Pledge under Sections 172 to 179 of the Indian Contract Act, 1872: The Pawnee's Rights of Retainer and Sale, the Pawnor's Right to Redeem, Pledge by a Non-Owner, and Pledge Compared with Mortgage, Hypothecation and Lien

A pledge is a bailment for security. The pawnor hands goods to the pawnee to secure a debt or the performance of a promise, and the pawnee gets something no ordinary bailee has: a power of sale on default. That power is what makes the pledge commercially useful and it is hedged by two protections for the pawnor. The pawnee must give reasonable notice of the sale, which cannot be contracted out of; and the pawnor may redeem at any time before the actual sale takes place. The other recurring question is whether a person who is not the owner can create a valid pledge, and Sections 178 to 179 answer it in three defined situations.

1. The Definition

Section 172, Indian Contract Act, 1872

Pledge, pawnor and pawnee defined. 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.

1.1 Essential elements

A bailment, so every requirement of Section 148 applies: delivery of possession, actual or constructive, of movable goods.
The purpose must be security for the payment of a debt or the performance of a promise. A delivery for any other purpose is an ordinary bailment.
The goods must be movable, and the general property remains with the pawnor; the pawnee acquires only a special property by way of security.
Delivery and the advance need not be simultaneous. A pledge may be perfected by delivery made after the advance, as the Supreme Court recognised in Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322.
Constructive delivery suffices, including delivery by attornment, and the pledge of documents of title such as railway receipts operates as a pledge of the goods they represent, on the reasoning in Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954.

The pawnee's two courses on default, and the pawnor's right to redeem

2. Rights of the Pawnee

Sections 173 to 176, Indian Contract Act, 1872, in substance

173. Pawnee's right of retainer. The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest on the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

174. Pawnee not to retain for debt or promise other than that for which goods pledged. The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.

175. Pawnee's right as to extraordinary expenses incurred. The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.

176. Pawnee's right where pawnor makes default. If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due, the pawnor is still liable to pay the balance. If the proceeds are greater, the pawnee shall pay over the surplus to the pawnor.

2.1 Retainer and subsequent advances

Section 173 permits retention for the debt, the interest and the necessary expenses of possession and preservation. Section 174 confines the retainer to the particular debt for which the goods were pledged, so the pawnee has no general lien over them, except that a contract to retain for subsequent advances is presumed in the absence of anything to the contrary. The distinction between necessary expenses under Section 173, which support the retainer, and extraordinary expenses under Section 175, which are recoverable but do not, is worth noting: the pawnee may sue for extraordinary expenses but cannot hold the goods for them.

2.2 The two courses on default

📖 Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322

Facts: The appellant advanced Rs. 20,000 against a promissory note and a receipt, and the borrower executed an agreement to pledge aeroscrapes worth about Rs. 35,000 as security. The appellant sued on the promissory note, contending that the goods had never been delivered and that the agreement had never ripened into a pledge. The borrower pleaded that the goods had been delivered and that no decree should be passed unless the appellant was ready and willing to redeliver them. The goods were not forthcoming.

Held: The Supreme Court refused the decree. Where goods have been pledged, the pawnee who sues upon the debt must be ready and willing to return the pledged goods; if by reason of his own act he is unable to redeliver them, he cannot have judgment for the debt. The two courses in Section 176 are alternatives in this sense: the pawnee who sues on the debt retains the goods as collateral security and must be in a position to give them back on payment.

Ratio: A pawnee who sues on the debt must hold the pledged goods available for redelivery. Having parted with or lost them by his own act, he cannot obtain a decree for the debt.

⚠ Reasonable notice of sale is a statutory obligation that cannot be excluded

Section 176 permits sale only on giving the pawnor reasonable notice of the sale, and the requirement has three features. It is statutory, so a clause in the loan agreement permitting sale without notice is ineffective. The notice must be clear and specific about the intended sale, and a mere reminder or demand for payment is not a notice of sale; a pawnor's request for more time cannot be read as one either. And a sale made without such notice is bad in law, leaving the pawnee liable to the pawnor notwithstanding that the debt was genuinely in default. The Supreme Court has also held that the pawnee may not sell the pledged goods to himself, since a sale requires a transfer to another.

3. Rights of the Pawnor

Section 177, Indian Contract Act, 1872

Defaulting pawnor's right to redeem. If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.

The right to redeem survives default. The pawnor may redeem at any time before the actual sale, which is the point at which the right is extinguished.
He must pay the expenses arising from his default, in addition to the debt and interest.
He is entitled to the surplus if the sale realises more than the amount due, under the closing words of Section 176, and remains liable for any shortfall.
He may hold the pawnee to the duty of care in Section 151, and where the goods are lost through the pawnee's negligence the pawnor's liability is reduced to the extent of their value.
He may sue for wrongful sale, where the sale was made without reasonable notice or otherwise improperly.

