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

Rights of Pawnor 

• As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. By this, we mean that on the repayment of the debt or the performance of the promise, the Pawnor can redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual sale. The right of redemption is extinguished once the actual sale is done by the Pawnee as per his right under section 176 of the Indian Contract Act, 1872.
• If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before their actual sale; but he must, in that case, pay in addition, any expenses which have arisen from his default.
• Besides this, all the duties of a Pawnee are the rights of a pawnor and so he has the right to get Pawnee’s duties duly enforced.

 Rights of a Pawnee (Sec.173 and 176) 

The rights of the Pawnee as per Indian Contract Act, 1872 are:

 Right to retain the goods: 

• If the Pawnor fails to make the payment of a debt or does not perform as per the promise made, the Pawnee has the right to retain the goods pledged as security.
• Pawnee can also retain goods for non-payment of interest on debt or nonpayment of expenses incurred.
• Pawnee cannot retain goods for any other debt or promise other than that agreed for in the contract.

 Right of Retainer [Sec.173] 

• The Pawnee has right to retain the pledged goods till his payments are made (Sections 173 and 174).
• Pawnee may retain the goods pledged for:
•  (a)  Payment of the debt or the performance of promise,
•  (b)  Any interest due on the debt; and
•  (c)  All necessary expenses incurred by him with respect to possession or for preservation of goods pledged.
• This right of the Pawnee to retain the pledged goods till he is paid, is known as Pawnee’s right of particular lien.
• In the absence of a contrary contract, the Pawnee cannot retain the goods pledged for any debt or promise other than the debt or promise for which the goods are pledged.
• However, in the absence of any thing to the contrary, such a contract shall be presumed when subsequent advances are made without any further security.
• If fresh security is provided for the fresh advance, this presumption will not apply.

 Retainer for Subsequent Advances (Sec. 174) 

• When the  Pawnee  lends money to the  Pawnor  after the initial pledge date, it is assumed that the Pawnee has the right to retain the already pledged goods for the new loan as well.
• This assumption can only be challenged by a specific provision stating otherwise.

 Right to Recover Extraordinary Expenses (Sec. 175) 

• The Pawnee can recover expenses incurred for preserving the pledged goods from the Pawnor.
•  Reimbursement of Expenses (Sec. 175)  : If the Pawnee incurs extraordinary expenses for preserving the pledged goods, he is entitled to recover these costs from the Pawnor. However, this right does not allow the Pawnee to retain the goods for the recovery of such expenses. Instead, he can sue the Pawnor for the payment of these expenses.

 Right of Suit to Procure Debt and Sale of Pledged Goods (Section 176)

• If the Pawnor fails to repay the debt to the Pawnee, the Pawnee has two options:
•  Initiate Legal Proceedings  : The Pawnee can keep the goods as collateral and start court proceedings against the Pawnor. The Pawnor must be given reasonable notice of these proceedings.
•  Sale of Goods  : The Pawnee can sell the goods after informing the Pawnor about the sale. If the sale proceeds are less than the amount due, the Pawnor is liable for the difference. If the sale proceeds exceed the amount due, the excess must be returned to the Pawnor.

 Right to Sale (Sec. 176) 

• If the Pawnor defaults on the payment of the debt or the performance of the promised duty, the Pawnee has two main rights:
•  Right to Sue  : The Pawnee can file a lawsuit against the Pawnor to recover the owed amount or to enforce the promised duty. In this case, the Pawnee can keep the goods as collateral security.
•  Right to Sell  : The Pawnee can sell the pledged goods, but must give reasonable notice of the intended sale to the Pawnor. If the sale proceeds are less than the amount due, the Pawnor is still responsible for paying the balance. If the sale proceeds exceed the amount due, the surplus must be returned to the Pawnor. It is important to note that the Pawnee cannot sell the goods to himself; such a sale would be void, and the Pawnor would have the right to reclaim the goods after paying the amount due.

 Rights in Case of Default by Pawnor [Sec. 176] 

 (a) Suit/Right to Sue: 

• The Pawnee has the right to file a lawsuit against the Pawnor if there is a failure to pay the debt or fulfill the promise within the agreed timeframe.

 (b) Retention/Sale of Goods: 

• The Pawnee can either:
  • Keep the pledged goods as collateral security.
  • Sell the pledged goods after giving reasonable notice to the Pawnor.

 Disjunctive Remedies: 

• The remedies of filing a suit and selling the goods are disjunctive.
• If the Pawnor defaults in payment within the stipulated time, the Pawnee has two options:
  • File a suit against the Pawnor while retaining the pledged goods as collateral.
  • Sell the goods after giving reasonable notice to the Pawnor.

 K. M. Hidaathulla v Bank of India: 

• In this case, it was established that the remedies available to the Pawnee are disjunctive.
• The time limit for filing a suit, as prescribed by the limitation act, does not automatically extend the time for selling the goods.

 (c) Surplus/Deficit on Sale: 

• If there is a surplus from the sale, the Pawnee must pay the excess amount to the Pawnor.
• In case of a deficit, the Pawnor is responsible for the remaining balance.

 (d) Notice Before Suit: 

• The Pawnee is not required to give reasonable notice to the Pawnor before filing a suit.
• A suit for the debt owed can be filed without prior notice.
• The Pawnee can also file a suit to sell the pledged goods without notice.
• However, a suit to recover the debt by selling the pledged articles must be preceded by notice.

Right Against True Owner of Goods [Sec. 178A]

The Pawnee acquires a good title to the goods, even against the true owner, provided that he had no notice of the Pawnor’s defect in title and acts in good faith.

 (a)  If the Pawnor has obtained possession of pledged goods under a voidable contract as per section 19 or 19A, and the contract has not been rescinded at the time of the pledge, the Pawnee secures a valid title to the goods, even against the true owner.

 (b)  The title of the Pawnee is considered valid only if:
 (i)  He had no knowledge of the Pawnor’s defect in title.
 (ii)  He acts in good faith.

 Reasonable Notice Under Section 176 

 Reasonable notice  under section 176 refers to the notification of the creditor's intention to sell the security within a specified timeframe, allowing the debtor the opportunity to settle the debt within the mentioned period.

 Requisites of a Valid Notice 

• The notice must be clear and specific, clearly indicating the Pawnee's intention to sell the security.
• It should not be implied and must be reasonable, avoiding vagueness.
• Mere arrangements for sale do not constitute a valid notice.
• The debt for which the pledged goods are being sold must be explicitly mentioned.

 Effect of Sale Without Notice 

• Notice of sale is crucial, and any agreement clause waiving this requirement is inconsistent with the Act, rendering it void and unenforceable.
• A sale conducted without notice is invalid.
• A buyer without notice of the pledgee acquires only the limited rights or interest of the Pawnee, effectively stepping into the Pawnee's position.