What is a Contract of Pledge?

Pledge is defined in Section 172 of the Indian Contract Act, 1872 as “The bailment of goods as security for payment of a debt or performance of a promise is called Pledge. The Bailor in this called is called the Pawnor and the Bailee is called as Pawnee.”

A Pledge is a particular kind of bailment in which one party, the Pawnor, transfers moveable property to another, the Pawnee in exchange for payment of a debt or other commitment. In the event of default, the Pawnee is entitled to sell or keep the property that has been pledged as collateral. The Pawnee is responsible for providing the pledged item with appropriate care. The Pawnee may be able to recover the amount through the sale of the property if the Pledgor defaults on the agreement. For example, things like utilizing stocks as security for a bank loan or pledging jewellery to a shop in exchange for a loan.

Contract of Bailment and Contract of Pledge are the two types of special contracts that are regulated under the Indian Contract Act, 1872. Contract of Bailment refers to when certain goods are transferred from one party to another for a specific purpose; whereas, Contract of Pledge implies when certain goods are transferred from one party to another as a security against a debt. Both contracts safeguard the best interest of both the parties involved and are very crucial for business transactions.