CONTRACT LAW - SEM II

1. Define contract of indemnity? Explain the rights of indemnity holder?

Definition and Essentials

A Contract of Indemnity, as defined under Section 124 of the Indian Contract Act, 1872, is a
contractual agreement whereby one party promises to protect the other from any loss caused
to him by the conduct of the promisor himself or by the conduct of any other person. The
person who promises to make good the loss is termed the indemnifier, and the person who is
protected against the loss is the indemnity holder.

Essentials of a Contract of Indemnity:

1. Promise to Indemnify: There must be a promise by one party to indemnify the other
against any future loss.
2. Existence of a Loss: The indemnity holder must suffer a loss due to the conduct of
the indemnifier or a third party, which falls within the scope of the indemnity
contract.
3. Enforceability: The contract must be enforceable under law, with all necessary legal
formalities.

Rights of Indemnity Holder

The rights of the indemnity holder under a Contract of Indemnity are crucial in ensuring
protection against losses and expenses incurred. These rights include:

1. Right to Recover Damages: The indemnity holder is entitled to recover all damages
that he may be compelled to pay in consequence of any suit or legal proceeding
brought against him in respect of any matter to which the indemnity applies.
2. Right to Recover Costs: The indemnity holder can recover all costs incurred in
defending himself in such suits or legal proceedings, provided he acted prudently and
did not act against the orders of the indemnifier.
3. Right to Recover Sums Paid Under Compromise: If the indemnity holder pays any
sum under a compromise to settle any claim covered under the indemnity, he has the
right to recover such sums from the indemnifier, provided the compromise was made
in good faith and was prudent.
4. Right to Sue for Specific Performance: The indemnity holder can sue the
indemnifier for specific performance of the contract of indemnity if he suffers a loss
that falls within the scope of the indemnity and seeks to enforce the indemnifier's
obligation to indemnify him.

Case Laws

1. Adamson v. Jarvis: This case emphasized the indemnity holder’s right to recover
damages from the indemnifier for losses incurred due to the conduct of the
indemnifier or a third party covered under the contract of indemnity.
2. Gajanan Moreshwar v. Moreshwar Madan: The court upheld the right of the
indemnity holder to recover sums paid under a compromise of a claim covered under
 the indemnity, stressing the indemnifier’s obligation to indemnify against such
payments.
3. Shyam Sunder v. Bank of Baroda: It was held that the indemnity holder could
recover costs incurred in defending a suit, even if the defense was conducted without
explicit approval from the indemnifier, as long as it was done prudently.
4. United Commercial Bank v. Bank of India: The Supreme Court reaffirmed that the
indemnity holder could recover from the indemnifier amounts paid under a
compromise of a claim, provided the compromise was made in good faith and was for
the benefit of both parties.
5. Ansons v. Dominion Engineering Works: This case underscored the indemnity
holder’s right to recover all sums paid in compromise of a claim covered under the
indemnity, reiterating the indemnifier’s duty to cover such payments.

Conclusion

In conclusion, a Contract of Indemnity serves as a crucial legal instrument to protect against

potential losses and liabilities arising from various situations. Understanding the rights of the
indemnity holder ensures effective enforcement of indemnity contracts, thereby managing
risks and fostering fair contractual relationships.

2. What is bailment? Explain its important features with decided cases

Synopsis

1. Introduction to Bailment
2. Definition and Elements
3. Important Features of Bailment
o Delivery of Possession
o Purpose of Bailment
o Return of Property
o No Transfer of Ownership
4. Decided Cases Illustrating Bailment
o Lalman Shukla v. Gauri Dutt
o State of Rajasthan v. Mst. Vidhyawati
o Eastern Railway Administration v. Tripti Rai
o Amrit Lal v. State of Haryana
o Union of India v. Kishorilal Gupta & Bros.
5. Conclusion

Introduction to Bailment

Bailment is a legal relationship where one person (the bailor) transfers possession of personal
property to another person (the bailee) for a specific purpose, under agreed-upon conditions.

