PLEDG

PLEDGE
(S.172)

Literal meaning can be related

to Promise
Also known as PAWN
A pawn or a pledge is a bailment
of personal property as a security for
some debt or engagement.
Definition: the bailment of goods
as security for the payment of a debt
or performance of a promise is called
pledge.

Pledge is a special kind of

bailment and the main
distinction is the object of
the contract.

PLED
GE

The object of
the delivery of
goods

To provide a
security for a
loan or for the
fulfilment of
an obligation

BAILMENT

GOODS

BAILOR

BAILEE

(Book)
(For reading)

PURPOSE

CONTRACT OF BAILMEN

PLEDGE

GOODS
PAWNEE

PAWNER

(jewellery)

A(to provide a security for a loan)

B
PURPOSE

CONTRACT OF PLEDG

PARTIES TO THE CONTRACT

The person
who delivers
goods as a
security for
payment of
his debt.
The person
to whom the
goods are
delivered as
a security for
the loan he
raised.

PAWNE
Ror
PLEDG
ER

PAWNE
Eor
PLEDG
EE

Thus, a pledge constitutes the

delivery of goods by the pawnor
to the pawnee as a security
under a contractual obligation
that the goods shall be returned
or disposed off as per pawnors
direction on the debt being
discharged or the fulfilment of
the obligation

FEATURES:
Only the real owner can pledge
Movable property
The pledgee retains the possession of
the goods until the pledgor (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,etc.

MODE OF DELIVERY
two modes by which shares can be
pledged to a pawnee
Actual delivery (S.149)

SUBJECT MATTER OF PLEDGE

All MOVABLE goods, capable of actual or
constructive delivery form the subject-matter
of a pledge.
Though the term goods has not been
defined under the Contract Act, the Sale of
Goods Act, 1930 defined the term goods as
follows:

every kind of movable property other

than actionable claims and money; and
includes stock and shares, growing
crops, grass, and things attached to or
forming part of the land which are
agreed to be severed before sale or
under the contract of sale;

ESSENTIAL
CHARACTERISTICS
1.SECURITY FOR A DEBT
2.SPECIFIC MOVABLE
PROPERTY
3.AGREEMENT TO RETURN
GOODS
4.DELIVERY OF POSSESSION
5.IN PURSUANCE OF A
CONTRACT

SECURITY FOR A DEBT

The goods should be given as a security to the
pawnee for payment of the debt taken or the
performance of the obligation.

SPECIFIC MOVABLE PROPERTY

The goods passed as security to the pawnee must
be movable property and ascertainable at the time
of the contract.

AGREEMENT
TO RETURN GOODS
The essence
of a contract of pledge is that the
pawnee should agree to return the goods on the
satisfaction of the debt or the performance of
obligation. In absence of such agreement, a valid
pledge cannot come into existence.
A pledge, being essentially a contract of
bailment, the pawnee is under a duty to take care
of the goods pledged as a man of ordinary

DELIVERY OF POSSESSION
The goods have to be
delivered by the pawnor to
the pawnee. Delivery is
necessary for a complete
pledge and it may be
either actual or
constructive
POSSESSION

MORVI MERCHANTILE BANK v UNION OF INDIA, AIR

1965
SC 1954
A firm doing business
in Bombay
entrusted goods
worth Rs. 35,500 to the Railway for delivery in Delhi
the firm endorsed the railway receipts to a Bank as a
security against an advance of Rs. 20,000 made by the
Bank to the firm.
When the goods reached the destination, the Bank
refused to take delivery, on the ground that they were
not the goods consigned by the firm.
Meanwhile the goods were lost in the transit
The Bank, thereafter filed a suit for the recovery of the
value of the goods.
The trial court dismissed the suit and on an appeal by
the Bank, the High Court allowed the appeal and
decreed the claim for Rs. 20,000 on the ground that as
pledgee of the goods, the Bank suffered loss only to the
extent of the loss of its security.
Both the Bank and the Railway appealed to the

CONTENTIONS

The endorsement of the railway

receipt in favour of the Bank, did
not constitute a pledge of the
goods covered by the receipt and
that the Bank had no right to sue
for compensation.

