Pledge

Morvi Mercantile Bank Ltd. Union of India

FACTS:

A firm doing business in Bombay entrusted goods worth Rs.35500 with the
Railway for delivery in Delhi. The goods were consigned to “self” and the firm
endorsed the railway receipts to a Bank against an advance of Rs. 20,000
made by the Bank to the firm. The firm also executed a promissory note in
favour of the Bank for that amount. When the goods reached the destination,
the Bank refused to take delivery, on the ground that they were not the goods
consigned by the firm. The Bank, thereafter filed a suit for the recovery of the
value of the goods against the Railway.

ISSUE:

Can an owner of goods make a valid pledge of them by transferring the

railway receipt representing the said goods? What value such a document
carry for this purpose?

HELD:

Trial Court: Dismissed the suit of bank.

High Court: Allowed the appeal and decreed the claim for Rs. 20,000 on the
ground that as pledgee of the goods, the Bank suffered loss only to the extent
of the loss of its security.

Both the Bank[1] and the Railway appealed to SC.

SUPREME COURT

The matter went to Supreme Court on the issue that whether the railway
recent could be equated with “goods” for the purpose of constituting delivery
of goods. The majority opinion, in this case, held that the delivery of railway
receipt was same thing ads delivery of goods and held that pledge was valid
and pledgee was entitled to the amount of the loss.

Delivery of documents of title which would enable the pledgee to obtain

possession is equally effective to create a pledge.

Add definition part at start “Pawn or pledge is a bailment of personal property

as a security for some debt or engagement. A pawner is one who being liable
to an engagement gives to the person to whom he is liable a thing to be held
as security for payment of his debt or the fulfilment of his liability”.
Blundell Leigh v. Attenborough

The matter was discussed in the case of Blundell Leigh v. Attenborough[3],

where the plaintiff handed her jewellery to Miller to let her know what offer he
could she could give to him as a lending amount and in return, the jewellery
was kept as an advance, then Miller pledged the jewellery to the defendant
for a certain amount of money and handed some part of it to plaintiffs as the
security of the jewellery.

The plaintiff died and the legal heirs paid the amount she borrowed and sued
the defendant for the return of the jewellery. The contention of the plaintiff
was she gave the jewellery to Miller for examination only & she only becomes
the gratuitous bailee having no right to deal with it and there was no valid
pledge.

The court held that it was clear that when the plaintiff handed the goods to
one Miller, it was done to create that when the plaintiff handed the goods to
one Miller, it was done to create a valid pledge between him and her from the
moment when he handed her money by the way of loan which she was
prepared to accept. So the court held that the pledge was valid.

FACTS

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 ber jewellery.

The contention on her part was that when she gave the jewellery to miner 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 I 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

Bank of Bihar v. State of Bihar

In this particular case law, the

defendant had opened a cash credit account with plaintiff where they would
get

advances but have to pledge some goods to the bank. The bank had pledged

certain amount of sugar bags as security to the bank for a certain amount of

advance. However, during a raid made on the bank, some bags were
confiscated.

The bank alleged this raid was illegal and the bags should be returned. The
court

in this case held that the raid and the detention of goods were legal but that
the

bank still had a right over the goods.

The nature of the special property in the goods which is

acquired by the pledgee in Bank of Bihar v State of Bihar the Supreme

Court observed: "This special property or interest is to be distinguished

from the mere right of detention which the holder of a lien possesses, in

that it is transferable in the-^ense that a pawnee may assign or pledge his

special property or interest in the goods. Where judgment has been obtained

against the pawner of goods and execution has issued thereon, the sheriff
cannot seize the goods pawned unless he satisfies the claim of the pawnee.

On the bankruptcy of the pawner the pawnee is a secured creditor with

respect to things pledged."

Thus, so long as the pawnee's claim is not satisfied no other creditor of

the pawner has any right to take away the goods or their price. In that case,

the goods which were under the pledge of a bank were seized by the State of

Bihar. It was held that the seizure could not deprive the pledgee of his right

to realise the amount for which the goods were pledged and, therefore, the

State was bound to indemnify him up to the amount which would have been

realised from the goods. The court also pointed out that the Indian law in

this respect was not different from the English law.

the pawnee gets a special property in the goods pledged. The general
property remains in the pawner and wholly reverts to him on discharge of the
debt. The right to property vests in the pledgee only so far as is necessary to
secure the debt.

Sec 174 and 176 are to be used along with definition section.

Jaswant Rai Manilal Akhaney vs State of Bombay

If a time is stipulated for the payment of the debt, or performance of the

promise,for which the pledged is made, and the pawnor makes default in
payment of the debtor performance of the promise at the stipulated time, he
may redeem the goods pledged at any subsequent time before the actual sale
of them; but he must, in that case, pay, in addition, any expenses which have
arisen from his default.

