A pledge is a type of special contract where the pawnor delivers a good to the pawnee as security for paying a debt or keeping a promise. Sections 172 to 181 of the Indian Contract Act 1872 deal with pledge. Pledge comes under bailment, hence, the pawnor who is originally a bailor enjoys the rights associated with a bailor. Besides, Section 177 and Section 181 also provide certain rights to the pawnor.
Rights of Bailor Also Applied to the Pawnor
The Contract Act of 1872 does not specifies the rights of the bailor. It, however, states the duties of the bailee that can be implied to mean the bailor’s rights. In simple words, when the bailee who is pawnee in the pledge performs all their duties the rights of the bailor or pawnor are secured.
1] Right to claim damages – The pawnor can sue the pawnee if due care of the pledged good is not taken by the pawnee and recover the loss.
2] Right to claim compensation – The pawnor may claim compensation if the pawnee misuses the pledged goods and degrades its quality.
3] Right to share profit – In case of pawnor’s failure, the pawnee may get back their amount by selling the pledged commodity. And if they receive proceeds higher than the amount lend to the debtor, the pawnor has the right to be informed about it and paid the same by the pawnee.
4] Right to get the goods back – The pawnor has the right to regain the goods pledged after the purpose of the pledge is complete. The pawnee must return the goods instead of still holding them in possession. However, It is upon the pawnor’s discretion to take back the goods whenever they feel like.
Section 177 of Contract Act talks about the pawnor’s right to redeem their goods when they have failed to pay the debt or perform the promise in the decided time of the pledge contract. The pawnor may ask for the goods to be returned any time but before they are actually sold by the pawnee. In such a scenario, pawnee must be paid extra expenses by the pawnor.
This means that the pawnor has the right to reclaim their goods from the pawnee even if they fail to pay the debt. This provision must be understood along with Section 176 where the pawnee has the right to sell the pledged goods when the pawnor is unable to repay. The pawnor may ask for the goods to be returned after being notified until the goods are put out for actual sale.
Other than the pawnor enjoying the bailor’s rights and the right to redeem goods under Section 177, Section 181 also gives the bailor, i.e. pawnor the right to take action against a third party of their pledged goods suffer damage due to that party.
Right over any increase to the pledged goods
The Supreme Court of India has held in Standard Chartered Bank v. Custodian [AIR 2000 SC1488] that any bonus given on the pledged goods is part of the pledge transaction. The bonus, dividend or the interest paid becomes a part of the securities when shares and debentures are pledged. They must be kept with the pawnee and returned to the pawnor with the original security. If they fail in redeeming within the given time their right over it does not ceases. But they are liable to pay for their default in collecting their pledged item.
Right to Redeem by the Pawnor’s Legal Heir
Where the original pawnor does, their legal heir becomes party to the pledge and is responsible to fulfill the terms of pledge. After successfully paying back the borrowed amount or keeping the promise laid in the pledge, the heir would get the goods.
Kamili Sarojini’s husband had pledged gold ornaments with the Indian Bank as security for a gold loan. He executed notarised will which put the responsibility of clearing the loan on his wife and take back the pledged ornaments and the balance amount in his bank account if he dies. The bank rejected the will and asked for its probate or get succession certificate. The Andhra Pradesh High Court found that the children of the couple had no issue with the father’s will. Thus, they directed the bank to allow the deceased’s wife to pay the loan and to return the ornaments and the balance amount in the husband’s bank account to her.
In another similar case, the Bombay High Court held that deceased borrower’s heir had the right to redeem the pledged ornaments after they clear the loan taken by the deceased with interest. Production of a Letter of Administration was not required to receive the pledged ornaments of the original pawnor. [State Bank of India v. Mangalabai G Deshmukh, AIR 2005 Bom 221]
These are the rights of a pawnor in a pledge contract.
Contract & Specific Relief Act – Avtar Singh (Twelfth Edition)
Contract II – Dr R K Bangia
The Indian Contract Act, 1872 (Bare Act)
Kamili Sarojini v. Indian Bank (AIR 2008 AP 71)
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