JAMIA MILLIA ISLAMIA

New Delhi-110025

FACULTY OF LAW

CONTRACT-II ASSIGNMENT

TOPIC:
Pledge (Pawn)-Definition and
Conceptual Validity, who can Pledge-
Duties of Pledger (Pawnor) and
Pledgee (Pawnee)-Rights of Pledger
(Pawnor) and Pledgee (Pawnee).

NAME: KAIF JILANI

STUDENT ID: 202004023(R)
COURSE: BA.L.L.B. (Hons) REGULAR
SEMESTER: 2nd (2020-2021)
ROLL NO: 23
SUBMITTED TO-
(DR. SHABANA SHABNAM)
pg. 1
 ACKNOWLEDGEMENT

I would like to express my gratitude to my teacher DR. SHABANA

SHABNAM, who gave me the opportunity to do this wonderful project
of the subject CONTRACT-II on the topic Pledge (Pawn)-Definition and
Conceptual Validity, who can Pledge-Duties of Pledger (Pawnor) and
Pledgee (Pawnee)-Rights of Pledger (Pawnor) and Pledgee (Pawnee). The
project helped me learn how to do proper Research and I learned about
many new things while doing the project.

I am greatly indebted to the various writers and jurists and all others
from whose writings and work I have taken help to complete this
assignment.

DATE: 02 July 2021 NAME: KAIF JILAN

pg. 2
 TABLE OF CONTENTS

 INTRODUCTION ………………………………………………... 04

1) Meaning of ‘Pledge’, ‘Pawnor’, ‘Pawnee’ (Sec.172) …………. 04

2) Essentials of Pledge ……………………………………………. 06
3) Who can make a Valid Pledge? ……………………………….. 08
4) Rights of a Pawnee (Sec.173 and 176) ………………………... 10
5) Duties of Pledgee (Pawnee) …………………………………… 13
6) Rights of Pawnor …………………………………………….... 13
7) Duties of Pawnor ……………………………………………… 14

 CONCLUSION ………………………………………………… ... 15

 REFERENCES ……………………………………………………. 16

pg. 3
 Introduction

A pledge contract, or simply a promise, is a special type of contract that is extremely important,
particularly in commercial transactions. In general, a pledge refers to the deposit of a good or its
title as a security for repayment of a creditor's debt or for the discharge of an obligation arising
from a promise. Pledge has been viewed as a sort of bailment in both India and English common
law because both entail the delivery and possession of goods. Despite their similarities, there are
variances, and the Contract of Pledge is unique.
The elements of the Contract of Pledge give it its uniqueness. The Indian Contract Act Chapter
addresses the Contract of Pledge in detail under the subhead Bailment of Pledges in Chapter IX
of Bailment. Sections 172 to 1791 are the sections that are pertinent to the study of this subject.

Meaning of ‘Pledge’, ‘Pawnor’, ‘Pawnee’ (Sec.172)

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 ‘Pawnee’.2

The pawnor transfers/bailed his possessions to the Pawnee as security for the sum he obtains from
the Pawnee in the pledge. The pawnor is responsible for paying the sum back to the Pawnee, and
the Pawnee is responsible for returning the goods once the pawnor has paid the amount. If the
Pawnee makes unlawful use of the commodities bailed to him, he will be responsible for
compensating the pawnor. If the pawnor fails to repay the loan, the Pawnee has the right to sell the
goods after providing the pawnor notice.

For example-
It is a contract of pledge if you borrow one hundred rupees from B and keep your bicycle with him
as security for repayment. The pledger or pawnor is the individual who takes out the loan, while
the Pawnee is the person to whom the goods are committed. The pledgee does not become the
owner of the pledged goods. The pledger retains the general property, but the pledgee receives a
"special property" in it. The special property entails a right to custody of the objects as well as the

1
Omkar Upadhyay, Contract of Pledge: Features and Distinctiveness, Legal Service Authority of India (Last
Visited 27 June 2021)
2
Section 172, The Indian Contract Act, 1872

pg. 4
ability to sell them in the event of default. ' The delivery of the pawned goods is a need for the
creation of a pawn. The Pawnee should receive the property pledged.

