Rights of Pawnee

A pledge transaction involves a pawnor providing a good as collateral to a pawnee who holds onto it for a specified time. In this type of agreement, the pawnee has possession of the pledged good, even though it still belongs to the pawnor. 

According to Sections 173 to 176 and 181 of the Contract Act, the pawnee is granted certain rights related to the possession of the pledged good, with some exceptions based on the circumstances of each case.

Rights of Pawnee

These rights of the pawnee include:

The right to hold onto the pledged good (Sections 173 and 174)  

Under Section 173, the pawnee has the right to keep the good, not just to ensure payment of the debt or performance of a promise, but also to cover interest and other expenses related to the care and protection of the good. 

Section 174 limits the pawnee’s right to use the pledged good for purposes other than the original debt or promise, but subsequent advances may be considered part of the original debt unless the contract specifically states otherwise.

The right to claim extraordinary expenses (Section 175) 

The pawnee is entitled to demand reimbursement for additional expenses incurred for maintaining the pledged good, as stipulated in Section 173.

The right to sue the pawnor (Section 176) 

If the pawnor fails to pay or perform within the specified time, the pawnee can sue them. In addition, Section 176 allows the pawnee to sell the pledged good after giving proper notice to the pawnor and use the proceeds to repay the debt. However, the pawnee cannot exercise both remedies simultaneously.

The right to buy the pledged good (Dhani Ram & Sons v. Frontier Bank Ltd) 

If the pawnee wishes to buy the pledged good, they are permitted to do so. The sale will not void the pledge, but the pawnor may seek legal action if they believe they were not compensated fairly.

The right to sue a third party for damages (Section 181) 

The pawnee has the right to take legal action against any third party that causes damage to the pledged good.

Illustrations on Rights of Pawnee

Let’s take an example to understand the rights of the pawnee under the Indian Contract Act. Suppose Mr. A deposits his gold chain with Mr. B as security for a loan of Rs. 10,000. According to the pawn agreement, the loan must be repaid within three months. If Mr. A fails to repay the loan on the due date, Mr. B has the right to take possession of the gold chain.

If Mr. A still does not repay the loan after a reasonable period, Mr. B can sell the gold chain to recover his dues. If the sale proceeds are more than Rs. 10,000, Mr. B can appropriate the profits. If the sale proceeds are less than Rs. 10,000, Mr. A is still liable to pay the remaining amount.

Legal Remedies

If the pawnor disputes the pawnee’s right to possess the pawned property or sell it, the pawnee can take legal action to enforce his rights. The pawnee can file a lawsuit to recover possession of the pawned property or seek a court order to sell the property. If the pawnor disputes the pawnee’s right to sell the property, the pawnee can file a summary suit to obtain a quick judgment.

The first part of Section 176 states that if the pawnee fails to produce and return the goods due to their own actions, they cannot claim the debt. In the case of Lallan Prasad v. Rahmat Ali, the plaintiff sold the security given as collateral by the defendant for a loan, and then sued for repayment of the loan. However, the plea was rejected by the court, citing the House of Lords’ decision in Trustees of the Property of Ellis & Co v. Dixon Johnson, which held that if the creditor holding the security is unable to return it and sues the debtor, they cannot ask for the debt.

Case Laws on Rights of Pawnee

In Dena Bank v. Glorphis James, the Kerala High Court held that a bank would not lose its right to recover a loan even if the security is lost due to its negligence, provided there is a clause in the agreement that does not hold the bank liable for such loss.

When the pawnee decides to sell the pledged item, a notice must be issued to the pawnor about the sale of their goods. The notice need not have the date, time, and place of sale. T S Kotagi v. Tahsildar Gadag held that the right to sue can be practised without notice but not the right to sale. 

If the proceeds from the sale are less than the amount due in respect of debt or promise, the pawnor is liable to pay the balance. If the proceeds are more than the due amount, the pawnee shall pay the surplus to the pawnor.

In Laxmi Narayan Arjundas v. SBI, the Patna High Court rejected the action of a banker who sold the pledged goods twice and sued the pawnor for the balance amount due even after selling the goods. Untwalla J stated that such actions do not come under Section 176 of the Contract Act and that accepting and upholding them would be disastrous in the commercial world.

According to Dhani Ram & Sons v. Frontier Bank Ltd, the pawnee can also buy the pledged goods without terminating the pledge, as held by the Punjab High Court on the basis of a Privy Council judgment. However, the pawnor may have the goods back without paying the loan, and they may hold the pawnee liable for getting less value for the goods.

Conclusion

The rights of a pawnee are well-protected under the Indian Contract Act, 1872. A pawnee has the right to retain possession of the goods until the debt or promise for which they were pledged is satisfied. The pawnee also has the right to sell the pledged goods after issuing proper notice to the pawnor. Additionally, the pawnee can purchase the pledged goods and the pledge will not get terminated by such an act.