PLEDGE (Important case Laws)

Section 172 of Indian Contract Act

“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 “pawnor“. The bailee is called
“pawnee“.”

● Lallan Prasad v. Rahmat Ali & Anr.   1967 SCR (2) 233

● The Morvi Mercantile Bank Ltd. And Anr. v. Union of India   1965 SCR (3)
254   

● The Official Assignee of Madras v. The Mercantile Bank Of India Ltd.   (1935)

37 BOMLR 13

  
● Karnataka Pawn Brokers Association and Ors. v. State of Karnataka and
Ors.   
  
● Bank of Rajasthan v. Hajarimal Milap C. Surana     

1. Lallan Prasad v. Rahmat Ali and Anr.

Lallan Prasad v. Rahmat Ali & Anr.

1967 SCR (2) 233

FACTS:

The appellant advanced Rs. 20,000 to the first respondent against a promissory note and
a ‘receipt. The first respondent executed an agreement whereby he agreed to pledge as
security-for the debt aeroscapes, to deliver them to the appellant, and to keep them in
the appellant’s custody.

The appellant filed a suit on the promissory note claiming that the first respondent
failed to deliver the goods, that the agreement therefore did not ripen into a pledge, and
that consequently, he was entitled to recover the amount advanced by him. It was found
on the evidence that the goods were delivered to the appellant, and that he was it
pledgee thereof.

HELD:

Trial Court: favoured the appellants

High Court: favoured the respondents

SUPREME COURT

Issues

1. Whether the first respondent pledged aeroscraps  and delivered possession

thereof to the appellant ?
2. Whether the appellant was entitled to any relief when his case was that the first
respondent never delivered to him the said goods and the said agreement never
ripened into a pledge?
3. Whether the custody of the said goods after they were stored at the aforesaid
place was with A or R?

Contention(s)

Appellant- Even if the said delivery was made, s.176 entitles the appellants to maintain
the suit on the promissory note.

SHELAT, J.

1. (w.r.t.1stissue) The goods were under the control and custody of the appellant.
Some of the evidences apart from oral evidences are-
● The appellant showed indifference about the delivery.
● Considering the huge amount that had been advanced he could not
ordinarily be content merely with a promissory note.
● The appellant was to permit the first respondent to remove and sell part of
the said goods provided he paid to the appellant 3/4th of the sale proceeds.
●  The letter of surety from the second respondent itself stated that the goods
were pledged with the appellant, that the appellant was not allowing the
first respondent to remove them for sale.
●  Appellant continued to pay the salaries of the watchmen, though their
services were no longer required by him.
 ●  The first respondent removed part of the said goods but did so after paying
to the appellant.
●  Amrit Lal directly gave the cheque to the appellant w.r.t 100 maunds of
the said aeroscraps that he purchased from A.
2. (w.r.t.2nd issue) The appellant would not be entitled to a decree on the promissory
note and also retain the goods found to have been delivered to him and to be in
his Custody. So long, however, as the sale does not take place, the pawner is
entitled to redeem the goods on payment of the debit. Therefore, the right to sue
on the debt assumes that pawnee is in a position to redeliver the goods on
payment of the debt, and if by denying the pledge or otherwise, he has put
himself in a position whereby he is not able to redeliver the goods, he cannot
obtain a decree.

 LAW POINTS

Section 176 of the Indian Contract Act, 1872, deals with the rights of a pawnee and
provides that in case of default by the pawner the pawnee has (1) the right to sue upon
the debt and to retain the goods as collateral security, and (2) the right to-sell the goods
after reasonable notice of the intended sale to the pawner.

2. The Morvi Mercantile Bank Ltd. and Anr. v. Union of India

The Morvi Mercantile Bank Ltd. and Anr. v. Union of India

1965 AIR 1954

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

Contention (Railway): The endorsement of the railway receipt in favour of the Bank

did not constitute a pledge of the goods covered by the receipt and the Bank had no
right to sue for compensation.

