BAILMENT AND PLEDGE 89 If the goods have already been found voluntarily, and then the owner of the goods promises to compensate the finder for his past voluntary services, the contract is binding and the owner is bound to pay the promised amount! For example, A finds B’s purse and gives it to him. B promises to pay A Rs. 50. This is a contract, and B is bound to pay the amount? (iii) Right to sell the goods found (Section 169) The finder of the goods has also been given the right to sell the goods found by him under certain circumstance mentioned in Section 169. Such a right is available to the finder of the lost goods when the following conditions are satisfied : (a) If the owner of the goods cannot with reasonable diligence be found; or if he refuses, upon demand, to pay the lawful charges of the finder; and (b) When the thing is in danger of perishing or lesing the greater part of its value; or when the lawful charges of the finder in respect of the thing found, amount to two-thirds of its value. i PLEDGE PLEDGE—Defined (Section 172) Section 172 of the Indian Contract Act, 1872, defines "pledge", "Pawnee" or "Pledge" as follows : “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 baile is called the ‘pawnee’." ‘Pledge’ or ‘Pawn’ is a kind of bailment of goods with a special purpose. The goods pledged or pawned serve as security for the payment of a debt or performance of a promise. The person pledging the goods is known as the ‘Pawnor’ and the person with whom the goods are pledged is known as the ‘Pawnee’ or ‘Pledgee’. The bailor is in this case called the "pawnor". The bailee is called the "pawnee”. The term "pledge" literally means "thing given over as security"? In the ordinary sense of the term, a pledge is a case in which money is advanced on goods or chattels which are given into 1 See Setion 250). 2. Illustration (c) to Section 25. 3. New Gem Dictionary, 1965, 391.90 CONTRACT-II the possession of the person who advances money on them, As per Black’s Law Dictionary’ : "Pledge" is a formal promise or undertakin; 7 the ct providing something as security for a debt or obligation. bailment or other deposit of personal property to a red a as security for debt or obligation. tor Ray Andrews Brown describs "pledege" in the followin A pledge is a bailment of personal property to secure obligation of the bailor. If the purpose of the transaction jg t transfer property for security only, then the Courts will hold the transaction a pledge, even though in form it may be sale or other out-and out transfer? a The term “pledge” has also been described as "a bailment o movable property by way of security. Possession is given and the transaction involves a transfer of special property in the subject of the security" It is further explained! that : A pawnee has no right of foreclosure since he never had absolute ownership at law and his equitable-title cannot exceed what is specifically granted by law. i In a “pledge”, it is held® : the pledgee is in possession of and has a special Property in the goods which he is entitled to detain to secure repayment, — Explaining the Common Law concept of "pledge", a three-Judge Bench of the Supreme Court in Maharashtra State Co-op. Bank Ltd. v. Assistant PF. Commissioner; said : sl “a pawn or a pledge is a bailment of personal property a security for some debt or engagement. A pawner is said to be one who being liable to engagement gives to the person to whom he is liable a thi to be held as security for payment of his debt or fulfilment of his liability. The Court, further, said that, the two ingredients of a pawn a pledge are’ : '& Words, i 1. Black’s Law Dictionary, 8th Edn., quoted in Maharashtra State Co-op Ltd. v. Assistant PF. Commissioner, A.LR. 2010 S.C. 868. . Linv of Personal Property, Ul, 1936, quoted ibid (Emphasis added). . Mulla’s Treaties on the Transfer of Property, quoted ibid.. Ibid. Ibid. ALR. 2010 S.C. 868. Ibid. NOR wNcere rete eee errr ee eee ee errr eee reer ree eee eee eee BAILMENT AND PLEDGE 91 (1) that, it is essential to the contract of pawn that the property pledged should be actually or constructively delivered to the pawnee; and (2) a pawnee has only a special property in the pledged (goods) but the general property in the pledge therein remains in the pawner and wholly reverts to him on discharge of the debt. A pawn, therefore, is a security where, by contract a deposit of goods in made as security for a debt.! The right to property, the Court explained/ vests in the pledgee only so far as is necessary to secure the debt. In this sense a pawn or pledge is said to be— an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed.’ It has been held that there is no difference between Common Law of England and the law with regard to the pledge, as codified in Sections 172 to 176 of the Indian Contract Act, 1872.4 Section 172 defines "pledge" in terms of "bailment". It is, thus, basically a “bailment”. But, in pledge, bailment is executed for a special purpose, i.e., as security for a debt or performance of a promise.> A pledge is, thus, only a special kind of bailment and the main basis of distinction is the object of the contract. It is— —to provide a security for a‘loan or to the fulfilment of an obligation.