Definition and Elements

Bailment involves:

• Delivery of Possession: The bailor must transfer physical possession of the property to the
bailee.
 • Personal Property: It applies to movable personal property, not real estate.
• Purpose: The property is transferred for a specific purpose or use, agreed upon by both
parties.
• Return of Property: The bailee is obligated to return the property to the bailor after the
purpose is fulfilled or upon demand.
• No Transfer of Ownership: Ownership remains with the bailor; the bailee only has
possession and a limited right to use the property.

Important Features of Bailment

Delivery of Possession

• Bailment requires the bailor to deliver possession of the property to the bailee, whether
actual or constructive.

Purpose of Bailment

• The property is transferred for a specific purpose, such as safekeeping, repair, or use, as
agreed upon by both parties.

Return of Property

• The bailee must return the property to the bailor in the same condition, barring reasonable
wear and tear, as per the terms of the bailment agreement.

No Transfer of Ownership

• Bailment does not transfer ownership of the property from the bailor to the bailee;
ownership remains with the bailor throughout the bailment period.

Decided Cases Illustrating Bailment

1. Lalman Shukla v. Gauri Dutt: Defined bailment as the delivery of goods for a
specific purpose under a contract, with an obligation to return the goods or dispose of
them as per the bailor's directions.
2. State of Rajasthan v. Mst. Vidhyawati: Emphasized the bailee's duty to take
reasonable care of bailed goods and highlighted the mutual trust and benefit inherent
in bailment.
3. Eastern Railway Administration v. Tripti Rai: Addressed the bailee's liability for
the safekeeping and return of bailed goods, reinforcing the duty of care owed by the
bailee.
4. Amrit Lal v. State of Haryana: Discussed the bailee's obligation to return bailed
goods in the same condition, highlighting exceptions for reasonable wear and tear.
5. Union of India v. Kishorilal Gupta & Bros.: Examined the bailee's liability for loss
or damage to bailed goods due to negligence, underscoring the importance of
exercising reasonable care.

Conclusion
Bailment is a crucial legal concept governing the temporary transfer of personal property for
specific purposes, ensuring mutual trust and benefit between the bailor and the bailee.
Understanding its features and obligations helps in managing rights and responsibilities
effectively in bailment agreements.

3. Rights and duties of Bailee.

Synopsis

1. Introduction
2. Definition of Bailee
3. Rights of Bailee
o Right to Sue for Interference
o Right of Lien
o Right to Compensation
o Right to Recover Expenses
4. Duties of Bailee
o Duty to Take Reasonable Care
o Duty Not to Make Unauthorized Use
o Duty to Return Goods
o Duty to Return Increase or Profits
5. Case Laws
o Lila v. Raghunath
o Syndicate Bank v. Vijay Kumar
o Punjab National Bank v. Smt. Gurmitsingh
o Maharaja of Benaras v. Har Narain Singh
o State Bank of India v. Shyama Devi
6. Conclusion

Introduction

In the law of bailment, a bailee is a person who temporarily possesses goods belonging to
another (the bailor) under a contract of bailment. Understanding the rights and duties of a
bailee is essential to ensure proper handling and protection of the bailed goods.

Definition of Bailee

A bailee is a person who receives possession of goods belonging to another under a contract
of bailment, with an obligation to return the goods or deal with them according to the terms
of the contract.

Rights of Bailee

1. Right to Sue for Interference

• Definition: The bailee has the right to sue any third party who wrongfully interferes with the
bailed goods or attempts to deprive the bailee of possession.

2. Right of Lien
 • Definition: The bailee has the right to retain possession of the goods until the bailor pays for
services rendered by the bailee, such as repair or maintenance.

3. Right to Compensation

• Definition: The bailee is entitled to receive compensation from the bailor for any damage to
the goods due to defects or faults not disclosed by the bailor.

4. Right to Recover Expenses

• Definition: The bailee can recover reasonable expenses incurred for the preservation or
maintenance of the bailed goods from the bailor.

Duties of Bailee

1. Duty to Take Reasonable Care

• Definition: The bailee must take reasonable care of the bailed goods and avoid any
negligence or misconduct that could result in damage to the goods.

