Contract of Pledge (Pawn)
1. Statutory Meaning of Pledge (Section 172)
Section 172 of the Indian Contract Act 1872 defines a pledge:
“The bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. The bailor is in this case called the ‘pawnor’. The bailee is called the ‘pawnee’.”
Distinctive Characteristics of Pledge:
- Species of Bailment: All pledges are bailments, but all bailments are not pledges (bailment can be for repair or safe custody; pledge is exclusively as security for debt).
- Moveable Property Only: Immovable property cannot be pledged (it is mortgaged under Transfer of Property Act 1882).
- Special Property (Right of Retainer): General ownership remains with pawnor; pawnee acquires a special property interest authorizing sale upon default.
2. Rights of the Pawnee (Lender / Pledgee)
Four Statutory Rights of the Pawnee
Section 173
Right of Retainer:
Pawnee may retain pledged goods not only for payment of the principal debt or interest, but also for all necessary expenses incurred in preservation of the goods.
Section 174
Right Not to Retain for Subsequent Debts:
Pawnee cannot retain goods for debt other than that for which goods were pledged, unless specifically agreed by contract.
Section 175
Right to Extraordinary Expenses:
Pawnee is entitled to receive extraordinary expenses incurred for preserving goods (can sue pawnor, though cannot retain goods solely for extraordinary costs).
Section 176
Pawnee's Remedies on Pawnor's Default:
Upon default, pawnee may: (a) bring a civil suit against pawnor and retain goods as collateral; or (b) sell the pledged goods after giving reasonable notice of sale to pawnor.
3. Rights of the Pawnor (Borrower)
- Right to Redeem (Section 177): If a time is stipulated for payment, and the pawnor makes default, he may redeem the goods at any subsequent time before the actual sale, paying any expenses arising from his default.
- Right to Surplus: If the pawnee sells the goods upon default and the sale proceeds exceed the debt, the surplus must be refunded to the pawnor.
- Duty for Deficit: If the proceeds are less than the outstanding debt, the pawnor remains personally liable for the balance.
4. Pledge by Non-Owners (Exceptions to Nemo Dat Quod Non Habet)
The general rule is that only the true owner can pledge goods. However, the law recognizes commercial exceptions to protect bona fide lenders:
- Pledge by Mercantile Agent (Sec 178): Pledged by agent with owner’s consent, in ordinary course of business, provided pawnee acts in good faith.
- Pledge by Person in Possession under Voidable Contract (Sec 178A): Valid if pledged before the contract is rescinded by the aggrieved party.
- Pledge where Pawnor has Limited Interest (Sec 179): Pledged to the extent of pawnor’s actual financial interest.