Sie sind auf Seite 1von 22

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

School of Law, Mumbai


A Project
On

PLEDGE V. MORTGAGE
In compliance to the partial fulfilment of the marking scheme,
For Trimester III of 2014-2015, in
The subject of LAW OF CONTRACTS - I
Submitted
To
Faculty

Mr. Sunil George


For evaluation.
`
SUBMITTED BY:
MUDIT SINGH CHAUHAN
B.B.A. L.LB (Hons.)
ROLL NO A061
RECEIVED BY: ____________________________
ON DATE: __________ TIME: _________

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

INDEX:
SR. NO.

TOPIC

PAGE NO

Abbreviations

Table Of Cases/Statutes

Research Methodology

Introduction

Legal Analysis

Role of Judiciary

15

Comparative Study

18

Conclusion

19

References

21

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

ABBREVIATIONS:

vs. : Versus
AIR : All India Reporter
SC : Supreme Court
HC: High Court
edn. : Edition
pg. : Page
para : paragraph
.org : organization
SCR : Supreme Court Reports

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

TABLE OF CASES/ STATUTES:


CASES:

STATE OF HARYANA AND ORS. VS. NAVIR SINGH


AND ANR.
MARDIA CHEMICAL CASE

LALLAN PRASAD V. RAHMAT ALI AND ANR.

1
RESEARCH METHODOLOGY

1.1

RELEVANCE:

Mortgage loans refer to secured loans where the collateral is a house or an apartment. When
borrowers apply, they need to present property documents, which stipulate they own the

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

space. This raises the minimum amount of money they can take out and increases the
number of years in which they have to pay the money back. The higher the value of the
house is, the larger the loan borrowers have access to. Mortgages come with better interest
rates and additional advantages for the borrower.

1.2

OBJECTIVES OF THE STUDY:

To understand the meaning of Pledge and Mortgage

To get an overview about the essentials of Pledge and Mortgage

To analyse the legal provisions related to Pledge and Mortgage in India

To study the difference between Pledge and Mortgage

To see the landmark judgements related to Pledge and Mortgage

1.4

HYPOTHESIS:
The study gives an overview about Pledge and Mortgage. It also throws light on the

differences between Pledge and Mortgage.

1.5

LIMITATION OF THE STUDY:


The research is restricted to secondary research. Due to the constraints of time and

scope of the project it was not possible to conduct a primary research. The study being
critical in nature, doctrinal methods have been adopted for the purpose of research because it
is not possible to study the subject by experimental method.

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

INTRODUCTION
2.1

MEANING:

PLEDGE:
Pledge is used when the lender (pledgee) takes actual possession of assets (i.e. certificates,
goods). Such securities or goods are movable securities. In this case the pledgee retains the
possession of the goods until the pledger (i.e. borrower) repays the entire debt amount. In
case there is default by the borrower, the pledgee has a right to sell the goods in his
possession and adjust its proceeds towards the amount due (i.e. principal and interest
amount).

Some examples of pledge are Gold /Jewellery Loans, Advance against

goods,/stock, Advances against National Saving Certificates etc.

MORTGAGE:
Mortgage is used for creating charge against immovable property which includes land,
buildings or anything that is attached to the earth or permanently fastened to anything
attached to the earth (However, it does not include growing crops or grass as they can be
easily detached from the earth). The best example when mortgage is created is when
someone takes a Housing Loan / Home Loan. In this case house is mortgaged in favour of
the bank / financer but remains in possession of the borrower, which he uses for himself or
even may give on rent.

Mortgage : is defined in Section 58 of the "Transfer of Property Act 1882". It is the transfer of an
interest in specific immovable property for the purpose of securing payment of money advanced by way
of loan.

MUDIT SINGH CHAUHAN

2.2

LAW OF CONTRACTS- I

ORIGIN AND HISTORICAL PERSPECTIVE:

MORTGAGE:
During 1552-1634, Sir Edward explained, who is the great jurist, succinctly
explained how the word mortgage was come from Old French words mort,
gage and dead. Pledge. If mortgagor does not pay the debt forever, it is
dead to him upon condition. If mortgagor does pay the debt, then the pledge/
mortgage is dead with regard to mortgagee.

