The document discusses the legal concept of a pledge. It defines a pledge as the bailment of goods as security for payment of a debt or performance of a promise. It outlines the essential elements of a pledge contract including that it involves movable property, a change in possession of the goods to the pawnee, and that the purpose is to provide security for a debt. It also discusses the rights of the pawner including getting the goods back upon payment and redeeming the debt before sale of goods, and the rights of the pawnee such as retaining goods until payment and selling goods if default occurs.

1. Legal Aspects Of Business
Section-A
A Project Report on
PLEDGE
Submitted to Submitted by
Prof. Devaiah NG Konijeti Abhilash Gupta
Roll no: PG2018H025
Section : A
KIRLOSKAR INSTITUTE OF ADVANCED MANAGEMENT STUDIES
HARIHAR

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TABLE OF CONTENTS
Contents Pg.No
Meaning and Introduction 2
Essentials ofcontract of Pledge 3-5
Distinction between Bailment & Pledge 5-6
Rights ofPawner 6-7
Duties ofPawner 7
Rights ofPawnee 7-8
Duties ofPawnee 8-9
Pledge through Non-owners 9-11

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Konijeti Abhilash Gupta
Prof. Devaiah NG
Course : Legal aspects of Business
01 December 2018
PLEDGE
MEANING AND INTRODUCTION
A pledge is only a special kind of bailment, and chief basis of distinction is the object
of the contract. Where the object of the delivery of goods is to provide a security for a loan or
for the fulfilment of an obligation, that kind of bailment is pledge. Under Indian Contract Act,
1872 the ‘Pledge’ has been defined in section 172 as
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 the
“Pawnee”.
In a simple words,
A pledge is a deposit of personal property as security for a personal loan of money. If
the loan is not repaid when due, the personal property pledged is forfeited to the lender. The
property is known as collateral. A pledge occurs when someone gives property to a
pawnbroker in exchange for money.
As the pledge is for the benefit of both parties, the pledgee is bound to exercise only
ordinary care over the pledge. The pledgee has the right of selling the pledge if the pledgor
make default in payment at the stipulated time. In the case of a wrongful sale by a pledgee,
the pledgor cannot recover the value of the pledge without a tender of the amount due.
Example:
John asks to borrow $500 from Mary. Mary decides first that John will have to pledge
his stereo as security that he will repay the debt by a specific time. In law John is called the pl
edgor, and Mary the pledgee.

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The stereo is referred to as pledged property. As in any common pledge contract, poss
ession of the pledged property istransferred to the pledgee. At the same time, however, owner
ship of the pledged property remains with the pledgor.
John gives the stereo to Mary, but he still legally owns it. If John repays the debt unde
r the contractual agreement, Mary mustreturn the stereo. But if he fails to pay, she can sell it t
o satisfy his debt.
WHO MAY PLEDGE
Any of the following persons may create a valid pledge:
 The owner, or his authorized agent, or One of the many co-owners,
who is in the sole possession of goods, with the consent of other
owners
 A mercantile agent, who is in possession of the goods with the
consent of real owner
 A person in possessionunder a voidable contract, before the
contract is rescinded
 A seller, who is in possessionof goods after sale or a buyer who has
obtained possession of the goods before sale
 A person who has a limited interest in the property. In such a case
the pawn is valid only to the extent of such interest.
ESSENTIALS OF CONTRACT OF PLEDGE
A contract of pledge has the following essential features;
1.CONTRACT
A pledge is a contract of bailment where goods are given as security for the payment
of a debt or for the performance of promise.

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2.MOVEABLEPROPERTY
In a contract of pledge, only the movable property (goods) is given a? security and it
is not for immovable property, The moveable property includes goods, jewellery and
documents of title to goods like a bill of lading, railway receipts etc.
3. CHANGE OF POSSESSION
The possession of goods must be affected by a contract of pledge custody without,
possession is not the contract of pledge.
4. GOODS IN THE POSSESSION OF PAWNEE
In a contract of a pledge, the change of possession of goods is not necessary, if the
goods are already in the possession of the Pawnee.
5. PURPOSE OF DELIVERY
In a contract of pledge, the goods are given as security for the payment of a debt or
for the performance of a contract. The main purpose of the pledge is to assure the payment of
the debt other performance of the contract.
6. NUMBER OF PARTIES
In a contract of pledge (Pawn), there are two parties i.e., the Pawner and Pawnee. The
person who gives the goods as security is known as Pawner and the person to whom goods
are given as security is known as Pawnee.
7. RIGHT OF OWNERSHIP
In a contract of pledge (pawn), the right of ownership remains with ‘the Pawner and is
not changed. If the ownership is transferred, the contract will be a contract of sale and not of
pledge.
8. CHANGE OF FORM
In a contract of pledge (pawn), the goods must not change the form and same goods
must be returned to Pawner after the performance of the contract.

