A pledge refers to an item of value used as collateral or security for

a loan. When someone pawns an item, they provide it as a pledge to

the lender in exchange for a loan.

The lender holds onto the pledge until the loan is repaid. At this
point, the item is returned to the borrower. If the borrower fails to
repay the loan, the lender can sell the pledged item to recover the
amount owed.

From the definition of the term pledge in the given section, it is clear that pledge is also a
type of bailment due to the fact that a contract of pledge to come into existence, delivery of
goods is requisite. A pledge can also be defined as , Pledge is the transfer by one person to
another of the possession of certain goods to be held by the latter as security for the
performance by the former of some obligation to pay or perform, which being performed,
the pledge must be restored.[2] The Supreme Court has defined pledge as , Pawn or pledge
is a bailment of personal property as a security for some debt or engagement. A pawnor 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[3]

There are three categories in which security is provided, namely- lien, mortgage and the
third of them is pledge.[4] Under a contract of pledge, any good or the title of the good is
pledged by one party to the other as a collateral for the money advanced by the later party.
Thus making of pledge is a condition precedent for advancing money. Pledge may also be
defined as delivery of goods by the debtor to the creditor for a debt or for any other
contractual obligation and the object herein delivered shall be returned to the pledgor when
the debt money has been repaid or the obligation has been performed.[5]

A valid contract of pledge involves the bailment of goods, as defined under section 148[6] of
the Act as security for the debt. There is no difference regarding the concept of pledge in
both Indian and Common Law system of England. The nature of the contract is one of
security where this security is liable in case of default by the debtor.

ESSENTIALS OF PLEDGE
1. Delivery of the good to be pledged- to constitute a valid contract of pledge, the
primary requirement is the delivery of the possession of a good. There must be an
actual delivery of possession of the identified chattel in pursuance of the contract.[7]
The property or any other good pledged must be actually and constructively
delivered to the creditor which in this case is the pawnee, the person to whom
pledge has been made.

Actual delivery refers to the physical delivery of the good to the pawnee, the whole
of the good is bailed to him. On the other hand pledge by way of constructive
 delivery involves an indirect or symbolic delivery of the property or the good. The
most common illustration on this point is the delivery of the key of the warehouse
containing the goods to be pledged to the pawnee. Delivery can also be made by the
way of attornment[8] which means that if the goods are in possession of a third
person, the pledgor may give him direction to hold them on pledgees behalf. Also
delivery of the title of the good or property to be pledged would constitute an
equivalent of actual delivery for the purpose of pledge. In a Supreme Court case,
Subba Rao J held that the railway receipts for goods was the same thing as delivery
of goods and that pledge entered thereby was valid and the pledgee was invested
with the rights.[9]

Thus what can be inferred is that the goods pledged need not actually change hands,
there can be a valid contract of pledge in spite of the good still remaining in the
possession of the pawnor.

2. A valid contract- though contract of pledge comes under the head of Special
contracts yet it is necessary that for it to be valid, there must be contract with all the
essentials as mentioned in the provisions of the Indian Contract Act 1872.

3. Right on the Pledge- another major ingredient of pledge is that the pawnee merely
possess possessory rights and not juristic rights over the pledge. The pawnee only
has the special property while the general property stays with the pledgor. When the
pledge comes to an end by way of repayment the special rights are also transferred
back to the pledgor.[10]

4. Time of Delivery- Under a contract of pledge the delivery of possession and the
payment of money need not always be simultaneous. A pledge can even be given
subsequently after advance has been made.[11] A case in hand on this issue to
elaborate further is Blundell Leigh v Attenborough[12].

The facts of the case are that A gave B some jewels for the purpose of valuation and to let
her know as to what credit can she secure on their value. B kept the jewel as security if he
did make advances to her. This was on November 1st. that same day B took the jewels and
pledged them with C for 1000 pounds. On a later date B made advance of 500 pounds to A
on the pledge of the jewels and promissory note.

