Concept of pledge under Indian Contract Act, 1872.

Pledge under the Contract law is a concept where the goods are bailed as security for repayment of debt or performance of a promise. The person who gives such goods is called a pawner or pledger whereas the person who is accepting those goods as a security is called a pawnee or pledgee.

One must know that only a movable property can be pledged.

Essentials of a valid pledge:

1) Goods are to be delivered to the other person in the form of security. Such delivery may be actual in nature or constructive or symbolic delivery.

2) The goods so delivered shall be returned by the pledgee to the pledger once the purpose of the pledge is fulfilled or the debt is discharged.

It must be noted that pledging the goods in the future does not cause a pledge which would stand valid in the eyes of law. It means that pledging of the goods has to take place only at the time of taking the debt. Also, an agreement that transfers the possession in the future under a pledge shall be held invalid.

If the title deed concerning the goods or property is however handed over at present but the possession is transferred in the future, it will be considered as a valid pledge.

If the pledger holds the goods in trust for a certain period of time and delivers those goods on demand made by the pledgee, such a pledge would also amount to a valid pledge of the goods.

A pledgee is bound to hold the goods pledged to him only as security and shall not use it for any other purpose.

Persons who are authorized to pledge the goods shall either be the owner of the goods or the mercantile agent acting with the pledger’s consent. The mercantile agent shall possess the goods to be pledged or the document of title of such goods provided he has obtained the consent of the pledger.  

If the mercantile agent has pledged the goods without the consent of the pledger, the pledgee can still possess the goods provided he has done so in good faith without the knowledge of the defect in the title of the mercantile agent.  

If the goods are pledged under a contract that is voidable in nature, the pledgee can still take possession of the goods so pledged only if it is proved that the pledgee has acted in good faith.

A pledgee is entitled to recover only such amount which the pledger is liable to pay and not over and above that.

Rights of the pledger or the pawner:

1) Right to redeem the goods or take back the possession of the goods pledged on the fulfillment of the purpose (i.e on repayment of the debt).

2) Right to claim any increase or surplus on the goods so pledged while in the possession of the pledgee.

3) Right to claim compensation from the pledgee for loss caused to the goods pledged.

Rights of the pledgee or the pawnee:

1) Right to sell the goods if the debt is not paid.

2) Right of retaining possession of goods for recovering interest on the debt.

3) Right to file a suit for recovering the debt due.

A pledgee cannot retain the possession of the goods pledged against one debt for failure to repay another debt due from the same pledger.

Difference between pledge and bailment:

i)A bailment can be both gratuitous and non-gratuitous whereas a pledge can only be non-gratuitous in nature.

ii) A bailment is a wide concept as the goods can be bailed for various purposes. A pledge comparatively has a limited scope as the goods can be pledged only for a specific purpose (i.e usually as a security against a loan or debt due).

iii) A bailee is not entitled to sell the goods so bailed whereas the pledgee can sell the goods in case of default on the part of the pledger to repay the debt.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.