PLEDGE

PLEDGE (S.172)
Literal meaning can be related to Promise
Also known as PAWN

A pawn or a pledge is a bailment of personal

property as a security for some debt or
engagement.
Definition: the bailment of goods as security for
the payment of a debt or performance of a
promise is called pledge.

Pledge is a special kind of

bailment and the main
distinction is the object of the
contract.

PLEDGE

The object of the

delivery of goods

To provide a security
for a loan or for the
fulfilment of an
obligation

BAILMENT

GOODS
BAILOR

BAILEE

(Book)
(For reading)
PURPOSE
CONTRACT OF BAILMENT

PLEDGE

GOODS
PAWNEE

PAWNER

(jewellery)
(to provide a security for a loan)

PURPOSE
CONTRACT OF PLEDGE

PARTIES TO THE CONTRACT

The person who
delivers goods as
a security for
payment of his
debt.

PAWNER
or
PLEDGER

The person to
whom the goods
are delivered as a
security for the
loan he raised.

PAWNEE
or
PLEDGEE

Thus, a pledge constitutes the delivery of

goods by the pawnor to the pawnee as a
security under a contractual obligation that
the goods shall be returned or disposed off
as per pawnors direction on the debt being
discharged or the fulfilment of the obligation

FEATURES:
Only the real owner can pledge
Movable property
The pledgee retains the possession of the goods until
the pledgor (i.e. borrower) repays the entire debt
amount.
In case there is default by the borrower, the pledgee has
a right to sell the goods in his possession and adjust its
proceeds towards the amount due (i.e. principal and
interest amount).

Some examples of pledge are Gold /Jewellery

Loans, Advance against goods,/stock, etc.

MODE OF DELIVERY
two modes by which shares can be pledged to a
pawnee

Actual delivery
(S.149)

Constructive
delivery(S.149)

Delivery by
attornment

Eg: pawner
hands over
the gold
ornament to
pawnee

Eg: pawner
gives the key
of the
godown
where goods
are kept

Eg: pawner
consents to a
third person
to hold the
documents
in behalf of
the pawnee

SUBJECT MATTER OF PLEDGE

All MOVABLE goods, capable of actual or constructive delivery
form the subject-matter of a pledge.
Though the term goods has not been defined under the
Contract Act, the Sale of Goods Act, 1930 defined the term
goods as follows:

every kind of movable property other than actionable

claims and money; and includes stock and shares,
growing crops, grass, and things attached to or forming
part of the land which are agreed to be severed before
sale or under the contract of sale;

ESSENTIAL CHARACTERISTICS

1.SECURITY FOR A DEBT

2.SPECIFIC MOVABLE PROPERTY
3.AGREEMENT TO RETURN GOODS
4.DELIVERY OF POSSESSION
5.IN PURSUANCE OF A CONTRACT

SECURITY FOR A DEBT

The goods should be given as a security to the pawnee for payment of
the debt taken or the performance of the obligation.

SPECIFIC MOVABLE PROPERTY

The goods passed as security to the pawnee must be movable
property and ascertainable at the time of the contract.

AGREEMENT TO RETURN GOODS

The essence of a contract of pledge is that the pawnee should agree
to return the goods on the satisfaction of the debt or the
performance of obligation. In absence of such agreement, a valid
pledge cannot come into existence.
A pledge, being essentially a contract of bailment, the pawnee is
under a duty to take care of the goods pledged as a man of ordinary
prudence would take under similar circumstances.

