Contract of Pledge – Everything You Need To Know

Contract of Pledge, as the term implies “pledge” which means to give the goods as security. So, every good which is bailed for the purpose of getting a loan by giving the goods as security or for doing any promise is termed as a contract of pledge.

Note– A Contract of Pledge can only be made for movable goods.

Documents of title like Railway Receipt and Bill of lading will be considered as movable item.

Every Contract of Pledge will be a part of Contract of Bailment, but every Contract of Bailment will not be part of Pledge.

Contract of pledge is defined under Sec- 172 of the Indian Contract Act,1872 as

Sec-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”.

Illustration– Here, in Contract of pledge, the purpose behind keeping the goods is the Security of a loan and to for the performance of a promise. The pawnee has the right to sell the goods pledged on the failure of the pawnor to pay back the debt, and also the pawnee does not have the authority to use the goods.

Essentials of a Valid Contract of Pledge.

1. The delivery of possession of goods by the Pawnor to the Pawnee.

The delivery of the goods can be made in any ways actual delivery (when the goods are physically delivered), constructive (when the goods are not physically delivered, whereas the legality of the possession changes), and by attornment (where the goods are received by 3rd person on behalf of the Pawnee).

2. The delivery of possession of goods must be made upon a contract.

3. Goods should be given only as a security for loan or for performing any promise.

4. Goods must be returned, by the Pawnee to the Pawnor after the debt is clear.

5. Goods Pledges must be movable goods and not immovable goods.

Rights and Duties of Pawnor.

The Rights of Pawnor is covered under sec- 177 of the Indian Contract Act, 1872.

1. Right to Redeem the goods. Sec- 177

Sec- 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 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.

Illustration– The Right to Redeem the goods is performed by the pawnor when he/she fails to pay the debt on the given the time.

The Pawnee in Sec-176 of the Indian Contract Act, 1872 has the right to sell the goods pledged by the pawnor as security, if he/she fails to pay the debt.

The pawnor has the right to redeem the goods by paying the debt before the Pawnee could make any sale of the goods. He/She has this power in existence until the sale is not made, if it is sold by the pawnee, then the right to redeem the goods will not be existence.

For eg- If Mr A takes a loan of Rs. 1 Lakh from bank X, and in return pledge his car to the bank. And the time is specified in the contract that after 2 months from the date of the contract came into existence, he has to pay the debt.

But, due to some circumstances, he couldn’t pay the debt, due to which the pawnee gave notice to him under sec-176 of ICA, 1872 for the sale of the goods.

In this situation, Mr A has the power to redeem the goods pledge under sec-177 of ICA, 1872 before the sale is made by the Pawnee, by paying off all the debt on his side.

The Duties of the Pawnor is covered under sec- 175 and 176 of the Indian Contract Act.

1. To Pay the arrear back to the pawnee.

The Pawnor has the duty to pay the amount back to the pawnee after the time of the contract is over. Here, the amount includes the Principal amount + interest + extraordinary expenses, which is to pay to the Pawnee by the Pawnor.

For eg- If Mr A, takes a loan of 10,000 at the rate of 10% interest per year for 1 year, by pledging his car to bank X. The bank takes proper care of the car, which an ordinary man would take, due to which they have to spend Rs. 5,000.

Now, here Mr. A is liable to pay the amount of Rs 10,000 + 1,000 (rate of interest) + the amount of Rs 5,000 as extraordinary expenses.

2. To Pay the extraordinary expenses which the Pawnee has to spend for taking care or getting the possession of the goods. Sec- 175

Under Sec- 175, it is been mentioned that Pawnee is entitled to receive all the expenses which have been incurred by him to take proper care of the goods to preserve them.

like, in the above-mentioned example, the bank has to find a safe place to keep the car from theft and natural calamity, for which they need to rent a shelter for it, along with that after every week they need to start the vehicle to keep it in a running position, for which they required fuel in the car.

These all expenses of shelter, fuel, and transportation will come under extraordinary expenses covered in Sec-175, which the pawnor has to pay.

3. To Pay the left amount, after the sale of the pledged goods. Sec- 176

Under Sec- 176 of ICA, 1872 it is mentioned that if the Pawnor fails to pay the amount, then the pawnee has the right to sell the goods, after giving prior notice to the pawnor.

The crux of this provision is that, if after the sale of the goods the amount acquired is more then, the pawnee has to return the extra amount back to the pawnor, but if after the sale, the amount acquired is less than the required amount then, the Pawnor is still liable to pay the debt to the pawnee.

For eg- In the above-mentioned example in point no-1, the liability of the pawnor Rs. 16,000. If he fails to pay the debt, then the bank has the right to sell the car after giving prior notice.

If the car is sold for Rs. 20,000 then the bank is liable to pay the extra amount of 4,000 back to the pawnor. but if the sum acquired is only Rs. 10,000, then the pawnor is still liable to pay the left amount of Rs. 6,000 to the bank.

4. To disclose faults in the goods pledged.

The pawnor has the duty to disclose all the faults in the goods which he is going to pledge because, if he will to do the same, it will hamper the pawnee to make a proper evaluation of the goods.

