INTRODUCTION

PLEDGE

A pledge is only a special kind of bailment, and chief basis of

distinction is the object of the contract. Where the object of the
delivery of goods is to provide a security for a loan or for the
fulfillment of an obligation, that kind of bailment is
pledge.1Under Indian Contract Act, 1872 the ‘Pledge’ has been
defined in section 172 as:

S 172. “Pledge”, “pawnor”, and “Pawnee” defined-

The bailment of goods as security for payment of a debt or

performance of a promise is called “pledge”. The bailor is in
this case called the “Pawnor”. The Bailee is called the “Pawnee”.

In case of LALLAN PRASAD V. RAHMAT ALI,2 Supreme Court

of India defined Pledge as:

“Pawn or pledge is a bailment of personal property as a

security for some debt or engagement. A pawner is one who
being liable to an engagement gives to the person to whom he
is liable a thing to be held as security for payment of his debt
or the fulfillment of his liability”.

1
Avtar Singh, Contract and Specific Relief, (11th Edition), p.689
2
AIR 1967 SC 1322
The property pledged should be delivered to the Pawnee.
Delivery of possession may be actual or constructive. Delivery
of the key of the go down where the goods are stored, is an
illustration of constructive delivery. Where the goods are in the
possession of a third person, who, on the direction of the
pledger, consents to hold them on pledgee’s behalf, that is
enough delivery. It is sometimes called delivery by attornment.
Delivery of documents of title which would enable the pledgee
to obtain possession is equally effective to create a pledge.3

In case of MORVI MERCANTILE BANK LTD V. UNION OF

INDIA4, the Apex Court held that- “delivery of railway receipts
was the same thing as delivery of goods, the pledge was
therefore valid and the pledgee was entitled to sue for the loss”.

Sometimes the goods are allowed to remain in the custody of

the pledger for a special purpose and that constitutes pledge by
hypothecation. Thus, in case of default by the pledger, the
Pledgee will have to first take possession of the security and
then sell the same.

The best example of this type of arrangement are Car Loans.

In this case Car / Vehicle remains with the pledger but the
same is hypothecated to the bank / financer. In case the
pledger defaults, banks take possession of the vehicle after
giving notice and then sell the same and credit the proceeds to
the loan account.5

3
Avtar Singh, Business Law, (9th Edition), p.226
4
AIR 1965 SC 1954
5
Pledge vs Hypothecation”, retrieved from http://www.allbankingsolutions.com/
WHAT CAN BE PLEDGED:-

Pledge is a kind of bailment where the goods are delivered by

one person to another as security for payment or performance
of a promise. If the goods are in the possession of a third
person there is deemed to be no delivery of the goods unless
and until the third person acknowledges to the transferee that
he holds the goods. The following things can be pledged:-

i) Only the moveable goods can be pledged.

ii) The goods which are in possession of the True Owner Should
have a clear title and valid documents.

WHO CAN MAKE A VALID PLEDGE:-

Ordinarily he should be the owner of the goods, or any person

authorized by him in that behalf who can pledge the goods. If a
servant has the custody of the goods or a tenant gets the
possession of a furnished house, the servant cannot pledge the
goods nor can a tenant pledge the furnishing materials in his
possession.

A person obtaining the goods fraudulently does not have any

right to pledge them as described in a case of PURSHOTAM
DAS V/S UNION OF INDIA.6 In the following exceptional
cases a person who is neither the owner nor having any
authority from the owner for pledging the goods, but having
possession with the owner’s consent can make a pledge and
confer rights on the pledgee. These are as under:-

1. PLEDGE BY MERCANTILE AGENT:

Section 178 of the Act a mercantile Agent having the

possession of the goods with the consent of the owner
but having no authority to pledge them can make a

6
AIR 1967 All 549
 pledge provided the pledgee or pawnee is acting in good
faith. He must pledge the goods while acting in the
ordinary course of his business of a mercantile agent.

2. PLEDGE BY PERSON IN POSSESSION UNDER A

VOIDABLE CONTRACT:
The Act recognizes another exception to the rule that
either the owner or his duly authorized agent can
pledge the goods. According to this a person who has
obtained the possession of the goods under a voidable
contract.

Voidable contract is a valid contract until it has been

rescinded and becomes void after the same has been
rescinded.

If the pawnor has obtained the possession of the goods under a

voidable contract but the contract has not yet been rescinded,
the pledgee is capable of having a good title to such goods.
Thus if a person has obtained the possession of goods by fraud,
misrepresentation, coercion or undue influence, he could make
a valid pledge of the goods if the same is done before the
contract has been rescinded.

A case of PHILLIPS V/S BROOKS LTD.: It was in this case

that pledge was valid.

3. PLEDGE BY A PERSON WITH A LIMITED INTEREST:

-
This Provision have been given in the section 179 of the
act that a person having limited interest in the goods
may make a valid pledge.
For example : A pledges the goods to B for Rs.5000/-
and B makes a sub pledge of those goods for Rs.8000/-
 A gets a right to take back those goods only by paying
Rs.5000/-as held in case of BELGAWN POINER
URBAN CO-OP CREDIT BANK V/S SATYAPARMODA.

