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contract_laws:part-2:pledge

Pledge

A pledge is the delivery of goods by the pawnor to the pawnee by way of security upon a contract that they shall when the debt is paid or the promise is performed, be returned or otherwise disposed of according to the direction of the pawnor.

The section affirms the Common Law. There is no difference between the Common Law of England, and the law with regard to pledge as contained in ss 172-176 of the Contract Act. The ingredients of a pawn are stated as:

  1. the property pledged should be actually or constructively delivered to the pawnee; and
  2. a pawnee has only a special property in the pledge, the general property remains in the pawnor and wholly reverts to him on discharge of the debt.

Pledge is a special kind of bailment in which a person transfers the possession of his property to another for securing the loan taken from the other. It only differs from bailment in the matter of purpose. When the purpose of the bailment is to secure a loan or a promise, it is called a pledge.

In J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 it was observed that Pawn or pledge is a bailment of personal property as a security for some debt or engagement.

Important Questions

  • What are the essentials of pledge?
  • Can a pledge be made by a person who is not the owner of goods?
  • What is the difference between bailment and pledge?
  • Explain Pawnor's right to redeem.
  • Difference between pledge and mortgage.

Meaning of ‘Pledge’, ‘Pawnor’, ‘Pawnee’

Pledge: The bailment of goods as security for payment of a debt or performance of promise is called pledge.

Pawnor: The bailor in case of a pledge is called as pawnor.

Pawnee: The bailee in case of pledge is called as pawnee.

Who May Pledge

Any of the following persons may make a valid pledge:

  1. The owner, or his authorised agent, or
  2. One of the several co-owners, who is in the sole possession of goods, with the consent of other owners, or
  3. A mercantile agent, who is in possession of the goods with the consent of real owner, or (sec 178)
  4. A person in possession under a voidable contract, before the contract is rescinded, or (sec 178 A)
  5. A seller, who is in possession of goods after sale (sec 30(1))or a buyer who has obtained possession of the goods before sale,sec-30 (2) or
  6. A person who has a limited interest in the property. In such a case the pawn is valid only to the extent of such interest.(Sec 179)

Note: If a servant has the custody of the goods, or a tenant gets the possession of a furnished house, the servant cannot pledge the goods, nor can a tenant pledge the furnishing materials in his possession.

A person obtaining the goods fraudulently does not have any right to pledge them. In Purshottam Das v Union of India, the goods were pledged on the basis of a forged railway receipt and it is not a valid pledge.

The ‘document of title’ has the same meaning as the Sale of Goods Act 1930, acc to sec 2(4) of that act, includes a bill of lading, dock warrant, warehousekeeper’s certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.

If the person entrusts some valuables to his neighbour for safe custody for some time, and he happens to be a mercantile agent, a pledge made by him will not be covered by this provision. So the mercantile agent has not got the possession as such agent but in a different capacity, a pledge made by him not be a valid one.

Essentials of Pledge

The following are essential ingredients of a pledge

Delivery of possession

As in bailment, the delivery of possession is essential in a pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready. This was held not to be a pledge because there was no delivery of possession at the time of the agreement.

It is possible to do delivery by atonement in which case a third person who has the possession of the property agrees to hold it on behalf of the pledgee upon direction of the pledger.

Hypothecation - It is also possible to let the pawnor keep the physical goods even though the legal possession is transfered to the pawnor. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a cinema hall equipment was pledged to the bank but the bank allowed the hall owner to keep the equipment to show the movies. The hall owner then sold the equipment to another party. It was held that the sale was subject to the pledge.

In Bank of India vs Binod Steel AIR 1977, MP H.C held that in such cases where goods are hypothecated, other creditors cannot claim right on them until the claim of the pledgee is satisfied.

In return of a loan or a promise

The delivery must be in return of a loan or of acceptance of a promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a simple bailment. However, if A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge.

In pursuance of a contract

The delivery must be done under a contract though it is not necessary that the delivery and the payment of loan be at the same time. Delivery can be made even after the loan is received.