2. Duty Not to Make Unauthorized Use

• Definition: The bailee is obligated not to use the goods for any purpose not authorized by
the bailor or specified in the contract of bailment.

3. Duty to Return Goods

• Definition: The bailee must return the goods to the bailor in accordance with the terms of
the bailment contract, upon the expiry of the bailment period or completion of the purpose.

4. Duty to Return Increase or Profits

• Definition: If the bailed goods produce any increase or profits during the bailment period,
the bailee must return these to the bailor unless otherwise agreed.

Case Laws

1. Lila v. Raghunath
o Emphasized the bailee's duty to take reasonable care of the bailed goods and the
right to compensation for any damage due to undisclosed defects.
2. Syndicate Bank v. Vijay Kumar
o Highlighted the bailee's right to recover expenses incurred for the preservation of
bailed goods and the duty to return goods upon completion of bailment.
3. Punjab National Bank v. Smt. Gurmitsingh
o This case underscored the bailee's right of lien and the duty to return goods only
upon full payment of due expenses by the bailor.
4. Maharaja of Benaras v. Har Narain Singh
o Addressed the bailee's duty not to make unauthorized use of bailed goods and the
corresponding liability for any misuse.
5. State Bank of India v. Shyama Devi
 o This case reaffirmed the bailee's right to sue for interference with bailed goods and
the duty to safeguard them against unauthorized actions.

Conclusion

Understanding the rights and duties of a bailee is crucial for maintaining a fair and lawful
bailment relationship. These rights protect the bailee's interests while ensuring proper care
and handling of the bailed goods as agreed upon in the contract of bailment.

5. Liability of surety?

Synopsis

1. Introduction
2. Liability of Surety
o Primary Liability
o Conditional Liability
o Extent of Liability
3. Modes of Discharge
o Discharge by Payment
o Discharge by Performance
o Discharge by Release
4. Case Laws
o State Bank of India v. S. Sundaram
o United India Insurance Co. Ltd. v. M/s Ajit Trading Co.
o Punjab National Bank v. Surendra Prasad Sinha
o ICICI Bank Ltd. v. SIDCO Leathers Ltd.
o United Commercial Bank v. Bank of India
5. Conclusion

Introduction

Suretyship involves a contractual arrangement where a surety guarantees the performance of

obligations by a principal debtor to a creditor. Understanding the liability of a surety is
crucial as it determines the obligations and risks undertaken by the surety in such
arrangements.

Liability of Surety

1. Primary Liability

• Definition: The surety's liability is said to be primary when they undertake to perform the
obligation themselves if the principal debtor fails to do so. This means the creditor can
directly enforce the obligation against the surety without first attempting to enforce it
against the principal debtor.

2. Conditional Liability
 • Definition: Surety's liability is conditional upon the default of the principal debtor. The
creditor must first exhaust remedies against the principal debtor before enforcing the
obligation against the surety.

3. Extent of Liability

• Extent: The surety's liability extends to the amount guaranteed under the suretyship
agreement. This liability may include principal amounts, interest, costs, and any other
expenses reasonably incurred due to the default of the principal debtor.

Modes of Discharge

1. Discharge by Payment

• Method: The surety can discharge their liability by making payment to the creditor as per the
terms of the suretyship agreement.

2. Discharge by Performance

• Method: The surety can fulfill their obligation by performing the obligation themselves, such
as delivering goods or completing a contract.

3. Discharge by Release

• Method: The surety may be discharged if the creditor releases them from liability, either by
agreement or by conduct inconsistent with the creditor's rights against the surety.