® - Bailment and Pledge distinguished 1. Bailment is a wider term. It includes pledge. Pledge is a kind of bailment, where the goods are delivered by one person to another as security for payment of a debt or performance of a promise. It means that if the goods serve as security, it is pledge, whereas when the goods are given for some other purpose, for example, a watch is given for repairs, it is bailment (other than pledge). 2. In case of bailment, if the bailor does not pay the lawful charges due to the bailee in respect of services, etc. rendered by the Ibid. Ibid. Ibid. |. Maharashtra State Coop. Bank Ltd. v. Assistant PF. Commissioner, A.LR. 2010 SC. 68, reiterating and relying on Lallan Prasad v. Rahmat Ali, A.1LR. 1967 S.C. 1322. New Gem Dictionary, 1965, 391. . Lallan Prasad v. Rahmat Ali, A.LR. 1967 S.C.1322, per Shelat J. aeE nl as1, Quoted in Bank of Bihar v. State of Bihar, ALR. 1971 SC. 1210, 3rd 92 CONTRACT-I bailee, the bailee can exercise lien over the goods bailed, ig retain them until the necessary payment is made to him, 1,’ he pledge, the pledgee has not only a right to retain the 00ds se until the repayment of debt or performance of the Promise Pie in the event of default by the pawnor in payment of the a performance of the promise at the stipulated time, he may a t the goods, after giving a due notice of sale to the Pawnor, a Nature of Pledge According to Halsbury’s Laws of England,’ "pawn" has } described as : a security whereby contract, a deposit of goods is ma security for a debt and the right to the Property vests | pledgee so far as is necessary to secure the debt; in this sense it is intermediate between a simple lien an mortgage which wholly passed the property in the thin, conveyed. : The pawnee has a special property or special interest in thing pledged, while the general property therein continues in owner. That special property or interest exists so that, the pawn can compel payment of the debt or can sell the goods when right to do so arises. This special property or interest is to be distinguished from mere right of detention which the holder of a lien PoOssesses, in ¢] it is transferable in the sense that a pawnee may assign or ple his special property or interest in the goods. Where judgment has been obtained against the pawnor goods and execution has issued thereon, the sheriff cannot seize goods pawned unless he satisfied the claim of the pawnee. On the bankruptcy of the pawnor, the pawnee is a secui creditor in the bankruptcy with respect to things pledged before date of the receiving order and within notice of the prior availa act of bankruptcy. Essentials of pledge In order to constitute a valid pledge, the following requiremet must be satisfied : (1) There should be bailment of goods, ie,, the delivery goods from one person to another. rl (2) The purpose of such bailment is to make the goods bal Vol. 29, 222,eee BAILMENT AND PLEDGE “93 serve as security for the payment of a debt, or performance of a promise. () Delivery of goods since pledge is a bailment, the delivery of the goods from the awnor to the pawnee is a must.’ There must be delivery of the oods, i.e., the transfer of possession from one person to another. Fre delivery may, however, be either actual or constructive. Mere agreement to transfer possession in future is not enough to constitute a pledge. In Revenue Authority v. Sudarsanam Pictures? it has been held that an agreement wherein, the producer of a film agrees to deliver final prints of the film under production, when the same are ready, to a financier-distributor in return for the finance provided by the latter, is not pledge because there is no delivery of the goods. Delivery of the goods may be either actual or constructive. Doing of something which has the effect of putting the pawnee OF his agent in.possession of the goods may be treated as delivery? Handing over the key of a godown in which the goods are lying, or the transfer of a document of title, like a bill of lading or a railway receipt, which represents particular goods amounts to the delivery of goods.' A bill of lading or a railway receipt are documents of title but not a way-bill issued by a public carrier, and, therefore, transfer of a way-bill in favour of a bank does not create a valid pledge.’ . In the case of Morvi Mercantile Bank v. Union of India,” the delivery of a railway receipt was considered to be enough to constitute delivery of the goods represented by that railway receipt, for the purpose of pledge. In this case, a business firm consigned certain goods through railway for being carried from Bombay to Okhla, near Delhi, and to be delivered to ‘self’. The firm borrowed a sum of Rs. 20,000 from the appellant bank and executed a promissory note in favour of the bank and also endorsed the railway receipt representing the goods as stated above, to constitute the railway receipt as a security for the loan. The goods were lost in transit. The appellant bank brought an action against the railway as the pledgee of the goods, which were lost during transit. The . See Section 148. . ALR. 1968 Mad. 319. 