Contract of Pledge

What is the Contract of Pledge according to Section 172?

In accordance with Section 172 of the Indian Contract Act, 1872, the term “pledge” is defined as ‘the bailment of the goods as security for a payment of a debt or performance of a promise is called pledge’. In this context, the party delivering the goods, known as the bailor, assumes the role of the pawnor, while the recipient, referred to as the bailee, is termed the pawnee.

What are the essential features of a Contract of Pledge?

Essential features include a valid contract, delivery of possession, the inability to transfer ownership, the asset serving as security against debt, and the obligation to return the pledged asset upon repayment.

Can ownership be transferred in a Contract of Pledge?

No, ownership remains with the pawnor. While possession is transferred to the pawnee, the pawnor retains ownership of the pledged asset.

What are the duties of the Pawnor?

The pawnor is responsible for delivering the pledged asset in good condition, disclosing any defects, repaying the debt within the agreed timeframe, and maintaining any necessary insurance on the asset.

What are the duties of the Pawnee?

The pawnee must take reasonable care of the pledged asset, provide proper notice in case of default, and follow due process if selling the asset to recover the debt.

What rights does the Pawnor have?

The pawnor has the right to redeem the pledged asset upon full repayment of the debt and is entitled to any surplus from the sale of the asset if it exceeds the debt amount.

What rights does the Pawnee have?

The pawnee has the right to retain possession until the debt is repaid, and in case of default, the right to sell the pledged asset to recover the debt.

Are there legal precedents related to the Contract of Pledge?

Yes, cases like “State of Punjab v. Nathu Ram” and “State Bank of India vs. Ghamandi Ram” have provided legal insights and precedents regarding the interpretation and enforcement of pledge contracts.

What happens if the pledged asset is damaged while in possession of the Pawnee?

The pawnor may hold the pawnee liable for any damage caused to the pledged asset, and compensation may be required.

Can the Pawnee sell the pledged asset immediately upon default?

Generally, the pawnee must provide proper notice to the pawnor before selling the pledged asset, allowing an opportunity for rectification of the default.

Contract of Pledge is a formal agreement whereby one party, referred to as the Pawnor, promises particular items or property to another, referred to as the Pawnee, as security for a debt or obligation. Contract of Pledge carries unique legal implications, encompassing enforceability, consequences of default, and legal rights of both parties. The transfer of possession and the right of sale contribute to an enhanced security arrangement, safeguarding the Pawnee’s interests. The Pawnor transfers ownership of the pledged item to the Pawnee under the agreement, with the understanding that the Pawnor keeps ownership and the Pawnee has a security interest.

Geeky Takeaways:

• Contract of Pledge is considered to be a subset of a Contract of Bailment.
• The goods bailed here are kept as security against a debt or a performance of a promise.
• The bailor here is called Pawnor, and the bailee here is called Pawnee.
• Possession of pledged goods is transferred to the Pawnee, distinct from other bailments.
• The Pawnee has the right to sell the pledged goods in case of default by the Pawnor, providing a recourse for debt recovery.