Rights of a Pawnee

Right of retainer

As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Further, as per section 174, in absence of any contract to the contrary, the pawnor shall not retain the goods pledged for debt or promise other than the debt or promise for which they have been pledged. However, such contract shall be presumed in absence of any contract to the contrary with respect to any subsequent advances made by the pawnee.

This means that if A pledges his gold watch with B for 1000 Rs and later on he promises to teach B’s son for a month and takes for 500Rs for this promise , and if he does not teach B’s son, B cannot retain A’s gold watch after A pays 1000Rs. Thus, the right of retainer is a sort of particular lien.

The difference was pointed out in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a pawnee obtains a special interest in the pledged goods in the sense that he can transfer or pledge that special interest to somebody else. The lien only gives the right to detain the goods but not transfer. Thus, a pledgee get the first right to claim the goods before any other creditor can get them. The pledgee’s loan is secured by the goods.

Right to extra ordinary expenses

As per section 175, the pawnee is entitled to receive from the pawnor extra ordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have right to detain the goods. Section 175 says that the pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.

Right of sale

As per section 176 (Pawnee’s right where pawnor makes default) - If the pawnor makes default in payment of the debt or performance at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or the 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. This right secures the debt for the pawnee up to the value of the goods pledged because it allows the pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged. If the value received after selling the goods, the pawnor is still liable for the difference and if the value of the sale is more than the amount of debt, the pawnee is supposed to give the difference to the pawnor. However, if the pawnee has sold the goods, he cannot sue for the debt.

In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note and gave him aeroscrapes worth about 35000Rs, as a security for the loan. The plaintiff sued for repayment of the loan but was unable to produce the security, having sold it. SC rejected his action. It held that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property.

The pawnor is required to give a reasonable notice to the pawnee about the sale. The notice is not a mere notice but reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an agreement of a loan enabled the bank to sell the securities upon default without notice. The pawnor defaulted in payment. The bank sent a reminder upon which the pawnor asked for more time. The bank sold the securities. SC held that this was bad in law. The bank is required to give a clear and specific notice of the impending sale. Pawnor’s request for more time cannot be interpreted as a notice of sale.

When the goods are lost due to pawnee’s negligence, the liability of the pawnor is reduced to the extent of value of the goods.

Pawnor’s Right to Redeem (Section 177)

Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his property even if he has defaulted. It says that if a time is stipulated for the payment of a debt or performance of the promise for which the pledge is made, and the pawnor make 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 expense which have arisen from his default.

J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor has as absolute right to redeem his property upon satisfaction or the debt or the promise. This right is not extinguished by the expiry of the stipulated time for repayment of debt or performance of the promise but only by the actual sale of the goods. If the pawnor redeems his goods after the expiry of the stipulated time, he is bound to pay the expenses as have arisen on account of his default.

The pawnor also has a right to take back any increase in the property. In M R Dhawan vs Madan Mohan AIR 1969, certain shares of a company were pledged. During the period of the pledge, the company issued bonus and rights shares. Delhi HC held that the pawnor was entitled to those at the time of redemption.

Duties of a Pawnor (Sec.175)

  • Pay the debt: The pawnor is liable to pay the debt or perform his promise as the case may be.
  • Pay deficit on sale: If the pawnee sells the goods due to default by the pawnor, the pawnor must pay the deficit.
  • Pay extra – ordinary expenses: The pawnor is liable to pay to the pawnee any extraordinary expenses incurred by the pawnee for preservation of goods.
  • Disclose faults in goods: The pawnor is liable to disclose all the faults which
    1. Are material for use of the goods; or
    2. May put the pawnee to extraordinary risks.
    3. Indemnify the pawnee: If loss is caused to the pawnee due to defect in pawnor’s title to the goods, the pawnor must indemnify the pawnee.

