Keith Mack
A pledge, also known as a pawn, is a legal concept in India that allows goods to be used as security for loans or promises. It is a type of bailment, which is the delivery of goods from one person to another for a specific purpose. In a pledge, the person delivering the goods is called the pawnor, and the person receiving them is the pawnee. The key difference between bailment and pledge is that in a pledge, there is always consideration involved as it is given as security for a loan or promise. The Indian Contract Act, 1872, provides a comprehensive framework for pledges, safeguarding the rights of both parties involved.
| Characteristics | Values |
|---|---|
| Definition | The bailment of goods as security for the repayment of a debt or the performance of a promise |
| Section | 172 of the Indian Contract Act, 1872 |
| Bailor | Pawnor |
| Bailee | Pawnee |
| Ownership | Ownership of the goods does not transfer to the pawnee—only possession does |
| Delivery | The delivery of goods, whether actual, symbolic or constructive, is necessary to constitute a pledge |
| Timing of delivery | The delivery of goods and the loan amount don't have to happen at the same time |
| Right of forfeiture | Not available and admissible |
| Notice of sale | A notice of sale must be issued by the pawnee to the pawnor before selling the pledged goods |
| Right of retention | Not absolute and comes with certain limitations |
| Right of foreclosure | Does not exist |
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What You'll Learn
Definition of a pledge
In India, a pledge is a form of bailment—a subset of a contract of bailment—that allows goods to be used as security for loans or promises. The Indian Contract Act, 1872, provides a comprehensive framework that protects both the person giving the goods (pawnor) and the person receiving them as security (pawnee), ensuring a fair and transparent process.
Section 172 of the Indian Contract Act defines a pledge as the "bailment of goods as security for the repayment of a debt or the performance of a promise". The bailor in this case is called the "pawnor", and the bailee is called the "pawnee". In the case of Lallan Prasad v. Rahmat Ali, the Supreme Court of India defined a pledge as:
> "Pawn or pledge is a bailment of personal property as security for some debt or engagement. A pawner is one who, being liable to an engagement, gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability."
The key aspect is that the goods are delivered as security and not transferred absolutely. The ownership of the goods does not transfer to the pawnee—only possession does. The right of retention is not absolute and comes with certain limitations. For instance, in Lallan Prasad v. Rahmat Ali, it was held that a pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property.
The delivery of goods can be actual (physical handing over), constructive (by means of documents of title), or even symbolic. For example, even handing over the keys to a warehouse where the goods are stored can count as a valid pledge. The delivery of goods and the loan amount also do not have to happen at the same time. A pledge can be made after the loan is given. However, without delivery, there is no valid pledge.
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Distinction between pledge and bailment
In the Indian legal system, the terms 'pledge' and 'bailment' are often confused, but they are distinct types of contracts with different underlying purposes and legal implications.
Bailment
Bailment is defined in Section 148 of the Indian Contract Act, 1872, as the "delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them". The person who delivers the goods is called the 'bailor', and the person who receives them is called the 'bailee'. Bailment can be done with or without consideration, and it can arise even without a formal contract, as in the case of goods being seized by government authorities.
Pledge
Pledge is a type of bailment, defined in Section 172 of the Indian Contract Act, 1872, as "the bailment of goods as security for payment of a debt or performance of a promise". In this case, the bailor is called the 'pawnor', and the bailee is called the 'pawnee'. Pledge is always done for consideration, and it is a narrower concept than bailment.
Distinguishing Features
The key difference between pledge and bailment lies in their purpose and legal implications:
- Purpose of Delivery: In a bailment, goods are delivered for a specific purpose such as repair, maintenance, safe custody, transportation, or use. In contrast, a pledge is made for the sole purpose of securing a loan or debt, with the goods acting as collateral.
- Right to Sell: In a pledge, the pawnee has the right to sell the goods if the pawnor defaults on payment or performance, after giving reasonable notice. The bailee in a bailment does not have this right and can only exercise a lien over the goods to recover their dues.
- Right to Redeem: The pawnor has the right to redeem the goods at any time before their sale by fulfilling their obligations.
- Rights of Pawnee/Bailee: The pawnee has the right to retain the goods until payment, to retain them for subsequent advances, and to sue the pawnor or sell the goods upon default. The bailee in a bailment has similar duties of care, use, and non-mixing of goods, but they do not have the same rights of retention and sale.
- Use of Goods: In a pledge, the pawnee cannot use the goods, whereas in a bailment, the bailee can use the goods if the terms of the contract allow it.
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Rights and duties of the pawnor
A pledge, also referred to as a pawn, is a form of bailment in which goods are delivered as security for the repayment of a debt. In India, this is covered under Section 172 of the Indian Contract Act, 1872.
