Rights and Duties of Pawnor and Pawnee

A pledge refers to an item of value used as collateral or security for a loan. When someone pawns an item, they provide it as a pledge to the lender in exchange for a loan. 

The lender holds onto the pledge until the loan is repaid. At this point, the item is returned to the borrower. If the borrower fails to repay the loan, the lender can sell the pledged item to recover the amount owed.

Who is a Pawner and Pawnee?

Pawner: The pawner is the individual who offers the pledge as collateral to obtain a loan. The pawner retains ownership of the pledged item while it is in the lender’s possession. The pawner typically pays interest on the loan and is responsible for repaying the borrowed amount within a specified period. Please repay the loan within the agreed-upon time to avoid the loss of the pledged item.

Pawnee: The pawnee, also known as the lender or pawnbroker, is the person or institution that accepts the pledged item and provides the loan. The pawnee holds the item as security until the borrower repays the loan in full, including any accrued interest. If the borrower defaults on the loan, the pawnee has the right to sell the pledged item to recover the loan amount and any outstanding interest.

Rights of Pawnor and Pawnee

Provisions regarding the rights of the pawnee (lender) and the pawnor (borrower) concerning the pledged merchandise are outlined in several sections. 

Rights of Pawnor

The rights of the pawnor are:

Right to Retain Merchandise (Section 173)

The pawnee can retain the pledged goods until the loan is due. This includes keeping the goods for the interest on the debt and any expenses incurred for their preservation. Additionally, the pawnee can exercise a specific lien solely over the merchandise.

Right to Retain Ensuing Advances (Section 174)

Generally, the right to retain the pledged merchandise also extends to any money lent by the pawnee to the pawnor after the pledge date unless there is a contract stating otherwise.

Right to Extraordinary Expenses (Section 175)

The pawnee can seek compensation for any extraordinary expenses incurred in preserving the pledged goods. However, the pawnee does not have the right to retain the goods; they can only sue for reimbursement of the expenses.

Right Against the True Owner (Section 178A)

The contract remains valid if the pledger’s title to the pledged merchandise is defective but obtained under a revocable contract. In such cases, the pawnee can obtain a valid title to the pledged goods if they act in good faith.

If the pawnee makes an unauthorised sale of the pledged goods without providing proper notice and time to the pawnor, the pawnor has the following rights:

• The right to initiate legal proceedings to redeem the goods by paying off the debt.
• The right to claim damages and losses based on conversion, i.e., unauthorised disposal of the pledged goods.

Rights of a Pawnee

The rights of the pawnee are:

Right to Receive Back the Products

The pawnor has the right to receive the pledged goods back once they have fulfilled their promise or repaid the loan and any interest owed.

Right to Retain Goods until Payment

The pawnee has the privilege to hold the pledged merchandise until the repayment of the debt, including the principal amount, interest and other expenses related to those goods. For example, suppose Mr X pledges his gold jewellery to a bank for a loan. In that case, the bank has the right to retain the jewellery until the loan amount and accumulated interest are repaid.

Right to the Redemption of Debt

If the pawnor fails to fulfil their promise or repay the debt within the agreed-upon time, the pawnor has the right to redeem the pledged merchandise before it is sold. However, the pawnor is responsible for any expenses incurred due to their default.

Right to Maintenance and Preservation of Merchandise

The pawnee has the right to ensure the pledged goods are properly maintained and preserved. They may seek reimbursement for any extraordinary costs incurred but cannot retain the goods.

Rights of the Ordinary Debtor

The pawnor possesses certain rights similar to those of a regular debtor as provided by applicable debtor protection laws.

Right to Suit

The pawnee can file a lawsuit to recover the debt while holding the pledged goods as security. They can sue for the sale of the pledged goods and the recovery of money owed to them.

Right to Sell

The pawnee has the privilege to sell the pledged goods after giving the pawnor reasonable notice and sufficient time. After the sale, the pawnee can sue the pawnor for any deficiency, if applicable and must return any excess proceeds from the sale to the pawnor.

