Duties of Pawnor and Pawnee | Law of Contracts - CLAT PG PDF Download

Duties of a Pawnor (Sec. 175) 

•  Pay the Debt:  The pawnor is obligated to pay the debt or fulfill the promise as specified.
•  Pay Extraordinary Expenses:  The pawnor is responsible for reimbursing the Pawnee for any extraordinary expenses incurred in preserving the goods.
•  Disclose Faults in Goods:  The pawnor must disclose any faults in the goods that are either material to their use or could expose the Pawnee to extraordinary risks.
•  Indemnify the Pawnee:  If the Pawnee suffers a loss due to a defect in the Pawnor's title to the goods, the pawnor is required to indemnify the Pawnee.

 Duties of a Pawnee 

•  Not to Use the Goods:  The Pawnee is not allowed to use the goods unless given permission by the pawnor.
•  Return the Goods:  The Pawnee must return the goods when the pawnor pays the debt or fulfills their promise.
•  Take Reasonable Care:  The Pawnee should take care of the pledged goods as a reasonable person would take care of their own belongings.
•  Not to Mix Goods:  The Pawnee must keep their own goods separate from the pledged goods.
•  Return Increase in Goods:  The Pawnee must return any increase or additional value in the pledged goods to the pawnor.

 Duty Not to Act Inconsistent with Pledge Terms 

 Case Example: Central Bank of India v. Abdul Mujeeb Khan 

• The bank took possession of a hypothecated truck but  failed to sell it as per the agreed terms  and neglected its care, leading to significant depreciation in the vehicle's value.

 Important Note 

 Requirement of Notice 

• Before selling the pledged item, the pledger must give the pawner  reasonable notice  of the intention to sell.
• This requirement of  “reasonable notice”  is a statutory obligation and cannot be waived by contract.

Case Example: Prabhat Bank v. Babu Ram

• In this case before the Allahabad High Court, a loan agreement allowed the lending banker to  sell securities without notice  to the pawner.
• When the pawner defaulted, the bank disposed of the securities after sending a reminder.

 Liability of Pawnor 

• If the proceeds from the sale are less than the amount due, the pawnor is liable to pay the  remaining balance  .
• If the sale proceeds exceed the amount due, the pawnee must pay the  surplus to the pawnor  .

 Authority and Benefit in Sale 

• When the pawnee sells the pledged goods, it is done  not as a full owner  but with implied authority from the pawnee.
• The sale must be for the  benefit of both parties  .

 Right to Recover and Surplus 

• After the sale, the pawnee has the right to  recover the remaining loan balance  from the sale of the pledge.
• If there is a surplus from the sale, it must be  accounted for and refunded  to the pawnor.

 Pawnee's Right of Sale 

• The pawnee can only hold the pawnor liable for loss if the right of sale is  exercised according to section 176  .
• Before the sale, the goods remain the property of the pawnor in the custody of the pawnee.

 Dispute over Goods Quality 

• In case of a dispute regarding the quality of goods, the  pawnee must refer to the pawnor  before proceeding.
• In such instances, the pawnee acts as an  agent of the pawnor  .

 Loss of Security due to Pledgee’s Negligence 

• If goods are lost due to the negligence of the pledgee, the liability of the pledger is reduced by the  value of the lost goods  .
• In the case of  Gurbax Rai v. Punjab National Bank  , the Supreme Court ruled that when goods in a firm's godown were pledged to a bank and part of them were damaged by fire, the bank's liability was limited to the  value of the lost goods  .

 Sale by Hypothecatee 

• A hypothecatee, who is not in actual possession of the goods, has the right to take possession and  sell the goods  if the borrower defaults.
• The hypothecatee acts in the capacity of a pledgee  and does not require court intervention  to sell the goods.

 Pawner's Right to Redeem 

Section 177 of the Act outlines the important right of the pawner regarding default in payment or performance of a promise.

 Defaulting Pawner's Right to Redeem 

• If a specific time is set for the payment of the debt or the fulfillment of the promise for which the pledge is made, and the pawner fails to make the payment or fulfill the promise within the stipulated time, they have the right to redeem the pledged goods at any time before the actual sale of these goods.
• However, in such a case, the pawner must also cover any expenses that have arisen due to their default.
• This provision adds to the earlier section, emphasizing that even after the deadline for payment or promise has passed, the pawner can still redeem the pledged goods until they are sold, but must pay for any expenses incurred due to their default.

 Supreme Court Ruling 

In the case of  Jaswantrai Manilal Akhaney v. State of Bombay  , the Supreme Court clarified that the pledgee's special interest ends once the debt is paid. The pledger can redeem the pledge by paying the full amount at any time if no redemption period is fixed, or after the fixed date until the pledged item is lawfully sold.

 Redemption Explained 

•  Redemption  refers to the right of the pledger to reclaim ownership of the pledged property, free from the pledge, by restoring the title to the pledged property.
• To exercise this right, a suit for redemption must be filed, not just for a declaration of the right to redeem.

 Heritable Right 

• In a case where gold ornaments were pledged with a bank as security for a gold loan, the pawner's widow attempted to redeem the pledge after her husband's death by repaying the loan.
• The court ruled in her favor, allowing her to redeem the pledge based on her husband's will, without requiring probate or a succession certificate.
• As long as there were no objections from her children, the bank could not contest her right to redeem the pledge.

 Premature Redemption 

• If a pawner chooses to redeem the pledged item before the specified period elapses, they are still bound by the terms of the loan.
• This includes any stipulation that a premium will be charged for early repayment.

 Statutory Right 

• In a situation where an employer's property was pledged with a bank as security for loan repayment, the court determined that the property could be attached and sold to recover the employee's Provident Fund dues.
• This is in accordance with  Section 11(2) of the Provident Fund Act, 1952  , which prioritizes employee Provident Fund claims over mortgages and pledges executed by the employer.

 Pledged Goods: Rights and Liabilities 

 Pledged Goods: Lost or Damaged 

• In the case of  Central Bank of India v. Grins and Gunny Agencies  , pledged goods were lost due to the negligence of the pledgee bank.
• Thepawnorrequested the bank to sell the goods and realize the balance, but the bank failed to do so.
• Since the bank could not redeliver the goods upon satisfying its claim, it was held liable for the loss of the goods.
• As a result, the bank could not succeed in its claim against the pawnor.

 Legal Heir's Right to Redeem 

• In the event of the death of a  pawnor  , the pledge made by him can be redeemed by his legal heirs.
• This is contingent upon the legal heirs meeting the liabilities associated with the pledge.

[Question: 1754500]

 Conclusion 

•  Pledge  is a form of  bailment  where an item is given as security for the repayment of a debt or the fulfillment of a promise.
•  Delivery of possession  to the  pawnee  can be either actual or constructive.
•  Ownership  of the pledged item does not transfer to the pledgee.
• The pawnee has the right to retain the goods until the repayment of the debt, any interest on the debt, and any other necessary expenses incurred for the preservation of the goods.
• If the pawnee incurs extraordinary expenses for the preservation of the goods, he is entitled to reimbursement from the pawnor.
• In case of default by the pawnor in repaying the debt or fulfilling the promise, the pawnee has the right to sell the pledged goods.
• The pawnor also has the right to redeem the goods before the actual sale, provided he pays the debt or fulfills the promise along with any other expenses arising from his default.