In this Contract Act law note, you will read about the concept of pledge, its essentials, and the rights and duties of pledgor and pledgee.
What Is Pledge?
Pledge is a subset of a contract of bailment defined under section 172 of the Indian Contract Act, 1872.
Contract of bailment is the temporary transfer of the movable goods from one part to another till the time of the fulfilment of the specific purpose and with the expectation to be returned to the owner. Whereas the pledge is a bailment of movable goods as security till the time debt is repaid, or the promise is performed.
- The person who delivers the goods is known as a pawnor or pledgor.
- The person who accepts the goods, for the time being, is known as a pawnee or pledgee.
Essential Features of Pledge
1. Valid contract: All the basic features of a valid contract should be fulfilled; For example, offer, acceptance, consideration, capacity to contract, wilful consent, etc. If basic features are not fulfilled, the contract would be void and unenforceable.
2. Delivery of possession: Possession of goods should be transferred from the pawnor/pledgor to the pawnee/pledgee. It can either be actual or constructive. Actual delivery is where goods are transferred in real whereas constructive delivery is where the goods are transferred indirectly. For example:
- The key to the warehouse is handed over to Mr A, where the goods are kept – is a constructive delivery.
- On the other hand, if the actual goods had been handed over to Mr A, that would be actual delivery.
3. Ownership cannot be transferred: Pawnee/pledgee only possesses the goods for the time being, as per the duration of the contract. Pawnor/pledgor still remains the actual owner of the goods.
4. Security against debt: Goods must be pledged against the debt of the pawnor.
5. Return of goods on repayment: Once the motive of the contract gets performed, the pledged goods should be returned to the pawnor/pledgor, who is the real owner of the goods, in the duly prescribed manner.
There are some rights provided to both the contracting parties, i.e., pledgor and pledgee. They are as follows.
Rights of the Pledgor
1. Right to redeem goods: If the pledgor from his end fails to fulfil the contract or does any default, then according to section 177 of the Indian Contract Act, the pledgor can redeem his pledged goods before the pledgee sells them. But the pledgor has to compensate the pledgee for the expenses or damages incurred to him.
2. Right over the increased value of goods: If the value of the pledged goods increases, it is the right of the pledgor to claim those values along with the return of the goods.
Rights of the Pledgee
1. Right to retain goods: As per section 173 of the Indian Contract Act, the pledgee has the right to retain the goods unless the amount owed by the pledgor is paid, the promise is fulfilled, or the interest accrued during the preservation of the goods is paid.
2. Right over extraordinary expenses: As per section 175 of the Indian Contract Act, the pledgee is entitled to receive compensation for the extraordinary expenses he incurred while preserving the goods.
3. Right to sell goods: On the same grounds where the pledgee was entitled to retain goods, the pledgee can also sell them under section 176 of the Indian Contract Act by giving reasonable notice of sale to the pledgor.
Note: If the amount received after the selling is still lesser than the amount due, the pledgor still would be liable to pay the balance amount, and if the amount received is in surplus, then the pledgee is bound to return the surplus to the pledgor.
With rights come duties that need to be fulfilled. So, now you will read some of the duties imposed on the pledgor and the pledgee.
Duties of the Pledgor
1. Duty of compensation: For the care taken by the pledgee of the pledged goods, the pledgor is entitled to compensate for all ordinary and extraordinary expenses incurred by the pledgee.
2. Duty to pay interest in addition to principal amount: Pledgor is bound to repay the entire principal amount back to the pledgee by adding the interest upon it if it arises during the contractual period.
3. Duty to disclose all facts: Pledgor is liable to reveal all the facts about the goods he is pledging to the pledgee before coming into the contract. If the pledgee experiences any loss because of the non-disclosure of the fact, the pledgor will be held liable.
Duties of the Pledgee
1. Duty to take reasonable care: Care taken by the pledgee should be just, fair, and reasonable. It should be in such a way as if the pledgee is taking care of his own goods. If goods get damaged due to the pledgee’s negligence, the pledgee would be liable to compensate the pledgor.
2. Duty of not using the pledged goods: Pledgee is not supposed to use the goods pledged to him by the pledgor unless and until the pledgee is authorised to do so.
3. Duty to return goods: Once the motive of the contract is fulfilled, the pledgee is liable to return the goods back to the pledgor.
4. Duty to return the benefit: If the pledgee gets any benefit arising from the pledged goods during the contract, the pledgee is supposed to repay the benefit enjoyed by him to the pledgor.
5. Duty to keep goods separate: Pledgee is supposed to keep his goods separate from the pledgor’s goods, and if he mixes it, only he has to bear expenses to separate, and if it is not possible, he shall pay for the damages incurred to the pledgor.
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