Subsequently A died. B then sued C for recovery of jewels stating that the jewels which she
gave top a was only a gratuitous bailment and he was not entitled to do anything with them.
When he subsequently advanced money it was not a pledge as he was not in the possession
of the goods. When the matter went to the court, the trial court held that there was no valid
pledge between A and B as the jewels were not in the possession of B at the time of pledge
being made.
Therefore A was entitled to get back the jewels from C without any payment of money of
any kind. However this decision was reversed by the Court of Appeals which held that the
original delivery, though a gratuitous one, constituted a good and valid delivery. Thus even
though he was not in the possession of the jewels at the time of making the pledge, it was
still valid

Who is a Pawner and Pawnee?

Pawner: The pawner is the individual who offers the pledge as
collateral to obtain a loan. The pawner retains ownership of the
pledged item while it is in the lender’s possession. The pawner
typically pays interest on the loan and is responsible for repaying
the borrowed amount within a specified period. Please repay the
loan within the agreed-upon time to avoid the loss of the pledged
item.

Pawnee: The pawnee, also known as the lender or pawnbroker, is

the person or institution that accepts the pledged item and provides
the loan. The pawnee holds the item as security until the borrower
repays the loan in full, including any accrued interest. If the
borrower defaults on the loan, the pawnee has the right to sell the
pledged item to recover the loan amount and any outstanding
interest.

RIGHTS OF PAWNOR AND PAWNEE

Provisions regarding the rights of the pawnee (lender) and the
pawnor (borrower) concerning the pledged merchandise are outlined
in several sections.

Rights of Pawnor

The rights of the pawnor are:

1. Right to Retain Merchandise (Section 173) The pawnee

can retain the pledged goods until the loan is due. This
includes keeping the goods for the interest on the debt and
any expenses incurred for their preservation. Additionally, the
pawnee can exercise a specific lien solely over the
merchandise.
2. Right to Retain Ensuing Advances (Section 174)
Generally, the right to retain the pledged merchandise also
 extends to any money lent by the pawnee to the pawnor after
the pledge date unless there is a contract stating otherwise.
3. Right to Extraordinary Expenses (Section 175)The
pawnee can seek compensation for any extraordinary
expenses incurred in preserving the pledged goods. However,
the pawnee does not have the right to retain the goods; they
can only sue for reimbursement of the expenses.
4. Right Against the True Owner (Section 178A)The
contract remains valid if the pledger’s title to the pledged
merchandise is defective but obtained under a revocable
contract. In such cases, the pawnee can obtain a valid title to
the pledged goods if they act in good faith.

If the pawnee makes an unauthorised sale of the pledged goods

without providing proper notice and time to the pawnor, the pawnor
has the following rights:

 The right to initiate legal proceedings to redeem the goods by

paying off the debt.
 The right to claim damages and losses based on conversion,
i.e., unauthorised disposal of the pledged goods.

Rights of a Pawnee

The rights of the pawnee are:

1. Right to Receive Back the Products The pawnor has the

right to receive the pledged goods back once they have
fulfilled their promise or repaid the loan and any interest owed.
2. Right to Retain Goods until Payment The pawnee has
the privilege to hold the pledged merchandise until the
repayment of the debt, including the principal amount, interest
and other expenses related to those goods. For example,
suppose Mr X pledges his gold jewellery to a bank for a loan. In
that case, the bank has the right to retain the jewellery until
the loan amount and accumulated interest are repaid.
3. Right to the Redemption of Debt If the pawnor fails to
fulfil their promise or repay the debt within the agreed-upon
time, the pawnor has the right to redeem the pledged
merchandise before it is sold. However, the pawnor is
responsible for any expenses incurred due to their default.
4. Right to Maintenance and Preservation of
Merchandise The pawnee has the right to ensure the
pledged goods are properly maintained and preserved. They
may seek reimbursement for any extraordinary costs incurred
but cannot retain the goods.
 5. Rights of the Ordinary Debtor The pawnor possesses
certain rights similar to those of a regular debtor as provided
by applicable debtor protection laws.
6. Right to Suit The pawnee can file a lawsuit to recover the
debt while holding the pledged goods as security. They can
sue for the sale of the pledged goods and the recovery of
money owed to them.
7. Right to Sell The pawnee has the privilege to sell the
pledged goods after giving the pawnor reasonable notice and
sufficient time. After the sale, the pawnee can sue the pawnor
for any deficiency, if applicable and must return any excess
proceeds from the sale to the pawnor.

