Introduction to contract of pledge

A pledge contract is a pact between two or more parties outlining the specific steps that each will take to fulfil a predetermined objective. The parties to the contract typically agree on its terms, which may be changed or updated as needed. Contracts with pledges can be used for a number of things, like boosting productivity, enhancing communication, or just solidifying a personal commitment. They can be especially beneficial for teams or groups trying to accomplish a common objective. It’s crucial to include all relevant information when creating a pledge contract, such as deadlines and penalties for missing commitments.

Essentials of contract of pledge

A Valid Contract

Similar to a bailment contract, a pledge contract must also contain all the prerequisite elements of a legal agreement. The contract is invalid and unenforceable in a court of law if it lacks these components.

Transfer of possession

It is necessary for the pawnee to receive possession of the goods from the pawnor. Pledge is a bailment, as stated in the definition, and this is a crucial component of bailment. The delivery may be constructive or actual. There might be exceptions, though, in which the pawnor retains ownership.

It is impossible to transfer ownership

In the case of a pledge, the pawnee only receives possession of the goods. The goods’ pawnor is still the owner. Despite having possession of the items, the pawnee has little desire for them.

Protection From Debt

The items must be pledged as security for the pawnor’s unpaid debt. This unpaid balance may also represent a commitment to a specific performance.

Goods Returned After Payment

The goods must be returned to the pawnor in the manner he specifies after the debtor completes the specific performance for which they were pledged as security.

Duties Of The Pawnor

The pawnor’s obligations include paying expenses

The pawnor is obligated to reimburse the pawnee for all regular and exceptional costs incurred by the pawnee to maintain the condition of the pledged property.

To Pay Back The Entire Amount Owed, Plus Interest

The amount owed to the pawnee by the pawnor must be repaid. This sum consists of the principal amount and any interest that may have accrued thereon during the term of the contract.

To Make Clear Every Flaw In The Product

Before signing a contract, the pawnor is required to inform the pawnee of all defects in the goods. If the Pawnee suffers any loss in the future because of those faults the pawnor will be held liable.

Taking reasonable care of the goods is one of the pawnee’s obligations

The pawnee is in charge of maintaining the goods that are pledged. The pawnee must exercise just, fair, and reasonable care. As the pawnee took good care of his personal property, it should be. The pawnee will be responsible for paying the pawnor if the goods are damaged as a result of his carelessness.

As an illustration, suppose “A” and “B” pledge their watches for Rs. 100. Then “B” is required to treat A’s watch reasonably as if it were B’s own watch. The watch’s condition shouldn’t worsen or be worse than it was when it was pledged.

To Only Use The Products For Authorized Uses

Only with the pawnor’s permission may the pledgee use the goods. The pawnee must make up the difference for the pawnor if the goods are used for an unapproved purpose.

For instance, “A” and “B” pledge their cars. “A” gives “B” permission to use the car for personal purposes. When “B” lets his cousin “C” operate the vehicle, the vehicle is damaged. B will be required to reimburse A for the damages.

Returning the items

The goods must be returned to the pawnor in accordance with the terms of the contract once the amount against which they are pledged has been paid. This repayment must follow the terms of the contract or the pawnbroker’s instructions.

To Return Any Earnings From The Sale Of The Goods

If the pawnee makes a profit from the pledged goods at any point in the contract, that profit must be returned to the pawnor when the agreement is terminated.

As an illustration, “X” pledged his property to “Y.” Z received the property on a rental basis. Returning the property’s rent to “X” is required.

To Maintain Object Separation

The pawnee is responsible for keeping the pledged items apart from his personal belongings. If he combines the pledged goods, the pawnee will be responsible for paying all separation costs. The pawnee will be responsible for all the damages if separating is impossible.

The Pawnor’s And Pawnee’s Rights

Redeeming the goods is one of the pawnor’s rights

According to Section 177 of the Act, “If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt, or performance of the promise, at the stipulated time, he may redeem the goods pledged at any later time before the actual sale of them, but he must, in that case, pay, in addition, any expenses which have arisen from his default.”

