Pledge

Pledge is the bailment of goods as security for payment of a debt or

performance

of

promise. Bailor

in

this

case

is

called

the

pawnor and the bailee is called the pawnee (Sec. 172).

Pledge by non-owners
Ordinarily only a person who is the real owner of the goods can
make a valid pledge, but in the following cases pledge made by nonowners will also be valid.
1. Pledge by a mercantile agent (Sec. 178). Where a mercantile
agent is, with the consent of the owner, a possession of goods or the
documents of title to goods, any pledge made by him, when
acting in

the

ordinary

course

of

business

of

mercantile

agent, shall be as valid as if he were expressly authorised by the

owner of the goods to make the same, provided that the pawnee act
in good faith and has not at the time of the pledge notice that the
pawnor has no authority to pledge.
2. Pledge by person in possession under voidable contract (Sec.
178

A). When

the pawnor

has obtained

possession of

the

goods pledged by him under a contract voidable under Section 19 or

Section 19A, but the contract has not been rescinded at the time of
the pledge, the pawnee acquired a good title to the goods,provided
he acts in good faith and without notice of the pawnors defect of
title.

3. Pledge where pawnor has only a limited interest (Sec. 179).

Where a person pledges goods in which he had only a limited
interest, the pledge is valid to the extent of that interest.
Example: A finds a watch on the road and spends Rs. 25 on its
repairs. He pledges it with B for Rs. 50/-. The real owner can get
the watch by paying Rs. 25 to the pledge.
4. Pledge by a co-owner in possession. If there are several joint
owners of goods and goods are in the sole possession of one of the
co-owners with the consent of other co-owners, such a co- owner
can make a valid pledge of goods.
5. Pledge by seller or buyer in possession after sale: A seller who has
got possession of goods even after sale,can make a validpledge, provided the pawnees act in good faith.
Example: X buys goods from Y, pays for them, but leaves them in
the possession of Y, and Y
Then pledges the goods with Z who does not know of sale to X, the
pledge is valid.
Similarly, if the buyer obtains possession of goods with the consent
of the seller before payment of price and pledges them, the pawnee
will get a good title provided he does not have the notice of sellers
right of lien or any other right.

Pledge

Pledge is a special kind of bailment in which a person transfers the

possession of his property to another for securing the loan taken
from the other.

It only differs from bailment in the matter of

purpose. When the purpose of the bailment is to secure a loan or a

promise, it is called a pledge. Section 172 of Indian Contract Act
1872

defines

Pledge

as

follows

Section 172 - The bailment of goods as a security for the payment

of a debt or performance of a promise is called Pledge. The bailor in
this case is called a Pawnor and the bailee is called Pawnee.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 observed that
Pawn or pledge is a bailment of personal property as a security for
some
The

debt
following

are

or

essential

ingredients

engagement.
of

pledge

1. Delivery of possession - As in bailment, the delivery of

possession is essential in a pledge. Thus, in Revenue Authority vs
Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum
of money from a financier and agreed to deliver the final prints of
the film when ready. This was held not to be a pledge because there
was no delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third
person who has the possession of the property agrees to hold it on
behalf

of

the

pledgee

upon

direction

of

the

pledger.

Hypothecation - It is also possible to let the pawner keep the

physical goods even though the legal possession is transfered to the
pawner. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a

cinema hall equipment was pledged to the bank but the bank
allowed the hall owner to keep the equipment to show the movies.
The hall owner then sold the equipment to another party. It was
held

that

the

sale

was

subject

to

the

pledge.

In Bank of India vs Binod Steel AIR 1977, MP HC held that in

such cases where goods are hypothecated, other creditors cannot
claim right on them until the claim of the pledgee is satisfied.
2. In return of a loan or a promise - The delivery must be in
return of

a loan or of acceptance of a promise to perform

something. Thus, if A gives his bicycle to B in friendship, it is not a

pledge but a simple bailment. However, if A gives his bicycle to B as
a

security

for

debt

of

100Rs

it

will

be

pledge.

