Contract law 2 Project

Submitted To: Submitted By:

Proff Ms Nishtha Agrawal Preet Patel (Sem 3)

Who can Pledge Judicial Interpretation

 Declaration

The Project on “Law of Contracts 2” is do hereby submitted to the Law faculty of United World School of
Law, Karnavati University. And it is purposely consecrated to the Respected Professor Nishtha Agrawal and
honorable Dean of the faculty Mr. Nachiketa Mittal. I have tried out best not to fall into lapses of the subject
matter and the language but errors the habit of creeping in inadvertently. I hope that you and my fellow
classmates, friends will help me in making the project more useful.
 Table of Contents

Declaration............................................................................................................................................................................ 2
1. Introduction to Pledge......................................................................................................................................................4
1.1Section 172 of Indian Contract Act: ‘Pledge’, ‘pawnor’ and ‘pawnee’..........................................................................4
1.2Definition of Pawnor....................................................................................................................................................4
1.3 Definition of Pawnee...................................................................................................................................................4
1.4 Subject Matter of a Pledge.........................................................................................................................................5
1.5 Core Ingredients of Pledge..........................................................................................................................................5
2. Pledge made by non-owner of the Goods.........................................................................................................................5
2.1 Introduction................................................................................................................................................................ 5
2.2 Section 178 of Indian Contract Act, 1872: Pledge by mercantile agent.......................................................................6
2.3 Exposition of the section.............................................................................................................................................6
2.4 Core Ingredients of this Rule.......................................................................................................................................7
3. Pledge by person in possession under voidable contract section.....................................................................................8
3.1 Introduction................................................................................................................................................................ 8
3.2 Section 178A of Indian Contract Act, 1872: Pledge by person in possession under voidable contract.......................9
3.3 Exposition of the Section.............................................................................................................................................9
4. Pledge by pledge...............................................................................................................................................................9
4.1 Introduction................................................................................................................................................................ 9
4.2 Section 179 of Indian Contract Act, 1872: Pledgee where pawnor has only a limited interest.................................10
4.3 Exposition of the Section...........................................................................................................................................10
5. Cases’ Study.................................................................................................................................................................... 10
5.1 Cases related to Sec 172............................................................................................................................................10
5.2 Case related to Sec. 178............................................................................................................................................12
5.3 Cases related to Sec. 178A........................................................................................................................................12
5.4 Cases related to Sec. 179...........................................................................................................................................13
Conclusion........................................................................................................................................................................... 14
Bibliography........................................................................................................................................................................ 15
 1. Introduction to Pledge

Pledge is a special kind of bailment in which a person transfers the possession of his property to another for
securing the loan taken from the other. It only differs from bailment in the matter of purpose. When the purpose
of the bailment is to secure a loan or a promise, it is called a pledge.

It was observed that Pawn or pledge is a bailment of personal property as a security for some debt or
engagement.1

1.1Section 172 of Indian Contract Act: ‘Pledge’, ‘pawnor’ and ‘pawnee’.

The sections reads, the bailment of goods as security for payment of a debt or performance of a promise is
called ‘pledge’. The bailor is in this case called the ‘pawnor’. The bailee is called ‘pawnee’.

1.2Definition of Pawnor

One who, being liable to an engagement, gives to the person to whom he is liable, a thing to be held as a
security for the payment of his debt or the fulfilment of his liability. The rights of the pawnor are to redeem the
pledge, at any time before it is sold.

His obligations are to warrant the title of the pledge, and to redeem it at the time agreed upon.

1.3 Definition of Pawnee

He who receives a pawn or pledge. The rights of the Pawnee are to have the exclusive possession of the pawn;
to use it, when it is for the advantage of the pawner, but, in such case, when he makes a profit out of it, he must
account for the same.
The Pawnee is bound to take reasonable care, of the pledge, and to return it to the, pawnor, when the obligation
of the latter has been performed. The Pawnee has two remedies to enforce his claim; the first, to sell the pawn,
after having given due notice; and, secondly, by action.

1
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967
1.4 Subject Matter of a Pledge

Any Kinds of goods, documents or valuable things of a personal nature may be pledged. Shares,2 Government
promissory notes may also be the subject matter of a pledge. There cannot be a pledge of that which cannot be
the subject matter of the sale, therefore money can’t be pledged.