Held

Subba Rao[2], Raghubar Dayal and Bachawat, J J

1. An owner of goods can make a valid pledge of them by transferring the railway
receipt representing the said goods.[3]The firm by endorsing the railway receipts
in favour of the Bank, for consideration, pledged the goods covered by the said
receipts, to the Bank, and the Bank being the pledgee could maintain the suit for
the recovery of the full value of consignment amounting to Rs. 35,500.
2. A pledge being a bailment of goods under s. 172 of the Contract Act the pledgee,
as a bailee will have the same remedies as the owner of the goods would have
against a third person for deprivation of the said goods or injury to them under s.
180 of the Act.

Mudholkar & Ramaswami JJ. (Dissenting)

1. There was no valid pledge of the consignments of goods represented by the

railway receipt in favour of the Bank and the Bank was not entitled to sue the
Railway for compensation for the loss of goods, relying upon the endorsements
of the railway receipts in its favour.
 2. After the passing of the Indian Contract (Amendment) Act, 1930, the legal
position with regard to the pledge of railway receipts, is exactly the same in
Indian Law as it is in English Law, and consequently, the owner of the goods
cannot pledge the goods represented by a railway receipt, by endorsing the
railway receipt, unless the railway Authorities were notified of the transfer, and
they agreed to hold the goods as bailee of the pledgee. Under the amended law a
valid pledge can no longer be made by every person “in possession” of goods. It
can only be made by a mercantile agent as provided in s. 178 of the Contract Act
(after amendment) or by a person who has obtained possession of goods under a
contract voidable under s. 19[4] or s. 19A of the Contract Act, as provided by s.
178 of the Act or by a seller or buyer in possession of goods, after sale as
provided in s. 30[5] of the Indian Sale of Goods Act.
3. Negotiability of such receipt is a creature of a statute or mercantile usage, not of
Judicial decisions apart from either. So, in the absence of any usage of trade or
any statutory provision to that effect, a railway receipt cannot be accorded the
benefits which flow from negotiability under the Negotiable Instruments Act, so
as to entitle the endorsee, as the holder for the time being of the document of
title, to sue the carrier-the railway authority-in his own name. In view of cl. (3) of
the notice printed at the back of the receipt that an endorsement made on the face
of the receipt by the consignee was only meant to indicate the person to whom
the consignee wished delivery of goods to be made if he himself did not attend to
take delivery, the Bank had no right to sue the Railway.

Since the language of s. 178[6]of the Contract Act is clear and explicit, if any hardship
and inconvenience is felt because of, such practice of treating the receipt as a symbol of
goods as not recognized, it is for Parliament to take appropriate steps to amend the law
and it is not for courts to legislate under the guise of interpretation.

[1] Wanted fullrecovery of Rs.35500

[2] Main Judge
[3] On a reasonable construction of s. 178 of the Contract Act, 1872, ss. 4 and 137 of
the Transfer of Property Act, 1882, and ss. 30 and 53 of the Indian Sale of Goods Act,
1930.
[4] When consent to an agreement is caused by coercion {The words “undue influence”
were rep.by Act 6 of 1899, s 3} fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused.
[5] Where a person, having sold goods, continues or is in possession of the goods or of
the documents of title to the goods, the delivery or transfer by that person or by a
mercantile agent acting for him, of the goods or documents of title under any sale, or
other disposition thereof to any person receiving the same in good faith and without
notice of the previous sale shall have the same effect as if the person making the
delivery or transfer were expressly authorised by the owner of the goods to make the
same.  (2) Where a person, having bought or agreed to buy goods, obtains, with the
consent of the seller, possession of the goods or the documents of title to the goods, the
delivery or transfer by that person or by a mercantile agent acting for him, of the goods
or documents of title under any sale, pledge or other disposition thereof to any person
receiving the same in good faith and without notice of any lien or other right of the
original seller in respect of the goods shall have effect as if such lien or right did not
exist.
[6] 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.

3. The Official Assignee of Madras v. The Mercantile Bank of India Ltd.

The Official Assignee of Madras v. The Mercantile Bank Of India Ltd. 

(1935) 37 BOMLR 130

FACTS:

The Official Assignee of Madras has been assigned with the property of the insolvents
CK Nayaran and sons. The insolvents had a big business of groundnuts. They were
purchased from up-country and transported through railways to the madras port. A
godown in the port was leased to the insolvents, but the signboard had the respondents’
name(R). R financed the business by advancing money against a consignment of goods.
The insolvents used to take loans against the consignments and R used to give them
regularly; the railway companies knew about this arrangement, but were never
specifically informed. The company was declared insolvent. After that some
consignment reached the port but the port auth. was not willing to release them until
their debts were paid off. The goods were then sold off by port auth. and the proceeds
were kept.

