Concept and Definition of Pledge

Introduction

The article analyzes the Concept and Definition of Pledge. In our day to day interactions, we undertake various contractual transactions with various types of people for various reasons knowingly or unknowingly. Undertaking a contractual relationship has become so common that people hardly realise that what they are undertaking could have legal consequences.

One such example is the case of “Bailment”. Bailment Contract as stated in section 148 of the Contract Act, states that when any person delivers any goods to another person on a contract that upon a contract that after the purpose for which it was delivered is fulfilled the goods shall be returned to the owner of that goods.

It basically means that when goods have been given to someone for any use, then when that user has been complete then those goods have to be returned to the owner of the goods. The receiver of the goods shall have the sole responsibility of taking such care of the goods as if it’s the property of the receiver and shall be liable if the goods get destroyed.

Like, if A hands over her jewellery to B for polishing, and then the jewellery get stolen, then B shall be liable to A. In this case since the jewellery was handed over to B for some particular purpose (for polishing) and temporary purpose, so it becomes the contract of bailment and A becomes the Bailor and B becomes the Bailee.

The whole purpose of entering into the contract of bailment is to ensure that goods which are handed over to another person for any person shall be returned after the fulfilment of that purpose.

Now, in the case of pledge, as stated in section 172, is nothing but a special kind of pledge. In this case, also the delivery of goods is there, but it differs from bailment on the point of object of the delivery. In bailment, the delivery of the goods is done for the completion of some purpose, but here the goods are delivered to provide some kind of security for a loan taken or for a performance of a promise.

Like, suppose, A takes a loan from B for Rs 50,000 for a certain purpose. Now for the security of that loan B delivers the papers of his property to A so that A can ensure that B will return the money loaned or else he can sell off his property and recover his money.

I. Section 172 of the act

Section 172 of the act states that “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’. ”

Section 172 of the Act states that when a bailment is done for the purpose of creating security for repayment of the debt then that kind of bailment shall be called a Pledge. Pledge is a special kind of bailment in which personal property is delivered as a security for the debt or engagement.

As held in the case of Lallan Prasad[1] “A pawnor is one is one who is liable to an engagement gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability and the person to whom it’s delivered shall be called pawnee”.

Characteristics of pledge

To understand the ambit and scope of pledge better, it’s imperative to understand some of its characteristics:-

1. Delivery of possession

One of the most basic but important characteristics of the pledge is that there should be the delivery of possession from one party to another. The property pledged should be delivered by the pawnor to the pawnee. The delivery of the possession can be either actual or constructive.

In the former case, there is physical delivery of the goods from pawnor to pawnee, while in the latter case their delivery there is no as such physical delivery of the good but something is done which indicate that implied delivery has taken place putting them in the possession of the bailee. Like delivery of the railway receipt of the goods amounts to constructive delivery as there no such physical transfer of possession, but with the transfer of the railway receipt, it’s assumed that there has been a transfer of the possession from the pawnor to pawnee.

In the case of Morvi Merchant bank v. Union of India[2], here the goods were allocated to railways for the delivery to a certain place. The consignor has submitted the railway receipt to the bank for obtaining certain advance. The goods lost in transit and the bank being the endorsee & pledgee of the railway receipt sued Indian railway for the loss of goods. The matter went to Bombay High Court and the court accepted the claim for Rs 20,000 only.

The matter went to Supreme Court on the issue that whether the railway recent could be equated with “goods” for the purpose of constituting delivery of goods. The majority opinion, in this case, held that the delivery of railway receipt was same thing ads delivery of goods and held that pledge was valid and pledgee was entitled to the amount of the loss.

2. In pursuance of the contract

It’s an important feature of the pledge is that the delivery of the goods by the pawnor to the pawnee shall be done in pursuance to the contract of pledge. But it’s important to note that that the contract for pledge and delivery of goods need not be contemporaneous, in sense that it’s not necessary that contract for pledge and delivery has to be done at the same time, the delivery of goods can be done before which ripens the pledge as soon as the advance is made.

The matter was discussed in the case of Blundell Leigh v. Attenborough[3], where the plaintiff handed her jewellery to Miller to let her know what offer he could she could give to him as a lending amount and in return, the jewellery was kept as an advance, then Miller pledged the jewellery to the defendant for a certain amount of money and handed some part of it to plaintiffs as the security of the jewellery.

The plaintiff died and the legal heirs paid the amount she borrowed and sued the defendant for the return of the jewellery. The contention of the plaintiff was she gave the jewellery to Miller for examination only & she only becomes the gratuitous bailee having no right to deal with it and there was no valid pledge.

The court held that it was clear that when the plaintiff handed the goods to one Miller, it was done to create a valid pledge between him and her from the moment when he handed her money by the way of loan which she was prepared to accept. So the court held that the pledge was valid.