1.5 Core Ingredients of Pledge

The following are essential ingredients of a pledge -

i) Delivery of possession - As in bailment, the delivery of possession is essential in a pledge. Thus, in
Case3, a film producer borrowed a sum of money from a financier and agreed to deliver the final
prints of the film when ready. This was held not to be a pledge because there was no delivery of
possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has the
possession of the property agrees to hold it on behalf of the pledgee upon direction of the pledger.

a) Hypothecation - It is also possible to let the pawner keep the physical goods even though the legal
possession is transferred to the pawner. Thus, in Case 4, a cinema hall equipment was pledged to the bank
but the bank allowed the hall owner to keep the equipment to show the movies. The hall owner then sold
the equipment to another party. It was held that the sale was subject to the pledge.

2. Pledge made by non-owner of the Goods

2.1 Introduction

2
Arjun Prasad v. Central Bank of India, AIR 1956 Pat 32.
3
Revenue Authority vs Sudarsanam Pictures, AIR 1968.
4
Bank of Chittor vs Narsimbulu AIR 1966 .
Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. Thus in Case,5 it
was held that a pledge made by the servant who was holding the goods of his master was not valid. Similarly, in
another case6, a railway company delivered goods on a forged railway receipt. The goods were then pledged
with the defendants. In a suit by the railways to recover the goods it was held that the pledge was invalid.

This is important to protect the interest of the owners. However, in many situations it is equally important to
allow trade and commerce and so there are some situations where a person having the possession of the goods
by owners consent, is entitled to pledge those goods even without owner’s consent for the pledge. These
situations are discussed by various provisions of Indian Contract Act, 1872.

2.2 Section 1787 of Indian Contract Act, 1872: Pledge by mercantile agent.

The section reads, Where a mercantile agent is, with the consent of the owner, in possession of goods or the
document 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 authorised 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 the pledge notice that the pawnor
has not authority to pledge.

Explanation.--In this section, the expressions ‘mercantile agent’ and ‘documents of title’ shall have the
meanings assigned to them in the Indian Sale of Goods Act, 1930 (3 of 1930).]

The Section is the Counterpart of the second para of section 27 of the Sale of Goods Act, 1930, which relates to
sale.

2.3 Exposition of the section

Pledge by Mercantile Agent.—By Sec.2 of the Sales of Goods Act, 1930, Sub Sec. (9), “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 the goods.

The old section 178 was as follows: “A person who is in possession of any goods, or of any bill of lading, dock
warrant, warehouse keeper's certificate or warrant or order for delivery, or any other document of title to goods
may make a valid pledge of such goods or document:

5
Biddomoy Dabee v/s Sittaram, ILR 4 Cal 497
6
Purushottam Das v/s Union of India AIR 1967
7
Sec 178 and 178A substituted by Sec.2 of the Indian Contract (Amendment) Act, 1930 (4 of 1930).
Provided that the Pawnee acts in good faith, and under circumstances which are hot such as to raise a
reasonable presumption that the pawnor is acting improperly:

Provided also that such goods or documents have not been obtained from the lawful owner, or from any person in
lawful custody of them by means of an offence or fraud.

The Language of old sec. 178 was very wide and it appeared capable of giving effect to pledges made by
persons who were in temporary possession of goods or documents of title without having either the real or
apparent authority of mercantile agents, and indeed without being agents of any kind. The Courts endeavoured
to keep the results within tolerable bounds by putting a strict construction on a word, “possession” but this was
only a partial remedy.

2.4 Core Ingredients of this Rule

Antecedent debt.—The present section seems to protect a pledge for an antecedent debt as well as a pledge for
an advance made specifically upon it.

Possession with Owner’s Consent.—As the Supreme Court in Morvi Mercantile v. Union of India8 observed,
if a mercantile agent is with the consent of the owner in possession of the goods or document of title to the
goods, the pledge made by him will be deemed to have been expressly authorized by the owner of the goods
and the fiction of authorization indicate that he is doing what the owner could have done.

Good faith.—to validate a pledge by a mercantile agent the pledgee must have acted in good faith and must not
have at the time of the pledge notice that the pawnor has no authority to pledge the goods. The onus of proving
both these facts upon the person disputing the validity of the pledge.9

Documents of title to goods.—As to what this term means see Section 2, Sub-Section (4), of the Sales of the Goods
Act, 1930, below. Share Certificates are not document of title to goods within the meaning of the section, 10 nor
cash receipts given in place of delivery orders.11

The Supreme Court referred with approval to the Judgment of BACHAWAT J In commissioners for the part of
Calcutta v/s General Trading corp. ltd.12 It was stated:

