Pledge(section 172-181)

Pledge is a kind of bailment. Pledge is also known as Pawn.It is defined under section 172 of the
Indian Contract Act, 1872“Pledge”, “pawnor” and “pawnee” defined [Section 172]: 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 called the “pawnor”. The bailee is called the “pawnee”..
Analysis: Pledge is a variety or specie of bailment. It is bailment of goods as security for
payment of debt or performance of a promise. The person who pledges [or bails] is known as
pledgor or also as pawnor, the bailee is known as pledgee or also as pawnee. In pledge, there is
no change in ownership of the property. Under exceptional circumstances, the pledgee has a right
to sell the property pledged. Section 172 to 182 of the Indian Contract Act,1872 deal specifically
with the bailment of pledge.
Example: A lends money to B against the security of jewellery deposited by B with him i.e. A.
This bailment of jewellery is a pledge as security for lending the money. B is a pawnor and A is
a pawnee.
ESSENTIALS OF PLEDGE: Since Pledge is a special kind of bailment, therefore all the
essentials of bailment are also the essentials of the pledge. Apart from that, the other essentials of
the pledge are:
a. There shall be a bailment for security against payment or performance of
the promise,
b. The subject matter of pledge is goods,
c. Goods pledged for shall be in existence,
d. There shall be the delivery of goods from pledger to pledgee,
•There must be bailment for security for payment of debt/ performance of a promise.
•Goods must be the subject matter of the contract of pledge.
•The goods pledged must be in existence.
•There must be a delivery of goods from pawnor to pawnee.
Pawnee’s rights: Rights of Pawnee can be classified as under the following headings:
(a) Right to retain the pledged goods [Section 173]: The pawnee may retain the goods
pledged, not only for payment of the debt or the performance of the promise, but 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.
Example: Where ‘M’ pledges stock of goods for certain loan from a bank, the bank has a right to
retain the stock not only for adjustment of the loan but also for payment of interest.
(b) Right to retention of subsequent debts [Section 174]: 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.

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 (c) Pawnee’s right to extraordinary expenses Incurred [Section 175]: The pawnee is
entitled to receive from the pawnor 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.
(d) Pawnee’s right where pawnor makes default [Section 176]: 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 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.

Rights of a pawnor
As the bailor of goods pawnor has all the rights of the bailor. Along with that he also has the
right of redemption to the pledged goods which is enumerated under Section 177 of the Act.
Right to redeem [Section 177]: 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.
Duties of the Pawnee ; Pawnee has the following duties:
a. Duty to take reasonable care of the pledged goods
b. Duty not to make unauthorized use of pledged goods
c. Duty to return the goods when the debt has been repaid or the promise has been performed
d. Duty not to mix his own goods with goods pledged
e. Duty not to do any act which is inconsistent with the terms of the pledge
f. Duty to return accretion to the goods, if any.
Duties of a Pawnor
Pawnor has the following duties:
a. The pawnor is liable to pay the debt or perform the promise as the case may be.
b. It is the duty of the pawnor to compensate the pawnee for any extraordinary expenses incurred
by him for preserving the goods pawned.
c. It is the duty of the pawnor to disclose all the faults which may put the pawnee under
extraordinary risks.
d. If loss occurs to the pawnee due to defect in pawnors title to the goods, the pawnor must
indemnify the pawnee.
e. If the pawnee sells the good due to default by the pawnor, the pawnor must pay the deficit.

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 PLEDGE BY NON-OWNERS
Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf, who can
pledge the goods. But in order to facilitate mercantile transactions, the law has recognised certain
exceptions. These exceptions are for bonafide pledges made by those persons who are not the
actual owners of the goods, but in whose possession the goods have been left.
a. Pledge by mercantile agent [ Section 178]: Where a mercantile agent is, with the consent of
the owner, in possession of goods or the documents of title to goods, any pledge made by him,
when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he
were expressly authorised by the owner of the goods to make the same; provided that the
pawnee acts in good faith and has not at the time of the pledge notice that the Pawnor has no
authority to pledge.
Explanation: In this section, the expressions ‘mercantile agent and documents of title’ shall
have the meanings assigned to them in the Sale of Goods Act, 1930.
Analysis: Though generally only a owner of goods can pledge, the Act recognizes the right of
certain mercantile agents to pledge provided it is done with the consent of the owner of the
goods. Such a pledge done in the ordinary course of business is valid. Pledge in this case can be
effected through pledge of documents like a bill of lading or a railway receipt etc.
The necessary conditions of validity under the section 178 are as follows:
(i) The person pledging the goods must be a mercantile agent,
(ii) Mercantile agent must be in possession either of the goods or the documents of title to goods,
(iii) Such possession must be with the consent of the owner. If possession has been obtained
dishonestly or by a trick, a valid pledge cannot be effected,
(iv) Pledge must have been made by the mercantile agent, when acting in the ordinary course of
business of a mercantile agent,
(v) The pledgee must act in good faith;
(vi) The pledgee should have no notice of the pledger's defect of title. If the pledgee knows that
the pledger has a defective title, the pledge will not be valid.
b. Pledge by person in possession under voidable contract [Section 178A]:
When the pawnor has obtained possession of the goods pledged by him under a contract voidable
under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge,
the pawnee acquires a good title to the goods, provided he acts in good faith and without notice
of the pawnor’s defect of title.
c. Pledge where pawnor has only a limited interest [Section 179]: Where a person pledges
goods in which he has only a limited interest, the pledge is valid to the extent of that interest.
d. Pledge by a co-owner in possession: Where the goods are owned by many person and with
the consent of other owners, the goods are left in the possession of one of the co-owners. Such a
co-owner may make a valid pledge of the goods in his possession.

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e. Pledge by seller or buyer in possession: A seller, in whose possession, the goods have been
left after sale or a buyer who with the consent of the seller, obtains possession of the goods,
before sale, can make a valid pledge, provided the pawnee acts in good faith and he has no
knowledge of the defect in title of the pawnor.
For example, A buys a cycle from B. But leaves the cycle with the seller. B then pledges the
cycle with C, who does not know of sale to B, and acted in good faith. This is valid pledge.
DISTINCTION BETWEEN BAILMENT AND PLEDGE
S.no Basis of Pledge
Distinction Bailment
1. Meaning Transfer of goods by one Transfer of goods from
person to another for some one person to another as
specific purpose is known as security for repayment of
bailment debt is known as the
pledge.
2. Terms The person delivering the The person who delivers
Applicable goods under a contract of the good as security is
bailment is called as “Bailor”. called the “Pawnor”. The
The person to whom the person to whom the
goods are delivered under a goods are delivered as
contract of bailment is called security is called the
as “Bailee” “pawnee”
3. Purpose Bailment may be made for Pledge is made for the
any purpose (as specified in purpose of delivering the
the contract of bailment, eg: goods as security for
for safe custody, for repairs, payment of a debt, or
for processing of goods) performance of a promise.
4. Consideration The bailment may be made Pledge is always made for
for consideration or without a consideration.
consideration
5 Right to sell The bailee has no right to sell The pawnee has right to
the goods the goods even if the chargesof sell the goods if the
pawnor fails to redeem the
bailment are not paid to
goods.
him. The bailee’s rights are
limited to suing the bailor for
his dues or to exercise lien on
the goods bailed

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6. Right to use Bailee can use the goods Pledgee or Pawnee
of goods only for a purpose specified cannot use the goods
in the contract of bailment pledged.
and not otherwise.