First-Year Law Notes & Flashcards

PLEDGE 

1. Meaning and Definition of Pledge

A contract of pledge is a specific type of bailment where goods are delivered as security for the payment of a debt or performance of a promise. Under Section 172 of the Indian Contract Act, 1872, the person giving the goods is called the pawnor, and the person receiving them is called the pawnee. The key feature is that ownership of the goods does not transfer; only possession is delivered. For example, if A borrows ₹50,000 from B and pledges his gold chain, A is the pawnor, B is the pawnee, and the gold chain is the pledged good.

2. Essentials of a Valid Pledge

A pledge must satisfy the general essentials of a valid contract (consent, lawful object, consideration, competence) and additional requirements specific to pledges:

• Delivery of Possession: The pledge requires delivery, which can be actual, constructive, or symbolic. Without delivery, there is no valid pledge.  
  Case Example: In Lallan Prasad v. Rahmat Ali (1967) , the Supreme Court held that delivery of possession is essential; absence of delivery invalidated the pledge.

• Purpose – Security for Debt or Performance: The goods must be delivered specifically as security for a debt or promise. Delivery for other purposes (like storage or repair) is a simple bailment.

• Return of Goods: After repayment or performance, the pawnee must return the goods to the pawnor.

• Ownership Remains with Pawnor: The pawnor retains ownership; the pawnee has the right to retain or sell only if authorized or upon default.

3. Statutory Provisions (Sections 172–181)

• Section 173 – Pawnee’s Right of Retainer: Pawnee can retain goods until payment of principal debt, interest, and necessary expenses for preservation.  
  Illustration: A bank can retain pledged jewellery until the borrower repays the loan and charges.

• Section 174 – Pawnee Cannot Retain for Other Debts: Goods cannot be retained for unrelated debts unless agreed. Subsequent advances are presumed secured by the same goods unless otherwise stated.

• Section 175 – Pawnee’s Right to Extraordinary Expenses: Pawnee can recover extraordinary expenses (e.g., damage repair) but cannot retain goods for non-payment of these expenses.

• Section 176 – Pawnee’s Remedies on Default: Pawnee may either sue the pawnor or sell pledged goods after reasonable notice. Any surplus from sale must be returned to the pawnor.  
  Case Example: K.M. Hidayathulla v. Bank of India (2001) confirmed that pawnee has independent remedies to sue or sell.

• Section 177 – Pawnor’s Right to Redeem: Pawnor can redeem goods before sale by paying the debt, interest, and expenses.

• Section 178 – Pledge by Mercantile Agent: Goods can be validly pledged by an agent with the owner’s consent, provided the pawnee acts in good faith.  
  Case Example: Morvi Mercantile Bank Ltd. v. Union of India (1965) validated pledging of documents of title by an agent.

• Section 178A – Pledge under Voidable Contract: If goods are obtained under a voidable contract and pledged before rescission, the pawnee acquires good title if acting in good faith.

• Section 179 – Pledge by Person with Limited Interest: Pledge is valid only to the extent of the pledgor’s interest in the goods.

• Sections 180 & 181 – Suits Against Wrongdoers and Apportionment: If a third party wrongfully interferes, both pawnor and pawnee can sue, and compensation is apportioned according to their interests.

4. Rights and Duties of the Pawnor and Pawnee

• Duties of Pawnor: Pay debt and interest, compensate expenses, disclose defects in goods.

• Rights of Pawnor: Redeem goods before sale, receive surplus if sale proceeds exceed debt, claim profits earned by pawnee from the goods.

• Duties of Pawnee: Take reasonable care, not use goods without permission, return goods after payment, keep pledged goods separate.

• Rights of Pawnee: Retain goods until debt, interest, and expenses are paid; recover extraordinary expenses; sell goods on default with notice; sue third parties who interfere with possession.

5. Difference between Bailment and Pledge

Basis	Bailment	Pledge
Purpose	Safe custody, repair, or specific reason	Security for debt or performance
Right to Sell	Cannot sell	Can sell on default (with notice)
Right to Use	As agreed between parties	Only if expressly permitted
Interest in Goods	Only possession	Special property: right to retain/sell
Governing Sections	Sections 148–171	Sections 172–181

6. Practical Examples

• Gold Loans: Individuals pledge gold to banks for loans.

• Pledge of Shares: Companies pledge shares as collateral.

• Agricultural Produce: Farmers pledge crops or warehouse receipts for seasonal loans.

1. Pledge by a Mercantile Agent (Section 178)

Definition :  
A mercantile agent is an agent who, in the ordinary course of business, buys or sells goods, receives or delivers goods, or handles negotiable instruments with the owner’s consent.

Rule :  
If the agent is in possession of goods with the owner’s consent, he can pledge the goods as security for a debt, provided the pawnee acts in good faith and is unaware of any defect in the agent’s authority .

Example:

• X owns a consignment of textiles and appoints Y as a mercantile agent to sell them.

• Y borrows money from a bank and pledges X’s textiles as security.

• The bank, acting in good faith, accepts the pledge.

• Outcome: The pledge is valid, and the bank can enforce its security.

Case Law: Morvi Mercantile Bank Ltd. v. Union of India (1965) – The Supreme Court held that pledging railway receipts (documents of title) by a mercantile agent is valid if done in good faith.

2. Pledge by a Person in Possession under a Voidable Contract (Section 178A)

Definition :  
When goods are obtained under a voidable contract (e.g., due to fraud, coercion, or misrepresentation) and the possessor pledges them before the contract is rescinded , the pledge can still be valid.

Rule :  
The pawnee acquires good title to the goods if he acts in good faith and has no notice of the defect in the pawnor’s title .

Example:

• A buys a laptop from B by misrepresenting his identity (voidable contract).

• Before the contract is rescinded, A pledges the laptop to C for a loan.

• C, unaware of any fraud, accepts the laptop as security.

• Outcome: The pledge is valid, and C’s rights are protected.

3. Pledge by a Person with Limited Interest (Section 179)

Definition :  
If a person has limited interest in goods (not full ownership), they can pledge only to the extent of their interest .

Rule:

• A pledge is valid only for the interest the pledgor has .

• The pawnee cannot claim more than the pledgor’s interest.

Example:

• A tenant possesses a piece of machinery belonging to a landlord under a rental agreement.

• The tenant borrows money and pledges the machinery.

• Outcome: The pledge is valid only to the extent of tenant’s interest (e.g., right to use during tenancy), not full ownership.

4. Pledge by a Finder of Goods

Definition :  
A person who finds goods can pledge them if they intend to return them to the rightful owner .

Example:

• A finds a valuable necklace on the street and temporarily possesses it.

• A pledges the necklace to B for a loan.

• Outcome: The pledge is valid only to the extent of the finder’s interest (i.e., the finder can’t give full ownership; rights are limited until the true owner claims the necklace).

Key Takeaways

7. Conclusion

A contract of pledge is an effective legal mechanism to secure debts or promises. The Indian Contract Act, 1872, provides a detailed framework protecting both pawnor and pawnee. Awareness of rights, duties, and statutory requirements ensures a fair and dispute-free process.

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