In case of Lallan Prasad v. Rehmat Ali3, 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 pawnor 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 fulfilment of his liability.”
There are three categories in which security is provided, namely 4-
1. Lien
2. Mortgage
3. The third of them is pledge.
The pledged property must be transferred to the Pawnee. Actual or constructive delivery of
possession is possible. Constructive delivery is demonstrated by the delivery of the key to the go
down where the goods are stored. When the items are in the possession of a third party who agrees
to retain them on the pledgee's behalf on the pledger's direction, that is sufficient delivery. It's also
known as "attornment delivery." The delivery of title documents that would allow the pledgee to
take possession is also an effective way to form a pledge. 5

In case of Morvi Mercantile Bank Ltd v. Union of India6, 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”.

Pledge via hypothecation occurs when the pledged items are allowed to remain in the pledger's
custody for a specific reason. As a result, if the pledger defaults, the Pledgee will have to first
acquire ownership of the security before selling it.

3
1967 AIR 1322, 1967 SCR (2) 233
4
Lallan Prasad v Rehmat Ali, AIR 1967 SC 1322
5
Avtar Singh, Business Law, (9th Edition), pg.226
6
1965 AIR 1954, 1965 SCR (3) 254

pg. 5
Essentials of Pledge
In order to constitute a valid pledge, the following requirements must be satisfied: 7
1. There should be Bailment of Goods, i.e., the delivery of goods from one person to another.
2. The purpose of such bailment is to make the goods bailed serve as security for the payment
of a debt, or performance of a promise.

1. Delivery of the good

The essential prerequisite for a valid contract of pledge is the conveyance of possession of a good.
For the contract to be fulfilled, the indicated chattel must be delivered in person. 8 The property or
other good pledged must be handed to the creditor, who in this situation is the Pawnee, the person
to whom the pledge has been made, both actually and constructively.

In the case of Madras High Court, Chief Controlling Revenue v. Sudarsanam Picture9, it was
held that in an argument wherein:
When a film's producer borrowed money from a financier-distributor and pledged to deliver the
final prints of the picture when they were ready, the agreement was found not to be a pledge
because there was no actual transfer of possession. Actual or constructive delivery of possession
is possible. Constructive delivery is demonstrated by the delivery of the key to the go down where
the goods are stored. When the items are in the control of a third party who agrees to keep them
on the pledgee's behalf on the pledger's instructions, that is sufficient delivery.

2. Purpose of Pledge is Security for payment of debt, etc.

In a transaction of pledge, the purpose for which the goods are bailed is that the bailed goods
should serve as a security for the payment of a debt, or performance of a promise. When some
goods are pledged, the pawned becomes a secured creditor and he has a prior claim over the goods
pledged than other creditors.

In the Case of Madhya Pradesh High Court, Bank of India v. Binod Steel Ltd.10,

7
RK Bangia, Law of Contract II, (7th Edition) pg.91
8
P.C. Markanda, The Law of Contract, (3rd Edition), vol.2, p.1609
9
AIR 1968 Mad 319
10
AIR 1977 MP 188

pg. 6
It has been held that when certain movables have been pledged by a company to a bank, they
cannot be attached and sold for the satisfaction of claims other creditors of the company without
first satisfying the claim of the bank.

3. 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.

4. In Pursuance of Contract
It is an important feature of the pledge is that the delivery of the goods by the pawnor to the Pawnee
shall be done in pursuance to the contract of pledge. But it is important to note that that the contract
for pledge and delivery of goods need not be contemporaneous, in sense that it’s not necessary that
contract for pledge and delivery has to be done at the same time, the delivery of goods can be done
before which ripens the pledge as soon as the advance is made. 11

The matter was discussed in the case of Blundell Leigh v. Attenborough12, where the plaintiff
handed her jewelry to Miller to let her know what offer he could she could give to him as a lending
amount and in return, the jewelry was kept as an advance, then Miller pledged the jewelry to the
defendant for a certain amount of money and handed some part of it to plaintiffs as the security of
the jewelry.

The plaintiff died and the legal heirs paid the amount she borrowed and sued the defendant for the
return of the jewelry. The contention of the plaintiff was she gave the jewelry to Miller for
examination only & she only becomes the gratuitous bailee having no right to deal with it and
there was no valid pledge.
The court held that it was clear that when the plaintiff handed the goods to one Miller, it was done
to create a valid pledge between him and her from the moment when he handed her money by the
way of loan which she was prepared to accept. So, the court held that the pledge was valid.

