Pledge by Non-Owners

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Introduction:

The Indian Contract Act, 1872 defines the term pledge in section 172 as “The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”.” Therefore pledging a good refers to giving the good in the temporary custody of one’s creditor as security promising the payment of a debt or the proper performance. While talking about the contract of pledge, it is pertinent that the contract of bailment is discussed first. According to section 148 of the Indian Contract Act, 1872, bailment refers to “the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them”. The etymological meaning of bailment is “handing over”, the word itself is derived from the French word “Bailer” which means to deliver. A bailment is made for a specific purpose, which in the case of the pledge is as a security for debt or performance of the promise. Therefore, we can conclude that pledge is a special kind of bailment where the purpose is specified. 

The debtor to pledge their goods is called the pawnor and the one to whom it is pledged is called pawnee. It is necessary to mention at this point that the pledge is also known as a pawn. 

Example of a pledge:   Let A be the debtor and B be the creditor. As security for payment of the loan, A pledges one of his cows to B. In this case, A is the pawnor and B is the pawnee. 

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As stated in the case of P.N. Krishna Pattare vs Kannambra Nayare Veettil Valia, the pledge has two essential elements-  (i) delivery of goods and 

(ii) security for a debt or performance of an obligation

The term “goods” however is not defined in the chapter relating to bailment and not in the whole of Indian Contract Act, 1872 after the amendment. There exists a difference of opinion regarding the exact meaning of this term with regards to the inclusion of stocks and shares as goods. In  Lalit Mohan Nandy v. Hareidas Mukherjee (1916) 24 C.L.J. 335 (F.B.), Chief Justice Sanderson and Justice Mukherjee, were of the opinion that the term “goods” in this regard was exclusive of stocks and shares with respect to Section 178 of Indian Contract Act, 1872. While, the Bombay court has the opinion that the term is, in fact, inclusive of stocks and shares. They back their points by stating that if the languages of Sections 172 and 178 are taken together, “ it would seem that the term “goods” was intended to connote property which is capable of physical possession and transferable by manual delivery. This view derives support from the nature of a pledge. A pledge in law is neither a mortgage nor a lien and does not pass the property in the goods but only passes what is described as “special” property for want of a better term (vide criticism of the use of the term by Rash Behari Ghose in his Book on Mortgages, Volume I–5th edition p. 112)” 

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The Indian Contract Act, 1872 also lays down the duties and rights of both the pawnor and the pawnee. It states that the rights of the pawnee are as follows- 

1.Right to retain goods in case of default by pawnor 

2.Right to retain goods for subsequent transactions

3.Right to be compensated for extraordinary expenses related to the goods

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4.Right to sue the pawnor in case of default or sell the goods pledged with proper notice to the pawnor

While in most cases, the goods pledged are owned by the owner, there are certain circumstances wherein, the goods are pledged by non-owners. This paper deals with this particular aspect of the pledge.

Ownership

Ownership and possession are two very commonly interchangeable terms, however, in the legal world, the two terms have distinctly different meanings. While possession refers to “the acquisition of either a considerable degree of physical control over a physical thing, such as land or chattel, or the legal right to control intangible property”, ownership refers to the legal relationship between a person or group and an object, movable or immovable. 

Ownership as a concept has its origin in ancient Roman Law which termed “ownership” and “possession” respectively as “dominium” and “possession”; The former noted a complete authority over an object while the former denoted only physical control over it. The concept of ownership has features such as liberty, power, and immunity in respect to the thing owned. Therefore, one can call ownership the sum of possession, disposition, and destruction, including the right to enjoy the object. 

