The Contract of Pledge

INTRODUCTION

Pledge is a special kind of bailment contract wherein a person delivers the possession of an item as collateral to a loan or a debt. The person delivering the item is called the pawnor and the person to whom the delivery is made is called the pawnee. The delivery of the item is considered as a security to the loan or debt taken by the pawnor. The Indian Contract Act makes the provision for such special contracts.

PLEDGE

Sections 172 – 181 of the Indian Contract Act deal with the provisions for pledge under the heading ‘Bailment of Pledges’. Pledge as defined in the Act is the bailment of goods as security for a payment of a debt or a performance of a promise. Section 171 defines pledge, pawnor and pawnee.

To form the contract of pledge following are the essentials to be fulfilled:

1. Valid Contract: The basic essentiality for any kind of contract is that it should be a valid contract. It should fulfill the basic essentials of a valid contract as enshrined under section 10 of the Indian Contract Act. Since, pledge is a special kind of contract it need not fulfill all the conditions of a valid contract but must fulfil the basic essentials that there should be offer and acceptance, intention to enter into a contract, consideration, parties should be competent to contract and object of the contract should also be valid.
2. Delivery of Possession: To constitute the contract of pledge there should be some delivery of possession. It can be actual or constructive but delivery is required. This delivered item is considered to be the security for the debt that the pawnor has obtained from the pawnee.
3. Ownership not transferred: In a contract of pledge with the delivery of possession ownership is not transferred. Ownership remains with pawnor. It is similar to bailment where the delivery is made for a specific purpose is made and when the purpose is accomplished the item the goods are delivered back to the owner that is, the bailor. Similarly, in pledge contracts it is the possession that is transferred and not the ownership.
4. Security against debt: There should be some security against the debt incurred by the pawnor. The security should have considerable amount so as to fulfil the loss of the pawnee in case of default. The pawnee has the right to sell the security in case the default occurs.
5. Return of goods on repayment: A valid pledge contract also requires that when the pawnor has made the repayment, the goods should be returned duly to the pawnor. Since, the debt is cleared, the goods that were acting as a security to the debt needs to be returned in the same manner.

RIGHTS OF PAWNOR AND PAWNEE

RIGHTS OF PAWNEE

Right of Retention: Section 173 enshrines the right of the pawnee to retain the goods on non-payment of the debt after the time for the debt has lapsed. This right of the pawnee is secured until the payment is not done by the pledgor.

Right to extraordinary expenses: If, during the time the goods are with the pawnee, he had to incur extra expenses for the preservation of the goods then the pawnee has the right for that loss’s compensation. The pawnor can be compelled to pay off the amount that the pawnee had to incur for preservation.

Right to sue, retain or sell or dispose: If the pawnor defaults in paying the debt then the pawnee has the right to bring a suit against the pawnor and may retain the goods pledged. He may also sell the goods pledged after giving a notice to the pawnor. This is enshrined under section 176 of the Indian Contract Act. This section also states that if the amount obtained by selling the goods is not sufficient then the pawnor is liable to pay the remaining amount.

RIGHTS OF PAWNOR

Right to redemption: The pawnor has the right to get back his goods after paying the debt to the pawnee. This right also confers on the pawnee, the duty to return the good of the pawnor after the payment of the debt.

Right to be notified: Pawnor also has the right to be notified when the payment is due. Pawnee is required to send a notice to pawnor before he sells the goods or claim right over it.

Right to Inspection: Pawnor also has the right to inspect whether pawnee is taking good care of the goods that are pledged. By good care is meant the care taken by person of ordinary prudence. Thus, it also confers duty on the pawnee to take care of the goods pledged.

CONCLUSION

The contract of pledges can be put in the category of special contract because although it does not satisfy all of the essentials of a valid contract although it is a kind of contract. The Contract Act has provided the sections pertaining to pledge from section 172 to 181. These sections deal with the rights and duties of the pawnor and pawnee. Section 178 tells of the validity of contract when a mercantile agent pledges goods. The provisions of the Contract Act pertaining to pledge contracts provide safeguards the right of both the pawnor and the pawnee.

Contributed by- Ishita Saxena

Symbiosis Law School, Noida (2023-28)