3. In pursuance of a contract - The delivery must be done under

a contract though it is not necessary that the delivery and the
payment of loan be at the same time. Delivery can be made even
after

the

loan

is

received.

Rights of a Pawnee
1. Right of retainer (Section 173- 174) - As per section 173, the
pawnee may retain the goods pledged, not only for a payment of a
debt or the performance of the promise, but also for the interest of
the debt, and all necessary expenses incurred by him in respect of
the possession or for the preservation of the goods pledged.
Further, as per section 174, in absence of any contract to the
contrary, the pawner shall not retain the goods pledged for debt or
promise other than the debt or promise for which they have been
pledged. However, such contract shall be presumed in absence of

any contract to the contrary with respect to any subsequent

advances

made

by

the

pawnee.

This means that if A pledges his gold watch with B for 1000 Rs and
later on he promises to teach B's son for a month and takes for
500Rs for this promise , and if he does not teach B's son, B cannot
retain A's gold watch after A pays 1000Rs.

Thus, the right of

retainer is a sort of particular lien. The difference was pointed out

in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a
pawnee obtains a special interest in the pledged goods in the sense
that he can transfer or pledge that special interest to somebody
else. The lien only gives the right to detain the goods but not
transfer. Thus, a pledgee get the first right to claim the goods before
any other creditor can get them. The pledgee's loan is secured by
the

goods.

2. Right to extra ordinary expenses (Section 175) - As per

section 175, the pawnee is entitled to receive from the pawner extra
ordinary expenses incurred by him for the preservation of the goods
pledged. For such expenses, however, he does not have right to
detain the goods. Section 175 says that the pawnee is entitled to
receive from the pawner extraordinary expenses incurred by him for
the

preservation

of

the

goods

pledged.

3. Right of sale (Section 176) - As per section 176 (Pawnee's right

where pawnor makes default) - If the pawnor makes default in
payment of the debt or performance at the stipulated time, of the
promise, in respect of which the goods were pledged, the pawnee
may bring a suit against the pawnor upon the debt or the promise
and retain the goods pledged as a collateral security; or he may sell

the thing pledged, on giving the pawnor reasonable notice of the

sale.
This right secures the debt for the pawnee up to the value of the
goods pledged because it allows the pawnee to either sue the
pawnor for recovering the debt or perform the promise or sell the
goods pledged. If the value received after selling the goods, the
pawner is still liable for the difference and if the value of the sale is
more than the amount of debt, the pawnee is supposed to give the
difference to the pawnor. However, if the pawnee has sold the
goods,

he

cannot

sue

for

the

debt.

In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed

20000Rs from the plaintiff on a promissory note and gave him
aeroscrapes worth about 35000Rs, as a security for the loan. The
plaintiff sued for repayment of the loan but was unable to produce
the security, having sold it. SC rejected his action. It held that
pledgee cannot maintain a suit for recovery of debt as well as retain
the

pledged

property.

The pawner is required to give a reasonable notice to the pawnee

about the sale. The notice is not a mere notice but reasonable
notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an
agreement of a loan enabled the bank to sell the securities upon
default without notice. The pawnor defaulted in payment. The bank
sent a reminder upon which the pawnor asked for more time. The
bank sold the securities. SC held that this was bad in law. The
bank is required to give a clear and specific notice of the impending
sale. Pawner's request for more time cannot be interpreted as a
notice

of

sale.

When the goods are lost due to pawnee's negligence, the liability of

the pawnor is reduced to the extent of value of the goods.

Pawnor's

Right

to

Redeem

(Section

177)

Section 177 provides a very important right to the pawnor. It

allows the pawnor to redeem his property even if he has defaulted.
It says that if a time is stipulated for the payment of a debt or
performance of the promise for which the pledge is made, and the
pawnor make 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 the actual sale of them; but he must, in
that case, pay, in addition, any expense which have arisen from his
default.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that
the pawnor has as absolute right to redeem his property upon
satisfaction or the debt or the promise. This right is not
extinguished by the expiry of the stipulated time for repayment of
debt or performance of the promise but only by the actual sale of
the goods. If the pawnor redeems his goods after the expiry of the
stipulated time, he is bound to pay the expenses as have arisen on
account

of

his

default.

