Pawnee is supposed to be the original owner and holder of the goods in order to pledge them to the other person as security. Goods pledged by any other person may not make the pledge valid. Suppose a servant pledges some goods given to him by his master when the master was not present, the pledge made by the servant is held invalid. This happened in Biddomoy Dabee v. Sittaram (ILR 4 Cal 497). However, Section 178 and 179 of the Contract Act and certain Sections of the Sales of Goods Act 1930 provide for some exceptions where a person who holds goods in their possession with the owner’s consent are able to enter into a valid pledge contract without the owner’s permission.
1] Pledge by mercantile agent (Sec 178) – When a mercantile agent has some goods with the owner’s consent or documents of title to goods, and they form a pledge during their course of business, the pledge is valid. The pawnee must act in good faith and is not aware that agent has no authority to pledge. A few example cases are: customers jewellery pledged by a jewellery broker (Sesappier v. Subramania Chettiar, ILR 1917 40 Mad 678); customers shares pledged by a share broker (Fuller v. Glyn 1914 2KB 168).
Conditions for validity of pledge made by a mercantile agent are as follows:
- The person must be a mercantile agent. Section 178 does not defines the term. But it is taken to mean what is defined in the Sales of Goods Act 1930: an agent who has authority to sell goods, to consign goods for the purpose of sale, to buy goods or to raise money for security of goods. [Sec 2(9)].
- The agent should possess the goods or documents of title with owner’s consent. The Supreme Court specified that the word “consent” means as defined in Section 13 of the Contract Act, that is, agreeing on the same thing in the same sense.
The court interpreted “possession” mentioned in Sec 178 as juridical possession and not just custody or physical possession. Thus, the owner entrusting someone with custody of goods does not make the person possessor of it and does not makes a pledge. [Sharadin v. Gokulchand AIR 1931 Lah 526]
- Pledge should be entered in during the business course by the mercantile agent only who is given the authority to do so. The plaintiff was a dealer in diamonds at Amsterdam. He had sent some diamonds to a diamond broker living in London for sale. The broker asked his friend to pledge them for him. The friend pledged with the defendants. The owner brought action against the defendants. But the pledge was held invalid as it was held that a mercantile agent should not ask a friend to pledge goods entrusted to him but pledge them himself. [De Gorter v. Attenborough & Sons 1904 21 TLR 19]. Moreover, it is not correct to pledge outside the agent’s business premises or hours.
- Lastly, the pawnee should act in good faith and should not have the knowledge of the fact that the pawnor has no authority to pledge.
2] Pledge by documents of title (Sec 178) – If the mercantile agent has possession of the documents of title for the goods and pledges them, the pledged gets good title if acted in good faith and without notice. The definition of “documents of title” is given in Sec 2(4) of the Sales of Goods Act 1930 which includes a bill of lading, dock warrant, warehouse keepers certificate, railway receipt, etc. Initially, when the Act was part of the Contract Act, “railway receipt” was not mentioned. But in 1930, when the provisions of sales of goods wee put into a separate Act, the term ‘railway receipt’ was added.
3] Person in possession under voidable contract (Sec 178A) – A pawnor who has goods pledged under voidable contract, but the contract is not repealed at the time of pledge, the pawnee gets the title to the goods if he acts in good faith and is unaware of pawnor’s defect of title. In simple words such a pledge is valid.
A fraud person pretended as a creditor. He influenced the plaintiff to give him a valuable ring in return for his cheque which turned out to be of no use. Before the fraud was revealed he pledged the ring with the defendants. The pledge was considered to be valid because it was made by a person possessing the thing under a voidable contract. [Philips v. Brooks Ltd 1919 2KB 243]
The fraud makes the transaction voidable. If a person takes certain goods under a pledge before the transaction is avoided the original owner cannot demand them to be returned.
4] Pledge by the pledgee or where pawnor has only a limited interest (Sec 179) – A person pledging who only has limited interest in the goods shall enter the pledge to the extent of that interest.
In case of a pledgee further pledging the goods, the pledge will be valid only to the ambit of his interest. His interest is the amount for which the goods were given as a security. If he pledges for amount more than that, the original pledger is entitled to his goods after paying the amount for which he had pledged the goods in the first place. [Firm Thakur Das v. Mathura Prasad AIR 1958 All 66]
5] Pledge by the seller who’s in possession after sale – Generally when a seller has sold something their ownership over the property is passed to the buyer. The seller has no more a right over those goods. But Section 30(1) of Sales of Goods Act says that the seller after selling the goods but still in possession of the goods or the documents of title of the goods sells or pledges them himself or through a mercantile agent to another person, the transferee will get a good title of he acts in good faith and without knowing anything about the previous sale. It will be a valid pledge.
6] Pledge by buyer in possession after sale – In normal situations when a buyer who has obtained the possession of goods but has not become an owner of it yet cannot deal with such goods. According to Sec 30(2) of the Sales of Goods Act, however, when a buyer obtains possession of the goods or the documents of title with the seller’s consent, the delivery or transfer by such a buyer himself or through his mercantile agent in the form of sale or pledge will give good title to the transferee if that person acts in good faith and without notice of a lein or other rights of the original seller regarding the goods.
These are the people and situations where a person other than the original possessor and owner of the goods, i. e. the pawnor, can enter into a pledge without such a transaction being invalid.
Pollock & Mulla on The Indian Contract Act, 1972 (15th Edition)
Contract & Specific Relief Act – Avtar Singh (Twelfth Edition)
The Indian Contract Act 1872 (Bare Act)
The Sales of Goods Act 1930 (Bare Act)
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