Tutorial Class 5

Pledge
  §172: The bailment of goods as security for payment of a debt or
performance of a promise is called ‘pledge’. The bailor is in this case
called the ‘pawnor’. The bailee is called ‘pawnee’.
 A pledge is a bailment made as security for payment of a debt or
performance of a promise where:
Definition  the property pledged should be actually or constructively delivered
to the pawnee; and
 such conveyance is in pursuance to a contract; and
 a pawnee has only a special property in the pledge, the general
property remains in the pawnor and wholly reverts to him on
discharge of the debt.
  To constitute a pledge, there must be delivery to the pawnee of
goods and retainment by him. Delivery is necessary to complete a
pledge; it may be actual or constructive. To constitute a valid
pledge, the following essentials need to be satisfied:
 bailment of goods pledged;
 bailment by way of security; and
Delivery of  security for payment of a debt

Possession  Morvi Mercantile Bank v. UoI

 Goods were consigned with the Railways to be delivered back to
‘self’. The consignor endorsed the railway receipts with the bank
against an advance. When the goods were lost in transit, the bank
sought to sue the Railways as pledgee.
 Whether a railway receipt can be equated with goods for the
purpose of ascertaining whether there has been a valid pledge?
  Morvi Mercantile Bank v. UoI
 Majority: Delivery of railway receipts is the same as delivery of
goods, and the pledge was therefore valid, allowing the pledgee to
sue for the loss.
Delivery of  Dissent: In all cases of pledge, it is necessary for there to have been
Possession an effective change in possession. If the goods are in the physical
possession of a third party, the pledge must be effected by a
notification to the custodian, who should acknowledge to hold the
goods for the bailee. Only by doing this would there be a change in
possession and constructive delivery.
  A pledge is a conveyance made pursuant to a contract, and it is
essential to a valid pledge that delivery of the chattel shall be
made by the pledger to the pledgee in pursuance of the contract
of pledge.
 However, it is not necessary that the delivery of possession and
the loan should be contemporaneous. The pledge may be
perfected by delivery after the advance is made.
In Pursuance  Blundell Leigh v. Attenborough
of a Contract  A hands her jewellery over to B, to have it valued and to
subsequently inform her what offer he could make to her as to
lending her money, and if he made the advance, he could keep the
jewellery as security.
 On the same day, B pledged the jewellery with C, a pawnbroker for a
sum, and four days later advanced half that sum to A on security of
the ring.
 A found out about this, paid the amount she borrowed, and sued for
the return of the jewellery, claiming there was no valid pledge.
  Blundell Leigh v. Attenborough
 The court held that the pledge was valid. Delivery made originally
In Pursuance was a good delivery for the purpose of creating a pledge, whenever
that pledge was created.
of a Contract  It was clear that when A handed over the jewellery to B, it was to
create a valid pledge between them from the moment B advanced
the money by way of loan which A was prepared to accept.
  The pledgee under a contract of pledge does not become owner
Pledgee’s but has a special interest which exists so that the pawnee can
Special compel payment of the debt or can sell the goods when the right
to do so arises.
Property (or  This is different from general interest in the property which the
Special owner has.
 The usage of the word special property has been criticized and
Interest) special interest is preferred to be used.
  Hypothecation is a pledge without actual transfer of either the
property, or the possession thereof to the creditor.
 In a hypothecation, the owner retains the possession of the
property, and certain rights in that movable property are
transferred to the person in whose favour the property is
hypothecated.
 In these cases, a constructive pledge comes into existence as soon
Hypothecation as the pledgor, without actually delivering the goods, agrees to
hold them for the pledgee, and promises to deliver them on
demand.
 Bank of Chittoor v. Narasimbulu
 A cinema projector was pledged with the bank. The bank allowed
the property to remain with the pledgors, since they formed the
equipment of running the cinema. The court held that there was a
valid pledge, as there was delivery by attornment to the bank. This is
an example of hypothecation.
  Right of Retainer
Rights of the  Right to Extraordinary Expenses

