Contract of Pledge

 

INTRODUCTION AND MEANING

Contract of Pledge.It only differs from bailment in the matter of purpose. When the purpose of the bailment is to secure a loan or a promise, it is called a pledge.Under Indian Contract Act, 1872 the ‘Pledge’ has been defined in section 172 as:

S 172. “Pledge”, “pawnor”, and “Pawnee” defined.-

The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “Pawnor”. The Bailee is called the “Pawnee”.

In case of Lallan Prasad v. Rahmat Ali, Supreme Court of India defined Pledge as “Pawn or pledge is a bailment of personal property as a security for some debt or engagement. A pawner is one who being liable to an engagement gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability”.

J Shelat inLallan Prasad vs. Rahmat Ali AIR 1967 observed that Pawn or pledge is a bailment of personal property as a security for some debt or engagement.

The property pledged should be delivered to the Pawnee. Delivery of possession may be actual or constructive.Sometimes the goods are allowed to remain in the custody of the pledger for a special purpose and that constitutes pledge by hypothecation. Thus, in case of default by the pledger, the Pledgee will have to first take possession of the security and then sell the same. The best example of this type of arrangement are Car Loans.   In this case Car / Vehicle remains with the pledger but the same is hypothecated to the bank / financer.   In case the pledger defaults, banks take possession of the vehicle after giving notice and then sell the same and credit the proceeds to the loan account

ESSENTIALS OF PLEDGE

The essential of a pledge are–

  1. Delivery of possession

 As in bailment, the delivery of possession is essential in a pledge.  Thus, in Revenue Authority vs. Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready. This was held not to be a pledge because there was no delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has the possession of the property agrees to hold it on behalf of the pledgee upon direction of the pledger.

  1. In return of a loan or a promise – The delivery must be in return of a loan or of acceptance of a promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a simple bailment. However, if A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge.
  2. In pursuance of a contract – The delivery must be done under a contract though it is not necessary that the delivery and the payment of loan be at the same time. Delivery can be made even after the loan is received.

RIGHTS OF PAWNEE

Right of retainer (Section 173- 174)

As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

Thus essentials of section 173 are

  • the payment of the debt or the performance of the promise for which the goods were pledged
  • the interest of the debt; and
  • All necessary expenses incurred by him in respect of; the possession or for the preservation of the goods pledged.

Section 174. Pawnee not to retain for debt or promise other than for which goods pledged – presumption in case of subsequent advances –

Section 174 states that The Pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise of other than the debt or promise for which they are pledged; but suchcontract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the Pawnee.

Right to extra ordinary expenses (Section 175) –

 As per section 175, the pawnee is entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have the right to retain the goods. He can only sue to recover them 

Section 175 says that the pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged.

Right of Sale:-

As per section 176 (Pawnee’s right where pawnor makes default) – If the pawnor makes default in payment of the debt or performance at the 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 the promise and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

This right secures the debt for the pawnee up to the value of the goods pledged because it allows the pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged. If the value received after selling the goods, the pawner is still liable for the difference and if the value of the sale is more than the amount of debt, the pawnee is supposed to give the difference to the pawnor.  However, if the pawnee has sold the goods, he cannot sue for the debt.

In Lallan Prasad vs. Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note and gave him aero scrapes worth about 35000Rs, as a security for the loan. The plaintiff sued for repayment of the loan but was unable to produce the security, having sold it. SC rejected his action. It held that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property.

When the goods are lost due to pawnee’s negligence, the liability of the pawnor is reduced to the extent of value of the goods.

NOTICE

Before making the sale, the pledger is required to give to the pawner, a reasonable notice of his intention to sell. The requirement of ‘reasonable notice’ is a statutory obligation and, therefore, cannot be excluded by a contract to the contrary.

PLEDGE MADE BY NON-OWNER OF THE GOODS

A pledge made by any other person is not valid. This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerce’s and so there are some situations where a person having the possession of the goods by owner’s consent, is entitled to pledge those goods even without owner’s consent for the pledge. These situations are discussed below – 

  1. Pledge by Mercantile agent (Section 178):

When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods.

The essential conditions of this rule are – he must be a mercantile agent, he must have possession of the goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.

  1. Pledge by a person in possession under voidable contract (Section 178 A):When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge. Thus, in Phillips vs. Brooks Ltd 1919, a fraudulent person pretending to be a man of credit induced the plaintiff to give him a valuable ring in return for his cheque which proved worthless. Before the fraud could be discovered, he pledged the ring with the defendants. The pledge was held to be valid.
  2. Pledge by person with limited interest (section 179) :

Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.

PAWNOR’S RIGHT TO REDEEM

Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his property even if he has defaulted.

Section 177 says that if a time is stipulated for the payment of a debt or performance of the promise for which the pledge is made, and the pawnor make 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 expense which have arisen from his default.

CONCLUSION

Pledge is a kind of bailment where a thing is delivered as security for the repayment of a debt or performance of any promise. Delivery of the possession to the pawnee may be actual delivery or constructive delivery. Ownership of the pledged article does not pass to the pledgee.

 

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