Contract of Pledge

Sanjay Bang
Points to be covered in the lecture
1) Definition and essentials of pledge.
2) Difference between agreement of Bailment and
Pledge.
3) Similarities between Pledge and Bailment.
4) Rights of Pawnee.
5) Persons who may pledge.
6) Duties or liabilities of the Pawnee.
7) Difference between pledge and hypothecation
8) Termination mode of pledge.
Introduction
A pledge, which is also known as pawn has been
defined in Chapter IX from sections 172 to 179 of the
Indian contract Act-1872.
The Supreme Court defined the pledge as , “ A
bailment of personal property for some debt or
engagement”.
Sec 172 of the Indian Contract Act-1872 defines “The
bailment of goods as security for payment of a debt or
performance is called pledge”.
Meaning and definition
A pledge or pawn is a special kind of bailment.
It is the bailment of a moveable things as a security for
the repayment of a debt or performance of promise.
The bailor in this case is called the “Pawnor” or “
Pledger”.
The bailee is called as “Pawnee” or “ pledgee”.
Essential
I) Since pledge is a special kind of bailment, therefore all the
essentials under section 10 of the Indian Contract Act-1872
along with the provisions of bailment must be satisfied.
II) There shall be a bailment for security against payment or
performance of the promise.
III) The subject matter of pledge must be goods.
IV) Goods pledged for must be in existence.
V) There shall be the delivery of the goods from pledge to
pledgee.
VI) There is no transfer of ownership in case of the pledge.
Persons who may pledge
1) The owner or his authorized agent.
2) One of the several co-owners.
3) A mercantile agent who is in possession of the goods with
the consent of real owner.
4) A person who is in possession of the goods under
voidable contract before it set void.
5) A seller who is in possession of the goods or the buyer
who has obtained possession of the goods before sale.
6) A person who has limited interest in the property. In such
case the pawn is valid only to the extent of such interest.
Continued
“A” borrows a gold loan from the Bank.
Here “A” is pledger and the bank is pledgee.
The agreement between them is termed as the
agreement of Pledge or Pawn.
It is a special type of contract, hence it has to satisfy all
the essential of valid contract.
The delivery must be actual or constructive.
Pledge , like bailment is concerned with moveable
property. Even the valuable document like passbook
can be considered.
Questions
Assignment of Insurance policy, is a bailment?
If a borrow a motor cycle on loan, whether I am
Pawnor?
Any example from your side?
Compare between Pledge and
Hypothecation
The second example which we discussed is the classic
example of hypothecation and not of the pledge.
In both hypothecation and pledge, can be effected
against the moveable property only.
But the difference between the two is in pledge the
possession of the property passes to the pawnee where
as in hypothecation it would remain with the user, he
can use it exclusively.
Where as ownership is transferred to the
hypothegadee and not so in case of pledge.
Comparison between Bailment and Pledge
Similarities between Bailment and Pledge
1) In both the cases, there is a delivery of moveable
goods or property.
2) The goods are delivered back to the bailor or
pawnor after accomplishment of purpose or expiry of
stipulated time.
However the Two differs in a number of ways such as
the following
Continued
1) Purpose:- Pledge has a specific purpose, that is
repayment of debt or performance of a promise, where as
bailment has a general purpose.
2) Use of goods:- The Pawnee has no right to make any
use of the goods pledged. On the other and, in bailment
the bailee uses the goods if the terms of bailment so
provide.
3) Right on the goods:- Bailee has right to lien for his
lawful charges or sue the bailor for his charges , where as
the pawnor has the right of lien and also a right to sell
when pawnor fails to repay the debt.
Continued
4)General purpose:- Delivery of goods is only to do
something on them, where as in pledge delivery is
made as a security for the due discharge of a legal
obligations.
5) Mode of delivery:- The pledge must be actual or
constructive where as bailment may be actual or
symbolic as well.