4. Pledge by a Non-Owner

The general rule is that no one can give a better title than he has. Sections 178, 178A and 179 create three exceptions, each protecting a pawnee who acted in good faith.

Section	Who may pledge	Conditions
178	A mercantile agent who is, with the consent of the owner, in possession of goods or of the documents of title to goods	The pledge must be made by him when acting in the ordinary course of business as a mercantile agent, and the pawnee must act in good faith and without notice at the time of the pledge that the pawnor had no authority to pledge
178A	A person in possession of goods under a voidable contract under Sections 19 or 19A	The pledge is valid provided the contract has not been rescinded at the time of the pledge, and the pawnee acts in good faith and without notice of the pawnor's defect of title
179	A person who has only a limited interest in the goods	The pledge is valid to the extent of that interest only

Two further situations arise in practice. A co-owner in sole possession with the consent of the others may make a valid pledge. And a seller in possession after sale, or a buyer in possession before property passes, may create a valid pledge under the corresponding provisions of the Sale of Goods Act, 1930, which operate on the same principle of protecting a good faith transferee.

5. Pledge Compared with Other Securities

	Pledge	Mortgage	Hypothecation
Subject matter	Movable goods	Immovable property, under Section 58 of the Transfer of Property Act, 1882	Movable goods
Possession	Delivered to the pawnee	Remains with the mortgagor in most forms	Remains with the borrower
Interest created	A special property by way of security	An interest in the immovable property	An equitable charge on the goods
Remedy on default	Sale after reasonable notice, under Section 176	Sale or foreclosure, by the modes the Transfer of Property Act, 1882 allows	The lender must first take possession, ordinarily under the contract or under enforcement legislation, and then sell
Governing law	Sections 172 to 179, Indian Contract Act, 1872	Transfer of Property Act, 1882	Contract, and enforcement statutes for secured creditors
Registration	Not required	Required for most forms	Company charges require registration under the Companies Act, 2013

5.1 Pledge and lien

A lien permits retention only; a pledge permits sale after notice under Section 176.
A lien arises from possession obtained for another purpose, such as repair; in a pledge possession is delivered for the very purpose of security.
A lienholder has no proprietary interest; a pawnee has a special property which he may transfer, subject to the pawnor's right of redemption.
A lien is lost irretrievably on parting with possession; the pawnee's special property survives a transfer to a sub-pledgee.
There is no right of redemption against a lienholder corresponding to Section 177, the goods simply being released on payment.

6. The Position Stated Shortly

Section 172 defines a pledge as the bailment of goods as security for payment of a debt or performance of a promise.
Every requirement of bailment applies, including delivery of possession, which may be constructive and may follow the advance.
Section 173 permits retainer for the debt, interest and necessary expenses; Section 174 confines it to that debt but presumes a contract to retain for subsequent advances.
Section 175 makes extraordinary expenses recoverable, though they do not support the retainer.
Section 176 gives the pawnee two courses on default: to sue on the debt while retaining the goods as collateral security, or to sell after reasonable notice.
Lallan Prasad: a pawnee who sues on the debt must be ready and willing to redeliver the goods, and cannot obtain a decree if he has parted with them.
Reasonable notice of sale is statutory, cannot be excluded by contract, must be clear and specific, and the pawnee may not sell to himself.
Section 177 allows the pawnor to redeem at any time before the actual sale, on paying the expenses arising from his default.
Sections 178, 178A and 179 validate pledges by a mercantile agent in possession with consent, by a person in possession under an unrescinded voidable contract, and by a person with a limited interest to the extent of that interest.
A pledge differs from a mortgage in subject matter, from hypothecation in possession, and from a lien in the power of sale.

7. Related Topics and Provisions

Topic or provision	Connection
Bailment under Sections 148 to 169	The general law a pledge sits within
Lien under Sections 170 and 171	Retention without a power of sale
Bailment Distinguished from Sale, Licence, Pledge and Agency	The comparisons in full
Agency under Sections 182 to 238	Mercantile agents and Section 178
Sections 172 to 179, Indian Contract Act	The provisions on pledge
Section 176, Indian Contract Act	The pawnee's two courses on default
Section 177, Indian Contract Act	The pawnor's right to redeem
Section 151, Indian Contract Act	The pawnee's duty of care as a bailee
Sale of Goods Act, 1930	Pledges by a seller or buyer in possession