PLEDGE:
Section 172 of the Indian Contract Act defines pledge as "The bailment of goods as a security for the
payment of a debt or performance of a promise" The bailor in this case is called a Pawnor and the
bailee is called Pawnee.

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

3
LEGAL ANALYSIS

3.1 STUDY IN THE LIGHT OF THE LEGAL FRAMEWORK:


MORTGAGE:
Under the Indian Contract Act of 1872, it states that a contract is an agreement enforceable
by law. Thus a contract is an agreement made between two or more parties which the law
will enforce, however, contract consists two elements1. An agreement.
An agreement means every promise and every set of promises, forming consideration for
each other. When a proposal is accepted it becomes a promise. Thus an agreement is an
accepted proposal. Therefore, in order to form an agreement there must be a proposal or an
offer by one party and its acceptance by other party.
2. Its enforceability by law
An agreement is enforceable if it is made by competent parties, out of their free consent and
for lawful object and consideration. Therefore, a Contract = Agreement + Enforceability.
Thus all contracts are agreements but all agreements are not necessarily contracts.
Mortgage
The term mortgage means the transfer of an interest in specific immoveable property for the
purpose of securing the payment of money advanced or to be advanced by way of loan, an
existing or future debt, or the performance of an engagement which may give rise to
pecuniary liability.

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

The transferor is called a mortgagor, the transferee a mortgagee; the principal money and
interest of which payment is secured for the time being are called the mortgage-money, and
the instrument (if any) by which the transfer is effected is called a mortgage-deed.
Kinds of Mortgages
There are in all six kinds of mortgages in immovable property, namely:
1.

Simple mortgage.

Simple mortgage-Where, without delivering possession of the mortgaged property, the


mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or
impliedly, that, in the event of his failing to pay according to his contract, the mortgagee
shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be
applied, so far as may be necessary, in payment of the mortgage-money, the transaction is
called a simple mortgage and the mortgagee.
2. Mortgage by conditional sale.
Mortgage by conditional sale-Where, the mortgagor ostensibly sells the mortgaged
property-on condition that on default of payment of the mortgage-money on a certain date
the sale shall become absolute, or on condition that on such payment being made the sale
shall become void, or on condition that on such payment being made the buyer shall transfer
the property to the seller, the transaction is called a mortgage by conditional sale and the
mortgagee a mortgagee by conditional sale, provided that no such transaction shall be
deemed to be a mortgage, unless the condition is embodied in the document which effects or
purports to effect the sale.
3. Usufructuary mortgage.
Usufructuary mortgage-Where the mortgagor delivers possession or expressly or by
implication binds himself to deliver possession of the mortgaged property to the mortgagee,
and authorises him to retain such possession until payment of the mortgage-money, and to
receive the rents and profits accruing from the property or any part of such rents and profits
and to appropriate the same in lieu of interest or in payment of the mortgage-money, or
partly in lieu of interest or partly in payment of the mortgage-money, the transaction is
called a usufructuary mortgage and the mortgagee a usufructuary mortgagee.
4. English mortgage.
English mortgage-Where the mortgagor binds himself to repay the mortgage-money on a
certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to

