kinds of mortgages in immovable property. Usufructuary mortgage. and the instrument (if any) by which the transfer is effected is called a mortgage-deed. the mortgagor binds himself personally to pay the mortgage-money. namely: 1. so far as may be necessary. the transaction is called a usufructuary mortgage and the mortgagee a usufructuary mortgagee. and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest or in payment of the mortgage-money. without delivering possession of the mortgaged property. and agrees. or partly in lieu of interest or partly in payment of the mortgage-money. Simple mortgage. the principal money and interest of which payment is secured for the time being are called the mortgage-money. 3. 4. in payment of the mortgage-money. unless the condition is embodied in the document which effects or purports to effect the sale. the transferee a mortgagee. and transfers the mortgaged property absolutely to the mortgagee. and authorises him to retain such possession until payment of the mortgage-money. English mortgage-Where the mortgagor binds himself to repay the mortgage-money on a certain date. Simple mortgage-Where. the mortgagor ostensibly sells the mortgaged property-on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute. 2. the transaction is called a simple mortgage and the mortgagee. Usufructuary mortgage-Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee. or on condition that on such payment being made the sale shall become void. Mortgage by conditional sale-Where. Mortgage by conditional sale. in the event of his failing to pay according to his contract. or on condition that on such payment being made the buyer shall transfer the property to the seller.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. but subject to 10 . that. English mortgage. the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale. the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied. provided that no such transaction shall be deemed to be a mortgage. expressly or impliedly.I The transferor is called a mortgagor.

Essentials of a Mortgage Transfer of Interest: The first thing to note is that a mortgage is a transfer of interest in the specific immovable property. 6. Where. it was held by the Court that this was not a mortgage. the transferee gets it subject to the right of the mortgagee to recover from it what is due to him i. and Bombay. namely. by notification in the Official Gazette. There is thus a debt and the relationship between the mortgagor and the mortgagee is that of debtor and creditor. with intent to create a security thereon. and in any other town which the State Government concerned may. If the mortgagor transfers this property. the transaction is called a mortgage by deposit of title-deeds. or if a loan has already been granted to secure the repayment of such loan. His ownership has become less for the time being by the interest which he has parted with in favour of the mortgagee. 5. The mortgagor as an owner of the property possesses all the interests in it. Madras. Anomalous mortgage-A mortgage which is not a simple mortgage. he only parts with a part of the interest in that property in favour of the mortgagee. the interest of the mortgagor is reduced by the interest which has been transferred to the mortgagee. The reason why the immovable property must be distinctly and specifically mentioned in the mortgage deed is that. the towns of Calcutta. a mortgage by conditional sale. delivers to a creditor or his agent documents of title to immovable property.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. Specific Immovable Property: The second point is that the property must be specifically mentioned in the mortgage deed. When A borrows 50 bags of sugar from B on a mortgage and agrees to return 11 . the transaction is called an English mortgage. the mortgagor stated “all of my property” in the mortgage deed. To Secure the Payment of a Loan: Another characteristic of a mortgage is that the transaction is for the purpose of securing the payment of a loan or the performance of an obligation which may give rise to pecuniary liability. a usufructuary mortgage. It may be for the purpose of obtaining a loan. Mortgage by deposit of title-deeds or equitable mortgage.e.. an English mortgage or a mortgage by deposit of title-deeds within the meaning of this section is called an anomalous mortgage. After mortgage. and when he mortgages the property to secure a loan. Anomalous mortgage. Where a person in any of the following towns.I a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed. the principal plus interest. for instance. specify in this behalf. in case the mortgagor fails to repay the loan the Court is in a position to grant a decree for the sale of any particular property on a suit by the mortgagee.