11
Sagnik Sarkar, Concept and Definition of Pledge, Legal Bites © Reserved: https://www.legalbites.in/concept-and-
definition-of-pledge/ (Last Visited on 1 July 2021)
12
Blundell Leigh v. Attenborough (1921) 3 KB 235 (CA)

pg. 7
Who can make a Valid Pledge?
Normally, he should be the owner of the commodities, or any person authorized by him to pledge
the goods on his behalf. If a servant has custody of the items or a tenant has possession of a
furnished residence, neither the commodities nor the furnishing materials in the tenant's possession
can be pledged.
As indicated in the case of Allahabad High Court, Purshottam Das Banarsi Das vs The Union of
India (UOI) And Ors. 13, a person who obtains commodities fraudulently has no right to pledge
them. A person who is neither the owner nor has any authorization from the owner for pledging
the goods but has possession with the owner's consent can make a promise and confer rights on
the pledgee in the following rare instances.

1. Pledge by The Mercantile Agent

A promise made by a mercantile agent operating in the ordinary course of business is legal under
(Section 178).
It goes like this: Sec 178. Mercantile agent's pledge.- When a mercantile agent has possession of
goods or the document of title to goods with the consent of the owner, any pledge made by him in
the ordinary course of business is as valid as if he were expressly authorised by the owner of the
goods to make the pledge; provided, however, that the Pawnee acts in good faith and has not
received notice of the pledge at the time of the pledge.

Explanation:
The terms mercantile agent and papers of title have the meanings given to them under the Indian
Sale of Goods Act, 1930 (3 of 1930) in this section.
When a mercantile agent pledges an item, it is presumed that the owner of the commodities has
given his or her consent. A mercantile agent is a person who has the authority to sell, consign, or
raise money from the commodities by maintaining them as security on behalf of the owner. 14

2. Pledge by person in possession under a voidable contract

This form of pledge is allowed by section 178A of the Act, which provides that the Pawnee will

13
AIR 1967 All 549
14
Sec. 2(9), Sales of Goods Act, 1930

pg. 8
acquire a good title to the pledged goods even if the pawnor got the items under a voidable contract
by virtue of sections 19 and 19A, and the contract has not been revoked at the time of pledge. The
Act recognises another exemption to the rule, allowing the items to be pledged by either the owner
or his lawfully authorised agent. A person who has taken ownership of goods through a voidable
contract, according to this.
The pledgee can obtain a good title to the goods if the pawnor obtained possession of the
commodities under a voidable contract that has not yet been revoked. Thus, if a person obtains
control of things through deception, misrepresentation, coercion, or undue influence, he may make
a lawful pledge of the items before the contract is cancelled.
A case of Phillips v. Brooks Ltd.15: It was in this case that pledge was valid.

3. Pledge When Pawnor Has Limited Interest

A person is eligible to make a commitment to the extent that he has an interest in it, according to
section 179 (Pledge where pawnor has only a limited interest. -Where a person pledges goods in
which he has only a limited interest, the pledge is valid to the extent of that interest.) If a party to
a promise has interest, he has unrestricted authority to charge at least that amount. 16 While section
178 and 178A of the Act cover situations when the pawnor has no interest and just possession,
section 179 governs situations where the pawnor has even a little interest.

For example:
A pledge 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 The Pioneer
Urban Co-operative Bank Ltd., Belgaum, Karnataka17.

4. Pledge by seller in possession after sale [Section 30(1), Sale of Goods Act]
After the seller has sold certain goods and the property (ownership) in respect of them has passed
to the buyer, the seller has no right to deal with such goods. But according to section 30(1), Sale

15
Law Teacher. November 2013. Phillips v Brooks Ltd [1919] 2 KB 243. [online]. Available from:
https://www.lawteacher.net/cases/phillips-v-brooks.php?vref=1 (Last Visited 28 June 2021).
16
Lakshamsey Ladha & Co. v Lakmichand Padamsey, (1918) 42 Bom 205, AIR 1917 Bom 152
17
Laws (KAR)-1960-11-18

pg. 9
of Good Acts, if the seller after selling the goods, continues or is in possession of the goods or the
documents of title in respect of the goods, then any sale or pledge or other disposition of the goods
by him or a mercantile agent on his behalf, will convey a good title to the transferee, provided that
the transferee is acting in good faith an without any notice of previous sale.