ESSENTIALS OF PLEDGE
Following are the essential characteristics or ingredients of a
pledge:

1. CONTRACT:
A pledge is a contract of bailment where goods are given
as security for the payment of a debt or for the
performance of promise.

2. MOVEABLE PROPERTY:
In a contract of pledge, only the movable property
(goods) is given as security and it is not for immovable
property, The moveable property includes goods, jewelry
and documents of title to goods like a bill of lading,
railway receipts etc.

3. DELIVERY OF POSSESSION :

"Delivery of the chattel pawned is a necessary element in the

making of a pawn.”7 The property pledged should be delivered
to the pawnee. Thus, where the producer of a film borrowed a
sum of money from a financier-distributor, and agreed to
deliver the final prints of the film when ready, the agreement
was held not to amount to a pledge, there being no actual
transfer of possession.8 Delivery of possession may be actual or
constructive.9 Delivery of the key of the godown where the
goods are stored, is an illustration of constructive delivery.
Where the goods are in the possession of a third person, who,
7
SUNEEL KUMAR GUPTA V PUNJAB & SIND BANK, AIR 2006
8
REVENUE AUTHORITY V SUNDARSANAM PICTURE, AIR 1968 Mad 319
9
SECTION 149 INDIAN CONTRACT ACT
on the direction of the pledger, consents to hold them on
pledgee's behalf, that is enough delivery. It is sometimes called
delivery by attornment. Delivery of documents of title which
would enable the pledgee to obtain possession is equally
effective to create a pledge. This clearly recognized by the
Supreme Court in MORVI MERCANTILE BANK LTD V UNION
OF INDIA.10

Certain goods were consigned with the Railways to "self" from

Bombay for transit to Okhla. The consigner endorsed the
railway receipts to the appellant bank against an advance of Rs
20,000. The goods having been lost in transit, the bank as an
endorsee of the railway receipts and pledgee of the goods sued
the Railways for the loss of the goods which were worth Rs
35,500. The trial court rejected the action. The Bombay High
Court allowed recovery up to Rs20,000 only. There were cross-
appeals against this decision.

The Supreme Court was called upon to decide whether a

railway receipt could be equated with the goods covered by the
word "goods" for the purpose of constituting delivery of goods.
SUBBA RAO J (AFTERWARDS CJ), who delivered the
majority opinion, held, that delivery of railway receipts was the
same thing as delivery of goods, the pledge was, therefore,
valid and the pledgee was entitled to sue for the loss. "In this
vast country where goods carried by Railways over long
distances and remain in transit for long periods of time, the
railway receipt is regarded as the symbol of the goods
purposes for which a bill of lading is so regarded in England.11
The Court also held that the pledgee was entitled to recover
the full value of the goods lost and not merely the amount of
his advance.

10
AIR 1965 SC 1954: (1965) 3 SCR 254
11
MORVI MERCANTILE BANK LTD V UNION OF INDIA.
 "A pledge being a bailments of goods as security for payment
of a debt, the pledgee will have the same remedies as the
owner of the goods would have against third person deprivation
of the said goods or injury to them.”

RAMASWAMI AND MUDHOLKAR JJ dissented. They were of the

view that in all cases of pledge an effective change of
possession is absolutely necessary. The only exception could be
in favour of a bill of landing. If the pledger has good in his
physical possession he could effect the pledge by actual
delivery. If, however, the goods are in the physical possession
of a third person, pledge should be effected by a notification to
the custodian who should acknowledge to hold the goods for
the bailee. There would thus be a change of possession and
constructive authority.

It has been held by the Mysore High Court that way bills issued
by a public carrier have not yet acquired the character of being
documents of title and, therefore, their delivery cannot be
regarded as pledge of the goods.

PLEDGE BY HYPOTHECATION

Sometimes the goods are allowed to remain in the custody of

the pledger for a special purpose. But that does not militate
against the effectiveness of the pledge. REEVES V CAPPER is
an early illustration.

The captain of a ship pledged his chronometer with the ship

owner who allowed him to use the instrument for the purpose
of a voyage. The captain pledged it over again with another
person.

The question was whether the first pledge was valid. The court
beld that it was. In the same way a constructive pledge comes
into existence as soon as the pawner, withour actually
delivering the goods, agrees to hold them for the pawnee and
promises to deliver them on demand. An illustration is the
decision of Andhra Pradesh High Court in BANK OF
CHITTOOR V NARASIMBULU12 .

A cinema projector and accessories were pledged with a bank.

The bank allowed the property to remain with the pledgers,
since they formed the equipment of a running cinema.
Subsequently the pledgers sold the machinery .

The court held that the sale was subject to the pledge. "There
was a constructive delivery or delivery by attornment to the
bank."

