Introduction

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. Section 172 of Indian Contract Act
1872 defines Pledge as follows -
Section 172 - The bailment of goods as a security for the payment of a debt or
performance of a promise is called Pledge. The bailor in this case is called a
Pawnor and the bailee is called Pawnee.

In case of Lallan Prasad v. Rahmat Ali 1Supreme Court of India defined Pledge as:
Pawn or pledge is a bailment of personal property as a security for some debt or
engagement. A pawner 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 fulfillment of his liability.

The property pledged should be delivered to the Pawnee. Delivery of possession

may be actual or constructive. Delivery of the key of the go down where the goods
are stored is an illustration of constructive delivery. Where the goods are in the
possession of a third person, who, on the direction of the pledger, consents to hold
them on pledgees behalf, that is enough delivery. It is sometimes called delivery
by attornment. Delivery of documents of title which would enable the pledgee to
obtain possession is equally effective to create a pledge2. In case of Morvi
Mercantile Bank Ltd v. Union of India3, the Apex Court held that- delivery of
railway receipts was the same thing as delivery of goods, the pledge was therefore
valid and the pledgee was entitled to sue for the loss.

1 AIR 1967 SC 1322

2 Avtar Singh, Business Law, (9th Edition), p.226
3 AIR 1965 SC 1954
 Rights of a Pawnee

1. Right of retainer (Section 173- 174) - 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 pawner 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.

2. Right to extra ordinary expenses (Section 175) - As per section 175, the pawnee is entitled
to receive from the pawner 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 pawner extraordinary expenses incurred
by him for the preservation of the goods pledged.

3. Right of sale (Section 176) - 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 pawner 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 1967 the 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 pawner 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. Pawner'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.

Duties of a Pawnee
Duty to take reasonable care of the goods pledged
Duty not to make unauthorized use of goods
Duty not to mix pawnors goods with his own goods
Duty to return goods
Duty to return accretion to the goods
 Rights of Pawnor

1. Right to get pawnees duties duly enforced The pawnor has the right to get pawnees
duties duly enforced(for example,right to get back the goods pledged,right to receive any
accretions to the goods pledged).
2. Right to redeem [Section 177]
3. If a time 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 stipulated time,he may redeem the goods pledged at any
subsequent time before the actual sale of them;but he must;in case payin addition ,any
expenses which have arisen from his default.

Duties of Pawnor

1. Duty to comply with the terms of pledge

2. Duty to compensate the Pawnee for extraordinary expenses [Section 185]
 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.
 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

1. 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.

2. 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.

3. 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.
 Distinction between Pledge and Bailment

Bailment Pledge

Bailment can be for many reasons ranging for A pledge is bailment done for a specific type of
reward to gratuitous. purpose, which is to secure a loan or
performance of a promise.
The bailee does not get a right to sell the A pawnee has a right to sell the goods in case
goods. of default.

The bailee only get a right of lien over the A pawnee gets a right of retainer and a special
goods. interest in the goods, which is more that just
the lien.
The bailee can use the goods bailed. The pawnee has no right to use the goods.

The bailee is not responsible for the loss,

destruction, or deterioration if he uses the The pawnee is absolutely liable for the upkeep
goods with reasonable care of the goods

Conclusion
Pledge is a kind of bailment where a thing is delivered as security for the repayment of a debt or
performance of any promise. Delivery of the possession to the pawnee may be actual delivery or
constructive delivery. Ownership of the pledged article does not pass to the pledgee. The pawnee
has the right to retain goods till the payment, of the debt, any interest on the debt, and any other
necessary expenses incurred for preservation of the goods. Where pawnee incur any other
extraordinary expenses on goods for preservation, he is entitled of the same from pawnor. In case
of the default of the pawnor, in the debt or performance, the pawnee has the right to sell the
goods pledged.

The pawnor has also the right to redeem the goods before the actual sale, but after the payment
of the debt or performance of promise and any other expenses which have arisen from his
default.