Pledge and Bailment | Law of Contracts - CLAT PG PDF Download

Introduction

 Pledge , also known as Pawn, is a specific type of bailment defined under Section 172 of the Indian Contract Act, 1892. It involves the bailment of goods as security for the repayment of a debt, loan, or the performance of an obligation.

 Key Terms in Pledge 

•  Pledger or Pawnor:  The person who pledges the goods as security.
•  Pledgee or Pawnee:  The person in whose favor the goods are pledged.

 Example of Pledge 

• If you borrow ₹100 from person B and keep your bicycle with him as security for repayment, it is a contract of pledge.
• The person taking the loan is called the pledger or pawnor, and the person with whom the goods are pledged is called the pawnee.

 Ownership and Rights in Pledge 

• Ownership of the pledged goods does not pass to the pledgee.
• The general property remains with the pledger, but a  "special property"  in it passes to the pledgee.
• The special property gives the pledgee the right to possess the articles and the power of sale in case of default.

 Delivery of Goods in Pledge 

• Delivery of the goods pawned is a necessary element in creating a pawn.
• The property pledged should be delivered to the pawnee.
• For example, if a film producer borrows money from a financier-distributor and agrees to deliver the final prints of the film when ready, this does not constitute a pledge without the actual transfer of possession.

 Types of Delivery 

• Delivery of possession can be actual or constructive.
• For instance, delivering the key to a godown where goods are stored is an example of constructive delivery.
• If goods are in the possession of a third person who agrees to hold them on behalf of the pawnee at the pledger's direction, that is sufficient delivery.

 Pledge of Documents 

• A railway receipt is a document of title to goods, and pledging the receipt operates as a pledge of the goods.

 Definitions 

•  Pledge:  The bailment of goods as security for payment of a debt or performance of a promise.
•  Pawnor:  The bailor in a pledge.
•  Pawnee:  The bailee in a pledge.

 Legal Definition 

In the case of  Lallan Prasad v. Rahmat Ali  , the Supreme Court of India defined pledge as follows:

 "Pawn or pledge is a bailment of personal property as a security for some debt or engagement. A pawnor is one who, being liable to an engagement, gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfillment of his liability." 

 Illustrations / Examples: 

•  Mr. A gives his watch for repair to Mr. B.  In this case, Mr. A is bailor, Mr. B is Bailee and the goods bailed is watch.
•  Harry bailed his bike to David  for riding for himself to go to college. David used it for racing purpose. Now David will be liable for unauthorized use of the bike bailed.
•  Mr. X gave his cat to Mr. Y  for looking after over some days. Cat in that while gave birth to kittens. Now Mr. Y is liable to return the cat along the accretions.
•  Mr. A bailed his carriage for Mr. B  for hire for a few days. But there was a default in the carriage of which Mr. A was not aware. And subsequently, Mr. B suffered injuries because of the same. Now Mr. A is liable to pay damages to Mr. B.
•  Y mixes his sweets with that of Z  without Z’s consent. Since the sweets can be separated so the cost to separate the sweets will be borne by Y.
•  Mark took a loan from the bank against a security of gold  . In this case, Mark is a pledger, the bank is a pledgee and gold is the pledged goods.
•  Z pledged his goods with A  . But now Z refuses to make the payment of the same. A now can either sell his goods or can initiate a suit proceeding against Z.

 WHO MAY PLEDGE: 

• The owner, or his authorised agent, or
• One of the several co-owners, who is in the sole possession of goods, with the consent of other owners, or
• A Mercantile agent, who is in possession of the goods with the consent of real owner, or
• A person in possession under a voidable contract, before the contract is rescinded, or
• A seller, who is in possession of goods after sale or a buyer who has obtained possession of the goods before sale, or
• A person who has a limited interest in the property. In such a case the pawn is valid only to the extent of such interest.

 Note:  If a servant has the custody of the goods, or a tenant gets the possession of a furnished house, the servant cannot pledge the goods, nor can a tenant pledge the furnishing materials in his possession. A person obtaining the goods fraudulently does not have any right to pledge them.

 In Purshottam Das v Union of India 

The goods were pledged on the basis of a forged railway receipt and it is not a valid pledge. The ‘document of title’ has the same meaning as the Sale of Goods Act 1930, Acc to sec. 2(4) of that act, includes a bill of lading, dock warrant, ware housekeeper’s certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.

 If the person entrusts some valuables 

to his neighbor for safe custody for some time, and he happens to be a mercantile agent, a pledge made by him will not be covered by this provision. So, the mercantile agent has not got the possession as such agent but in a different capacity, a pledge made by him not be a valid one.

 Example: 

Mr. Wali pledges the plot with Mr. Raffel and gets 10 lacs. The ownership of the plot remains with Mr. Wali. There is no transfer of ownership in case of the pledge:

 Exception: 

In exception circumstances pledgee has the right to sell the movable goods or properties that are been pledged.

 Return of goods 

• The delivery of goods must be conditional.
• The condition shall be that the goods shall be returned (either in original form or in altered form); or
• Disposed of according to the directions of the pawnor when the purpose is accomplished.

 A case of Mere Custody: 

• Those people who have only mere custody of the goods cannot pledge them.
• Example: A custodian cannot pledge his master’s bang low. It will be an invalid pledge.

 Limited Interest: 

• Pledge property cannot be used for unlimited interest.
• When a person pledges goods in which he has only limited interest, the pledge is valid to the extent of that interest only.

 Example: 

• Mr. Nelson gives a car to Mr. Andre for repair, but does not pay 20,000 repair charges. Mr. Andre pledges the car with Mr. Smith and borrows fifty thousand. This pledge is valid only up to ten thousand.

 Revenue Authority v Sudarsanam pictures 

It has been held that an agreement wherein, the producer of a film agrees to deliver final prints of the film under production, when the same are ready, to a financier- distributor in return for the finance provided by the latter, is not pledge because there is no delivery of the goods.

 Morvi Mercantile Bank v Union of India, AIR 1965, S.C. 1954 

• The delivery o f a railw ay receipt was considered to be enough to constitute delivery of the goods represented by that railway receipt for the purpose of pledge.
• It was held with the majority that according to the prevailing Indian law, railway receipt is a document of title, and therefore delivery of the railway receipt means delivery of the goods represented by the railway receipt.

 Bank o f India V. Vinod Steel Ltd AIR 1977 M P 188 

• C ourt held that w hen certain movables have been pledged by a company to a Bank, they cannot be attached and sold for satisfaction of claims of other creditors of the company without first satisfying the claim of the bank.

 Reeves v. Copper (1933) 

In this case, the captain of the ship pledged his chronometer with his employer, the ownership. The captain was allowed to keep the chronometer and to use it for the purpose of a voyage later on the captain pledged it again with another person. It was held that the first place was valid as it was a case of constructive delivery.