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A Study On The Contract Of Pledge

The Indian Contract Act, 1872 deals with some specific contract, a contract that has specific features. They are distinct from the other contract. They include Indemnity, Guarantee, Bailment, Pledge, Agency, etc. The contract of Pledge is of great importance in the economic transaction. Pledge generally means the placement of goods or their title as security for borrowing a loan from the creditor or for discharging any obligation under the promise.

It is regarded as a subset of bailment as both involve the delivery and possession of goods. Apart from the similarity, some features of Pledge make it distinct from Bailment. The present study focuses on the concept of the Contract of Pledge, how it works, and the rights available to the party to the contract. The Indian Contract Act, 1872 elaborately discuss the contract of pledge under the head of chapter IX of Bailment sub head- Bailment of Pledges the relevant sections about the study of this concept are section 172 to section 179.

Definition of Pledge, Pawnor, and Pawnee

Section 172 of The Indian Contract Act, 1872 defines the Bailment of goods as security for payment of a debt or performance of the promise.

The person delivering the goods (Bailor in case of Bailment) is Pawnor.

The person to whom goods are delivered (Bailee in case of Bailment) is Pawnee.

Illustration:
A lends money to B against the security of gold deposited by B. This bailment of jewellery is a pledge as security for lending the money. B is a pawnor and A is a pawnee.

Essential ingredients to constitute the contract:

  • A valid contract
  • Delivery of goods
  • Ownership cannot be transferred
  • Security against debt
  • Return of goods on repayment of loan

Valid contract
Though the contract of pledge comes under specific contract but it should fulfill all the requirements of a valid contract as mentioned in The Indian contract act.

Delivery of goods
Another essential element is that the goods should be delivered. It could be both actual or constructive delivery. An example of constructive delivery would be the delivery of the key of the warehouse to the pawnee in this case. Delivery of the document of title will also be equally valid to the pledge.[1]

Ownership cannot be transferred.
A mere procession of goods is transferred, and the pawner is the actual owner of the goods and has an absolute interest, and the pawnee has limited interest.

Security against debt
The goods must be pledged as security against a debt.

Return of goods on repayment of the loan

Once the debt is paid by the Pawnor, the goods pledged as security should be returned by the Pawnee in the manner specified by him.

Rights of the Pawnee

The Pawnee does not have the absolute title of the goods pledged because he is only the processor, and the actual ownership lies with the Pawnor. But there are certain rights provided to the Pawnee.
  1.  Right to Retain:
    The pawnee has the right to retain the goods until the pawnor has repaid the debt amount or performed part of the obligation. This right has been given under section 173 of The Indian Contract Act, 1872, as

    Pawnee's Right Of Retainer:
    The Pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interests of the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

    Here it means that the Pawnee can retain the goods pledge not only just for the payment of debt but also for any interest on the debt or any necessary expenses incurred by him for the maintenance or preservation of that good.

    Illustration: Where 'M' pledges stock of goods for certain loan from a bank, the bank has a right to retain the stock not only for adjustment of the loan but also for payment of interest.

    Case Study:
    Bank of Bihar v State of Bihar
    W[2]here the pledgee bank advanced loan to the pledgor on the pledge of sugar bags whose constructive delivery was made by handing over of the key of the godown where these were stored. However these were then seized by the state of Bihar through rationing officer and district magistrate. Thereafter the pledgee, the Bank, filed a suit for the recovery of the sugar bags. It was held that the act of the State of seizing the goods will not deprive the pledgee of his rights of the pledge and that he was still liable to the amount he advanced.
     
  2. Right To Retention Of Subsequent Debts
    It is actually the terms of the contract that pawnee this right. However, he is not entitled to retain the goods for debt or promise other than for which the goods are pledged. This is mentioned under section 174 of The Indian Contract Act, 1872 as

    The Pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the Pawnee.
     
  3. Right To Get Compensation For Extraordinary Expenses Incurred:
    the Pawnee has the right to claim extraordinary expenses from the Pawnor. This right is given under section 175 of The Indian Contract Act, 1872, as

    Pawnee's right as to extraordinary expenses incurred.-The Pawnee is entitled to receive from the Pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.

    The thing to note here is the word 'receive' and not 'retain', which means that the Pawnee cannot claim a lien over the extraordinary expenses as in case of necessary expenses for the preservation of goods.
     
  4. Right to Sale:
    If the Pawnor makes a default in the payment, then the Pawnee has the right to either bring a suit against the Pawnor or may sell the thing pledged by giving reasonable notice of sale. This right is given under section 176 of The Indian Contract Act,1872 as

    If the Pawnor makes default in payment of the debt, or performance, at the stipulated time or 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 collateral security; or he may sell the thing pledged, on giving the Pawnor reasonable notice of the sale.

    If the proceeds of such sale are less than the amount due in respect of the debt or promise, the Pawnor is still 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.

