Pledge

Sec. 172: "Pledge", "Pawnor", and

"Pawnee" defined
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
"pawnor". The bailee is called "pawnee".
Difference between Bailment and Pledge
Bailment is a wider term Pledge is a kind of
and it includes pledge. bailment.
Purpose of delivery of Purpose of delivery of
goods may be any. goods in pledge is
always securing the
payment of a debt
Pledgee has right of lien
Bailor has right of lien
as well as right to sell
the goods in default of
payment by pawnor.
Essentials of pledge
1. There should be bailment of the goods.
2. The purpose of bailment is to made the
goods bailed to serve as security for the
payment of a debt.
Delivery of the goods:
 Delivery may be actual or constructive.
 Morvi Merchantile Bank v. Union of India AIR 1965 SC
1954.
 A Business firm consigned certain goods through railway
from bombay to Okhla and to be delivered to ‘self’.
 Firm took a loan of Rs. 20,000 and pledged the goods by
giving the reciept to bank.
 And the goods were lost in the transit.
 Bank sued the railway in the capacity of pledgee.
 Court held that giving receipt not only mean delivery of
receipt but also the goods, and held railway liable
accordingly.
Purpose of the bailment is securing the
payment of a debt.
For general purposes (except security for a debt)
delivery of goods constituted bailment but if the
purpose is securing the payment of any debt, such
bailment converted to pledge.
Bank of India v. Binod Steel Ltd. AIR 1977 MP 188,
court rightly held that once the goods has been pledged
they can not further attached or sold to satisfy other
creditors of the pawnor .
 Hypothecation
 Though hypothecation is not defined in the Indian Contract Act but it

is recognised as usage in the business transactions.

 Hypothecation is a kind of pledge where delivery of the goods is

relaxed, i.e. Pawnor need not to deliver the goods to pawnee but he
can still furnish those very goods as security for the payment of any
loan.
 Since in hypothecation possession is not given to the pawnee so no

right of lien arises in this case.

 Hypothecatee can not demand the possession but he can sell the
goods in case of default only with the intervention of the court
(Tarun Bhargave v. State of Haryana AIR 2003 P&H 98)
 Who can pledge?
Generally it is the owner who can pledge. So a tenant
has no right to pledge the rented house.
But in exceptional cases the person who is not the
owner of the goods can also pledge the goods.
1. Pledge by Mercantile agent (sec. 178)
2. Pledge by person in possession under voidable
contract (sec. 178A)
3. Pledge by a person having limited interest (sec. 179)
4. Pledge by seller in possession after sale (sec. 30(1)
Sales of Goods Act)
5. Pledge by buyer in possession before payment. (sec.
30(2) Sales of Goods Act)
 1. Pledge by Mercantile Agent
Sec. 178: Pledge by mercantile agent: Where a
mercantile agent is, with the consent of the owner, in
possession of goods or the documents of title to goods, any
pledge made by him, when acting in the ordinary course of
business of a 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 acts in good faith
and has not at the time of the pledge notice that the pawnor
has no authority to pledge.
Explanation : In this section, the expression "mercantile
agent" and "documents of title" shall have the meanings
assigned to them in the Indian Sale of Goods Act, 1930 (3
of 1930).
 Essentials
1. The pledge should be by mercantile agent
2. Mercantile agent should have obtained the
possession of the goods or documents of title:
a. In his capacity as mercantile agent.
b. With the consent of the owner.
3. He must pledge the goods while acting in the
ordinary course of his business as mercantile agent.
4. the plegdee should have acted in good faith.
2. Pledge by person in possession under
voidable contract.
Sec. 178-A: Pledge by person in possession under

