Updated: Jun 24, 2019
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 "pawnee"
Essentials of pledge
1. Moveable Property
The pledge is concerned with the moveable property. All types of goods and valuable documents are included in it.
2. Transfer of Possession
In case of pledge only possession of goods transferred by the pawnor to the pawnee.
3. Ownership Right
In case of pledge, the ownership of the goods remains with the pawnor. It is not transferred to pawnee.
4. Case of Mere Custody
Those people who have only mere custody of the goods cannot pledge them.
5. Limited Interest
Pledge property cannot be used for unlimited interest. When a person pledges goods in which he has only limited interest, the pledge is valid to the extent of that interest only.
Can a pledge be made by a person who is not the owner of goods?
No, ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge made by any other person is not valid.
This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerce and so there are some situations where a person having the possession of the goods by owner's consent, is entitled to pledge those goods even without owner's consent for the pledge. These situations are discussed below -
1. Pledge by Mercantile agent (Section 178)
When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods.
The essential conditions of this rule are - he must be a mercantile agent, he must have possession of the goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.
2. Pledge by a person in possession under voidable contract (Section 178 A)
When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge.
3. Pledge by person with limited interest (Section 179)
Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B both having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the pledge that the pledgee can receive upon default is only 50% of the value received by sale.
Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods.
Pawner's right to redeem
Under Section 177 of Indian Contract Act 1872 , it provides a very important right to the pawnor. It allows the pawnor to redeem his property even if he has defaulted. It says that if a time is stipulated for the payment of a debt or performance of the promise for which the pledge is made, and the pawnor make default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expense which have arisen from his default.
Difference between bailment and pledge
The act of delivering goods for a special purpose is termed as bailment. The person who is delivering the goods is called a bailor while the person who receives the goods is referred top as a bailee in the contract. The goods that are transferred in this manner shall be returned to the owner upon completion of the purpose of the contract. The point to be remembered in this kind of transaction is that ownership of the goods does not get changed. In bailment, only goods are involved, and all movable items apart from property and money come under bailment. Thus it is clear that when you keep money in a bank account, it does not come under bailment.
But, if a person keeps his gold or other valuable items in a bank locker or with a money lender in exchange for a loan, he is making a pledge to the money lender or the bank that he will return the money and get back his valuables. This is deemed as a kind of bailment and all conditions that are applicable on a bailment apply in such a case also. Bailment for security can be termed as a pledge. You are keeping your valuables with the money lender as a security against the loan and also making a pledge to pay back the money. To your pledge, the money lender agrees to keep the valuables as a security. In this special type of bailment where goods act as a security for payment of loan is called a pledge.