CONTRACT OF PLEDGE

The pledge is a kind of bailment also known as PAWN.

According to Section 172 of ICA 1872, The bailment of
goods as security for payment of a debt or performance of
a promise is called a “pledge”.

For example, if A borrows rupees one hundred from B and

keeps your cycle with him as security for repayment, it is a
contract of pledge.

PARTIES

• The bailor is in this case called the "pawnor"- the

person who delivers the possession of the goods.
• The bailee is called the "pawnee"- The person to whom
the possession of the goods is delivered as security.

ESSENTIALS

1. Pawnor has delivered the possession of the goods to

pawnee:-For a valid pledge it is necessary that pawnor
has delivered the possession of the goods to the
pawnee. It is a point to be noted that only possession
of goods passes from pawnor to pawnee and not
ownership. Where the pawnor has not delivered the
possession of the goods there cannot be a valid pledge.
 The case of Revenue Authority v. Sudarshan Pictures
(1968) is the best example of this point. In this case, a
producer of film took a loan from a financer
distributor and promised to deliver the final prints of
the film when it was ready. It was held that there was
no valid pledge because there was no delivery of
possession for the pawnor to the pawnee. The pledge is
a kind of Bailment therefore like a bailment delivery of
possession may be of two kinds :
(i) Actual delivery;
(ii) Constructive delivery.

Delivery of documents of little and delivery of key of the

store is an example of constructive delivery.

In Morvi Mercantile Bank Ltd. v. Union of India (1965) the

Supreme Court held that the Railway receipts for goods was
the same thing as delivery of goods and delivery of railway
receipts amounts to delivery of goods.

Similarly, the case of Bank of Chittor v. Narsimbulu (1968)

is the best example of constructive delivery.

In this case, the loan was taken by the owner of the cinema
from the Bank. The cinema projector and accessories were
pledged with the Bank as security. The bank allowed the
pledge goods to remain with the cinema owner. The owner of
the cinema sold the Cinema Projector. It was held that the
projector was under constructive delivery of the bank.
 2. Possession has been delivered upon a contract:- It is
also an essential element of a valid pledge that the
Pawnor has delivered the possession of goods in
pursuance of a contract of pledge. Delivery of
possession may be

(i) Simultaneous with advance; or

(ii) after getting advance; or

(iii) Before or in contemplation of Advance.

In Blundell Leigh v. Attenborough. (1921) A gave B a

diamond ring for valuation and to let her know to what
credit can she secure on their value. On the same by B
pledged the ring to C for 1000 pounds on the next day B
gave A 500 pounds. It was held that the pledge was valid.

3. Possession of the goods has been delivered as Security-

for valid pledge, Pawnee must delivered some goods the
Pawnee for:

(i) Repayment of a debt; or

(ii) Fulfilment of the promise

4. The pawnor has delivered the goods to the pawnee on

condition to return- For a valid pledge it is necessary that
the pawn or has delivered the possession of the goods to
the pawnee on the condition that when the loan is repaid or
promised is fulfilled delivered goods as a security be return
to Pawnor.

5. All essentials of valid bailment must be present: - Pledge

is a kind of bailment therefore All essentials of bailment
must be present in the valid pledge. The pledge can be made
for only movable goods.

Pledge by hypothecation

Sometimes the goods are allowed to remain in the custody

of the pledger for a special purpose. But that does not
militate against the effectiveness of the pledge.

Reeves v Capper is an early illustration.

The captain of a ship pledged his chronometer to the

shipowner who allowed him to use the instrument for a
voyage. The captain pledged it over again with another
person. The question was whether the first pledge was valid.
The court held that it was, in the same way, a constructive
pledge that comes into existence as soon as the pawner,
without actually delivering the goods, agrees to hold them
for the pawnee and promises to deliver them on demand.

An illustration is the decision of the Andhra Pradesh High

Court in Bank of Chittoor v Narasimbulu

A cinema projector and accessories were pledged with a

bank. The bank allowed the property to remain with the
pledgers, they formed the equipment of a running cinema.
Subsequently, the pledgers sold the machinery. The court
held that the sale was subject to the pledge. "There was a
constructive delivery or delivery by attornment to the
bank."

