CONTRACT OF PLEDGE

What is Pledge?

A special kind of ‘Bailment’.

A form of security/ assurance to assure that a person will repay a debt or perform an
act under contract.

Essentials:
a) Contract of Bailment
b) Delivery of goods
c) Transfer of possession
d) Purpose: Security as payment of debt or performance of an obligation
e) Two parties : Pawnor and Pawnee

Discussion: A borrows Rs. 5000 from B. B tells A that A will have to pledge his ipod as
security for repayment of the debt by a specific time. Pledge? Identify the parties.
What is Pledge?
Section 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” (pledger). The bailee is called the" pawnee“
(pledgee).”
• Security could be for : 1. Payment of Debt - or
2. Performance of a promise
• The transaction is pawn or pledge.
• Essential : Delivery - Actual or constructive

• Example : When the goods are in bulk and cannot be given possession a symbolic delivery is
sufficient - such as railway receipt (if in transit) – the intention matters
 Bailment Pledge

S. 148 - 171 S. 172 – 179

Any purpose – safe custody, benefit of Specific purpose – security or

the bailor/bailee performance of contract
The bailee can use the goods on the A pledgee can only retain
terms of the contract possession but not use the goods

No right to sell the goods Right to sell the goods if default or

pledger does not redeem within the
stipulated period

Lien on goods for labour and skill Right to Lien even for non-payment
of interest
 Who can Pledge?
• Owner or the Person or authorized by him can legally pledge.
• Latin maxim – Nem odat quod non habet –No one can give what he doesn’t
have.

• However, certain exceptions to this rule:

1. Mercantile Agent – S. 178
2. Pledge by a person in possession under voidable contract – S. 178A
3. A person having limited interest – S. 179
4. Pledge by co-owner, take his permission., if not then pledge valid only to
the extent of your interest.
5. Pledge by a seller in possession of foods after sale, Section 30(1) Sale of
Goods Act
6. Pledge by buyer in possession of goods, Section 30(2) Sale of Goods Act
Pledge by non-owners
1. “Mercantile agent" under Sale of Goods Act, Section 2(9) means a mercantile
agent having in the customary course of business as such agent authority either to sell
goods, or to consign goods for the purposes of sale, or to buy goods, or to raise money
on the security of goods.

S. 178. 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
authorized by the owner of the goods to make the same; provided that the pawnee
acts in good faith {honestly and not negligently} and has not at the time of the
pledge notice that the pawnor has not authority to pledge.
Essentials:
1. Agent for commercial purposes
2. Any pledge made by him is valid if:
3. Consent of owner to keep goods or documents in possession
4. When he is performing the duty in the ordinary course of business
(not when the goods have been given for his personal use and not as
an agent to transact for commercial purposes)
5. Pledgee acting on good faith – not dishonestly or malafide intention –
the pledgee believed him to be the agent authorized to do so
Pledge by non-owners
2) S. 178A. Pledge by person in possession under voidable contract –
When the pawnor has obtained possession of the other 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.

Essentials:
1. Pawnor acquired possession before rescindment under Section 19/19A
2. S. 19 – contracts without free consent
3. S. 19 A - Power to set aside contract induced by undue influence
4. Pawnee has good title – provided he acted in good faith.

Discussion: A contracts with B by fraud and obtains certain goods. A further, pledges those
goods to C. C was unaware of the logistics of the contract between A and B. Valid
Pledge?
– Valid, as long as the contract between A and B was not rescinded before A
contracted with C.
3) S. 179. Pledge where pawnor has only a limited interest -
Where person pledges goods in which he has only a limited interest, the
pledge is valid to the extent of that interest.
• Pledge by co-owner – with the consent of the co-owners can execute a valid
pledge – if not with consent only to the extent of his share.

• Pledge by seller who is in possession after sale, (Section 30(1) SOG Act) – a
seller, who is in possession of the goods after sale i.e. A sold the goods to B
but is still having the possession, as B hasn’t taken the delivery. He can
pledge the goods provided the pledgee has acted in good faith and had no
notice of the previous sale.

• Pledge by a buyer In possession before sale (Section 30(2) SOG Act) – A

buyer who is in possession of the goods, with the consent of the seller, but
has not paid the full price can make valid pledge, provided, the pledgee did
not have notice of the pawner’s defective title and acted in good faith.
 Revenue Authority Vs. Sundarsanam Pictures ( AIR 19668 Mad. 319)
• Facts: The producer of the film agreed to deliver fine prints of the film under production,
when the same are ready to a financer in return of finances.
• Issue: Is this Valid Pledge?
• Held: No, as there is no actual or constructive delivery of Goods.