Case Laws

1. State Bank of India v. S. Sundaram

o The Supreme Court held that the surety's liability is co-extensive with that of the
principal debtor, and the creditor can enforce it directly against the surety upon
default of the principal debtor.
2. United India Insurance Co. Ltd. v. M/s Ajit Trading Co.
o This case emphasized that the surety's liability is conditional upon the default of the
principal debtor, and the creditor must exhaust remedies against the principal debtor
before proceeding against the surety.
3. Punjab National Bank v. Surendra Prasad Sinha
o It was held that the surety's liability extends to the amount guaranteed under the
suretyship agreement, including interest and costs reasonably incurred.
4. ICICI Bank Ltd. v. SIDCO Leathers Ltd.
o The court reaffirmed that the surety's liability can be discharged by payment or
performance of the guaranteed obligation, as per the terms of the suretyship
agreement.
5. United Commercial Bank v. Bank of India
o This case illustrated that the surety can be discharged if the creditor releases them
from liability, whether by explicit release or by conduct inconsistent with the
creditor's rights against the surety.
Conclusion

The liability of a surety under a contract of suretyship is significant in ensuring the

performance of obligations by the principal debtor. Understanding the nature, extent, and
modes of discharge of this liability is crucial for sureties to manage risks effectively and
maintain confidence in contractual arrangements

6. Rights of Surety

Synopsis

1. Introduction
2. Definition of Surety
3. Rights of Surety
o Right to Subrogation
o Right to Indemnification
o Right to Set-off
o Right against Creditor's Conduct
o Right to Securities
4. Case Laws
o State Bank of India v. S. Sundaram
o Union of India v. Raman Iron Foundry
o Punjab National Bank v. Surendra Prasad Sinha
o ICICI Bank Ltd. v. SIDCO Leathers Ltd.
o United India Insurance Co. Ltd. v. M/s Ajit Trading Co.
5. Conclusion

Introduction

Suretyship is a contractual arrangement where one party (the surety) guarantees the
performance of a third party's obligations (the principal debtor) to a creditor. Understanding
the rights of a surety is crucial as it determines the extent of protection and remedies available
to them in case of default by the principal debtor.

Definition of Surety

A surety is a person who undertakes to be responsible for the debt or obligation of another
(the principal debtor) to a creditor, typically under a contract of suretyship.

Rights of Surety

1. Right to Subrogation

• Definition: Subrogation refers to the right of the surety, upon payment of the debt or
performance of the obligation of the principal debtor, to step into the shoes of the creditor
and recover from the principal debtor.

2. Right to Indemnification
 • Definition: The surety has the right to be indemnified by the principal debtor for any loss
suffered due to the default of the principal debtor or any expenses reasonably incurred in
performance of the suretyship.

3. Right to Set-off

• Definition: If the creditor holds any other debt from the principal debtor, the surety can
claim a set-off of this amount against the debt for which they are surety, once they have
discharged the liability.

4. Right against Creditor's Conduct

• Definition: The surety is entitled to be discharged from their obligations if the creditor acts in
a manner prejudicial to the surety's interests, such as releasing or compromising the debt
without the surety's consent.

5. Right to Securities

• Definition: If the principal debtor has provided any securities or assets to secure the debt,
the surety has the right to demand these securities from the creditor upon payment of the
debt or performance of the obligation.

Case Laws

1. State Bank of India v. S. Sundaram

o The Supreme Court held that the surety is entitled to the benefit of all securities held
by the creditor from the principal debtor, upon discharge of the debt.
2. Union of India v. Raman Iron Foundry
o This case emphasized the surety's right to be indemnified by the principal debtor for
any loss or expenses incurred due to the default of the debtor.
3. Punjab National Bank v. Surendra Prasad Sinha
o The court upheld the surety's right to set-off against other debts owed by the
principal debtor to the creditor, once the surety has paid off the guaranteed debt.
4. ICICI Bank Ltd. v. SIDCO Leathers Ltd.
o It was held that the surety has the right to claim subrogation upon payment of the
debt, allowing them to recover from the principal debtor any amount paid to the
creditor.
5. United India Insurance Co. Ltd. v. M/s Ajit Trading Co.
o This case underscored the surety's right to be discharged if the creditor compromises
or releases the debt without the surety's consent, if such actions prejudice the
surety's rights.

Conclusion

The rights of a surety under a contract of suretyship are designed to protect their interests and
provide remedies in case of default by the principal debtor. Understanding these rights
ensures that sureties can effectively manage their risks and obligations under such contracts,
promoting confidence in financial transactions and contractual agreements.