voidable contract: 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 acquires a goods title to the goods,
provided he acts in good faith and without notice of
the pawnor's defect of title.
Nature of voidable contract
Voidable contracts are valid contracts until declared
void.
Phillips v. Brooks ltd. (1919) 2 KB 243
A person went to a jewellers shop and falsely
represented himself to be “Sir George Bullough”, a
man of credit.
Jeweller believed the person and handed over the ring
to person and accepted cheque as the payment.
Person further pledged the ring to some other person
who acted in good faith.
Meanwhile Cheque was dishonoured.
Whether this pledge is valid or not?
Court held that as this contract is voidable at the option
of jeweller and not declared void before the pawnor
pledges the ring and also pawnee acted in good faith,
pledge is valid.
3. Pledge by a person of limited interest
Sec. 179: Pledge where pawnor has only a limited
interest: Where person pledges goods in which he has
only a limited interest, the pledge is valid to the extent
of that interest.
Ex: A pledges goods for Rs.5000 to B, B is entitled to
sub pledge the same goods to the extent of amount Rs.
5000 only.
4. Pledge by seller in possession after sale
Sec. 30 Seller or buyer in possession after sale : (1)
Where a person, having sold goods, continues or is in
possession of the goods or of the documents of title to
the goods, the delivery or transfer by that person or by
a mercantile agent acting for him of the goods or
documents of title under any sale, pledge or other
disposition thereof to any person receiving the same in
good faith and without notice of the previous sale shall
have the same effect as if the person making the
delivery to transfer were expressly authorised by the
owner of the gods to make the same.
5. Pledge by buyer in possession before
payment
Sec. 30 (2): Where a person, having bought or agreed
to buy goods, obtains with the consent of the seller,
possession of the goods or the documents of title to the
goods, the delivery or transfer by that person or by a
mercantile agent acting for him, of the goods or
documents of title under any sale, pledge or other
disposition thereof to any person receiving the same in
good faith and without notice of any lien or other right
of the original seller in respect of the goods shall have
effect as if such lien or right did not exist.
Rights of Pledgee or Pawnee
1. Right to retain the goods pledged (sec. 173-174)
2. Right to recover extraordinary expenses incurred by
him (sec. 175)
3. Right to suit to procure the debt and sale of the
pledged goods (Sec. 176)
Right to retain the goods pledged
Sec 173: Pawnee's right of retainer -
The pawnee may retain the goods pledged, not only for
payment of the debt or the performance of the promise,
but for the interests of the debt, and all necessary
expenses incurred by him in respect to the possession
or for the preservation of the goods pledged.
Sec 174: . Pawnee not to retain for debt or promise
other than for which goods pledged - presumption
in case of subsequent advances - The pawnee shall
not, in the absence of a contract to that effect, retain
the goods pledged for any debt or promise of other
than the debt or promise for which they are pledged;
but such contract, in the absence of anything to the
contrary, shall be presumed in regard to subsequent
advances made by the pawnee.
Right to recover extraordinary expenses
incurred by him
Sec. 175: Pawnee's right as to extraordinary
expenses incurred -
The pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the
preservation of the goods pledged.
For ex: Pawnee insured the goods, or hired a locker for
the goods.
Right to suit to procure the debt and sale of
the pledged goods
 Sec. 176: Pawnee's right where pawnor makes default - 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.
If the proceeds of such sale are less than the amount due in
respect of the debt or promise, the pawnor is still liable to pay
the balance. If the proceeds of the sale are greater that the
amount so due, the pawnee shall pay over the surplus to the
pawnor
Right of Pawnee will prevails over other
creditors
Central Bank of India v. Sirigupta Sugars and
Chemicals Ltd. AIR 2007 SC 2804.
Court held that pawnee has a special right over the
goods, and so long as his claim was not satisfied no
other creditor had any right to take away the goods.
No right to recover the amount if goods
pledged lost.
Central Bank of India v. Grains and gunny
Agencies AIR 1989 MP 28
Pledged goods were lost due to the negligence of bank.
And Pawnor requested the bank to sell the goods and
release the balance. Bank failed to do so. It was held
that bank was responsible for the goods.
Notice of sale is must
Prabhat Bank Ltd. v. Babu Ram AIR 1966 ALL
134.
Court held that even if there is a contract to sale the
pledged goods without giving notice, then also sale
without notice is bad in law.
Pawner’s Right to Redeem
Sec. 177: Defaulting pawnor's right to redeem -
If a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledged 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, on that case, pay, in addition, any expenses
which have arisen from his default.
Legal heirs are entitled to redeem
State Bank of India v. Mangalabai G. Deshmukh
AIR 2005 BOM 221.
Legal heirs are entitled to redeem the ornaments of the
deceased borrower before the sale of the same.