10

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money
as agreed, the transaction is called an English mortgage.
5. Mortgage by deposit of title-deeds or equitable mortgage.
Where a person in any of the following towns, namely, the towns of Calcutta, Madras,
and Bombay, and in any other town which the State Government concerned may, by
notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent
documents of title to immovable property, with intent to create a security thereon, the
transaction is called a mortgage by deposit of title-deeds.
6. Anomalous mortgage.
Anomalous mortgage-A mortgage which is not a simple mortgage, a mortgage by
conditional sale, a usufructuary mortgage, an English mortgage or a mortgage by deposit of
title-deeds within the meaning of this section is called an anomalous mortgage.
Essentials of a Mortgage
Transfer of Interest: The first thing to note is that a mortgage is a transfer of interest in the
specific immovable property. The mortgagor as an owner of the property possesses all the
interests in it, and when he mortgages the property to secure a loan, he only parts with a part
of the interest in that property in favour of the mortgagee. After mortgage, the interest of the
mortgagor is reduced by the interest which has been transferred to the mortgagee. His
ownership has become less for the time being by the interest which he has parted with in
favour of the mortgagee. If the mortgagor transfers this property, the transferee gets it
subject to the right of the mortgagee to recover from it what is due to him i.e., the principal
plus interest.
Specific Immovable Property: The second point is that the property must be specifically
mentioned in the mortgage deed. Where, for instance, the mortgagor stated all of my
property in the mortgage deed, it was held by the Court that this was not a mortgage. The
reason why the immovable property must be distinctly and specifically mentioned in the
mortgage deed is that, in case the mortgagor fails to repay the loan the Court is in a position
to grant a decree for the sale of any particular property on a suit by the mortgagee.
To Secure the Payment of a Loan: Another characteristic of a mortgage is that the
transaction is for the purpose of securing the payment of a loan or the performance of an
obligation which may give rise to pecuniary liability. It may be for the purpose of obtaining
a loan, or if a loan has already been granted to secure the repayment of such loan. There is
thus a debt and the relationship between the mortgagor and the mortgagee is that of debtor
and creditor. When A borrows 50 bags of sugar from B on a mortgage and agrees to return

11

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

an equal quantity of sugar and a further quantity by way of interest, it is a mortgage


transaction for the performance of an obligation.
Where, however, a person borrows money and agrees with the creditor that till the debt is
repaid he will not alienate his property; the transaction does not amount to a mortgage. Here
the person merely says that he will not transfer his property till he has repaid the debt; he
does not transfer any interest in the property to the creditor. In a sale, as distinguished from a
mortgage, all the interests or rights or ownership are transferred to the purchaser. In a
mortgage, as stated earlier, only part of the interest is transferred to the mortgagee, some of
them remains vested in the mortgagor.
To sum up, it may be stated that there are three outstanding characteristics of a mortgage:
The mortgagees interest in the property mortgaged terminates upon the performance of the
obligation secured by the mortgage.
The mortgagee has a right of foreclosure upon the mortgagors failure to perform.
The mortgagor has a right to redeem or regain the property on repayment of the debt or
performance of the obligation.

PLEDGE:

Section 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.

Section 173. Pawnees 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.

Section 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 debtor promise for which they are pledged; but such contract,

12

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

in the absence of anything to the contrary, shall be presumed in regard to subsequent advances
made by the pawnee.

Section 175. Pawnees 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.

Section 177. Defaulting pawnors 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;

1but

he must, on that case, pay, in addition, any expenses which have

arisen from his default.

Section 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).

Section 178A. Pledge by person in possession under


voidable contract When the pawnor has obtained possession of the other goods pledged by him under a contract
voidable under section 19 of section 19A, but the contract has not been rescinded at the time of
the pledge, the Pawnee acquired a goods title to the goods, provided he acts in good faith and
without notice of the pawnors defect of title.

13

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

Section 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.

DIFFFERENCE BETWEEN PLEDGE AND MORTGAGE:

1. The Security in Mortgaged is an immovable property, while in a pledge it is a


movable property.
2. In a pledge the ownership of the pledged property remains with the debtor (the
pledgor or borrower). In a mortgage, the ownership of the mortgaged property is
transferred to the creditor (banker or mortgagee).
3. Delivery of the property is essential to a pledge; hence the goods delivered by the

14

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

pledgor or borrower will be in the custody of the banker. But, in a mortgage, the
possession of the property will be with the borrower.
4. In a pledge, the banker (pledgee) can sell the pledged property without the
intervention of the Court. In a mortgage, except in English mortgage, a mortgagee
can sell the property only with the permission of the Court.
5. A pledgee does not have the right of foreclosure (i.e. cannot debar the pledgor or
the borrower from taking or redeeming the pledged property). But, in a mortgage, a
mortgagee (borrower) has the right of foreclosure, i.e., can debar the borrower from
taking back the mortgaged property under certain circumstances.

