Pledge in Contracts

 This article is written by Shaheera Almas Sultana, pursuing BA LLB in NBM LAW COLLEGE, Vizag.

What is the Meaning of Pledge?

The word Pledge is defined as the goods being bailed in the form of security for payment of a debt or performance of a promise. The definition of pledge seems similar to the definition of bailment(goods are delivered on specific purpose from one person to another) but the pledge is considered as a special kind of bailment. The other word for the pledge is ‘Pawn’. The major difference between bailment and pledge is every pledge can be considered as bailment but every bailment cannot be considered as a pledge. An individual who delivers goods to another is called a Bailor. But in this case, the person who delivers the goods in the form of security for payment of a debt or performance of a promise is called a ‘Pledger’. The person who receives the goods is known as ‘Pledgee’ or ‘Pawnee’.

The words  “Pledge”, ” Pawner” and “Pawnee” are defined in Section 172 of the Indian Contract Act, 1872,  which states that  ‘the goods being bailed in the form of a debt or performance of a promise, is termed as a pledge’.

Example:- A shopkeeper has delivered 100 bags of rice to the bank as security for obtaining a loan. The whole process is known as Pledge. Here, the shopkeeper is the pledger and the pledgee will be the bank.

To make it more simple let’s take another example, ‘X’ gave ₹50,000/-  to  ‘Y’ and kept Y’s gold chain with him in the form of security for the payment of the debt. In this case, the bailment of the gold chain is known as ‘Pledge’. Here, ‘X’ is termed as ‘Pledger’ and ‘Y’ is termed as ‘Pledgee’.

Section 172 deals with “Essential Elements of the Pledge”:- 

  1. Goods being delivered 
  2. For payment of a debt, security is required.
  3. The given property must be movable.

 Goods being delivered

To constitute a pledge, bailment of goods is necessary. This means the goods must be delivered from one person to another. The delivery of goods may be actual or constructive. During a popular case, Reeves v. Copper (1933) Bing NC 136; 132 ER 1057: during this particular case, the captain of the ship pledged his chronometer together with his employer. Here, the captain was allowed to keep the chronometer and to use it for the voyage. Later, the captain pledged the chronometer again with another person. As it was a case of constructive delivery the first pledge was valid. In another leading case, Bank of Chittor v. Narasimha, A.I.R.1966 AP 163: This was the case of constructive delivery where the bank gave access to the property pledged or bailed to them (a cinema projector and some accessories) to remain with the pledgers who sold those to the other person. Here, the sale was subject to the pledge.

For Payment of a debt, Security is Required

The main component of constituting a pledge is, the goods bailed between one person to another must serve as security for the payment of a debt, or performance of a promise made. In simple words, for the payment of a debt or for the performance of a promise the following goods should be bailed to serve as security. In Bank of India v. Binod Steel Ltd, without satisfying the claim of the bank,  the movables pledged by a company to a bank cannot be attached and sold for the satisfaction of claims of other creditors of the company.

The Given Property must be Movable

The property given must be a movable property like goods, documents, valuables, and chattels.

Difference between Bailment and Pledge

  • Section 148 to 171 of the Indian Contract Act deals with bailment. Pledge is dealt with in Section 172 to 181 of the Indian Contract Act.
  • Bailment is made for any purpose but the pledge is made for specific purposes.
  • The Pledgee cannot use the goods but the bailee can use the goods.
  • If the pledger fails to complete his task on time then the pledgee has the right to sell the goods. Whereas, the bailer has no right to sell the goods.
  • The exercise of lien by bailee on goods are only for labour and service but pledgee can exercise lien even for non-payment of interest also.

The pledge by non-owners in Latin maxim known as “Nemo Dat quod non-habet”. The actual rule explains to us that the person who can create a valid pledge is the real owner. The interest of the individual is protected. In simple words, the person who has the actual right over the goods can only have the valid title over the goods and can create a valid pledge. But, there are some exceptional cases where a non-owner can also create a valid pledge.

  1. Mercantile Agent creating a valid pledge:- Pledge by Mercantile Agent is dealt with in Section 178. It states that- ” when the consent of the owner is given to the mercantile agent regarding goods or the documents. It shall be valid for a pledge made by the owner when acting within the ordinary course of business of a mercantile agent because he was expressly authorized by the goods to make the same. It is also provided that the pawnee acts in good faith and during the time of pledge did not notice that the pawnor has no authority to pledge. 
  2. Under the voidable contract, pledge by the person in possession of goods:- The pledge made by the person who has caused the pawnor’s defect of title by acting in good faith and without the notice of pawnor, he gave the goods under a voidable contract under Section 19 or Section 19 A, the contract has not been rescinded at the time of the pledge.

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