Duties of the Pawnor 

Duty to Reimburse Standard and Extraordinary Expenses

The pawnor is responsible for reimbursing the pawnee (lender) for any extraordinary expenses incurred by the pawnee in preserving the pledged goods. For instance, if the pawnee pays for the food and shelter of a cow pledged by the pawnor, the pawnor must repay these expenses to the pawnee.

Duty to Repay the Debt and Any Interest Due

The pawnor is obligated to repay the debt or fulfil the promise made concerning the pledged goods. For example, if the pawnor pledges a gold chain as security for a loan, they have a duty to repay the loan amount to the pawnee.

Duty to Pay Claims and Damages or Compensation to the Pawnee

The pawnor must disclose any material faults or risks associated with the pledged goods that could potentially harm the pawnee or the goods’ intended use. If the pawnee incurs legal damages due to the pawnor’s merchandise, the pawnor must compensate the pawnee for such losses or damages.

Indemnify the Pawnee

If the pawnee suffers any losses due to defects in the pawnor’s title to the pledged goods, the pawnor must indemnify the pawnee for such losses. This duty ensures that the pawnee is protected if any problems arise with the ownership or legal status of the pledged merchandise.

Duties of the Pawnee 

The duties of the pawnee are:

Duty to Take Charge of the Pledged Goods

The pawnee is required to take possession and control of the pledged goods. The pawnee must exercise the same care and prudence in safeguarding the goods as they would with their belongings.

Case Law Example:

In the State Bank of Saurashtra v. Chitranjan Rangnath Raja and Anr., the bank acted as the pawnee, and the borrower was the pawnor. The pawnor pledged 5000 tins of peanut oil as security for a loan of Rs. 75000. Unfortunately, the pledged goods were lost while in the bank’s possession. The bank filed a case against the pawnor to seek reimbursement of the loan amount. However, the court dismissed the petition because the bank, as the pawnee, lost the borrower’s goods, making it unable to recover its payment.

Duty to Not Make Unauthorised Use of the Pledged Goods

The pawnee is prohibited from using the pledged goods for any purpose other than what is specified in the pledge contract. The pawnee has no right to utilise the goods unless authorised by the pawnor.

Illustration:

If A pledges their car to B as security for a loan of Rs. 90000 and B uses the car as a taxi without A’s consent, B would be held responsible for the unauthorised use of the car.

Duty to Return the Pledged Goods

The pawnee has a duty to return the pledged goods once the purpose of the pledge has been fulfilled. The pawnee has no right to use the goods unless authorised by the pawnor.

Illustration:

If A pledges their watch to B as security for a loan of Rs. 2000, B has to return the watch to A once A repays the loan amount.

Duty to Return any Accretion to the Goods

The pawnee must return any additional value that accrues to the pledged goods. The pawnee must give back to the pawnor any value increase or additions that occur while the goods are in their possession.

Illustration:

If A pledges their cow to B as security for a loan of Rs. 80000 and the cow gives birth to a calf while in B’s possession, it is B’s duty to return both the calf and the cow to A when the loan amount is repaid.

Duty to Not Mix the Pledged Goods

The pawnee must avoid blending or mixing the pledged goods with their own goods. The pawnee should keep the pledged goods separate and distinct from their personal belongings.

Illustration:

If A pledges 100 litres of gasoline to B for a loan of Rs. 13000, it is B’s duty to avoid mixing the gasoline with their supply.

Conclusion

The contract of pledge establishes certain rights and duties for both the pawnor and the pawnee under Contract Law. The pawnor has the right to receive back the pledged goods upon fulfilling the promise or repaying the debt. They also have a duty to reimburse standard and extraordinary expenses incurred by the pawnee, repay the debt and any interest due, pay claims and damages to the pawnee if necessary and indemnify the pawnee for any losses caused by defects in the pawnor’s title to the goods.

On the other hand, the pawnee has the right to retain the pledged goods until the payment of the debt, including interest and expenses. They also have the right to retain any subsequent advances made by the same pawnor. The pawnee has a duty to take charge of the pledged goods, not make unauthorised use of them and return the goods to the pawnor once the purpose of the pledge is fulfilled. They must also return any accretion or increase in value to the goods and refrain from mixing the pledged goods with their own.