3. See Section 33, Sale of Goods Act, 1930. Morvi Mercantile Bank Ltd. v. Union of India, A.LR. 1965 S.C. 1954. . See Section 2(4), Sale of Goods Act, 1930. Canara Industrial and Banking Syndicate v. Ramchandra, A.LR. 1968 Mysore 133, 7, ALR. 1965 S.C. 1954. Sake94 CONTRACT-II question before the Supreme Court was whether by the trans the railway receipt, the possession of the goods had been transfer ey to the bank. The respondent contended that the endorsement ore Tailway receipt does not amount to pledge of the goods, and thy best means the pledge of the railway receipt and not the ot a. Tepresented by the railway receipt. Subbarao, J. gave the Maju’ decision (Ramaswami and Mudholkar JJ.) dissented ang held according to the prevailing Indian law, railway receipt is a doc hat of title, and, therefore, delivery of the railway receipt means of the goods represented by the railway receipt. The transaction held to be a valid pledge and as such the bank was held entitley a claim against the railway for the value of the Joan given agai the security of the railway receipt. “| It has been noted above that the transfer of a document of fit leans transfer of goods represented by the document of title, A m that, if the goods are in the possession of a third Person, thers ‘8 deemed to be no delivery of the goods unless and until the thing person acknowledges to the transferee that he holds the goods behalf of the transferee’ After such an acknowledgment, the third person becomes the transferee’s agent for holding the Boods, ang therefore, the transferee is deemed to be having the Possession through such third party. Sometimes even the bailor may hold the possession of the goods pledged in trust for the bailee. The moment an arrangement is made that the bailor is to hold the goods on bailee’s behalf, there is constructive delivery of the goods to the bailee and, thus, it is a valid pledge. In Bank of Chittoor v. Narasimhulu; the bailor of a cine or and other accessories requested the bailee bank to allo edged goods to remain in his possession and promised ld the same in trust for the bailee, and also further promised and over the possession of the same to the bank whenev demanded. It was held that there was constructive delivery, is delivery by attornment to the bailee, and the bailor’s possession in fact the possession of the bailee. The transaction was, therefo ~ a valid pledge. deliv, : (2) Purpose of pledge is security for payment of debt, etc. In a transaction of pledge, the purpose for which the goods a bailed is that the bailed goods should serve as security for th payment of a debt, or performance of a promise. When some §} 1. See Section 36(3), Sale of Goods Act, 1930, 2. See Bank of Chittoor v. Narasimhulu, ALR. 1966 AP. 163. 168 3. ALR. 1966 AP. 163, Bank of India v. Binod Steel Ltd, ALR. 1977 MP.rr a BAILMENT AND PLEDGE . 9 se pledged. the ama ‘ ecomes a secured creditor and he has a aor claim over the ce s pledged than other creditors. Thus, in p ank of India v. Binod Steel Ltd, it has been held that when certain Baryables have been pledged by a company to a bank, they cannot * attached and sold for the satisfaction of claims of other creditors og the company without first satisfying the claim of the bank. Unlike a mortgage, a pledge or hypothecation does not transfer “interest” in the property in favour of the pledgee or hypothecatec. The pledge or hypothecation simply creates a special roperty in the goods in favour of the pledgee or hypothecatee, ie., prentitles him to have the possession of the goods and dispose them of for the realization of his debt, for which the goods constitute the security: If the pledgee or hypothecatee waives his right as mentioned above, his claim in respect of those goods comes to an end. In Syndicate Bank v. Official Liquidator, M/s Prashant Engg. Co. (P) Ltd.? Syndicate Bank advanced a loan to Prashant Engg. Co. and the latter hypothecated all the machines installed in its factory in favour of Syndicate Bank as a security for the money advanced by the Bank to the company. The Bank brought an action against the said company and obtained a money decree for Rs. 2,11,897/20. ' It may be relevant to note that the bank neither took possession of the hypothecated property on its own, nor did it request for a possession of the same through the Court. It was held that the fact ' the bank did not avail of its right to have the possession of the goods, it was deemed to have waived its right as a hypothecatee. A » subsequent action by the Bank to have the right as a hypothecatee | of those goods could not be entertained. _ Hypothecation and Pledge distinguished Hypothecation as such has not been defined in the Contract _ Act but the same has been recognized by usage since long. In pledge, | as has been already noted, there is delivery of goods from one person to another as security for payment of debt or performance of a promise. In hypothecation, on the other hand, the possession of the movable property is retained by the owner and certain rights in that Ptoperty are transferred to the person in whose favour the property is hypothecated3 _ In case of pledge, since the pledgee has got the possession of the goods, in the event of default by the pawnor, apart from other 1. AIR 197 MP. 188. 2 ALR. 1985 Delhi 256. 