Similarly, where a firm of merchants, having pledged certain

railway receipts with a bank, took them back under the
pretence of clearing the goods and repledged them with
another bank, the Privy Council held that the first pledge
was not thereby defeated." Likewise, where certain motor
vehicles pledged by a motor dealer were allowed to remain
in his possession for demonstration purposes, the pledge
was held to be valid." In such cases, the other creditors
cannot claim anything from such goods unless the claim of
the pledgee is first satisfied.
PAWNOR
RIGHTS

a. Right to receive back the goods: According to Sections

160 and 161 of the Indian Contract Act, the pawnor is
entitled to the goods pledged with the pawnee upon
performance of the promise within the time stated or
repayment of the loan and interest, if any.

b. Right to maintenance and preservation of goods: The

pledgor has the right to see whether the pawnee is
preserving and maintaining the goods properly or not.

c. Pawnor’s Right to Redeem:

As per Section 177 of ICA, if a time is stipulated for the

payment of the debt, or performance of the promise, for
which the pledge 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.

By this Section, the pawnor is entitled to redeem the

goods pledged at any time before the actual sale of
goods, even though he makes a default in payment of the
debt or performance of the promise within the stipulated
time. His right is extinguished after the sale of the
goods. Hence, he enjoys the right to redeem the goods at
any time before the actual sale of the goods pledged.

DUTIES

a. To pay the debt- The pawnor must pay back his debt
and interest on it on the due date and in the manner
stated in the contract.

b. To disclose the defects in goods- According to

Section 150, the pawnor is obliged to disclose any
defects in the goods that are within his knowledge
and might cause inconvenience or harm to the
pawnee at the time of the pledge.

c. To repay the necessary expenses- According to

Section 175, if the pawnee has incurred any
reasonable expense on the maintenance or upkeep of
the goods in pledge during the term of the contract,
the pawnor is liable to pay such expense to the
pawnee.

d. Duty after sale- In the case of the pawnor's default

in loan payment, if the goods under the pledge are
sold and the sale proceeds are less than the amount
of the loan plus interest payable, the pawnor is
required by law to pay the difference.
PAWNEE
RIGHTS

1. Right of retainer: The pawnee has the right to retain

the pledged goods till his payments are made (Sections
173 and 174)- He can retain the goods for the following
payments:
a) for the payment of the debt or performance of the
promise,
b) interest on the debt, and
c) for all necessary expenses incurred by him in
respect of the possession or for the preservation of
the pledged goods. This right of the pawnee to retain
the pledged goods till he is paid is known as the
pawnee's right of particular lien, In the absence of a
contrary contract, the pawnee cannot retain the goods
pledged for any debt or promise other than the debt
or promise for which the goods are pledged. However,
in the absence of anything to the contrary, such a
contract shall be presumed when subsequent advances
are made without any further security. If fresh
security is provided for the fresh advance, this
presumption will not apply.

2. Right to Extraordinary Expenses (Sec. 175): The

pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the
preservation of the goods pledged. This right does not
entitle the pawnee to retain the goods for recovery of
 such expenses, however, he can sue the pawnor to pay
such an amount.

3. Right to Sale (Sec. 176): Upon a default being made by

the pawnor in the payment of the debt or performance
of the promise pawnee gets two distinct rights.

Firstly, the pawnee may bring a suit against the pawnor for
the recovery of the due amount or the performance of the
promised duty and in addition he may retain the goods as
collateral security.

Secondly, he may sell the goods pledged but only after

giving reasonable notice of the intended sale, to the pawnor.
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. Further, the pawnee cannot sell the
goods to himself. If it does so the sale is void and the
pawnor can take back the goods after paying the amount
due.

4. Right against the true owner of goods (Sec. 178 A):

When the pawnor has acquired, and possession of
pledged goods, under a voidable contract, but the
contract has not been rescinded, at the time of pledge,
the pawnee acquires a good title to the goods, even
against the true owner, provide the pawnee had no
 notice of the pawnor’s defect in title and he acts in
good faith.