5. Pledge by buyer in possession after sale [Section 30(2), Sale of Goods Act]
A buyer of the good, who may have obtained the possession of the goods, but has not become the
owner of those goods, cannot deal with such goods. According to section 30 (2), Sale of Goods
Act, however, if a buyer has obtained the possession of the goods or the documents of title with
the consent of the seller, the delivery or transfer by such a buyer or a mercantile agent on his
behalf, by way of sale, pledge or other disposition will convey a good title to the transferee,
provided that the transferee is acting in good faith and without notice of any lien or other rights
of the original seller in respect of those goods. 18

Rights of a Pledgee or Pawnee (Sec.173 and 176)

Pawnee rights can be divided under the following categories:

1) Right of retainer:
The Pawnee has the right to keep the pledged goods until the Pawnee makes his payments (Sections
173 and 174).

 Section 173: Pawnee’s right of retainer19: The Pawnee may retain the goods pledged, not
only for payment of the debt or the performance of the promise, but for the interests of the
debt, and all necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged. —The Pawnee may retain the goods pledged, not only
for payment of the debt or the performance of the promise, but for the interests of the debt,
and all necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged."

18
RK Bangia, Law of Contract II, (7th Edition) pg.99
19
Section 173, Indian Contract Act 1872 https://indiankanoon.org/doc/1848269/ (Last visited 29 June 2021)

pg. 10
  Section 174: Pawnee not to retain for debt or promise other than that for which goods
pledged. Presumption in case of subsequent advances.20 —The Pawnee shall not, in the
absence of a contract to that effect, retain the goods pledged for any debt or promise other
than the debt or promise for which they are pledged; but such contract, in the absence of
anything to the contrary, shall be presumed regarding subsequent advances made by the
Pawnee. —The Pawnee shall not, in the absence of a contract to that effect, retain the
goods pledged for any debt or promise other than the debt or promise for which they are
pledged; but such contract, in the absence of anything to the contrary, shall be presumed
regarding subsequent advances made by the Pawnee."

He has the right to keep the goods in exchange for the following:
a) payment of the debt or execution of the promise,
b) interest on the debt, and
c) all necessary expenses incurred by him in connection with the possession or preservation
of the pledged assets. The Pawnee’s right of lien allows him to keep the pledged goods
until he is paid. In the absence of a contrary contract, the Pawnee cannot keep the items
pledged for any obligation or promise other than the debt or promise for which the goods
are pledged. In the absence of any evidence to the contrary, a contract is presumed to exist
when successive advances are given without any additional security. This presumption will
not apply if new security is given for the innovation.

Example:
Where ‘M’ pledges stock of goods for certain loan from a bank, the bank has a right to retain the
stock not only for adjustment of the loan but also for payment of interest.

2. Right to Extraordinary Expenses (Sec. 175):

Sec175. Pawnee’s right as to extraordinary expenses incurred. 21 —The Pawnee is entitled to
receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods
pledged. —The Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by

20
Section 173, Indian Contract Act 1872 https://indiankanoon.org/doc/1183992/ (Last visited 29 June 2021)
21
Section 173, Indian Contract Act 1872 https://indiankanoon.org/doc/549529/ (Last visited 1 July 2021)

pg. 11
him for the preservation of the goods pledged."
It has already been noted that according to section 173, a Pawnee can retain the goods for various
claims, including the claim for necessary expense incurred by him in respect of the possession or
for the preservation of the good pledged. Section 175 confers an additional right, i.e., a right to
receive from the pawnor extraordinary expenses incurred by him for the preservations of good. 22
For Example, If the Pawnee must arrange for a bank locker for the safety of the goods or he
spends some amount for insuring them against theft, etc., he can recover such expenses from the
pawnor. He can enforce this right by filling a suit.23

3. Right of suit to recover the debt, etc., and the sale of the pledged goods (Sections 176)
Section 176 confers right on the Pawnee, including the right of selling the pledged goods, if the
pawnor makes a default in payment of the debt, or performance of the promise at the stipulated
times.

The section reads as under:

Pawnee’s right where pawnor makes default. —If the pawnor makes default in payment of the
debt, or performance; at the stipulated time or the promise, in respect of which the goods were
pledged, the Pawnee may bring a suit against the pawnor upon the debt or 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. —If the pawnor makes default in payment of the debt, or
performance; at the stipulated time or the promise, in respect of which the goods were pledged,
the Pawnee may bring a suit against the pawnor upon the debt or 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." If the proceeds of such sale are less than the amount due in respect of the debt
or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater
than the amount so due, the Pawnee shall pay over the surplus to the pawnor.

