Contract of Pledge under Indian Contract Act

Contract of Pledge is bailment of goods as security for payment of a debt or performance of a promise.

In India, Law of Contracts (formation and enforcement) is governed by the Indian Contract Act 1872.  It lays down all the essentials for the formation of a valid contract along with the types of contracts. It defines some special contracts, Pledge is one of them.

Section 172 defines pledge as “The bailment of goods as security for payment of a debt or performance of a promise is called pledge.”

The parties to this contract are called ‘pawnor’ and ‘pawnee’.

Difference between Contract of Bailment and Contract of Pledge

To understand these terms completely, one needs to understand the contract of bailment and parties to it defined under Section 148. Section 148 defines the contract of bailment as “a “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.” Here, the person delivering the goods is known as ‘bailor’ and to whom it is delivered is called ‘bailee’. It is also stated that if a person is already in possession of someone’s goods contracts to hold them as bailee and the owner becomes bailor even if the goods were not delivered through the way of bailment.

The contract of bailment has certain essentials. These are:[1]

• There must be an agreement between parties.
• The delivery of goods must have taken place voluntarily and in accordance of the contract.
• In the bailment, the ownership of goods must remain with the bailor, and not transferred to bailee or anyone else. If the ownership is transferred, then it does not remain the contract of bailment.

Coming back to the contract of pledge, the bailor in case of pledge is known as ‘pawnor’ (the person who delivers the goods as a security for repayment of loan or performance of a promise) and the bailee is known as ‘pawnee’ (to whom the goods are delivered).[2]

Illustration- ‘A’ borrows amount of Rs. 1 Lakh from ‘B’ and keeps his gold ring as security for payment of the debt. Here, the bailment of gold ring is pledge and, ‘A’ is the pawnor and ‘B’ is the pawnee.

Chief Controlling Revenue vs Sudarsanam Picture[3]

In this case, – A film-producer borrowed Rs 1 crore from a financier distributor and agreed to deliver the final prints of the film when ready. This Madras High Court This agreement was not a pledge and only an agreement because there was no actual transfer of possession of goods as security.

Pledge is often confused with bailment. But there is a thin line of distinction between them.[4] In a bailment, goods are handed over for a specific period of time, But, in a pledge, the goods or property is handed over as a surety for repayment of debt. Another point of difference between the two is that there may or may not be the presence of consideration   in the contract of bailment but the consideration is present for sure in the contract of pledge.

Also, in the contract of bailment, the bailee can use the goods for a specified purpose, but, in the arrangement of pledge, the pawnee has no right to use the goods. In bailment the goods are delivered for purpose of safe keeping or return, but in pledge, goods are delivered as a security against a loan.

Every pledge is a bailment, but every bailment is not a pledge.

Rights and Duties of Pawnor and Pawnee in Contract of Pledge

Right of Pawnee to sell as compared to that of ordinary Bailee

Section 176 of the Indian Contract Act provides for an important right as follows:

S. 176 Pawnee’s right where Pawnor makes default^_

If the pawnor makes default in payment of the debt, or performance, at a stipulated time, of 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 for sale.

If the proceeds of such sale are less than the amount due in respect of debt, then the pawnor is 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.

It means, in case where pawnor makes a default in payment of the debt or performance of the promise, pawnee has two options under the said section. Firstly, he can sue the pawnor upon debt and retain the pledged goods as collateral security. Secondly, he may sell the goods after formulating a reasonable notice to pawnor to recover the debt.

This distinctive right of sale is available to pawnee only, unlike bailee. This right does not exist in bailment.