but for the interests of the debt. “Pawnor”. The mortgagee has a right of foreclosure upon the mortgagor’s failure to perform. a person borrows money and agrees with the creditor that till the debt is repaid he will not alienate his property. In a sale. he does not transfer any interest in the property to the creditor. as stated earlier.I an equal quantity of sugar and a further quantity by way of interest. but such contract. 12 . PLEDGE: Section 172. To sum up. not only for payment of the debt or the performance of the promise. it may be stated that there are three outstanding characteristics of a mortgage: The mortgagee’s interest in the property mortgaged terminates upon the performance of the obligation secured by the mortgage. The mortgagor has a right to redeem or regain the property on repayment of the debt or performance of the obligation.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. however. and all necessary expenses incurred by him in respect to the possession or for the preservation of the goods pledged. the transaction does not amount to a mortgage. Section 174. “Pledge”. The bailor is in this case called “pawnor”. In a mortgage. only part of the interest is transferred to the mortgagee. Pawnee not to retain for debt or promise other than for which goods pledged – presumption in case of subsequent advances The Pawnee shall not. all the interests or rights or ownership are transferred to the purchaser. retain the goods pledged for any debt or promise of other than the debtor promise for which they are pledged. Section 173. Where. it is a mortgage transaction for the performance of an obligation. Here the person merely says that he will not transfer his property till he has repaid the debt. as distinguished from a mortgage. Pawnee’s right of retainer The pawnee may retain the goods pledged. in the absence of a contract to that effect. some of them remains vested in the mortgagor. The bailee is called “pawnee”. and “Pawnee” defined The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”.

Section 178. 1but he must. provided he acts in good faith and without notice of the pawnor’s defect of title. with the consent of the owner. Section 177. shall be as valid as if he were expressly authorised by the owner of the goods to make the same. any expenses which have arisen from his default. in possession of goods or the documents of title to goods. 13 . Pledge by person in possession under voidable contract When the pawnor has obtained possession of the other goods pledged by him under a contract voidable under section 19 of section 19A. Explanation : In this section. when acting in the ordinary course of business of a mercantile agent. any pledge made by him. the Pawnee acquired a goods title to the goods. Defaulting pawnor’s right to redeem If a time is stipulated for the payment of the debt. he may redeem the goods pledged at any subsequent time before the actual sale of them. but the contract has not been rescinded at the time of the pledge. Pledge by mercantile agent Where a mercantile agent is. provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge. pay.I in the absence of anything to the contrary. for which the pledged is made. and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time. shall be presumed in regard to subsequent advances made by the pawnee. on that case.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. Section 175. Section 178A. 1930 (3 of 1930). Pawnee’s right as to extraordinary expenses incurred The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. in addition. the expression “mercantile agent” and “documents of title” shall have the meanings assigned to them in the Indian Sale of Goods Act. or performance of the promise.

hence the goods delivered by the 14 . In a pledge the ownership of the pledged property remains with the debtor (the pledgor or borrower). Delivery of the property is essential to a pledge. the pledge is valid to the extent of that interest.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. In a mortgage. 3. while in a pledge it is a movable property. the ownership of the mortgaged property is transferred to the creditor (banker or mortgagee). 2.I Section 179. Pledge where Pawnor has only a limited interest Where person pledges goods in which he has only a limited interest. DIFFFERENCE BETWEEN PLEDGE AND MORTGAGE: 1. The Security in Mortgaged is an immovable property.

A pledgee does not have the right of foreclosure (i. in a mortgage.. the banker (pledgee) can sell the pledged property without the intervention of the Court. 4.I pledgor or borrower will be in the custody of the banker. can debar the borrower from taking back the mortgaged property under certain circumstances.e.e. in a mortgage. In a pledge. cannot debar the pledgor or the borrower from taking or redeeming the pledged property). a mortgagee (borrower) has the right of foreclosure. except in English mortgage. 4 ROLE OF JUDICIARY 15 . But. 5. i. In a mortgage. But.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. the possession of the property will be with the borrower. a mortgagee can sell the property only with the permission of the Court.

