Question-

i. What is pledge?
ii. What are the essentials of pledge?
iii. Can a pledge be made by a person who is not the owner of goods?
iv. What is the difference between bailment and pledge?
v. Explain Pawner's right to redeem.

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 the case of Lallan Prasad vs Rahmat Ali AIR 1967 observed that Pawn or pledge is a
bailment of personal property as a security for some debt or engagement.

Essential ingredients-
The following are essential ingredients of a 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 transferred 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. Secure a loan or a promise - The delivery must be done for securing any loan or for
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 a debt of 100 Rs it will be a 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 to retain the goods (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 the goods 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.

It means if by any work done by pawner, the goods become advanced, he will be entitled for
expences.

Problem- 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 500 Rs 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
 in performance of the promise
at the stipulated time, in respect of which the goods were pledged,

The pawnee has two rights-

1. he may bring a suit against the pawnor upon the debt or the promise and retain the goods
pledged as a collateral security; or
2. 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 1967 the defendant borrowed 20000 Rs from the plaintiff
on a promissory note and gave him aero scrapes 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.

Notice is necessary- 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 is goods was lost- 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 of 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.

Right to take back increment-

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.
Question- Write a short notes on “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 commerce 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 are discussed below –

1. Pledge by Mercantile agent (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 pledge the goods.

The essential conditions of this rule are –

i. he must be a mercantile agent,
ii. he must have possession of the goods by consent of the owner, and
iii. it must be done in ordinary course of business.
iv. pawnee should act in good faith and
v. 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 declared void 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 100,000 Rs 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 100000 Rs for 20000 Rs 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
20000 Rs, 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 SC held
that the pledge was invalid.
 Question- What are the basic difference between Bailment and Pledge –

Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true.

Bailment Pledge

A pledge is bailment done for a specific type of

Bailment can be for many reasons ranging for
purpose, which is to secure a loan or performance of a
reward to gratuitous.
promise.

The bailee does not get a right to sell the

goods. Except the finder of goods when he A pawnee has a right to sell the goods in case of
expends more that two third amount of that default.
goods.

The bailee only get a right of lien over the A pawnee gets a right of retainer and a special interest
goods. in the goods, which is more that just the lien.

The bailee can use the goods bailed. The pawnee has no right to use the goods.

The bailee is not responsible for the loss,

The pawnee is absolutely liable for the upkeep of the
destruction, or deterioration if he uses the
goods.
goods with reasonable care.