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9. REDELIVERY OF GOODS
Under the contract of pawn, the goods are delivered to the Pawner when the debt is
paid by him or the promise has been performed for which goods are given as security.
10. RIGHT OF SALE
If the Pawner becomes defaulter, the Pawnee can sell the goods to recover his funds
by giving reasonable notice of this fact to the Pawner.
DISTINCTION BETWEEN BAILMENT AND PLEDGE
The following are the points of distinction between bailment and pledge.
1. BY MEANING
The bailment may be for many purposes but in case of pledge, the goods are delivered only to
provide security to the creditor for debt.
2. NATURE OF PARTIES
In the contract of bailment, the parties are known as bailor and bailee. But in case of
pledge parties are known as Pawner and Pawnee.
3. RIGHT TO SELL GOODS
In the contract of bailment; the bailee cannot sell the goods. But in case of pledge
when. The Pawner fails to make payment of debt, the Pawnee can sell the goods under certain
conditions.
4. RETURN OF GOODS
In bailment, goods are returned to the bailor after the accomplishment of the purpose
or on the expiry of time. But under pledge, the goods are returned only when the debt, is paid.
5. CHANGE OF FORM
In a contract of bailment, the bailee may change the form of the goods as he can make
the shirt from the cloth. But in case of pledge the form of the goods cannot be altered.
6. RIGHT OF REWARD
In case of contract of bailment both the parties, the bailor and bailee can get a reward
from such contract. But in case of contract of pledge, there is no concept of reward.

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7. MAJOR INTEREST
In a contract of bailment, either the bailor or the bailee has a major interest in the
contract because he has more benefits from the contract. But in the contract of pawn, the
the Pawnee may retain goods until the interest on the debt is not paid to him along
with the original, debt.
9. major interest lies with the Pawner because he wants to get a loan.
8. CONCEPT OF INTEREST
In a contract of bailment, there is no concept of Interest. But in a contract of pledge, USE OF
GOODS
In bailment, the bailee can use the goods according to the terms of the contract. But in
case of pledge, the Pawnee cannot use the goods pledged with him.
RIGHTS OF PAWNER
The rights of Pawner and duties of the Pawnee under the contract of a pledge (pawn) are as
follows:
1. RIGHT TO GET BACK THE GOODS
The Pawner has a right to get back the goods from the Pawnee as soon as the payment
of the debt is made, or the promise is performed.
2. EXPENSES OF SEPARATION
If the Pawnee has mixed the goods of the Pawner with someone other goods not
belonging to Pawner without the consent of the Pawner, Pawner has a right to recover the
expenses of separation and cost of damage if any from the Pawnee.
3. COMPENSATION FOR CHANGE OF FORM
If the Pawnee has changed the form of the goods given as security; the Pawner has
right to claim damage.
4. RIGHT TO REDEEM GOODS
If the Pawnee has made sale of goods without giving reasonable notice to the Pawner,
the Pawner has a right to sue for the redemption of goods, treating the sale as void after
depositing the does with the court.

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5. RIGHT TO GET PROFIT
If the Pawnee has earned a profit by using Pawner’s goods which has not allowed to
him with conditions of the contract, the Pawner has a right to get back the goods along with
profit earned by Pawnee by paying the Pawner.
6. REDEMPTION OF DEBT
A Pawner who makes default in payment of debt at the stipulated date has a right to
redeem the debt at any subsequent time before the actual. sale of the goods pledges after
paying additional expenses which have arisen from his default.
DUTIES OF THE PAWNER
1.DUTY TO PAY DEBT
It is the duty of the Pawner to pay the amount of debt or perform the contract within
stipulated time according to the terms of the contract.
2. DUTY TO COMPENSATE
It is the duty of the Pawner to compensate the Pawnee for an extraordinary expense
incurred by him for the preservation of the goods pledged (See. 175).
3. DUTY TO PLEDGE GOODS
It is the duty of the Pawner to pledge only those goods for which he has good title. If
the Pawner’s title is defective and this fact is not in the knowledge of the Pawnee, the Pawnee
has good title.
RIGHTS OF PAWNEE
The rights of the Pawnee under the contract of pledge are started below:
1. RIGHT TO RETAIN GOODS
The Pawnee may retain the goods pledged, not only for payment of debt or for the
performance of the promise, but for the interest of the debt; and all necessary expenses
incurred by him in respect of the possession or for the preservation of the goods pledged
(Sec. 173).