The bailor (the person delivering the goods) is called the pawnor, and the bailee (the person receiving the goods) is called the pawnee. The pawnor has the following rights and duties:
Rights of the Pawnor
- The right to redeem the goods pledged at any time before the actual sale of goods, even if they have defaulted on payment of the debt or performance of the promise within the stipulated time. This right is extinguished after the sale of the goods.
- The right to receive back the pledged goods upon fulfilling the promise or repaying the debt.
- Rights similar to those of a regular debtor as provided by applicable debtor protection laws.
Duties of the Pawnor
- The duty to reimburse standard and extraordinary expenses incurred by the pawnee in preserving the pledged goods.
- The duty to repay the debt and any interest due.
- The duty to pay claims and damages to the pawnee if necessary.
- The duty to indemnify the pawnee for any losses caused by defects in the pawnor's title to the goods.
- The duty to disclose any material faults or risks associated with the pledged goods that could potentially harm the pawnee or the goods' intended use.
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Rights and duties of the pawnee
In Indian law, a pledge is a form of bailment where goods are delivered as security for the repayment of a debt. The bailor is called the pawnor, and the bailee is called the pawnee. The pawnee's rights and duties include:
Rights of the Pawnee
The pawnee has the right of retainer, which allows them to retain the goods pledged until the payment of the debt, including any interest and expenses incurred for the preservation of the goods. This right gives the pawnee a special interest or property in the goods pledged. The pawnee also has the right to file a civil suit against the pawnor for the amount of the debt and retain the goods as collateral security. They can also sell the goods after giving reasonable notice to the pawnor and sue for any remaining balance if the sale proceeds are insufficient.
Duties of the Pawnee
The pawnee has a duty to take reasonable care of the goods pledged as a prudent person would under similar circumstances. They must also ensure that any unauthorised use of the goods does not occur, as they can be held liable for any damages that may occur. The pawnee must also return the goods upon satisfaction of the debt or promise.
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Judicial interpretations of pledges
The Indian Contract Act, 1872, lays down the legal framework for various types of contracts, including the crucial concepts of bailment (Sections 148-171) and its specialised form, pledge (Sections 172-181). While both involve the transfer of possession of goods, their underlying purposes and legal implications differ significantly.
In the case of Lallan Prasad v. Rahmat Ali (1967), the Supreme Court of India held that a pledge is a bailment of personal property as security for some debt or engagement. The Court clarified that the pawnor, being liable to an engagement, gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability. This case established that the ownership of the goods does not transfer to the pawnee, only possession does, and that a pledgee cannot maintain a suit for recovery of debt while also retaining the pledged property.
In Purshottam Das v. Union of India (1967), the Court clarified that someone who obtains goods fraudulently cannot legally pledge them. However, it recognised that in certain exceptional situations, if a person has possession of the goods with the owner's consent, they may pledge them even without being the owner.
In Morvi Mercantile Bank v. Union of India (1956), the Supreme Court held that the delivery of goods pledged is a necessary element in the making of a pledge, but that the delivery and the advance of the loan do not need to be simultaneous, and a pledge may be perfected by delivery subsequent to the advance.
In Ltd. v. SEBI, the appellants contended that the pawnee banks who invoked the pledge on their default were only the beneficial owners of the shares and no legal ownership vested in them. This contention was rejected, holding that the Depositories Act deals with only two classes of owners: 'registered owners' who are necessarily depositories, and 'beneficial owners' in whom all rights vest. It was further held that the procedure under Regulation 58 of the Depositories Act does not contravene the substantial law contained in the Contract Act and Sale of Goods Act, as there was 'no sale of shares involved'.
The Delhi High Court, in a judgement, established two essentials in relation to a pledge: firstly, the right of forfeiture is not available and admissible, and secondly, a notice of sale must be issued by the pawnee to the pawnor before selling the pledged goods.
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Frequently asked questions
A pledge, also referred to as a pawn, is a form of bailment in which goods are delivered as security for the repayment of a debt or the performance of a promise. The person delivering the goods is called the pawnor, and the person receiving them is called the pawnee. The ownership of the goods does not transfer to the pawnee—only the possession does.
A contract of pledge must satisfy the general essentials of a valid contract, such as consent, consideration, lawful object, and competence. In addition, there must be a transfer of possession, not just ownership. Delivery can be actual (physical handing over), constructive (by means of documents), or even symbolic (e.g. handing over the keys to a warehouse where the goods are stored).
Once the debt is paid or the promise performed, the pawnee must return the goods to the pawnor. The pawnor retains ownership rights, while the pawnee has the right to retain and, if necessary, sell the goods to recover the debt, but not to use them unless authorised.