DELIVERY OF POSSESSION
The goods have to be delivered
by the pawnor to the pawnee.
Delivery is necessary for a
complete pledge and it may be
either actual or constructive
POSSESSION

MORVI MERCHANTILE BANK v UNION OF INDIA, AIR 1965 SC 1954

A firm doing business in Bombay entrusted goods worth Rs. 35,500
to the Railway for delivery in Delhi
the firm endorsed the railway receipts to a Bank as a security against
an advance of Rs. 20,000 made by the Bank to the firm.
When the goods reached the destination, the Bank refused to take
delivery, on the ground that they were not the goods consigned by
the firm.
Meanwhile the goods were lost in the transit
The Bank, thereafter filed a suit for the recovery of the value of the
goods.
The trial court dismissed the suit and on an appeal by the Bank, the
High Court allowed the appeal and decreed the claim for Rs. 20,000
on the ground that as pledgee of the goods, the Bank suffered loss
only to the extent of the loss of its security.
Both the Bank and the Railway appealed to the Supreme Court

CONTENTIONS

The endorsement of the railway receipt in favor

of the Bank, did not constitute a pledge of the
goods covered by the receipt and that the Bank
had no right to sue for compensation.

COURT HELD:
When goods are carried by railways over long
distances and remain in transit for long period of
time, the railway receipt is regarded as the symbol
of the goods for all purposes.
Delivery of railway receipts therefore was the
same thing as delivery of goods.
A pledge being a bailment of goods as security for
payment of a debt, the pledgee will have the same
remedies as the owner of the goods would have
against third person for deprivation of the said
goods or injury to them.

REVENUE AUTHORITY v SUDARSANAM PICTURES, AIR 1968 Mad 319

FACTS:
The producer of a film borrowed a sum of money
from a Financier-distributor, and agreed to deliver
the final prints of the film when ready.
ISSUE: whether this amounts to a contract of
pledge?
OBSERVATION: there being no actual transfer of
possession it cannot be considered as a contract
pledge.
JUDGEMENT: there is no contract of pledge

PLEDGE BY HYPOTHECATION:
Goods are allowed to remain in the custody of the
pledger for a special purpose.
REEVES v CAPPER
FACTS: The captain of a ship pledged his chronometer
with the ship owner who allowed him to use the
instrument for the purpose of the voyage. The captain
pledged it over again with another person.
ISSUE: Whether the first pledge was valid?
OBSERVATION: According to the concept of hypothecation
the pledge is valid

BANK OF CHITTOOR v NARASIMBULU, AIR 1966 AP

163
FACTS: a cinema projector and accessories were
pledged with a bank. The bank allowed the
property to remain with the pledgers, since they
formed the equipment of a running cinema.
Subsequently the pledgers sold the machinery.
OBSERVATION: the sale was subject to the pledge.
There was a constructive delivery.

IN PURSUANCE OF THE CONTRACT

For a valid contract of pledge it is essential that
the delivery has to be made in pursuance of the
contract of pledge.
It is not necessary that delivery and advance has
to be contemporaneous.
Delivery may be made before or in
contemplation of an advance, which ripens into a
pledge as soon as the advance is made.
Illustrative case: BLUNDELL LEIGH v
ATTENBOROUGH, (1921) 3 KB 233

FACTS:
The plaintiff gave her jewellery to one Miller to lend her
some money after he estimates the value of the jewellery.
He was given a right to keep the jewellery as security if he
made the advance.
That very same day Miller plledged the jewellery with a
pawnbroker (defendants), who in good faith advanced
1000 euro.
After 5 days Miller advance 500 euro to the plaintiff on
the security of the jewellery.
Later Miller died and she came to know about the facts.
She paid the amount and sue the defendant for the
return of her jewellery.

CONTENTIONS BY PLAINTIFF

When she gave the jewellery to the Miller

for examination there was no valid pledge
and he became only a gratuitious bailee
having no right to deal with it.

Since he had already parted with the

possession of the goods at the time of
advancing money, no valid pledge could
arise.

OBSERVATION BY COURT

it is clear that the plaintiff intented, when

she handed over the jewellery to Miller, to
create a valid pledge as between him and her
from the moment when he handed her the
money by way of loan which she was
prepared to accept
The court held the pledge as valid.

RIGHT OF PAWNER
RIGHT OF REDEMPTION
(S.177)
Normally, the right to redeem the pledge continues upto the
time on the expiry on which the pawnee has notified that the
goods would be sold.
But under S.177, It is open to the pledger to redeem the
pledge by full payment of the amount for which the pledge
has been made at any time after the fixed date and the right
continues until the thing pledged is lawfully sold.
When the pawner redeems after the expiry of the specified
time, he is bound to pay to the pawnee such expenses as
have arisen.