The pawnor also has a right to take back any increase in the
property. In M R Dhawan vs Madan Mohan AIR 1969, certain
shares of a company were pledged. During the period of the pledge,
the company issued bonus and rights shares. Delhi HC held that
the pawnor was entitled to those at the time of redemption.

Pledge

made

by

non-owner

of

the

goods

Ordinarily goods may be pledged by the owner or by any person

with the consent of the owner. A pledge made by any other person is
not valid. Thus, in Biddomoy Dabee vs Sittaram, it was held that
a pledge made by the servant who was holding the goods of his
master was not valid. Similarly, in Purushottam Das vs Union of
India AIR 1967, a railway company delivered goods on a forged
railway receipt. The goods were then pledged with the defendants.
In a suit by the railways to recover the goods it was held that the
pledge

was

invalid.

This is important to protect the interests of the owners. However, in

many situations it is equally important to allow trade and
commerces and so there are some situations where a person having
the possession of the goods by owner's consent, is entitled to pledge
those goods even without owner's consent for the pledge. These
situations
1.

Pledge

are
by

discussed
Mercantile

agent

below
(Section

178)

When a mercantile agent is in possession of the goods with consent

of the owner, any pledge made by him in ordinary course of
business will be valid, provided that the pawnee acts in good faith
and that he has no notice of the fact that the pawnor is not
authorized

to

pawn

the

goods.

The essential conditions of this rule are - he must be a mercantile

agent, he must have possession of the goods by consent of the
owner, and it must be done in ordinary course of business. Further,
the pawnee should act in good faith and he must not have notice
that

the

pawnor

has

no

authority

to

pledge.

2. Pledge by a person in possession under voidable contract

(Section

178

A)

When the goods are obtained by a person under a contract that is

voidable under section 19 or 19 A, he can pledge the goods if the
contract is not avoided at the time of the pledge. Thus, in Phillips
vs Brooks Ltd 1919, a fraudulent person pretending to be a man of
credit induced the plaintiff to give him a valuable ring in return for
his cheque which proved worthless. Before the fraud could be
discovered, he pledged the ring with the defendants. The pledge was
held

to

be

valid.

3. Pledge by person with limited interest (Section 179)

Section 179 says that where a person pledges goods in which he
has only a limited interest, the pledge is valid to the extent of that
interest. Thus, when a car worth 100,000Rs is owned jointly by A
and B both having 50% interest in the car, and if A pledges the car
for 60000Rs, the value of the pledge that the pledgee can receive
upon default is only 50% of the value received by sale.
Thus, if a pledgee further pledges the goods, his interest is only the
amount for which the first pledger pledged the goods. For example,
if A pledged his car worth 100000Rs for 20000Rs to B. B's interest
in the car is only 20000 Rs. He can further pledge it but if he
pledges it for more than 20000Rs, A will be liable only for 20000Rs.
In Jaswantrai Manilal Akhney vs State of Bombay 1956, a
cooperative bank had an overdraft account with the Exchange
Bank, which was secured by the deposit of certain securities. After
many dealing and adjustments the last position of the account was

that the overdraft limit was set at Rs 66150 and the securities
under the pledge of the bank were worth Rs 75000. The cooperative
bank did not make use of this overdraft for a long time and when it
attempted to use it, the Exchange Bank was itself in financial crisis
and had pledged the securities first with Canara Bank and then
after having redeemed them, pledged them again with a private
financier.

The

Difference

SC

held

between

that

the

Bailment

pledge

was

invalid.

and

Pledge

Pledge is a special kind of Bailment. Thus, all Pledges are Bailments

but

the

reverse

is

not

true.

Bailment
Bailment can be for many reasons ranging for reward to gratuitous.
The bailee does not get a right to sell the goods.
The bailee only get a right of lien over the goods.
The bailee can use the goods bailed.
The bailee is not responsible for the loss, destruction, or deterioration if he
uses the goods with reasonable care.