In normal circumstances, ownership implies the following- 

1.The right to manage the object

2.The right to possess the object

3.The right to control

4.The right to capital

5.The right to income

Therefore, in summary, we can state the following characteristics of ownership-

1.Ownership may be absolute or restricted, that is restricted by the limitation of law

2.The rights of ownership may be restricted in times of emergency

3.The ownership of an object doesn’t allow the owner to use it in a manner harmful to others

4.The owner also has the right of possession

5.Ownership is residuary in nature

6.Death of owner doesn’t affect the right to ownership but is transferred to their heirs 

Therefore, with respect to pledging, we can say that while in most cases, the pawnor is the owner and the pawnee merely is in possession of the good(s), in certain cases, the law allows non-owners to pledge goods owned by others as well.                                                                                   

Pledge by Non-Owners

The Indian Contract Act, 1872, lays down the law for pledges by non-owners in its sections from 178 to 179. The Sales of products Act, 1930, section 30(1) conjointly lays down such legislation. the subsequent are the circumstances-

1.Pledge by Mercantile Agent- in line with section 178, “Where a mercantile agent is, with the consent of the owner, in possession merchandise|of products} or the document of title to goods, any pledge created by him, once acting within the standard course of business of a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the products to form the same; on condition that the pawnee acts in honesty and has not at the time of the pledge notice that the pawnor has no authority to pledge.”.

A mercantile agent is somebody the World Health Organization has appointed by those in business to act on behalf of the business in coping with others. Because the agent acts on behalf of the principal or business, they’re allowed to pledge any property closely held by the corporate as long as it is within the standard course of business and it’s sanctioned by law. The Sales of products Act, 1930, section two (9), lays down the definition of mercantile agent as- s a mercantile agent having within the customary course of business as

such agent authority either to sell merchandise, or to consign merchandise for the needs of sale, or to shop for merchandise, or to lift cash on the protection of goods” The necessities of a pledge are –

The person pledging merchandise ought to be a mercantile agent

The agent has got to be in possession of products or document of title of products

The possession ought to be with the consent of the actual owner

It should be in the standard course of business

Pledgee must act in honesty

2.Pledge by a person in possession of products underneath a revocable contract- underneath section 178A of the Indian Contract Act, 1872, it’s explicit that a private World Health Organization has the title of the owner of an honest underneath a revocable contract will pledge it, provided the subsequent 3 conditions are fulfilled-

The shrunken has not been off at the time of pledge

The pawnee acts in honesty

The pawnee is unaware of the pawnor’s defective title

3.Pledge once pawnor has restricted interest- in line with section 179 of the Indian contract Act, 1872, “Where an individual pledges merchandise within which he has solely a restricted interest, the pledge is valid to the extent of that interest.”.

This section may be best understood through Associate in Nursing illustration- A finds a cycle on the road and gets it repaired for Rs. five hundred and pledges it with B for Rs.1000. The important owner will get the cycle payment of Rs. 500.

4.Pledge by a vendor in possession of goods- Given in section 30(1) of the Sale of products Act, it’s explicit that – “Where an individual, having sold-out merchandise, continues or is in possession of the products or of the documents of title to the products, the delivery or transfer by that person or by a mercantile agent acting for him, of the products or documents of title underneath any sale, pledge or different disposition therefrom to a person receiving constant in honesty and all at once of the previous sale shall have a constant impact as if the person creating the delivery or transfer were expressly authorized by the owner of the products to form constantly.”

To be a sound contract, however, it’s on the condition that the pawnee shouldn’t have information of the sale and act in honesty.

In such a case, the customer is allowed to get compensation for the products from the pawnor however cannot claim the products back from the pawnee.

5.Co-owners- A co-owner might pledge a collectively closely-held sensible with the consent of the opposite homeowners.

 

References:

  1. Indian Contract Act, 1872
  2. Sale of Goods Act, 1930
  3. https://commercestudyguide.com/pledge-non-owner/
  4. https://content.patnawomenscollege.in/bcom/PLEDGE%20Final.pdf 
  5. https://www.toppr.com/guides/business-laws-cs/indian-contract-act-1872/rights-of-pawnee-and-pawnor/ 
  6. https://educatech.in/pledge-by-non-owners/
  7. Avtar Singh, Contract and Specific Relief, Twelfth edition
  8. https://www.advocatekhoj.com/librarey/bareeacts/indiancontract/179.php?Title=Indian%20Contract%20Act,%201872&STitle=Pledge%20where%20pawnor%20has%20only%20a%20limited%20interest 
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