Understanding the Contract of Pledge: Rights and Obligations

INTRODUCTION

A contract of pledge is a type of special contract where the owner of goods (the pledgor) delivers movable property to another person (the pledgee) as security for a loan or debt. The pledge ensures that the pledgee has a legal right to retain possession of the goods until the debt or obligation is paid or fulfilled. It is a form of security interest used to guarantee the repayment of a loan or performance of an obligation. In a contract of pledge, the ownership remains with the pledgor, while possession is transferred to the pledgee. The pledgee has the right to retain the goods only until the debt is satisfied. If the pledgor defaults, the pledgee can sell the pledged goods, following legal procedures, to recover the debt. Key elements of a pledge include: delivery of goods, the loan or debt being secured, and the agreement that possession will be retained by the pledgee until the debt is repaid. The pledge is legally binding and provides the lender with a form of assurance or collateral.

DEFINITION AND CHARACTERISTICS

Section 172 of the Indian Contract Act, 1872 defined pledge as 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 the “pawnor”. The bailee is called the “pawnee”. Thus, a pledge is only a special kind of bailment, and the chief basis of distinction is the object of the contract. Where the object of the delivery of goods is to provide a security for a loan or for the fulfilment of an obligation, that kind of bailment is called a pledge. “Pawn or pledge is a bailment of personal property as a security for some debt or engagement. A pawnee is one who being liable to an engagement gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability.[i] The following are the essential characteristics or ingredients of a pledge:

1. Delivery of Possession

“Delivery of the chattel pawned is a necessary element in the making of a pawn.”[ii] The property pledged should be delivered to the pawnee. Sometimes the goods are allowed to remain in the custody of the pledger for a special purpose.

2. In pursuance of contract

“Pledge is a conveyance pursuant to a contract, and it is essential to a valid pledge that delivery of the chatter shall be made by the pledger to the pledgee in pursuance of the contract of pledge.”[iii] But it is not necessary that delivery of possession and the loan should be contemporaneous. Delivery and advance need not be simultaneous and a pledge may be perfected by delivery after the advance is made. Delivery may be made before or in contemplation of an advance, which ripens into a pledge as soon as the advance is made.

RIGHTS OF PAWNEE

1. Right of Retainer [Section 173 – 174]

The first important right of a pawnee is the right to retain the goods pledged until his dues are paid. He has a right to retain the goods not only for payment of the debt or performance of the 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 the goods pledged.[iv] The pledgee can retain the goods only for the payment of that particular debt for which the goods were pledged and not for any other debt or promise, unless there is a contract to the contrary. Where, however, after a pledge is created, a subsequent advance is made without any other security, a contract to burden the same goods shall be presumed. The right of retained ends on proper tender of payment. If the pledgee refuses a proper tender, he opens himself up for pledger’s remedies of seeking return and absolute liability of bailee under Sections 160 and 161 for failure to return in time. Section 173 provides for the pawnee’s right of retainer as 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. Section 174 further provides that 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. The right of the retainer is thus in the nature of a particular lien. Yet lien is different from pledge. “A pawn or pledge is an intermediate between a simple lien and a mortgage.[v] The pawnee gets a special property in the goods pledged. The general property remains in the pawner and wholly reverts to him on discharge of the debt. The right to property vests in the pledgee only so far as is necessary to secure the debt.[vi] Where the pledge is by way of hypothecation, the creditor cannot directly seize the goods by entering premises or otherwise.

2. Right to Extraordinary Expense [Section 175]

The pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have the right to retain the goods. He can only sue to recover them. This right is provided for in Section 175 which is as follows - The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.

3. Right to Sell [Section 176]

Section 176 which provides for this important right is as follows - 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. Upon default being made by the pawner in the payment of the debt or performance of the promise, the pledgee gets two distinct rights under Section 176 of the Act. Firstly, the pledgee may sue upon the debt and retain the goods as collateral security. Secondly, he may sell the goods after reasonable notice of the intended sale to the pawner.[vii] The right to sue is a personal action and tests upon the contract of loan quite apart from the pledge. The pawnee’s two rights, namely the right to sue the pawner for personal recovery or resort to sell the security after reasonable notice, are disjunctive, being dependant of each other.

PAWNER’S RIGHT TO REDEEM

Section 177 provides for the most valuable right of the pawner. 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.

CONCLUSION

The contract of pledge is thus an important legal mechanism that provides security for loans and the performance of obligations by allowing the pledgor to use movable property as collateral while retaining ownership. Through the transfer of possession to the pledgee, the debt is secured, and the pledgee is granted specific rights to ensure the protection of their interests, such as the right to retain possession, claim extraordinary expenses, or, in case of default, sell the pledged goods following due process. On the other hand, the pawner retains the vital right to redeem the goods, emphasizing the balance of fairness and equity in this contractual arrangement. Sections 172 to 177 of the Indian Contract Act, 1872, lay a comprehensive legal framework governing the creation, enforcement, and termination of a pledge. This system ensures that both parties have enforceable rights while safeguarding the property interests of the pledgor. Understanding these principles is crucial for lenders and borrowers engaging in secured transactions to prevent disputes and uphold legal obligations. [i] Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322. [ii] Suneel Kumar Gupta v. Punjab & Sind Bank, AIR 2006 Utt 26. [iii] Blundell Leigh v. Attenborough, (1921) 3 KB 235 (CA). [iv] Alliance Bank of Simla v. Ghamandi Lal Jain Law, AIR 1927 Lah 408. [v] Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322. [vi] Sarvopari Investments (P) Ltd. v. Soma Textiles & Industries Ltd., (2003) 4 ICC 604. [vii] SN Choubey v. Central Coalfields Ltd., AIR 2001 Jhar 13.