II. Who can pledge

Ordinarily, goods may be pledged either by the owner or any person with the owner’s consent. Here, it’s essential that the owner’s consent is present for making the pledge like if the owner of the good left his possession to the maid & then maid makes the pledge then the pledge won’t be a valid one as there was no consent of the owner.

Similarly, when the goods are left in possession of someone for some special purpose then also the goods can be pledged by that person[4]. So to avoid confusion regarding who can pledge and does the consent of the owner is always necessary or not, the Indian Contract Act, have provided section 178 & 179 in that effect.

Section 178 of the act

Section 178 of the Act states that “Where a mercantile agent is, with the consent of the owner, in possession of goods or the document of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he was expressly authorised by the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge.

Explanation.—In this section, the expressions “mercantile agent” and “documents of title” shall have the meanings assigned to them in the Indian Sale of Goods Act, 1930 (3 of 1930).”

This section creates an exception in regards to the mercantile agent. The section provides that when the mercantile agent has the possession of the goods with the consent of the owner, then any pledge made by him in the ordinary course of business shall be considered as valid pledge made with the express authorisation of the owner.

The only caveat regarding this is that the agent has to act in good faith and shouldn’t lose the authority to pledge at the time of making the pledge. The necessary conditions of validity under this section are as follows:-

1. Mercantile agent

The pledge should be made by the mercantile agent. Now mercantile agent as explained in the section 2(9) of the Sales of Goods Act “a mercantile agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise money on the security of good.”

2. Possession with the owner’s consent

It’s an important factor which shall decide the validity of a pledge. It states that possession of the goods should be done only with the owner’s consent. If the consent is real then it doesn’t matter whether it was obtained with any dishonest intention or not. If these things are present then it would make the person receiving the goods liable for some kind of offence but the consent as such is not annulled.

3. In due course of business

The goods must be entrusted to the agent in his capacity as a mercantile agent by the owner. If it’s been entrusted in any other capacity apart from mercantile one then the pledge made by him won’t be a valid one. And another necessary condition in this regard is that the pledge made by him should be done in the ordinary course of business by an agent.

4. Good faith

This one is an equity principle which should be present in all the commercial transactions. This principle, says that pawnee should act in a good faith & should have the authority to undertake that pledge contract.

Section 178A of the act

Section 178-A of the act states that “When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.”

This section states that when the pawnor obtained the goods of the owner in a voidable contract u/s 19/19A then its void pledge, but if the contract is to cancel at the time of making pledge, and if the pawnee has acquired the goods by not noticing the defect and in good faith then the pledge shall be considered the pledge as a valid one.

Like, in Phillips v Brooks[5], here a fraud man pretending to be the man of credit persuaded the plaintiff to give him his ring for a certain amount of cheque which bounced. Before the fraud took place, the fraudulent man had already pledged the ring with the defendants.

The court held the pledge as a valid as it was a voidable contract and the pledge took place before the contract can be rescinded and the defendant has obtained the goods before the contract was considered as void one, so it’s a valid pledge.

Section 179 of the act

Section 179 of the Act stipulates that “Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.”

This section talks about the limited interest pledge. This section states that when a person makes a pledge who has limited interest in that good, then the pledge shall be valid only to that interest only. This concept can be extended to that fact that when a pledgee has received goods from the pawnor who has limited interest, then if that pledgee makes further pledge then that pledge shall be valid to the extent he has an interest in the pledge.

So if the pledgee makes the pledge for any amount which is outside of his capacity to do so, the original pledger shall be only liable to the amount for which he has given the pledge and the pledgee shall be liable for the remaining, amount to the subsequent pledgee[6].

Conclusion

From all the discussion above it can be construed that the concept of the pledge is very important in the current commercial world where almost in the everyday situation we are giving pledge either through direct possession or through constructive possession.

The ambit of the pledge has been kept wide so that innocent person who is taking pledge the pledge doesn’t have to suffer because of some contractual vice between the owner and the agent who makes the pledge.

But at the same time, the Act makes sure that the whole transactions were done following the principle of good faith as it’s the sole principle which governs any commercial transactions. Any contractual transactions which don’t have the aspect of good faith will lose out on its validity as the principle of equity governs each and every aspect of life and contract law is just one of them.

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[1] Lallan Prasad v. Rahmat Ali AIR 1967 SC 1322

[2] Morvi Merchant bank v. Union of India AIR 1965 SC 1954

[3] Blundell Leigh v. Attenborough (1921) 3 KB 235 (CA)

[4] Shankar Murlidhar v. Mohanlal Jaduram ILR (1887) 11 Bom 704

[5] Phillips v. Brooks (1919) 2 KB 243

[6] Firm Thakur Das v. Mathura Prasad AIR 1958 All 66

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1. Bailment: Concept And Definition
   
2. Rights of The Pawnor & Pawnee