This Article is written by Pratham Bhatt.
Table of Contents
Pledge is a form of contract covered under the ambit of special contracts. According to section 172 of the Indian Contract Act, a pledge can be defined as a type of contract of bailment in which goods are bailed as security for payment of a debt or for the performance of a promise. In this case, the bailor becomes the ‘pawnor’ and the bailee becomes the ‘pawnee’. On the basis of the main object of a contract a pledge is distinguished from other kinds of bailments. It is the pawning of goods by the pawnor, who is the debtor to the pawnee who is always the creditor.
The elements of a pledge.
- The delivery of possession –A necessary element when it comes to a pledge is the actual delivery of possession or transfer of possession from the pawnor to the pawnee. The delivery of the particular goods can be actual or constructive in nature. It can also be done by an agent, called delivery by attornment.
Case law –Morvi mercantile bank v. Union of India – In the judgement pronounced by Subba Rao J, it was held that the delivery of rail receipts was the same as delivery of goods. When goods were loaded to be transported from Mumbai to Okhla, the consigner advanced the receipts he received from the railway to the bank and collected an advance of Rs. 20,000. The goods were lost in transit and it was held that the pledgee (bank) was entitled to seek compensation.
- In pursuance of contract –Another essential element when it comes to a pledge is that the pledge should be made only in pursuance of a contract. Any delivery of chattel has to be only under the pretext of a contract of pledge.
Rights of a pawnee.
- Right of retainer –Section 173 and 174 of the Indian Contract Act focus on the right possessed by the pawnee in retaining the goods bailed to him by the pawnor. Till the complete repayment of the debt or the fulfillment of the promise, the goods are to be retained by the pawnee. The goods can also be retained till the interest due is paid and the pawnee is compensated for all necessary expenses made in preserving the goods.
The right to retain possessed by the pawnee is quite special. It is set exactly in the middle between a mere lien and a mortgage. If a pawner has multiple creditors, no second creditor has a right to seize the goods that were already pledged to another creditor.
It has to be kept in mind by the pawnee that he/she has no directly exercised power in seizing the goods. Goods can only be seized if the consent of the debtor is obtained or via the means of a court order stating to do so. Also when the goods are in possession of the pawnee, he/she has to maintain a reasonable duty of care. Any damage done to the goods can mean that the pawner can claim for damages.
- Right to extraordinary expenses –According to section 175, the pawnee has every right to claim any extraordinary expenses incurred by him in preserving the goods bailed to him. In case of any outstanding compensation, the pawnee cannot retain the goods. He can either sell them after sending the pawnor a notice of sale or he can sue to recover the amount. Section 176 states that in case of any default made by the pawnor, the pawnee can retain the goods bailed as a collateral or sell them. If the amount recovered from the sale is less than the debt, then the pawnor is liable for the balance. In the opposite scenario any surplus obtained has to be returned to the pawnor. The right of sale is also applicable to a time barred debt.
In the judgement given in the case of Trustees of the property of Ellis and co v.Dixon Johnson, it was held that the action made by the creditor is not maintainable if he/she is unable to return the goods pledged as collateral. The right to sue and the right to sell are disjunctive and completely independent of each other. In case of a scenario where a pledgee has to sell the goods bailed to him, he has to first send a reasonable notice of sale to the debtor. Till the time of the sale, the debtor has a chance to repay the debt and claim the goods that he owns.
In case of any negligence on behalf of the pledgee, the liability of the pledger is reduced to the extent of the harm done. According to section 177, in case of any fault of the pawnor, his right to redeem is defaulted and on top of that he has to pay any additional expenses that have occurred because of his fault. If the time of the pledge expires, then the pawnor may be held liable for interest.
Who can pledge?
Sections 178 and 179 focus on the right to pledge and who possesses the same right. The owner or any authorized individual can become the pledger of goods. The mercantile agent, person in possession under voidable contract and the pawnor with a limited interest are 3 different scenarios that give rise to 3 different types of pawnors.
- Mercantile agent–Section 178 states that any agent with a clear authority from the owner of the goods can become a pledger. The conditions being that the possession should be with the agent and the consent may be expressly stated. There are 4 conditions that have to be fulfilled in order for a pledge made by the agent to be held valid. The first condition is that the agent has to be a mercantile agent. According to the sale of goods Act 1930, a mercantile agent is an agent who has the authority to buy and sell goods on behalf of the owner. The second condition is that the goods have to be pledged with an honest intention (with consent) and not via any fraud or dishonest means. In Sharadin v. Gokulchand it was held that the possession of the goods with the agent has to be judicial possession. The third condition is that the pledge has to be made in the course of business and not in any other different capacity. Finally, the last condition being that all acts done by the agent have to be done in good faith.In the course of business, if the agent is in possession of any document showing proof of authority to act and possession of goods, then the document can be pledged. Examples of such documents being a dock warrant or a railway receipt.
- Person in possession under voidable contract –When a pledgor obtains possession of the goods under a voidable scenario with the contract not being rescinded and the pledgee acting in good faith, the pledge is held valid. In the case of Phillips v. Brooks –a fake and worthless ring was pledged in return for a cheque. The goods were pledged and the pledgee accepted before the transaction could be held invalid. It was held that the owner could not claim the goods back as the pledge was valid. If the contract is rescinded, then the pledge is invalid. A contract can be rescinded by a notice of intent to rescind or by doing anything possible such as contacting the police or the authorities.
- Pledge where the pledgor has a limited interest –Section 179 states that a pledge is valid only till the limited extent of the interest of the pawnor. Illustration –Jaswantrai Manilal Akhaney v. State of Bombay –The co-operative bank had set the limit of overdraft at Rs, 66,150 and had deposited securities worth Rs. 75,000. There was no use of the overdraft facility but the bank further pledged the goods with a private financier. The pledge was declared invalid as overdraft facility was never accessed and that meant the bank had no right to pledge the securities.
There are 2 more exceptions provided under the sale of goods act. The tow exceptions being – a pledge made by the seller after the completion of the sale, provided that he has possession of the goods and a pledge made by a buyer who has gained possession of the goods before the completion of the sale.
References – Singh A, (2017), Contract and Specific relief (Twelfth edition), EBC Publishers.