Pledgee  Right to Sue

 Right to Sell
  The pledgee has the right to retain the goods until his dues are
paid.
 He has the right to retain the goods not only for payment of the
debt or performance of the promise, but for the interest due on
the debt, and all necessary expenses incurred by him in respect of
the possession or for the preservation of the goods pledged.
Right of  The pledgee can retain the goods only for the payment of that
debt for which the goods were pledged and not for any other debt
Retainer or promise, unless there is a contract to the contrary.
 Where, however, after a pledge is created, a subsequent advance
is made without any other security, a contract to burden the same
goods shall be presumed.
 In case of general lien the right of retention is accordingly
broadened.
  So long as the pledgee’s claim is not satisfied, no other creditor of
the pledgor has any right to take away the goods or their price.
 The pledgee’s special property or interest in the goods is
distinguishable from the right of lien, in that the former may also
Right of be transferred to another by the pledgee.
Retainer  Right to retain is extinguished when the debt is paid.
 The pawnee cannot have the payment of the debt and retain the
goods. He is only entitled to recover the difference between the
debt and the price of the goods if it is less than the debt.
  The pawnee makes himself a wrongdoer if he persists in holding
the goods after tender of all that is due.
 In that event his 'special property' is determined by his wrongful
Wrongful refusal of a tender properly made, and the pawnor can recover the
goods.
Retainment  The pawnee will not be entitled to charge any interest on the
principal amount from the date on which the pawnor wanted
release of the goods pledged, by satisfying the debt.
  The pawnee is entitled to receive from the pawnor extraordinary
Right to expenses incurred by him for the preservation of the goods
Extraordinary pledged.
 For such expenses, however, he does not have the right to retain
Expenses the goods.
  §176: If the pawnor makes default in payment of the debt, or
performance; at the stipulated time or the promise, in respect of
which the goods were pledged, the pawnee may bring a suit against
the pawnor upon the debt or 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.
Right to  Upon default by the pledgor, the pledgee gets two distinct rights
under §176:
Sue/Sell  First, he may sue upon the debt and retain the goods as security
 Second, he may sell the goods after reasonable notice of the
intended sale to the pledgor
 The rights are independent of each other and operate separately,
if limitation to sue has passed, it does not mean that the remedy
to sale is also extinguished.
  The right to sue is a personal action and rests upon the contract of
loan quite apart from the pledge.
 The pawnee may choose to sue whenever he so desires after the
default, before availing the remedy to sale or after it.
Right to Sue  The pawnee may sue for the entire amount while retaining the
goods or he may sell the goods with requisite notice and then sue
for the leftover amount.
 If the sale proceeds are in surplus, the excess amount will have to
be returned to the pawnor.
  The pawnee can sell the pawned goods pursuant to the default of
the pawnor.
 This has to be preceded by a valid notice. The sale can be done via
the court or by private sale.
 If the pawnee wants to sell the goods without the intervention of
the court, he can do so, only after issuing a notice of sale to the
pawnor.
Right to Sell  If the sale is adjourned for some reason, no fresh notice is
necessary.
 Essentials of a valid notice:
 Must be clear and specific in nature
 Cannot be implied, must be specific and not vague
 Debt involved must be mentioned
 For example: Notice stating 'failing which we shall arrange for the
sale of hypothecated stock' is merely an intimation and not an actual
notice.
  When the pawnee sells the pledged goods, he does not do so as
full owner, but by virtue of an implied authority from the pawnee
to do so. The sale must be for the benefit of both the parties.
 The pawnee has the right to appropriate the sale proceeds or any
portion thereof for satisfaction of his dues from the pawnor. The
surplus must be accounted for and refunded to the pawnor.
 A pledgor cannot compel the pledgee to exercise the power of
sale as a means of discharging or satisfying the decree. His only
rights are:
 in case the pledgee exercises the power, to insist that it should be
honestly and properly done, and the sale proceeds applied to the
Right to Sell debt;
 in case the pledgee does not exercise the power, to redeem the
pledge on payment of the debt or so much of it as remains
otherwise unpaid; and
 in case the sale is improperly exercised, to get damages caused
thereby.
 It has also been held that sale by the pawnee to himself is void and
amounts to conversion.
 Legal position on the matter is not settled, with courts also
deciding that the sale is valid in cases by reasoning that nothing in
