Pledge in Contracts

Pledge is a concept within contract law that involves the transfer of possession of personal property by a debtor (pledgor) to a creditor (pledgee) as security for a debt or obligation. 

What is Pledge?

Pledge refers to a contractual arrangement where a debtor pledges personal property as collateral for a debt or obligation. The debtor transfers possession of the property to the creditor, who holds it as security until the debt is repaid or the obligation is fulfilled. Unlike bailment, where the property is held for safekeeping, a pledge involves using the property as security for a specific purpose.

Legal Provisions Dealing with Bailment

Pledge in India is primarily governed by the Indian Contract Act 1872. The act provides legal provisions that regulate the rights and obligations of the pledgor and the pledgee. It outlines the rights of the pledgee to possess and sell the pledged property in case of default, as well as the duties of the pledgor to repay the debt and protect the property’s value.

Essentials of Pledge

To establish a valid pledge, certain essential elements must be present.

Debt or Obligation

There must be an existing debt or obligation the pledgor owes to the pledgee, which serves as the underlying reason for the pledge.

Transfer of Possession

The pledgor must transfer possession of the property to the pledgee. The property remains in the physical custody of the pledgee until the debt is repaid or the obligation is fulfilled.

Intention to Create Security

Both parties must intend for the transfer of possession to serve as security for the debt or obligation. This intention distinguishes a pledge from a mere bailment or sale of the property.

Right of Redemption

The pledgor retains the right to redeem the pledged property by repaying the debt or fulfilling the obligation. Once redeemed, the pledgee must return the property to the pledgor.

Examples of Pledge

Mortgage

When a person pledges their property, such as a house or land, as security for a home loan, it is considered a mortgage. The property is collateral, and the lender holds the right to sell it in case of default.

Pledged Securities

In financial transactions, individuals may pledge securities like stocks, bonds, or mutual funds as collateral for a loan or credit facility. The financial institution holds the securities until the debt is repaid.

Pawnshop Loan

When a person pawns their valuable possessions, such as jewellery or electronics, at a pawnshop in exchange for a loan, it is a form of a pledge. The pawnshop holds the pledged items until the loan and interest are repaid.

Summary

Pledge, within the context of contracts, involves the transfer of possession of personal property as collateral for a debt or obligation. It is governed by legal provisions outlined in the Indian Contract Act 1872. 

The essential elements of a pledge include:

• An existing debt or obligation.
• Transfer of possession.
• Intention to create security.
• The right of redemption.

Practical examples demonstrate how pledge applies in real-life scenarios, such as mortgages, pledged securities, and pawnshop loans.