Other rights of Pawnee

1. Right of Lien- Section 173 entitles the pawnee with a right to retain goods until he is paid –[5]
2. Money due under the pledge
3. Interest to be paid on debt
4. Necessary expenses for preservation of goods.
5. Right of retainer for subsequent advances- Section 174 provides for a presumption that if there are any subsequent advances made by pawnee to pawnor, it will be included in the original debt only. Therefore, the pawnee has the right to retain the goods until subsequent advances are paid.[6]
6. Right to extra ordinary expenses- The pawnee holds the right to recover any extraordinary expenses incurred by him in the preservation of pledged goods from the pawnor under Section 175 of Indian Contract Act.[7]

Duties of Pawnee[8]

Pawnee has to fulfil the below mentioned duties:

1. Duty to take reasonable care of the goods pledged.
2. Duty to return the goods upon payment of debt or performance of promise.
3. Duty to not mix his own goods with the pledged goods.
4. Duty not to act in anyway which is inconsistent with the contract of pledge.
5. Duty to not make unauthorized use of goods.
6. Duty to return accretion of goods if any.

Rights of Pawnor

The pawnor is entitled with the following rights:

1. Defaulting pawnor’s right to redeem.

Section 177 provides pawnor with his most valuable right. It states “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 them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.”

Supreme court has pointed out “The special interest of the pledgee comes to an end as soon as the debt for which the goods were pledged is discharged.  It is open to the pledger to redeem the pledge by full payment of the amount for which the pledge had been made at any time is there is no fixed period for redemption, or at any time after the fixed date and the right continues until the thing pledged get lawfully sold.”

The right to redeem clearly continues up to the time on the expiry of which the pawnee has notified that the goods would be sold. But it does not extinguish only with the expiry of time, but continues until the actual sale of goods is made. Pawnor may redeem the goods at any subsequent time before the actual sale of them.

Legal heir’s right to redeem

If a pawnor dies, his/her legal heir can redeem the goods on his behalf.

In Kamili Sarjini v Indian Bank, certain gold ornaments were pledged with the bank as security for gold loan. The pawnor died. He left behind a will allowing his widow to redeem on his behalf. The bank demanded probate. It was held that the bank had no right to do so. Neither probate nor succession certificate was necessary.[9]

Duties of Pawnor

Pawnor has the following duties

1. The pawnor is liable to pay the debt or perform the specified promise.
2. To compensate the pawnee for any expenses incurred by him for preserving the goods pledged.
3. To disclose the defaults that may put the pawnee under extraordinary risks.
4. The pawnor must compensate the pawnee, if loss is caused to him due to defect in pawnor’s title of goods.  

Commercial Utility of Contract of Pledge

Pledge by mercantile agent[10]

Pledge by mercantile agent is defined under Section 178 of Indian Contract Act. Pledge by a mercantile agent acting in ordinary course of business is valid. It reads, “Where a mercantile agent is, with the consent of the owner, in possession of goods or the document of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has not authority to pledge.”

Consent of owner is assumed to be present if the mercantile agent pledges the goods.

In the Section 178, the terms mercantile agent and documents of title shall bear the same meaning as they do in Indian Sale of Goods Act, 1930 (3 of 1930).

A mercantile agent is one who can sell, consign or raise money out of the goods by keeping them as security on behalf of owner.

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[1] https://www.lkouniv.ac.in/site/writereaddata/siteContent/202004221613338913sunita_com_bailment.pdf

[2] http://niu.edu.in/slla/Pledge.pdf

[3] https://indiankanoon.org/doc/1013750/

[4] https://keydifferences.com/difference-between-bailment-and-pledge.html

[5] Indian Contract Act, 1872 Section-173

[6] Indian Contract Act, 1872 Section-174

[7] Indian Contract Act, 1872 Section-175

[8] https://gargicollege.in/wp-content/uploads/2020/03/Unit-2-Special-Contracts.pdf page-23

[9] Avtar Singh- Contract and Specific Relief, Twelfth Edition

[10] http://www.legalserviceindia.com/legal/article-1361-contract-of-pledge-features-and-distinctiveness.html

This article is contributed by Urvi Gupta, a student at Vivekananda Institute of Professional Studies, Pitampura, Delhi.

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