ROLE OF JUDICIARY

15

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

CASE LAWS RELATING TO MORTGAGE:

STATE OF HARYANA AND ORS. VS. NAVIR SINGH AND


ANR.
Facts:
The facts in both the cases being similar, these cases were heard jointly by the Court.
Punjab National Bank (PNB) sanctioned a term loan and working capital facility to
UltraTech Private (UT). Pursuant to this, original title-deeds in respect certain immovable
properties belonging to Narvir Singh and Rajinder Kaur were deposited with the Bank by the
borrower as mortgage by deposit of title-deeds. A request for mutation on the basis of
mortgage effected was made by the Bank which was resisted by the Respondent on the
ground that no entry can be made as the instrument of deposit of title-deeds is compulsorily
registrable Under Section 17(1)(c) of the Registration Act.
Issue:
Whether creation of mortgage by way of deposit of title deeds would require compulsory
registration under Section 58(f) of the Transfer of Property Act?
Held:

1. Mortgage by way of deposit of title deeds to the creditor with the intent to create a
security thereon can be effected by the debtor and no instrument is required to be
drawn for this purpose.
2. The parties may choose to draw a memorandum showing deposit of the title-deeds.
In such a case also registration will not be required. However, in a case where
memorandum recorded in writing creates right, liability or extinguishes them, the
registration would be required to that effect.

MARDIA CHEMICAL CASE

16

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

Facts of the case:


In a notice dated July 24, 2002 to Mardia Chemicals Ltd., the Industrial Development Bank
of India (for short `the IDBI') under Section 13 of the Ordinance, then in force, required it to
pay the amount of arrears indicated in the notice within 60 days, failing which the IDBI as a
secured creditor would be entitled to enforce the security interest without intervention of the
court or Tribunal, taking recourse to all or any of the measures contained in sub-section (4)
of Section 13 namely, by taking over possession and/or management of the secured assets.
The petitioner was also required not to transfer by way of sale, lease or otherwise any of the
secured assets. Similar notices were issued by other financial institutions and banks under
the provisions of Section 13 of the Ordinance/Act to different parties who filed petitions in
different High Courts.
This was joined with various writ petitions in various High Courts challenging the validity
of the Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
Issues involved in the case
Whether the terms or existing rights under the contract entered into by two private parties
could be amended by the provisions of law providing certain powers in one sided manner in
favour of one of the parties to the contract
The argument raised on behalf of many petitioners was that existing rights of private parties
under a contract cannot be interfered with, more particularly putting one party to an
advantageous position over the other. For example, in the present case, in a matter of private
contract between the borrower and the financing bank or institution through impugned
legislation rights of the borrowers have been curtailed and enforcement of secured assets has
been provided for without intervention of the court and above all depriving them the remedy
available under the law by approaching to the civil court.
Held
The Court however did not accept these arguments and struck down section 17(2) as ultravirews to the Constitution being arbitrary.
The reasoning of the Court was the following
1. Under s.13 (2) the borrower does not get any pre decisional hearing
2. There should be no pre-supposition that the borrower is a willful defaulter.
In order to make the legislation fair the provision was held to be arbitrary and struck down.

CASE LAWS RELATING TO PLEDGE:

17

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

LALLAN PRASAD V. RAHMAT ALI AND ANR.

