What is Pledge | Meaning and Nature

Introduction

A pledge is a special type of bailment where goods are transferred as security for a debt or performance of a promise. In India, this concept is governed by the Indian Contract Act of 1872, specifically under Section 172. The Act defines a pledge as the bailment of goods to secure payment or fulfil an obligation. The parties involved in a pledge are known as the pawnor (the one who pledges the goods) and the pawnee (the one who receives the pledge).

Key Differences Between Bailment and Pledge

While both bailment and pledges involve the transfer of possession of goods, their purposes differ significantly. In a bailment, goods are handed over for a specific period or purpose, such as storage or repair. In contrast, a pledge involves transferring goods as security for a loan or obligation.

For instance, if you take a loan from a bank and offer your gold jewellery as security, this is a pledge. You, the borrower, are the pawnor, and the bank is the pawnee. The main difference lies in the use of goods; a bailee might use the goods for a specified purpose, but a pawnee holds them solely as security and cannot use them.

Rights and Duties of Pawnor and Pawnee

Rights of the Pawnee

1. Right to Retain: The pawnee can keep the pledged goods until the pawnor pays the debt or fulfills the promise.
2. Right to Sell: If the pawnor defaults. The pawnee has the right to sell the goods after giving reasonable notice to the pawnor.
3. Right of Lien: The pawnee can retain the goods for the debt, interest, and any necessary expenses incurred for the preservation of the pledged goods.

Duties of the Pawnee

1. Duty of Care: The pawnee must take reasonable care of the pledged goods.
2. Duty to Return: Upon repayment of the debt or performance of the promise, the pawnee must return the goods.
3. Duty Not to Mix: The pawnee should not mix the pledged goods with their own goods.

Rights of the Pawnor

1. Right to Redeem: The pawnor can redeem the pledged goods at any time before the actual sale by paying the debt and any additional expenses incurred due to default.
2. Legal Heir’s Right to Redeem: If the pawnor dies, their legal heirs can redeem the pledged goods.

Duties of the Pawnor

1. Payment of Debt: The pawnor must repay the debt or fulfill the promise.
2. Disclosure of Faults: The pawnor must disclose any faults in the goods that might expose the pawnee to risks.
3. Compensation for Loss: The pawnor must compensate the pawnee for any loss caused by defects in the pawnor’s title to the goods.

Commercial Utility of Pledge

The pledge contract is particularly useful in commercial transactions. For example, a mercantile agent can pledge goods with the owner’s consent. According to Section 178 of the Indian Contract Act, a pledge made by a mercantile agent is valid if done in the ordinary course of business, provided the pawnee acts in good faith and without notice of any lack of authority.

Conclusion

Understanding the nuances between bailment and pledges is crucial for effectively navigating commercial transactions involving goods. A pledge provides security for loans and ensures the pawnee’s interests are protected, making it a vital component of financial dealings.

FAQ About Pledge

1. What is a pledge in Indian Contract Law?

A pledge is the bailment of goods as security for payment of a debt or performance of a promise. Defined under Section 172 of the Indian Contract Act, of 1872.

2. How does a pledge differ from a bailment?

While both involve the transfer of goods, a pledge is specifically for securing a debt or obligation. Whereas bailment can be for various purposes like storage or repair.

3. What are the rights of a pawnee in a pledge?

The pawnee has the right to retain the pledged goods until the debt is paid, the right to sell the goods upon default after reasonable notice, and the right of lien for the debt, interest, and necessary expenses.

Also Read: Rights and Duties of Bailor and Bailee

Reference: zerodha