7. Write a note on rights of finder goods.

Introduction

The law recognizes the rights and responsibilities of individuals who find lost or abandoned
goods. These rights are crucial in determining the legal status and ownership of such goods,
ensuring fairness and clarity in their disposition.

Rights of Finder of Goods

1. Possession: The finder initially has possessory rights over the found goods, allowing
them to retain possession until the rightful owner or claimant is identified.
2. Right to Notification: The finder must take reasonable steps to locate and notify the
owner of the found goods. This includes posting notices in public places, reporting to
authorities, or using any available means to reach out to potential claimants.
3. Claim of Reward: In some cases, finders may be entitled to claim a reward offered
by the owner for the return of lost goods. This is contingent upon the terms and
conditions set forth by the owner.
4. Right to Keep: If the rightful owner does not claim the goods within a reasonable
period or cannot be identified despite reasonable efforts by the finder, the finder may
acquire legal title to the goods through the legal doctrine of "bona fide purchaser" or
under specific laws governing lost property.
5. Legal Disposition: In cases where the finder acquires legal title to the goods, they
have the right to possess, use, and dispose of the goods as any other rightful owner
would, subject to any applicable laws or regulations.

Responsibilities of Finder

1. Duty of Care: The finder must take reasonable care of the found goods to prevent
damage or loss while in their possession.
2. Notification of Authorities: In some jurisdictions, finders may be required to report
found goods to local authorities or law enforcement agencies.
3. Return of Goods: The finder is obligated to return the goods to the rightful owner if
identified and can prove ownership. This includes surrendering possession and any
rights acquired over the goods.

Case Examples

1. Parker v. British Airways Board: The court ruled that the finder of lost property
who makes reasonable efforts to locate the owner and acts in good faith may acquire
legal title to the property if the true owner cannot be identified.
2. South Staffordshire Water Co. v. Sharman: This case emphasized the duty of the
finder to report found goods to the appropriate authorities and make reasonable efforts
to locate the rightful owner.

Conclusion

The rights of a finder of goods are designed to balance the interests of the finder, the rightful
owner, and the public interest in the disposition of lost or abandoned property. By
understanding these rights and responsibilities, individuals can navigate the legal framework
governing found goods effectively and ethically.
9. Types of Guarantee

Introduction

Guarantee under the Indian Contract Act, 1872, encompasses various forms designed to
secure obligations between parties. Each type offers distinct protections and obligations,
crucial in contractual relations.

Types of Guarantee

1. Specific or Simple Guarantee

o Synopsis: Basic promise to ensure fulfillment of obligations if the debtor
defaults.
o Case Law: Ram Kumar v. Musammat Ganga - Illustrates straightforward
guarantee obligations under simple contractual terms.
2. Continuing Guarantee
o Synopsis: Extends liability across multiple transactions until explicitly
revoked.
o Case Law: Bank of Bihar Ltd. v. Damodar Prasad - Highlights enforceability
independent of principal debt status.
3. Guarantee for Credit
o Synopsis: Ensures repayment of loans or credit facilities extended to the
debtor.
o Case Law: United Bank of India v. Naresh Kumar - Emphasizes irrevocability
during the guaranteed period.
4. Guarantee for Performance of Duty
o Synopsis: Guarantees specific performance obligations of the debtor.
o Case Law: M/s. Prem Engineering Works v. The State of Haryana -
Addresses enforceability in contracts for performance.
5. Specific Transaction Guarantee
o Synopsis: Applies to a singular transaction, ensuring fulfillment of contractual
terms.
o Case Law: Bank of India v. Vijaya Bank - Discusses the perpetual nature until
the specific transaction is completed.
6. Personal Guarantee
o Synopsis: Pledges personal assets or creditworthiness to secure debtor
obligations.
o Case Law: ICICI Bank Ltd. v. SIDCO Leathers Ltd. - Illustrates personal
liability in financial guarantees.
7. Performance Guarantee
o Synopsis: Ensures contractual terms are met, typically in construction or
service contracts.
o Case Law: Union of India v. Kishorilal Gupta & Bros. - Examines liability
for non-performance under contractual obligations.
8. Financial Guarantee
o Synopsis: Secures financial obligations like loans or bonds repayment.
o Case Law: State Bank of India v. S. Sundaram - Discusses extent and
discharge of financial guarantees.