the contracts act bars such sale.
 Right of Redemption
 §177: 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 the actual sale of them, but he must, in
that case, pay, in addition, any expenses which have arisen from his
default.
 Satisfaction of the debt or engagement extinguishes the pledge,
and the pledgee on such satisfaction is bound to redeliver the
Right of the property.
Pledgor  The pledgor has an absolute right to redeem the property pledged
upon tender of the amount advanced.
 The right to redeem the pledge continues until the point of time,
on whose expiry the pledgee has notified that the goods would be
sold.
 However, on a late payment, the pledgor would also be liable to
pay any expenses which arise from his default.
 Agreement that pledge becomes irredeemable if not redeemed
after specific duration was held to be valid, but scholars criticize
this decision as it does not correctly interpret the section.
 Duty of Care
 Pledge, being essentially a bailment, the pawnee is bound to take
care of the goods bailed to him as a man of ordinary prudence
would under similar circumstances, take of his own goods.
Duty of the  In a pledge, when the possession does not get transferred, the
Pledgor/ pledgor can use the goods for the purpose of his business, it is
subject to sending reports to the creditor, in addition to
Pledgee maintaining the value of the goods as per the requirements of the
agreement.
 If goods get damaged due to failure on part of pawnee, he cannot
return the goods to the pawnor in same condition. The amount in
respect of pawn will also be mitigated because of this.
  This is an exception to the general rule that only the owner of the
goods can lawfully pledge them.
 Section 178 states that a pledge made by a mercantile agent,
Pledge by acting in the ordinary course of business is valid provided:
 It is made by a mercantile agent;
Mercantile  He is in possession of goods or documents of title of goods;
 Such possession is with the consent of the owner;
Agent  The pledge is made while acting in the ordinary course of business;
and
 The pawnee acted in good faith and without notice at the time that
the pawnor had no authority to pledge.
  Mercantile agent means agent in the ordinary course of business
having such authority, either to sell goods, or to consign goods for
the purpose of sale or to buy goods, or to raise money on the
Pledge by security of goods, as defined under the SOGA.
 Possession has been held to mean juridical possession. It is
Mercantile different from bare custody or mere physical possession.
Agent  Possession with the consent of the owner means that the owner
must consent to the agent having them for a purpose which is, in
some way or other, connected with his business as a mercantile
agent.
  In the course of business means that the goods must have been
entrusted to the agent in his capacity as a mercantile agent and he
should be in possession in that capacity.
 In Pearson v. Rose & Young Ltd., the court held that a sale of a
motor car without the registration book was not a sale in the
ordinary course of business. Retention of registration book by the
owner would thus prevent the Factors Act from operating.
Pledge by Therefore, where mercantile agent obtained the car from the
owner with his consent but acquired possession of the registration
Mercantile book only by theft, he could not make title to an innocent third
party.
Agent  The onus of proving that the pawnee acted in good faith and did
not notice that the pawnor had no authority to pledge the goods
rests upon the person disputing the validity of the pledge. There
are, however, two facts that an innocent purchaser or pawnee
must establish in such cases:
 possession by a mercantile agent of goods or document of the title
with the consent of the owner; and
 pledge or sale to an innocent transferee.
Pledge by  Good faith means that the pledgee has acted has to act in good
faith without any knowledge or notice that the pawnor does not
Mercantile have any proper authority to make the pledge. Notice here means
Agent actual and constructive notice.
  Section 178 seeks to protect those persons who, in good faith,
Pledge by deal with persons whom they know to be mercantile agents, but
Mercantile of the details of whose agency they are not aware.
 The section applies only when the pawnee is aware that the
Agent pawnor is a mercantile agent.
  When the pawnor has obtained possession of the goods pledged
by him under a voidable contract, however, the contract has not
been rescinded at the time of the pledge, the pawnee acquires a
Pledge good title to the goods, provided he acts in good faith, i.e. without
notice of defect in title.
Subsequent to  Eg:
Voidable  There is a contract between A and B based on fraud, and pursuant to
this, B pledges the property to C.
Contract  If A rescinds the contract before the B transfers the property to C,
then the pledge is not valid
 If A fails to stop B before B pledges the property, the pledge
becomes effective.