Rights and Duties of Pawnee.

The Rights of pawnee is covered under section- 173, 174, 175 and 176 of the Indian Contract Act, 1872.

Sec- 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 of the possession or for the preservation of the goods pledged.

Illustration– The section says, that pawnee has the right to keep the good by him, if the pawnor fails to pay the amount.

For eg- Please refer the example of point no-1 of the duties of the pawnee.

Sec- 174 Pawnee not to retain for debt or promise other than that for which goods pledged. The 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 other than the debt or 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.

Illustration– This section talks about the pawnee right to retain the goods for subsequent advances. If in the contract it is not written to the contrary, that the pawnee can retain the goods for subsequent advances then, he/she does not have the right to retain them.

But if it is written, then he/she can retain the goods.

Let’s understand the section with the help of a hypothetical situation-

Let’s say Mr. X takes a loan of Rs. 10 lakh from a Money lender by giving his his tractor on pledge on 01.05.21.

He, (Mr. X) again on 25.06.21, takes a loan of Rs. 5 lakh from the money lender. and again on 30.9.21 for Rs. 2 lakh.

Here, in this situation, the goods were pledged for the 1st loan which takes place on 01.05.21, and not for another subsequent loan which the pawnor has taken from him on 25.06.21 and on 30.09.21. So, the moneylender does not have the right to retain the goods for the subsequent loans.

but it is written in the contract contrary, that for every subsequent advance the pawnee can retain the goods, then he would have the power to retain them, otherwise not.

Sec- 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.

Illustration– The pawnee has the right to get the necessary expenses which he/she have incurred to keep the goods safe and secure.

please refer point-2 of the duties of pawnor, paragraph-2 for better understanding.

Sec- 176 Pawnee’s right where pawnor makes default– If the pawnor makes default in payment of the debt, or performance; at the stipulated time or the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or 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

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.

Illustration– The Pawnee has the right to bring a suit against the pawnor, or may retain the goods, or may sell the goods on prior notice if he fails to pay the amount back on time.

Let’s understand it with a help of a example-

If Mr X takes a loan of Rs. 5,00,000 from the Bank of Punjab, on giving his car on the pledge, for one year, then he needs to return the amount on the stipulated time.

But if he fails to pay back the loan even after making reasonable reminders by the bank, the bank can sue the pawnor (Mr X) in court. Along with that, they can keep his car in their possession until he pays the full amount back to the bank.

Along with, if he fails to pay, the bank can also sell his car after giving prior notice.

If the amount to be paid is Rs. 6,00,000 after all the expenses and interest, and the sale is made of Rs. 5,50,000 then, Mr X is still liable to pay Rs. 50,000 more. but if the sale is made of Rs. 6,50,000 then the bank has to pay the extra sum back to Mr X.

The Duties of pawnee–

1. The Pawnee is not allowed to use the goods pledged.

If Mr. X is giving his car on pledge to the bank, then bank is not allowed to use the car for his own use.

2. To take reasonable care of the pledged goods.

If Mr X is giving his car on a pledge to the bank, then the bank is required to take proper care of the car, as a man of ordinary prudence would take of his own goods in different circumstances.

The care changes according to the nature of the goods, Perishable and Non- Perishable.

More care is required in Perishable goods.

3. Not to mix the pledged goods with some other goods.

If Mr X is giving his stock of potatoes on a pledge to the bank, then the bank is not allowed to mix the potatoes with some other similar goods, pledged by somebody else.

If the bank does so, then pawnor is not liable for the damages and expenses for separation, infact bank would compensate the pawnor.

4. To return the increase sum received after sale of the pledged goods.

Please refer the illustration of sec- 176 last paragraph for better understanding.

5. To return the pledged goods.

The Pawnee (bank) should return the goods, after pawnor made full payment of the debt.

Difference between Bailment and Pledge.

Bailment	Pledge
The Contract of Bailment is defined under Sec- 148 of the Indian Contract Act, 1872.	The Contract of Pledge is defined under Sec- 172 of the Indian Contract Act, 1872.
The purpose behind bailment can be anything, other than Security of loan and performance of a promise.	In Pledge, the purpose for bailment is Security of loan and performance of a promise
In bailment, the bailee has no right to sell the goods. but he has the right to use the goods.	In pledge, the pawnee has the right to sell the goods. but he has no right to use the goods.
In bailment, the person who gives the goods is called the bailor, and the person to whom the goods are given is known as the bailee.	In pledge, the person who gives the goods is called Pawnor, and the person to whom the goods are given is known as Pawnee.

Conclusion

Every contract covered in our Indian Contract Act,1872 is different from each other, same goes with the contract of bailment, the contract of pledge is somewhat similar to the contract of bailment, but the only difference between them is a contract of pledge is made on grounds of taking the loan from the party by giving goods as security for the loan, but in the contract of bailment the goods are given for some purpose other the security upon a contract.

So, please don’t intermixes the contract of bailment with that of contract of pledge. Contract of pledge is just a part of bailment.

To read Contract of Bailment: