Pledge: Rights of Pledger and Pledgee

What is Pledge? What are the Rights and Duties of Pawnor and Pawnee?

Introduction:

Pledge or Pawn is special kind of bailment and the chief basis of distinction is the object of contract. So when the object of the delivery of goods is to provide a security for a loan or for the fulfillment of an obligation, that kind of bailment is called pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge.

The bailor in this case is called the pawnor or pledger. The bailee is called the Pawnee or pledgee. (Sec 172) Under Pledge one person transfers possession of some goods to another to secure the payment of debt or the performance of a promise. In case of pledge the goods are deposited as security to get a loan. If there is no transfer of possession of goods, there is no pledge.
pledge is bailment and purpose of creation of pledge is security for payment of debt as is defined in S. 172 of Contract Act, 1872. [2015 CLD 829]

Relevant Provisions:

Sections 172, 173,174, 175, 176, 178-A and 179 of the Contract Act, 1872.

Pledge Meaning:

According to Oxford Dictionary of Law:

"An item of goods transferred by the owner (the pawnor) to another (the Pawnee) as security".

Contents

Pledge Definition:

(i) According to Black’s Law Dictionary:
A bailment, pawn or deposit of personal property to a creditor as security for some debt or engagement.
(ii) According to Section 172 of the Contract Act, 1872:
The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailor in this case is called the pawnor. The bailee is called Pawnee.
Simple Words Definition:
A pledge is a special form of mutual benefit bailment by which one Person transfer possession of some articles to another to secure the payment of debt or the performance of a promise.

Example of pledge:

A borrows Rs. 1000 from B and keeps his watch as security for payment of the debt. This bailment of watch is called a pledge.

Essential Ingredient/Features of a Contract of pledge:

The essentials of a Pledge are as under:

(1) Movable Property:

The pledge is concerned with only movable property. This includes any kind of goods, valuable, documents for title, e.g., railway receipts bills of lading etc.

(2) Limited Interest:

When a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest only.
Example: ‘A’ gives his Radio to ‘B' for repairs. ‘A’ does not pay Rs. 100/as repair charges to ‘B’. ‘B' pledges Radio with ‘X' and borrows Rs. 1000/-. The pledge by ‘B' with 'X’ is valid up to Rs. 100/-

(3) In Pursuance of Contract:

According to Lord Bankers, “Pledge is a conveyance pursuant to a contract, and it is essential to a valid pledge that delivery of the chattel shall be made by the pledger to the pledgee in pursuance of the contract of pledge.”

(4) Transfer of Possession:

Under the Pledge, only the possession of goods is transferred by the Pawnor to the Pawnee. The delivery of Possession can be actual or constructive e.g.

(i) Delivery of the key of godown where goods are stored is an example of Constructive delivery.
(ii) While the delivery of goods in the bank godown is an example of actual delivery.

(5) No Transfer of Ownership:

Under the Pledge, the ownership of goods remains with the pawnor. Only possession of goods is transferred and not the title thereto.

(6) Not mere Custody:

Persons who have the mere custody of goods cannot Pledge them. For example a servant in-charge of his master’s goods cannot make a valid Pledge of them.

Parties to Pledge or Pawn:

(i) Pawnor/Pledger: i.e. the person pledging the goods.
(ii) Pawnee/Pledgee: i.e. the person to whom goods are pledged.

Rights of Pawnee/Pledgee:

The rights of the Pawnee are as under:

(1) Right To Retain Goods:

Section 173 says that the Pawnee can retain the goods pledged until his dues are paid. He can retain them not only for payment of debt or performance of promise, but for the interest due on the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of goods Pledged.

(2) Right to Retention for Subsequent Advances:

When the pawnee lends advances to the same pawnor after the date of the pledge, it shall be presumed that the right to retain over the pledged goods extends even to subsequent advances. This presumption can be rebutted only by a contract to the contrary. (Sec 174).

Example:

‘A’ borrows Rs. 5 Lac from 'B' on 5" April and pledges his car Subsequently on 5" July ‘A’ borrows another sum of Rs. 4 Lac from ‘B’. ‘A repays the first debt in full. ‘B’ can retain the car against his claim for second loan.

(3) Right to extraordinary expenses:

The Pawnee also has the right to recover from the Pawnor extraordinary expenses incurred by him for the preservation of the goods pledged’. But he cannot retain the goods, if such expenses are hot paid. He has only a right to sue the Pawnee for recovery of such extraordinary expenses. (Sec. 175)

(4) Right to sue and Sell The Goods Pledged:

If the Pawnor makes default in the payment of the debt or performance of the promise, the Pawnee may sell the thing pledged, after giving to the Pawnor, a reasonable notice of his intention to sell.
In connection with the right of sale, the following points must be noted: (Sec 176)

(a) The reasonable notice is necessary. A sale without notice is void.
(b) The Pawnee cannot sell the goods to himself. If he does so then such sale is void. The Pawnor can recover the goods on paying the amount due.
(c) If the proceeds of such sale are less than the amount due he can recover the balance from the Pawnor. But if there is surplus, he must pay to the Pawnor.