A suit for right to redemption has to be filed for

excercising this specific remedy.
The pawner has the right to take back with the
goods the increase, if any , that the goods have
undergone during the period of pledge.
M.R.Dhawan v. Madan Mohan, AIR 1969 Del 313 where certain shares of a company were pledged and
bonus shares were issued during the period of
redemption, it was held that the pawnor is entitled
to the bonus shares so issued.

UNION OF INDIA v DEEP CHAND, AIR 2007 Uttr 455The provisions of the IT Act could not defeat the
right of the pawnor to institute the suit for recovery.
LEGAL HEIR: KAMALI SARJONI v. INDIAN BANK, AIR
2008 AP 71- certain gold ornaments were pledged
with the bank as security for gold loan. The pawner
died. He left behind a will enabling his widow to
redeem. The bank demanded probate. The court
held that the bank has no right to do so. Neither
probate nor succession certificate was necessary.

OTHER RIGHTS
Right to sue: within a period of 3 years
under limitation act if the pawnee rufuses
to return the goods even after returning
the whole amount.
Right to take care of goods: right to
demand the pawnee to take reasonable
care and preservation of the goods
pledged.
Right to receive increase or profit from
the goods

RIGHTS AND LIMITATIONS OF PAWNEE

1.RIGHT OF RETAINER (Ss.173 and
174)
2.RIGHT TO EXTRAORDINARY
EXPENSES (S.175)
3.RIGHT WHERE PAWNOR MAKES
DEFAULT. (S.176)
a) Right to sell
b) Right to sue

RIGHT OF RETENTION

S.173:
The most important right of a pawnee is the right to retain the
goods pledge until the dues are paid.
The right to retain is not only for payment of the debt or
performance of the promise, but for the interest due on the debt
and all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
S.174
The pledgee can retain the goods only for the payment of that
particular debt for which the goods were pledged and not for any
other debt or promise, unless there is a contract to contrary.
However after a pledge is created, a subsequent advance is made
without any other security, a contract to burden the same goods
shall be presumed.

The pawnee has the option of exercising his right to

retain the pledged goods in relation to the following:
payment of the debt or performance of the promise
for which the pledge was created;
(ii) interest on the debt;
(iii) all necessary expenses incurred by the pawnee in
respect of the possession or preservation of the goods
pawned.

Lien and Pledge

The right of retainer can be related to the
nature of a particular lien. Yet lien is
different from pledge.
A pledge creates a special interest in the
property pledged in favour of the pledgee
giving him the right to sell, but a lien is only
a right to retain.

SPECIAL PROPERTY IN GOODS:

special property or interest exists in the goods pawned so

that the pawnee can compel payment of the debt, or can
exercise his right to sell the goods as and when it arises.
It is to be noted that only a special property and no legal
title to the goods pledged is vested in the pawnee.

RIGHT OF POSSESSION

RIGHT OF ENJOYMENT

NATURE OF SPECIAL PROPERTY

Bank Of Bihar vs State Of Bihar & Ors, 1971 AIR 1210
Certain sugar was pledged with the plaintiff bank
Part of the said sugar was seized under the Public Demands
Recovery Act in connection with a demand of sugar cess by
the Cane Commissioner (state).
The sugar was sold and the sale proceeds were attached
towards the payment of cess. No payment was made to the
plaintiff bank, which thereupon filed a suit to enforce its
claim.
The trial court granted a decree against the State of Bihar for
the price of the sugar.
The High Court however held that no decree could be
granted against the State as the seizure was lawful.

REASONING BY THE SC: so long as the

pawnees claim is not satisfied no other
creditor of the pawner has the right to take
away the goods or their price.
The seizure could not deprive the pledgee of
his right to realise the amount for which the
goods were pledged and therefore, the state
was bound to indemnify him up to the
amount which would have been realised
from the goods.