3. State Bank of India v. $.B. Shah Al, ALR. 1995 AP. 134.96 CONTRACT-I rights, the pledgee has a right of lien over the goods, ie, he retain the goods pledged until payment of the debt, or Performa’? of the promise, etc.' In case of hypothecation, since the 08: an of the goods remains with the owner, the hypothecatee cannot the right of lien. He may sell the property in default2 ave If an agreement empowers the hypothecatee to take Possesg of the goods and then sell the same in case of default of payne” he can proceed in accordance with the agreement to sell the s ent, without the intervention of the Court ods, Right of the Hypothecatee In Tarun Bhargava v. State of Haryana,’ it has been held th when there is hypothecation of goods by way of loan agreement th rights of the creditor are similar to those of the hypothecatee. He cannot take possession of the hypothecated goods, viz., the securit without the intervention of the Court. It means that the hypothecatee has the right to take pessession or sell the hypothecated Property through the Court, or give notice to the hypothecator to enforce the security. Who can pledge | 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 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 recovet e goods from B. In the following exceptional cases, a person who is neither the wner, nor having the authority from the owner for pledging the goods, but having possession with the owner’s consent can make @ pledge and confer rights on the pledgee. The exceptions recognized ; are as follows : . |. See Section 173, . See Bank of Baroda v. R.B. Hirabai, ALR. 1987 Guj. 1. State Bank of India v. S.B. Shah Ali, ALR. 1995 AP. 134. . ALR. 2003 P & H 98, 5. ALR. 1967 All. 549. AaenwlBAILMENT AND PLEDGE 97 () Pledge by a mercantile agent. (Section 178). 2) at Alaa IN possession under voidable contract. (3) Pledge % a person with a limited interest. (Section 179). (4) Pledge by seller in possessi , (4) sale of Goods Act] ion after sale. [Section 30 (1), 5) Pledge by buyer in aarti / 7 Sale of Goods Act} session after sale. [Section 30 (2), () 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? 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. () Pledge should be by mercantile agent Here the expression "mercantile agent’ has the same meaning eee T. 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.98 CONTRACT-II as assigned to it by the Sale of Goods Act. According to : (9) of that Act, "mercantile agent" means a mercantile agent h, ng in the customary course of business as such agent authori ae to sell goods, or to consign geods for the purpose of Sale, of to the 00ds, or to raise money on the security of goods, by, (ii), Possession of mercantile agent with owner's consent Although the mercantile agent may not have been authog, to pledge the goods, yet he must have obtained the Possession the goods or the documents of title to the goods with the con.” of the owner of those goods. Moreover, such Possession must been obtained in his capacity as a mercantile agent, and Not in a” other capacity. If I send my watch to a mercantile agent with avi Y to knowing as to for what maximum amount it can be pledged, ang the mercantile agent, who has not been authorized to pledge it dee (0, the pledge is valid. If, however, the mercantile agent has not , F tables to my neighbour for safe custody for sometime, and he happens to be a mercantile agent, a pledge made by him will no 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, warehousekeeper’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 Lay It is further necessary that the pledge must have been made by the mercantile agent while he is acting in the ordinary course business of a mercantile agent. Thus, if a mercantile agent asks " friend to pledge the goods instead of himself doing the same, it wi not be a valid pledge.! 1. See De Gorter v. George Attenbrough & Sons, (1904) 21 ‘TLR. 19; Turner Sampson, (1911) TLR. 200,_— BAILMENT AND PLEDGE 99 (wv) 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 pave acted in good faith and without notice that such a mercantile ent did not have an authority to pledge. The idea of considering s 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 ossession 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.,! 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 1. (1919) 2 KB. 243.100 CONTRACTHII ayment by cheque, and hand over the ring immediately. The ee oe dishonoured. Before the plaintiff could avon : contract on the ground of fraud by North, North had Pledgeq ring to the defendant. The defendant had taken the ring in faith and without any notice of the fact that the goods with on (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 pa is in possession of the goods under a voidable contract. If the pa has stolen the goods or has obtained possession under a agreement, the pawnee will get no rights in that transaction, It is further necessary that the pledgee must be acting in g faith and without any notice about the pawnor’s defect in title, t Voig (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.’ 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.? s (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 jas no right to deal with such goods. But according to Section ), Sale of Goods Act, if the seller after selling the goods, continues pr is in possession of the goods or the documents of title in respect f the goods, then any sale or pledge or other disposition of the oods by him or a mercantile agent on his behalf, will convey 4 good title to the transferee, provided that the transferee is acting in good faith and without any notice of the previous sale. t 2. See Belgaum Pioner Urban Co-op, Credit Bank v. Satyapromoda, A.LR. 1962 My 48; Firm Thakur Das v. Mathura Prasad, ALR. 1958 All. 66. 