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PLEDGE
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PLEDGE (S.172)
Literal meaning can be related to Promise
Also known as PAWN
A pawn or a pledge is a bailment of personal
property as a security for some debt or
engagement.
Definition: the bailment of goods as security for
the payment of a debt or performance of a
promise is called pledge.
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Pledge is a special kind of
bailmentand the maindistinction is the object of the
contract.
The object of the
delivery of goodsPLEDGETo provide a securityfor a loan or for the
fulfilment of an
obligation
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(Book)
(For reading)
GOODS
PURPOSE
CONTRACT OF BAILMENT
BAILOR BAILEE
BAILMENT
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(jewellery)
(to provide a security for a loan)
GOODS
PURPOSE
CONTRACT OF PLEDGE
PAWNER PAWNEE
PLEDGE
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PARTIES TO THE CONTRACT
The person who
delivers goods as
a security for
payment of hisdebt.
The person to
whom the goods
are delivered as a
security for the
loan he raised.
PAWNER
or
PLEDGER
PAWNEEor
PLEDGEE
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Thus, a pledge constitutes the delivery of
goods by the pawnor to the pawnee as a
security under a contractual obligation that
the goods shall be returned or disposed off
as per pawnorsdirection on the debt being
discharged or the fulfilment of the obligation
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FEATURES:
Only the real owner can pledge
Movable propertyThe pledgee retains the possession of the goods until
the pledgor (i.e. borrower) repays the entire debt
amount.
In case there is default by the borrower, the pledgee hasa right to sell the goods in his possession and adjust its
proceeds towards the amount due (i.e. principal and
interest amount).
Some examples of pledge are Gold /Jewellery
Loans, Advance against goods,/stock, etc.
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MODE OF DELIVERY
two modes by which shares can be pledged to a
pawnee
Actual delivery
(S.149)
Eg: pawner
hands over
the gold
ornament to
pawnee
Constructive
delivery(S.149)
Eg: pawner
gives the key
of the
godown
where goods
are kept
Delivery by
attornment
Eg: pawner
consents to a
third person
to hold the
documents
in behalf of
the pawnee
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SUBJECT MATTER OF PLEDGE
All MOVABLE goods, capable of actual or constructive delivery
form the subject-matter of a pledge.Though the term goods has not been defined under the
Contract Act, the Sale of Goods Act, 1930 defined the term
goods as follows:
every kind of movable property other than actionable
claims and money; and includes stock and shares,
growing crops, grass, and things attached to or formingpart of the land which are agreed to be severed before
sale or under the contract of sale;
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ESSENTIAL CHARACTERISTICS
1.SECURITY FOR A DEBT2.SPECIFIC MOVABLE PROPERTY
3.AGREEMENT TO RETURN GOODS
4.DELIVERY OF POSSESSION5.IN PURSUANCE OF A CONTRACT
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SECURITY FOR A DEBT
The goods should be given as a security to the pawnee for payment of
the debt taken or the performance of the obligation.
SPECIFIC MOVABLE PROPERTY
The goods passed as security to the pawnee must be movable
property and ascertainable at the time of the contract.
AGREEMENT TO RETURN GOODS
The essence of a contract of pledge is that the pawnee should agree
to return the goods on the satisfaction of the debt or theperformance of obligation. In absence of such agreement, a valid
pledge cannot come into existence.
A pledge, being essentially a contract of bailment, the pawnee is
under a duty to take care of the goods pledged as a man of ordinaryprudence would take under similar circumstances.
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DELIVERY OF POSSESSION
The goods have to be deliveredby the pawnor to the pawnee.
Delivery is necessary for a
complete pledge and it may be
either actual or constructive
POSSESSION
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MORVI MERCHANTILE BANK v UNION OF INDIA, AIR 1965 SC 1954
A firm doing business in Bombay entrusted goods worth Rs. 35,500
to the Railway for delivery in Delhithe firm endorsed the railway receipts to a Bank as a security against
an advance of Rs. 20,000 made by the Bank to the firm.
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.
Meanwhile the goods were lost in the transit
The Bank, thereafter filed a suit for the recovery of the value of the
goods.