8
AIR 1965 SC 1954
9
Stadium Finance v. Robbins, (1962) 2 QB 664 (673).
10
Lalit Mohan v. Haridas, (1916) 24 Cal LJ 335.
11
Kemp v. Falk, (1882) 7 App Cas 573, at pg. 585.
12
AIR 1964 cal 290
“The law on the subject, as we conceive it, may be stated thus, an owner of goods can make a valid pledge of
them by transferring the railway receipt representing the said goods. The general rule is expressed by the maxim
nemo dat quod non habet, i.e., no one can convey a better title than what he had. To this maxim, to facilitate
mercantile transactions, The Indian law has drafted some exceptions, in favour of bona fide pledges by transfer
of documents of title from persons, Whether Owners of goods or their mercantile agents who do not possess the
full bundle of rights of ownership at the time the pledges are made. To confer a right to documents of title
relating to goods on owners of the goods with defects in title and meanwhile agents and to deny it to the full
owners thereof is to introduce an incongruity into the Act by construction. On the other hand, the real intention
of the legislature will be carried out if the said right is conceded to the full owner of goods and extended by
construction to owners with defect in title or their mercantile agents.

Revocation of authority of mercantile agent.—A Pledge by a mercantile agent, though made after the
revocation of his authority, is valid, provided the pledgee has not at the time of the pledge notice of such
revocation.13

Notice.—the term “notice” in this section includes both express and constructive notice.

In the Course of Business.—Goods should have been entrusted to the agent in his capacity as a mercantile
agent and he should be in possession in that capacity. If the goods are entrusted to him in a different capacity, it
is not open to a third party who takes a pledge from him to say that they were in his possession as a mercantile
agent and therefore, he had the power to create a pledge.

3. Pledge by person in possession under voidable contract section

3.1 Introduction

When the goods are obtained by a person under a contract that is voidable under a contract that is voidable
under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge.

In Phillips v/s Brroks ltd 1919, a fraudulent person pretending to be a man of credit induced the plaintiff to
give him a valuable ring in return for his cheque which proved worthless. Before the fraud could be discovered,
he pledged the ring with the defendants. The pledge was held to be valid.

13
Moody v. Pallmall, (1917) 22 Times LR 306.
3.2 Section 178A14 of Indian Contract Act, 1872: 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 19A, 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 title.

3.3 Exposition of the Section

A Person may obtain possession of goods under a contract which is voidable at the option of the lawful owner
on the ground of fraud, misrepresentation, or corceion (Sec.19), or on the ground of undue influence (Sec.19A).
Possession so obtain is not by free consent as defined in section 14 of the Act.

It is the nevertheless possession by consent, and the person in possession may take a valid pledge of the goods,
provided the contract has not been rescinded at the time of the pledge.
There is in such case, a de facto contract, though voidable on the ground of fraud and the like. It is however,
different if there is no real consent, as where goods have been obtained by the means of the theft as defined in
Sec. 378 of the Indian Penal Code, 1860. A Thief has no title and give none.

Pledge by co-owner in Possession.—One of several joint owners of goods in soul possession thereof with the
consent of the rest may make a valid pledge of the goods.15 Compare with Sec. 28 of Sale of Goods Act, 1930.

4. Pledge by pledge

4.1 Introduction

Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that
interest.
In firm Thakur das v/s Mathur Prasad16, held that Section 179, which is the relevant provision says that
where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that
interest. Thus, when a pledgee further pledges the goods the pledge will be valid only to the extent of his
interest and his interest is the amount for which the goods have been given to him as a security. If he pledges for
14
Substituted by Act 4 of 1930, S.2.
15
Shadiram v. Mahtab Chand, (1895) Punj REC No.1
16
AIR 1958 ALL 66 SC
a larger amount, the original pledger will still be entitled to his goods on paying the amount for which he
himself pledged the goods.

4.2 Section 179 of Indian Contract Act, 1872: Pledgee where pawnor has only a limited interest.

The Section reads, where a person pledges goods in which he has only a limited interest, the pledge is valid to
the extent of that interest.

4.3 Exposition of the Section

This must be taken as subject to the operation of the forgoing Section. In those cases, where a pledge which
otherwise would not be valid is made valid by Ss.178 and 178A, it doesn’t matter whether the pawnor has any
interest of his own or not. This present section applies to other cases, Pawnor has possession and some interest,
but not the whole interest, in the goods; and where it applies, it is immaterial that the pawnee had no notice of
pawnor’s limited interest.17

The pawnor on satisfying his debt to the Pawnee is entitled to the return of his goods even if the sub pledge is
for a larger amount.18

5. Cases’ Study

5.1 Cases related to Sec 172

Reeves v. Capper 132 ER 1057

FACTS:

The captain of a ship pledged his chronometer with the ship owner who allowed him to use the instrument for
the purpose of voyage. The captain pledged it over again with another person.

