Business law

Unit- 3

PLEDGE

A pledge is a delivery of goods by the owner to another person to make the goods as security for
a loan taken from the other.

Pledge is a special kind of bailment. A pledge involves only movable goods. In case where land
or building is made as security for a loan, then it is known as “mortgage”.

Rights of pledgee/ Pawnee:

1. Right to Retain the Goods (Section 173)

The Pawnee can keep (retain) the goods pledged with him until:

1. The loan amount is repaid, or

2. The promise is performed.

He can also keep the goods for:

1. The interest on the loan, and

2. Any necessary expenses he incurred to preserve the goods.

Example 1:

Ravi borrows ₹1, 00,000 from a bank and pledges his gold ornaments as security.
If Ravi fails to repay the loan or interest, the bank can keep the ornaments until Ravi pays both
the loan and interest.

Example 2:

Anita pledges her silver articles with a pawnshop owner for a loan of ₹20,000. The owner
spends ₹500 on polishing and preserving them. He can retain the articles until Anita pays the
loan, interest and ₹500 spent on preservation.

2. Right to Retain Goods for Subsequent Debts (Section 174)

The Pawnee can also keep the goods as security for future loans or debts, but only if there is an
agreement allowing this. That means unless both parties agreed in advance, the Pawnee cannot
automatically keep goods for new loans.

Example:

Ramesh pledges his gold chain with a jeweler for ₹10,000. Later, the jeweler gives him another
₹5,000 loan.

If their old contract says that the jeweler can keep the chain for “any future loans”, the jeweler
can retain it for both loans.

If there was no such condition mentioned in the contract, then jeweler can keep it only for the
first ₹10,000.

3. Right to Recover Extraordinary Expenses (Section 175)

If the Pawnee spends extra money (beyond normal maintenance costs) to protect or preserve the
goods, he can recover that amount from the pledger, but he cannot keep the goods for that extra
amount.

He must return the goods once the original debt is paid, but he can sue the pledger for
reimbursement of those extra expenses.

The right of lien cannot be exercised by the Pawnee for extraordinary expenses because such
expenses do not arise out of the original contract of pledge. The lien of a Pawnee extends only to
the amount of the loan, interest, and necessary expenses incurred for the ordinary preservation of
the goods. Extraordinary expenses are those unusual or exceptional costs that go beyond normal
maintenance, such as repairing damage or providing medical care to a pledged animal. Since
these expenses are not part of the agreed terms of the pledge, the Pawnee cannot retain the goods
for their recovery. Instead, the law allows the Pawnee to recover such expenses by filing a suit
against the pawnor, but not by holding the goods as security.

Example:
Ramesh pledges his car with a finance company for a loan of ₹2,00,000. The company spends
₹2,500 on regular servicing and parking charges to keep the car in good condition — these are
ordinary expenses, and the company can retain the car until Ramesh pays them along with the
loan. However, when the car’s engine breaks down and the company pays ₹10,000 for major
repairs, this becomes an extraordinary expense, and the company can only claim that amount
but not retain the car for it.

4. Rights of Pawnee if Pawnor Defaults (Section 176):

If the pawnor fails to pay the debt or perform the promise on time, the Pawnee has two options:

(a) Right to Sue and Retain Goods: The Pawnee can file a suit in court for repayment of
the debt or performance of the promise, and keep the goods as collateral security until
payment.

(b) Right to Sell the Goods: The Pawnee can sell the goods, but only after giving
reasonable notice to the pawnor.

If he sells:

1. If sale proceeds are less than the loan amount, the pawnor must pay the balance.
2. If sale proceeds are more than the loan amount, the Pawnee must return the extra money
to the pawnor.

Example: Seema pledges her gold bangle to a bank for a ₹50,000 loan. She fails to repay the
loan by the due date. The bank gives her notice and then sells the bangle for ₹60,000. The bank
keeps ₹50,000 (loan) + interest(2000). The remaining ₹8,000 (surplus) must be returned to
Seema.

Rights of a pawnor:

Right to Redeem the Pledged Goods (Section 177)

If a time is fixed for repayment of the loan or performance of the promise and the pawnor fails to
pay on time, he does not immediately lose ownership of the goods. He can still redeem (get
back) the pledged goods at any time before the Pawnee actually sells them, but he must also pay
any extra expenses caused by his delay. Redemption means getting back the goods pledged by
paying off the loan, interest, and any additional charges that have arisen due to delay or default.
Pledge by non-owners:

Pledge by Person in Possession under Voidable Contract [Section 178A]

If someone gets goods by fraud, coercion, misrepresentation, or undue influence —

the contract is voidable (can be canceled by the true owner).
If that person (the one who obtains goods via fraud or misrepresentation from true owner)
pledges the goods before the contract is canceled by aggrieved party, and the Pawnee acts in
good faith, he pledge is valid.

Example 4:

Ramesh obtains a watch from Suresh by misrepresentation and pledges it to Mohan.

Mohan acts in good faith. The pledge is valid, since the contract between Ramesh and Suresh
had not yet been canceled.

Pledge by mercantile agent [Section 178]:

A mercantile agent is a person who deals with goods on behalf of someone else — for example,
a broker, commission agent, or warehouse keeper who buys, sells, or stores goods for the owner.
Sometimes, these agents have possession of goods or their documents (like a bill of lading,
railway receipt, or warehouse receipt) with the owner’s permission. According to Section 178 of
the Indian Contract Act, if such an agent pledges (gives as security) those goods in the ordinary
course of business, the pledge is valid, even though the agent is not the real owner. However, this
is true only if the Pawnee (the person giving the loan) acts honestly (in good faith) and does not
know that the agent had no authority to pledge the goods.

Pledge where pawnor has only a limited interest [Section 179]:

Where a person pledges goods in which he has only a limited interest i.e. pawnor is not the
absolute owner of goods, the pledge is valid to the extent of that interest.

Example: A pledges his jewellery worth ₹1,00,000 to B for a ₹70,000 loan. B then pledges the
same jewellery to C for ₹90,000. This second pledge is valid only up to ₹70,000 plus interest,
since B’s right (his limited interest) was only for that amount.

Pledge by a co-owner in possession:

Where the goods are owned by many people and with the consent of other owners, the goods are
left in the possession of one of the co-owners. Such a co-owner may make a valid pledge of the
goods in his possession.

Pledge by seller or buyer in possession:

A seller, in whose possession, the goods have been left after sale or a buyer who with the consent
of the seller, obtains possession of the goods, before sale, can make a valid pledge, provided the
pawnee acts in good faith and he has no knowledge of the defect in title of the pawnor.

Example: A buys a cycle from B. But leaves the cycle with the seller. B then pledges the cycle
with C, who does not know of sale to A, and acted in good faith. This is valid pledge