Page 111 - DMGT102_MERCANTILE_LAWS_I

Unit 8: Contract of Bailment and Pledge

Notes

Task X lends his car to Y for going to attend the annual general meeting of ABC Limited,
being held at Juhu, a place in Mumbai. The brakes of the car are not in working order. This
fact is already known to X, but he did not tell Y about the defect. Y holds a valid driving
licence. Y, instead of going to attend the annual general meeting at Juhu, drives the car to
the Gateway of India on a pleasure trip. The car meets with an accident and Y gets injured.
Y wants to hold X liable for the injury. Decide whether Y would succeed? [Hint: Y would
not succeed s.154.].

8.5 Pledge as a Special Kind of Bailment

Section 172, defines a pledge as the bailment of goods as security for payment of a debt or
performance of a promise. The person, who delivers the goods as security, is called the ‘pledgor’
and the person to whom the goods are so delivered is called the ‘pledgee’. The ownership

remains with the pledgor. It is only a qualified property that passes to the pledgee. He acquires a
special property and lien which is not of ordinary nature and so long as his loan is not repaid, no
other creditor or ‘authority’ can take away the goods or its price. Thus, in Bank of Bihar v. State of
Bihar and Ors. (1971) Company Cases 591, where sugar pledged with the Bank was seized by the
Government of Bihar, the Court ordered the State Government of Bihar to reimburse the bank
for such amount as the Bank in the ordinary course would have realized by the sale of sugar
seized.

8.5.1 Delivery Essential

A pledge is created only when the goods are delivered by the borrower to the lender or to
someone on his behalf with the intention of their being treated as security against the advance.
Delivery of goods may, however, be actual or constructive. It is constructive delivery where the
key of a godown (in which the goods are kept) or documents of title to the goods are delivered.
The owner of the goods can create a valid pledge by transferring to the creditor the documents
of title relating to the goods.

Example: A businessman pledged a railway receipt to a bank, duly endorsed. Later he was
declared bankrupt. The Official Assignee contended that the pledge of the railway receipt was

not valid. Held, that the railway receipts in India are title to goods, and that the pledge of the
railway receipt to the bank, duly endorsed, constituted a valid pledge of the goods.
Similarly, where the goods continue to remain in the borrower’s possession but are agreed to
be held as a ‘bailee’ on behalf of the pledgee and subject to the pledgee’s order, it amounts to
constructive delivery, and is a valid pledge.

8.5.2 Advantages of Pledge

To a creditor, pledge is perhaps the most satisfactory mode of creating a charge on goods. It offers
the following advantages:
1. The goods are in the possession of the creditor and therefore, in case the borrower makes a
default in payment, they can be disposed of after a reasonable notice.

2. Stocks cannot be manipulated as they are under the lender’s possession and control.
3. In the case of insolvency of the borrower, lender can sell the goods and prove for the
balance of the debt, if any.

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