CONTRACT OF PLEDGE UNDER INDIAN CONTRACT ACT, 1872

This article made a detail study about concept of pledge under Indian Contract Act, 1872, containing the distinguished between bailment and pledge; hypothecation and pledge, and essentials of pledge, who can pledge, rights and duties of pawnor and pawnee.

 

1. MEANING OF PLEDGE:

 

‘Pledge’ or ‘Pawn’ is a kind of bailment of goods with a special purpose. The goods pledge or pawned serve as security for the payment of a debt or performance of a promise.  The person pledging the goods is known as the ‘Pawnor’ and the person with whom the goods are pledge is know as the ‘Pawnee’ or ‘Pledge’.

 

As per the Section 172 of the Indian Contract Act, 1872, the bailment of goods as security for the payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called “pawnor”. The bailee is called “pawnee”.

 

2. ESSENTIALS OF PLEDGE:

 

In order to constitute a valid pledge, the following requirements must be satisfied:

 

• a)   There should be bailment of goods, i.e., the delivery of goods from one person to another.
• b)   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.

 

a) Delivery of goods:

 

Since pledge is a bailment, the delivery of the goods from the pawner to the pawnee is must. There must be delivery of the goods i.e., the transfer of possession from one person to another. The delivery may, however, be either actual or constructive. Mere agreement to transfer possession in future is not enough to constitute a pledge.

 

b) Purpose of pledge is security for payment of debt, etc.

 

In 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 debt, or performance of a promise. When some goods are pledged, the pawnee becomes a secured creditor and has priority over other creditors when it comes to claims regarding the pledged goods.

 

3. BAILMENT AND PLEDGE: DISTINGHUISHED

a. Bailment is a wider term. It includes pledge. Pledge is a kind of bailment, where the goods are delivered by one person to another as security for payment of a debt or performance of the promise. It means that if the goods serve as security, it is pledge, whereas when the goods are given for some other purpose, for example, a watch is given for repair, it is bailment.

 

b. In case of bailment, if the bailor does not pay the lawful charges due to bailee in respect of service, etc. rendered by the bailee, the bailee can exercise lien over the goods, i.e., he can retain them until the necessary payment is made to him. In case of pledge, the pledgee has not only a right to retain the goods pledged until the repayment of debt or performance of the promise, i.e., but in the event of default by the pawnor in payment of the debt, or performance of the promise at the stipulated time, he may even sell the goods, after giving a due notice of sale to the pawnor.

 

4. HYPOTHECATION AND PLEDGE: DISTINGUISHED

 

a. In pledge, there is delivery of goods from one person to another as security for payment of debt or performance of a promise. In hypothecation, on the other hand, the possession of the goods movable property is retained by the owner and certain rights in that property are transferred to the persons in whose favour the property is hypothecated.

b. In case of pledge, since the pledgee has got the possession of the goods, in the event of default by the pawnor, apart from other rights, the pledgee has a right of lien over the good, i.e., he may retain the goods pledge until the payment of the debt, or performance of the promise, etc. In case of hypothecation, since the possession of the goods remains with the owner, the hypothecatee cannot have the rights of lien. He may sell the property in default. 

 

5. WHO CAN PLEDGE:

 

Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf, who can pledge the goods. If a servant has 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 frequently does not have any right to pledge them. 

 

In the following exceptional cases, a person who is neither the owner, nor having the authority from the owner for pledging the goods, but having the possession with the owner consent can make a pledge and confer rights on the pledgee. The exceptions recognized are as follows;

 

• a)   Pledge by a mercantile agent (section 178).
• b)   Pledge by person in possession under voidable contract (section 178A).
• c)   Pledge by a person with a limited interest (section 179).
• d)   Pledge by seller in possession after sale [section 30(1) of Sale of Goods Act].
• e)   Pledge by buyer in possession after sale [section 30(2) of Sale of Goods Act]

 

Let’s have a detailed discussion;

 

a) Pledge by a mercantile agent:

 

A mercantile agent having possession of the goods with the consent of the owner but having no authority to pledge them can make a pledge provided the pledgee or pawnee is acting in good faith.

 

b) Pledge by person in possession under voidable contract:

 

Section 178-A of the Act recognizes another exception to the rule that either the owner or his duly authorised agent can pledge the goods. According to this exception, a person who has obtained the possession of the goods under a voidable contract, a pledge by him before the contract has been rescinded, to a pledgee acting in good faith and without notice of the pawnor’s defect in title, confers a good title on the pledgee.

 

c) Pledge by a person with a limited interest:

 

A person having the limited interest in the goods, for instance, a pledge, may pledge the goods. According to section 179, where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. In such a case, the pawnee’s right is limited to the extent of the pawnor’s interest in the goods. It is immaterial that the pawnee had no notice that the pawnor had only a limited interest. Thus, if, for example, A pledges the goods to B for Rs. 8,000 and B makes a sub-pledge of those goods for Rs. 12,000, A gets a right to take back those goods only by paying Rs. 8,000.

