Pledge
A pledge (also known as a pawn) is a special kind of bailment where goods are delivered by one person (the pledgor or pawnor) to another person (the pledgee or pawnee) as security for the payment of a debt or the performance of a promise.
Definition:
Section 172 of the Indian Contract Act, 1872, defines pledge as “the bailment of goods as security for payment of a debt or performance of a promise.”
Essentials of a Pledge:
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Bailment: Like bailment, pledge involves the delivery of goods from one person to another. This delivery can be actual or constructive.
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Security for Debt or Promise: The goods are delivered as security for a debt that is owed or a promise that needs to be fulfilled. This is the key distinguishing factor between bailment and pledge.
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Ownership Remains with Pledgor: The pledgor remains the owner of the goods, while the pledgee only has possession and a special interest in the goods as security.
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Right of Sale on Default: The pledgee has the right to sell the goods if the pledgor defaults on the debt or promise.
Rights of the Pledgee:
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Right of Retainer (Section 173): The pledgee has the right to retain possession of the goods pledged until the debt is paid or the promise is performed.
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Right of Reimbursement for Expenses (Section 174): The pledgee is entitled to receive from the pledgor extraordinary expenses incurred by them for the preservation of the goods pledged.
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Right of Sale (Section 176): If the pledgor makes default in payment of the debt or performance of the promise, the pledgee may sell the goods pledged after giving the pledgor reasonable notice of the sale.
Rights of the Pledgor:
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Right to Redeem (Section 177): The pledgor has the right to redeem the goods pledged by paying the debt or performing the promise at any time before the actual sale of the goods by the pledgee.
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Right to Surplus (if any): If the proceeds of the sale of the pledged goods exceed the amount of the debt and expenses, the pledgor is entitled to the surplus.
Distinction between Bailment and Pledge:
| Feature | Bailment | Pledge |
|---|---|---|
| Purpose | Safe keeping, repair, transportation, etc. | Security for debt or performance of a promise |
| Right of Sale | Bailee does not have the right to sell | Pledgee has the right to sell on default after notice |
Bottomry and Respondentia Bonds:
These are historical maritime loan agreements that are less common today but are important to understand in the context of pledge and security.
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Bottomry Bond: This is a loan taken by the owner of a ship, where the ship itself is pledged as security for the loan. If the ship is lost at sea, the lender loses their money. If the ship completes the voyage successfully, the lender receives their principal back with a high rate of interest (maritime interest), which compensates for the risk.
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Respondentia Bond: This is similar to a bottomry bond, but instead of the ship being pledged as security, it is the cargo that is pledged. If the cargo is lost, the lender loses their money. If the voyage is successful, the lender receives their principal back with maritime interest.
Key Differences between Bottomry and Respondentia Bonds:
| Feature | Bottomry Bond | Respondentia Bond |
|---|---|---|
| Security | Ship | Cargo |
| Borrower | Ship owner | Cargo owner |
| Risk | Loss of the ship | Loss of the cargo |
Both bottomry and respondentia bonds are forms of pledge where specific goods (ship or cargo) are used as security for a loan. They are contingent contracts, as the lender’s repayment depends on the successful completion of the voyage. These types of bonds were more prevalent in the age of sailing ships, where voyages were much riskier. Today, modern insurance and financing mechanisms have largely replaced them.