PAWNEE’S/PLEDGEE’S RIGHT WHERE PAWNOR/PLEDGER MAKE DEFAULT:

According to Section 176 of the Contract Act, 1872; where the pawnor fails to redeem his pledge, the pawnee/pledgee acquires the following rights.

(i) He may file a suit against the pawnor/pledger upon the debt of promise.
(ii) He may also retain the goods pledged as a collateral security.
(iii) He may sell goods pledged after giving the pawnor/pledger a reasonable notice of sale.
(iv) He can recover from the pawnor/pledger any deficiency arising on the sale of goods by him.

Duties/Liabilities Of Pawnee or Pledgee:

The duties of Pawnee are as follows:

Duty To Perform Contract:

It is the duty of the pawnee/pledgee to perform the contract according to its terms and conditions and Not to do any act inconsistent with the terms of the contract.

Duty To Take Reasonable Care:

The pawnee/pledgee is bound to take reasonable care of the goods pledged with him.

Duty Not To Use Goods:

The Pawnee/pledgee must not use goods pledges, and if does, so he would be responsible for damages and any loss occasioned by such uses.

Duty Not To Transfer:

It is the duty of the Pawnee/pledgee not to transfer the goods to third party without the Consent of pawnor/pledger.

Duty Not To Mix Goods:

It is the duty of the pawnee/pledgee not to mix the pledged goods with his own goods.

Duty To Return Goods:

It is the duty of the pawnee/pledgee to return the goods on receipt of his full dues.

Duty To Return Any Increase/Profit:

The Pawnee/pledgee is bound to return any increase / profit of the goods pledged.

Rights of Pawnor/Pledgor

The duties of pawnee are the rights of Pawnor. Pawnor / pledger is the person who delivers possession of his goods. He has the following rights:

(i) Right To Redemption Of Goods:

Section 176 of the Contract Act, 1872 lays down that if the pawnee makes an unauthorized sale e.g. without giving a reasonable notice, the pawnor/pledger can file a suit for redemption of goods, treating the sale as void after depositing dues with the court.

(ii) Right To Redeem The Debt:

Section 177 of the Contract Act, 1872 provides that a pawnor/pledger who makes default in payment of debt at the stipulated date, has a right to redeem the debt at any time before the actual sale of goods pledged.

(iii) Right to claim increase:

The Pawnor has the right to receive the pledged goods back along with accretion, if any, on making the full payment on stipulated date.

(iv) Right to claim damages:

If the Pawnee mixes the goods pledged with his own goods or converts into other forms, the pawnor has the right to claim damages.

(v) Reduction in Liability:

If the goods pledged are lost due to pledgee’s negligence, the liability of pawnor / pledger is reduced to the extent of value of such goods.

(vi) Extinction of Liability:

Pawnor/Pledger’s liability is extinguished, if Pawnee /pledgee is unable to return the pledged goods.

(vii) Reasonable Notice For Sale:

It is Pawnee/pledgee's duty to give reasonable notice to pawnor/pledger for sale of the pledged property if he defaults. The requirement of reasonable notice is a statutory night.
No hard and fast rule could be laid down in respect of what constituted "reasonable notice" and same depended on each particular case to determine whether notice given to pledger was reasonable within meaning of S. 176 of Contract Act, 1872 and it was not necessary for such notice to contain actual date and time of sale. Only requirement was that vide such notice, pledger should be given reasonable time to redeem property pledged and furthermore pledgee was not required to serve notice at the time of the actual sale. [2021 CLD 1422]

(viii) Right to Excessive Sale Proceeds:

The pawnor/piedgor's right to excessive proceeds by the sale of his pledged property in case of his default is justified.

(ix) Preservation and Maintenance:

The pawnor/pledger can enforce the preservation and property maintenance of the goods pledged.

(x) Right to Claim Damages:

If the Pawnee/pledgee mixes the goods pledged with his own goods, the pawnor/pledger has a right to claim damages.

Duties/Liabilities of Pawnor/Pledgor

The duties of pawnor/pledger are as follows:

(i) Duty to Compensate:

It is the duty of pawnor/pledgor to compensate the Pawnee/pledgee for extraordinary expenses incurred by him.

(ii) Duty To Complete The Contract:

It is the duty of the pawnor/pledger to meet his obligation on stipulated date and comply with the terms of contract.

Pledge by Non-Owner

The owners of goods can always make a valid pledge, but in the following cases pledge made by non-owners will also be valid.