1. Hoare v. Parkeer, (1788) 2 T.R. 376. _—BAILM ENT AND PLEDGE 101 pledge by buyer in possessi i 8 ee etl possession after sale [Section 30 (2), Sale A buyer of the goods, who may have obtained the possession 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 ‘ds or the documents of title with the consent of the seller, the ivery of transfer by such a buyer or a mercantile agent on his half, by way of sale, pledge or other disposition will convey a 0d title to the transferee, provided that the transferee is acting in 4 faith and without notice of any lien or other rights of the original seller in respect of those goods. Rights of Pledgee or Pawnee (Secs. 173 to 176) © A pawnee has the following rights under the Act : (1) Right to retain the goods pledged. (Secs. 173 and 174). (2) Right to recover extraordinary expenses incurred by him. (Section 175). (3) Rights. of suit to procure the debt, etc. and sale of the pledged goods. (Section 176). (1) Right to retain the goods pledged (Secs. 173 and 174) Sections 173 and 174 make the following provision regarding the pawnee’s right of retaining the goods pledged to him : "773, Pawnee’s right of retainer—The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise but for the interests of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.” "174, Pawnee not to retain for debt or promise other than that for which goods pledged. Presumption in case of subsequent advances.—The patunee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent adoances made by the pawnee." According to the above stated provision, the right of a pawnee to retain the goods pledged shall be not only for the payment of the debt, or the performance of the promise, but he can also exercise this right for the interest on the debt and all necessary expenses incurred by him in respect of the possession or for the preservation102 CONTRACT- of the goods pledged.’ Although, ordinarily, a pawnee can retain the goods Pl only as a security for that debt or promise for which the pledged, but there is a presumption that if there are subse 3 advances, they are also the part of the original debt, and the pad R may retain the goods to recover subsequent advances also, T.. merely a presumption which could be rebutted by a contract tog contrary. ‘ Thus, if while advancing any further amount subsequent), | pawnor clearly points out that the goods already pledged cane retained in respect of the subsequent debt, then the Position 3 governed by such a contract. ; ; The pawnee is bound to redeliver the goods after he gets wi is due to him. (2) Right to recover extraordinary expenses incurred by pawna, (Section 175) j According to Section 175, the pawnee is entitled to receive On the pawnor extraordinary expenses incurred by him for - preservation of the goods pledged. It has already been noted that according to Section 173) pawnee can retain the goods for various claims, including the claj for necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Section 175 confers aq additional right, i.e., a right to receive from the pawnor extraordina expenses incurred by him for the preservation of the goods. example, if the pawnee has to arrange for a bank locker for ff safety of the goods or he spends some amount for insuring the against theft, etc., he can recover such expenses from the pawnd He can enforce this right by filing a suit. Where loan was granted against hypothecated goods. was specific agreement of hypothecation and pledge between ti parties. Under such agreement, goods were required to be insur by the borrower against the fire and other risk. Bank was at libe to get insurance at risk and expenses of the borrower only if If failed to insure goods. Held, that said clauses were only enabliti clauses for the benefit of bank and same could not be used by # borrower for denying its own liability and for making claim agai the Bank.? 1. See also Vimal Chandra Grover v. Bank of india, A.I.R. 2000 S.C. 2181, refet to in Sanjay Khemani v. N.PR. Finance Limited, A..R. 2018 Cal. 49. 2. Haryana Pesticides v. Bank of Rajasthan Ltd., A.LR. 2004 P. & H. 83.~~ BAILMENT AND PLEDGE 103 Right of suit to recover the debt, etc, and sale of the @ dged goods (Section 176) PI Section 176 confers right on the pawnee, including the right of sling the pledged goods, if the pawnor makes a default in payment a the debt, or performance of the promise at the stipulated time. fhe Section reads as under : "176. Pawnee’s right where pawnor makes default—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 pavwnor." This Section confers the following rights on the pawnee, on the pawnor's default in fulfilling his promise : (i) he may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or (ii) he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. (i) Right of suit against pawnor A pawnee has a right to recover the debt by filing a suit against the pawnor. Section 176 does not require any notice to the pawnor before the institution of the suit. If certain securities have been deposited with the lender and it is further agreed that the lender will have a lien over those securities, that does not debar the lender from filing a suit against the borrower and obtaining a personal money decree against the borrower. Apart from filing a suit, the pawnee has also a right to retain the goods pledged as a collateral security. When the Pawnee sues for the recovery of the debt, it is expected that on the satisfaction of the debt, he will return the security. "The right to sue on the debt assumes that he is in a position to redeliver the goods on payment of the debt and, therefore, if he has put himself in a position where he is not able to redeliver the goods, he cannot obtain a decree. If SFE ra 1. TRS. Kotagi_v. Tehsildar, Gadag, ALR. 1985 Kant. 265. 