ISSUE: Whether a railway receipt is a document of title and thus the pledge of railway
receipts, the pledge of the goods?

HELD:
Civil Court: [Plaintiff (official assignee) WON; Defendant (port trust) LOST]

High Court: [Appellant (port trust) WON; Respondent (official assignee) LOST]

PRIVY COUNCIL (Wright J.) [Respondent (port trust) WON; Appellant (official

assignee) LOST]

1. Railway receipt is a document of title and pledging such documents is same as

pledging the goods themselves. This is backed up by S.178 of ICA, S.2 (4) of
SOGA.
2. The consideration that, no third party holding the goods or dealing with them
without notice of the respondents’ lien, would be affected by that lien, is
irrelevant to the equitable rights constituted as between the respondents and the
insolvents. Even if the documents of title are regarded as merely tokens of an
authority to receive possession, their transfer for value by way of security for
advances must at least raise an equity as between transferor and transferee
entitling the latter to restrain transferor from claiming delivery of the relative
goods without producing the receipts. If so, the appellant must be subject to the
same equity.
3. (obiter) Application of Hypothecation, which is a right in equity, could also have
helped R. Insolvents used to give letters of hypothecation to R, and it stated that
the R had the right to sell off the pledged goods to recover their debt. Thus the
letter crated an equitable right of R against the official assignee. (as the assignee
was in the shoes of the insolvent and thus did not have any greater right than the
insolvent).

LAW POINTS

In common law a mercantile agent can pledge the goods by pledging their documents of
title but not the owner. This is an anomalous position. Indian law uses the term
“person” and not “agent” to define who can pledge the goods. This includes both
owners and agents of the said goods. The concept that the pledging of the documents of
title is akin to pledging the goods has been established by the Indian Factors Act and
can also be construed by sec. 178 of ICA.

4. Bank of Rajasthan v. Hajarimal Milap C. Surana

Bank of Rajasthan v. Hajarimal Milap C. Surana

FACTS:

The respondents (R) (Hajarimal Milap C. Surana) were indebted to the appellants (A)
(Bank of Rajasthan) and had deposited precious stones as security. For the recovery of
the debt, a suit had been filed in the court by A. Pending the suit, the parties came to an
agreement, for the enforcement of which another suit was filed by A.

ISSUES:

1. Whether the second suit is maintainable since the first suit for recovery of the
debt was already pending?
2. Whether the precious stones constitute full and final settlement of the debt?
3. Whether the A’ claim to interest is justified.

HELD:

Debts Recovery Tribunal: favoured R

Rejected A’s claim on two grounds; (a) Bank had taken the precious stones as full and
final settlement (b) Suit was barred under order 23 rule 1(4) of the CPC.

Appellate Tribunal (favoured R)

Recognized the second suit i.e. did not consider it barred on the basis of CPC provisions
but dismissed the appeal maintaining that the bank had taken the precious stones in full
and final settlement of the debt.

SUPREME COURT (favoured A)

1. (Issue 1) The case was not for the recovery of the original debt but for the
enforcement of the agreement and as such not similar to the first suit.
2. (Issue 2) The precious stones did not constitute full and final settlement but were
merely security as expressly mentioned in clause 3 of the agreement.
3. (Issue 3)  A’s claim to interest was justified as clause 2 of the agreement revealed
that the bank had agreed to charge any further interest.
● Held: S.176 applicable; A was entitled to the recovery of the debt with interest.

LAW POINTS:
S.176 of Indian Contract Act: If the pawnor makes default in payment of the debt, or
performance, at the stipulated time of the promise, in respect of which the goods were
pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and
retain the goods pledged as a collateral security; or he may sell the thing pledged, on
giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less
than the amount due in respect of the debt or promise, the pawnor is still liable to pay
the balance. If the proceeds of the sale are greater than the amount so due, the pawnee
shall pay over the surplus to the pawnor.