Pledge under the Indian Contract Act

Definition

The bailment of goods as security for payment of a debt or performance of a promise is called a “pledge.” The bailor is in this case called the “pawnor” and the bailee the “pawnee.” (Sec 172)

Pawnee’s right of retainer

The pawnee may retain the debt, not only for payment of the debt or the performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or the preservation of the goods pledged (Sec 173).

The pawnee shall not, in the absence of contract to the contrary, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged (Such contract shall be presumed, in the absence of anything to the contrary, to be for subsequent advances made by the pawnee) (Sec 174).

Pawnee can recover extraordinary expenses (Sec 175)

The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for preservation of the goods pledged.

Pawnee’s Right where Pawnor makes Default (Sec 176)

If the pawnor makes default in payment of the debt or performance, at the time stipulated, the pawnee may bring a suit against the pawnor and retain the goods pledged as a collateral security; or he may sell the goods on giving the pawnor reasonable notice of such sale.   

In case the proceeds of the sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater, the pawnee shall pay the surplus to the pawnor.

Defaulting pawnor’s right to redeem (Sec 177)

If a time is stipulated for payment of the debt or performance of the promise, and the pawnor makes default in payment, he may redeem the goods at any subsequent time before the actual sale of them; but he must, in addition, pay any expenses which may have arisen from his default.

Pledge by mercantile agent (Sec 178 and 178A)

Where a mercantile agent is, with the consent of the owner, in possession of the goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business, as valid as if it was expressly authorized by the owner;

Provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge. 

When the pawnor has obtained possession under a contract voidable under Sec 19 or 19A of the Indian Contract Act, but the contract has not been rescinded at the time of pledge, the pawnee acquires a good title.

Provided that the pawnee acts in good faith and has not at the time of the pledge notice of the pawnor’s defect of title.

Pledge where pawnor only has a limited interest (Sec 179)

Where a person pledges goods in which he only has a limited interest, the pledge is valid to the extent of the interest.