January 25, 2024

The law that controls the creation and execution of contracts in India and its territories is the Indian Contract Act of 1872. The act establishes guidelines for the fundamental elements of a contract, including offer, acceptance, consideration, and so forth. The Contract Act is not a comprehensive version of the Law of Contracts; rather, it is a consolidated and amending act.

The contract of pledge under Indian contract act 1872 is one example of this unique type of agreement. Pledge contracts, or just pledges, are a unique type of contract that are very important, particularly in business dealings. A general definition of a pledge is the act of placing an item or its title as security for fulfilling a commitment or repaying a debt obtained from a creditor. Both Indian and English common law have viewed pledges as a form of bailment as they both entail the delivery and possession of goods.

pledge under Indian contract act meaning

  • According to Section 172 of the Indian Contract Act, a pledge is a term used to describe the bailment of goods as security for the fulfilment of a promise or payment of debt.
  • A pawnor, often called a pledgor, is the person who provides the goods.
  • A pawnee, or pledgee, is the individual who temporarily accepts the items.

pledge under Indian contract act example

  • For example, the pledge is legal if A buys a watch under duress from B and pawns it with C before B calls off the transaction. The watch will initially belong to C, and B’s only right is to sue A for damages.
  • For a cost of Rs. 2,000, A goes to B, a tailor, to have his clothes stitched. When the outfit was finished, B desperately needed money and pledged it to C for Rs. 3000. The commitment is good for a maximum of 1500, which is B’s interest.

who can pledge under Indian contract act?

For a valid pledge to be created, the people who can pledge are as follows:

Mercantile Agent:

  • With the owner’s permission, a mercantile agent may pledge items while conducting business as usual if they are in possession of the commodities or the documentation proving their ownership.
  • This guarantee is enforceable to the same extent as if the owner of the goods gives his explicit consent.
  • However, this commitment is only enforceable if the Pawnee acts in good faith and is not aware that the commercial agent lacked the necessary authorization at the time of the pledge.

Pledge Made by Person in Possession under Voidable Contract:

  • If the contract hasn’t been revoked at the time of the pledge and the pawnor has acquired possession of the goods pledged under section 19 or section 19A, then the pawnee has acquired good title to the goods, so long as he acts in good faith and doesn’t disclose the pawnor’s title defect. [Section 178A]
  • The pawnee must act in good faith in this situation. When a pawnor pledges goods without the owner’s free assent, which is voidable, the pledge is considered legitimate as long as the contract is still in effect at the time of the pledge.

Pledge Made by a Pawnor having a Limited Interest:

  • When a pawnor pledges things they do not own and have limited interest in, the pledge is only good to the degree of that limited interest.

Pledge Made by a Co-owner

  • A legal pledge is one made by a co-owner who is in possession of the goods and has the consent of all other co-owners.

pledge under Indian contract act: Case Rulings

  • In the case of Lallan Prasad v Rahmat Ali and anr, the verdict went in favor of the defendant. the plaintiff launched a lawsuit, arguing that this agreement cannot be regarded as a contract of commitment because the aeroscapes were never sent out to be in his hands. He asserted that he was qualified to get his loan money back.  

The Supreme Court decided that the plaintiff received the pledged items. This implied that a contract of commitment had indeed developed out of this agreement. The plaintiff claimed that the commodities had never been pledged to him, but the court ruled that he was not entitled to any compensation.

  • In the case of K. M. Hidayathulla v the Bank of India, together with the respondent, the petitioner pledged a number of gold gems. A specific sum was pledged in exchange for these jewels. The petitioner did not pay back the money by the prearranged deadline. To recoup the debt, the bank auctioned off the gems.

The Madras High Court ruled in favour of the bank in its ruling. It was decided that the bank could sell the items after giving the pawnor adequate notice, or it could bring a lawsuit to recover the loan. The two cures were determined to be unrelated to one another. The other options remained available even after the deadline for bringing a lawsuit had gone. It was decided that the allotted time should be extended if the pawnee used an alternative method of selling.

Pledges, outlined by the Indian Contract Act, are a crucial component of commercial relationships because they give creditors and lenders a safe way to protect their rights. The Act maintains a careful balance between the rights and responsibilities of each party, providing a fair and equitable resolution in a situation of default. The Act strengthens the trustworthiness and legitimacy of pledge agreements in the Indian legal system by maintaining the concepts of mutual consent, specified objectives, and compliance with legal procedures.

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