Duties of the Pawnor

1. Duty to Reimburse Standard and Extraordinary

Expenses The pawnor is responsible for reimbursing the
pawnee (lender) for any extraordinary expenses incurred by
the pawnee in preserving the pledged goods. For instance, if
the pawnee pays for the food and shelter of a cow pledged by
the pawnor, the pawnor must repay these expenses to the
pawnee.
2. Duty to Repay the Debt and Any Interest Due The
pawnor is obligated to repay the debt or fulfil the promise
made concerning the pledged goods. For example, if the
pawnor pledges a gold chain as security for a loan, they have a
duty to repay the loan amount to the pawnee.
3. Duty to Pay Claims and Damages or Compensation to
the Pawnee The pawnor must disclose any material faults or
risks associated with the pledged goods that could potentially
harm the pawnee or the goods’ intended use. If the pawnee
incurs legal damages due to the pawnor’s merchandise, the
pawnor must compensate the pawnee for such losses or
damages.

Indemnify the Pawnee

If the pawnee suffers any losses due to defects in the pawnor’s title
to the pledged goods, the pawnor must indemnify the pawnee for
such losses. This duty ensures that the pawnee is protected if any
problems arise with the ownership or legal status of the pledged
merchandise.

Duties of the Pawnee

The duties of the pawnee are:

 1. Duty to Take Charge of the Pledged Goods The pawnee
is required to take possession and control of the pledged
goods. The pawnee must exercise the same care and prudence
in safeguarding the goods as they would with their belongings.

Case Law Example:

In the State Bank of Saurashtra v. Chitranjan Rangnath Raja

and Anr., the bank acted as the pawnee, and the borrower was the
pawnor. The pawnor 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 filed a case against the pawnor
to seek reimbursement of the loan amount. However, the court
dismissed the petition because the bank, as the pawnee, lost the
borrower’s goods, making it unable to recover its payment.

2. Duty to Not Make Unauthorised Use of the Pledged

Goods The pawnee is prohibited from using the pledged
goods for any purpose other than what is specified in the
pledge contract. The pawnee has no right to utilise the goods
unless authorised by the pawnor.

Illustration:

If A pledges their car to B as security for a loan of Rs. 90000 and B

uses the car as a taxi without A’s consent, B would be held
responsible for the unauthorised use of the car.

3. Duty to Return the Pledged Goods The pawnee has a

duty to return the pledged goods once the purpose of the
pledge has been fulfilled. The pawnee has no right to use the
goods unless authorised by the pawnor.

Illustration:

If A pledges their watch to B as security for a loan of Rs. 2000, B has

to return the watch to A once A repays the loan amount.

4. Duty to Return any Accretion to the Goods The pawnee

must return any additional value that accrues to the pledged
goods. The pawnee must give back to the pawnor any value
increase or additions that occur while the goods are in their
possession.

Illustration:
If A pledges their cow to B as security for a loan of Rs. 80000 and
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.

5. Duty to Not Mix the Pledged Goods The pawnee must

avoid blending or mixing the pledged goods with their own
goods. The pawnee should keep the pledged goods separate
and distinct from their personal belongings.

Illustration:

If A pledges 100 litres of gasoline to B for a loan of Rs. 13000, it is

B’s duty to avoid mixing the gasoline with their supply.

Conclusion

The contract of pledge establishes certain rights and duties for both the
pawnor and the pawnee under Contract Law. The pawnor has the right to
receive back the pledged goods upon fulfilling the promise or repaying the
debt. They also have a duty to reimburse standard and extraordinary
expenses incurred by the pawnee, repay the debt and any interest due,
pay claims and damages to the pawnee if necessary and indemnify the
pawnee for any losses caused by defects in the pawnor’s title to the
goods.

On the other hand, the pawnee has the right to retain the pledged goods
until the payment of the debt, including interest and expenses. They also
have the right to retain any subsequent advances made by the same
pawnor. The pawnee has a duty to take charge of the pledged goods, not
make unauthorised use of them and return the goods to the pawnor once
the purpose of the pledge is fulfilled. They must also return any accretion
or increase in value to the goods and refrain from mixing the pledged
goods with their own.