CREATION OF PLEDGE:

PRELIMINARY NOTE:

A pledge is a form of bailment in which goods are delivered as security for the repayment of a debt or performance of a promise. If the debtor (pawnor) defaults, the creditor (pawnee) has the legal right to retain and even sell the goods. A pledge is terminated when the goods are returned to the pawnor upon fulfillment of the obligation.

According to Section 172 of the Contract Act, 1872, the bailment of goods as security for the payment of a debt or performance of a promise is called a pledge.

• The person who delivers the goods is called the pawnor.

• The person to whom they are delivered is called the pawnee.

 

RELEVANT LAW AND PROVISIONS:

• Chapter IX (Bailment and Pledge)

• Sections 172 to 181 of the Contract Act, 1872

 

WHAT CAN BE PLEDGED:

Any type of movable property (goods, documents, valuables) can be pledged. Even a bank passbook or share certificate may be pledged. Delivery may be actual or constructive; physical delivery is not mandatory.

 

PERSONS WHO MAY PLEDGE:

1. The owner of the goods

2. Authorized agent of the owner

3. Mercantile agent with possession and owner's consent

4. Person in possession under a voidable contract (before rescission)

5. Seller in possession after sale

6. Buyer in possession before sale

7. Person with limited interest, to the extent of that interest

8. Co-owner with consent of other co-owners

 

CREATION OF PLEDGE:

A pledge is created by delivery of possession of goods from the pawnor (or his agent) to the pawnee. In some cases, the pawnee may already be in possession and only a contractual acknowledgment is required.

 

ESSENTIALS OF A VALID PLEDGE:

• Delivery of goods by pawnor to pawnee

• Valid contract with consideration

• Delivery must be for securing a debt or promise

 

I. RIGHTS OF PAWNOR (SECTION 177):

1. Right to redeem goods before actual sale, even after default

2. Right to proper care and preservation of goods

3. Right to receive accretions or additions to the goods

4. Right to receive reasonable notice before the sale of goods

5. Right to claim back the goods upon performance of obligation

 

II. RIGHTS OF PAWNEE:

1. Right of Retainer (Section 173):
   Can retain goods for debt, interest, and necessary expenses.

2. Right to Recover Extraordinary Expenses (Section 175):
   Pawnee is entitled to recover extra expenses incurred for preserving the goods.

3. Right in Case of Default by Pawnor (Section 176):
   If pawnor defaults, pawnee can:

   • Sue for the debt and retain goods, or

   • Sell the goods after giving reasonable notice to pawnor.

 

III. DUTIES OF PAWNOR:

1. Duty to disclose faults or risks in the goods

2. Duty to bear extraordinary expenses

3. Duty to compensate for shortfall if goods sold

4. Duty to ensure valid title to pledge the goods

 

IV. DUTIES OF PAWNEE:

Same as a bailee under general bailment principles:

1. Reasonable care of goods

2. No unauthorized use

3. No mixing of pledged goods with own

4. Follow terms of pledge and Contract Act

5. Deliver accretions to goods to pawnor

 

PLEDGE IN SPECIAL CASES:

 

1. Pledge by Mercantile Agent (Section 178):

If a mercantile agent, with the owner's consent, is in possession of goods or title documents, he may pledge them in the ordinary course of business.
The pledge is valid if pawnee acts in good faith and has no notice of the agent’s lack of authority.

 

2. Pledge under Voidable Contract (Section 178-A):

If the pawnor obtained possession under a voidable contract (under Sections 19 or 19A), the pledge is valid so long as:

• The contract hasn’t been rescinded, and

• The pawnee acts in good faith and without notice of defect in title.

 

3. Pledge by Person with Limited Interest (Section 179):

If a person pledges goods in which he holds only a limited interest, the pledge is valid only to the extent of that interest.

 

RIGHTS OF BAILOR AND BAILEE AGAINST WRONGDOERS:

• Section 180: Bailor or bailee can sue third parties who wrongfully deprive possession or damage goods.

• Section 181: Any compensation recovered is to be apportioned according to their respective interests.

 

CONCLUSION:

A pledge is a unique contract of bailment where goods are used as collateral to secure a debt or obligation. It benefits both parties—giving the pawnor access to credit while protecting the pawnee with rights over the pledged goods.
The Contract Act, 1872, from Sections 172 to 181, clearly outlines the rules, duties, and remedies available in cases of pledge. The law ensures fair treatment, mutual obligations, and security of goods until the contract is fully performed or legally terminated.