Similarly, where a firm of merchants, having pledged certain

railway receipts with a bank, took them back under the
pretence of clearing the goods and repledged them with
another bank, the Privy Council held that the first pledge was
not thereby defeated." Likewise, where certain motor vehicles
pledged by a motor dealer were allowed to remain in his
possession for demonstration purposes, the pledge was held to
be valid.13

In such cases the other creditors cannot claim anything from

such goods the claim of the pledgee is first satisfied."14

4. IN PURSUANCE OF CONTRACT

“Pledge is a conveyance pursuant to a contract, and it is

essential to a valid pledge that delivery of the chattel shall be
made by the pledger to the pledgee in pursuance of the
contract of pledge."15 But it is not necessary that delivery of
possession and the loan should be contemporaneous. "Delivery
12
AIR 1966 AP 163
13
APPA RAO V SALEM MOTORS AND SALEEM RADIOS, AIR 1955 Mad 505
14
BANK OF INDIA V BINOD STEEL LTD, AIR 1977 MP 18
15
See BANKERS LJ in BLUNDELL LEIGH V ATTENBOROUGH (1921) 3 K B 235(CA)
and advance need not be simultaneous and a pledge may be
perfected by delivery after the advance is made."16 Delivery
may be made before or in contemplation of an advance, which
ripens into a pledge as soon as the advance is made.For
instance, in BLUNDELL LEIGH V ATTENBOROUGH.

On November 1, 1919, the plaintiff handed her jewellery to

one Miller to value it and let her know what offer he could
make as to lending her money; he was to keep the jewellery as
security if he made the advance. On the same day Miller
pledged the jewellery with the defendants, a pawnbroker, who
in good faith advanced £ 1000 on it. On November 5, Miller
advanced £ 500 to the plaintiff on the security of the ring.
Miller died. The plaintiff came to know the facts. She paid the
amount she had borrowed and sued the defendant for return of
her jewellery.

The contention on her part was that when she gave the
jewellery to Miller for examination, he only became a
gratuitous bailee having no right to deal with it. There was no
valid pledge then. Subsequently, when he advanced the honey,
no valid pledge could arise as he had already parted with the
posses- ion of the goods. But the court held that the pledge
was valid. Delivery made on November 1 was a good delivery
for the purpose of creating a pledge, whenever that pledge was
created. "It is clear that the plaintiff intended when she handed
over the jewellery to Miller, to create a valtd pledge as between
him and her from the moment when he handed her the money
by way of loan which she was prepared to accept.”17

16
SHELAT J IN LALLAN PRASAD V RAHAMAT ALI, AIR 1967 SC 1322,1325
17
See BANKERS LJ in BLUNDELL LEIGH V ATTENBOROUGH (1921) 3 K B 235(CA)
 5. CHANGE OF POSSESSION

The possession of goods must be affected by a contract of

pledge custody, without possession is not the contract of
pledge.

6. GOODS IN THE POSSESSION OF PAWNEE

In a contract of a pledge, the change of possession of goods is

not necessary, if the goods are already in the possession of the
Pawnee.

7. NUMBER OF PARTIES

In a contract of pledge (Pawn), there are two parties i.e., the

pawner and pawnee. The person who gives the goods as
security is known as pawner and the person to whom goods are
given as security is known as pawnee.

8. RIGHT OF OWNERSHIP

In a contract of pledge (pawn), the right of ownership remains

with ‘the pawner and is not changed. If the ownership is
transferred, the contract will be a contract of sale and not of
pledge.

9. CHANGE OF FORM

In a contract of pledge (pawn), the goods must not change the

form and same goods must be returned to pawner after the
performance of the contract.
 10. REDELIVERY OF GOODS

Under the contract of pawn, the goods are delivered to the

pawner when the debt is paid by him or the promise has been
performed for which goods are given as security.

11. RIGHT OF SALE

If the pawner becomes defaulter, the pawnee can sell the

goods to recover his funds by giving reasonable notice of this
fact to the pawner.
 CONCLUSION

Pledge is a kind of bailment where a thing is delivered as

security for the repayment of a debt or performance of any
promise. Delivery of the possession to the pawnee may be
actual delivery or constructive delivery. Ownership of the
pledged article does not pass to the pledgee. The pawnee has
the right to retain goods till the payment, of the debt, any
interest on the debt, and any other necessary expenses
incurred for preservation of the goods. Where pawnee incur
any other extraordinary expenses on goods for preservation,
he is entitled of the same from pawnor. In case of the default
of the pawnor, in the debt or performance, the pawnee has the
right to sell the goods pledged.

The pawnor has also the right to redeem the goods before the
actual sale, but after the payment of the debt or performance
of promise and any other expenses which have arisen from his
default.
 BIBLIOGRAPHY

 SOURCES-

 LAW OF CONTRACT AND SPECIFIC

RELIEF- DR. AVTAR SINGH
 LAW OF CONTRACT II – DR. R.K.
BANGIA

 WEBSITE SOURCES-

 WWW.GOOGLE.COM
 WWW.BOOKS.GOOGLE.COM
 WWW.WIKIPEDIA.ORG