2. Kuri Lal Rungta v. Banarasi Devi, ALR. 1986 All. 94.104 CONTRACT-I it were otherwise, the result would be that he would recoy debt and also retain the goods pledged and the pawnor in i case would be placed in a position where he incurs a greater tat ii than he bargained for under the contract of pledge.' Pawnee can opt to file a suit and also to retain the Pleq goods ae Section 176 provides for pawnee’s right when the Pai makes default. The pawnee has been empowered : (i) to br suit against the pawnor on the debt, and to retain the goods pled? as a collateral security, or (ii) to sell the pledged goods after , 88 a reasonable notice to the pawnor. ivi In State Bank of India v. Smt. Neela Ashok Naik, it has be held that if an F.D.R. has been pledged with a Bank, the Bank jg .. obliged to adjust the instalments of repayable instalments of loa against the FD.R. He may retain FD.R. as such, and bring a suit recover the loan. Pledge by Joint-Account Holders In Anumati v. Punjab National Bank,’ the question related pledge of joint fixed deposit with the Bank. It was explained that fixed deposit in the joint names of two persons was nothing but joint account which was repayable on the expiration of the agreg period. The Bank is a debtor to the account holder in respect of amount deposited. An "either or survivor" clause in such an accoi the Court said, meant that the amount payable by the Bank maturity, might be paid to either of the account holders, in order obtain a valid discharge. It is a tripartite agreement between the join account holders inter se and the Bank. But this tripartite agreemen the Court held, could not be bilaterally modified by one of th holders for example by pledging the account with any third pa The Bank was also held not entitled to set-off the fixed depos against any claim in respect of one account holder. In the instant case, the appellant and her husband made a fixe deposit with the respondent Bank. Later on, the appellant took loan in his sole proprietary business. The loan remaining unpaid, ti Bank claimed that the appellant could pledge the fixed account Wit the Bank. without the consent of the other deposit holder since tl account was “either or survivor". Rejecting the claim of the Ba T. Lallan Prasad v. Ralmat Al, ALR. 1967 SC. 1322, at 1325-26, per Sheil S.K. Engg. Works v. New Bank of India, ALR. 1987 P. & H. 90. 2. ALR. 2000 Bom. 151. 3. ALR. 2005 S.C. 20.BAILMENT AND PLEDGE 105 Apex Court ruled that the Banker had no right to set-off the it balance in the joint account except in respect of another joint unt of the same parties, The Court reiterated and- approved the Court of Appeal’s decision in Hirschorn v. Evans; wherein the facts were identical. The Court of Appeal had ruled that inasmuch as the debt which the k owed was not a debt due to the husband alone, but to him iointly with his wife, it could not be attached to answer the judgment against the husband. Nature of Pawnee’s Interest As stated above, in pledge, a special property in the goods pledged passes to the pawnee, but the general property in them remains in the pawnor and wholly reverts to him on discharge of the debt. The special property in the goods, i.e. the right to property ~ vests in the pawnee only so far as is necessary to secure the debt.” This special property vests in the pownee in order that he may be able to sell the goods if his right to sell° arises.‘ In Maharashtra State Co-op Bank Ltd. Assistant P.F. Commissioner, a three Judge Bench of the Supreme Court ruled that in view of Section 11(2) of the Act, 1952, the Provident Fund dues would have priority over mortgage and pledge executed by the employer. In the instant case, the appellant advanced a loan to Gangapur Sahakari Sakhar Karkhana Ltd. during the crushing season 2002-03. For securing the payment of the loan, the management of the sugar Mill executed three deeds and pledged the sugar bags lying in the godowns. On account of failure of the employer (Mill) to pay the dues of provident fund, etc., the Competent Authority passed orders and held the Mill liable to pay a sum of money towards the dues of these Funds. Thereafter, the Assistant Commissioner issued warrant of attachment and sale of the sugar bags (so pledged with the Bank) for realisation of PE. dues. The attachment and sale of the sugar bags was challenged by the Bank contending that by virtue of the deeds of pledge executed by the sugar mill, the Bank had become the owner of the sugar bags “T1938 (2) KB. 801 (L). See also Simla Banking & Ind. Co. Ltd. v. Bhagwan Kuar, ALR. 1928 Lahore 316. 2. Maharashtra State Co-op. Bank Ltd. v. Assistant PF. Commissioner, A.1.R. 2010 S.C. 868; Lallan Prasad v. Rahmat Ali, ALR. 1967 S.C. 1325, citing from Holliday v. Holygate, (1868) 3 Ex. 299. 