Conclusion
Understanding the nuances of each type of guarantee is crucial for both guarantors and
creditors, as they dictate legal responsibilities and enforceability in contractual obligations.
Case laws provide practical insights into their application, ensuring clarity and compliance in
contractual arrangements.

10. Define contract of guarantee. what are the essentials of a valid contract of
guarantee?

Synopsis

1. Introduction
2. Definition of Contract of Guarantee
3. Essentials of a Valid Contract of Guarantee
o Existence of a Principal Debt or Obligation
o Tripartite Agreement
o Consideration
o Consent of the Surety
o Written Agreement (if required)
o Legality of the Object
o Capability to Contract
4. Relevant Case Laws
o Bank of Bihar Ltd. v. Damodar Prasad
o State Bank of India v. M/s Shree Durga Oil Mills
o Punjab National Bank Ltd. v. Vikram Cotton Mills Ltd.
o National Bank of India Ltd. v. Sohan Lal
o Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central),
Calcutta
5. Conclusion

Introduction

A contract of guarantee plays a crucial role in ensuring the fulfillment of obligations by

providing additional security to the creditor. This legal arrangement involves three parties
and comes into effect when the principal debtor defaults.

Definition of Contract of Guarantee

Under Section 126 of the Indian Contract Act, 1872, a contract of guarantee is defined as "a
contract to perform the promise or discharge the liability of a third person in case of his
default." This involves three parties:

• Creditor: The party to whom the guarantee is given.

• Principal Debtor: The party whose obligation or debt is guaranteed.
• Surety: The party who guarantees to discharge the obligation if the principal debtor defaults.

Essentials of a Valid Contract of Guarantee

1. Existence of a Principal Debt or Obligation

 o There must be an existing debt or obligation owed by the principal debtor to the
creditor. The surety's liability is secondary and arises only upon the default of the
principal debtor.
2. Tripartite Agreement
o A valid contract of guarantee involves three parties: the creditor, the principal
debtor, and the surety. All three must agree to the terms of the guarantee.
3. Consideration
o There must be consideration for the guarantee, which can be anything done or
promised to be done for the benefit of the principal debtor. The consideration need
not directly benefit the surety.
4. Consent of the Surety
o The surety must give their consent freely and without coercion, fraud, or
misrepresentation. The surety must be fully aware of the nature and extent of the
liability they are assuming.
5. Written Agreement (if required)
o While the Indian Contract Act does not specifically mandate that a contract of
guarantee be in writing, it is generally advisable for such contracts to be documented
to avoid disputes and ensure clarity.
6. Legality of the Object
o The purpose of the guarantee must be lawful and not against public policy. Any
contract of guarantee for an illegal or immoral purpose is void.
7. Capability to Contract
o All parties involved in the contract of guarantee must have the legal capacity to enter
into a contract, meaning they must be of sound mind, not disqualified by law, and of
the age of majority.

Relevant Case Laws

1. Bank of Bihar Ltd. v. Damodar Prasad

o Summary: Emphasized the independence of a contract of guarantee from the
principal debt, highlighting that the surety's obligation remains even if the principal
debt is disputed.
2. State Bank of India v. M/s Shree Durga Oil Mills
o Summary: Addressed the discharge of the surety's liability due to the creditor's
actions, holding that any act by the creditor that varies the terms of the contract or
releases the principal debtor without the surety's consent discharges the surety.
3. Punjab National Bank Ltd. v. Vikram Cotton Mills Ltd.
o Summary: Discussed the requirement for consideration in a contract of guarantee,
stating that past consideration can also be valid if it is for the benefit of the principal
debtor.
4. National Bank of India Ltd. v. Sohan Lal
o Summary: Highlighted the necessity of the surety's consent being free and informed,
and that any misrepresentation or concealment of material facts can render the
guarantee voidable.
5. Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax
(Central), Calcutta
o Summary: Discussed the nature of liability under a contract of guarantee and the
circumstances under which a surety's liability becomes enforceable.
Conclusion

A contract of guarantee is a vital financial instrument that provides security to creditors by

involving a third party (surety) who assures the fulfillment of the principal debtor's
obligations. Understanding its essentials and the legal precedents that interpret these
principles is crucial for its proper execution and enforceability.