The trial court dismissed the suit and on an appeal by the Bank, theHigh 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 and the Railway appealed to the Supreme Court
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CONTENTIONS
The endorsement of the railway receipt in favor
of the Bank, did not constitute a pledge of thegoods covered by the receipt and that the Bank
had no right to sue for compensation.
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COURT HELD:
When goods are carried by railways over long
distances and remain in transit for long period of
time, the railway receipt is regarded as the symbol
of the goods for all purposes.
Delivery of railway receipts therefore was thesame thing as delivery of goods.
A pledge being a bailment of goods as security for
payment of a debt, the pledgee will have the sameremedies as the owner of the goods would have
against third person for deprivation of the said
goods or injury to them.
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REVENUE AUTHORITY v SUDARSANAM PICTURES, AIR 1968 Mad 319
FACTS:The producer of a film borrowed a sum of money
from a Financier-distributor, and agreed to deliver
the final prints of the film when ready.ISSUE: whether this amounts to a contract of
pledge?
OBSERVATION: there being no actual transfer of
possession it cannot be considered as a contract
pledge.
JUDGEMENT: there is no contract of pledge
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PLEDGE BY HYPOTHECATION:
Goods are allowed to remain in the custody of the
pledger for a special purpose.
REEVES v CAPPER
FACTS: The captain of a ship pledged his chronometerwith the ship owner who allowed him to use the
instrument for the purpose of the voyage. The captain
pledged it over again with another person.
ISSUE: Whether the first pledge was valid?OBSERVATION: According to the concept of hypothecation
the pledge is valid
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BANK OF CHITTOOR v NARASIMBULU, AIR 1966 AP
163FACTS: a cinema projector and accessories were
pledged with a bank. The bank allowed the
property to remain with the pledgers, since they
formed the equipment of a running cinema.
Subsequently the pledgers sold the machinery.
OBSERVATION: the sale was subject to the pledge.There was a constructive delivery.
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IN PURSUANCE OF THE CONTRACT
For a valid contract of pledge it is essential thatthe delivery has to be made in pursuance of the
contract of pledge.
It is not necessary that delivery and advance has
to be contemporaneous.
Delivery may be made before or in
contemplation of an advance, which ripens into apledge as soon as the advance is made.
Illustrative case: BLUNDELL LEIGH v
ATTENBOROUGH, (1921) 3 KB 233
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FACTS:
The plaintiff gave her jewellery to one Miller to lend her
some money after he estimates the value of the jewellery.He was given a right to keep the jewellery as security if he
made the advance.
That very same day Miller plledged the jewellery with a
pawnbroker (defendants), who in good faith advanced
1000 euro.
After 5 days Miller advance 500 euro to the plaintiff on
the security of the jewellery.
Later Miller died and she came to know about the facts.
She paid the amount and sue the defendant for the
return of her jewellery.
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CONTENTIONS BY PLAINTIFF
When she gave the jewellery to the Miller
for examination there was no valid pledge
and he became only a gratuitious bailee
having no right to deal with it.
Since he had already parted with the
possession of the goods at the time of
advancing money, no valid pledge could
arise.
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OBSERVATION BY COURT
it is clear that the plaintiff intented, whenshe handed over the jewellery to Miller, to
create a valid pledge as between him and her
from the moment when he handed her themoney by way of loan which she was
prepared to accept
The court held the pledge as valid.
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RIGHT OF PAWNER
RIGHT OF REDEMPTION
(S.177)
Normally, the right to redeem the pledge continues upto the
time on the expiry on which the pawnee has notified that the
goods would be sold.But under S.177, It is open to the pledger to redeem the
pledge by full payment of the amount for which the pledge
has been made at any time after the fixed date and the right
continues until the thing pledged is lawfully sold.When the pawner redeems after the expiry of the specified
time, he is bound to pay to the pawnee such expenses as
have arisen.
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A suit for right to redemption has to be filed for
excercising this specific remedy.
The pawner has the right to take back with the
goods the increase, if any , that the goods have
undergone during the period of pledge.