As an illustration, “A” loaned “B” his watch as collateral for the outstanding INR 800. They concurred that the money needed to be paid back within a month.

Given that “B” has not yet sold the watch, if “A” fails to comply, he may still redeem his watch even after the contract’s expiration. However, “A” will be responsible for covering any costs “B” incurred to keep that watch safe.

To Recover The Items

The right to recover the goods belongs to the pawnor after he pays the pawnee the sum owed plus interest. The pawnee is not permitted to keep the pledged items after paying the full amount secured by them.

Pawnee’s Legal Right To Keep The Items

Until the amount owed by the pawnor is fully paid or the promise is fully fulfilled, the pawnee has the right to keep the goods. The expenses incurred by the pawnee and any interest earned on that amount are included in this sum. Section 173 of the Act makes reference to this.

As an illustration, “A” pledged his home to a bank in exchange for a loan of INR 2,50,000. The interest was 10,000 Indian rupees. Until “A” pays back the entire amount plus interest, or INR 2,60,000, the bank may keep the pledged home.

According to Section 174, “The pawnee shall not retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged, in the absence of a contract to that effect; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.”

To Be Reimbursed For Extraordinary Costs

It is implied that the pawnor will be responsible for covering all costs associated with keeping the items safe. According to Section 175, the pawnor will only be responsible for those costs if they occur. The pawnee cannot keep the goods if these costs are not paid, though.

Selling The Products

According to Section 176, “The pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; if the pawnor makes default in payment of the debt, or performance; at the stipulated time; or the promise, in respect of which the goods were pledged; or, after giving the pawnor reasonable notice of the sale, he may sell the item pledged. It is significant to remember that the pawnor must receive adequate notice before the goods are sold. As it is stated further, “the pawnor is still liable to pay the balance if the proceeds of such sale are less than the amount due in respect of the debt or promise. The pawnee must give the pawnor the surplus if the sale proceeds exceed the amount that is due.

As an illustration, “X” pledged his watch to “Y” as collateral for INR 10,000. Even with ample warnings, “X” still missed the payment deadline. To sell his watch, “Y” went. When the watch sells for more than INR 10,000, the surplus amount must be returned to ‘Y’. However, if the watch is sold for less, ‘X’ will still be liable for the difference.

Relevant case law

Rahmat Ali and Others V. Lallan Prasad, 1996

FACTS

In this case, the plaintiff gave the defendant an advance of INR 20,000 in exchange for a promissory note and a receipt. Both parties signed a contract committing the defendant to use his aeroscapes as collateral for his debt. According to their agreement, the defendant was required to give the appellant the aeroscapes, who would then keep them in his possession.

According to the plaintiff’s lawsuit, this agreement cannot be regarded as a contract of pledge because the aforementioned goods were never delivered to be in his custody. He asserted that he had a right to the money he had lent.

ISSUE

Whether the plaintiff received the pledged goods after they were delivered?

Was the plaintiff eligible for damages because, according to him, there was no contract of pledge because the goods hadn’t been delivered?

Judgement of the Court

The defendant was given a favourable ruling. The Supreme Court ruled that the plaintiff received delivery of the pledged goods. This indicated that this arrangement did indeed develop into a contract of pledge. The plaintiff’s claim that the goods were never pledged to him was denied, according to the court, and he was not entitled to any compensation.

Difference between bailment and pledge

Pledge and bailment are both forms of contracts. A contract known as a bailment allows for the temporary transfer of moveable property from one party to another for a specific purpose.

The pledge is a type of bailment where property is pledged as security for the payment of debt.

In a bailment, consideration may or may not be present, whereas consideration is always present in a pledge.

The keeping or fixing of given goods is the goal of a bailment. In contrast, in a pledge, the products are only delivered in order to serve as security or collateral for the debt.

The receiver of a bailment has no authority to sell the goods or moveable property, but may do so if the pawnee does not redeem the goods within a reasonable time frame.