4. Right against the true owner of goods (Sec. 178 A):

When the pawnor has acquired, possession of pledged goods, under a voidable contract, but the

22
RK Bangia, Law of Contract II, (7th Edition) pg.101
23
Haryana Pesticides v. Bank of Rajasthan Ltd. AIR 2004 P.&H. 83

pg. 12
contract has not been rescinded, at the time of pledge, the Pawnee acquires a good title to the
goods, even against the true owner, provide! the Pawnee had no notice of the pawnor defect in title
and he acts in good faith.24

Duties of Pledgee (Pawnee)

The following are the Duties of the Pawnee: 25
1. Duty to take reasonable care of the pledged goods.
2. Duty not to make unauthorized use of pledged goods.
3. Duty to return the goods when the debt is paid, or the promise is fulfilled.
4. Duty not to mix his own goods with pledged goods.
5. Duty not to do anything that is inconsistent with the terms of the pledge.
6. Obligation to repay any accretion to the items.

Rights of Pawnor
As the bailor of goods pawnor has all the rights of the bailor-
 Enforcement of Pawnee’s duties
Right to redeem [Section 177]: Defaulting pawnor right to redeem. —
If a time is stipulated for the payment of the debt, or performance of the promise, for which the
pledge is made, and the pawnor makes default in payment of the debt or performance of the
promise at the stipulated time, he may redeem the goods pledged at any subsequent time before
the actual sale of them1, but he must, in that case, pay, in addition, any expenses which have arisen
from his default.26

For example:
If A bailed his watch as security and took Rs.800 as a loan from N. A return the money to N. Here,
A has a right to get his watch back.

24
Unit 10, Bailment & Pledge pg. 30
25
Kishnendra Joshi, Bailment and Pledge, Intelligence Legal Solutions https://blog.ipleaders.in/bailment-and-
pledge/ (Last visited 1 July 2021)
26
Section 173, Indian Contract Act 1872 https://indiankanoon.org/doc/1491992/ (Last visited 1 July 2021)

pg. 13
Duties of Pawnor
Pawnor has the following duties:27
1. The pawnor is liable to pay the debt or perform the promise.
Illustration
If A bails his gold chain as security to B for a loan of Rs.3000 Here, A has a duty to pay back the
amount of loan to B.

2. It is the duty of the pawnor to compensate the Pawnee for any extraordinary expenses
incurred by him for preserving the goods pawned.
Illustration
If A bails his cow to B for Rs.8000. B paid all the expenses like food for cow, shelter etc. Here A
has a duty to pay the expenses back to B.

3. It is the duty of the pawnor to disclose all the faults which may put the Pawnee under
extraordinary risks.

4. If loss occurs to the Pawnee due to defect in pawnor title to the goods, the pawnor must
indemnify the Pawnee.

5. If the Pawnee sells the good due to default by the pawnor, the pawnor must pay the deficit.

Illustration
If A bails his bike as security to B for the loan of Rs.50000 with the term that B can use his bike.
A, however, did not disclose the fact to B that the breaks of the bike are not working well. B met
with an accident and suffered damage. Here it is the duty of A to compensate B for the damage he
has suffered due to A’s goods.

27
Department of Commerce, Gargi College, pg. 24

pg. 14
 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.

pg. 15
 References

a. David M. Walker, The Oxford Companion to Law, 1980.

b. H.K. Sahara, Dutta on Contract, Eastern Law House, 11th ed., 2013.
c. Pollock & Mulla, The Indian Contract Act & Specific Relief Act,
LexisNexis, 15th ed., vol 2, 2017.
d. R.K Bangia, Law of Contract II, 7th edition
e. P.C. Markanda, The Law of Contract, LexisNexis, 3rd ed., 2013, vol.2.
f. Avtar Singh, Contract and Specific Relief, Eastern books Company, 11th
ed., 2013.
g. When A Bailment Becomes A Pledge, The Yale Law Journal, 31(3), 314-
318, 1922.
h. Security Interests Under Pledge Agreements, 51 Yale Law Journal, 1942.

pg. 16