Even after the time for payment of the debt or the performance of the promise
has expired, the pawnor is entitled to redeem the goods pledged until they
are actually sold; but he must then also pay any expenses which arise from
his default
It has been pointed out by the Supreme Court that "the special interest of the
pledgee comes to an end as soon as the debt for which the goods were
pledged is discharged. It is open to the pledger to redeem the pledge by full
payment of the amount for which the pledge had been made at any time if
there is no period fixed for redemption, or at any time after the fixed date and
the right continues until the thing pledged is lawfully sold". The right to
redeem clearly continues up to the time on the expiry of which the pawnee
has notified that the goods would be sold. But the right continues even
longer, for Section 177 clearly provides that the pawner may redeem the
goods at any subsequent time before the actual sale of them. "So long as the
sale does not take place the pawner is entitled to redeem the goods on
payment of the debt." In other words, the right to redeem is extinguished not
by the expiry of the specified in the notice of sale, but by the actual sale of the
goods.

AGENCY

Summan Singh v. N.C. Bank of New York

A sub-agent failed to insure the principal's goods, which were destroyed by

fire. But the principal could not recover against the sub-agent.

Similarly, in Summan Singh v N.C. Bank of New York

The plaintiff in a foreign country appointed the N.C. Bank to deliver a sum of
money to one Pritam Singh of Jullundur, whose address was given. The bank
instructed its Bombay branch accordingly. The Bombay branch appointed the
Punjab National Bank which delivered the money to a wrong person. The
plaintiff's action against either bank failed. The Punjab National Bank was
held not liable on the principle that a sub-agent is not liable to the principal
except when he is guilty of fraud or wilful wrong. The wrong delivery was due
only to negligence. The N.C. Bank had exempted itself from the
consequences of wrong delivery.

A sub-agent is, however, bound by all the duties of an ordinary agent. His
rights cannot go beyond those of the main agent and they have to be
exercised through the agent except where direct action would be necessary
to give business efficacy to the appointment of a sub-agent.

Hence, here the Plaintiff's action failed against either bank. Punjab national
bank was not liable on the principle that a sub-agent is not liable to the
principal except when he is found guilty of fraud or wilful wrong. The wrong
delivery was due to only negligence. The NC Bank exempted itself from the
consequence of the wrong delivery.

Calico Printers’ Assn v. Barclays Bank

There is no privity of contract between the payee/customer of a remitting

bank and the collecting bank arising from the processing of a cheque. Wright
J said: ‘To create privity it must be established not only that the principal
contemplated that a sub-agent would perform part of the contract, but also
that the principal authorised the agent to create privity of contract between
the principal and the sub-agent, which is a very different matter requiring
precise proof.’

there is no privity of contract between the principal and the sub-agent and,
therefore he cannot sue the sub-agent, except for fraud or willful wrong. Even
where fraud or willful wrong is established the principal has the choice to sue
either the agent or the sub-agent. But the agent exempt himself from such
liability.

The sub-agent is not directly liable to the principal, except for fraud and Wilful
wrong. A sub-agent failed to insure the principal's goods, which were
destroyed by fire. But the principal could not recover against the sub-agent.

Pannalal Jankidas v. Mohanlal

The first and the foremost duty of every agent is to carry out the mandate

of his principal. He should perform the work which he has been appointed

to do. Any failure in this respect would make the agent absolutely liable for

the principal's loss. Thus it has been held in a number of cases that: "The

rule of equity is, that if an order is sent by a principal to a factor to make an

insurance, and he charges his principal, as if it was made, if he never in fact

made that insurance, he is considered as the insurer himself.""^

In such cases the agentis held liable to the principal for the amount which

Would have been recovered if the goods had been insured."^ Thus, for
example, in Pannalal Jankidas v Mohanlal-}^^

A commission agent purchased goods for his principal and stored them
in a godown pending their despatch. The agent was under instruction to

insure them. He actually charged the premium for insurance, but failed

to insure the goods. The goods were lost in an explosion in the Bombay.

harbour.

The meaning of the expression "direct consequences" has been explained

by the Supreme Court in PannalalJankidas v Mohanlal

An agent, having been instructed to insure certain goods, failed to do

so. The goods were lost in an explosion at the docks. Even if the agent

had taken out a fire insurance policy in the usual form it would not have

covered a loss of this kind, as fire due to explosion would have been an

excepted peril. But the Bombay Government passed an ordinance under

which it undertook to pay half loss in cases of uninsured goods. Thus the

principal got only half of what he would have got if the goods had been

insured.

Facts

Plaintiffs, as agents of the defendants had stored the goods in Government

godowns, requiring permit to supply them to the defendants. In the
meanwhile, due to the fire in godown, the goods got burned up and plaintiffs
got compensation of 50% of damage caused in respect of the goods as they
were uninsured. However, plaintiffs sued defendants to be indemnified
against the rest 50% of damages caused to the goods while handling those as
latter’s agent. The defendants pleaded, and it was found as a fact that
plaintiffs had agreed to insure the goods and even charged defendants,
nevertheless omitted to insure the goods; they further pleaded that they were
entitled to set off or counter claim for the value of the goods destroyed as
damages caused to them by the neglect or breach of duty of the plaintiffs.

