WHAT IS PLEDGE UNDER THE INDIAN CONTRACT ACT?

WHAT IS PLEDGE UNDER THE INDIAN CONTRACT ACT?

Pledge of Contract Law- Pawnor, Pawnee Rights and duties

Introduction-

Every human being has contracted as an imperative part of their lives. It has normalized to the extent that many people are engaged in the contracts without even knowing the legal support which they can seek, in case of any wrong. From purchasing a product to rendering a service, hiring some property on rent to borrow money in exchange of some property, these all are categorized as a contract. In this article, we will be talking about a type of contract called pledge. ‘Pledge’, the name suggests of some undertaking or a promise made by a person. In the contract, the term Pledge is somehow similar. When a person enters into a contract to borrow a specific amount of money for a specific period of time, for creating the essence of faith from the part of the lender, he deposits any of his property as a surety. This is known as a pledge. It denotes that, the person (borrower) is responsible to pay his (lender) money back. In case of failure, the lender is entitled to recover his money from the property of the borrower. Though it is similar to the bailment, but it is not exactly what bailment is.

Also Read: CONDITION AND WARRANTIES ON SALE OF GOODS

Pledge under the contract act- 

A pledge is defined under section 172 of the act. In this section, the bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. A pledge is characterized as a type of bailment, but the former is bifurcated from the latter on the basis of an object of the delivery. It is also called by the name ‘Pawn’.

Parties to the pledge–

(a). The person delivering the goods is called “Pawnor”.

 (b). The person to whom the goods are being delivered is called “Pawnee”.

A pawnor is entitled to pay back the borrowed sum to the pawnee within the time ascertained in the contract made between them. After the lapse of time, a pawnee has the right to take legal action over the pawnor for recovery of his money.

Illustration-

If Ram delivers some gold to the bank for the purpose of borrowing some amount in exchange, here Ram is the pawnor and the bank is the pawnee. The bank is entitled to recover the money from within the specified date along with the interest (if applied) from Ram. If the latter fails to do so, the former can take steps whichever is suitable.

Also Read: Condition and warranties on sale of goods

Ingredients of Pledge-

• Delivery of property- The property pledged must be delivered from the pawnor to the pawnee. Along with the property, the possession is also transferred. If any contract is formed, where transfer of money is involved and conveying of property is not made, then it won’t be considered as a pledge. The delivery may be actual or by attornment. The direct shifting to access of the property to the pawnee is called actual / constructive delivery. The other type includes the delivery made by the third party on the behalf of the pawnor.

In case of pledge by hypothecation- The pledger is allowed to keep the property with them. These pledges are meant for special purpose. It does not counter the purpose of pledge in any manner. For example- The captain of a ship pledged his chronometer with the shipowner who allowed him to use the instrument for the purpose of a voyage. The captain pledged it over again with another person.

• Performance of contract- Pledge is a carriage pursuant to a contract, and it is necessary for a valid contract that the delivery of chattel must take place. But, the simultaneous delivery of the property and the advancement of loan is not necessary. The delivery can be either before or after the advance.

• Property must be goods- This ingredient brings the basic bifurcation between pledge and bailment. The property which is being transferred must be goods, that is, they must be movable in nature. When properties like ornament, vehicles, etc are put as a surety, then the contract is termed as a pledge.

In case of any robbery, where the culprit robs all the ornament of a lady on the gunpoint, with a condition that he will only spare her if she will transfer her ornaments to the robber, this won’t be termed as a pledge.

• Existence of the property- The asset pawned must be in present existence. One cannot pledge over a property he is not owning at the moment or it is not existing. A mere possibility of it being purchased in the future is not a ground for a pledge.

  Rights of a pledgee:

1. Right to sell² – If the pledger makes default in payment of the debt, or performance, at the specified time, in respect of which the goods were pledged, the pledgee can bring up a suit against the pledger for not paying the debt. In the case of default, the pledgee can sell of the property after giving a notice to the pledger.
2. Right to recover extraordinary expenses³– The pawnee is entitled to receive all the expenses incurred by him for the maintenance of the property delivered.
3. Right to Lien- The pledgee can retain the goods for not just the payment of debt, but also to incur the interest implied on the debt.

Rights of a pledger:

1. Right to get back goods- The pawnor has the right to get his goods back after the payment of all of his dues.

• Preservation and maintenance of goods- It is a right of the pledger that his goods are safely stored and maintained.

• Right to get increase in the goods- It is the right of the pledger to get back the good pledged along with the increase in the good, if any.

Example- A man pledged his cow to the pawnee to get some loan. If the cow gives birth to a calf within the period of pledge, after the payment, the pledger is entitled to get that cow back along with the calf.

• Right to redeem- If the pawnor makes default in payment of the debt or performance of the promise at the given time, he may redeem the goods pledged at any time before the actual sale of them.

Duties of the Pawnor-

1. Indemnify the pawnee- The pawnor must indemnify the pawnee if any loss has been incurred by the latter due to the defect in the goods.

• Disclose faults in the goods- He must disclose if the goods have any fault in them which may extra expenses to the pawnee.

• Pay all the dues within specified period- He/She must pay all the dues (debts including extraordinary expenses) to the pawnee.

    Case law- Lallan Prasad v Rahmat Ali⁴

   Facts- The defendant borrowed Rs. 20,000 from the plaintiff on a promissory note and gave him aeroscrapes worth about Rs 35,000 as security for the loan. The plaintiff sued for recovery of the loan, but was unable to produce the security, sold it, and, therefore, his action for the loan was rejected.

  Judgement- Shelat J. cited that ‘If a creditor holding security sues for the debt, he is under an obligation on payment of the debt to hand over the security, and that if, having improperly made away with the security he is unable to return it to the debtor he cannot have judgement for the debt’⁵.

Conclusion- 

            Contract, being an important part of life is practised in so many forms. The main purpose of the contract is to bind the parties under any obligation. In the above topic, which is Pledge, the main purpose is to lend the money from the pledgee. As security, and to create responsibility in the minds of the borrowers, they (pawner) are obliged to transfer any goods to the pawnee. Pledge is similar to the bailment, but the major difference is about the nature of the goods pledged. Both the parties to the contract have certain rights and duties. This is how a pledge is made fair and successful.     

Author: Vasudha Priyansha is a 3rd year under graduate student pursuing B.com llb from MM deemed to be University, Ambala, Haryana

1. Section 176 of the Indian Contract Act, 1872
2. Section 175 of the Indian Contract Act, 1872
3. AIR 1967 SC 1322.
4. Pg. 723, Contract and Specific Act by Avatar Singh

                                                                References

1. Singh Avatar – Contract & Specific Relief Act
2. http://www.legalserviceindia.com/legal/article-1361-contract-of-pledge-features-and-distinctiveness
3. www.lawtimesjournal.in
4. www.blog.ipleaders.in
5. www.indiankanoon.com
6. www.lawnn.com