What is the Concept of Pledge?
A variety or specie of bailment is a pledge. Bailment is the holding of things as security for the payment of a debt or the fulfilment of a promise. The individual who pledges (or bails) is referred to as pledgor or pawnor, while the bailee is referred to as pledgee or pawnee. The property’s ownership does not change as a result of the commitment. The pledgee has the right to sell the property pledged under extraordinary circumstances. The bailment of promise is particularly addressed in sections 172 to 182 of the Indian Contract Act, 1872.
The pawnor transfers/bailed his goods to the Pawnee as security for the sum he gets from the Pawnee in the pledge. The pawnor is responsible for paying the sum back to the Pawnee, and the Pawnee is responsible for returning the goods once the pawnor has paid the amount. If the Pawnee makes illegal use of the items bailed to him, he will be responsible for compensating the pawnor. If the pawnor fails to repay the loan, the Pawnee has the right to sell the items after providing the pawnor notice.
A lends money to B against the security of jewellery deposited by B with him i.e. A. This bailment of jewellery is a pledge as security for lending the money. B is a pawnor and A is a pawnee.
Who is a Pawnor?
In the case of a pledge, the bailor is known as the pawnor or pledger. The pawnor is the person who gives the goods as security for the payment of a debt or the fulfilment of a promise.
Who is a Pawnee?
In the case of a pledge, the bailee is known as the pawnee or pledgee. The pawnee is the individual to whom the goods are handed as security for the payment of a debt or the fulfilment of a promise.
Rights of Pawnee and Pawnor
Key features of Pledge are:
The Pawnee will get the property that was pledged. The delivery must be in accordance with the contract. This delivery will be for security purposes only. Furthermore, delivery of goods will be subject to a return condition.
Rights of Pawnee
1. Right to retain the pledged goods [Section 173]:
The pawnee is entitled to keep the goods pledged not only for the payment of the debt or the fulfilment of the promise but also for the interest on the debt and other required expenditures paid by him in connection with the possession or maintenance of the pledged goods.
Example: Where ‘M’ pledges stock of goods for a certain loan from a bank, the bank has a right to retain the stock not only for adjustment of the loan but also for payment of interest.
2. Right to the retention of subsequent debts [Section 174]:
In the absence of a contract to the contrary, the Pawnee shall not keep the goods pledged for any obligation or promise other than the debt or promise for which they are pledged; nevertheless, such contract shall be inferred in relation to subsequent advances made by the Pawnee.
3. Pawnee’s right to extraordinary expenses Incurred [Section 175]:
The pawnee is entitled to a repayment from the pawnor for extraordinary costs paid in the maintenance of the pledged property. He does not, however, have the right to keep the items for such costs.
4. Pawnee’s right where pawnor makes default [Section 176]:
If the pawnor fails to pay the debt or execute the promise at the specified time, the pawnee may sue the pawnor for the debt and keep the items pledged as collateral security; or he may sell the goods pledged after providing the pawnor sufficient notice of the sale.
The pawnor is still obliged to pay the balance if the profits of the sale are less than the amount due on the obligation or promise. If the profits of the sale exceed the amount owed, the pawnee must return the excess to the pawnor.
Duties of Pawnee
1. To take reasonable care of the goods pledged: The act states that pawnee must have to take reasonable care of the goods pledged.
In this case, the bank was the Pawnee and the defendant was the pawnor, the pawnor bails his 5000 tins of groundnut oil as security against the amount of Rs. 75000. The defendant died. The bailed goods of the defendant were lost from the possession of the bank. Later, after the given time limit bank files a case against the defendant can ask for the repayment of the amount. The bank states that, as the bank is the Pawnee, they have the right to get their money back, but because they lost the goods of the plaintiff whose market value is Rs. 75000, that makes them not able to get their payment back, thus the petition got dismissed.
2. Not to make unauthorized use of goods pledged: The act states that the goods must be used for the purpose mentioned in the contract of Pledge and not otherwise.
If A bails his car to B as a security against a loan amount of Rs.90000. If B uses the car as a taxi without A’s Consent. Here, B will be liable for unauthorized use of the car.
3. To return the goods: The act States that, the pawnee has a duty to return the goods pledged after the purpose is accomplished.
If A bails his watch to B as security for Rs.2000 as a loan. It is the duty of B to give back the watch to A when A repay Rs.200
4. To return any accretion that increases to the goods: The pawnee is bound to return the added accrued value from the goods pledged.
If A bails his cow to B as a security against a loan amount of Rs.80000. During B’s possession cow gives birth to a calf. If A repays the amount, It is the duty of B to give that calf and the cow back to A.
5. Duty not to mix the goods: Pawnee has a duty not to mix the goods pledged
If A bails 100lt of petrol to B against the loan of Rs.13000. It is the duty of the B to not mix the goods of A with his goods.
Rights of a pawnor
As the bailor of goods pawnor has all the rights of the bailor. Along with that he also has the right of redemption to the pledged goods which is enumerated under Section 177 of the Act.
1. Right to redeem [Section 177]
If a deadline is set for the payment of the debt or performance of the promise for which the pledge is made, and the pawnor fails to pay the debt or perform the promise by the deadline, he may redeem the goods pledged at any time before they are actually sold; however, he must pay any additional expenses incurred as a result of his default.
If A bailed his watch as security and took Rs.800 as a loan from N. A return the money to N. Here, A has a right to get his watch back.
Duties of Pawnor:
1.Duty to reimburse ordinary and extraordinary expenses.
If A bails his cow to B for Rs.8000. B paid all the expenses like food for cow, shelter etc. Here A has a duty to pay the expenses back to B.
2. Duty to repay the debt plus any interest due on debt.
If A bails his gold chain as security to B for a loan of Rs.3000 Here, A has a duty to pay back the amount of loan to B.
3. Duty to pay claims and damages or compensation to Pawnee
The pawnor has a duty to pay the compensation or damages to the Pawnee if the Pawnee suffered any type of legal damages due to the pawnor’s goods.
If A bails his bike as security to B for the loan of Rs.50000 with the term that B can use his bike. A, however, didn’t disclose the fact to B that the breaks of the bike are not working well. B met with an accident and suffered damage. Here it is the duty of A to compensate B for the damage he has suffered due to A’s goods.
The pawnor transfers/bailed his assets to the Pawnee as security for the sum he gets from the Pawnee in the pledge. The pawnor is responsible for paying the sum back to the Pawnee, and the Pawnee is responsible for returning the goods once the pawnor has paid the amount. If the Pawnee makes illegal use of the items bailed to him, he will be responsible for compensating the pawnor.
Author: Shreyas Nair,
Symbiosis Law School, Nagpur / First Year / Law