Contract of pledge is governed by the Indian Contract Act, 1872. Contract of pledge is a subset of the Contract of Bailment. Contract of pledge in contract law and provisions relating to the pledge is defined under Chapter IX and sections 172 to 181 of the Indian Contract Act, 1872.
Meaning of Contract of Pledge
Meaning of contract of pledge has been provided under section 172 of the Contract Act, as ‘The bailment of goods as security for payment of a debt or performance of a promise is called pledge’. The parties in the contract of the pledge are called ‘pawnor’ and ‘pawnee’
Essential Features of Contract of Pledge
1. Valid Contract
The most important essential element of a contract of pledge is a valid contract.
Similarly, to the contract of bailment, all the essential elements of a valid contract should be present in the contract of pledge.
If any one of the essential elements is not there then the contract will be void and would not be enforceable in a court of law.
2. Delivery of possession
In the contract of pledge, mere possession of the pledged goods is transferred to the pawnee by the pawnor as similar to the contract of bailment.
Pledge is a bailment and this is an essential element of the bailment. The delivery of the pledged goods can be either actual delivery or constructive delivery.
3. Ownership cannot be transferred.
In the contract of pledge, the possession of the goods is transferred and not the ownership of the goods. After the formation of the contract of pledge, the possessor is the pawnee and the owner of the goods is the pawnor.
4. Security against Debt
The pledged goods to the pawnee must be as security against an outstanding debt of the pawnor. The outstanding debt can also be a promise for the specific performance of the contract.
5. Return of Goods Repayment.
Once the debtor’s specific performance against which the goods are pledged as security is repaid or completed, the goods must be returned to the pawnor in the manner he specified.
Rights and Duties of Pawnor
Duties of Pawnor
1. To compensate the expenses: – It is the duty and responsibility of the pawnor to compensate the pawnee for all the ordinary and extraordinary expenses made by the pawnee in order to take reasonable care of the pledged goods.
2. To repay the amount due along with interest: – The pawnor has to repay the entire amount which is due to the pawnee. This amount is the total of the principal amount as well as any interest accrued on that amount during the course of the contract.
3. To disclose all the defects in the goods: – It is the duty of the pawnor before entering into a contract of pledge with the pawnee to disclose all the material defects in the goods. If the pawnee incurs any loss later due to those defects in the goods which are hidden by the pawnor then the pawnor will be held liable for those and entitled to pay compensation to the pawnee.
Rights of the Pawnor
1. Defaulting pawnor’s right to redeem
Section 177 of the Contract Act provides the pawnor with his most valuable right. It states “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.”
Supreme court has pointed out “The special interest of the pledgee comes to an end as soon as the debt for which the goods were pledged is discharged. It is open to the pledger to redeem the pledge by full payment of the amount for which the pledge had been made at any time is there is no fixed period for redemption, or at any time after the fixed date and the right continues until the thing pledged to get lawfully sold.”
The right to redeem clearly continues up to the time on the expiry of which the pawnee has notified that the goods would be sold. But it does not extinguish only with the expiry of time, but continues until the actual sale of goods is made. Pawnor may redeem the goods at any subsequent time before the actual sale of them.
2. Legal heir’s right to redeem
If a pawnor dies, his/her legal heir can redeem the goods on his behalf.
In Kamili Sarjini v Indian Bank, certain gold ornaments were pledged with the bank as security for gold loans. The pawnor died. He left behind a will allowing his widow to redeem it on his behalf. The bank demanded probate. It was held that the bank had no right to do so. Neither probate nor succession certificate was necessary.
Rights and Duties of Pawnee
Duties of pawnee
1. Take reasonable care of the goods: – It is the duty of the pawnee to take reasonable care of the pledged goods. The care taken by the pawnee must be just, fair and reasonable care of the pledged goods. It should be as if the pawnee took care of his personal belongings. If due to any negligence of the pawnee the pledged goods are damaged then the pawnee is held liable to pay compensation to the pawnor.
2. To use goods for authorised purposes only: – The pawnee can use the pledged goods only when it is authorized by the pawnor. If the goods are used for any purpose that is not authorized then the pawnee will be held liable for any loss to the pawnor and also held liable to pay compensation to the pawnor.
3. To return the goods: – It is the duty of the pawnor to return the pledged goods when the amount against which the goods are pledged is repaid. This return of the pledged goods must be mentioned in the contract or as per the pawnor’s directions.
4. To return any profits arising from the goods: – It is the duty of the pawnee to return any profits incurred by the pawnee out of the pledged goods then the same shall be returned to the pawnor during the termination of the contract of pledge.
5. To keep goods separate: – It is the duty of the pawnee to keep the pledged goods separate from his own goods. If he mixed the pledged goods with his own goods then all expenses to separate them will be taken by the pawnee. And, if the separation of the same is not possible then the pawnee will be held liable for the damages caused to the pawnor and held liable to pay compensation to the pawnor.
Rights of Pawnee
1. Right of Lien– Section 173 entitles the pawnee with a right to retain goods until he is paid.
2. Money due under the pledge.
3. Interest to be paid on debt.
4. Necessary expenses for preservation of goods.
5. Right of retainer for subsequent advances: – Section 174 provides for a presumption that if there are any subsequent advances made by pawnee to pawnor, it will be included in the original debt only. Therefore, the pawnee has the right to retain the goods until subsequent advances are paid.
6. Right to extraordinary expenses: – The pawnee holds the right to recover any extraordinary expenses incurred by him in the preservation of pledged goods from the pawnor under Section 175 of the Indian Contract Act
Contract of pledge is governed by the Indian Contract Act, 1872. Contract of pledge is a subset of the Contract of Bailment. Contract of pledge and provisions relating to the pledge is defined under Chapter IX and sections 172 to 181 of the Indian Contract Act, 1872.
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