HYPOTHECATION AND RIGHT OF SEIZURE

When the pledge is by way of

hypothecation, the pledgee
cannot directly seize the goods
by entering premises or
otherwise. It can be done either
with the consent of the borrower
or through a court order.
The pledgee does not have the
right to enter the premises, lock
and seal the same.

RIGHT TO EXTRAORDINARY EXPENSES (S.175)

The pawnee is entitled to receive any

extraordinary expenses incurred by him for the
preservation of the goods pledged.
But he does not have the right to retain the
goods for the recovery of the extraordinary
expenses. The right of lien can be excercised only
for necessary expenses.

Illustration 1: A bank took over the possession of the

hypothecated truck but thereafter neither sold it according to
the agreed terms nor took care of it, leaving it in open place.
HELD: The bank was liable for the extraordinary depreciation.
(Central Bank of India v Abdul Mujeeb Khan, (1997) AIHC 299

Illustration 2: A bank provided money for purchase of a lorry and also

paid insurance premium and subsequently the lorry was lost by theft.
Held: insurance company was liable to pay the insurance money to the
bank irrespective of the fact that the insurance was not in the name of
the bank. Insurance company and the borrower were joint debtors.
Insurance company to the extent of insured value and the borrower for
the advance. (SBI V Suresh Kumar, (1995) AIHC 3889)

RIGHT WHERE PAWNOR MAKES DEFAULT (S.176)

This enables the pawnee to take certain measures
in case of default made by the pawnor in the
repayment of debt or performance of the
obligation at the stipulated time.
when the time has not been stipulated in the
agreement, the debtor is not in default until notice
has been given by the creditor asking the debtor to
repay the loan by a certain time and that time has
passed.

The pledgee gets two distinct rights under S.176

of the Act.

The pledgee may

sue upon the
debt and retain
the goods as a
collateral
security.

He may sell the

goods after
reasonable notice
of the intended
sale to the
pawner

RIGHT TO SELL
The power of sale is conferred for the benefit of the pawnee, and can
be exercised at his discretion.
A pawnor cannot force the pawnee to exercise the right of sale as a
means for discharging the debt or satisfying the decree

If the proceeds of such sale are:

Less than the amount of

the debt = pawner liable to
pay the balance

Greater than the amount

so due = the pawnee
shall pay over the
surplus to the pawner.

RIGHT TO SUE
The pawnee has been conferred with the right to
institute a suit claiming the repayment of debt in the
event of default by the pawnor
An express authority given by the pawnor to the pawnee
to sell the goods does not take away his right to institute
proceedings against the pawnor.
If by reason of his own act, the pledgee is unable to
return the goods, he cannot have judgement for the debt
Supreme Court in Lallan Prasad v Rahamat Ali (AIR
1967 SC 1322)

Lallan Prasad v Rahamat Ali (AIR 1967 SC 1322)

FACTS:
The defendant borrowed Rs.20,000 from the plaintiff on
a promissory note and gave him aeroscrapes worth
about Rs. 35,000 as security for the loan. The plaintiff
sued for the repayment of the loan, but was unable to
produce the security, having sold it, therefore, his action
for the loan was rejected.
REASONING: if a creditor holding security sues for the
debt, he is under an obligation on payment of the debt
to hand over the security, and that if, having improperly
made away with the security he is unable to return it to
the debtor he cannot have judgement for the debt

THE RIGHT TO SELL AND RIGHT TO SUE ARE

DISJUNCTIVE

Both the rights are disjunctive and

independent from each other.
The right to sue and the right to sell are
not concurrent rights and the pawnee
can only exercise either of them.
Lallan Prasad v. Rahmat Ali

Requirement of notice
Before making the sale he is required to
give to the pawner, a reasonable notice of
his intention to sell.
Reasonable notice is a statutory obligation
nd thus cannot be excluded by a contract to
contrary.
Requesting the pawnee to postpone the
sale could not deprive the bank of its right to
proceed with the sale.

