CONTRACT OF PLEDGE

MEANING OF PLEDGE OR PAWN [SEC. 172]: The bailment of goods as

security for payment of a debt or performance of a promise is called pledge (or
pawn).

Eg., X borrows ₹1,00,000 from Citi Bank and keeps his shares as security for
payment of a debt. It is a contract of Pledge.

PAWNOR : The person who delivers the goods as security for payment of a debt or
performance of a promise is called the Pawnor or Pledgor. In the aforementioned eg.
X is the pawnor.

PAWNEE : The person tp whom the goods are delivered as security for payment of a
debt or performance of a promise is called the Pawnee or Pledgee. In the aforesaid
eg. Y is the pledgee/Pawnee.

It is to be noted that it is the special property in goods and not the general
property in goos , which is transferred to the pledgee. General property means
ownership and special property means the possession of goods.

RIGHTS OF A PAWNEE

A Pawnee has almost the same rights as those of a bailee. The are as follows;

1. Right of Retainer [Sec. 173] :The Pawnee has right to retain the goods pledged,
i. For payment of the debt or the performance of the promise
ii. For the interest of the debt, and
iii. All necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.

2. Right to Recover Reimbursement of Extra-ordinary Expenses [sec. 173]:

The Pawnee has right to recover from the pawnor extraordinary expenses
incurred by him for the preservation of the goods pledged.
3. Right to Sue Pawnor [Sec. 176] : The Pawnee has right to sue the pawnor. If the
pawnor makes default in payment of the debt or performance of the promise.

4. Right to Sell [sec. 176] : The Pawnee has a right to sell the goods pledged after
giving a reasonable notice of the intended sale, to the pawnor, if the pawnor
makes default in payment of the debt or performance of the promise. Any loss
from such sale is recoverable from the pawnor but profits resulting therefrom is
returnable to the pawnor.
5. Right against True Owner [sec. 178A]: The Pawnee acquires a good title to the
goods provided he acts in good faith and without notice of the pawnor’s defect of
title. When the pawnor has obtained possession of the goods pledged by him
under a contract voidable under section 19 or 19A but th contract has not been
rescinded at the time of the pledge.

DUTIES OF A PAWNEE

The Pawnee has almost the same duties as those of the bailee.they are as follows :

1. Duty to take Reasonable Care of the Goods pledged : The Pawnee must take
reasonable care of the goods pledged.

2. Duty not to make Unauthorised use of goods : The Pawnee must not make
unauthorised use of the goods pledged.

3. Duty not to mix goods pledged with his own goods : The Pawnee must not mix
the goods pledged with his ow goods.

4. Duty to Return Goods : The Pawnee must return the goods pledged on the
repayment of the debt or on the performance of the promise.

5. Duty to Return accretions to the goods: The Pawnee must return the accretions
if any to the goods pledged.

RIGHTS OF A PAWNOR

The duties of a Pawnee are basically the rights of a pawnor. They are as follows:

1. Right to get Pawnee’s duty duly enforced : The pawnor has the right to get
pawnee’s duties duly enforced .

2. Right to Redeem [sec. 177]: Redemption means right to recover back the goods
by making payment of the debt or performance of the promise.
The pawnor may excessive the right of redemption
- before the expiry of fixed time ,or
- after the expiry of the fixed time provided the pawnee has not sold the goods
and the pawnor pays the pawnee all expenses arising on account of this default.
 DUTIES OF A PAWNOR

Basically, the pawnor has the following duties:

1. Duty to comply with the terms of Pledge : The pawnor must comply with the
terms of pledge. He must repay the debt on the stipulated date or perform the
promise at the stipulated time.

2. Duty to compensate the pawnee for Extra-ordinary expenses [Sec. 175]: The
pawnor must compensate the pawnee for any extra-ordinary expenses incurred by
him for preserving the goods pledged.

3. Duty to pay the loss on sale [sec. 176]: The pawnor must pay the loss on sale if
the pawnee sells the goods due to default by pawnor.

4. Duty to disclose all faults in goods : The pawnor must disclose all the faults
which are material for use of the goods and/or may put the Pawnee to
extraordinary risks.

5. Duty to indemnify against defective title: The pawnor must indemnify the
pawnee if loss is caused to the pawnee due to defect in pawnor’s title to goods.

Distinction between Pledge and Bailment

PLEDGE BAILMENT
1. Pledge is bailment of goods for a specific
purpose , i.e. repayment of a debt or 1. Bailment is for a purpose of any kind.
performance of a duty.
2. Bailee can use the goods as per the terms of
2. Pawnee cannot use the goods pledged.
bailment.
3. Pawnee can sell the goods pledged after giving
3. Bailee can either retain the goods or sue the
notice to the pawnor in case of default by the
bailor for his dues.
pawnor.
 PLEDGE BY NON-OWNERS

As per the general rule, only the true owner can pledge the goods but under the
following cases, even a non- owner can make a valid pledge:

1. Pledge by Mercantile Agents [sec. 178]: A mercantile agent who is having the
possession of the goods or documents of title of goods may make a valid pledge
in the ordinary course of business.

2. Pledge by person in possession under voidable contract [sec. 178A]: A valid

pledge can be created before the contract gets avoided by the innocent party. Here
too, the pawnee must take the goods in good faith and he must be unaware of the
flaw in the consent.
3. Pledge by a person having limited interest [sec. 179]: Where a person pledges
the goods in which he has a limited interest, the pledge is valid only to the extent
of that interest.

4. Pledge by joint or co-owners : One of the several joint owners of the goods in
sole possession thereof with the consent of the rest may make a valid pledge of
the goods.

5. Pledge by seller in possession after sale: A seller if continues to have

possession of the goods after sale may create a valid pledge. However, the
pawnee must have acted in good faith and without the knowledge of the sale.

6. Pledge by buyer in possession before sale : A buyer who with the consent of the
seller has got possession of the goods before sale my create a valid pledge. Here
too, the pawnee must take the goods in good faith and be unaware of the fact that
the sale is not yet completed.