M.R.Dhawan v. Madan Mohan, AIR 1969 Del 313 -
where certain shares of a company were pledged and
bonus shares were issued during the period of
redemption, it was held that the pawnor is entitled
to the bonus shares so issued.
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UNION OF INDIA v DEEP CHAND, AIR 2007 Uttr 455-The provisions of the IT Act could not defeat the
right of the pawnor to institute the suit for recovery.
LEGAL HEIR: KAMALI SARJONI v. INDIAN BANK, AIR
2008 AP 71- certain gold ornaments were pledgedwith the bank as security for gold loan. The pawner
died. He left behind a will enabling his widow to
redeem. The bank demanded probate. The court
held that the bank has no right to do so. Neitherprobate nor succession certificate was necessary.
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OTHER RIGHTS
Right to sue: within a period of 3 years
under limitation act if the pawnee rufusesto return the goods even after returning
the whole amount.
Right to take care of goods: right to
demand the pawnee to take reasonable
care and preservation of the goods
pledged.
Right to receive increase or profit from
the goods
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RIGHTS AND LIMITATIONS OF PAWNEE
1.RIGHT OF RETAINER (Ss.173 and
174)
2.RIGHT TO EXTRAORDINARYEXPENSES (S.175)
3.RIGHT WHERE PAWNOR MAKES
DEFAULT. (S.176)a) Right to sell
b) Right to sue
G O O
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RIGHT OF RETENTIONS.173:
The most important right of a pawnee is the right to retain the
goods pledge until the dues are paid.
The right to retain is not only for payment of the debt or
performance of the promise, but for the interestdue on the debt
and all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
S.174The pledgee can retain the goods only for the payment of that
particular debt for which the goods were pledged and not for any
other debt or promise, unless there is a contract to contrary.
However after a pledge is created, a subsequent advance is made
without any other security, a contract to burden the same goods
shall be presumed.
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The pawnee has the option of exercising his right to
retain the pledged goods in relation to the following:
payment of the debt or performance of the promise
for which the pledge was created;
(ii) interest on the debt;
(iii) all necessary expenses incurred by the pawnee in
respect of the possession or preservation of the goods
pawned.
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Lien and Pledge
The right of retainer can be related to the
nature of a particular lien. Yet lien is
different from pledge.A pledge creates a special interest in the
property pledged in favour of the pledgee
giving him the right to sell, but a lien is onlya right to retain.
SPECIAL PROPERTY IN GOODS
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RIGHT OF POSSESSION
RIGHT OF ENJOYMENT
SPECIAL PROPERTY IN GOODS:
special property or interest exists in the goods pawned so
that the pawnee can compel payment of the debt, or can
exercise his right to sell the goods as and when it arises.
It is to be noted that only a special property and no legal
titleto the goods pledged is vested in the pawnee.
NATURE OF SPECIAL PROPERTY
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NATURE OF SPECIAL PROPERTY
Bank Of Bihar vs State Of Bihar & Ors, 1971 AIR 1210
Certain sugar was pledged with the plaintiff bankPart of the said sugar was seized under the Public Demands
Recovery Act in connection with a demand of sugar cess by
the Cane Commissioner (state).
The sugar was sold and the sale proceeds were attached
towards the payment of cess. No payment was made to the
plaintiff bank, which thereupon filed a suit to enforce its
claim.
The trial court granted a decree against the State of Bihar for
the price of the sugar.
The High Court however held that no decree could be
granted against the State as the seizure was lawful.
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REASONING BY THE SC: so long as the
pawneesclaim is not satisfied no othercreditor of the pawner has the right to take
away the goods or their price.
The seizure could not deprive the pledgee ofhis right to realise the amount for which the
goods were pledged and therefore, the state
was bound to indemnify him up to theamount which would have been realised
from the goods.
HYPOTHECATION AND RIGHT OF SEIZURE
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HYPOTHECATION AND RIGHT OF SEIZURE
When the pledge is by way of
hypothecation, the pledgee
cannot directly seize the goods
by entering premises or
otherwise. It can be done either
with the consent of the borrower
or through a court order.
The pledgee does not have the
right to enter the premises, lock
and seal the same.