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2. RECOVERY OF EXPENSES
The Pawnee is entitled to receive from the Pawner extraordinary expenses incurred by
him for the preservation of the goods pledged (Sec. 175).
3. RIGHT TO SELL THE GOODS
If the Pawner fails to perform the contract or to make payment of the debt, the
Pawnee has not only the right to retain the goods but can sell it after giving reasonable notice
to the Pawner.
4. GOOD TITLE
If the Pawner’s title is defective under voidable contract. the Pawnee has good title
provided that he has no notice of such defect in the Pawnee.
DUTIES OF THE PAWNEE
The duties of the Pawnee under the contract of pawn (pledge) are;
1. CARE OF GOODS
It is the duty of the Pawnee to take reasonable care of goods pledged with him.
2. NO UNAUTHORISED USE
It is the duty of the Pawnee not to make any such use of the goods pledged with him
which has not been authorized to him according to the terms of the contract.
3. NO CHANGE OF FORM
The Pawnee cannot change the form of the goods pledged with him. If he does so, the
Pawner can claim for damage.
4. NO MIXTURE
The Pawnee cannot mix the goods of the Pawner with his own goods or with someone
other goods do not belong to Pawner. If he does so, the Pawner can get the compensation for
separation of his goods from other goods.
5. NO INCONSISTENT ACT
The Pawnee cannot take any act with the goods pledged with him which is
inconsistent with the terms of the contract. If he does so, the Pawner can claim for damages.

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6. RETURN OF PROFIT
If the Pawnee has earned any profit from the use of the goods pledged with him,
which he cannot use according to the terms of the contract, he must return such profits to the
Pawner.
7. RETURN OF GOODS
The Pawnee must return the goods pledged with him to the Pawner as soon as the debt
is paid in full or promise is performed by Pawner.
‘
PLEDGE THROUGH NON-OWNERS
As you know that normally only the owner of goods can pledge them and that no one
can pass a better title to the goods than what he himself has. But in order. to facilitate
mercantile transactions, the law has recognized sure exceptions. These exceptions are for
Bonafede pledges made through those persons who are not the actual owners of the goods,
but in whose possession the goods have been left. You will now read those situations in
which a nonowner too can create a valid pledge of the goods.
1.PLEDGE THROUGH A MERCANTILE AGENT
Where a mercantile agent is, with the consent of the owner, in possession of
goods or, the documents of title to goods, any pledge made through him, when acting
in the ordinary course of business of a mercantile agent, shall be valid, provided that
the Pawnee acts in good faith and has, at the time of pledge, no notice of the
information that the agent has no power to pledge. The necessary circumstances of
validity under the section are as follows: The person pledging the goods necessity be
a mercantile agent, Mercantile agent necessity be in possession either of the goods or
the documents of title to goods, Such possession necessity be with the consent of the
owner. If possession has been obtained dishonestly or through a trick, a valid pledge
cannot be affected.
Pledge necessity have been made through the mercantile agent, when acting in
the ordinary course of business of a mercantile agent, The pledgee necessity act in

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good faith; and The pledgee should have no notice of the pledger's defect of title. If
the pledgee knows that the pledger has a defective title, the pledge will not be valid.
2.PLEDGE THROUGH PERSON IN POSSESSION UNDER VOIDABLE
CONTRACT
You have already read under earlier units that for the formation of a contract,
the consent of parties should be free, i.e., the consent necessity not have been caused
because of coercion, misrepresentation, fraud, undue power, or mistake or because of
any of them. If the consent is caused because of any of them, such contract is voidable
under Section 19 or 19 A of the Indian Contract Act, at the option of person, where
consent was so obtained. Section 178 A of the Contract Act gives that where goods
are pledged through a person who has obtained their possession under a voidable
contract, the pledge is valid, provided that the contract has not been rescinded at the
time of the pledge and the pledgee has acted in good faith and without notice of the
pledger's defect of title.
3.PLEDGE WHERE PLEDGER HAS ONLY A LIMITED INTEREST
Where the Pawner is not the absolute owner of the goods but has only a
limited interest and he pawns it, the pledge is valid to the extent of that interest. A
finder of goods, a mortgagee or a person who has lien in excess of the goods, may
create a valid pledge of such goods, to the extent of his interest in the goods. For
instance, A discovers a defective watch lying on the road. He picks it up, gets it
repaired and pays Rs. 50 for the repairs Later on he pledges the watch for Rs. 25.The
true owner can recover the watch only on paying Rs. 50 to the pledgee.
4.PLEDGE THROUGH A CO-OWNER IN POSSESSION
Where the goods are owned through several persons and with the consent of
other owners, the goods are left in the possession of one of the co-owners. Such a co-
owner may create a valid pledge of the goods in his possession.

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5.PLEDGE THROUGH SELLER OR BUYER IN POSSESSION
A seller, in whose possession, the goods have been left after sale or a buyer
who with the consent of the seller, obtains possession of the goods, before sale, can
create a valid pledge, provided the Pawnee acts in good faith and he has no
knowledge of the defect in title of the pawnor. For instance, A buys a cycle from B.
But leaves the cycle with the seller. B then pledges the cycle with C, who does not
know of sale to B, and acted in good faith. This is valid pledge.
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