Morvi Merchantile bank vs. Union of India (AIR 1965 J.C. 1954)
• Facts: The firm borrowed a sum of Rs. 20,000/- from the Appellant bank and gave the railway
receipts of the goods which were in transit to constitute a security for the loan. The goods
were lost during the transit.
• Issue: Delivery of Railway receipts constitutes as valid pledge?
• Held: Yes. They are enough to constitute a delivery.
 Purushotam Das Vs. Union of India (AIR 1967 All 549)
• Facts : A obtained certain goods from the railway on the basis of forged
railway receipts. The goods were then pledged with the defendants.
• Issue: In a suit by the railways to recover the goods question was whether the
pledge was invalid.
• Held: The pledge was invalid. The railway authorities could recover the goods.
Rights of Pledgee

Rights of Pawnee / Pledgee

1. Right to retain the goods – S. 173

2. Right to recover extraordinary expenses – S. 175
3. Right to sue and sell the pledged goods – S. 176
S. 173 - 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 to the possession or for the
preservation of the goods pledged.”

Discussion: A took loan from B to be repaid after a year. A agreed to pay an interest of
12% annually for default. Till A does not pay up, can B can retain the goods for this and
12% interest too ?

– However, the intention of the pawnee cannot be malafide.

- Interest should be agreed to beforehand, otherwise, the court decides a just interest
rate.
- Necessary expenses – which are so required to be carried out for the preservation.
- Ex – sugar storage - rodents free, pesticide free – This is necessary expense
Sec 174. Pawnee not to retain for debt or promise other than for which goods pledged –
presumption in case of subsequent advances -
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 debtor 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.
-somewhat similar to Particular lien – retain only those goods which were pledged for
that loan
- Bank exercises general lien by virtue of S. 171
- subsequently if more money has been advanced as loan, it is presumed that the same
goods act as security, unless a contrary contract – this of course has to be while the previous
contract still subsists – otherwise a new contract of pledge is needed

Eg. A takes loan from B of Rs. 3000/- to be payable after 6 months and pledges his watch. After
a month he takes another loan of Rs. 1500/-. This subsequent advancement will be with regard
to the same watch and B can retain the watch for this amount of Rs. 1500/- too.
S. 175. 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.

Example: Some plants were given as a security. The plant got infected.
Necessary would be – watering, manuring
Extraordinary would be- expecting something beyond the required like medical
treatment.
Right to retain goods due to:
1. Performance of the promise
2. payment of the debt
3. interests of the debt
4. necessary expenses
5. extraordinary expenses
Rights of Pledgee

S. 176. Pawnee’s right where pawnor makes default -

“If the pawnor makes default in:
1. payment of the debt,
2. or performance or the promise,
3. Violates the stipulated time in respect of which the goods were pledged,
The pawnee may:
1. bring as suit against the pawnor upon the debt or promise,
2. and retain the goods pledged as a collateral security;
3. or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

i.e., Retain goods+ Suit or Sell + Reasonable Notice

Also, If the proceeds of such sale are
1. less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance.
2. greater that the amount so due, the pawnee shall pay over the surplus to the pawnor.
• Discretion of the pawnee to sell the goods in case of default or retain and sue
• The right is alternative – The pawnee cannot retain and sell at the same time
• Reasonable notice before selling– telling the pawnor his intention of selling within a
period: can not be excluded by a contract to contrary
• No need for a notice before the institution of the suit. (T.R.S. Kotagi v. Tehsildar AIR
1985 Kant. 265)

• Discussion: A pledged goods worth Rs. 500 to B and took a loan of Rs. 1000/-. If B does
not take reasonable care, and the goods are damaged or lost or stolen. How much
money is A liable to pay?
A is now liable to pay only Rs. 500. If the pawnee has lost the goods by not
exercising due care, the pawnor is discharged to that extent
 • Central Bank of India vs. Sirigupta Sugars and Chemicals Ltd. (AIR 2007 SC 2804)
• Held: That the Pawnee, the Bank, had a lien on the goods which was not ordinary in nature
on the goods. And so long his claims was not satisfied, no other creditor of the pawnor had
any right to take away the goods or its price.