NAVIR SINGH AND ANR. MARDIA CHEMICAL CASE 16 . A request for mutation on the basis of mortgage effected was made by the Bank which was resisted by the Respondent on the ground that no entry can be made as the instrument of deposit of title-deeds is compulsorily registrable Under Section 17(1)(c) of the Registration Act. 2. the registration would be required to that effect. Pursuant to this. In such a case also registration will not be required.I CASE LAWS RELATING TO MORTGAGE: STATE OF HARYANA AND ORS. Mortgage by way of deposit of title deeds to the creditor with the intent to create a security thereon can be effected by the debtor and no instrument is required to be drawn for this purpose. The parties may choose to draw a memorandum showing deposit of the title-deeds. Punjab National Bank (“PNB”) sanctioned a term loan and working capital facility to UltraTech Private (“UT”). Facts: The facts in both the cases being similar. original title-deeds in respect certain immovable properties belonging to Narvir Singh and Rajinder Kaur were deposited with the Bank by the borrower as ‘mortgage by deposit of title-deeds’. liability or extinguishes them. in a case where memorandum recorded in writing creates right. Issue: Whether creation of mortgage by way of deposit of title deeds would require compulsory registration under Section 58(f) of the Transfer of Property Act? Held: 1. these cases were heard jointly by the Court. VS. However.MUDIT SINGH CHAUHAN LAW OF CONTRACTS.

13 (2) the borrower does not get any pre decisional hearing 2. taking recourse to all or any of the measures contained in sub-section (4) of Section 13 namely. required it to pay the amount of arrears indicated in the notice within 60 days. Held The Court however did not accept these arguments and struck down section 17(2) as ultravirews to the Constitution being arbitrary. 2002 to Mardia Chemicals Ltd. more particularly putting one party to an advantageous position over the other. The reasoning of the Court was the following 1.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. This was joined with various writ petitions in various High Courts challenging the validity of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. in the present case. lease or otherwise any of the secured assets. failing which the IDBI as a secured creditor would be entitled to enforce the security interest without intervention of the court or Tribunal. Under s. the Industrial Development Bank of India (for short `the IDBI') under Section 13 of the Ordinance. then in force. For example. by taking over possession and/or management of the secured assets. in a matter of private contract between the borrower and the financing bank or institution through impugned legislation rights of the borrowers have been curtailed and enforcement of secured assets has been provided for without intervention of the court and above all depriving them the remedy available under the law by approaching to the civil court.I Facts of the case: In a notice dated July 24. In order to make the legislation fair the provision was held to be arbitrary and struck down. CASE LAWS RELATING TO PLEDGE: 17 .. 2002 Issues involved in the case Whether the terms or existing rights under the contract entered into by two private parties could be amended by the provisions of law providing certain powers in one sided manner in favour of one of the parties to the contract The argument raised on behalf of many petitioners was that existing rights of private parties under a contract cannot be interfered with. Similar notices were issued by other financial institutions and banks under the provisions of Section 13 of the Ordinance/Act to different parties who filed petitions in different High Courts. The petitioner was also required not to transfer by way of sale. There should be no pre-supposition that the borrower is a willful defaulter.

MUDIT SINGH CHAUHAN LAW OF CONTRACTS. and to keep them in the appellant’s custody. and that consequently.000 to the first respondent against a promissory note and a ‘receipt. and that he was it pledgee thereof. It was found on the evidence that the goods were delivered to the appellant.I LALLAN PRASAD V. 20. RAHMAT ALI AND ANR. he was entitled to recover the amount advanced by him. that the agreement therefore did not ripen into a pledge. Whether the custody of the said goods after they were stored at the aforesaid place was with A or R 5 COMPARITIVE STUDY 18 . HELD: Trial Court: favoured the appellants High Court: favoured the respondents SUPREME COURT Issues 1. The appellant filed a suit on the promissory note claiming that the first respondent failed to deliver the goods. Whether the appellant was entitled to any relief when his case was that the first respondent never delivered to him the said goods and the said agreement never ripened into a pledge? 3. Whether the first respondent pledged aeroscraps and delivered possession thereof to the appellant ? 2. to deliver them to the appellant. The first respondent executed an agreement whereby he agreed to pledge as security-for the debt aerospace’s. FACTS: The appellant advanced Rs.

