Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Pledge: Pawnor, Pawnee and Section 178

Updated 10 October 2026 · Fact-checked

A contract of pledge is a bailment of goods as security for payment of a debt or performance of a promise. The giver is the pawnor and the receiver is the pawnee. Solve questions by checking delivery of goods, the debt secured, and who pledged: the owner, a mercantile agent or another person.

Understand Contract of Pledge

A pledge is a special kind of bailment. In a bailment, goods are handed over for some purpose and must be returned. In a pledge, the purpose is fixed: the goods are handed over as security for a loan or for the performance of a promise.

The person who hands over the goods is the pawnor. The person who receives them is the pawnee. Example: Ravi borrows ₹50,000 from a lender and gives his gold chain to the lender until he repays. Ravi is the pawnor and the lender is the pawnee.

Delivery of possession is essential. If the goods stay with the borrower, there is no pledge. Delivery can be actual or constructive, such as handing over the keys of the godown where the goods are stored. Only movable goods can be pledged. Security over immovable property is a mortgage, not a pledge.

The pawnee may retain the goods for the debt, interest on it and necessary expenses of possession or preservation (Section 173). He may also claim extraordinary expenses incurred to preserve the goods (Section 175). If the pawnor defaults in payment at the stipulated time, the pawnee may sue on the debt and keep the goods as collateral security, or sell the goods after giving the pawnor reasonable notice (Section 176). The pawnee never becomes the owner just because the pawnor defaults. The pawnee owes duties too: take reasonable care of the goods and not use them for personal benefit.

Normally only the owner can pledge goods. The Contract Act makes exceptions. A mercantile agent who is in possession of goods or documents of title with the owner's consent can make a valid pledge, if he pledges as a mercantile agent in the ordinary course of business and the pawnee acts in good faith and has no notice that the agent has no authority to pledge (Section 178). A person in possession under a voidable contract that has not been rescinded at the time of the pledge can also pledge validly, if the pawnee acts in good faith and has no notice of the pledgor's defect in title (Section 178A). A pledgor with only a limited interest in the goods can pledge to the extent of that interest (Section 179). A seller or buyer in possession is dealt with under the Sale of Goods Act, Sections 27 and 30, not as a Contract Act pledge exception.

Key formulas to remember

Meaning of pledge: Pledge = bailment of goods as security for payment of a debt or performance of a promise; Bailor is called pawnor and bailee is called pawnee.
Essentials of a valid pledge: Movable goods + delivery of possession + security for debt or promise + a valid contract; No delivery means no pledge. Immovable property gives a mortgage, not a pledge.
Pawnee's right of retainer (Section 173): Pawnee may retain the goods for the debt or promised performance, interest on the debt and necessary expenses of possession or preservation; Retainer does not extend to other debts unless there is a contract to that effect.
Pawnee's extraordinary expenses (Section 175): Pawnee may claim extraordinary expenses incurred to preserve the goods; The pawnor must repay them. They are separate from the ordinary necessary expenses of keeping the goods.
Pawnee's right of sale (Section 176): Pawnor defaults at the stipulated time + reasonable notice to pawnor = right to sell the goods; If sale proceeds are less than the dues, the pawnor stays liable for the balance. Surplus goes to the pawnor.
Pawnee's right to sue (Section 176): Pawnee may sue on the debt and also retain the goods as collateral security; Suing does not by itself end the right to hold the goods.
Pawnee's duties: Take reasonable care + do not use the goods for own benefit + do not mix them with own goods + return them on payment; Failure to do so makes the pawnee liable for loss or damage.
Pawnor's duty and right (Sections 150 and 177): Pawnor, as bailor, must disclose known faults in the goods (Section 150). After default, pawnor may redeem the goods at any time before actual sale by paying the debt together with any expenses arising from the default (Section 177); Once the goods are actually sold, the right to redeem ends. After default, paying the debt alone is not enough; the expenses arising from the default must also be paid.
Pledge by mercantile agent (Section 178): Mercantile agent + possession of goods or documents of title with owner's consent + pledge made as a mercantile agent in the ordinary course of business + pawnee in good faith without notice of lack of authority = valid pledge; All four conditions must be met. The owner's consent relates to the agent's possession of the goods or documents of title.
Pledge by person with voidable title (Section 178A): Voidable contract not yet rescinded at the time of pledge + pawnee in good faith without notice = valid pledge; The pledge is good only if the owner has not rescinded the voidable contract before the pledge.
Pledge by pledgor with limited interest (Section 179): Pledgor with only a limited interest in the goods can pledge to the extent of that interest; The pawnee gets only that interest unless another exception applies.
Other non-owners in possession: Seller or buyer in possession: Sale of Goods Act, Sections 27 and 30. A co-owner can pledge only his own share unless the other co-owners authorise the pledge of the whole; Do not call seller or buyer in possession a Contract Act pledge exception. Cite the Sale of Goods Act sections.

