CONTRACT OF PLEDGE UNDER THE INDIAN CONTRACT ACT

Introduction

Pledge is a modified form of a contract of bailment, as inferred from its definition provided in Sec. 172 of ICA. It is defined as the bailment of goods that are delivered for purpose of security against a debt or performance. It differs from Bailment, in one aspect only, and that is its object. Here the bailor, who is referred to as pawnor, provides goods to the bailee, who is referred to as pawnee in pledge or pawn.  The liability is on the pawnor, to repay the debt or fulfill the performance, to retrieve goods of security from the pawnee.

Essentials of a Pledge

  1. Delivery of goods

The property that is pledged to the pawnee should be delivered to him, either in actual or constructive form. It is a necessary condition, as transfer of possession is a must to bring the pledge into being. Delivery of key of the warehouse where pledged goods are kept or delivery of documents of title of the property amounts to constructive delivery.

However, sometimes, goods that are pledged by the pawnor may remain in his possession, if permitted by the Pawnee for any special purpose, it does not nullify the obligations made under the pledge.

  1. In persuasion to contract

It is a core element of the pledge, to always deliver the goods following an existing contract of pledge, however, it is not necessary for both the contract and delivery to happen simultaneously. Similarly, in cases where an advance amount is already granted, and pledged goods are delivered after it, it amounts to a valid contract of a pledge as soon as an advance was made with intention of receiving goods as security.

Rights of the Pawnee

  1. Right of Retainer

As per Sec. 173 of ICA, 1872, the Pawnee or the receiver of pledged goods has the right to retain the goods pledged until the dues, along with interest and all the necessary expenses are paid by the pawnor. This right is not limited to dues but extends to any interest or expense that may have arisen to preserve the goods pledged. As per Sec. 174 of ICA, 1872, the pawnee is not entitled to retain the goods if there has been no prior contract in pursuance of it. In cases, where the advance has been granted by the pawnee, on basis of the security, such a contract is presumed under the law to exist. This right comes to an end, as soon as the pledger pays off all the dues, and recovers the pledged goods. In case of non-delivery of security by the pawnee, the pledger can seek remedy under Sections 160 and 161 of the Indian Contract Act. Along with the right to retain, the pawnee has several duties to comply with, such as the duty to care, and the duty to timely deliver the pledged goods, once the due has been paid off. Loss of goods pledged due to negligence of pledgee makes the pledgee liable to reimburse the value of such goods.

  1. Right to extraordinary expenses

As per Section 175, the pawnee has the right to obtain reimbursement for any such expenses that he had to bear to preserve the goods pledged. Such expenses, do not entitle him to retain the goods after the payment of a due amount, thus pawnee must sue to recover the lost cost.

  1. Right to sell the pledged goods

Under Section 176, when the pawnor makes a default in clearing the dues or performance within ascertained time, the pawnee has two options to proceed against the pawnor for the reimbursement of his dues. Either, he can retain the goods as security and sue the pawnor upon debt, or he can sell the pledged goods by giving reasonable notice to the pawnor. It is also clarified by way of this section, that if the amount obtained from such sale is lesser than the due amount, the pawnor remains in liability to pay off the remaining due, and if the proceeds obtained from the sale are greater than the due amount, they shall be returned to the pawnor. Both these rights, to proceed against pawnor if the default is done, are unrelated to each other. The right to sue can only be utilized after a set limitation period but it does not apply to the selling of goods to recover the debts or performance loss. The requirement of notice, in process of selling goods, is a mandatory provision. Before the sale is complete, reasonable notice shall be issued to the pawnor, indicating the desired sale, but it is not ought to contain the details of the sale. When a notice is issued, before the sale, and the pawnor fails to communicate or mitigate within a reasonable time, a sale cannot be held to be bad in law.

Pawnor’s right to redeem

According to Section 177 of the Indian Contract Act, the pawnor of the pledged goods has the absolute right to recover the goods once he pays off the due amount or carries out the promised performance. And if he has defaulted in payment or performance at a stipulated time, he can redeem them by making the payment of the due amount and any expenses that aroused due to his default in the meantime. One more condition is, that the goods must not have been sold by pledgee to someone else after proper issue of notice to pawnor or in other words, lawfully sold.

Relevant Judicial Precedents

In Morvi Mercantile Bank Ltd v Union of India, the Supreme Court of India held that delivery of railway receipt can be equated to the goods, which are meant to be delivered under the definition of the pledge. The pledge was held to be valid, thereby pledgee has all the rights against the third party in case of loss of goods in transit. In Blundell Leigh v Attenborough, one of the landmark judgments, laid down that contract of pledge and delivery do not need to be done at the same time. Delivery of goods may be done before the advance, which in turn constituted to pledge as soon as the advance is made.

Conclusion

Alike, several contracts covered under The Indian Contract Act, the contract of pledge has its relevance. It is a kind of contract of bailment of goods, where the purpose of the whole transaction is for the goods to act as the security to the promisor’s debt or performance. The one who gives the goods under pledge is known as pawnor, and the party to whom such security is given is known as pawnee. The owner of the good is a rightful pawnor, but any other party equally authorized by the owner may also deliver goods under the pledge, provided that they act under good faith and authority. There are primarily two essentials of any pledge, the first being the delivery of goods to the pawnee. The delivery may be actual or constructive, depending upon the terms of a contract. Another essential is a contract. A contract thereby must be a valid one, fulfilling all the essentials and such delivery must be upheld in fulfilment of that contract. Order of their happening is not vital under pledge. Both the parties, in their interest, are provided with certain rights. Pawnee, a party whose debt is yet to be fulfilled, has the right of retainer, which allows them to not return the pledged goods until the amount of debt with interest and necessary cost has been paid off. The pawnee, also has the right to demand a return for expenses, that he invested to preserve the pledged goods. He also is provided with the right to sue or sell the pledged goods when the pawnor defaults in payment or performance. Similarly, the pawnor has the right to redeem goods, even after the stipulated date, by making required payments. Provided, that such goods have not been lawfully sold with reasonable notice.

 Author(s) Name: Huda Naaz (Faculty of Law, Aligarh Muslim University)