Pawnor's default: the pawnee's remedy; rights and duties of pawnee and pawnor

B's remedy. If the pawnor makes default in payment of the debt at the stipulated time, the pawnee may either sue the pawnor on the debt and retain the goods pledged as collateral security, or sell the goods “on giving the pawnor reasonable notice of the sale; if the proceeds” fall short of the amount due, the pawnor is still liable for the balance, and any surplus must be paid over to the pawnor (s. 176). A pledged jewels worth ₹ 2 Lakh for a loan of ₹ 1,00,000 at 12 per cent and defaulted at the year's end. A year's interest is ₹ 1,00,000 × 12% = ₹ 12,000, so ₹ 1,12,000 is due, before any necessary expenses. B may sue A for ₹ 1,12,000 and keep the jewels as security, or sell the jewels after reasonable notice to A, retain what is due (principal, interest and necessary expenses) and pay A the surplus. Until the actual sale, A may still redeem the jewels by paying the debt and the expenses of his default.

Rights of the pawnee:

1. to retain the goods for the debt, its interest and necessary expenses for their possession or preservation (s. 173);
2. to retain them for subsequent debts, only where there is a contract to that effect (s. 174);
3. to recover from the pawnor, by suit, extraordinary expenses incurred for preserving the goods, though he may not retain the goods for them (s. 175); and
4. on default, to sue and retain the goods, or to sell them after reasonable notice (s. 176).

Duties of the pawnee. A pledge is a bailment, so the pawnee carries a bailee's duties, taken here in the order of the Contract Act's sections:

• take the care of the goods that a person of ordinary prudence would take of his own (s. 151);
• do nothing with them that is inconsistent with the terms of the pledge (s. 153);
• not use them without the pawnor's authority (s. 154);
• not mix them with his own goods without the pawnor's consent (ss. 155–157);
• return them once the debt has been repaid or the promise performed (s. 160); and
• hand over any increase or profit the goods have produced, such as interest on pledged securities (s. 163).

Rights and duties of the pawnor:

• Rights: the rights of a bailor, and the right to redeem the goods after default, at any time before their actual sale, on paying the debt and the expenses caused by the default (s. 177).
• Duties, again in section order: to tell the pawnee of any fault in the goods that exposes him to extraordinary risk (s. 150); to meet any extraordinary expenses the pawnee incurs in preserving the goods (s. 175); to make good any loss the pawnee suffers because the pawnor had no right to pledge the goods (s. 164); and, above all, to repay the debt or perform the promise for which the goods were pledged, remaining liable for any shortfall if the pawnee sells them on default (s. 176).