PLEDGE

What is a Pledge?

Section 172 of the Indian Contract Act, 1872 defines the concepts of pledge, pawnor, and pawnee:

• Pledge: Bailment of goods as security for payment of a debt or performance of a promise.
• Pawnor: The person who delivers the goods (bailor).
• Pawnee: The person who receives the goods (bailee).

📎 Essentials of a Valid Pledge

• There must be a delivery of goods.
• Such delivery must be for the purpose of securing a debt or fulfilling a promise.

Rights of Pawnee

1. Right to Retain the Goods – Section 173

The pawnee can retain the goods not only for repayment of the debt or performance of the promise, but also for interest on the debt and any necessary expenses incurred in preserving the goods.

2. Right to Recover Extraordinary Expenses – Section 175

The pawnee is entitled to claim extraordinary expenses incurred for preserving the pledged goods from the pawnor.

3. Right to Sue or Sell the Goods – Section 176

If the pawnor defaults in payment or performance:

• The pawnee can file a suit to recover the debt and retain the goods as security.
• Alternatively, the pawnee may sell the goods after giving reasonable notice to the pawnor.
• If the sale proceeds fall short, the pawnor is liable to pay the balance.
• If the sale proceeds exceed the amount due, the pawnee must return the surplus to the pawnor.

Other Important Provisions

1. Pawnor’s Right to Redeem – Section 177

Even after default, the pawnor has a right to redeem the goods before their actual sale by the pawnee. However, the pawnor must pay any additional expenses incurred due to the delay.

2. Pledge by Mercantile Agent – Section 178

A pledge by a mercantile agent is valid if:

• The agent had the owner’s consent.
• The pawnee acted in good faith and had no knowledge of any defect in the agent’s authority.

3. Pledge under Voidable Contract – Section 178A

If the pawnor got possession of the goods through a voidable contract (e.g., through fraud or misrepresentation), and the contract hasn’t been rescinded at the time of pledge, the pawnee:

• Acquires a valid title to the goods,
• If acting in good faith and without notice of the defect in title.