Contract of pledge and its essential elements

Contract of pledge and its essential elements 

Pledge is a kind of contract in which the bailment of goods as security for the repayment of debt or loan advanced or performance of obligation or promise. The person who pledges the goods for security purpose is called pledger or pawnor and the person in whose favor the goods has been pledged is called pledgee or pownee. Pledge is also defined as pawn. The contract of pledge is defined under section 172 of Indian contract act 1892.

Essentials of pledge

  • There must be a bailment for the security against payment or the security against the performance of the promise.
  • In case of pledge there is no transfer of ownership of the property or goods.
  • In case of pledge there must be delivery of goods from the pledger to the pledgee
  • There should be existing goods to be pledged
  • The subject of the pledge must be goods.
  • There is an exception to the circumstances in which pledgee has the right to sell the property or the goods that has been pledged.

Rights given to pawnor/pledger

The rights to the pledger/pawnor is given under section 177 of Indian contract act which states that the pledger/pawnor has the right to redeem. This means that when the payment of debt or the performance of promise is done, the pawnor has the right to redeem the goods or property pledged from pawnee before making the actual sale by the pawnee. The right to redeem is extinguished once the actual sale of the goods or property is done by the pawnee as per the section 176 of Indian contract act.

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Rights of a Pawnee

The rights of Pawnee are defined under Indian contract act 1872.

These are the following rights given to Pawnee

  • Right to retain goods till payment
  • Right to recover extraordinary expense
  • The right of suit to procure debt and sale of pledged goods
  • Right to receive back the product
  • Right to sell
  • Right to file suit

 Right to retain goods till payment

The Pawnee has the right to retain the goods till the payment of the goods. For example, Mr. Y took a loan of Rs 50 lakh from xyz bank and as a security he has given the papers of his property worth Rs 55 lakh. In this case the bank xyz has the right to retain the paper of Mr. Y property till the time he hasn’t returned the bank the sum of 50 lakh which he took as loan.

Right to recover extraordinary expense

The section 175 of Indian contract act says that the pawnee has the right to recover the extraordinary expense from the pawnor for the preservation of the goods pledged.

The right of suit to procure debt and sale of pledged goods

Section176 of Indian contract act states that on the failure to make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit proceedings against him or sell the goods. In the former case, the Pawnee retains the goods with himself as collateral security and initiate the court proceedings. He need not provide any notice of such proceedings to the Pawnor. And in the latter case, the Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount received from the sale of goods is less than the amount due, then the rest amount can be recovered from Pawnor. And if the Pawnee gets more amount than the due amount then such surplus is to be given back to Pawnor.

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Right to receive back the product

The pawnee has the right to receive back the product after the performance of the promise. From the above example Mr. Y has the right to receive back the papers of his property worth 55 lakh after clearing his loan of 50 lakh (along with interest if applicable) which he took from the xyz bank. The xyz bank has not right to retain the papers of the property after getting back the amount of loan.

Right to sell

The pawnee has the right to sell the goods which the pawnor has kept with the pawnee for the particular purpose. In the above example the bank xyz has the right to sell the property of Mr. Y and recover the amount which it has given as loan, if Mr. Y fails to pay back the amount loaned to him in the given period of time. But for this the pawnee has to notify pawnor before the selling his land.

Right to file suit

Th pawnee has the right to sue the pawnor for the recovery of the amount which he has given to the pawnor while holding the products promised as the security. He has the authority to sue for the offer of goods swore and cash instalment because of him.

Difference between pledge and bailment

  • Transfer of goods from one person to another against some security for the repayment of debt is called pledge. Whereas transfer of goods from one person to another for some specific purpose is called bailment.
  • Bailment is defined under section 148 of the Indian Contract Act, 1872 whereas pledge is defined under section 172 of the Indian Contract Act, 1872.
  • The party who delivers the pledged goods is known as Pledger or Pawnor and the person receiving such goods is known as Pledgee or Pawnee. Whereas the person who delivers the bailed goods is known as Bailor and the person receiving such goods is known as Bailee.
  • Consideration is necessary in pledge whereas consideration may or may not be present.
  • Pledgee or Pawnee has the right to sell the goods whereas bailee has no right to sell the goods bailed.
  • Pledgee or Pawnee cannot use the goods pledged whereas Bailee can use the goods only for a specific purpose only and not otherwise.
  • The purpose of pledged goods is to act as security for repayment of debt or performance of the promise whereas the purpose of bailed goods is for safekeeping or repairs etc.

Author: Rohit Soni,
NMIMS Kirit P Mehta School of Law, First year student

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