Ordinarily, it is the owner of the goods, or any person authorized by him in that behalf, who can pledge the goods. If a servant has the custody of the goods, or a tenant gets the possession of a furnished house, the servant cannot pledge the goods, nor can a tenant pledge the furnishing materials in his possession. A person obtaining the goods fraudulently does not have any right to pledge them.
In Purshottam Das v. Union of India A.I.R. 1967 All. 549, A obtained the possession of certain goods from the railway on the basis of a forged railway receipt and then pledged the goods to B. It was held that the pledge by A was not valid, and B did not get any rights in the goods as a pledgee, and hence the railway authorities could recover the goods from B.
In the following exceptional cases, a person who is neither the owner, nor having the authority from the owner for pledging the goods, but having possession with the owner’s consent can make a pledge and confer rights on the pledgee. The exceptions recognized are as follows:
(1) Pledge by, a mercantile agent. (Section 178).
(2) Pledge by person in possession under voidable contract. (Section 178A).
(3) Pledge by a person with a limited interest. (Section 179).
(4) Pledge by seller in possession after sale. [Section 30 (1), Sale of Goods Act.]
(5) Pledge by buyer in possession after sale. [Section 30 (2), Sale of Goods Act.]
Also Read Pledge: Meaning, Nature and Essentials
Also Read Right of lien on the goods bailed
Also Read Five (5) Duties of Bailee
(1) Pledge by mercantile agent (Section 178)
A mercantile agent having possession of the goods with the consent of the owner but having no authority to pledge them can make a pledge provided the pledgee or pawnee is acting in good faith.This exception is similar to the one recognized by Proviso to Section 27, Sale of Goods Act, 1930. That provision relates to sale by a mercantile agent.
Section 178 is as under:
“178. Pledge by mercantile agent.-Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to make the same provided that the pawnee acts in good faith and has not, at the time of pledge, notice that the pawnor has no authority to pledge.
Explanation.– In this Section, the expressions “mercantile agent” and “documents of title” shall have the meaning assigned to them in the Indian Sale of Goods Act, 1930.”
For the application of this provision, the following essentials are to be satisfied:
(i) The pledge should be by a mercantile agent.
(ii) The mercantile agent should have obtained the possession of the goods or documents of title in his capacity as a mercantile agent and with the consent of the owner.
(iii) He must pledge the goods while acting in the ordinary course of his business of a mercantile agent.
(iv) The pledgee should have acted in good faith and without notice that such a mercantile agent did not have an authority to pledge.
(i) Pledge should be by mercantile agent
Here the expression “mercantile agent” has the same meaning as assigned to it by the Sale of Goods Act. According to Section 2 (9) of that Act, “mercantile agent” means a mercantile agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods.
(ii) Possession of mercantile agent with owner’s consent
Although the mercantile agent may not have been authorized to pledge the goods, yet he must have obtained the possession of the goods or the documents of title to the goods with the consent of the owner of those goods. Moreover, such possession must have been obtained in his capacity as a mercantile agent, and not in any other capacity.
If I send my watch to a mercantile agent with a view to knowing as to for what maximum amount it can be pledged, and the mercantile agent, who has not been authorized to pledge it does so, the pledge is valid. If, however, the mercantile agent has not got the possession as such agent but in a different capacity, a pledge made by him will not be a valid one. Thus, if I entrust some valuables to my neighbour for safe custody for sometime, and he happens to be a mercantile agent, a pledge made by him will not be covered by this provision.
It has been noted above that when a mercantile agent is in possession of the goods or documents of title with the consent of the owner, he can make a valid pledge of those goods, or of the documents of title representing the goods. The expression “document of title” has the same meaning as ascribed to it in the Sale of Goods Act, 1930.
According to Section 2(4) of that Act, “document of title to goods” includes a bill of lading, dock warrant, warehouse keeper’s certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.
(iii) Pledge by the mercantile agent in the ordinary course of the business
It is further necessary that the pledge must have been made by the mercantile agent while he is acting in the ordinary course of business of a mercantile agent. Thus, if a mercantile agent asks his friend to pledge the goods instead of himself doing the same, it will not be a valid pledge.