FACTS:
The appellant advanced Rs. 20,000 to the first respondent against a promissory note and a
receipt. The first respondent executed an agreement whereby he agreed to pledge as
security-for the debt aerospaces, to deliver them to the appellant, and to keep them in the
appellants custody.
The appellant filed a suit on the promissory note claiming that the first respondent failed to
deliver the goods, that the agreement therefore did not ripen into a pledge, and that
consequently, he was entitled to recover the amount advanced by him. It was found on the
evidence that the goods were delivered to the appellant, and that he was it pledgee thereof.
HELD:
Trial Court: favoured the appellants
High Court: favoured the respondents
SUPREME COURT
Issues
1. Whether the first respondent pledged aeroscraps and delivered possession thereof to the
appellant ?
2. Whether the appellant was entitled to any relief when his case was that the first respondent
never delivered to him the said goods and the said agreement never ripened into a pledge?
3. Whether the custody of the said goods after they were stored at the aforesaid place was with
A or R

COMPARITIVE STUDY

18

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

PHILIPPINES
PROVISIONS COMMON TO PLEDGE AND MORTGAGE
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfilment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. (1857)
Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage. (n)
Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the payment to the
creditor. (1858).

CONCLUSION

19

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

For better understanding the word Mortgage, apart from the above principles, it is apt
to have a look on the maxim 'Once a mortgage, always a mortgage'. In the Law of
Mortgage by Dr. Rashbehary Ghose at page 231232 under the heading 'Once a
mortgage, always a mortgage' it is noticed: "In 1681 Lord Nottingham in the leading
case of Harris v. Harrisfirmly laid down the principle: 'Once a mortgage, always a
mortgage'. This is a doctrine to protect the mortgagor's right of redemption: It renders
all agreements in a mortgage for forfeiture of the right to redeem and also
encumbrances of or dealings with the property by the mortgagee as against a mortgagor
coming to redeem. In 1902 the wellknown maxim, 'once a mortgage, always a
mortgage, was supplemented by the words 'and nothing but a mortgage' added by Lord
Davey in the leading case of Noakes v. Rice, in which the maxim was explained to mean
'that a mortgage cannot be made irredeemable and a provision to that effect is void'. The
maxim has been supplemented in the Indian context by the words 'and therefore always
redeemable', added by Justice Sarkar of the Supreme Court in the case of Seth Ganga
Dhar v. Shankarlal. (See Achaldas Durgaji Oswal (Dead) ... vs Ramvilas Gangabisan
Heda (Dead); AIR 2003 SC 1017, 2003 (1) AWC 671 SC, 2003 (1) CTC 364) It thus
clear that the very conception of mortgage involves three principles. First, there is the
maxim: 'Once a mortgage, always a mortgage'. That is to say, a mortgage is always
redeemable and if a contrary provision is made, it is invalid. And this is an exception to
the aphorism, modus et conventio vincunt legem (custom and agreement overrule law).
Secondly, the mortgagee cannot reserve to himself any collateral advantage outside the
mortgage agreement. Thirdly, as a corollary from the first another principle may be
deduced, namely, 'once a mortgage, always a mortgage, and nothing but a mortgage'. In
other words, any stipulation which prevents a mortgagor from getting back the property
mortgaged is void. That is, a mortgage is always redeemable.

Mortgage is important in this era of development, however, one need to make sure that
it gets the best one that you possibly can. To acquire a mortgage is one of the biggest
commitments a person can make during his/her lifetime. But mortgage are time bound.
To shorten loan tenure by paying extra amounts into loan account is what general in
public prefer. If a person one aims to reduce the principal amount of his/her loan,
normally, then an advance one notice to the bank is require to make it effective.
However, if the mortgager wants make regular extra payment he/she must ensure that
the extra payment is deducted from the principal amount of loan monthly wise. Thus,
one should think carefully before mortgaging his/her property.

20

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

REFERENCES

http://www.manipurtimes.com/news-article/the-peoples-chronicle-article/item/9269mortgage-under-indian-contract-act

21

MUDIT SINGH CHAUHAN

LAW OF CONTRACTS- I

http://www.pathfindersonline.org/pledge-and-law
http://www.batasnatin.com/law-library/civil-law/obligations-and-contracts/791-

pledge-articles-2085-2123.html
http://uk.practicallaw.com/2-107-7016
http://karpuramanjari.blogspot.in/2013/06/hypothecation-what-banker-should-

know_13.html
http://thelawdictionary.org/pledge/
http://www.apr.gov.rs/eng/Registers/Pledges/QuestionsandAnswers.aspx

22