How to solve Contract of Pledge questions

Use this order for any pledge question, whether it is a definition, a rights and duties question or a case on who can pledge.

1Read the facts and find the parties. Mark who gave the goods (pawnor) and who holds them (pawnee).
2Check the essentials: are the goods movable, was possession delivered, and was the delivery as security for a debt or promise?
3If any essential is missing, say it is not a pledge. Then decide whether it is a simple bailment or a mortgage.
4If the question is about rights or duties, match the facts to retainer (Section 173), extraordinary expenses (Section 175), suit or sale after notice on default (Section 176), care of goods, no personal use, or redemption (Section 177).
5If the pledgor is not the owner, identify who they are: mercantile agent, person with voidable title, pledgor with limited interest, or seller or buyer in possession.
6For a mercantile agent, test each condition: he is a mercantile agent, he has possession of the goods or documents of title with the owner's consent, he pledges as a mercantile agent in the ordinary course of business, and the pawnee acts in good faith without notice of his lack of authority.
7State the conclusion in one line: valid or invalid pledge, and who bears the loss.
8In an MCQ, remember the pawnee may retain goods for the debt, interest and necessary expenses (Section 173) and may claim extraordinary expenses (Section 175). Pick the option that matches your conclusion and eliminate options that wrongly allow the pawnee to use the goods or sell without notice.

Quickest way: Three-check shortcut for pledge MCQs

When to use it: Use when the question gives a short fact situation and asks whether a pledge is valid or what the pawnee can do.

Check one: was possession delivered? If not, no pledge.
Check two: who pledged? If the owner, the pledge is valid. If a mercantile agent, test the four conditions of Section 178: he is a mercantile agent, he holds the goods or documents of title with the owner's consent, he pledges in the ordinary course of business as a mercantile agent, and the pawnee acts in good faith without notice of lack of authority.
Check three: what is the pawnee doing? Retaining the goods for the debt, interest and necessary expenses (Section 173), claiming extraordinary expenses (Section 175), or selling after notice on default (Section 176) is fine. Using the goods or selling without notice is wrong.
Eliminate any option that says the pawnee becomes owner on default. On default the pawnee may sue or sell after notice, but never becomes the owner.

Common mistakes in Contract of Pledge

Treating every bailment as a pledge
Both involve delivery of goods, so they look alike.
Fix: Ask the purpose. If goods are given as security for a debt or promise, it is a pledge. Otherwise it is an ordinary bailment.
Saying the pawnee can sell immediately on default
Students remember the right of sale but forget the condition.
Fix: Always add that the pawnor must have defaulted at the stipulated time and that reasonable notice must be given to the pawnor before sale (Section 176).
Allowing the pawnee to use the pledged goods
Students confuse pledge with a hire or loan for use.
Fix: The pawnee holds the goods only as security and cannot use them for personal benefit.
Confusing pledge with mortgage
Both are forms of security.
Fix: Pledge covers movable goods with delivery. Mortgage deals with immovable property.
Saying any agent can pledge the owner's goods
Students overlook the term mercantile agent and the conditions.
Fix: Only a mercantile agent who holds the goods or documents of title with the owner's consent, and who pledges as a mercantile agent in the ordinary course of business, can do so, and only if the pawnee acts in good faith without notice of his lack of authority (Section 178).
Ignoring the balance after sale
Students stop once the sale is made.
Fix: Surplus goes to the pawnor. If proceeds fall short, the pawnor must pay the balance.
Limiting the pawnee's retainer to the debt alone
Students remember only the debt and forget the other items.
Fix: The pawnee may retain the goods for the debt, interest on it and necessary expenses (Section 173), and may claim extraordinary expenses (Section 175).

