Discuss the cases in which a valid pledge can be made by person not the owner of goods pledged ?

When Someone Other Than the Owner Can Validly Pledge Goods

Generally, only the owner of goods has the right to pledge them. However, law makes exceptions to this rule to protect the interests of innocent parties who receive goods in good faith as security for a loan. Here are the key situations where a valid pledge can be made by a non-owner:

1. Pledge by a Mercantile Agent

A mercantile agent is someone who, in the customary course of their business, has the authority to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods.1 Think2 of brokers, factors, etc.

According to Section 178 of the Indian Contract Act, 1872, a pledge made by a mercantile agent is valid if the following conditions are met:

  • The mercantile agent is in possession of the goods or documents of title to the goods with the consent of the owner.3 If the agent stole the goods, this wouldn’t apply.
  • The pledge is made by the agent acting in the ordinary course of business of a mercantile agent.4
  • The pawnee (the person receiving the pledge) acts in good faith and without notice that the mercantile agent lacks the authority to pledge.5

In simpler terms: If you entrust your goods to a mercantile agent, and they pledge those goods to someone who genuinely believes the agent has the right to do so, the pledge is valid, even if you hadn’t explicitly authorized the pledge.6

Example: You give a consignment of textiles to a factor to sell. Instead, the factor pledges the textiles to a financier for a loan. If the financier acts in good faith and isn’t aware of the factor’s lack of explicit authority to pledge, the pledge is valid.

2. Pledge by a Person in Possession Under a Voidable Contract

Sometimes, a person might possess goods under a contract that can be cancelled (voidable) due to reasons like coercion, fraud, misrepresentation, or undue influence.

According to Section 178A of the Indian Contract Act, 1872, if such a person pledges the goods, the pledge is valid if:

  • The voidable contract has not been rescinded (cancelled) at the time of the pledge.7
  • The pawnee acts in good faith and has no notice of the defect in the pledgor’s title.8

Think of it this way: Until the original owner takes steps to cancel the flawed contract, the person in possession has a sort of temporary, albeit imperfect, right over the goods, enough to create a valid pledge for an innocent third party.

Example: Someone obtains a diamond ring from you by misrepresenting their identity. Before you realize the fraud and cancel the contract, they pledge the ring to a pawnbroker who has no knowledge of the fraudulent acquisition. This pledge to the pawnbroker would likely be considered valid.

3. Pledge by a Seller in Possession After Sale

This scenario arises when someone sells goods but continues to hold onto them.

According to Section 30(1) of the Sale of Goods Act, 1930, if a seller remains in possession of goods (or the documents of title) after selling them, and then pledges these goods (or documents) to someone who:

  • Receives them in good faith, and
  • Has no notice of the previous sale,

the pledge is as valid as if the seller was expressly authorized by the buyer to make it.

The logic here is to prevent fraud and protect innocent pledgees who assume the seller still owns the goods because they are still in possession.

Expanding on your example: In Haji Rahimbux Vs. Central Bank, A sold cutlery to B but kept the goods in his godown. Later, A pledged the same goods to C, who didn’t know about the sale to B. The court held the pledge to C was valid under Section 30 of the Sale of Goods Act.

4. Pledge by a Buyer in Possession Before Sale

Conversely, sometimes a buyer might get possession of goods even before the sale is finalized.

According to Section 30(2) of the Sale of Goods Act, 1930, if a buyer obtains possession of goods (or the documents of title) with the seller’s consent, even before the property in the goods has passed to them, a pledge made by this buyer is valid if the pawnee:

  • Acts in good faith, and
  • Has no notice of any lien or other right of the original seller regarding those goods.

This protects those who lend money against goods held by a buyer who appears to be the owner due to possession.

Example: You agree to sell your car to someone, and you let them take possession of it while they arrange financing. Before the sale is complete, they pledge the car to a bank for a loan. If the bank is unaware of your remaining ownership rights, the pledge could be valid.

In summary, while the general rule is that only the owner can create a valid pledge, these exceptions under the Indian Contract Act and the Sale of Goods Act aim to balance the rights of the original owner with the need to protect innocent parties dealing with those who have some form of possession or apparent authority over the goods.