ISSUE:

17
Hoare v. Parker, (1788) 2 TR 376.
18
Firm thakurdas v. Mathura Prasad, (58) AA 66; Belgum pioneer urban co credit bank v. Satyapromoda, AIR 1962 Mays 48
The question is whether the first pledged was valid or Not?

RULING:

The court held that it was. In the same way a constructive pledge comes into existence as soon as the pawner,
without actual delivering the goods, agrees to hold them for the pawnee and promises to deliver them on
demand. The court held that the sale was subject to pledge. “There was a constructive delivery or delivery by
attornment to the bank”.

Blundell Leigh v/s Attenborough ALL ER Rep 525 (CA)

FACT:

On November 1, 1919, the plaintiff handed her jewellery to one Miller to value it and let her know what offer
he could make as to lending her money; he was to keep the jewellery as security if he made the advance. On the
same day Miller pledged the jewellery with the defendants, a pawnbroker, who in good faith advanced £1000
on it. On November 5, Miller advanced £500 to the plaintiff on the security of the ring. Miller died. The
plaintiff came to know the facts. She paid the amount she had borrowed and sued the defendant for return of her
jewellery.
The contention on her part was that when she gave the jewellery to miller for examination, he only became a
gratuitous bailee having no right to deal with it. There was no valid pledge then. Subsequently, When he
advanced the money, no valid pledge could arise as he had already parted with the possession of the goods.

ISSUE:

Is there any valid pledge existed?

RULING:

The court held that the pledge was valid. Delivery made on November 1 was a good delivery for the purpose of
creating a pledge, whenever that pledge was created. “It is clear that the plaintiff intended, when she handed
over the jewellery to Miller, to create a valid pledge as between him and her from the moment when he handed
her the money by way of loan which she was prepared to accept.
5.2 Case related to Sec. 178

Purushottam Das v/s Union of India AIR 1967,

a railway company delivered goods on a forged railway receipt. The goods were then pledged with the
defendants. In a suit by the railways to recover the goods it was held that the pledge was invalid.

This is important to protect the interest of the owners. However, in many situations it is equally important to
allow trade and commerce and so there are some situations where a person having the possession of the goods
by owners consent, is entitled to pledge those goods even without owner’s consent for the pledge. These
situations are discussed by various provisions of Indian Contract Act, 1872.

5.3 Cases related to Sec. 178A

Pearson v/s Rose & young ltd (1950) 2 ALL ER 1027

DENNING LJ observed and explained the principle, “The pledge was held to be valid, it being made by a
person in possession under a voidable contract”. The effect of fraud is to render the transaction voidable and not
void and if, therefore, an innocent person has taken the goods under a pledged before the transaction is avoided,
the true owner cannot claim them back. According to him, “For instance, if a mercantile agent should induce the
owner to pass the property to him by some false pretence as by giving him a worthless cheque, or should induce
the owner to entrust property to him for display purposes, by falsely pretending that he was in a large way of
business when he was not, then the owner cannot claim the goods back from an innocent purchaser or pledgee.
But if the contract under which possession is obtained is void, the person in possession cannot create a valid
pledge.

Central National Bank v/s United Industrial Bank Ltd. 1954 SCR 391

B.K. MUKERJEA J explains the principle: “The position, however, is entirely different if the fraud committed
is of such a character as would prevent there being consent at all on the part of the owner to give possession of
the goods to a particular person. Thus A might obtain possession of the goods from the owner by falsely
representing himself to be B. In such cases the owner can never have have consented to the possession of goods
by A; the so-called consent being not a real consent is a totally void thing in law … The position, therefore, is
that when the transaction of possession is voidable merely by reason of its being induced by fraud, which can
be, rescinded at the option of the owner, the consent which follows false representation is a sufficient consent.
But there the fraud induced an error regarding the identity of the person to whom or the property in respect of
which possession was given, the whole thing is void and there is no consent in the sense of an agreement
between two persons on the same thing in the same sense”.

The contract must not have been rescinded at the time of the pledge. The usual method of rescinding a
contract is by giving notice to the other party of the intention to rescind.