Lallan Prasad v/s Rahmat Ali 1967 2 S.C.R 233

Rights of Pawnee
1) Right to retain (173 & 174):- The pawnee may retain the
goods not only till his dues are paid or promise is
performed but even for the interest which is unpaid. This
right may be termed as the Pawnees right of “Particular
lien”.
2) Right to extra ordinary expenses if incurred. (175)
3) Right against the true owner, when the Pawnors title is
defective.(178A)
The pawnee will acquire the title if the title of the Pawnor
is defective, provided he acted in good faith and without
the knowledge of he defective title of the pawnor
Continued
In Philips v/s Brooks Ltd ( 1919 2KB 243), where a
person by fraud induce himself to be the owner of the
golden ring and pledge it immediately before the true
owner comes in. It was held that the pledge was valid
and the defendants could not be called upon to return
the ring to the Plaintiff, the true owner.
4) Right on pawnors default ( sec 176):- if pawnor fails
to pay debt the pawnee will acquire the following
rights
Continued
I) The pawnee may bring a suit against the pawnor upon
the debt or promise.
II) The pawnee can retain the goods pledged as a collateral
security.
III) The pawnee may sell the goods pledged, on giving
reasonable notice to the pawnor.
In such situation if the amount due in respect of the debt or
promise is less, the pawnor can recover the same and if it is
more he has to pay the debts.
Standard Chartered Bank v/s Custodian (AIR 2000 Sc 1488)
Continued
In Dhni Ram and sons v/s Frontier Bank ( AIR 1962 Punj
321)
It has been held that when the pledgee gets a right to sell
the goods he may buy the goods himself. Sale to himself is
not void or illegal at all.
The condition is the pawnee must serve a notice to the
pawnor of his intention to sell, only when the pawnor fails
to perform his promise or to pay his debt.
If he fails to serve the notice, the sell would be bad and
void, though exact time and date of sell need not to be
mentioned
Continued
The notice must refer to the debt for which the goods
were pledged and for recovering of which goods are to
be sold.
Mere intimation of failing to pay the debt, fail to
which sale will be effected is not sufficient.
In Prabhat bank v Babu Ram AIR 1966 All 134), enter
into original contract, but the court held that the
pawnor is entitled to reasonable notice before sale of
the pawned goods and the provisions are mandatory in
character.
Continued
Such notice must be clear and specific in its language
and must indicate the intention of the Pawnee to
dispose of the security.
Thus, even if the Pawnee is having genuine right to
sale the pawned goods which he is having in
possession for security for the payment, have to take
reasonable steps which a prudent man must take to
avoid the future legal consequences.
Duties of Pawnee
1) To take reasonable care of the goods pledged.
2) To return the goods when the debt is clear or the
promise is performed.
3) To return the excess amount if after sell it remains.
4) To pay the damages to the pawnor if any loss to the
goods has caused to the goods or to the rights of the
pawnor because of Pawnee.
5) To avoid unauthorized use of the goods pledged
Continued
6) The pledgee has to indemnify the pledger for
any loss suffered by him if the goods pledged are
lost, damaged or destroyed.
7) Raja Venkata v Andhara Bank(1960)1 Andh WR
234:-Even if there is a term in the contract of
pledge to waive the notice, still the pledgee is not
relived of his obligation of sale of pledged goods.
Duties of the Pawnor
1) It is the duty of the Pawnor to disclose all the defects
in the goods pledged to the Pawnee.
2) It is the duty of the Pawnor to pay the debt according
to the promise.
3) He has to bear extra ordinary expenses for taking
care of goods pledged.
4) It is his duty not to pledge the goods which is not
belonging of him.
5) Under sec 177, if the pawnor fails to take back his
goods in reasonable time , he needs to bear the expense
Rights of Pawnor
1) Right to receive back the goods pledged from the
pawnee.
2) Right to receive accretion to the goods, it means
benefit, increment or achievement attached to the
goods pledged.
3) Right to receive the notice from the pawnee before
sale or auction of the goods pledged.
4) Right to sue the pawnee if the sale or auction is
effected without notice, even if it is mentioned in the
original contract about it and to claim damages.
Continued
5) Right to have surplus or excess amount obtained by
the sale or auction of the goods pledged.
6) Right to claim compensation against the pledge for
any losses he suffers due to negligently handling,
mixture and unauthorized use of the goods pledged.
7) Right to redeem the goods pledged before sale or
transferred by repaying the debt, interest, fine and
other expenses.
M R Dhawan v Madan Mohan AIR 1969 Delhi 313
Dividend issued against shares during pledged.
Termination of the pledge
The pledge will stand terminated as soon as the debt is
paid or the promise is performed or the pledged goods
are sold according to the legal provisions under the
contract between the parties.
After termination of the pledge the rights of both the
parties stand to get extinguished and both are free
from their respective obligations.
Thus, pledge has to satisfy all the ingredients of the
bailment.
Test your knowledge
1) State of Gujarat vs Haji Hasan (1967)
Goods seized by tax authority is pledged?
2) R D Saxena vs Balaram Prasad (2000)
Is advocate has right of lein over litigation files for his
unpaid fees? Is this contract of pledge. Can we
consider the file of the client as property under the
Contract of pledge?