DUTIES

a. Duty to take reasonable care of the pledged goods.

b. Duty not to make unauthorised use of goods pledged.
c. Duty to return the goods when the debt has been
repaid or the promise has been made.
d. Duty not to mix his goods with the goods pledged.
e. Duty not to do any act which is inconsistent with the
terms of the pledge.
f. Duty to deliver increase (if any), to the goods pledged.

Pledge by mercantile agent [S. 178]

Section 178 provides that where a mercantile agent is, with

the consent of the owner, in possession of goods or
documents of title to goods, any pledge made by him while
acting in the ordinary course of business shall be valid,
provided that the pawnee acts in good faith and has no
notice of the fact that the agent has no authority to
pledge.
The necessary conditions of validity under the section are
as follows:

1. Mercantile agent:

The expression "mercantile agent" has the same meaning as

is assigned to it by the Indian Sale of Goods Act, of 1930.
In this Act, "mercantile agent means an agent having in the
customary course of business as such agent authority either
to sell goods, or to consign goods for sale, or to buy goods
or to raise money on the security of goods". [S. 2(9), Sale
of Goods Act]

2. Possession with owner's consent:

The Supreme Court has laid down that the word "consent"
for this purpose means agreeing on the same thing in the
same sense as defined in Section 13 of the Contract Act. If
the consent is real, it is immaterial that it was obtained by
fraud or misrepresentation or with dishonest intentions.

In Sharadin v Gokulchand, the court interpreted

"possession" appearing in Section 178 as juridical possession
as distinguished from mere physical possession or bare
custody. It has been held that a servant or a relation
entrusted by the owner with the custody of goods during
his absence cannot be said to be in possession thereof to be
entitled to make a valid pledge thereof.
 3. In the course of business:

The principle is explained by this illustration:

The plaintiff, a dealer in diamonds in Amsterdam, sent some

diamonds to a diamond broker in London for sale. The
broker asked a friend of his to pledge the diamonds for
him. The friend pledged them to the defendants, who were
pawnbrokers. In the owner's action against the defendants
for the diamonds, the pledge was held to be invalid. "It was
not the ordinary course of business of a mercantile agent to
ask a friend to pledge goods entrusted to him but to pledge
them himself.

4. Good faith

According to the General Clauses Act, 1895 a thing is said

to be done in good faith when it is done honestly, whether
negligently or not. "Notice" will mean actual as well as
constructive notice.

Pledge by documents of title [S. 178]

Section 178 says that the expression "documents of title"
shall have the same meaning as is assigned to it in the Sale
of Goods Act, 1930. Section 2(4) of this Act provides that
"documents of title to goods" include a bill of lading, dock
warrant, warehouse keeper's certificate, wharfinger's
certificate, railway receipt, warrant or order for the
delivery of goods and any other documents used in the
ordinary course of business as proof of the possession or
control of goods, or authorising or purporting to authorise,
either by endorsement or by delivery, the possessor of the
document to transfer or receive goods hereby represented.

Person in possession under voidable contract [S. 178-A]

Where goods are pledged by a person who has obtained

possession under a voidable contract, the pledge is valid,
provided that the contract has not been rescinded at the
time of the pledge and the pledgee has acted in good faith
and without notice of the pledger's defect of title. Phillips
v Brooks Ltd is a well-known authority. 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,
the ring was pledged to the defendants. The pledge was
held to be valid, it being made by a person in possession
under a voidable contract. The effect of fraud is to render
the transaction voidable and not void and if, therefore, an
innocent person has taken the goods under a pledge before
the transaction is avoided, the true owner cannot claim
them back.
Pledge by pledgee [S. 179]

Section 179, which is the relevant provision 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.
Thus, when a pledgee further pledges the goods the pledge
will be valid only to the extent of his interest and his
interest is the amount for which the goods have been given
to him as a security. If he pledges for a larger amount, the
original pledger will still be entitled to his goods on paying
the amount for which he pledged the goods.