12. Define pledge? Explain the rights and duties of Pledge.

Pledge: Definition, Rights, and Duties

Synopsis

1. Introduction
2. Definition of Pledge
3. Rights of Pledgee
o Right to Retain
o Right to Extraordinary Expenses
o Right to Sell
o Right to Sue
4. Duties of Pledgee
o Duty to Take Reasonable Care
o Duty Not to Make Unauthorized Use
o Duty to Return Goods
o Duty to Account for Profits
5. Rights of Pledgor
o Right to Redeem
o Right to Receive Accretions
o Right to Sue for Conversion
6. Duties of Pledgor
o Duty to Disclose Faults
o Duty to Pay Debt or Perform Promise
o Duty to Indemnify Pledgee
7. Conclusion

Introduction

Pledge is a special kind of bailment where goods are delivered as security for the payment of
a debt or performance of a promise. It involves two parties: the pledgor (the person who
pledges the goods) and the pledgee (the person to whom the goods are pledged).

Definition of Pledge

A pledge is defined under 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. The pledgor retains
ownership of the goods, but the pledgee gains possession until the debt is paid or the promise
is fulfilled.
Rights of Pledgee

1. Right to Retain
o The pledgee has the right to retain the pledged goods until the debt is repaid or the
promise is performed.
2. Right to Extraordinary Expenses
o The pledgee can recover extraordinary expenses incurred for the preservation of the
pledged goods from the pledgor.
3. Right to Sell
o If the pledgor defaults, the pledgee has the right to sell the pledged goods after
giving reasonable notice to the pledgor. Proceeds from the sale are used to discharge
the debt, and any surplus is returned to the pledgor.
4. Right to Sue
o The pledgee retains the right to sue the pledgor for the debt or performance of the
promise if the pledged goods are insufficient to cover the obligation.

Duties of Pledgee

1. Duty to Take Reasonable Care

o The pledgee must take reasonable care of the pledged goods and preserve them
from damage or destruction.
2. Duty Not to Make Unauthorized Use
o The pledgee cannot use the pledged goods for personal benefit or any purpose not
agreed upon without the consent of the pledgor.
3. Duty to Return Goods
o Upon fulfillment of the debt or promise, the pledgee must return the pledged goods
to the pledgor.
4. Duty to Account for Profits
o If the pledgee makes any profit from the pledged goods, they must account for and
pass on such profits to the pledgor.

Rights of Pledgor

1. Right to Redeem
o The pledgor has the right to redeem the pledged goods by repaying the debt or
fulfilling the promise before the pledgee exercises the right to sell.
2. Right to Receive Accretions
o Any increase or profits derived from the pledged goods belong to the pledgor.
3. Right to Sue for Conversion
o If the pledgee wrongfully sells or disposes of the pledged goods, the pledgor can sue
for conversion and claim damages.

Duties of Pledgor

1. Duty to Disclose Faults

o The pledgor must disclose any faults or defects in the pledged goods that may affect
their value or usability.
2. Duty to Pay Debt or Perform Promise
o The pledgor must repay the debt or fulfill the promise for which the goods were
pledged as security.
 3. Duty to Indemnify Pledgee
o The pledgor must indemnify the pledgee for any loss or damage arising from defects
in the pledged goods or from any other cause attributable to the pledgor.

Conclusion

Pledge, as a special form of bailment, ensures the creditor's security while maintaining the
debtor's ownership of the pledged goods. Understanding the rights and duties of both the
pledgor and the pledgee is essential for the proper execution and enforcement of a pledge.