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PLEDGE

In the pledge, the pawnor transfer/bailed his goods to the Pawnee as security against the amount he takes from the Pawnee. The pawnor has a duty to pay the amount back to the Pawnee and the Pawnee has a duty to return the goods after pawnor pays the amount. The Pawnee should not make unauthorized use of the goods bailed to him if he does he will be liable to pay compensation to the pawnor. The Pawnee has a right to sell the goods after giving prior notice to the pawnor if he fails to pay the amount back.

Pledge is the transfer by one person to another of the possession of certain goods to be held by the latter as security for the performance by the former of some obligation to pay or perform, which being performed, the pledge must be restored

Under a contract of pledge, any good or the title of the good is pledged by one party to the other as a collateral for the money advanced by the later party. Thus making of pledge is a condition precedent for advancing money. Pledge may also be defined as delivery of goods by the debtor to the creditor for a debt or for any other contractual obligation and the object herein delivered shall be returned to the pledgor when the debt money has been repaid or the obligation has been performed.

Essentials Of Pledge

  • Delivery of the good to be pledged- to constitute a valid contract of pledge, the primary requirement is the delivery of the possession of a good. There must be an actual delivery of possession of the identified chattel in pursuance of the contract. The property or any other good pledged must be actually and constructively delivered to the creditor which in this case is the pawnee, the person to whom pledge has been made. Actual delivery refers to the physical delivery of the good to the pawnee, the whole of the good is bailed to him. On the other hand pledge by way of constructive delivery involves an indirect or symbolic delivery of the property or the good. The most common illustration on this point is the delivery of the key of the warehouse containing the goods to be pledged to the pawnee. Delivery can also be made by the way of attornment which means that if the goods are in possession of a third person, the pledgor may give him direction to hold them on pledgees behalf. Also delivery of the title of the good or property to be pledged would constitute an equivalent of actual delivery for the purpose of pledge. In a Supreme Court case, Subba Rao J held that the railway receipts for goods was the same thing as delivery of goods and that pledge entered thereby was valid and the pledgee was invested with the rights. Thus what can be inferred is that the goods pledged need not actually change hands, there can be a valid contract of pledge in spite of the good still remaining in the possession of the pawnor.
  • A valid contract- though contract of pledge comes under the head of Special contracts yet it is necessary that for it to be valid, there must be contract with all the essentials as mentioned in the provisions of the Indian Contract Act 1872.
  • Right on the Pledge- another major ingredient of pledge is that the pawnee merely possess possessory rights and not juristic rights over the pledge. The pawnee only has the special property while the general property stays with the pledgor. When the pledge comes to an end by way of repayment the special rights are also transferred back to the pledgor.
  • Time of Delivery- Under a contract of pledge the delivery of possession and the payment of money need not always be simultaneous. A pledge can even be given subsequently after advance has been made.[Rights and Duties of Pawnor

Rights of Pawnor

  • Right to redeem goods
    It is the right of the pawnor to redeem his goods i.e. to get back from the Pawnee after he paid the amount to the pawnee.
  • Right to claim damages or compensation
    It is the right of the pawnor to get the compensation if the Pawnee makes any unauthorised use of the goods or fails to keep the goods safe.

Duties of Pawnor

  • Duty to pay the loan
    It is the duty of the pawnor to pay the amount back to the pawnee so that he will get his goods back.
  • Duty to pay extraordinary expenses incurred by Pawnee.
    It is the duty of the pawnor to pay the extraordinary expenses to the pawnee, which the Pawnee incurred in keeping the goods safe.
  • Duty to pay claims and damages or compensation to Pawnee
    The pawnor has a duty to pay the compensation or damages to the Pawnee if the Pawnee suffered any type of legal damages due to pawnor's goods.

Rights of Pawnee

1. Right to retain Goods
As per Section 173 of the Indian Contract Act, if the pawnor fails to pay the amount to the Pawnee, so the Pawnee has a right to retain the goods of the pawnor.