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RIGHT TO EXTRAORDINARY EXPENSES (S.175)
The pawnee is entitled to receive any
extraordinary expenses incurred by him for the
preservation of the goods pledged.But he does not have the right to retain the
goods for the recovery of the extraordinary
expenses. The right of lien can be excercised only
for necessary expenses.
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Illustration 1: A bank took over the possession of the
hypothecated truck but thereafter neither sold it according to
the agreed terms nor took care of it, leaving it in open place.HELD: The bank was liable for the extraordinary depreciation.
(Central Bank of India v Abdul Mujeeb Khan, (1997) AIHC 299
Illustration 2: A bank provided money for purchase of a lorry and also
paid insurance premium and subsequently the lorry was lost by theft.
Held: insurance company was liable to pay the insurance money to the
bank irrespective of the fact that the insurance was not in the name of
the bank. Insurance company and the borrower were joint debtors.
Insurance company to the extent of insured value and the borrower for
the advance. (SBI V Suresh Kumar, (1995) AIHC 3889)
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RIGHT WHERE PAWNOR MAKES DEFAULT (S.176)
This enables the pawnee to take certain measures
in case of default made by the pawnor in the
repayment of debt or performance of the
obligation at the stipulated time.
when the time has not been stipulated in the
agreement, the debtor is not in default until noticehas been given by the creditor asking the debtor to
repay the loan by a certain time and that time has
passed.
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The pledgee gets two distinct rights under S.176
of the Act.
The pledgee may
sueupon the
debt and retain
the goods as a
collateralsecurity.
He may sellthe
goods after
reasonable notice
of the intended
sale to thepawner
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RIGHT TO SELL
The power of sale is conferred for the benefit of the pawnee, and can
be exercised at his discretion.
A pawnor cannot force the pawnee to exercise the right of sale as a
means for discharging the debt or satisfying the decree
If the proceeds of such sale are:
Less than the amount of
the debt = pawner liable to
pay the balance
Greater than the amount
so due = the pawnee
shall pay over the
surplus to the pawner.
RIGHT TO SUE
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RIGHT TO SUEThe pawnee has been conferred with the right to
institute a suit claiming the repayment of debt in theevent of default by the pawnor
An express authority given by the pawnor to the pawnee
to sell the goods does not take away his right to institute
proceedings against the pawnor.
If by reason of his own act, the pledgee is unable to
return the goods, he cannot have judgement for the debt
Supreme Court in Lallan Prasad v Rahamat Ali (AIR
1967 SC 1322)
Lallan Prasad v Rahamat Ali (AIR 1967 SC 1322)
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Lallan Prasad v Rahamat Ali (AIR 1967 SC 1322)
FACTS:
The defendant borrowed Rs.20,000 from the plaintiff ona promissory note and gave him aeroscrapes worth
about Rs. 35,000 as security for the loan. The plaintiff
sued for the repayment of the loan, but was unable to
produce the security, having sold it, therefore, his actionfor the loan was rejected.
REASONING: if a creditor holding security sues for the
debt, he is under an obligation on payment of the debt
to hand over the security, and that if, having improperly
made away with the security he is unable to return it to
the debtor he cannot have judgement for the debt
THE RIGHT TO SELL AND RIGHT TO SUE ARE
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THE RIGHT TO SELL AND RIGHT TO SUE ARE
DISJUNCTIVE
Both the rights are disjunctive and
independent from each other.The right to sue and the right to sell are
not concurrent rights and the pawnee
can only exercise either of them.Lallan Prasad v. Rahmat Ali
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Requirement of notice
Before making the sale he is required to
give to the pawner, a reasonable notice of
his intention to sell.
Reasonable notice is a statutory obligation
nd thus cannot be excluded by a contract to
contrary.
Requesting the pawnee to postponethe
sale could not deprive the bank of its right to
proceed with the sale.
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LOSS OF SECURITY DUE TO
PLEDGEES NEGLIGENCE:
Where goods are lost due to the
negligence of the pledgee, theliability of the pledger is reduced
to the extent of the value of suchgoods.
