A pledge transaction is conducted between a pawnor who delivers something as a security to a pawnee who keeps the good for a specific time mentioned in the contract. In a pledge, the pawnee has possession of goods that actually belong to the pawnor. The Contract Act provides pawnee certain rights with respect to holding the pledged goods subject to certain exceptions depending on the facts of the case decided by the court. This extends from Sections 173 to 176 as well as Section 181.
A pawnee has the following rights:
- Right to have the pledged goods (Sec 173 and 174) – Section 173 talks about pawnee’s right to retain the goods not only for payment of debt or performing a promise but also for the interest and other expenses bore by them to protect and take good care of the goods pledged to them.
According to Section 174, the pawnee is not allowed to keep the goods other than for the debt or promise they are originally meant to be pledged for. The goods can’t be used against any other debt or promise not part of the pledge between the said parties of the contract. However, the Section presumes if there are some subsequent advances they are part of the original debt. This is only a presumption that can be cancelled by a contrary contract, i. e. a contract that does not allows such presumption.
- Right to get extraordinary expenses (Section 175) – As stated in Sec 173 that pawnee not only possesses the goods but also bears expenses for proper maintenance of the goods. They can claim the pawnor to pay them those extra expenses.
- Right to sue pawnor (Section 176) – Section 176 provides this important right to the pawnee, wherein, the default of the pawnor to pay or perform within the time of the pledge may get them sued.
- Right to sell the pledged goods (Section 176) – Besides filing a suit against the pawnor on their default, the pawnee can also sell the pledged goods and get back the debt amount after issuing proper notice about the sale to the pawnor.
Section 176 must be understood in detail. It gives two distinct rights to the pawnee [K M Hidayathulla v. Bank of India AIR 2001 Mad 251]. If the pawnee files a suit against pawnor, they cannot seek alternate remedy of selling goods. Similarly, if they have decided to sell the goods they cannot sue the pawnor.
For the first part of the Section 176, if because of their own act, the pawnee fails to produce and return the goods, they cannot claim the debt. The defendant had borrowed Rs 20,000/- from the plaintiff on promissory note and gave him aeroscrapes worth about Rs. 35,000/- as security. Plaintiff had sold the security and then sued for repayment of loan. But his plea was rejected. Shelat J referred to the House of Lords’ decision in Trustees of the Property of Ellis & Co v. Dixon Johnson, where it was held that if the creditor holding the security is unable to return it and sues the debtor he cannot ask for the debt. [Lallan Prasad v. Rahmat Ali AIR 1967 SC 1322]
Kerala High Court held that where the security is lost due to Dena Bank’s negligence, the bank won’t lose the right to recover the loan if there is a clause in the agreement that does not holds the bank liable for such loss. [Dena Bank v. Glorphis James 1993 2 KLT 105]
When the pawnee decides to sell the pledged item, a proper notice is issued to the pawnor about sale of their goods. The notice need not have the date, time and place of sale. T S Kotagi v. Tahsildar Gadag held that right to sue can be practiced without notice but not right to sale. If the proceeds of the sale are less than the amount due in respect of debt or promise the pawnor is liable to pay the balance. If the proceeds are more than the due amount, the pawnee shall pay the surplus to the pawnor.
A banker was pledged with some jute bales. He sold them and refunded the price to the buyer when the latter rejected the goods for containing ‘gudri’ along with jute. The banker then sold the goods to another buyer at a lower price. Later, he sued the pawnor for the balance amount due even after selling the goods. The Patna High Court rejected the action. Untwalla J said that the actions of the bank do not come under Section 176 of the Contract Act and if this is practiced in the commercial world it “would be disastrous” “to accept and uphold it” as rightful. [Laxmi Narayan Arjundas v. SBI, AIR 1969 Pat 385]
Pawnee can also buy the pledged goods as held by Punjab High Court in Dhani Ram & Sons v. Frontier Bank Ltd on the basis of a Privy Council judgment. The Court decided that the sale to the pawnee won’t be void. The pledge will not get terminated by such act. Thus, the pawnor may have the goods back without paying the loan. The pawnor may hold the pawnee liable for getting less value for the goods.
Section 181 gives the bailee, i. e. pawnee the right to sue a third person if their act causes damage to the pledged goods.
These are the rights provided to the pawnee under the Indian Contract Act 1872.
Contract & Specific Relief Act – Avtar Singh (Twelfth Edition)
Contract II – Dr R K Bangia
The Indian Contract Act, 1872 (Bare Act)
Pollock & Mulla on The Indian Contract Act, 1972 (15th Edition)
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