 

d) Pledge by seller in possession after sale:

 

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) of Sale of Goods Act, if the seller after selling the goods, continues or is in possession of the goods of the document 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 transferee is acting in good faith and without any notice of the previous sale.

 

e) Pledge by buyer in possession after sale:

 

A buyer of the goods, who may have obtained the possession of the goods, but has not yet become the owner of those goods, cannot deal with such goods. According to section 30(1), Sale of Goods Act, however, if a buyer has obtained the possession of the goods or the documents of the 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.

 

6. RIGHTS OF THE PLEDGOR:

 

a) Right to redeem goods: 

 

As per the section 177 of the Act, the pawnor has right to redeem the goods pledged, i.e., take back the goods from the pawnee on payment of the agreed debt, or performance of the promise in accordance with the agreement. He can exercise the right to redeem before the pawnee has made an actual sale of the goods.

 

b) Right over the increased value of goods: 

 

The pledgor has the right to demand any increases in the value of the pledged goods in addition to receiving their return.

 

7. DUTIES OF THE PLEDGOR:

 

Following are the duties of the pledgor to perform;

 

1. Duty of compensation: 

 

The pledgor is entitled to reimbursement for all ordinary and extraordinary expenses incurred by the pledgee as compensation for the care taken by the pledgee of the pledged goods.

 

2. Duty to pay interest in addition to principal amount: 

 

Pledgor is bound to repay the entire principal amount back to the pledgee by adding the interest upon it if it arises during the contractual period.

 

3. Duty to disclose all facts: 

 

Before entering into the contract, the pledgor is required to inform the pledgee of all relevant information regarding the goods he is pledging. The pledger will be held accountable if the pledgee suffers any loss as a result of the fact not being disclosed.

 

8. RIGHTS OF THE PLEDGEE:

 

A pledgee has the following rights under the Act;

 

1. Right to retain the goods pledged: 

 

According to section 173 of the Indian Contract Act, the pledgee has the right to keep the goods until the pledgor makes good on his or her debt, fulfils the promise, or pays the interest that has accrued while the goods have been preserved.

 

2. Right to recover extraordinary expenses incurred by him: 

 

The pledgee is entitled to receive compensation for the extraordinary costs he incurred while preserving the goods as per the provision of section 275 of the Indian Contract Act.

 

3. Right of suit to procure the debt and sale of the pledged goods: 

 

In accordance with section 176 of the Indian Contract Act, the pledgee may sell the goods on the same grounds that allowed for the right to retain them by giving the pledgor reasonable notice of the sale.

 

9. DUTIES OF THE PLEDGEE:

 

1. Duty to take reasonable care: 

 

Pledgee has the obligation to take due care to the goods pledged. It should be in such a way as if the pledgee is taking care of his own goods. If goods get damaged due to the pledgee’s carelessness, the pledgee would be liable to compensate the pledgor.

 

2. Duty of not using the pledged goods: 

 

The pledgee is not permitted to use the goods that the pledgor has pledged to him until and unless the pledgee has been given permission to do so.

 

3. Duty to return goods: 

 

The pledgee is responsible for returning the goods to the pledgor once the contract's purpose has been achieved.

 

4. Duty to return the benefit: 

 

If the pledgee receives any benefit from the pledged goods while the contract is in effect, the pledgee is required to repay the pledgor for the benefit received.

 

5. Duty to keep goods separate: 

 

The pledgee is required to keep his goods separate from the pledgor's goods. If he does so, only he is responsible for the separation costs and if this is not possible, he is responsible for the pledgor's losses.

 

10. CONCLUSION:

 

Pledge on the other hand is a special kind of bailment, where a thing is delivered as security for the repayment of a debt or for the performance of a promise. By and large title pawnor anti pawnee have the same rights and duties as that of bailor and bailee. However. if the pawnor defaults in the payment of the debt or performance of duty, the pawnee can sell the goods after giving a notice to the pawnor, and satisfy his debt. If the proceeds of such sale are insufficient, the pawnor it still liable to pay the balance. But if the proceeds of such sale are greater than the amount due, the pawnee should refund the excess amount of the pawnor. Pawnee cannot sell the goods to himself.

 

Although the general rule is that no person can pass a better title to the goods than he himself has. It implies that only the true owner can pledge the goods. But under certain condition pledge by a mercantile agent, pledge by person in possession of goods under a voidable contract, pledge by a person who has only a limited interest in the goods, pledge by a co-owner in possession, pledge by seller or buyer in possession, have also been recognised to create a valid pledge.