• Kuri Lal Rungta vs. Banarasi Devi ( AIR 1986 All. 94 )

• If certain securities have been deposited with the lender and it is further agreed that the
lender will have a right to lien over those securities, that does not debar the lender from
filing a suit against the borrower and obtaining a personal money decree against the
borrower.
Duties of Pledgee

Duties of the Pawnee

The duties are identical to the bailee:

- take care of the goods pledged as a reasonable and prudent man
- not make unauthorized use of the goods
- not mix the goods with his own without the consent of the pawnor
- duty to return the goods pledged n payment or the performance of the promise
( Aratibala Mohanty v SBI, AIR 1991 Ori 260 – where the pawnee having refused to perform his
obligation to redeliver the goods on debts being satisfied cannot claim an interest for the said
period.)
- To act in conformity with the terms and conditions of the contract of pledge
- Not to retain for debt or promise other than that for which the goods pledged – particular lien S.
174
 Rights of Pawnor / Pledger

S. 177. Defaulting pawnor’s right to redeem -

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,
on that case, pay, in addition, any expenses which have arisen from his default.

Essentials: Time is the essence of the contract

Time is stipulated for the payment of the debt, or performance of the promise
in relation to the contract of pledge
The pawnor makes a default
He may redeem (get back) the goods anytime
But before the Actual Sale
and pay additional expenses
• The pawnor has a right to insist on the pawnee to maintain goods in some
particular form, but he has to pay for the expenses – S. 173 and S. 175
• Right to redeem is not restricted only to the owner – what if the owner dies
– the widow, legal heirs can redeem

Discussion: A pledged his goods to B. A defaulted and B sent a notice stating

that he is willing to sell the goods and the same will be done on 30th of this
month. B has to travel and is unable to sell on the 30th. A has a right to redeem
his goods?

Yes, A does. He can redeem by paying the debt even after the 30th i.e. till the
actual sale. His right does not extinguish on the 30th.
 PAWNOR’S RIGHT TO REDEEM.
Lallan Prasad v Rahmat Ali. ( AIR 1967 SC 1322)
Held: The pawnor’s right to redeem is lost/extinguished only when
pawnee makes an actual sale of goods by the virtue of his right under
Section 176 of the Act.
When the pawnee files a suit for recovery of the debt, though he is
entitled to retain the goods, he is bound to return them on the payment of
the debt.
 Duties Of The Pawnor

Section 176: Not to make default in:

1. payment of the debt,
2. or performance or the promise,
3. No Violation of the stipulated time in respect of which the goods were pledged.
DISCRETION NOT TO SELL THE PLEDGED GOODS BUT TO RETAIN THEM AND
FILE A SUIT.

• Bank of Maharashtra v Racman Auto Pvt Ltd (Air 1991 Delhi 278)
• Held: Under section 176, the pawnee has a discretion to sell the goods if
pawnor makes a default. If the pawnee prefers or opts not to sell the goods,
he cannot be blamed for that.

• Bombay HC agreed with the same decision in the case of State Bank of India
v Smt. Neela Ashok Naik (AIR 2000 Bom. 151)

• Similarily in the case of K.M Hiyatulla v Bank of India (AIR 2001 Mad. 251) It
was held that the two remedies available to the pawnee are disjunctive in
nature.
• Central Bank of India v.s Grains and Gunny Agencies (AIR 1989 MP 28)
Facts: Due to the negligence of the pledgee bank, the pledged goods were lost. The bank was
requested by the pawnor to sell away the goods and to realize the balance, but the bank
failed to do so. Moreover, now the bank was not in a position to redeliver the goods on the
satisfaction of its claims.
Issue: Was the bank liable for the loss of the goods or was it still in position to seek
claims against the pawnor?
Held: Bank was liable for the loss and was not entitled to succeed in claims against the
pawnor.

 Prabhat Bank Ltd. Vs Babu Ram (AIR 1966 All. 134)

Fact : There was an agreement between the bank and the customer, authorizing the bank to
sell the securities pledged without any notice to the pawnor, if the credit balance of the
pawnor falls below a certain limit.
Held: It was held that such a provision is bad in law. It would be inconsistent with the
provisions of the Contract Act and would be void and unenforceable.
Difference between Pledge, Hypothecation and Mortagae

• These terms are used for a charge on the asset which is given by the
borrower to the lender as a security for a loan.
• Casually these terms are used inter-changeably when an individual or
corporation avails a loan and the bank keeps some assets as a
security, so that it will be able to sell it in case there is a default in
repayment.
Pledge : Gold Loan, Hypothecation : Car loan ,
Mortgage: House Loan