Duties of a Pawnee

Duties of pawnee are as follows:

  1. The pawnee is required to take as much care of the goods pledged to him as a person of ordinary prudence would, under similar circumstances, take of his own goods, of a similar nature.
  2. The pawnee must not put the goods to an unauthorized use.
  3. The pawnee is bound to return the goods on payment of the debt.
  4. Any accruals to the goods pledged belong to the pledgor and should be delivered accordingly. Thus, if the security consists of equity shares and the company issues bonus shares to the equity shareholders, the bonus shares are the property of the pledgor and not the pledgee.

Pledge made by non-owner of the goods

Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge made by any other person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it was held that a pledge made by the servant who was holding the goods of his master was not valid. Similarly, in Purushottam Das vs Union of India AIR 1967, a railway company delivered goods on a forged railway receipt. The goods were then pledged with the defendants. In a suit by the railways to recover the goods it was held that the pledge was invalid.

This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerces and so there are some situations where a person having the possession of the goods by owner’s consent, is entitled to pledge those goods even without owner’s consent for the pledge. These situations are discussed below -

Pledge by Mercantile agent (Section 178)

When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods.

The essential conditions of this rule are

  • he must be a mercantile agent,
  • he must have possession of the goods by consent of the owner, and
  • it must be done in ordinary course of business.
  • Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.

Pledge by a person in possession under voidable contract (Section 178 A)

When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person pretending 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, he pledged the ring with the defendants. The pledge was held to be valid.

Pledge by person with limited interest (Section 179)

Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B both having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the pledge that the pledgee can receive upon default is only 50% of the value received by sale.

Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods. For example, if A pledged his car worth 100000Rs for 20000Rs to B. B’s interest in the car is only 20000 Rs. He can further pledge it but if he pledges it for more than 20000Rs, A will be liable only for 20000Rs.

In Jaswantrai Manilal Akhney vs State of Bombay 1956, a cooperative bank had an overdraft account with the Exchange Bank, which was secured by the deposit of certain securities. After many dealing and adjustments the last position of the account was that the overdraft limit was set at Rs 66150 and the securities under the pledge of the bank were worth Rs 75000. The cooperative bank did not make use of this overdraft for a long time and when it attempted to use it, the Exchange Bank was itself in financial crisis and had pledged the securities first with Canara Bank and then after having redeemed them, pledged them again with a private financier. The SC held that the pledge was invalid

Differences between Pledge and Hypothecation

Pledge Hypothecation
It is defined under Section 172 of the Indian Contract Act, 1872. As such it is not defined in the Indian Contract Act, 1872 but has been recognized by the usage since very long.
Property is transferred from one person to another as security. Property is not transferred; it stays with the owner.
Once the property is pledged, the owner loses the right to deal in that property. Since the property stays with the owner, therefore he can deal in the property subject to certain condition.
The right of lien can be exercised since the property is with the Pawnee. The right of lien cannot be exercised since the property is not with the creditor.

Pledge and Mortgage

Pledge involves transfer of possession of a thing in return for certain sum or as a security for fulfilling an obligation. A pledge gives pledgee special rights to the pledgee that in case of default he has remedies available with him. However, under a mortgage, other than these special rights, the juristic rights or the legal rights are also transferred. That is to say that the right of enjoyment is not transferred in the case of pledge, but in case of mortgage, the mortgagee has the right of enjoyment. Also, another point of distinction here is that a contract of mortgage does not require actual delivery of the goods or the things. Further, while only moveable goods are pledged under a contract of pledge, mortgage can be of both, moveable as well as immoveable property.

Summary

  • A pledge as the bailment of goods as security for payment of a debt or performance of a promise.
  • The person, who delivers the goods as security, is called the ‘pledgor’ and the person to whom the goods are so delivered is called the ‘pledgee’.
  • A pledgee has a right to recover any extraordinary expenditure incurred for preservation of the goods pledged.
  • The pledgee is required to take as much care of the goods pledged to him as a person of ordinary prudence would, under similar circumstances, take of his own goods, of a similar nature.
  • The pledgee is bound to return the goods on payment of the debt.


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Created on 2021/01/01 14:06 by Admin • Last modified on 2021/01/01 14:15 by LawPage