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Unit 11: Contract of Pledge

11.3.1 Rights of Pledgee Notes

In addition to the rights mentioned in s.176, a pledgee has the following rights:

1. It is the duty of the pledgor to disclose any defects or faults in the goods pledged which are
within his knowledge. Similarly, if the goods are of an abnormal character says explosives
or fragile, the pledgee must be informed. In case the pledgor fails to inform such faults or
abnormal character of the goods pledged, any damage as a result of non-disclosure shall
have to be compensated by the pledgor.

2. The pledgee has a right to claim any damages suffered because of the defective title of the
pledgor.
3. A pledgee’s rights are not limited to his interests in the pledged goods. In case of injury
to the goods or their deprivation by a third party, he would have all such remedies that
the owner of the goods would have against them. In Morvi Mercantile Bank Ltd v. Union
of India, the Supreme Court held that the bank (pledgee) was entitled to recover not only
` 20,000 – the amount due to it, but the full value of the consignment, i.e., ` 35,000. However,
the amount over and above his interest is to be held by him in trust for the pledgor.
4. Pawnee’s right of retainer [s.173]: The Pawnee may retain the goods pledged, not only for
payment of the debt or 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. However, s.174 provides that 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.
5. A pledgee has a right to recover any extraordinary expenditure incurred for preservation
of the goods pledged (s.175).

11.3.2 Duties of a Pledgee

Duties of pledgee are as follows:

1. The pledgee is required to take as much care of the goods pledged to him as a person of
ordinary prudence would, under similar circumstances, take of his own goods, of a similar
nature.
2. The pledgee must not put the goods to an unauthorized use.
3. The pledgee is bound to return the goods on payment of the debt.
4. Any accruals to the goods pledged belong to the pledgor and should be delivered
accordingly. Thus, if the security consists of equity shares and the company issues bonus
shares to the equity shareholders, the bonus shares are the property of the pledgor and not
the pledgee.

11.3.3 Rights of a Pledgor

There are number of rights of a pledgor. These are:
1. The pledgor has a right to claim back the security pledged on repayment of the debt with
interest and other charges.

2. He has a right to receive a reasonable notice in case the pledgee intends to sell the goods,
and in case he does not receive the notice he has a right to claim any damages that may
result.

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