Worked examples

Example 1

Meera borrows ₹1,00,000 from Kiran and delivers her gold necklace to him as security. Meera defaults. Kiran sells the necklace for ₹90,000 after giving her reasonable notice. What is Meera's position?

Show the solution

Identify the parties: Meera is the pawnor and Kiran is the pawnee.
Check the essentials: the necklace is movable, delivered as security for a loan, so it is a valid pledge.
On default, Kiran may sell after reasonable notice. He gave notice, so the sale is valid.
The sale proceeds of ₹90,000 are less than the debt of ₹1,00,000.
The shortfall is ₹1,00,000 − ₹90,000 = ₹10,000, which the pawnor remains liable to pay.

Answer: The sale is valid and Meera must pay the remaining ₹10,000 to Kiran.

Example 2

Anil, a mercantile agent, has Sunita's goods in his possession with her consent. In the ordinary course of business he pledges them with Bharat for a loan. Bharat acts in good faith and has no notice that Anil lacks authority to pledge. Is the pledge valid against Sunita?

Show the solution

Anil is not the owner, so check Section 178 for mercantile agents.
Condition one: Anil is a mercantile agent. Met.
Condition two: he is in possession of the goods with the owner's consent. Met.
Condition three: he pledges the goods acting as a mercantile agent in the ordinary course of business. Met.
Condition four: Bharat acts in good faith and has no notice of Anil's lack of authority to pledge. Met.
All four conditions are met, so the pledge is as valid as if Sunita had expressly authorised it, even if Anil had no real authority to pledge.

Answer: The pledge is valid against Sunita. Her remedy lies against Anil.

Exam tips

Questions often ask who can pledge. Memorise the four conditions for a mercantile agent as a short checklist.
Differences between bailment and pledge are a favourite. Focus on purpose: security for a debt versus a general purpose.
Watch for options that let the pawnee use the goods or sell without notice. These are almost always wrong.
Check whether goods are movable and delivered. Many fact patterns fail on delivery.
Do not spend long on a pledge MCQ. Apply the three checks, mark the answer and move on.

Practice questions from Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Pledge in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA IntermediatePledge: Pawnor and Pawnee

Contract of Pledge: frequently asked questions

What is the difference between bailment and pledge?

A pledge is a bailment made for a fixed purpose: security for a debt or promise. Every pledge is a bailment, but not every bailment is a pledge. In a pledge the pawnee has a right to sell the goods on default after notice.

Who can pledge goods other than the owner?

A mercantile agent in possession of goods or documents of title with the owner's consent can pledge when acting as a mercantile agent in the ordinary course of business (Section 178). A person in possession under a voidable contract not yet rescinded can pledge (Section 178A), and a pledgor with a limited interest can pledge to the extent of that interest (Section 179). A seller or buyer in possession is covered by the Sale of Goods Act, Sections 27 and 30. The pawnee must act in good faith without notice of any defect.

What are the rights of a pawnee?

The pawnee can retain the goods for the debt, interest and necessary expenses (Section 173). He can claim extraordinary expenses incurred to preserve the goods (Section 175). If the pawnor defaults at the stipulated time, he can sue on the debt and keep the goods as collateral security, or sell the goods after reasonable notice (Section 176).

Can the pawnor get the goods back after the due date?

Yes. After default, the pawnor may redeem the goods at any time before the pawnee actually sells them (Section 177). To do so he must pay the debt together with any expenses arising from the default. Once the goods are sold, the right to redeem ends.