6 CONCLUSION 19 . Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) Art. (3) That the persons constituting the pledge or mortgage have the free disposal of their property. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfilment of a principal obligation.I PHILIPPINES PROVISIONS COMMON TO PLEDGE AND MORTGAGE Art. and in the absence thereof. the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. that they be legally authorized for the purpose. (n) Art. The provisions of Article 2052 are applicable to a pledge or mortgage. 2086.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. 2087. It is also of the essence of these contracts that when the principal obligation becomes due. 2085. (1858).

. one should think carefully before mortgaging his/her property. a mortgage is always redeemable. any stipulation which prevents a mortgagor from getting back the property mortgaged is void. namely. always a mortgage. however. First. Thus. To shorten loan tenure by paying extra amounts into loan account is what general in public prefer. But mortgage are time bound. always a mortgage. If a person one aims to reduce the principal amount of his/her loan. was supplemented by the words 'and nothing but a mortgage' added by Lord Davey in the leading case of Noakes v.. always a mortgage' it is noticed: "In 1681 Lord Nottingham in the leading case of Harris v. The maxim has been supplemented in the Indian context by the words 'and therefore always redeemable'. vs Ramvilas Gangabisan Heda (Dead). then an advance one notice to the bank is require to make it effective. always a mortgage'.I For better understanding the word ‘Mortgage’. 'once a mortgage. This is a doctrine to protect the mortgagor's right of redemption: It renders all agreements in a mortgage for forfeiture of the right to redeem and also encumbrances of or dealings with the property by the mortgagee as against a mortgagor coming to redeem. it is invalid. AIR 2003 SC 1017. if the mortgager wants make regular extra payment he/she must ensure that the extra payment is deducted from the principal amount of loan monthly wise. one need to make sure that it gets the best one that you possibly can. In other words. always a mortgage'. always a mortgage'. In the Law of Mortgage by Dr.MUDIT SINGH CHAUHAN LAW OF CONTRACTS. Thirdly. and nothing but a mortgage'. there is the maxim: 'Once a mortgage. To acquire a mortgage is one of the biggest commitments a person can make during his/her lifetime. 20 . 2003 (1) CTC 364) It thus clear that the very conception of mortgage involves three principles. That is to say. In 1902 the wellknown maxim. However. Harrisfirmly laid down the principle: 'Once a mortgage. as a corollary from the first another principle may be deduced. That is. And this is an exception to the aphorism. 'once a mortgage. Shankarlal. the mortgagee cannot reserve to himself any collateral advantage outside the mortgage agreement. normally. it is apt to have a look on the maxim 'Once a mortgage. a mortgage is always redeemable and if a contrary provision is made. Secondly. (See Achaldas Durgaji Oswal (Dead) . added by Justice Sarkar of the Supreme Court in the case of Seth Ganga Dhar v. modus et conventio vincunt legem (custom and agreement overrule law). apart from the above principles. Rice. in which the maxim was explained to mean 'that a mortgage cannot be made irredeemable and a provision to that effect is void'. Rashbehary Ghose at page 231232 under the heading 'Once a mortgage. Mortgage is important in this era of development. 2003 (1) AWC 671 SC.

com/news-article/the-peoples-chronicle-article/item/9269mortgage-under-indian-contract-act 21 .manipurtimes.I REFERENCES  http://www.MUDIT SINGH CHAUHAN LAW OF CONTRACTS.

org/pledge/ http://www.MUDIT SINGH CHAUHAN LAW OF CONTRACTS.html http://uk.html http://thelawdictionary.batasnatin.blogspot.org/pledge-and-law http://www.pathfindersonline.I   http://www.apr.aspx 22 .in/2013/06/hypothecation-what-banker-should-   know_13.gov.practicallaw.rs/eng/Registers/Pledges/QuestionsandAnswers.com/law-library/civil-law/obligations-and-contracts/791-   pledge-articles-2085-2123.com/2-107-7016 http://karpuramanjari.