Introduction
The Contract of Pledge is a vital part of commercial law under Sections 172–179 of the Indian Contract Act, 1872. It deals with the delivery of goods by one party to another as security for repayment of a debt or performance of a promise.
In this contract, the pawnor (pledgor) delivers goods to the pawnee (pledgee). While ownership remains with the pawnor, possession is transferred to the pawnee until the debt is repaid. The pledge creates a fiduciary relationship, emphasizing trust, care, and legal obligations between the parties.
Definition (Section 172)
According to Section 172:
“The bailment of goods as security for payment of a debt or performance of a promise is called a pledge. The bailor in this case is called the pawnor, and the bailee is called the pawnee.”
Thus, pledge is a special type of bailment where goods are delivered as collateral. It is distinct from a simple bailment because its primary purpose is security, not safekeeping.
Essentials of a Valid Pledge
Delivery of Goods
Possession of goods must be delivered either:
- Actual Delivery: Physical transfer of goods (e.g., handing over jewelry to a pawnee).
- Constructive Delivery: Symbolic transfer through documents or keys.
Purpose of Security
Goods must be delivered solely as security for a debt or obligation.
Existence of Debt or Obligation
A pledge cannot exist without a valid debt or contractual obligation.
Consent of Parties
Both the pawnor and pawnee must mutually agree to create the pledge.
Possession, Not Ownership
Ownership of goods remains with the pawnor, while the pawnee only obtains possession.
Rights of the Pawnee
Right to Retain Goods
The pawnee can retain the goods until the debt or obligation is satisfied.
Right of Lien
Pawnee may retain goods as security for repayment (Section 170–171).
Right to Sell Pledged Goods
If the pawnor defaults, the pawnee may sell the pledged goods to recover the debt (Section 176).
Right to Recover Expenses
Pawnee is entitled to reimbursement of necessary expenses incurred to preserve pledged goods (Section 175).
Duties of the Pawnee
Duty to Take Care
Pawnee must exercise reasonable care as a prudent person would for their own goods.
Duty Not to Misuse
Pawnee cannot use pledged goods for personal benefit.
Duty to Return Surplus
Any surplus proceeds after sale or repayment must be returned to the pawnor.
Rights of the Pawnor
Right of Redemption
Pawnor can redeem the goods by repaying the debt before the goods are sold.
Right to Surplus Proceeds
Any excess proceeds from sale must be returned to the pawnor.
Right to Return of Goods
Once the debt is repaid, the pawnee must return the pledged goods.
Termination of Pledge
A pledge may terminate under the following circumstances:
- The debt or obligation is fully discharged.
- The pledged goods are sold to recover the debt.
- Mutual agreement between the pawnor and pawnee to terminate the contract.
Difference Between Bailment and Pledge
| Basis | Bailment | Pledge |
|---|---|---|
| Parties | Bailor & Bailee | Pawnor & Pawnee |
| Purpose | Safekeeping or delivery for a purpose | Security for debt or obligation |
| Ownership | Remains with bailor | Remains with pawnor |
| Right of Sale | None | Pawnee may sell goods if debtor defaults |
| Consideration | May or may not exist | Usually linked with debt or obligation |
Important Judicial Decisions
- State Bank of India v. Greenview Traders (1993): Pawnee entitled to sell pledged goods if debtor defaults.
- Ramachandran v. Ramaswamy (1968): Pawnee’s duty to exercise reasonable care confirmed.
- Hollins v. Fowler (1875): Right of pawnee to retain goods until debt satisfaction upheld.
Conclusion
The Contract of Pledge is a cornerstone of secured transactions in commerce and trade. It balances the rights of creditors and debtors, ensuring proper care, trust, and legal remedies. The Indian Contract Act, through Sections 172–179, provides a robust framework for regulating pledges, making it a reliable instrument for financial and commercial security.
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Also Read: Contract of Bailment under the Indian Contract Act, 1872