LOSS OF SECURITY DUE TO

PLEDGEES NEGLIGENCE:
Where goods are lost due to the
negligence of the pledgee, the
liability of the pledger is reduced
to the extent of the value of such
goods.

PRABHAT BANK v BABU RAM

FACTS: One of the terms of the agreement of loan
enabled the lending baker to sell the securities
without any notice to the pawner,. The pawner
defaulted in payment. The bank sent a reminder,
but the pawner asked for more time. The bank
thereupon disposed of the securities.
HELD: Notice is not a mere notice. It has to be a
reasonable one. Such notice has to be clear and
specific in language. The court held the sale as
bad under law.

LIMITATIONS ON THE RIGHT TO RETAIN

The right of retention is not absolute and comes with
certain limitations. These limitations have been established
through interpretation of the provision in various judicial
precedents.
In Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322 it has
been held that a pledgee cannot maintain a suit for
recovery of debt as well as retain the pledged property. He
is only entitled to recover the difference between the debt
and the price of the goods if it is less than the debt.

Where a suit has been filed by the pawnee for

realisation of the debt, it is to be presumed that he
has not sold the pledged article, and will return the
same to the pawnor on the suit claim being
satisfied.
Furthermore, Section 174 of the Contract Act
specifically provides that in the absence of any
contract to the contrary, a pawnee cannot exercise
his right of redemption for any other debt or
promise except that for which the goods have been
pledged.

Can pledgee buy the goods himself?

While exercising the right of sale of pledged

goods, the pawnee is restricted from making a
sale of the pledged goods to himself, though
such a restriction has not been explicitly
provided in the Contract Act with respect to
pledge of goods in general, the following
approach has been adopted through various
judicial precedents.

Privy Council in Neikram Dobey v. Bank of Bengal, (1891)

19 Cal 322:
The facts of the case are that certain government
securities were pledged with the defendant bank, who
exercised its right to sell the pledged securities on default
by the pawnor.
However, instead of selling the pledged securities to a
third party, the same was appropriated by the bank
towards itself. Thus, a suit was filed by the plaintiff before
a Single Bench of the Calcutta High Court contending that
such a sale was void and unauthorised. The Single Bench
upheld the contention in favour of the plaintiffs. Later, an
appeal was also preferred before the Privy Council.

The punjab high court in Dhani

Ram & Sons v. Frontier Bank, (AIR
1962 Punj 321) held that such an
act is not void. But the pledger may
hold the pledgee liable for any loss
he may have suffered for the goods
have been given a value less than
the market price.

It has been held in Shatzadi Begum Sahiba v. Girdharilal

Sanghi (AIR 1976 AP 273) by the Andhra Pradesh High Court
that under a contract of pledge, 'While the owner has the
right of possession as well as the right of enjoyment and right
of disposition, the pledgee has only the right of possession
but not the right of enjoyment. The pledgee's right of
disposition is governed by the terms of the pledge and is
limited to the recovery of the amount due to him under that
pledge.' Furthermore, in Chetty v. M.S.A.PS.L. Ramaswamy .L.
Palaniappa Chettiar, it has been held by the Madras High
Court that a sale by the pledgee of the pledged goods to
himself amounts to unauthorized conversion and the pledger
is rightfully entitled to have his property back on full value.

Thus the appropriation of pledged shares by the

pawnee does not amount to a sale and does not
fall within the ambit of sale by the pawnor to
himself.
Thus, the rights conferred upon the pawnee are
not absolute in nature and bring along with it
reasonable restrictions with a view to protect the
interest of the pawnor as well so that the pawnee
cannot take undue advantage of the pawnors
disability.

WHO CAN PLEDGE?

Usually owner or a person authorised by the
owner.
Pledge made by any other person may be
invalid.
Eg: where some goods were left in the
possession of the servant. If the servant makes
a pledge in the absence of owner it will be an
invalid pledge.
Yet, some are given authority to have a
juridical possession other than a mere physical
possession or bare custody.

