What Is Contract of Pledge?

A contract of pledge is a bailment in which the bailor delivers possession of goods to the bailee as security for a debt or obligation. The bailee has a right to keep the goods until the debt or obligation is paid, but they must also take care of the goods.

The contract of pledge is a type of security interest, which means that it gives the bailee a right to take possession of the goods if the bailor defaults on the debt or obligation.

The contract of pledge is governed by the Indian Contract Act, 1872.

Essential elements of a contract of pledge

The essential elements of a contract of pledge are:

  • Delivery of possession of goods to the bailee.
  • Intent to create a security interest.
  • Debt or obligation.

Delivery of possession of goods to the bailee

The bailor must deliver possession of the goods to the bailee. This means that the bailor must give up control of the goods to the bailee.

Intent to create a security interest

The bailor must intend to create a security interest in the goods. This means that the bailor must intend that the goods will be used as security for the debt or obligation.

Debt or obligation

There must be a debt or obligation that is secured by the pledge. The debt or obligation can be present or future, certain or uncertain.

Rights and duties of the parties

The rights and duties of the parties to a contract of pledge are:

  • The bailor has the right to redeem the goods by paying the debt or obligation.
  • The bailee has the right to keep the goods until the debt or obligation is paid.
  • The bailee has a duty to take care of the goods.
  • The bailor has a duty to pay the debt or obligation.

Termination of a contract of pledge

A contract of pledge can be terminated in a number of ways, including:

  • The debt or obligation is paid in full.
  • The bailor redeems the goods by paying the bailee a sum of money.
  • The goods are lost or destroyed.
  • The bailee becomes bankrupt.
  • The contract is terminated by agreement of the parties.

MCQs on Contract of Pledge

  1. Which of the following is not an essential element of a contract of pledge?
    • Delivery of possession of goods to the bailee.
    • Intent to create a security interest.
    • Debt or obligation.
    • Registration of the contract with the government.
    • Answer: Registration of the contract with the government. Registration of the contract with the government is not an essential element of a contract of pledge.
  2. The bailor has the right to redeem the goods by paying the debt or obligation. What does this mean?
    • This means that the bailor can get the goods back by paying the debt or obligation.
  3. The bailee has a duty to take care of the goods. What does this mean?
    • This means that the bailee must take reasonable care of the goods and keep them in good condition.
  4. The contract of pledge can be terminated in a number of ways, including:
    • The debt or obligation is paid in full.
    • The bailor redeems the goods by paying the bailee a sum of money.
    • The goods are lost or destroyed.
    • The bailee becomes bankrupt.
    • All of the above.
    • Answer: All of the above. The contract of pledge can be terminated in any of these ways.