This article on ‘Contract of Pledge under the Indian Contract Act: All you need to know‘ was written by Rishabh Tyagi, an intern at Legal Upanishad.
This article deals with the concept of the pledge as defined under the Indian Contract Act, of 1872 (hereinafter, “Act”). Pledge can be said to be a sub-species of bailment, which involves the delivery of goods in exchange for securing a loan or fulfillment of an obligation. The Act states several nuances important for the contract of pledges like the rights of the Pawnor, and Pawnee, and mentions situations where such rights can be exercised. Sections 172 to 179 of the Act deal with the concept of the pledge.
Ingredients of a pledge
- Delivery of Goods
An important element of a contract of a pledge is the delivery of possession of goods by the Pawnor to the Pawnee. Delivery can be either actual or constructive as stated under Section 149 of the Act. In Revenue Authority vs Sudarsanam Picture, the producer took a loan from a financial distributor in exchange for the final print of the film to be delivered when ready. This contract was held to be not a pledge as there was no actual delivery of possession.
In certain cases, the good pledged is allowed to remain in the custody of the pledger. In Bank of Chittoor vs Narasimbulu, certain pieces of equipment were allowed to remain with the Pawnor. They were essential for the running of Pawnor’s cinema. It was held to be a case of constructive delivery of possession and the contract came under the domain of pledge.
- In pursuance of an agreement
The delivery of goods in a pledge by a Pawnor to Pawnee shall be for the fulfillment of a contract. Although the advancement of loans and delivery of goods need not be synchronous. A pledge may be affected by the delivery of possession after an advance is made.
Rights of Pawnee
- Right to Retain
Section 173 of the Act empowers a pawnee to retain goods bailed by the pawnor in case of default on interests of the debt and this right is also extended to expenses incurred by him in keeping and preserving the goods pledged. However, Section 174 puts this right in check by stating that a pawnee cannot keep the goods for a contract that was never executed between the Parties. The possession of goods shall remain with the pawnee only for the promise they were pledged. After the payment of debts or the performance of obligations on part of the pawnor, the goods shall be duly returned by the pawnee.
Act under Sections 160 and 161 provide the remedy to the pawnor in relation to the return of bailed goods and puts the liability on the pawnee in case the return is not possible due to negligence on his part resulting in deterioration, loss, or damage to the bailed goods.
- Extraordinary Expenses
Sometimes it so happens that certain goods require preservation costs which fall upon the pawnee. For example, if a person delivers his aeroplane as a pledged good, its preservation would be expensive until the pawnor fulfills part of his obligations. So, Section 175 empowers the pawnee to receive remuneration for such maintenance or preservation of the pledged goods.
- Default on the part of the pawnor
When there is a default or breach on part of the pawnor in terms of payment, the Act via Section 176 empowers the pawnee via two pathways. Firstly, the pawnee may file a suit against the pawnor for default and keep the goods as collateral security. The right to sue is a personal act and a lot depends upon the terms of the loan contract. But, the pawnee can until the suit or debt is settled, retain the goods. Secondly, the pawnee is entitled to sell the good, provided reasonable notice is given to the pawnor.
This requirement of giving a reasonable notice is statutory and it cannot be dispensed with by putting a contrary clause in the contract. These two rights of suing and selling goods are not related to each other and are disjunctive.
Right to Redeem
The provision under Section 177 gives the pawnor a right to redeem the goods pledged. Even if the pawnor fails to pay on time, the provision enables him to redeem the goods before the sale or another deadline provided that additional expenses must be paid by him that occurred due to default on his part.
In case the goods are sold by the pawnee, two situations arise. In the first scenario, if the goods are sold at a loss, the pawnor would still be liable to pay the deficit amount. In the second case, if the sale is made for a profit, the excess amount shall be paid by the pawnee to the pawnor.
What can be inferred from this provision is that the pawnor has an absolute right to redeem once the debt or the amount due is cleared. On satisfaction of a debt or arrangement between the pawnor and pawnee, the pawn extinguishes and the pawnee is obliged to return the pledged goods.
Possession under Voidable Contract
Section 178A deals with a case where the possession of goods obtained by the pawnor is subject to a contract voidable under provisions of Section 19 or 19A. If such a contract hasn’t been rescinded at the time of pledge, the Act provides that the title of pawnor over such goods holds good.
There are different types of contracts that are mentioned in the Act, the pledge being a niche among them. It is a special type of contract which differs even from its nearest relative i.e., bailment. Two important factors determine whether a given arrangement is a pledge or not. There shall be a delivery of goods (either constructive or actual) and such a delivery shall be in line with a contract made for that specific arrangement agreed upon by both the pawnor and pawnee.
The provisions in relation to the rights of the pawnor and pawnee seem to resemble those given in the Transfer of Property Act, of 1882 for the rights in a mortgage agreement (although both are different domains). On an overall view of the pledge-related provisions, the Act does seem to create a balance between the rights of the pawnor and pawnee.
- Avtar Singh, Contract and Specific Relief 711-732 (Eastern Book Company, Lucknow, 13th edn., 2021).
- Huda Naaz. (2022, November 9). Contract of Pledge under the Indian Contract Act. Retrieved: https://www.juscorpus.com/contract-of-pledge-under-the-indian-contract-act/
- Revenue Authority vs Sudarsanam Picture, AIR 1968 Mad 319
- Bank of Chittoor vs Narasimbulu, AIR 1966 AP 163