3. See Section 176, the Indian Contract Act, 1872. | Per Bowen, LJ., in Ex. p. Hubbard, (1886), 17 QB.D., 690. 5. ALR. 2010 S.C. 868. -eS ULUrUCt 106 CONTRACT-II and the same could not have been attached and sold for realizay of the amount due under the Act, 1952. tion Rejecting the contention of the Bank, the Apex Court h; contribution of the employer under the Act, 1952 in respect - thay and other Funds would have priority over the mortgage anq pled executed by the employer. dpe The Court observed : ..in the contract of pawn or pledges, the Pawnee/pleq has only a special property in the pledge but the g Property remains with the pawner/pledger and wh reverts to him on discharge of the debt. The right to Pro lly vests in the pledgee only so far as necessary to secure hig debt. : Rights Pawnee of vis-a-vis Other Creditors As regards the rights of the pawnee vis-a-vis other un: creditors of the pawnor, the Apex Court in Central Bank of India v. Sirigupta Sugars and Chemicals Ltd.,! explained that the Pawnee had special property and a lien which was not of ordinary nature on the goods and so long as his claim was not satisfied, no other creditor of the pawnor had any right to take away the goods or its Price. In the instant case, the Labour Commissioner had passed an order under Section 33(c) of the Industrial Disputes Act, 1947 against the respondent company in respect of the dues to the workmen. The cane Commissioner had passed orders for recovery of amounts due from the respondent company for being paid to the sugarcane growers for the cane supplied by them. The respondent had challenged the above orders before the High Court. During the pendency of the writ petition, the recovery authority had taken possession of stock of sugar lying pledged to the appellant Bank forcibly and without reference to the Bank. Considering that the sugar stock was liable to lose its value by being stored indefinitely, the Court directed the sale of the sugar. The High Court had ordered the disbursement of the sale proceeds, firstly to meet the employees’ dues, then the dues of the sugarcane growers and lastly to the appellant Bank. In appeal filed by the appellant Bank, the Apex Court ruled that the rights of the Bank over pawned sugar had precedence over claims of cane Commissioner for payment to cane growers an ‘emands made by workers. The appellant, as the pawnee, the Court 1. AIR. 2007 S.C. 2804. Also see Karnataka Pawnbrokers Association v. Karnatakty ALR. 1999 S.C. 201.ere re eee ea eee CHEE ELE } BAILMENT AND PLEDGE 107 id would be entitled to the amount in satisfaction of its debt to sai’ which, the goods had been pawned and to appropriate the 5@ proceeds towards the debt due and only if there was surplus sale Dd it available for disbursal to the cane Commissioner and to ig mr abour Commissioner. o The Court referred to the decision in Lallan Prasad v. Rahmat Ali? wherein, the Supreme Court observed that there was no ajiference between the Common Law of England and the law with pect to pledge as codified in Sections 172 to 176 of the Contract vi 1872. Summing up the rights of the pawnee, the Court had ruled that once the pawnee by virtue of his right under Section 176 had sold the goods, the right of the pawnor to redeem them was of course extinguished and the pawnee was bound to apply the sale roceeds towards satisfaction of the debt and pay the surplus, if any, to the pawnor? pledged goods if lost or damaged If the pledged goods have been lost or damaged due to the fault of the pawnee, for instance, he fails to take due care of the goods as are required by Section 151 of the Contract Act, he will Jose his claim against the pawnor to that extent. In Central Bank of India v. Grains and Gunny Agencies,’ due to the negligence of the pledgee bank, the pledged goods were lost. The Bank was requested by the pawnor to sell away the goods and realize the balance, but the Bank failed to do so. Moreover, now the Bank was not in a sition to redeliver the goods on the satisfaction of its claim. It was held that the Bank was liable for the loss of the goods and, therefore, he was not entitled to succeed in his claim against the pawnor. In Lallan Prasad v, Rahmat Ali; A borrowed from B a sum of - Rs. 20,000 and in return gave a promissory note and aeroscrapes of _ the value of Rs. 35,000 as a collateral security, to B. B brought an action against A to recover back the loan, but himself was not in a position to return back the security, ie., the aeroscrapes, the same _ having been sold by B. It was held that since B was not in a position _ to return the goods, he was not entitled to any decree against A. In Gunvanti v. Mool Chand, the respondent pawnee, a | goldsmith, filed a suit for recovery of Rs. 50,000/- advanced against pledge of gold ornaments. In the suit for recovery of the debt, filed 1, AIR. 1967 S.C. 1322. 2. See also Dena Bank v. Bhikhabhai Prabhudas Parekh, A.LR. 2000 S.C. 3654, 3. ALR. 1989 MP. 28. 4 ALR. 1967 S.C. 1322. 