Contract of Pledge: Definition and Meaning

Contracts for pledges can be used for a variety of goals, including increasing productivity, improving communication, or just reinforcing a personal commitment. These can be especially helpful for teams or groups working towards a common goal.

Meaning of Contract of Pledge

A pledge contract is an agreement between two or more parties outlining the specific actions that each party will take in order to achieve a common objective. Contract terms are typically decided upon by the parties concerned and may be revised or updated as needed.

While establishing a pledge contract, it is critical to include all relevant details, such as dates and consequences for failure to satisfy obligations.

Features of Contract of Pledge

Major features of contract of pledge are −

• Delivery of possession − One of the most basic but important elements of the pledge is the delivery of possession from one party to another. The pawnor must deliver the pledged property to the pawnee. Possession delivery might be either actual or constructive.

• In pursuance of the contract − An important aspect of the pledge is that the pawnor must deliver the goods to the pawnee in accordance with the pledge contract. However, it is important to note that the contract for pledge and delivery of goods do not have to be contemporaneous, in the sense that the contract for pledge and delivery do not have to be done at the same time, and the delivery of goods can be done before, which ripens the pledge as soon as the advance is made.

• Who can pledge − Ordinarily, goods can be pledged by the owner or someone with the owner's consent. It is essential that the owner's consent be present for the pledge to be valid. For example, if the owner of the goods gave his possession to the maid and then the maid makes the pledge, the pledge will be invalid since the owner's consent was not there.

  Similarly, if the items are left in the possession of someone for a specific purpose, the goods can be pledged by that person as well. To avoid confusion about who can pledge and whether the consent of the owner is always necessary, the Indian Contract Act does include sections 178 and 179 to that effect.

• A valid contract − Pledge contracts are under the heading "Special contracts, but for them to be valid, they must have all of the essentials stated in the Indian Contract Act of 1872.

• Time of Delivery − The delivery of possession and the payment of money do not always have to be simultaneous under a pledge contract. A pledge can even be given after an advance has been made.

Pledge by Non-owners

Ordinarily, only the owner of the goods, or anyone authorized by him in that position, can pledge the goods or services. Nonetheless, in order to simplify commercial transactions, the law has recognized some exceptions. These exceptions apply to legitimate pledges made by people who are not the actual owners of the goods but have been left in their control

Non-owners can make a valid pledge in the following circumstances −

Mercantile agent (Sec 178)

A mercantile agent is an agent who has the authority to acquire and sell goods on behalf of his principal and can consign items for sale or raise money on the security of goods. A valid pledge can be made by such an agent with the consent of the principal.

A person in possession under a voidable contract (Sec. 178 A)

A person in possession under a voidable contract can form a valid contract of pledge of goods, as long as the contract was not cancelled at the time of the pledge and the pledger acted in good faith and without knowledge of the pledger's defective title.

For example, if A purchases a watch from B under coercion and pawns it with C before B cancels the deal, the pledge is valid. C will get the initial title to the watch, and B can only claim A for damages.

Pledger having limited interest (Sec. 179)

When a person pledges goods in which he has a limited interest, the pledge is only valid to the extent of his interest. As a result, a person with a lien on goods can pledge them up to the extent of his interest.

For example, A goes to B (a tailor) to have his cloth stitched for a fee of Rs. 2,000; When the suit was ready, B needed cash urgently and pledged it to C for Rs. 3000. The pledge is valid up to the amount of B's interest, which is 1500. Here, A may recover his suit from C by giving him Rs.1500.

Pledge by a co-owner in possession

If the goods are owned by many persons and are left in the possession of one of the co-owners with the consent of the other owners, a valid pledge of the goods in his possession may be made by such a co-owner.

Pledge by seller or buyer in possession

A seller who has left the goods in his possession after sale or a buyer who obtains possession of the goods before sale with the seller's consent can make a valid pledge, provided the pawnee acts in good faith and has no knowledge of the pawnor's defect in title.

For example, A buys a bicycle from B. Even so, the cycle is with the seller. B then pledges the cycle with C, who is unaware of B's sale and acted in good faith. This is a valid commitment.

Conclusion

The pawnor transfers or bails out his goods to the Pawnee as security for the amount he takes from the Pawnee in the pledge. The pawnor is required to pay the amount back to the Pawnee, and the Pawnee is bound to return the goods after the pawnor has paid the amount. If the Pawnee makes unauthorised use of the goods bailed to him, he will be liable for compensation to the pawnor.

Frequently Asked Questions (FAQ)

Q1. Is the pledge a real contract?

Ans. A pledge contract is an agreement between two or more parties outlining the specific actions that each party will perform in order to achieve a common goal.

Q2. What is the purpose of a contract of pledge?

Ans. A pledge is a bailment that conveys possessory title to property owned by a debtor (the pledgor) to a creditor (the pledgee) in return for repayment of a debt or obligation to the mutual benefit of both parties. The term is often used to refer to the property that acts as security.

Q3. What are the pledge rules in India?

Ans. A pawn or pledge is a bailment of personal property used as security for a debt or engagement. A pledge is defined as "the bailment of goods as security for the payment of a debt or the performance of a promise" under the Indian Contract Act, 1872.

Q4. Is the pledge immovable property?

Ans. A pledge is a type of movable property mortgage made by a borrower (pledgor) to a lender (pledgee) as security for a debt or other obligation. Both tangible and intangible movable property can be secured by a pledge.