Definition:
A pledge contract serves as a formal agreement between two or more parties, articulating the specific responsibilities and actions each party commits to in pursuit of a common objective. These contracts are collaboratively crafted by the involved parties and can be amended or updated as required.


When drafting a pledge contract, it is imperative to include comprehensive details such as timelines, milestones, and repercussions for any failure to fulfill obligations. By incorporating these specifics, the contract ensures clarity, accountability, and alignment among all parties involved in the endeavor.

Example:- A shopkeeper has delivered 100 bags of rice to the bank as security for obtaining a loan. The whole process is known as Pledge. Here, the shopkeeper is the pledger and the pledgee will be the bank.

Essential Features Of Contract Of Pledge:

1. Contract Essentials: A contract of pledge, like a bailment agreement, must include all the necessary components of a valid contract. The essential elements such as offer, consideration, contractual capacity, intention, etc. must be a part of the pledge. Without the presence of these essential elements, the contract cannot be enforceable in a court of law.
    
2. Delivery Of Possession: It is about giving something to the person who receives it. In a pledge, like when you give something valuable as security for a loan, it's important to physically hand over the item. There are two main ways to do this:
   • Actual Delivery: You physically give the item to the person receiving it. For example, if you pledge jewelry, you hand it directly to the person.
   • Constructive Delivery: You don't physically move the item, but you give control or access to it. For instance, you might give someone the keys to where the item is stored, like a warehouse or a locker.
   Whatever method is used, it's essential that the transfer is temporary. This means the person giving the pledge still owns the item unless they break the agreement. These rules are part of the Sale of Goods Act, 1930, which sets out how these kinds of transactions should work.
    
3. Ownership Cannot Be Transferred: In a pledge, ownership isn't transferred like in a sale. The person giving the pledge (the pledgor) still owns the item, even though it's used as security for a loan. The person receiving the pledge (the pledgee) becomes the owner of a security interest in the property, meaning they have a right to it if the loan isn't repaid.
    
4. Security Against Debt: To use something as security in a pledge, there needs to be an existing debt or obligation owed by the person giving the pledge (the pawnor). This debt could be money owed or a promise to do something specific. For example, if you owe money to someone, you might pledge your jewelry as security until you pay them back. Similarly, if you promise to perform a certain task, like completing a project, you could pledge something valuable as security until you fulfill that promise.
    
5. Return Of Goods On Repayment: In simple terms, when you give something valuable as security for a loan, like jewelry or a car, you expect to get it back once you've paid off the loan. This is a basic rule of a pledge. It means the item you give as security isn't being sold or given away permanently. It's just a way to assure the lender that they'll get their money back. This rule makes it clear that the lender doesn't become the new owner of your stuff—they're just using it as security until you fulfill your part of the deal by repaying the loan.

Rights And Duties

Rights Of Pawnor

1. Right to Redemption:

   The "right to redemption" means that the person who gave something as security in a pledge (the pawnor) has the option to get it back. They can do this by repaying the debt they owe or fulfilling other conditions outlined in the pledge agreement. Once they meet these requirements, they have the right to regain ownership of the item they pledged. This right is fundamental in a pledge agreement, giving the pawnor the opportunity to reclaim their property after fulfilling their obligations.
    

2. Right to Notification:

   The "right to notification" ensures that if the person who received the pledge (the pawnee) believes there's been a default or violation of the pledge agreement, they must inform the person who gave the pledge (the pawnor). This gives the pawnor a chance to fix the problem before the pawnee takes any action against the collateral. It's a way to provide fairness and give the pawnor an opportunity to address any issues before losing their pledged property.  

3. Right to Inspection:

   The "right to inspection" refers to the pawnor's entitlement to check the pledged items and ensure that the pawnee is handling them appropriately. However, the extent of this right can vary based on the specific terms outlined in the agreement between the pawnor and the pawnee.

Duties Of Pawnor:

1. To pay the debt: The pawnor is responsible for repaying the debt and any interest on time and in the manner specified in the contract. It's their duty to fulfill this obligation according to the terms agreed upon.
    
2. To disclose the defect in goods: According to Section 150, if you're giving something as security in a pledge (the pawnor), you have to tell the person receiving the pledge (the pawnee) about any problems or faults with the item that you know about and that could cause trouble or harm to the pawnee. This rule makes sure that the pawnee knows about any issues with the pledged item before accepting it as security.
    
3. To repay the necessary expenses: Section 175 states that if the person who received the pledge (the pawnee) spends money on things like repairs or upkeep to keep the pledged goods in good condition during the agreement, the person who gave the pledge (the pawnor) is obligated to reimburse those expenses. This means that if the pawnee has to spend money to maintain the pledged items, the pawnor has to pay them back for those costs. It's a way to ensure fairness and make sure that the pawnor takes responsibility for any expenses related to the pledged goods.
    
4. Duty after sale: After the sale of the pledged goods due to the pawnor's failure to repay the loan, if the sale proceeds are insufficient to cover the loan amount plus interest owed, the pawnor is legally obligated to pay the remaining balance. This means that if the sale doesn't generate enough money to cover what is owed, the pawnor still has to pay the difference. It's a way to ensure that the lender is compensated for their loss if the pledged items are sold for less than the amount owed.