(iv) Pledgee acting in good faith
In order that the pledge by a mercantile agent can be considered to be valid, it is also necessary that the pledgee should have acted in good faith and without notice that such a mercantile agent did not have an authority to pledge.
The idea of considering a transaction to be a valid pledge when made by mercantile agent is that a mercantile agent’s business includes making of a pledge and the pledgee can presume that he may be having the owner’s authority to do so.
If the pledgee is aware of the fact that the mercantile agent does not have any such authority and he is not acting in good faith, he cannot take advantage of this provision.
(2) Pledge by person in possession under a voidable contract (Section 178-A)
Section 178-A recognizes another exception to the rule that either the owner or his duly authorized agent can pledge the goods. According to this exception, a person who has obtained the possession of the goods under a voidable contract, a pledge by him before the contract has been rescinded, to a pledgee acting in good faith and without notice of the pawnor’s defect in title, confers a good title on the pledgee.
Section 178-A reads as under :
“178-A. Pledge by person in possession under voidable contract. When the pawnor has obtained possession of the goods pledged by him under a contract voidable under Section 19 or Section 19-A but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of the title.”
A voidable contract is a valid contract until it has been rescinded and becomes void after the same has been rescinded. If the pawnor has obtained the possession of the goods under a voidable contract, but the contract has not yet been rescinded, the pledgee is capable of having a good title to such goods. Thus, if a person has obtained the possession of goods by fraud misrepresentation, coercion or undue influence, he could make a valid pledge of the goods, if the same is done before the contract has been rescinded. If the goods have been pledged before the contract has been rescinded, the rights of the person entitled to rescind the contract are affected thereby.
In Phillips v. Brooks Ltd. (1919) 2 K.B. 243, a person, North, went to the plaintiff’s shop and selected some jewellery. He falsely represented himself to be “Sir George Bullough”, a man of credit, and thereby persuaded the plaintiff to take the payment by cheque, and hand over the ring immediately. The cheque was subsequently dishonoured. Before the plaintiff could avoid the contract on the ground of fraud by North, North had pledged the ring to the defendant. The defendant had taken the ring in good faith and without any notice of the fact that the goods with North (pawnor) were under a voidable contract. It was held that the pledge was valid.
It may be noted that this exception is applicable if the pawnor is in possession of the goods under a voidable contract. If the pawnor has stolen the goods or has obtained possession under a void agreement, the pawnee will get no rights in that transaction.
It is further necessary that the pledgee must be acting in good faith and without any notice about the pawnor’s defect in title.
(3) Pledge by a person with a limited interest (Section 179)
A person having a limited interest in the goods, for instance, a pledgee, may pledge the goods. According to Section 179, where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. In such a case, the pawnee’s right is limited to the extent of the pawnor’s interest in the goods.
It is immaterial that the pawnee had no notice that the pawnor had only a limited interest (Hoare v. Parkeer, (1788) 2 T.R. 376). Thus, if, for example, A pledges the goods to B for Rs. 5,000 and B makes a sub-pledge of those goods for Rs. 8,000, A gets a right to take back those goods by paying Rs. 5,000 only.
(4) Pledge by seller in possession after sale [Section 30 (1), Sale of Goods Act]
After the seller has sold certain goods and the property (ownership) in respect of them has passed to the buyer, the seller has no right to deal with such goods. But according to Section 30 (1), Sale of Goods Act, if the seller after selling the goods, continues or is in possession of the goods or the documents of title in respect of the goods, then any sale or pledge or other disposition of the goods by him or a mercantile agent on his behalf, will convey a good title to the transferee, provided that the transferee is acting in good faith and without any notice of the previous sale.
(5) Pledge by buyer in possession after sale [Section 30 (2), Sale of Goods Act]
A buyer of the goods, who may have obtained the possession of the goods, but has not yet become the owner of those goods, cannot deal with such goods. According to Section 30 (2), Sale of Goods Act, however, if a buyer has obtained the possession of the goods or the documents of title with the consent of the seller, the delivery or transfer by such a buyer or a mercantile agent on his behalf, by way of sale, pledge or other disposition will convey a good title to the transferee, provided that the transferee is acting in good faith and without notice of any lien or other rights of the original seller in respect of those goods.