Definition of Pledge under the Indian Contract Act | Civil Law for Judiciary Exams PDF Download

Contract of Pledge

Contract of Pledge refers to the bailment of goods as security for payment of a debt or performance of a promise. In India, the Indian Contract Act 1872 governs the Law of Contracts, outlining the essentials for forming a valid contract and defining special contracts, including Pledge.

Law of Contracts in India

The Indian Contract Act 1872 governs the formation and enforcement of contracts in India. It specifies the requirements for a valid contract and outlines different types of contracts, including special contracts like Pledge.

Difference between Contract of Bailment and Contract of Pledge

The contract of bailment involves the delivery of goods by one person to another for a specific purpose, with the goods to be returned or disposed of according to the instructions of the delivering person. On the other hand, the contract of pledge specifically involves delivering goods as security for repayment of a debt.
Essentials of Contract of Bailment:

• Agreement between parties
• Voluntary delivery of goods as per the contract
• Ownership of goods remains with the bailor

In a pledge, the person delivering the goods (pawnor) keeps them as security for a debt owed, while the person receiving the goods (pawnee) holds them as security. For instance, when 'A' borrows money from 'B' and pledges a gold ring as collateral, 'A' is the pawnor and 'B' is the pawnee.

It's important to note that while every pledge is a form of bailment, not every bailment is a pledge. The distinction lies in the purpose and nature of the delivery of goods, with pledge specifically involving goods handed over as security.

[Question: 1009297]

Rights and Duties of Pawnor and Pawnee in Contract of Pledge

Rights of Pawnee

• Right of Lien: Section 173 entitles the pawnee to retain goods until payment is received.
• Money due under the pledge.
• Interest to be paid on debt.
• Necessary expenses for preservation of goods.
• Right of retainer for subsequent advances: Section 174 allows the pawnee to retain goods until subsequent advances are paid.
• Right to extraordinary expenses: The pawnee can recover extraordinary expenses from the pawnor under Section 175 of the Indian Contract Act.

Duties of Pawnee

• Duty to take reasonable care of the pledged goods.
• Duty to return the goods upon payment of debt or performance of promise.
• Duty not to mix own goods with pledged goods.
• Duty not to act in a way inconsistent with the contract of pledge.
• Duty not to make unauthorized use of goods.
• Duty to return any accretion of goods if any.

Rights of Pawnor

• Defaulting pawnor's right to redeem: Section 177 grants the pawnor the right to redeem the pledged goods before their sale by paying the debt along with any additional expenses incurred due to default.
• Legal heir's right to redeem: In case of the pawnor's demise, their legal heir can redeem the goods on their behalf.

Duties of Pawnor

Pawnor has certain obligations when entering into a pawn agreement:

• The pawnor is responsible for repaying the debt or fulfilling the specified promise agreed upon.
• It is the pawnor's duty to reimburse the pawnee for any expenses they may have had to incur to safeguard the pledged goods.
• The pawnor must openly communicate any defaults that could expose the pawnee to exceptional risks.
• If the pawnee suffers a loss due to a flaw in the pawnor's ownership title of the goods, the pawnor is obligated to compensate the pawnee.

Commercial Utility of Contract of Pledge

• Definition of Pledge by Mercantile Agent: Pledge by a mercantile agent, as per Section 178 of the Indian Contract Act, is considered valid when the agent, with the owner's consent, possesses goods or their title documents. Any pledge made by the agent in the regular course of business is legally binding, provided the pawnee acts in good faith.
• Consent of Owner: The consent of the owner is assumed when a mercantile agent pledges goods, ensuring the validity of the pledge.
• Interpretation of Terms: The terms 'mercantile agent' and 'documents of title' have the same meanings as defined in the Indian Sale of Goods Act, 1930.
• Role of Mercantile Agent: A mercantile agent is authorized to sell, consign, or obtain funds using goods held as security on behalf of the owner.

[Question: 1009298]