Rights Of Pawnee

1. Right of Retention:
   The "right of retention" means that the person who receives something valuable as security (the pawnee) can keep it until the person who gave it as security (the pawnor) does what they promised. This allows the pawnee to hold onto the pledged items until the pawnor pays back the debt or fulfills their part of the deal. It's like keeping something valuable as a guarantee until the other person keeps their word.
    
2. Right to Sell or Dispose:
   The "right to sell or dispose" means that if the person who gave something as security (the pawnor) doesn't fulfill their obligations, the person who received the pledge (the pawnee) may sell or get rid of the pledged items to recover the unpaid debt. The terms and conditions of this sale are usually outlined in the pledge agreement. This allows the pawnee to take action to recover what they are owed if the pawnor doesn't meet their obligations.
    
3. Right to Interest and Costs:
   The "right to interest and costs" means that according to the agreement, the person who gets the pledge (the pawnee) can ask for extra money on top of the loan if it's not paid on time. They can also ask to be repaid for any reasonable expenses they had to cover while managing the pledge, like administrative fees or handling charges. This ensures that the pawnee is compensated fairly for any additional costs or inconvenience caused by the pawnor's actions.

Duties Of Pawnee

1. Duty to take charge of the pledged goods:The "duty to take charge of the pledged goods" means that the person who receives the pledge (the pawnee) has to physically take possession and control of the pledged items. They have to make sure the items are kept safe and secure, just like they would with their own belongings. This duty ensures that the pledged goods are protected while in the pawnee's possession. Case law example:
   In the case of State Bank of Saurashtra v. Chitranjan Rangnath Raja and Anr., the bank acted as the person receiving the pledge (the pawnee), and the borrower was the person giving the pledge (the pawnor). The borrower 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 then filed a case against the borrower to recover the loan amount. However, the court dismissed the petition because the bank, as the person who received the pledge, lost the borrower's goods, which made it unable to recover its payment.
    
2. Duty to not mix the pledged goods: The "duty to not mix the pledged goods" means that the person who receives the pledge (the pawnee) must not combine or mix the pledged items with their own belongings. Instead, they should keep the pledged goods separate and distinct from their personal property. This ensures that the pledged items remain identifiable and can be returned to the person who gave the pledge (the pawnor) when needed, without any confusion or complications. Illustration:
   Suppose A pledges 100 litres of gasoline to B as security for a loan of Rs. 13,000. In this scenario, it becomes B's responsibility to ensure that they do not mix the pledged gasoline with their own supply. By keeping the pledged gasoline separate from their own inventory, B maintains the integrity of the pledged goods, making them readily identifiable and available for return to A when necessary. This precaution ensures clarity and facilitates the smooth resolution of the pledge agreement between A and B.
    
3. Duty to return the pledged goods: The "duty to return the pledged goods" means that the person who receives the pledge (the pawnee) must give back the pledged items once the purpose of the pledge, such as repaying the loan, has been achieved. The pawnee cannot use the pledged goods unless specifically authorized to do so by the person who gave the pledge (the pawnor). This ensures that the pawnee respects the pawnor's ownership rights and returns the pledged items promptly once the pledge agreement is fulfilled. Illustration:
   Suppose A pledges their watch to B as security for a loan of Rs. 2000. In this situation, once A repays the loan amount to B, B is obligated to return the watch to A. B cannot keep or use the watch for any other purpose unless A authorizes it. This ensures that A's ownership rights are respected, and the pledged item is returned to them once the loan is repaid, fulfilling the purpose of the pledge agreement between A and B.
    
4. Duty to not make unauthorized use of the pledged goods: The "duty to not make unauthorized use of the pledged goods" means that the person who receives the pledge (the pawnee) is not allowed to use the pledged items for any purpose other than what is agreed upon in the pledge contract. The pawnee cannot utilize the goods unless authorized to do so by the person who gave the pledge (the pawnor). Illustration:
   Suppose A pledges their car to B as security for a loan of Rs. 90,000. If B uses the car as a taxi without A's consent, B would be held responsible for the unauthorized use of the car. This means that B would be in violation of the pledge agreement and could be liable for any consequences or damages resulting from the unauthorized use of the car.
    
5. Duty to return any accretion to the goods: The "duty to return any accretion to the goods" means that the person who receives the pledge (the pawnee) must give back any additional value that is added to the pledged goods while they are in their possession. This includes returning any increase in value or additions that occur during the time the goods are held by the pawnee.
   
   Illustration:
   Suppose A pledges their cow to B as security for a loan of Rs. 80,000. If 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.
   This ensures that A receives back not only the original pledged item but also any additional value that has accrued to it during the period of the pledge agreement.

Conclusion
A pledge serves as security to guarantee repayment of a debt or fulfillment of a promise to a creditor. While similar to bailment, it has distinct features. Pledge is solely for securing debt repayment or promise fulfillment, allowing the pawnee to sell the goods in case of default, unlike bailment where goods are delivered for specific purposes and cannot be sold by the bailor. Both parties in a pledge have rights and duties to adhere to.

Goods capable of delivery form the subject of a pledge, which must be identifiable at the contract's inception. Essential elements of a valid pledge include the delivery of goods as per the contract. Initially, documents of title were not considered goods, but a Supreme Court interpretation changed this, making them valid for pledge. Pledge contracts have proven beneficial, fostering economic transactions.