5. ALR. 2008 (NOC) 683 (Raj).108 CONTRACTHI by him, it was held that if he had put himself in a POSition he is not able to redeliver the goods pawned with him, he cou obtain a decree. Since the pawnee produced from the Cont re-delivery, the gold omaments were not the same as Biven to his claim to the debt was rejected. (ii) Right of sale of the pledged goods If the pawnor makes a default in the payment of the deb Performance of duty, as agreed, the pawnee has also the Tight to the thing pledged, on giving the pawnor reasonable notice of sale.' A sale made by the pawnee without giving a Teasonable p, to the pawnor is void. A sale without prior notice to the pa : will confer only limited rights to the buyer of such goods, His tig will be the same as that of the pawnee. Such a buyer steps into § shoes of the pledgee.? A sale by the pledgee after a Teasonable pq Notice to the pawnor is valid, and confers a good title on the by of such goods. In Prabhat Bank Ltd. v. Babu Ram; it has been held that ey f an agreement between the bank and its customer authorizes bank to sell the securities pledged with it without any notice to pawnor if the credit balance of the pawnor falls below a certain lin the sale of the securities by the bank without notice is bad in | and not binding on the pawnor. It was observed that an agreemen| authorizing the sale of goods by the pawnee without Proper nofi to the pawnor “would be inconsistent with the Provisions of Contract Act and as such, would be wholly void a unenforceable.......What is contemplated by Section 176 is not me rn a notice but, a ‘reasonable notice’, meaning thereby a notice intended sale of the security by the creditor within certain date: as to afford an opportunity to the debtor to pay up the amount within the mentioned time in the notice." However, Section 176 does not require specification of the da time and place. In Sunderlal Saraf v. Subhas Chand Jain,’ the Madhya Pradegi High Court held that what was required by Section 176 was sending a reasonable notice of the sale. Since this Section did not speak about sending the notice ) intending sale on a particular date, time and place and, therefore 1, Sunderlal Saraf v. Subhas Chand Jain, A.LR. 2006 MP. 35; Tapanga Ugh Foundry v. State Bank of India, A.LR. 1987 Orissa 174. 2. T.S. Kotagi v. Tehsildar, Gdag, A.LR. 1985 Kant. 265, at 267. 3. ALR. 1966 All. 134. 4, Ibid, at 135-136. 5. ALR. 2006 MP. 35. pawn Accretions to the pledged goods In Standard Chartered Bank v. Custodian,’ the Apex Court tuled that accretions to the goods pledged :constitute part of the pledge transaction. Thus, if shares and debentures are pledged, any bonus shares issued and dividend and interest paid will constitute part of the securities pledged and they can also be retained as Security by the pawnee. Accretions are not to be delivered back ee ket 1. Lallan Prasad v. Rahmat Ali, ALR. 1967 S.C. 1322. 2. Id, 1325, 3. MR. Dhawan v. Madan Mohan, ALR. 1969 Delhi 313, 315. 4. ALR. 2000 S.C. 1488.112 CONTRACT-II Separately but they are to be returned along with the main Pra which has been pledged when the redemption takes Place, Right of redemption of the goods thus also inc! : any accretion to the goods pledged. If a debtor Pledges his © of a certain company with a Bank, and during the period of pl the company issues bonus shares and right shares, the Pawngy | redemption will be entitled to such bonus and right shares ol If the pawnor does not seek redemption within the stipulg time, although his right of redemption is not thereby extinguishes he, however, becomes liable to pay any expenses which may te arisen from his default? aa Legal Heir’s Right to Redeem M In case of death of a pawnor, the Pledge made by hi M, can} redeemed by his legal heirs on meeting the liabilities concerning i pledge. e ludes a tip In Kamili Sarojini v. Indian Bank, good omaments we pledged by the husband of the petitioner with the respondent Banh as security for gold loan. During his lifetime, the husband of ig petitioner had executed a notarised will, whereunder she was to cleg the gold loan availed by her husband and take the om pledged as a surety for the loan, along with the balance amo existing in his account with the Bank. The bank insisted on production of probate of will or obtaining succession certifica Rejecting the demand of the Bank, the Andhra Pradesh High Count directed the Bank to permit the petition ner to repay the loan amount | and to hand over to the petitioner the ornaments as also amo mnt lying in the deceased husband's account, z It is no doubt true that the Banking Institutions are expected | to follow the procedure so as to safeguard the interest of borrowers) the deceased borrowers, the legal heirs of such borrowers; but in the light of the facts and circumstances of the case, the bona fides. of the petitioner could not be doubted especially when the son and daughter of the writ petitioner had raised no objection in relation” thereto, the Court said. The Bank was held to have no jurisdicti to insist upon production of a succession certificate, letters of administration or probate in this case 1, M.R. Dhawan v. Madan Mohan, ALR. 1969 Delhi 313, 2. Section 177. 3. ALR. 2008 AP. 71. 4, Gangavatha Lalu y. Gangavathi Tulsi, ALR. 2001 AP. 326. 5. See also State Bank of Hyderabad v. Gaderaju, ALR. 1993 AP. 337.BAILMENT AND PLEDGE 113 Likewise, in State Bank of India v. Mangalabai G. Deshmukh,’ Bombay High Court held that the legal heirs of the deceased me wer were efttitled to redeem the ornaments pledged by the pee on payment of loan amount with interest. It was further oer that the legal heirs were not required to produce the Letter of Ad ministration to redeem the pledged ornaments. 1. ALR. 2005 Bom. 221.