COURT HELD:

When goods are carried by railways

over long distances and remain in transit
for long period of time, the railway
receipt is regarded as the symbol of the
goods for all purposes.
Delivery of railway receipts therefore
was the same thing as delivery of goods.
A pledge being a bailment of goods as
security for payment of a debt, the
pledgee will have the same remedies as
the owner of the goods would have
against third person for deprivation of
the said goods or injury to them.

REVENUE AUTHORITY v SUDARSANAM PICTURES,

AIR 1968 Mad 319

FACTS:
The producer of a film borrowed a sum
of money from a Financier-distributor,
and agreed to deliver the final prints of
the film when ready.
ISSUE: whether this amounts to a
contract of pledge?
OBSERVATION: there being no actual
transfer of possession it cannot be
considered as a contract pledge.
JUDGEMENT: there is no contract of
pledge

PLEDGE BY HYPOTHECATION:
Goods are allowed to remain in the
custody of the pledger for a special
purpose.
REEVES v CAPPER
FACTS: The captain of a ship pledged his
chronometer with the ship owner who
allowed him to use the instrument for the
purpose of the voyage. The captain
pledged it over again with another
person.
ISSUE: Whether the first pledge was valid?
OBSERVATION: According to the concept
of hypothecation the pledge is valid

BANK OF CHITTOOR v NARASIMBULU,

AIR 1966 AP 163
FACTS: a cinema projector and
accessories were pledged with a bank.
The bank allowed the property to remain
with the pledgers, since they formed the
equipment of a running cinema.
Subsequently the pledgers sold the
machinery.
OBSERVATION: the sale was subject to
the pledge. There was a constructive
delivery.

IN PURSUANCE OF THE CONTRACT

For a valid contract of pledge it is
essential that the delivery has to be
made in pursuance of the contract of
pledge.
It is not necessary that delivery and
advance has to be contemporaneous.
Delivery may be made before or in
contemplation of an advance, which
ripens into a pledge as soon as the
advance is made.
Illustrative case: BLUNDELL LEIGH v
ATTENBOROUGH, (1921) 3 KB 233

FACTS:
The plaintiff gave her jewellery to one Miller to
lend her some money after he estimates the
value of the jewellery.
He was given a right to keep the jewellery as
security if he made the advance.
That very same day Miller plledged the
jewellery with a pawnbroker (defendants), who
in good faith advanced 1000 euro.
After 5 days Miller advance 500 euro to the
plaintiff on the security of the jewellery.
Later Miller died and she came to know about
the facts.
She paid the amount and sue the defendant
for the return of her jewellery.

CONTENTIONS BY
PLAINTIFF

When she gave the jewellery to the

Miller for examination there was no
valid pledge and he became only a
gratuitious bailee having no right to
deal with it.
Since he had already parted with
the possession of the goods at the
time of advancing money, no valid
pledge could arise.

OBSERVATION BY
COURT

it is clear that the plaintiff intented,

when she handed over the jewellery
to Miller, to create a valid pledge as
between him and her from the
moment when he handed her the
money by way of loan which she
was prepared to accept
The court held the pledge as valid.

RIGHT OF PAWNER
RIGHT OF
(S.177)
REDEMPTION
Normally, the right to redeem the pledge
continues upto the time on the expiry on which
the pawnee has notified that the goods would be
sold.
But under S.177, It is open to the pledger to
redeem the pledge by full payment of the amount
for which the pledge has been made at any time
after the fixed date and the right continues until
the thing pledged is lawfully sold.
When the pawner redeems after the expiry of the
specified time, he is bound to pay to the pawnee
such expenses as have arisen.

