Rights of Pawnee | Civil Law for Judiciary Exams PDF Download

Rights of Pawnee

• The right to possess the pledged good: As per Sections 173 and 174 of the Contract Act, the pawnee is authorized to retain the pledged item not only to ensure repayment of the debt or fulfillment of a promise but also to cover related expenses like interest and maintenance costs.
• The limitation on the use of the pledged good: Section 174 restricts the pawnee from utilizing the pledged item for purposes other than the initial debt or promise. However, any subsequent advances may be considered part of the original debt unless stated otherwise in the contract.
• The entitlement to claim additional expenses: Under Section 175, the pawnee can request reimbursement for extra expenses incurred in looking after the pledged good, as outlined in Section 173.
• The right to take legal action against the pawnor: If the pawnor defaults on payment or performance within the agreed timeframe, the pawnee has the right to sue them. Moreover, Section 176 enables the pawnee to sell the pledged item after providing proper notice to the pawnor and utilize the proceeds to settle the debt. It's important to note that the pawnee cannot pursue both remedies simultaneously.
• The option to purchase the pledged item: In cases like Dhani Ram & Sons v. Frontier Bank Ltd, the pawnee is permitted to buy the pledged good. This purchase does not invalidate the pledge, although the pawnor can take legal action if they feel inadequately compensated.
• The right to seek damages from a third party: Section 181 grants the pawnee the authority to sue any third party responsible for causing harm to the pledged item.

Understanding the Rights of Pawnee

• Scenario Overview: Imagine a situation where Mr. A pledges his gold chain to Mr. B as security for a loan of Rs. 10,000.
• Pawn Agreement Terms: According to the agreement, Mr. A must repay the loan within three months.
• Right of Possession: If Mr. A fails to repay the loan by the due date, Mr. B is entitled to take possession of the gold chain.
• Selling the Collateral: If Mr. A still doesn't repay the loan within a reasonable period, Mr. B can sell the gold chain to recover the amount owed.
• Handling Sale Proceeds:
  • If Sale Exceeds Rs. 10,000: If the sale amount surpasses Rs. 10,000, Mr. B can retain the profits.
  • If Sale Amount is Less: In case the sale proceeds are less than Rs. 10,000, Mr. A remains liable for the outstanding balance.

Legal Remedies

• Pawnor's Dispute: If the individual who pawns an item challenges the right of the pawnee (the person to whom the item is pawned) to either possess or sell the pawned property, the pawnee has the legal option to take action to enforce their rights.
• Legal Actions: The pawnee can initiate a lawsuit to retrieve possession of the pawned item or request a court order for the sale of the property, especially if there is a dispute regarding the pawnee's selling rights.
• Section 176 Stipulation: According to the initial segment of Section 176, if the pawnee fails to deliver the goods due to their own actions, they are not entitled to claim the debt.
• Court Precedents: In the case of Lallan Prasad v. Rahmat Ali, the plaintiff sold the collateral provided by the defendant as security for a loan and subsequently demanded repayment. However, the court dismissed the plea, referencing a ruling by the House of Lords in Trustees of the Property of Ellis & Co v. Dixon Johnson. This ruling established that if the creditor cannot return the security and sues the debtor, they forfeit the right to seek the debt.

Case Laws on Rights of Pawnee

• In Dena Bank v. Glorphis James: The Kerala High Court ruled that a bank can still seek to recover a loan even if the security is lost due to its negligence, given there is a clause in the agreement that absolves the bank of liability for such losses.
• Notice Requirement for Sale: When the pawnee intends to sell the pledged item, they must issue a notice to the pawnor regarding the sale of their goods. This notice is essential for the legal process. For example, in the case of T S Kotagi v. Tahsildar Gadag, it was emphasized that the right to sue can be exercised without notice, but the right to sale cannot be.
• Proceeds from Sale: If the proceeds from the sale are insufficient to cover the debt owed, the pawnor is responsible for paying the remaining balance. Conversely, if the sale generates more than the amount due, the pawnee must return the surplus to the pawnor.
• In Laxmi Narayan Arjundas v. SBI: The Patna High Court disapproved of a banker who sold pledged goods twice and then pursued the pawnor for the outstanding balance. Untwalla J stated that such actions do not align with Section 176 of the Contract Act and permitting them would have negative consequences in the business world.
• Dhani Ram & Sons v. Frontier Bank Ltd: According to this case, the pawnee has the right to purchase the pledged goods without ending the pledge, a ruling supported by the Punjab High Court based on a Privy Council judgment. However, the pawnor can reclaim the goods without repaying the loan and may hold the pawnee accountable if they receive less than the fair value for the goods.

Conclusion

A pawnee, under the Indian Contract Act, 1872, has well-protected rights concerning pledged goods. The pawnee is entitled to retain possession of the goods until the debt or promise for which they were pledged is fully satisfied. Furthermore, the pawnee has the right to sell the pledged goods after providing proper notice to the pawnor. In addition to selling, the pawnee also has the option to purchase the pledged goods, and this action does not terminate the pledge.