Pledge under Contract Law- Pawnor, Pawnee Rights, Mortgage, Lien
Pledge under Contract Law- Pawnor, Pawnee Rights, Mortgage, Lien

 

“Every pledge is a bailment but every bailment is not a pledge.”

 

Abstract

A pledge is often known as a special kind of bailment and the basis of distinction is the object of the contract. Whenever the goods are being delivered with an object to provide security for a loan or for fulfilling an obligation, the bailment will be known as pledge. This Article extensively deals with the concept of pledge by covering all its aspects and differentiating it from other similar concepts.

Introduction-

A pledge (also known as pawn) has been defined in Chapter IX under Sections 172 to 179 of the Indian Contract Act, 1872. Section 172 of the Act defines pledge as “The bailment of goods as security for payment of a debt or performance of a promise.” The bailor is called the ‘pledger’ or ‘pawnor’ and the bailee is called the ‘pledgee’ or ‘pawnee.’

For ex., If Z borrows Rs. 200 from Y and keeps his watch as a security for debt payment, the bailment of watch will be a pledge.

In Lallan Prasad v. Rahmat Ali[1], the Supreme Court defined Pledge as “a bailment of personal property as a security for some debt or engagement. A pawnor 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.”

All sorts of movable property can be pledged. The only essential required is “delivery.” If actual delivery is impracticable, a symbolic delivery will be sufficient for such goods. In Morvi Mercantile Bank Ltd v. Union of India[2], the Supreme Court held that the delivery of railway receipts was the same thing as delivery of goods.

 

Essentials required for a Pledge-

  • Bailment of goods pledged: The goods capable of constructive or actual delivery are the most important subject matter in a contract of pledge. Any sort of goods, documents and valuable things can be pledged. Shares can also be pledged by delivery of share certificate. Other negotiable instruments can also be pledged.
  • Bailment by way of security: Delivery of goods by the pledger to the pledgee by way of security, to be returned or disposed according to the instructions of the pledger is a pledge.
  • Security for payment of debt: The goods are delivered by pledger to pledgee as the former has taken a loan from the latter and the goods are the security of the repayment of loan and interest.

 

Rights of Pawnor-

  1. a) Right to retain goods (Section 173): The pawnee has a right to retain the pledged goods till the time his loan is due. He can retain them for the interest of the debt and all expenses incurred in respect of such goods for their preservation. However, he has a right to exercise only particular lien over goods.
  2. b) Right to retain subsequent advances (Section 174): It is always presumed that the right to retain the pledged goods also extends to the money lent by the pledgee to the same pledger after the date of pledge except in the case of a contract contrary to such presumption.
  3. c) Right to unordinary expenses (Section 175): The pawnee has a right to get reimbursement of any extraordinary expenses incurred by him for the preservation of goods pledged. He does not have a right to retain the goods but only to sue for recovering of the expenses.
  4. d) Right against true owner (Section 178 A): When the pledger’s title to the pledged goods is defective and the possession has been obtained under a voidable contract but the contract is still in existence, the pledgee has a right to acquire good title to the pledged goods if he acts in good faith.

 

Rights of Pawnee-

  1. a) Right to receive back the goods: The pawnor has a right to receive the goods back once the promise has been performed or the loan and interest has been repaid.
  2. b) Right to redemption of debt: When a specific time has been stipulated for performance of a promise or repayment of debt and the pawnor does not perform such promise or repay the debt at such time, the pawnor has a right to redeem the pledged goods before their sale but he shall pay any expenses arisen because of his fault.
  3. c) Right to maintenance and preservation of goods: The pledger has a right to see that the pledgee is preserving and maintaining the pledged goods properly.
  4. d) Rights of ordinary debtor: The pawnor also has rights similar to that of an ordinary debtor conferred on him by various laws made for protection of the debtors.

 

Difference between Pledge and Bailment-

Pledge Bailment
1) The bailment of goods as a security for the performance of the specific promise is known as a pledge. 1) Bailment can be for the purpose of any kind.
2) The pawnor has to pay charges if he fails to repay the debt. 2) The bailee has a right to sue, retain the goods and to sale in case of default of performance of the promise.
3) The Pawnee does not have a right to use the goods.

 

3) The bailee can use the goods if the terms of bailment provide for it.

 

Difference between Pledge and Mortgage-

Pledge Mortgage
1) The concept of pledge is governed by the Indian Contract Act, 1872. 1) The concept of Mortgage is governed by the Transfer of Property Act, 1882.
2) A pledge can be made only in respect of a movable property. 2) A mortgage can be made only in respect of immovable property.
3) The ownership of the pledged goods lies with the pledger. 3) In certain cases of the mortgage, the title of property also passes to the mortgagee.
4) Delivery of possession is must. 4) Delivery of the mortgaged property is not necessary.
5) The pledgee does not have a right to foreclosure. 5) The mortgagee has a right to foreclosure against the mortgagor.

 

Difference between Pledge and Lien-

Pledge Lien
1) Pledge is a bailment of goods as a security for performance of a promise or for payment of debts. 1) Lien is a right in which a person can possess the goods till the claim relating to them is satisfied.
2) If a pledger fails to pay, the pledgee has a right to sell the goods. 2) A mortgage can be made only in respect of immovable property.
3) The pledgee has a right over the goods pledged even if they are not in his possession. 3) The right of lien can be exercised when the pledged goods are in possession and there is no right if the possession is lost.

 

Conclusion

A pledge is a special kind of bailment in which goods are bailed as a security for performance of a promise or payment of a debt. A pledge is a bailment for security. From the above discussion, a conclusion can be drawn that pledge is different from a mortgage, line and bailment as delivery is an important factor to constitute a pledge.

 

In Ward v. Hobbes, the House of Lords held that a vendor cannot be expected to use artifice or disguise to conceal the defects in the product sold, since that would amount to fraud on the vendee; yet the doctrine of caveat emptor does not impose duty on vendor to disclose each and every defect in the product. The caveat emptor imposes such an obligation on vendee to use care and skill while purchasing such a product.

In Ward v. Hobbes, it was held that, in order to conceal the defects in the products sold, the vendor cannot be expected in any way, to use artifice or disguise the product, as this would amount to have committed fraud by the vendor on the vendee.

 

[1] AIR 1967 SC 1322

[2] AIR 1965 SC 1954

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