    Making the notice is a statutory obligation, and thus even though it is mentioned in terms of the contract, that notice is not necessary. Still, the Pawnee is obligated to make a notice. A notice of sale must be given in all cases of pledge, even when an instrument of pledge contains unconditional power of sale.

    It is not necessary on the part of the Pawnee to specify the details of the sale in the notice, and even when he has mentioned the specifics, he is under no obligation to abide by it. If in case of a pledge where no time for repayment has been specified, then a right to sell may arise when a notice has been served by the Pawnee regarding clearing the dues within the specified time.

    Until the money due is recovered the pledgee may retain the goods but the goods have to be surrendered when the debt amount is realised. If by reason of the pawnee's own act he is unable to return the goods he cannot have judgement for the debt. In a case

    The defendant borrowed Rs 20,000 from the plaintiff on a promissory note and gave him aero scrapes worth about Rs 35,000 as security for the loan. The Plaintiff sued for repayment of the loan but was unable to produce the security, having sold it, and, therefore, his action for the loan was rejected.[3]

Sale by Hypothecatee:
A hypothecatee is not in actual possession of the goods. He grants the right of use to the borrower. He naturally has a right to take possession of the goods if the borrower makes a default. He can then sell them in his capacity as a pledgee. Intervention of the court is not necessary.

Right of the Pawnor:
In case there is a stipulated time to pay for the debt and the Pawnor makes a default, he still has the right to redeem the goods at any time before the goods are actually sold. This right is given under Section 177 of The Indian Contract Act, 1872 as

If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledged 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.

So when the Pawner redeems the good after the expiry of time and before the actual sale of the goods he is bound to pay for any extra expenses that have incurred on his default.

Illustration- If A gives certain gold ornament to B as security for a loan of, say, Rs 50,000 for a period of 1 month, and after a month, A fails to repay the loan amount, but he has the right to redeem the gold ornament by B provided that B has not sold the watch. Also, A has to pay for any extra expenses incurred by A for keeping the ornaments safe.

Who can Pledge
Ordinarily, goods may be pledged by the actual owners or by any person that has the owner's authority. But the law has recognised certain exceptions where it is a bonafide pledge when it is made by persons who are not the actual owner but in whose procession goods are left. We have heard the maxim 'Nemo dat non quad habet' which implies no one can transfer a better title than he himself so here,are the exception for this. They re discussed under sections 178 and 179 of The Indian Contract Act, 1872.

Who is a mercantile Agent?
As per section 2(9) of the Sale of goods act, 1930, a mercantile agent is a person who in the customary course of business has an agent's authority either to sell or consign the goods for the purpose of sale or to buy goods or to raise money on the security of goods.
  1. Pledge by mercantile agent:
    Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents 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 authorised 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 no authority to pledge. (178)

    The necessary conditions for the validity of this section are as follows:
    1. The pledge must be made by a mercantile agent.
    2. The agent should be in possession of the goods or the document of title of goods by the consent of the owner and it is immaterial whether the consent is free.
    3. Should have pledged the goods in the ordinary course of business.
    4. The last requirement is the person to whom it is Pledged; that is, the Pawnee should act in good faith and should not notice that the Pawnor has no authority to pledge Then it will be a valid pledge.
       
  2. Pledge By Person In Possession Under Voidable Contract:
    When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor's defect of title. [Section 178A]

    Here it is required that the pawnee should act in good faith. If the pawnor has taken the procession of the goods by the owner without free consent, which is voidable, and he pledged the goods, at the time of pledge, if the contract is not rescinded, then the pledge is valid.
     
  3. Pledge Where Pawnor Has Only A Limited Interest:
    Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. [Section 179]
One can only pledge goods to the extent that he has an interest in the goods.

Some points of distinction between Bailment and Pledge:
  1. When goods are transferred from one part to another for a specific purpose, it is called Contract of Bailment.
    It is a kind of bailment when goods are transferred from one party to another as security against debt, it is called Contract of Pledge
     
  2. The goods cannot be sold by the bailee, even if the charges of bailment are not paid. The bailee right is limited to only filing a suit for the bailor dues or exercising lien.
    The goods can be sold by the pawnee if the pawnor makes a default.
     
  3. The goods can be used by the bailee only for specific purposes known to both parties or not otherwise.
    The goods cannot be used by the pawnee or the pledgee.
Conclusion
In comparison to bailment, pledge has limited scope. We can deduce from the present study that all contract of pledge are contract of bailment, but all contract of bailment are not contract of pledge.

Bibliography:
  • https://static.careers360.mobi/
  • https://blog.ipleaders.in/contract-of-bailment-and-pledge/#Ownership_cannot_be_transferred
  • https://www.legalserviceindia.com/legal/article-1361-contract-of-pledge-features-and-distinctiveness.html

End-Notes:
  1. https://indiancaselaw.in/the-morvi-mercantile-bank-ltd-and-anr-v-union-of-india/
  2. https://indiankanoon.org/doc/1139229/
  3. https://indiancaselaw.in/lallan-prasad-v-rahmat-ali-and-anr/

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