A suit for right to redemption has to

be filed for excercising this specific
remedy.
The pawner has the right to take back
with the goods the increase, if any ,
that the goods have undergone during
the period of pledge.
M.R.Dhawan v. Madan Mohan, AIR
1969 Del 313 - where certain shares of a
company were pledged and bonus
shares were issued during the period
of redemption, it was held that the
pawnor is entitled to the bonus shares
so issued.

UNION OF INDIA v DEEP CHAND, AIR

2007 Uttr 455- The provisions of the IT
Act could not defeat the right of the
pawnor to institute the suit for
recovery.
LEGAL HEIR: KAMALI SARJONI v.
INDIAN BANK, AIR 2008 AP 71- certain
gold ornaments were pledged with the
bank as security for gold loan. The
pawner died. He left behind a will
enabling his widow to redeem. The
bank demanded probate. The court
held that the bank has no right to do
so. Neither probate nor succession
certificate was necessary.

OTHER RIGHTS
Right to sue: within a period of 3
years under limitation act if the
pawnee rufuses to return the
goods even after returning the
whole amount.
Right to take care of goods:
right to demand the pawnee to
take reasonable care and
preservation of the goods pledged.
Right to receive increase or
profit from the goods

RIGHTS AND LIMITATIONS OF

PAWNEE
1.RIGHT OF RETAINER
(Ss.173 and 174)
2.RIGHT TO
EXTRAORDINARY
EXPENSES (S.175)
3.RIGHT WHERE PAWNOR
MAKES DEFAULT. (S.176)
a) Right to sell
b) Right to sue

S.173:
The most important right of a pawnee is the right to
retain the goods pledge until the dues are paid.
The right to retain is 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.
S.174
The pledgee can retain the goods only for the
payment of that particular debt for which the goods
were pledged and not for any other debt or promise,
unless there is a contract to contrary.

RIGHT OF RETENTION

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.

The pawnee has the option of exercising his

right to retain the pledged goods in relation
to the following:
payment of the debt or performance of the
promise for which the pledge was created;
(ii) interest on the debt;
(iii) all necessary expenses incurred by the
pawnee in respect of the possession or
preservation of the goods pawned.

Lien and Pledge

The right of retainer can be
related to the nature of a
particular lien. Yet lien is different
from pledge.
A pledge creates a special
interest in the property pledged in
favour of the pledgee giving him
the right to sell, but a lien is only a
right to retain.

PROPERTY
IN
special property
or interest
exists in the
SPECIAL
GOODS:so that the pawnee can
goods pawned
compel payment of the debt, or can
exercise his right to sell the goods as and
when it arises.
It is to be noted that only a special
property and no legal title to the goods
pledged is vested in the pawnee.
RIGHT OF POSSESSION
RIGHT OF ENJOYMENT

NATURE OF SPECIAL PROPERTY

Bank Of Bihar vs State Of Bihar & Ors, 1971

AIR
1210
Certain
sugar was pledged with the plaintiff bank
Part of the said sugar was seized under the
Public Demands Recovery Act in connection with
a demand of sugar cess by the Cane
Commissioner (state).
The sugar was sold and the sale proceeds were
attached towards the payment of cess. No
payment was made to the plaintiff bank, which
thereupon filed a suit to enforce its claim.
The trial court granted a decree against the
State of Bihar for the price of the sugar.
The High Court however held that no decree
could be granted against the State as the seizure

REASONING BY THE SC: so long as

the pawnees claim is not satisfied
no other creditor of the pawner has
the right to take away the goods or
their price.
The seizure could not deprive the
pledgee of his right to realise the
amount for which the goods were
pledged and therefore, the state
was bound to indemnify him up to
the amount which would have been
realised from the goods.