A pawnee can retain the goods fora)

  • payment of the debt or performance of the promise,
  • interests on the debt,
  • all other expenses incurred by him in respect of the pledged goods

2. Right to get compensation
In the case, where pawnee suffered because of the goods of the pawnor, the Pawnee has a right to get the compensation against that damage from the pawnor.

3. Right to Sell
As per section 176 of the Indian Contract Act, if the pawnor fails to pay the amount back to the Pawnee, the Pawnee has a right to sell the goods and reimburse his amount. Thus section 176 vests in the pawnee two distinct rights in case of default namely:

  • To sue the pawnor upon the debt and retain the goods or collateral as security and
  • To sell the thing which has been pledged after a proper notice of such a sale has been transmitted to the pawnor.

As per section 175 of the Indian Contract Act, if the pawnee has suffered any extraordinary expenses with respect to pawnor's goods then he has a right to get paid back by the pawnor.

4. Right to retain for subsequent advances- section 174 provides that the pawnee is not entitled to retain the goods for debt or promise other than that for which goods for pledged for. However it is presumed that the pawnee has the right, if he makes subsequent advances to the pawnor, to retain the goods unless it is otherwise provided in the contract. Thus it is the terms of the contracts which decides the rights of the pawnee in this case.

Duties of Pawnee

  • Duty to take reasonable care
    It is the duty of Pawnee to take reasonable care of the goods of pawnor, like his own goods.
  • Duty to give back the goods after repayment of the loan
    When the pawnor pays back the amount to the Pawnee, the Pawnee has a duty to give back the goods back to the pawnor
  • .
  • Duty not to make unauthorized use of goods
    It is the duty of the Pawnee to not to make any unauthorized use of pawnor's goods. If the Pawnee makes unauthorized use of goods he will be liable to pay compensation to the pawnor.
  • Duty to give back the owner any increment in the goods
    It is the duty of the Pawnee to give to the pawnor any increment in the goods during his possession.
  • Duty not to mix the goods
    It is the duty of the Pawnee to not to mix the pawnor's goods with his own goods.

Pledge by Non Owner

  • Pledge by Mercantile agent
    Section 178 of the Indian Contract Act states that the pledge between the mercantile agent and Pawnee can be valid if the agent has the possession of the goods with the consent of the owner and the Pawnee acted good faith and does not know about the original title of the goods.
  • Consent of the owner of the goods is assumed to exist in case where the mercantile agent pledges a good. A mercantile agent is one who has the authority on behalf of the owner to sell, consign or raise money out of the goods by keeping them as security.
  • Pledge by the person in possession under voidable contract
    As per section 178 'A' of the Indian Contract Act, the pledge between the pawnor having the possession of the goods under voidable contract and pawnee can be valid, provided that during the pledge the contract has not been revoked and the pawnee acted in good faith and does not have any idea about the title of the goods.
  • Pledge where pledger has only a limited interest
    As per Section 179 of the Indian Contract Act, the pledge between the pawnor having limited interest and Pawnee can be valid, if during the pledge the pawnee acted in good faith and does not know about the title of the goods.
  • Pledge by a co-owner in possession
    The pledge between a co-owner and Pawnee can be valid if he has the consent of other co-owner. But when the co-owner without the consent of other co-owner enters the contract of pledge, that contract can be valid if the Pawnee acted in good faith and does not know about the title of the goods.

Lawpreneurz Details of Law of Contracts

Sr No. Topics
Lecture 1 Judiciary Contracts 1
Lecture 2 Judiciary Contracts 2
Lecture 3 Judiciary Contracts 3
Lecture 4 Pledge
Lecture 5 Indemnity & Guarantee
Lecture 6 Agency
Lecture 7 Question Bank for The Indian Contract Act, 1872

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Shipra DhankerTopper for Delhi Judicial Services 2019