(1) Mercantile agents:

According to Section 178, “a Mercantile-agent who is, with the consent of the owner, in possession of the goods or the documents of title to goods (e.g. railway receipt) can make a valid pledge of the goods while acting in the ordinary course of business of mercantile agent. Such a pledge will be valid provided that the Pawnee has acted in good faith and did not have at the time of the pledge notice that the Pawnor had no authority to pledge the goods.”.

Illustration:

A French company sent to their London agents certain pictures, some being for exhibition only, but the agent pledged them, the pledge was held to be valid. (Moddi vs Pall Mall Deposit & Forwarding Co.)

(2) Person in Possession under voidable contract:

A person having possession of goods under a voidable contract can make a valid pledge of the goods, provided the contract has not been rescinded at the time of the pledge and he has acted in good faith and without notice of the pledger’s defect of title. (Sec 178-A).

Illustration:

(a) A purchases a ring from B by exercising coercion and pawns it with C before the contract is rescinded by B, the pledge is valid. C will get a good title to the ring and B can only claim damages from A.
(b) A fraudulent person, pretending himself 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 with the defendants. The pledge was held to be valid, it being made by a person in possession under a voidable contract. (Phillips vs Brooks Ltd).

(3) Pledgor Hearing Limited Interest:

Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Thus, a person having a lien over the goods may pledge them to the extent of his interest. (Sec 179)

Illustration:

A delivers a cloth to B, the tailor master, for making a suit and agrees to pay Rs. 150 as sewing charges. B pledges the suit with C for Rs. 300. The pledge is valid to the extent of B’s interest in the suit, namely Rs. 150 only (sewing charges). A can recover the suit only on paying Rs. 150 to C, the pledgee.

(4) Seller in Possession after sale:

A seller, in possession after sale, is no more owner of the goods but a pledge created by him will be valid, provided pawnee acted in good faith and had no notice of previous sale. The original buyer can obtain damages from the seller but cannot recover the goods from the pledgee.
S. 30(1), (sale of goods Act)

Example:

‘A’ buys goods from ‘B’ and pays for them, but leaves them in the possession of ‘B’ and then ‘B’ pledges the goods with ‘C’ who doesn’t know of the sale to ‘A’; the pledge is valid.

Illustration:

B buys goods from A and pays for them, but leaves them in the possession of A, and A then pledges the goods with C who does not know of the sale to B, the pledge is valid.

(5) Buyer in Possession before sale:

Where a buyer who has agreed to buy, obtains possession of goods with the seller’s consent, before the payment of price, pledges these goods to a pawnee who takes them in good faith and without notice of the seller’s right of lien or any other right of seller, the pledge is valid. [Sec 30(2) Sale of Goods Act]

Illustration:

(i) A agrees to buy a car if his, mechanic approves and obtains possession of the car and pledges it. The pledge is valid although at the time of pledge A was not the owner and later on also he does not become owner as the mechanic disapproves the purchase.
(ii) ‘A’ agrees to buy a motorcycle from ‘B’ if his mechanic approves and obtains possession of the motorcycle and pledges it with 'X’. The pledge is valid.

(6) Pledge by co-owner:

Where there are several joint owners of goods, one of the co-owners in sole possession of goods, with the consent of the others, can make a valid pledge of the goods.

Example:

‘A’ and ‘B’ jointly buy a motorcycle. ‘A’ keeps the motorcycle with him with B’s consent. ‘A’ pledges it with ‘X’. ‘B’ never gave his consent for such pledge. The pledge is valid.

Difference Between Bailment and Pledge:

Slight difference between bailment and pledge is that in the case of bailment deposit of goods is for a certain purpose to be returned after the purpose is accomplished but in case of pledge , goods are deposited as security to be kept till payment of debt is effected or a promise for which the goods were pledge d is performed, pledge is kind of bailment and security. [2022 CLD 320]

Conclusion:

To conclude that pledge or pawn is a special kind of bailment. In case of pledge, the goods are deposited as security to get a loan. The pledgee/pawnee has a right of sale of goods on default after giving a notice to the pledger/pawnee; but he does not have any right of using the goods pledged. In some cases, pledge can also be made by non-owners like mercantile agent etc.

Relevant Questions:

The most relevant questions from the examination point of view, answered and explained above are as under:

What do understand by the term pledge? Discuss the rights and duties of pledgor and pledgee.
Define pledge, What are the rights and duties of a Pawnee?
Discuss the circumstance under which a pledge made by non-owner becomes valid.
Briefly describe pledge of pawn & argument can pledge be made by non owners.
Pledge Or Pawn, Rights and Duties Of Pawnee and Pawnor
Define pledge and explain its essentials,
Describe the rights and duties of Power and Pawnee.
What is the effect of pledge by non-owner?

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