A Contract of Pledge is a formal agreement whereby one party, referred to as the Pawnor, promises particular items or property to another, referred to as the Pawnee, as security for a debt or obligation. The Pawnor transfers ownership of the pledged item to the Pawnee under the agreement, with the understanding that the Pawnor keeps ownership and the Pawnee has a security interest.
Geeky Takeaways:
- Contract of Pledge is said to be a subset of a Contract of Bailment.
- The goods bailed here are kept as security for a debt or a performance of a promise.
- The bailor here is called Pawnor, and the bailee here is called Pawnee.
Table of Content
What is a Contract of Pledge?
A Contract of Pledge is a legal document that specifies the terms and circumstances under which a borrower pledges property to a lender as security for a loan or other financial obligation. It is also known as a Pledge Agreement or Security Agreement. The pledge serves as a means of repayment for the lender if the borrower fails on the loan. Both parties must have a complete understanding of the contents of the agreement before signing a commitment and seeking legal advice.
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. The bailor in this pledge is called the Pawnor. The bailee is called the Pawnee”.
Essential Features of a Contract of Pledge
- Valid Contract: Like any other contract, a contract of pledge needs to fulfil certain requirements in order to be considered legitimate. These comprise similar elements as that of a Contract of Bailment, such as an offer, an acceptance, the desire to establish legal relations, consideration, the parties’ legal capacity and the purpose’s validity.
- Delivery of Possession: The transfer of title of the pledged asset from the pawnor to the pawnee is a crucial component of a pledge. This transfer of ownership denotes the security interest and frequently sets a promise apart from other security agreements.
- Ownership cannot be Transferred: A pledge does not include the transfer of ownership, as compared to a sale. The pledgor continues to be the owner. As security for the loan, the pledgee is the owner of a security interest in the property.
- Security against Debt: A pledge’s main objective is to offer security for a debt or commitment. In the event that the pledgor defaults, the pledgee may take and sell the pledged asset as collateral. This provision guarantees the availability of a valued asset to cover the debt.
- Return of Goods on Repayment: One of the main principles of a pledge is that the pledged commodities or property should be returned to the pledgor upon fulfilment of their duties, such as repaying the debt or meeting other established standards. The assumption that the pledge is a security agreement rather than a transfer of ownership is strengthened by this case.
Duties of the Pawnor and Pawnee
1. Duties of the Pawnor:
- Transfer of Ownership: It is the pawnor’s responsibility to provide the pawnee custody of the pledged items or property. This is an essential responsibility since a pledge differs from other security arrangements if that possession is transferred.
- Title Warranty: The pawnor guarantees that the items are free from liens or claims by third parties and that they have the legal authority to be pledged. In simpler terms, the pawnor guarantees the pawnee that the property they have pledged is theirs and can be utilized as collateral.
- Maintenance of the Collateral: It could be necessary for the pawnor to keep the pledged items in excellent shape for the duration of the promise. This guarantees the preservation of the collateral’s value.
2. Duties of the Pawnee:
- Managing Collateral Security: The pledged commodities must be kept in a secure location by the pawnee. They have to exercise reasonable caution to guard against losing or damaging the collateral.
- Inspection and Accounting: In some situations, the pawnee may also be obliged to permit the pawnor to see the pledged items and maintain a record of them. This guarantees that the collateral is handled effectively and contributes to maintaining transparency.
- Notification of Default: The pawnee is required to notify the pawnor of any failure on the loan or any breaches of the conditions of the pledge agreement. Before the pawnee asserts their rights over the collateral, this notice might offer the pawnor a chance to fix the default.
Rights of the Pawnor and Pawnee
1. Rights of the Pawnor:
- Right to Redemption: By paying back the debt or meeting other requirements mentioned in the pledge agreement, the pawnor has the option to redeem the pledged goods. The pawnor can regain ownership of the pledged property according to this fundamental right.
- Right to Notification: In the event of default or any other violation of the pledge agreement, the pawnee is usually required to notify the pawnor. Before the pawnee asserts their claim over the collateral, the pawnor is given the chance to remedy the default through this notification.
- Right to Inspection: The right of the pawnor to examine the pledged goods and make sure the pawnee is taking proper care of them may vary depending on the terms of the agreement.
2. Rights of the Pawnee:
- Right of Retention: Until the pawnor complies with their end of the bargain, the pawnee is entitled to keep ownership of the pledged items. The pawnee is permitted to retain the collateral as security for the debt due to this right.
- Right to Sell or Dispose: The pawnee may be able to sell or otherwise dispose of the pledged goods in order to recoup the unpaid obligation in the case if the pawnor defaults. The pledge agreement typically contains the terms and conditions of the sale.
- Right to Interest and Costs: As indicated in the agreement, the pawnee may be entitled to request interest on the outstanding obligation. The pawnee may also be entitled to a refund for reasonable fees and expenses spent in carrying out the pledge’s execution.
Conclusion
Delivery of possession, the inability to transfer ownership, security against debt or obligation and the promise to restore the pledged assets upon fulfilment of the agreed-upon terms are the fundamental components of a contract of pledge. Pledge agreements that are well-written and transparent serve to protect the goals of both the pawnor and the pawnee by guaranteeing justice, openness and obeying the law.
Contract of Pledge – FAQs
What legal safeguards are there in a Contract of Pledge for each party?
The Contract of Pledge specifies the legal protections, which could change depending on the jurisdiction. Common legal principles are the entitlement to equitable treatment, appropriate default notification and compliance with relevant legislation.
Is it possible for ownership to change in a Contract of Pledge?
No, the pawnor still has ownership. Not ownership, but possession and a security interest are transferred in a pledge.
Is it possible to renew or extend the Contract of Pledge?
It is possible to negotiate and specify the conditions of an extension or renewal in the original pledge agreement. If both parties consent, they may decide to prolong the pledge’s duration.
What is the general rule of the Pledge?
A Pledge is a bailment that conveys the possessory title to property owned by a pledgor to the pledge to secure repayment for some debt or obligations.
How is Contract of Bailment different from Contract of Pledge?
Bailment focuses on temporary transfer for safekeeping or repair, a pledge involves using goods as a collateral for debts.