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PRABHAT BANK v BABU RAM
FACTS: One of the terms of the agreement of loanenabled the lending baker to sell the securities
without any notice to the pawner,. The pawner
defaulted in payment. The bank sent a reminder,
but the pawner asked for more time. The bank
thereupon disposed of the securities.
HELD: Notice is not a mere notice. It has to be a
reasonable one. Such notice has to be clear andspecific in language. The court held the sale as
bad under law.
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LIMITATIONS ON THE RIGHT TO RETAIN
The right of retention is not absolute and comes withcertain limitations. These limitations have been established
through interpretation of the provision in various judicial
precedents.
In Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322 it has
been held that a pledgee cannot maintain a suit for
recovery of debt as well as retain the pledged property. He
is only entitled to recover the difference between the debt
and the price of the goods if it is less than the debt.
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Where a suit has been filed by the pawnee for
realisation of the debt, it is to be presumed that he
has not sold the pledged article, and will returnthesame to the pawnor on the suit claim being
satisfied.
Furthermore, Section 174 of the Contract Act
specifically provides that in the absence of any
contract to the contrary, a pawnee cannot exercise
his right of redemption for any other debt or
promise except that for which the goods have been
pledged.
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Can pledgee buy the goods himself?
While exercising the right of sale of pledged
goods, the pawnee is restricted from making a
sale of the pledged goods to himself, thoughsuch a restriction has not been explicitly
provided in the Contract Act with respect to
pledge of goods in general, the followingapproach has been adopted through various
judicial precedents.
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Privy Council in Neikram Dobey v. Bank of Bengal, (1891)
19 Cal 322:
The facts of the case are that certain governmentsecurities were pledged with the defendant bank, who
exercised its right to sell the pledged securities on default
by the pawnor.
However, instead of selling the pledged securities to athird party, the same was appropriated by the bank
towards itself. Thus, a suit was filed by the plaintiff before
a Single Bench of the Calcutta High Court contending that
such a sale was void and unauthorised. The Single Bench
upheld the contention in favour of the plaintiffs. Later, an
appeal was also preferred before the Privy Council.
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The punjab high court in Dhani
Ram & Sons v. Frontier Bank, (AIR1962 Punj 321) held that such an
act is not void. But the pledger mayhold the pledgee liable for any loss
he may have suffered for the goods
have been given a value less than
the market price.
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It has been held in Shatzadi Begum Sahiba v. Girdharilal
Sanghi (AIR 1976 AP 273) by the Andhra Pradesh High Court
that under a contract of pledge, 'While the owner has theright of possession as well as the right of enjoyment and right
of disposition, the pledgee has only the right of possession
but not the right of enjoyment. The pledgee's right of
disposition is governed by the terms of the pledge and is
limited to the recovery of the amount due to him under that
pledge.' Furthermore, in Chetty v. M.S.A.PS.L. Ramaswamy .L.
Palaniappa Chettiar, it has been held by the Madras High
Court that a sale by the pledgee of the pledged goods to
himself amounts to unauthorized conversion and the pledger
is rightfully entitled to have his property back on full value.
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Thus the appropriation of pledged shares by the
pawnee does not amount to a sale and does not
fall within the ambit of sale by the pawnor to
himself.
Thus, the rights conferred upon the pawnee are
not absolute in nature and bring along with it
reasonable restrictions with a view to protect the
interest of the pawnor as well so that the pawneecannot take undue advantage of the pawnors
disability.
WHO CAN PLEDGE?
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WHO CAN PLEDGE?
Usually owner or a person authorised by theowner.
Pledge made by any other person may be
invalid.
Eg: where some goods were left in the
possession of the servant. If the servant makes
a pledge in the absence of owner it will be an
invalid pledge.Yet, some are given authority to have a
juridical possession other than a mere physical
possession or bare custody.