5.4 Cases related to Sec. 179

Jaswantrai Manilal Akhaney v/s State of Bombay AIR 1956 SC 575

FACTS:

A Cooperative bank had an overdraft account with the Exchange bank, which was secured by the deposit of
certain securities. After many dealings and adjustment and the last position of the account was that the overdraft
limit was set at Rs. 66,150/- and the securities under the pledge of the bank were worth Rs. 75,000/-. The
cooperative bank did not, however, make use of this over draft facility for a very long time and when it
attempted to sue the Exchange bank it was itself in financial straits and had pledged the securities first with the
Canara Bank and then having redeemed them, pledged them again with the private financial.

ISSUE:
Can pledgee who had known overdraft for a very long time had such interest which would enable it to sub
pledge to a third party.

RULLING:

The SC held that the pledge was not valid. If the cooperative bank had in fact operated the overdraft account
and sums within the limit, the Exchange Bank would have had pro tanto an interest in these securities and might
then have been entitled to pledge the securities with a third party. But so long as there was no overdraft by the
pleasure, the pledgee had known such interest as would have enable it to sub pledge to a third party.

Appa Rao v/s Salem Motors & Salem radios & Electricals AIR 1955 MAD. 505.

FACTS:
A, a mercantile agent, pledged motor vehicles with B. One of the vehicles was left with A for display. This
vehicle was improperly sold by A without B’s knowledge. When on A’s failure to repay the loan, B demanded
return of the vehicle, A sent to him a vehicle belonging to C which was also with him for display. B caused the
vehicle to be sold in auction and it was purchased by D. C filed a suit challenging the sale as mala fide and
invalid. During the pendency of this suit B was informed by C by a letter that the vehicle originally pledged
with him was sold away and that he was the owner of the vehicle which was sold by B. The suit was settled out
of court and the terms of the settlement were to annul the sale held by public auction under which D became the
purchaser, revive the pledge and security and finally in default of redemption within a time limit vesting the
vehicle in B.

RULING:

Held, that as at the time when B was said to have become a pledgee once again under the compromise he had
full notice of C’s title by reason of the contents of C’s letter he could not invoke the provisions contained in s.
178 for sustaining the pledge over C’s vehicle and that B was guilty of conversion of C’s vehicle by unlawfully
effecting sale of it and appropriating the proceeds thereof.
 Conclusion

Pledge is a special kind of bailment in which a person transfers the possession of his property to another for
securing the loan taken from the other. It only differs from bailment in the matter of purpose. When the purpose
of the bailment is to secure a loan or a promise, it is called a pledge.

It was observed that Pawn or pledge is a bailment of personal property as a security for some debt or
engagement. This project tells about the “Whether the goods can be pledge by the non-owner of the goods”.
Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. Thus, In
Biddomoy Babee v/s sittaram, It was held that a pledge made by the servant who was holding the goods of his
master was not valid. This is important to protect the interest of the owners. Ordinarily goods may be pledged
by the owner or by any person with the consent of the owner. Thus in Case, it was held that a pledge made by
the servant who was holding the goods of his master was not valid. This is important to protect the interest of
the owners. However, in many situations it is equally important to allow trade and commerce and so there are
some situations where a person having the possession of the goods by owners consent, is entitled to pledge
those goods even without owner’s consent for the pledge.

. In Sec. 178 “Mercantile agent” has the same meaning as is assigned to it by Indian Sale goods Act, 1930.
Mercantile agent means an 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.

In Sec. 178A When the goods are obtained by a person under a contract that is voidable under a contract that is
voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the
pledge.

Sec. 179 provide a pledge made by pledgee. Pledgee where pawner has only a limited interest, the pledge is
valid to the extent of that interest. In Jaswantrai Manilal Akhaney v/s State of Bombay AIR 1956 SC 575,
The SC held that the pledge was not valid. If the cooperative bank had in fact operated the overdraft account
and sums within the limit, the Exchange Bank would have had pro tanto an interest in these securities and might
then have been entitled to pledge the securities with a third party. But so long as there was no overdraft by the
pleasure, the pledgee had known such interest as would have enable it to sub pledge to a third party.

Bibliography
Academic Books:

 Bhadbhade Nilima, Pollock & Mulla Butterworths’s Indian Contract and Specific Relief Act

 Singh Avatar EBC’s Contract and Specific Relief (11th edition)

 Kapoor S.K.’s Indian Contract Specific relief

 Bhangia R.K.’s indian contract Act specific Relief

 Carnel, P.V Butterworth’s U.K Short Note on Contract of Bailment and Pledge (20th Gold Edition)

Online Research

 Manupatra.com

 Westlaw.com

 LexisNexisIndia.in

 Shareyouressay.com

 Judis.nic

 Indiankanoon.org