Issues: What damages are plaintiffs liable to pay to the defendants for failure
to insure the goods which were destroyed?
Contention of the Plaintiffs:

The intervention of Government in passing this Ordinance could not increase

or add to the liability of the appellants for the breach of contract or breach of
duty and therefore they were not liable to pay the compensation which would
have been receivable by the respondents if the goods had been insured.

Granting that they were in default and had committed a breach of duty in not
insuring the goods according to the instructions or the agreement,
defendants could not recover anything more from them than the nominal
damages for breach, because the policy of fire insurance, if taken out, would
not have given to the defendants money in respect to damage due to fire in
godown. For this purpose they relied on a statement Mayne on Damages as
follows:

“Therefore if an agent is ordered to procure a policy of insurance for his

principal and neglects to do it, and yet the policy, if procured, would not have
entitled the principal, in the events which have happened, to recover the loss
or damage, the agent may avail himself of that as a complete defence.”

In the alternative it was argued on their behalf that the intervention of

Government in passing this Ordinance broke the chain of causation and could
not increase or add to the liability of the appellants for the breach of contract
or breach of duty and therefore they were not liable to pay the compensation
which would have been receivable by the respondents if the goods had been
insured.

As per Majority:

“Where two parties have made a contract which one of them has broken the
damages which the other party ought to receive in respect of such breach of
contract should be such as may fairly and reasonably be considered either
arising naturally, i.e., according to the usual course of things, from such
breach of contract itself, or such as may reasonably be supposed to have
been in the contemplation of both parties at the time they made the contract,
as the probable result of the breach of it.” (HADLEY v. BAXENDALE)
Restitutio In Integrum: “the party who has suffered the loss should be placed
in the same position, as far as compensation in money can do it, as if the
party in breach had performed his contract or fulfilled his duty”

As full compensation under the Ordinance was payable on proof of the

existence of a fire insurance policy irrespective of the terms of the policy, and
the non-recovery of half the value of the goods from the Government under
the Ordinance was due to the absence of a fire insurance policy, the loss to
the defendants arose directly from the neglect or breach of duty of the
plaintiffs to insure the goods as they had been instructed and agreed to do;
intervention of the Ordinance did not break the chain of causation or make
the loss remote or indirect as the liability of plaintiffs arises not because of
the Ordinance but because of the breach of their duty in failing to insure,
which has taken place apart from the Ordinance and which is not affected by
the Ordinance.

Even when there would have been no such ordinance passed, defendants
could have filed a suit against the fire insurance policy contending that the
fire, and not the explosion, was the cause of destruction of goods such that
court would then have decided the liability and rights of the parties.
Therefore, contending that had the ordinance not there, only nominal
damages would have been given, cannot hold true.

Ordinance did not create any new liability but only quantified the damages
such that failure of plaintiffs to insure the goods must now be measured on
new basis; and the fact that it did not exist at the time of the explosion and
could not have been in the contemplation of the parties was irrelevant for
deciding the question of liability. Therefore, plaintiffs must put the defendants
in the same position as they would have been had the goods been insured.

Narandas Morardas Gajiwala v. S.P.A.M. Papammal

The Principal’s right to sue an agent for rendition of accounts is recognised

by the Contract Act, inasmuch as S. 213 thereto specifically provides that an
agent is bound to render proper accounts to his principle on demand. There
is no such provision in the Act which enables an agent to sue his principal for
accounts. The statute is not exhaustive and the right of the agent to sue the
principal for accounts is an equitable right arising under special
circumstances and is not a statutory right.

The Supreme Court in Narandas Morardas

Gajiwala v S.P.A.M. Papammal laid down that the provisions of the

Contract Act are not exhaustive in this regard and that the right of an agent

to sue the principal for accounts is an equitable right arising under special
circumstances.

The principle behind these rulings was affirmed by the Supreme Court in
Narandas Morardas Gajiwala v S.P.A.M. Papammal. The agent sued for an
account and the principal sought enforcement of promissory note given by
the agent to the principal. The court passed a decree on the promissory note
subject to set-off for amounts due from the principal to the agent.

In English law an agent has a right to have an account taken and where the
accounts are of a simple nature they can be taken in an ordinary action in a
Queen’s Bench Division. The legal position in India is not different. Though an
agent has no statutory right for an account from his principal, nevertheless
there may be special circumstances rendering it equitable that the Principal
should account to the agent. Such a case may arise where all the accounts
are in the possession of the Principal and the agent does not possess
accounts to enable him to determine his claims for commission against his
principal. The right of the agent may also arise in an exceptional
circumstance where his remuneration depends on the extent of dealings
which are not known to him or where he cannot be aware of the extent of the
amount due to him unless the accounts of his principal are gone into.

State of T.N. v. S. A Chettiar

Right of an agent to sue the principal for accounts is an equitable right arising
under special circumstances. One of those special circumstances is where
all the accounts

are in the possession of the principal. In a case before the Madras High

Court,an agent was running a mill which was taken over by the own

ers. The agent claimed that he lost his accounts in the process of take-over

and, therefore, claimed accounts from the principal. The court did not pro

vide him any relief because he was not able to give any proof of the loss of

his accounts.
BAILMENT