Pledge by Non-Owners- Law of Contracts

What is a pledge? 

A pledge is a type of bailment which allows the pledgor/pawner to transfer the possession of an object to the pledgee/pawnee to maintain as a security or collateral until the duration of either repayment of a loan, deliverance of promised goods, or completion of specific contractual obligation. This is usually done to guarantee the performance of a duty owed to the pledgee and it assures mutual benefit of both parties. (Black, 1990)

The pawnee has the right to retain the pledged object until the pawnor has repaid all debts, interests, and other expenses incurred by said pawnee for possession and preservation of the good. 

Who can pledge? 

Typically, the owner must pledge something valuable that belongs to him. However, under certain circumstances, the law permits a non-owner who is in the possession of goods to pledge these goods. This will still lead to a valid pledge. 

Pledge by Non-Owners

  1.  Mercantile agents – He is one who has acquired the possession of goods or has valid documentation to prove possession in his own capacity. This agent , with the consent of the owner, can sell, buy or raise money to the security of goods in his ordinary course of business. (Mukhopadhyay, 2021) However, there are certain requirements for this:

a. Owner gives explicit authority to pledge the goods

b. Pawnee should have acted in good faith and without knowledge

c. The Pawnee is unaware the mercantile agent did not have the authority to pledge.

There are several examples of mercantile agents:

a. Factor – they have possession of goods for the purpose of selling. they sell them in their own name and have a general lien

b. Brokers – they are people who are appointed to legally negotiate and draft contracts for sale and purchase. They do not hold possession so they do not sell the good under their name. 

c. Commission agents – who receive commissions for successfully facilitating sale and purchase. 

d. Del credere agents – For the sake of extra commission, they take upon themselves the burden of guaranteeing the principle that the third person who enters into the contract on his behalf will perform their financial duty, and if not, the principal will be compensated by the agent himself. 

2. Persons with limited interest – Section 179 of the Contract Act, 1872 refers to the type of pledge where the pawnor has only a limited interest. (Contract Act, 1872) A person who has limited interest and is not the owner of goods can legally pledge but its validity depends on the extent of that interest. (Verma, 2017)

3. Seller or Buyer in current possession – Section 30(1) of the Sale of Goods Act, 1930 correlates to the pledge by the seller in possession after the sale. It says if a person, even after the sale of goods, continues to hold onto the goods or the documents of title to the goods then decides to sell, pledge or dispose it to a person who is unaware of its previous sale and accepts it in good faith, through delivery or his mercantile agent, will have the same effect as if he was given authorisation by the owner to do so. 

This means a pledge by a seller who holds current ownership of goods after it was sold to him can also make a valid pledge if the pawnee had good faith and was unaware of its sale to the buyer. 

Section 30(2) of the Sale of Goods Act, 1930 correlates to the pledge by the buyer. It says a person who bought or agreed to buy goods and procures the goods or takes the title for the goods with the seller’s consent, delivery or transfer of which is done by himself or a mercantile agent can do as he pleases with the goods. If he decides to sell, pledge or dispose of it to a person who receives it in good faith and without knowledge of the original seller’s right of lien with respect to the goods, the case shall have the same effect as the original owner’s right not existing in the first place. 

A burden more than reasonable due diligence shall not be imposed on the pawnee or pledgee. (SOGA, 1930)

4. Pledgee acting in good faith – In order for a pledge by a non-owner to be valid, the pledgee should act in good faith and must have no prior knowledge of the mercantile agent’s lack of authority to pledge an object. A person may get the possession of the goods under a contract that is voidable at the option of the lawful owner but it is only voidable on the grounds of fraud, misrepresentation, etc. before the contract had been rescinded and the person taking ownership was not aware of the mistake in the title of the person who is giving the possession. Therefore, a pledge by the person in possession of goods is valid until the contract is void. 

An example is the case of Phillips v Brooks Ltd,1919. 

5. Pledge by Co-owner/ Joint account holders – When a co-owner who possesses the goods, with the approval of the other co-owner pledges the goods, it is a valid pledge. However, if only one of the co-owners gives consent and the other is unaware, the pledge will not hold good to the interest of at least one party also. 

Example – Anumati v Punjab National Bank, 2004.

Therefore, pledges need not necessarily be made by an owner. In fact, subject to certain specific situations and conditions, non-owners can also make valid pledges that are recognized by law. 

CITATIONS

1. Black, Henry C. 1990. “Pledge”. Black’s Law Dictionary. 

2. Mukhopadhyay, Aaishani. 2021. “Pledge by Non-Owners”. Libertatem Magazine.

3. Section 179. 1872. Pledge where pawnor has limited interest. Indian Contract Act. 

4. Verma, Toran Lal. 2017. Pledge by non-owner. Commerce Study Guide.

  • Section 30(1) & Section 30(2). 1930. Sales of Good Act. 
  •  Phillips v Brooks Ltd. 1919. 2 KB 243

7. Anumati v Punjab National Bank. 2004. 

https://indiankanoon.org/doc/1440909/

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1 Comment

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