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PLEDGE BY MERCHANTILE AGENT
(S.178)
PERSON IN POSSESSION UNDER
VOIDABLE CONTRACT (S.178-A)
PLEDGE BY PLEDGEE (S.179)
PLEDGE BY MERCHANTILE AGENT
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PLEDGE BY MERCHANTILE AGENT
(S.178)
MERCHANTILE AGENT:
An agent having in the customary course of
business as such agent authority either to sellgoods, or to consign goods for the purpose of
sale, or to buy goods or to raise money on the
security of the goods.Same definition as in the sale of goods act,
1930
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A merchantile agent, with the consent of the
owner, in the possessionof goods or documents
of title to goods, any pledge made by him while
acting in the ordinary course of business shall be
valid, provided that the pawnee acts in good
faithand has no notice of the fact that the agenthas no authority to pledge.
Explanation to S.178: definition as same as
under sale of goods act,1930
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The necessary conditions of the
validity are:
1.Merchantile agent
2.Possession with ownersconsent
3.In the course of business4.Good faith
Merchantile agent
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Merchantile agent
There should be a merchantileagent as defined under the
Sale of goods act, 1930
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Possession with owners consent
As under S.13 of the contract act,1972, consent =
agreeing on the same thing in the same sense.
If consent is real, how it is got becomes immaterial
though it makes a person in possession liable for
many crimes. The consent given is not annulled.
Eg: a goldsmith obtained possession of certain
jewellery under the pretence that he had a customer,
and instead pledged with a third person. The pledgee
here was held to have a good title.
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SHARA DIN v GOKUL CHAND, AIR
1931 Lah 526
Possession under S.178 Is juridicalpossession as distinguished from
mere physical possession or bare
custody.
I th f b i
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In the course of business
Entrustment made in his capacity as a
merchantile agent
Q1: the plaintiffs dealer in diamonds at
Amsterdam, sent some diamonds to a
diamond broker in London for sale. The
broker asked a friend of his to pledge the
diamonds for him. The friend pledged them
with the defendants who were pawnbrokers.
f
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Good faith
Good faith and notice not
defined under the act. As pergeneral clauses act, 1895, good
faith- when done honestly,
whether negligently or not.
PERSON IN POSSESSION UNDER
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PERSON IN POSSESSION UNDER
VOIDABLE CONTRACT (S.178-A)
Goods are pledged by a person who has
obtained possession under a voidable
contract, the pledge is valid , provided that
the contract has not been rescindedat the
time of the pledge and the pledgee has
acted in good faith and without notice of
the pledgersdefect of title.
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PHILIPS v BROOKS Ltd, (1919) 2 KB 243
A fraudulent person, pretending to be a manof credit, induced the plaintiff to give him a
valuable ring in return for his cheque which
proved worthless. Before the fraud could bediscovered, the ring was pledged with the
defendants.
HELD: the pledge was held to be valid, itbeing made by a person in possession under
a voidable contract.
PLEDGE BY PLEDGEE (S 179)
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PLEDGE BY PLEDGEE (S.179)
S.179: PLEDGE WHERE PAWNOR HAS ONLY ALIMITED INTEREST- where a person pledges goods
in which he has only a limited interest. Therefore
when a pledgee further pledges the goods thepledge will be valid only to the extent of his
interest and his interest is the amount for which
the goods have been given to him as a security.
But an effective pledge in favour of the pledgee has
not taken place, any repledge made by him will be
equally ineffective.
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ADDITIONAL EXCEPTIONS UNDERTHE SALE OF GOODS ACT
S.30(1) and (2): A pledge by a sellerremaining in the possession after
sale and the buyer obtaining
possession before sale is valid.
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DIFFERENCE BETWEEN BAILMENT
AND PLEDGE
BAILMENT PLEDGE
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BAILMENT PLEDGEAS TO PURPOSE
Goods bailed for the
purposes such as safe
custody, repairs etc
It is a variety of bailment.
Goods are bailed as a
security for loan orperformance of a promise
AS TO RIGHT OF SALE
No right to sell. Only right
to retain or sue
Right of pledgee only on
default of pledgor and on
a reasonable notice.
BAILMENT PLEDGE
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CONSIDERATION
BAILMENT PLEDGE
There may or may not
with consideration Always with consideration
DISCHARGE OF CONTRACT
Discharged as the purpose
is fulfilled
Discharged on payment of
debt