HYPOTHECATION
AND RIGHT
OF SEIZURE
When the pledge
is by

way of hypothecation, the

pledgee cannot directly
seize the goods by
entering premises or
otherwise. It can be done
either with the consent of
the borrower or through a
court order.
The pledgee does not
have the right to enter the
premises, lock and seal the

RIGHT TO EXTRAORDINARY
EXPENSES (S.175)
The pawnee is entitled to receive any
extraordinary expenses incurred by him
for the preservation of the goods
pledged.
But he does not have the right to retain
the goods for the recovery of the
extraordinary expenses. The right of lien
can be excercised only for necessary
expenses.

Illustration 1: A bank took over the possession of

the hypothecated truck but thereafter neither
sold it according to the agreed terms nor took
care of it, leaving it in open place. HELD: The
bank was liable for the extraordinary
depreciation. (Central Bank of India v Abdul
Mujeeb Khan, (1997) AIHC 299
Illustration 2: A bank provided money for purchase of a
lorry and also paid insurance premium and subsequently
the lorry was lost by theft.
Held: insurance company was liable to pay the insurance
money to the bank irrespective of the fact that the
insurance was not in the name of the bank. Insurance
company and the borrower were joint debtors. Insurance
company to the extent of insured value and the borrower
for the advance. (SBI V Suresh Kumar, (1995) AIHC 3889)

RIGHT WHERE PAWNOR MAKES

DEFAULT (S.176)
This enables the pawnee to take certain
measures in case of default made by the
pawnor in the repayment of debt or
performance of the obligation at the
stipulated time.
when the time has not been stipulated
in the agreement, the debtor is not in
default until notice has been given by
the creditor asking the debtor to repay
the loan by a certain time and that time

The pledgee gets two distinct rights

under S.176 of the Act.
The pledgee
may sue
upon the
debt and
retain the
goods as a
collateral
security.

He may sell
the goods
after
reasonable
notice of the
intended
sale to the
pawner

RIGHT TO SELL
The power of sale is conferred for the benefit of the
pawnee, and can be exercised at his discretion.
A pawnor cannot force the pawnee to exercise the right
of sale as a means for discharging the debt or satisfying
the decree

If the proceeds of such

sale are:

Less than the amount

of the debt = pawner
liable to pay the
balance

Greater than the

amount so due =
the pawnee shall
pay over the
surplus to the

RIGHT
TO
SUE
The pawnee has been conferred with the right
to institute a suit claiming the repayment of
debt in the event of default by the pawnor

An express authority given by the pawnor to

the pawnee to sell the goods does not take
away his right to institute proceedings against
the pawnor.
If by reason of his own act, the pledgee is
unable to return the goods, he cannot have
judgement for the debt Supreme Court in
Lallan Prasad v Rahamat Ali (AIR 1967 SC
1322)

Lallan Prasad v Rahamat Ali (AIR 1967 SC

FACTS:
1322)
The defendant borrowed Rs.20,000 from the
plaintiff on a promissory note and gave him
aeroscrapes worth about Rs. 35,000 as
security for the loan. The plaintiff sued for the
repayment of the loan, but was unable to
produce the security, having sold it, therefore,
his action for the loan was rejected.
REASONING: if a creditor holding security
sues for the debt, he is under an obligation on
payment of the debt to hand over the
security, and that if, having improperly made
away with the security he is unable to return
it to the debtor he cannot have judgement for
the debt

THE RIGHT TO SELL AND RIGHT

TO SUE ARE DISJUNCTIVE

Both the rights are disjunctive

and independent from each
other.
The right to sue and the right to
sell are not concurrent rights and
the pawnee can only exercise
either of them.
Lallan Prasad v. Rahmat Ali

Requirement of notice

Before making the sale he is

required to give to the pawner, a
reasonable notice of his intention to
sell.
Reasonable notice is a statutory
obligation nd thus cannot be
excluded by a contract to contrary.
Requesting the pawnee to
postpone the sale could not deprive
the bank of its right to proceed with

LOSS OF SECURITY DUE TO

PLEDGEES NEGLIGENCE:
Where goods are lost due
to the negligence of the
pledgee, the liability of the
pledger is reduced to the
extent of the value of such
goods.

