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contract_laws:pledge-principles

Pawn or Pledge - Principles

The three ingredients of a pawn or a pledge are:

  1. The property pledged should be actually or constructively delivered to the pawnee
  2. A pawnee has only a special property in the pledge and
  3. The general property therein remains in the pawner and wholly reverts to him on discharge of the debt.

A pawn is a security. By contract a deposit of goods is made as security for a debt. The right to property vests in the pledgee only to secure the debt. A pawn or pledge is an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed.

A contract to pawn a chattel even though money is advanced on the faith of it is not sufficient in itself to pass special property in the chattel to the pawnee. Delivery of the chattel pawned is a necessary element in the making of a pawn. Delivery and advance need not be simultaneous. A pledge may be perfected by delivery after the advance is made. Satisfaction of the debt or engagement extinguishes the pawn and the pawnee. On such satisfaction pawnee is bound to redeliver the property.

The pawner has an absolute right to redeem the property pledged upon tender of the amount advanced. That right would be lost if the pawnee has in the meantime lawfully sold the property pledged. A contract of pawn carries with it an implication that the security is available to satisfy the debt and under this implication the pawnee has the power of sale on default in payment where time is fixed for payment and where there is no such stipulated time on demand for payment and on notice of his intention to sell after default. The pawner however has a right to redeem the property pledged until the sale.

If the pawnee sells, he must appropriate the proceeds of the sale towards the pawner's debt. The sale proceeds are the pawner's monies to be so applied. The pawnee must pay to the pawner any surplus after satisfying the debt. The pawnee's right of sale is derived from an implied authority from the pawner. A sale is for the benefit of both the parties. He has a right of action for his debt notwithstanding possession by him of the goods pledged. If the pawner tenders payment of the debt, the pawnee has to return the property pledged. If by his default the pawnee is unable to return the security against payment of the debt, the pawner has a good defence to the action. It was observed in Trustees of the Property of Ellis & Co. v. Dixon-Johnson Halsbury's Laws of England, 3rd ed. Vol. 29 page 221 and [1925] A.C. 489 that if a creditor holding security sues for the debt, he is under an obligation on payment of the debt to hand over the security. If, having improperly made away with the security, he is unable to return it to the debtor he cannot have judgment for the debt.

Statutory provisions as to pledge in India

Chapter IX of the Contract Act deals with the bailments of Pledges. There is no difference between the common law of England) and the law with regard to pledge as codified in sections 172 to 176 of the Contract Act. Section 172 of the Contract Act defines a pledge to mean the bailment of goods as security for payment of debt or performance of a promise. The bailor is called the “pawnor” and the bailee is called the “pawnee”. Section 173 of that Act provides that the pawnee may retain the goods pledged not only for the payment of the debt or performance of the promise but also for the interest of the debt etc. The Pawner can redeem the pledged article within the period stipulated or within the grace period provided or before the sale of pawned article takes place through auctioneer. Once the article is brought of sale and sold, the Pawner would lose his right in the pawned article as the general property right in the said article passes on to the purchaser.

Section 176 is in the following terms :

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 pawner 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.”

Section 176 deals with the rights of a pawnee and provides that in case of default by the pawner the pawnee has

  1. the right to sue upon the debt and to retain the goods as collateral security and
  2. to sell the goods after reasonable notice of the intended sale to the pawner.

Once the pawnee by virtue of his right under section 176 sells the goods the right of the pawner to redeem them is of course extinguished. The pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawner. So long as the sale does not take place the pawner is entitled to redeem the goods on payment of the debt. Where a pawnee files a suit for recovery of debt, though he is entitled to retain the goods he is bound to return them on payment of the debt.

The right to sue on the debt assumes that he is in a position to redeliver the goods on payment of the debt. If he has put himself in a position where he is not able to redeliver the goods he cannot obtain a decree. The pawnee can sue on the debt retaining the pledged goods as collateral security. If the debt is ordered to be paid he has to return the goods or if the goods are sold with or without the assistance of the court appropriate the sale proceeds towards the debt. If he sues on the debt denying the pledge and it is found that he was given possession of the goods pledged and had retained the same, the pawner has the right to redeem the goods so pledged by payment of the debt. If the pawnee is not in a position to redeliver the goods he cannot have both the payment of the debt and also the goods. Where the value of the pledged property is less than the debt and in a suit for recovery of debt by the pledgee, the pledgee denies the pledge or is otherwise not in a position to return the pledged goods he has to give credit for the value of the goods and would be entitled then to recover only the balance. Held, the appellant would not be entitled to a decree against the promissory note and also retain the said goods found to have been delivered to him and in his custody. For, if it were other wise the first respondent as the pawner would be compelled not only to pay the amount due under the promissory note but lose ;the pledged goods as well. Lallan Prasad vs. Rahmat Ali and another1)

Section 180 provides that if a third person wrongfully deprives the bailee of the use of the possession of the goods bailed or does him any injury the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made and either the bailor or the bailee may bring a suit against a third person for such deprivation or injury. According to Section 181 whatever is obtained by way of relief or compensation in any such suit shall, as between the bailor and bailee. be dealt with according to their respective interests.

In the case of Bank of Bihar, the sugar had been seized and then sold. The sale proceeds would have been available to defendants 2 to 5 subject to the claim of the plaintiff against them. It ceased to have any lien on the pledged property or the sale proceeds against any third party including the State as soon as it was legally deprived of the possession of the pledged goods. The plaintiff's right as a Pawnee could not be extinguished by the seizure of the goods in its possession inasmuch as the pledge of the 1/ 3rd goods was not meant to replace the liability under the cash credit agreement. It was intended to give the plaintiff a primary right to sell the goods in satisfaction of the liability of the pawnor. The Cane Commissioner who was an unsecured creditor could not have any higher rights than the pawnor. It was entitled only to the surplus money after satisfaction of the plaintiff's dues.The Bank of Bihar vs. State of Bihar and others2)

The Pawn-broker has special property rights in the goods pledged. He has a right higher than a mere right of detention of goods but a right lesser than general property right in the goods. The pawner at the time of pledge not only transfers to the pawnee the special right in the pledge but also passes on his right to transfer the general property right in the pledge in the event of the pledge remained unredeemed resulting in the sale of the pledge by public auction through an approved auctioneer. The pawnee holds not only the absolute special property right in the pledge. He has also conditional general property interest in the pledge, the condition being that he can pass on that general property only in the event of the pledge brought to sale by public auction.Karnataka Pawnbroker's Association and others vs. State of Karnataka and others3)

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1)
1967 (2) SCR 233
2)
1971 Suppl. SCR 299
3)
1998 (7) SCC 707


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