PLEDGE BY MERCHANTILE AGENT

(S.178)
PERSON IN POSSESSION UNDER
VOIDABLE CONTRACT (S.178-A)

PLEDGE BY PLEDGEE (S.179)

PLEDGE BY MERCHANTILE AGENT

(S.178)
MERCHANTILE AGENT:
An agent having in the customary course of
business as such agent authority either to sell
goods, or to consign goods for the purpose of
sale, or to buy goods or to raise money on the
security of the goods.
Same definition as in the sale of goods act,
1930

A merchantile agent, with the consent of the

owner, in the possession of goods or documents
of title to goods, any pledge made by him while
acting in the ordinary course of business shall be
valid, provided that the pawnee acts in good
faith and has no notice of the fact that the agent
has no authority to pledge.
Explanation to S.178: definition as same as
under sale of goods act,1930

The necessary conditions of the

validity are:
1.Merchantile agent
2.Possession with owners
consent
3.In the course of business
4.Good faith

Merchantile agent

There should be a merchantile

agent as defined under the
Sale of goods act, 1930

Possession with owners consent

As under S.13 of the contract act,1972, consent =
agreeing on the same thing in the same sense.
If consent is real, how it is got becomes immaterial
though it makes a person in possession liable for
many crimes. The consent given is not annulled.
Eg: a goldsmith obtained possession of certain
jewellery under the pretence that he had a customer,
and instead pledged with a third person. The pledgee
here was held to have a good title.

SHARA DIN v GOKUL CHAND, AIR

1931 Lah 526
Possession under S.178 Is juridical
possession as distinguished from
mere physical possession or bare
custody.

In the course of business

Entrustment made in his capacity as a
merchantile agent
Q1: the plaintiffs dealer in diamonds at
Amsterdam, sent some diamonds to a
diamond broker in London for sale. The
broker asked a friend of his to pledge the
diamonds for him. The friend pledged them
with the defendants who were pawnbrokers.

Good faith
Good faith and notice not
defined under the act. As per
general clauses act, 1895, good
faith- when done honestly,
whether negligently or not.

PERSON IN POSSESSION UNDER

VOIDABLE CONTRACT (S.178-A)

Goods are pledged by a person who has

obtained possession under a voidable
contract, the pledge is valid , provided that
the contract has not been rescinded at the
time of the pledge and the pledgee has
acted in good faith and without notice of
the pledgers defect of title.

PHILIPS v BROOKS Ltd, (1919) 2 KB 243

A fraudulent person, pretending to be a man
of credit, induced the plaintiff to give him a
valuable ring in return for his cheque which
proved worthless. Before the fraud could be
discovered, the ring was pledged with the
defendants.
HELD: the pledge was held to be valid, it
being made by a person in possession under
a voidable contract.

PLEDGE BY PLEDGEE (S.179)

S.179: PLEDGE WHERE PAWNOR HAS ONLY A
LIMITED INTEREST- where a person pledges goods
in which he has only a limited interest. Therefore
when a pledgee further pledges the goods the
pledge will be valid only to the extent of his
interest and his interest is the amount for which
the goods have been given to him as a security.
But an effective pledge in favour of the pledgee has
not taken place, any repledge made by him will be
equally ineffective.

ADDITIONAL EXCEPTIONS UNDER

THE SALE OF GOODS ACT
S.30(1) and (2): A pledge by a seller
remaining in the possession after
sale
and the buyer obtaining
possession before sale is valid.

DIFFERENCE BETWEEN BAILMENT

AND PLEDGE

BAILMENT

PLEDGE

AS TO PURPOSE
Goods bailed for the
purposes such as safe
custody, repairs etc

It is a variety of bailment.
Goods are bailed as a
security for loan or
performance of a promise

AS TO RIGHT OF SALE
Right of pledgee only on
No right to sell. Only right
default of pledgor and on
to retain or sue
a reasonable notice.

BAILMENT

PLEDGE

CONSIDERATION
There may or may not
with consideration

Always with consideration

DISCHARGE OF CONTRACT
Discharged as the purpose Discharged on payment of
is fulfilled
debt.