PRABHAT BANK v BABU RAM

FACTS: One of the terms of the
agreement of loan enabled the lending
baker to sell the securities without any
notice to the pawner,. The pawner
defaulted in payment. The bank sent a
reminder, but the pawner asked for
more time. The bank thereupon
disposed of the securities.
HELD: Notice is not a mere notice. It has
to be a reasonable one. Such notice has
to be clear and specific in language. The
court held the sale as bad under law.

LIMITATIONS ON THE RIGHT TO

RETAIN

The right of retention is not absolute and

comes with certain limitations. These
limitations have been established through
interpretation of the provision in various judicial
precedents.
In Lallan Prasad v. Rahmat Ali, AIR 1967 SC
1322 it has been held that a pledgee cannot
maintain a suit for recovery of debt as well as
retain the pledged property. He is only entitled
to recover the difference between the debt and
the price of the goods if it is less than the debt.

Where a suit has been filed by the

pawnee for realisation of the debt, it is to
be presumed that he has not sold the
pledged article, and will return the same
to the pawnor on the suit claim being
satisfied.
Furthermore, Section 174 of the
Contract Act specifically provides that in
the absence of any contract to the
contrary, a pawnee cannot exercise his
right of redemption for any other debt or
promise except that for which the goods
have been pledged.

Can pledgee buy the goods

himself?
While exercising the right of sale
of pledged goods, the pawnee is
restricted from making a sale of
the pledged goods to himself,
though such a restriction has not
been explicitly provided in the
Contract Act with respect to
pledge of goods in general, the
following
approach
has
been
adopted through various judicial
precedents.

Privy Council in Neikram Dobey v. Bank of

Bengal, (1891) 19 Cal 322:
The facts of the case are that certain
government securities were pledged with the
defendant bank, who exercised its right to sell
the pledged securities on default by the
pawnor.
However, instead of selling the pledged
securities to a third party, the same was
appropriated by the bank towards itself. Thus,
a suit was filed by the plaintiff before a Single
Bench of the Calcutta High Court contending
that such a sale was void and unauthorised.
The Single Bench upheld the contention in
favour of the plaintiffs. Later, an appeal was
also preferred before the Privy Council.

The punjab high court in

Dhani Ram & Sons v.
Frontier Bank, (AIR 1962
Punj 321) held that such an
act is not void. But the
pledger may hold the
pledgee liable for any loss
he may have suffered for the
goods have been given a
value less than the market

It has been held in Shatzadi Begum Sahiba v.

Girdharilal Sanghi (AIR 1976 AP 273) by the
Andhra Pradesh High Court that under a contract
of pledge, 'While the owner has the right of
possession as well as the right of enjoyment and
right of disposition, the pledgee has only the right
of possession but not the right of enjoyment. The
pledgee's right of disposition is governed by the
terms of the pledge and is limited to the recovery
of the amount due to him under that pledge.'
Furthermore, in Chetty v. M.S.A.PS.L. Ramaswamy
.L. Palaniappa Chettiar, it has been held by the
Madras High Court that a sale by the pledgee of
the pledged goods to himself amounts to
unauthorized conversion and the pledger is
rightfully entitled to have his property back on full

Thus the appropriation of pledged shares

by the pawnee does not amount to a
sale and does not fall within the ambit of
sale by the pawnor to himself.
Thus, the rights conferred upon the
pawnee are not absolute in nature and
bring
along
with
it
reasonable
restrictions with a view to protect the
interest of the pawnor as well so that the
pawnee cannot take undue advantage of
the pawnors disability.

WHO CAN PLEDGE?

