A pledge, also known as pawn, is a special type of bailment where goods are given as security for the repayment of a loan or the performance of a promise. In this arrangement, the person giving the goods is called the pawnor (or pledger), and the person receiving them is known as the pawnee (or pledgee). The pawnee holds on to the goods until the loan is repaid or the promise is fulfilled. Once that happens, the goods are returned to the pawnor.
The key idea behind a pledge is that the ownership of the goods doesn’t transfer to the pawnee—only the possession does. This concept was also recognized in case laws like Madras Official Assignee v. Mercantile Bank of India Ltd., where the court said that a valid pledge requires delivery of possession, either actual or symbolic. Even handing over the keys to a warehouse where the goods are stored can count as a valid pledge.
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Essentials of a Valid Pledge
To understand how a pledge works, it's important to know its essential features:
- Delivery of Goods: The goods being pledged must be delivered to the pawnee. This can be physical or constructive delivery, like handing over the keys or documents.
- Valid Contract: Even though a pledge is a special type of contract, it still needs to meet all the basic requirements of a valid contract under the Indian Contract Act, 1872.
- Rights of the Pawnee: The pawnee only gets possession of the goods—not ownership. The pawnor still remains the legal owner.
- Timing of Delivery: The delivery of goods and the loan amount doesn’t have to happen at the same time. A pledge can even be made after the loan is given.
Legal Definition and Judicial Interpretations
Section 172 of the Indian Contract Act defines a pledge as the bailment of goods as security for the repayment of a debt or the performance of a promise. In Lallan Prasad v. Rahmat Ali, the Supreme Court of India stated that a pledge is when someone liable to pay a debt gives personal property to the creditor as security.
However, not all transactions involving delivery of goods qualify as a pledge.
In another case, Purshottam Das v. Union of India (1967), the court made it clear that someone who gets goods fraudulently cannot legally pledge them. But in some exceptional situations, if a person has possession of the goods with the owner’s consent, they may be able to pledge them even if they aren't the owner.
Pledge vs. Bailment
Bailment refers to the transfer of goods from one person to another for a specific purpose, while a pledge is the transfer of goods given as security for the repayment of a debt. Bailment is defined under Section 148 of the Indian Contract Act, 1872, whereas pledge is covered under Section 172 of the same Act.
In a bailment, the person who delivers the goods is called the bailor, and the person who receives them is known as the bailee. In the case of a pledge, the person delivering the goods is referred to as the pledger or pawnor, and the person receiving the goods is called the pledgee or pawnee.
Another key difference lies in the aspect of consideration. In bailment, consideration may or may not be present, depending on the nature of the arrangement. However, in a pledge, consideration is always involved because it is given as security for a loan or promise.
Lastly, the bailee does not have the right to sell the goods that have been bailed, but the pledgee or pawnee has the right to sell the pledged goods if the pledger fails to repay the debt or fulfill the obligation.
Conclusion
A pledge is an important legal concept under the Indian Contract Act that allows goods to be used as security for loans or promises. It ensures protection for the lender while safeguarding the ownership rights of the borrower. Knowing the difference between pledge and other related concepts like lien or general bailment is important for understanding how security transactions work in contract law. Case laws further clarify how and when a valid pledge can be created and the rights it gives to each party involved.