Usually owner or
a
person
authorised by the owner.
Pledge made by any other person
may be invalid.
Eg: where some goods were left in
the possession of the servant. If the
servant makes a pledge in the
absence of owner it will be an invalid
pledge.
Yet, some are given authority to have
a juridical possession other than a
mere physical possession or bare

PLEDGE BY MERCHANTILE
AGENT (S.178)
PERSON IN POSSESSION UNDER
VOIDABLE CONTRACT (S.178A)
PLEDGE BY PLEDGEE (S.179)

PLEDGE BY MERCHANTILE
AGENT (S.178)
MERCHANTILE AGENT:
An agent having in the customary
course of business as such agent
authority either to sell goods, or to
consign goods for the purpose of
sale, or to buy goods or to raise
money on the security of the goods.
Same definition as in the sale of
goods act, 1930

A merchantile agent, with the consent

of the owner, in the possession of
goods or documents of title to goods,
any pledge made by him while acting
in the ordinary course of business shall
be valid, provided that the pawnee
acts in good faith and has no notice of
the fact that the agent has no
authority to pledge.
Explanation to S.178: definition as
same as under sale of goods act,1930

The necessary conditions

of the validity are:
1.Merchantile agent
2.Possession with owners
consent
3.In the course of business
4.Good faith

Merchantile agent
There should be a
merchantile agent as
defined under the Sale
of goods act, 1930

Possession with owners

consent

As under S.13 of the contract act,1972,

consent = agreeing on the same thing in
the same sense.
If consent is real, how it is got becomes
immaterial though it makes a person in
possession liable for many crimes. The
consent given is not annulled.

Eg: a goldsmith obtained possession of

certain jewellery under the pretence that
he had a customer, and instead pledged
with a third person. The pledgee here was
held to have a good title.

SHARA DIN v GOKUL CHAND,

AIR 1931 Lah 526
Possession under S.178 Is
juridical possession as
distinguished from mere
physical possession or bare
custody.

In the course of business

Entrustment made in his capacity
as a merchantile agent
Q1: the plaintiffs dealer in
diamonds at Amsterdam, sent some
diamonds to a diamond broker in
London for sale. The broker asked a
friend of his to pledge the diamonds
for him. The friend pledged them
with the defendants who were
pawnbrokers.

Good faith
Good faith and notice
not defined under the
act. As per general
clauses act, 1895, good
faith- when done
honestly, whether
negligently or not.

PERSON IN POSSESSION UNDER

VOIDABLE CONTRACT (S.178A)

Goods are pledged by a person

who has obtained possession
under a voidable contract, the
pledge is valid , provided that the
contract has not been rescinded at
the time of the pledge and the
pledgee has acted in good faith
and without notice of the pledgers
defect of title.

PHILIPS v BROOKS Ltd, (1919) 2 KB

243
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, the ring was
pledged with the defendants.
HELD: the pledge was held to be
valid, it being made by a person in
possession
under
a
voidable

PLEDGE BY PLEDGEE (S.179)

S.179: PLEDGE WHERE PAWNOR HAS
ONLY A LIMITED INTEREST- where a
person pledges goods in which he has
only a limited interest. Therefore when a
pledgee further pledges the goods the
pledge will be valid only to the extent of
his interest and his interest is the
amount for which the goods have been
given to him as a security.
But an effective pledge in favour of the
pledgee has not taken place, any
repledge made by him will be equally

ADDITIONAL
EXCEPTIONS
UNDER THE SALE OF GOODS
ACT
S.30(1) and (2): A pledge by
a seller remaining in the
possession after sale
and
the
buyer
obtaining
possession before sale is
valid.

DIFFERENCE BETWEEN
BAILMENT AND PLEDGE

BAILMENT PLEDGE
AS TO PURPOSE
It is a variety of

Goods bailed for the

purposes such as
safe custody, repairs
etc

bailment. Goods are

bailed as a security
for loan or
performance of a
promise

AS TO RIGHT OF SALE

Right of pledgee
No right to sell. Only only on default of
right to retain or sue pledgor and on a
reasonable notice.

BAILMENT PLEDGE
CONSIDERATION
There may or may
not with
consideration

Always with
consideration

DISCHARGE OF CONTRACT
Discharged as the
purpose is fulfilled

Discharged on
payment of debt.